As filed with the Securities and Exchange Commission on October 30, 1998.
Registration No. 333-65123
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM SB-2
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REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XYBERNAUT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 3571 54-1799851
(Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation) Classification Code Number) Identification Number)
12701 Fair Lakes Circle, Fairfax, Virginia 22033, (703) 631-6925
(Address and telephone number
of registrant's principal executive offices)
Edward G. Newman
12701 Fair Lakes Circle
Fairfax, Virginia 22033
(703) 631-6925
(Name, address and telephone number of agent for service)
-----------
Copies of communications to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
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Approximate date of proposed commencement of sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, please check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_| ___________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the same
offering. |_| ___________
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Each Class Amount to be Offering Price Aggregate Offering Amount of
of Securities to be Registered Registered (1) per Share (2) Price Registration Fee
- -------------------------------------- --------------------- ------------------------ -------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share 1,995,000 $5.0469 $10,068,565 $2,970.21
Common Stock, $.01 par value per share 105,000 $11.3555 (3) $1,192,328 $351.74
Total Registration Fee................ .........................................................................$3,321.95 (4)
</TABLE>
(1) Represents the shares of Common Stock being registered for offer by the
Company in connection with a proposed financing (the "Financing
Arrangement"). Pursuant to Rule 416, the shares of Common Stock offered
hereby also include such presently indeterminate number of shares of
Common Stock as shall be issued by the Company in connection with the
Financing Arrangement between the Company and the investor. Such number of
shares is subject to adjustment and could be materially less than such
estimated amount depending upon factors that cannot be predicted by the
Company at this time, including, among others, the future market price of
the Common Stock. This presentation is not intended to constitute a
prediction as to the future market price of the Common Stock or as to the
number of shares of Common Stock issuable upon exercise of the Warrants.
See "Risk Factors -- Dilution"; and "Description of Securities."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (g) of the Securities Act of 1933, as amended
(the "Securities Act"); based on the average ($5.0469) of the bid
(($5.0313) and asked ($5.0625) price on the Nasdaq SmallCap Market on
September 25, 1998.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(g) of the Securities Act, based on, according to the
terms of the warrant, 225% of the average price ($5.0469) of the Nasdaq
SmallCap Market on September 25, 1998.
(4) Previously paid with the original filing of the Registration Statement on
October 1, 1998.
------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE>
The information in this Prospectus is not complete. We may not sell these
securities until the Registration Statement filed with the Securities and
Exchange Commission is effective. This Prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any State where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER __, 1998
PROSPECTUS
2,100,000 Shares*
XYBERNAUT CORPORATION
This Prospectus covers our sale of 2,100,000 shares of our common stock to
HSBC James Capel Canada, Inc., the Investor, in connection with a proposed
financing arrangement whereby, we, at our option, may issue up to:
o $31,200,000 of Common Stock to the Investor over a twelve month
period based on weekly, monthly or quarterly draw downs. The number
of shares to be issued for each drawdown will be based on the price
per share equal to the lesser of (1) the average of the daily volume
weighted average price of the Common Stock on NASDAQ SmallCap Market
for a certain number of consecutive trading days preceding the
funding date of the draw down and (2) $8.00;
o $31,200,000 of Common Stock issuable upon exercise of an option we
granted to the Investor to purchase an additional amount of Common
Stock up to the maximum amount of each draw down; and
o approximately 105,000 shares of Common Stock issuable upon exercise
of warrants which we will issue to the Investor at each draw down.
The exercise price of such Warrants will be equal to 225% of the
daily volume weighted average price of the Common Stock on the date
we furnish the Investor with a draw down notice.
The actual number of Shares of Common Stock which we will sell under this
Prospectus, in certain cases, will be subject to increase or decrease depending
on the purchase price per share in effect on the actual date of sale.
We will receive the net proceeds from the aggregate number of draw downs
and the call options and warrants exercised by the Investor. We will use such
net proceeds for general corporate purposes. We will bear all expenses relating
to this registration.
NASDAQ SmallCap Market Symbol: "XYBR"
On October 26, 1998, the closing price of one share of our Common Stock on
the NASDAQ SmallCap Market was $5.0625.
*Pursuant to Rule 416 under the Securities Act of 1933, the shares of
Common Stock offered hereby include such presently indeterminate number of
shares of Common Stock issuable to the Investor under the Financing Arrangement.
The number of such shares is subject to adjustment and could be materially less
than estimated depending upon various factors, including, the future market
price of the Common Stock.
Our executive offices are located at 12701 Fair Lakes Circle, Fairfax,
Virginia 22033 and our telephone number is (703) 631-6925.
The securities offered hereby involve a high degree of risk. You should
carefully consider the factors described under the caption "risk factors" on
page 7 of this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The Date of this Prospectus is ______, 1998
<PAGE>
This Prospectus contains certain forward-looking statements which involve
substantial risks and uncertainties. These forward-looking statements can
generally be identified because the context of the statement includes words such
as "may," "will," "except," "anticipate," "intend," "estimate," "continue,"
"believe," or other similar words. Similarly, statements that describe our
future plans, objectives and goals are also forward-looking statements. Such
forward-looking statements are subject to a number of known and unknown risks
and uncertainties that, in addition to general economic and business conditions,
could cause our actual results, performance, and achievements to differ
materially from those described or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to our ability to:
o profit from the Mobile Assistant(R) as expected (see "Products and
Product Development");
o meet competition (see "Competition");
o maintain superior technological capability, foreseeing changes and
continuing to identify, develop and commercialize innovative and
competitive products and systems (see "Research and Development");
o penetrate different markets and successfully expand our market base (see
"Marketing and Sales");
o attract and retain technologically qualified personnel, particularly in
the areas of research and development (see "Employees"); and
o generate cash flows and obtain financing to support our operations and
growth (see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file
with them, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be a part of this prospectus, and information that we file later
with the SEC will automatically update or supersede this information. We
incorporate by reference the documents listed below and any future filing we
will make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934:
1. Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997;
2. Quarterly Reports on Form 10-QSB for the periods ended March 31, 1998
and June 30, 1998;
3. Current Reports on Form 8-K dated June 10, 1998.
You may request a copy of these filings, at no cost, by writing to us at
12701 Fair Lakes Circle, Fairfax, Virginia 22033, (703) 631-6925. Attention: W.
Jeff Pagano.
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<PAGE>
We have not authorized any dealer, salesperson or any other person to give
any information or to represent anything not contained in this Prospectus. You
must not rely on any unauthorized information. This Prospectus does not offer to
sell or buy any shares in any jurisdiction where it is unlawful. The information
in this Prospectus is current as of _____________, 1998.
-------------------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
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<S> <C>
Incorporation of Certain Documents by Reference...................................................................2
Prospectus Summary................................................................................................4
Risk Factors......................................................................................................7
Financing Arrangement............................................................................................16
Use of Proceeds..................................................................................................17
Dividend Policy..................................................................................................17
Market for Registrant's Common Equity and Related Stockholder Matters............................................17
Selected Financial Data..........................................................................................18
Management's Discussion and Analysis of Financial Condition and Results of Operations............................19
Business ........................................................................................................26
Management.......................................................................................................37
Executive Compensation...........................................................................................42
Principal Stockholders...........................................................................................48
Certain Relationships and Related Transactions...................................................................50
Shares Eligible for Future Sale..................................................................................51
Description of Securities........................................................................................52
Delaware Business Combination Provisions.........................................................................54
Plan of Distribution.............................................................................................55
Indemnification for Securities Act Liabilities...................................................................56
Legal Matters....................................................................................................56
Experts ........................................................................................................57
Index to Consolidated Financial Statements......................................................................F-1
</TABLE>
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may
not contain all of the information important to you. To understand this offering
fully, you should read the entire Prospectus carefully, including the risk
factors.
Information About Our Products
Xybernaut Corporation (the "Company") is a Delaware corporation engaged
in the research, development and commercialization of mobile computer systems
and related software solutions designed to enhance personal productivity,
especially in commercial, industrial and military applications. Our latest
available product is the Mobile Assistant(R) 133P model, which is a
full-function, body-worn, voice-controlled 133 MHZ Pentium(R) computer with a
head-mounted video display ("133P"). We have also commenced production of the
next-generation MMX Pentium(R) Mobile Assistant(R) ("MA IV").
The Mobile Assistant(R) combines the speed, memory, processing,
multimedia and communication capabilities of a desktop personal computer ("PC")
in a lightweight unit with hands-free operation and simultaneous user mobility.
The Mobile Assistant(R) is a combination of hardware and software designed to be
worn on the body to perform complex and time consuming tasks such as
maintenance, repair and inspection of complex technological and mechanical
systems, retrieval and analysis of medical information from remote locations,
and coordination of remote commercial and industrial activities and military
field operations. The Mobile Assistant(R) Series can utilize technologically
advanced features such as real time two-way video and audio communications
through radio frequency transmissions, integrated cellular linkups, global
positioning system tracking capabilities and access to information through the
Internet and World Wide Web. The new head-mounted display unit ("HMD") includes
a two-way audio system and optional built-in video camera, weighs approximately
l5 ounces and presents a desk-top quality full VGA color image that is
approximately equivalent to that of a 15" VGA monitor at a distance of
approximately two feet. We also offer an optional light-weight, 6.4 inch, full
VGA color, flat panel display ("FPD"), with integrated digitizer, for users who
do not desire an HMD or do not need to be 100% hands-free and feet-free to
perform their job. The body-worn computing unit is designed to allow operation
in environmental conditions in which conventional portable computers could not
previously operate, weighs less than two pounds and is capable of running
software applications designed for Microsoft(R) Windows(R) 3.11, Windows(R) 95
and 98, Windows(R) NT(TM), DOS, SCO UNIX(R) and LINUX.
We currently offer two novel software products to get user
documentation up and running on the Mobile Assistant quickly. The following
products can be used on the Mobile Assistant(R) or conventional desktop or
laptop computers:
o linkAssist(TM) allows users to link information quickly regardless
of the format of the data or where it is stored, avoiding the need
to change, convert or reenter the existing information or to use
the very technical HTML tagging process. An interesting and useful
feature of this product is that the linked words or phrases can
then be activated by voice automatically, with no development work
by the author of the documentation or databases.
o webAssist(TM) allows voice navigation of HTML document links such
as those found on web sites on the World Wide Web and intranets.
This software provides the user with hands-free access to all of
the information found on, for example, manufacturer and supplier
and company-owned, web sites.
Our current list of customers for the Mobile Assistant(R) Series
include AT&T, Lucent, NTT (Nippon Telegraph and Telephone), Eaton Corporation,
Fujitsu, Battelle Memorial Institute, Shell Oil, Mitsubishi, Rockwell
International, Lockheed Martin, and the United States Army and Navy.
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<PAGE>
General Information About Our Company
Our Company was incorporated in Virginia under the name Contemporary
Products & Services, Inc. in November 1990. We changed our name to Computer
Products & Services, Inc. in November 1992. In April 1996, we merged with
Xybernaut Corporation, a Delaware corporation, in order to change our name and
reincorporate in Delaware.
Our executive and administrative offices are located at 12701 Fair
Lakes Circle, Fairfax, Virginia 22033. Our telephone number is (703) 631-6925,
and our e-mail address is [email protected].
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<PAGE>
The Offering
Securities Offered................ 2,100,000 Shares of Common Stock
Common Stock Outstanding:
Before the Offering (1)........ 20,480,403
After the Offering (1)......... 22,580,403
Nasdaq Symbol..................... XYBR
Use of Proceeds................... We will receive proceeds from the draw
downs, the Call Options, if any, and the
exercise of the Warrants issued pursuant
to the Financing Agreement. We will use
such proceeds for general corporate
purposes. See "Use of Proceeds."
Risk Factors...................... The securities offered hereby involve a
high degree of risk. You should carefully
consider the factors described under the
caption "risk factors."
- ---------------------
(1) Based on shares of Common Stock outstanding at October 26, 1998, and does
not include (1) 1,234,550 shares of Common Stock reserved for issuance upon
the exercise of outstanding options granted pursuant to Rule 701 of the
Securities Act, our 1996 Omnibus Stock Incentive Plan and the 1997 Stock
Incentive Plan; (2) 5,173,402 shares of Common Stock reserved for issuance
upon exercise of outstanding warrants to purchase Common Stock, (3) 141,700
shares of Common Stock registered in connection with the Series C Preferred
Stock but unissued, (4) 595,360 shares of Common Stock registered in
connection with the April 1998 Private Equity Line of Credit Private
Placement but unissued, and (5) 420,000 shares of Common Stock reserved for
issuance upon exercise of an option granted pursuant to our initial public
offering to purchase 210,000 shares of Common Stock and 210,000 redeemable
warrants, each such warrant to purchase one share of Common Stock at an
exercise price of $9.075. See "Risk Factors -- Effect of Possible Non-Cash
Future Charge" and " -- Securities Issuable Pursuant to Options, Warrants
and the Unit Purchase Option."
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<PAGE>
RISK FACTORS
Before you buy shares of our Common Stock, you should be aware that
there are various risks associated with such purchase, including those described
below. You should consider carefully these risk factors, together with all of
the other information in this Prospectus before you decide to purchase shares of
our Common Stock.
Some of the information in this Prospectus may contain forward-looking
statements. Such statements can be identified by the use of forward-looking
words such as "may," "will," "except," "anticipate," "intend," "estimate,"
"continue," "believe," or other similar words. These statements discuss future
expectations, contain projections of our future results of operations or
financial condition or state other "forward-looking" information. When
considering such statements, you should keep in mind the risk factors and other
cautionary statements in this Prospectus. The risk factors noted in this section
and other factors noted in this Prospectus could cause our actual results to
differ materially from those contained in any forward-looking statements.
History and Expectation of Future Losses; Need for Additional Financing
We were incorporated in October 1990 and commenced operations in
November 1992. We have incurred the following losses since 1994:
Fiscal year ended:
o March 31, 1994 $47,352
o March 31, 1995 $1,303,892
o December 31, 1996 $5,238,536
o December 31, 1997 $9,479,966
Six months ended:
o June 30, 1998 $3,792,505
We intend to conduct significant additional marketing and distribution
of our products that, together with our existing research and development
programs, are expected to require substantial funding and to result in
continuing operating losses. In part to subsidize such costs, we have entered
the Financing Arrangement with the Investor. We believe that as long as the
Financing Arrangement is in effect, we will not need additional financing in
order to carry out our programs. However, we cannot assure you that, regardless
of our efforts and the expenditure of substantial funds, we will achieve
substantial sales of any of our products, that our operations will be profitable
or that we will be able to meet the competitive demands of the industry in which
we operate.
Going Concern Qualification
The report of our independent accountants contains an explanatory
paragraph regarding our ability to continue as a going concern. The independent
accountants cited several factors as raising substantial doubt as to our ability
to continue as a going concern, including, our history of operating losses and
our working capital deficit. We cannot assure you that we will ever achieve
significant revenues or that our operations will be profitable.
Liquidity; Working Capital Needs
Under the terms of the Financing Arrangement, we must have an effective
registration statement covering the Common Stock which is subject of the
financing prior to our first draw down. Although we have filed a registration
statement on Form SB-2 covering a certain amount of such shares, we cannot
provide any assurance as to if or when such registration statement will be
declared effective. As a result, and in order to
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<PAGE>
meet working capital cash requirements, we may obtain a working capital line of
credit and/or complete additional financings. In addition, if the Financing
Arrangement is terminated, we may exercise a put option to sell shares of our
Common Stock in the aggregate principal amount of $7,000,000 available to us
under an April 1998 Private Equity Line of Credit Agreement. However, we cannot
assure you that we will be able to raise additional capital, obtain funds from a
working capital line of credit, or that the sale of Common Stock under the
Private Equity Line of Credit Agreement and the Financing Arrangement will be
deemed advisable at such times as funds may be required. We could be required to
curtail materially, suspend or cease operations if we are unable to raise or
obtain the needed working capital.
Dilution; Impact of the Conversion of Outstanding Convertible Securities
Our sale of Common Stock to the Investor, on an continuous basis, under
the Financing Arrangement will have an immediate and substantial dilution in the
net tangible value of your Shares of the Company. The net tangible value of your
Shares will be diluted further upon the conversion of outstanding options,
warrants and the issuance of Common Stock under a repricing arrangement we
entered into in connection with our exercise of a $3,000,000 Put Option under
the April 1998 Private Equity Line of Credit Agreement (the "Initial Put
Option"). Specifically, certain options and warrants (other than the Warrants)
are convertible into Common Stock at discounts from future market prices of the
Common Stock. Such discounts could result in substantial dilution to existing
holders of Common Stock. The sale of such Common Stock acquired at a discount
could have a negative impact on the trading price of the Common Stock and could
increase the volatility in the trading price of the Common Stock.
At the date of this Prospectus, we have reserved an aggregate of
6,827,952 shares of Common Stock for issuance upon exercise of the following
outstanding options and warrants:
o options to purchase 1,234,550 shares at an exercise price between
$1.37 and $6.00 per share;
o warrants to purchase 590,000 shares at an
exercise price between $1.76 and $18.00 per share;
o warrants to purchase 3,846,429 shares at an exercise price of $9.00
per share; and
o 210,000 Units (the "Units"), each unit consisting of one share of
Common Stock and one Redeemable Warrant (a "Redeemable Warrant") to
purchase one share of Common Stock, at a price of $9.075 per Unit
during a period of four years commencing July 18, 1996. The
Redeemable Warrants included in the Units are exercisable at $12.60
per share.
During the terms of the outstanding options, Redeemable Warrants and
the Unit Purchase Option, we must give the holders the opportunity to profit
from a rise in the market price of the Common Stock. The existence of the
options, the Redeemable Warrants and the Unit Purchase Option may adversely
affect the terms on which we may obtain additional equity financing. Moreover,
the holders are likely to exercise their rights to acquire Common Stock at a
time when we would otherwise be able to obtain capital with more favorable terms
than we could obtain through the exercise of such securities.
In addition, we agreed to certain repricing arrangements in connection
with our exercise of the Initial Put Option. Under that arrangement, one-sixth
of the 545,454 shares of Common Stock (the "Initial Put Shares") we issued upon
exercise of the Initial Put Option, are subject to monthly repricing commencing
on September 30, 1998. Under the repricing calculation, if the closing price of
the Common Stock on the trading date immediately preceding the repricing date is
less than $7.20 per share, the shares of Common Stock subject to repricing will
be repriced at the lowest closing bid price of the Common Stock for the 30 days
preceding such repricing date (the "Initial Put Reset Price"). We will issue to
the investors such number of shares (the "Initial Put Repricing Shares") equal
to the difference between (a) the quotient of 500,000 and the Initial Put Reset
Price and (b) the number of shares subject to repricing. We will not issue any
shares of Common Stock under the repricing arrangement if the Initial Put Reset
Price is equal to or greater than $5.50.
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<PAGE>
Uncertainty of Completion of the Investment
Our Financing Arrangement with the Investor provides that if the
purchase price of the Common Stock at the time of the draw down is less than
$3.00, the Investor will not be required to fund a draw down. On October 26,
1998, the closing bid price for a share of Common Stock as quoted on the NASDAQ
SmallCap Market was $5.0625. However, we cannot assure you that the closing bid
price for a share of Common Stock will equal or exceed $3.00 in the future. The
decrease of the price of our Common Stock to less than $3.00, and the resulting
inability to draw down on the Financing Arrangement, may materially adversely
affect our financial condition and results of operations.
Uncertainty of Market Development and Product Acceptance
The mobile computing market is emerging and relatively undeveloped. We
sold our first Mobile Assistant(R) in 1993. From December 31, 1997 through June
30, 1998 have sold and delivered Mobile Assistant(R) systems valued at
approximately $357,000. We commenced delivery of the Pentium(R) Mobile Assistant
P-133(TM) in August 1997 and expect to commence delivery of Mobile Assistant(R)
IV, a Pentium 233 MHZ based system ("MA IV"), in the quarter ending December 31,
1998. In September 1997, we announced the introduction of our linkAssist(TM) and
webAssist(TM) software products.
The size of the mobile computing market is currently limited by (1) the
high unit prices of mobile computers as compared to laptops and other portable
computers, (2) the specialized nature of each application and the need for
custom applications and system integration, and (3) the limited supply to date
of components for completed systems. The potential size of the market will be
limited further by the rate at which prospective customers recognize and accept
the functions and capabilities of integrated mobile computing systems. We cannot
assure you that a significant market will develop for mobile computing systems
or, that, if a market develops, the Mobile Assistant(R) Series and any of our
other products will become a significant factor in any market that develops. In
addition, we cannot guarantee that we will obtain the working capital needed to
meet the competitive demands of the industry in which we operate. See "Risk
Factors - Liquidity; Working Capital Needs; -- Competition."
In addition, we believe 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 our other products, of which we can
provide no assurance.
Competition
The computer industry is intensely competitive and is characterized by
rapid technological advances, evolving industry standards and technological
obsolescence. Many of our current competitors have longer operating histories
and greater financial, technical, sales, marketing and other resources than we
do. Several other companies, including Computing Devices International, a
division of Ceridian Corporation, ViA Inc., Texas Microsystems, Telxon, Norand
and Teltronics, Inc., a subsidiary of Interactive Solutions, Inc., Raytheon and
a consortium of Litton and TRW, are engaged in the manufacture and development
of body-mounted or hand-held computing systems that do or could compete with the
Mobile Assistant(R) Series. 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 we do and which can be
expected to compete vigorously with us. We cannot assure you that we will be
able to compete successfully against our competitors, that we will have the
working capital needed to incorporate the constant technological advances in our
products or that competitive pressures will not adversely affect our financial
performance.
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<PAGE>
Dependence upon Suppliers
We have supplier relationships with Sony Digital Products and Shimadzu,
among others, for the production of the MA IV system. We also have written
agreements with our suppliers for batteries, head-mounted displays and computing
units. Although we believe that we 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 us to experience temporary delays or
interruptions in supply while we incorporate such changes. Since the order time
for certain components may range up to approximately three months, we also could
experience delays or interruptions in supply in the event we are required to
find a new supplier for any of these components. Any disruptions in supply of
necessary parts and components from our key suppliers could have a material
adverse effect on our results of operations. Any future shortage or limited
allocation of components for the Mobile Assistant(R) could have a material
adverse effect on our organization as a whole.
Currency Fluctuations
The exchange rates for some local currencies in countries where we
operate may fluctuate in relation to the U.S. dollar. Such fluctuations may have
an adverse effect on our expenses, earnings or assets when local currencies are
translated into U.S. dollars. We are party to a supplier arrangement with Sony
Digital Products for the production of the MA IV system. The fees we pay Sony
Digital Products are paid in Japanese yen. Any weakening of the value of the
U.S. dollar against the Japanese yen could result in an increase in our
production expenses which, if substantial, could have a material adverse effect
on our financial condition and results of operations.
Substantial Dependence upon Single Product Line;
Possibility of Unsuccessful New Product Development
Our Mobile Assistant(R) Series currently consists of two products, the
MA IV, which is expected to be available for sale in late 1998, and the 133P
model based on a 133 MHZ Intel Pentium(R) processor. The Mobile Assistant(R)
Series are our principal products, and our success will depend upon its
commercial acceptance, which cannot be assured.
For single unit purchases, the Mobile Assistant(R) 133P currently is
priced from $5,000 to $8,995 depending upon the discount and selected features.
We also are developing additional products for the Mobile Assistant(R) Series
for introduction in the future and intend to modify the Mobile Assistant(R)
Series for use in other applications and to develop other products using our
core technologies. As technological developments cause declines in hardware
costs, we expect that mobile computer sales will be driven by system
capabilities and integration. However, we cannot assure you that the Mobile
Assistant(R) will offer the performance capabilities or features that customers
will value or that we will have the capital required to modify the design of the
Mobile Assistant(R) in order to gain customer acceptance. In addition, while
linkAssist(TM) and our planned software toolkits are intended for use both with
the Mobile Assistant(R) Series and independently, we cannot guarantee that a
separate market for our existing and planned software products will develop or
that any products, if sold, will generate significant revenues or any profits.
Additional product development will result in a significant increase in
our research and development expenses that may be unrecoverable should
commercialization of new products prove unsuccessful. We also could require
additional funding if research and development expenses are greater than we
anticipate. We cannot assure you that we will be successful in our future
product development efforts or in diversifying our product line. See "Risk
Factors - Liquidity; Working Capital Needs."
- 10 -
<PAGE>
Uncertain Protection of Patent and Proprietary Rights;
No Assurance of Enforceability or Significant Competitive Advantage
We consider our patent, trade secrets, and other intellectual property
and proprietary information to be important to our business prospects. We rely
on a combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect our proprietary rights. We
have implemented a trade secret management program to protect our trade secrets
and proprietary information. In addition, we have confidentiality and invention
assignment agreements with our employees, and generally enter into
non-disclosure agreements with our suppliers, VARs, OEMs and actual and
potential customers to limit access to and disclosure of our proprietary
information.
We have registered our Mobile Assistant(R) and Xybernaut(R) trademarks
on the Principal Register of the United States Patent and Trademark Office
("Patent Office") and the patent and trademark offices in several foreign
countries. In April 1994, we obtained U.S. patent number 5,305,244 ("hands-free,
user- supported portable computers") (the "Patent") for the Mobile Assistant(R)
Series. We derived most of our revenue for the twelve months ended December 31,
1997 and 1996 and the six months ended June 30, 1998 and 1997 from products
included within the scope of the Patent. We have notified several of our
competitors of the existence of the Patent, which our counsel believes may have
been infringed on by some of such competitors. We intend to take any and all
appropriate measures, including legal action, necessary to maintain and enforce
our rights under the Patent and other patents held by us.
We have filed twenty patent applications covering various aspects of
computers in general and wearable computers in particular since July 1996. Six
of these patent applications have been issued, one patent has been allowed
pending issuance and thirteen patents are pending. We have also filed most of
these applications in European countries, The People's Republic of China, Japan,
Republic of Korea, Republic of China (Taiwan), Canada and Australia. All patents
issued to our employees under pending and future applications have been and will
be assigned to us under existing invention assignments.
We cannot assure you that our pending patent applications will issue as
patents, that any issued patent will provide us with significant competitive
advantages or that challenges will not be instituted against the validity or
enforceability of any of our patents. The cost of litigation to uphold the
validity and prevent infringement of patents can be substantial. We also can
provide no assurance that others will not independently develop similar or more
advanced products, design patentable alternatives to our products or duplicate
our trade secrets, or that our employees or suppliers will not breach their
confidentiality agreements. In addition, we may be required, in some cases, to
obtain licenses from third-parties or to redesign our products or processes to
avoid infringement.
Dependence upon and Need for Key Personnel
Our success depends to a significant extent upon the efforts of senior
management personnel and a group of employees with longstanding industry
relationships and technical knowledge of our business and operations. The loss
of certain key members of senior management and the inability to replace such
member could have a material adverse effect on our business and operations. Our
success also will depend upon our ability to attract and retain highly qualified
and experienced management and technical personnel. We face competition for such
personnel from numerous other entities, many of which have significantly greater
resources than we do. We cannot assure you that we will be successful in
recruiting such personnel or that, if recruited, such persons would succeed in
establishing profitable operations for our organization.
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
- 11 -
<PAGE>
standards could render our existing products and products currently under
development obsolete and unmarketable. Our success will depend upon our ability
to enhance our current products and develop and successfully introduce and sell
new products that keep pace with technological developments and respond to
evolving end user requirements. If we do not anticipate or respond adequately to
technological developments, end user requirements, or significant delays in
product development or introduction, our competitive position in the marketplace
could be damaged and we could experience a decrease in revenues. We expect to
increase the use of additional external and internal resources in the near term
to meet these challenges. However, we can provide no assurance that we will be
successful in hiring, training and retaining qualified product development
personnel to meet our needs or that we 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 our results of operations.
Year 2000 Issues
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the our
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, we determined that we will be required to
modify or replace portions of our software so that our computer systems will
properly utilize dates beyond December 31, 1999. We believe that we can mitigate
the Year 2000 Issue with modifications to existing software and conversions to
new software. However, if we fail to make such modifications and conversions, or
if we do not make them on a timely basis, the Year 2000 Issue could have a
material impact on our operations.
We have contacted all of our significant suppliers and large customers
to determine the possible effect on our operations of their inability or failure
to remediate their own Year 2000 Issue. Our estimate of the costs to remediate
our Year 2000 issue is based on presently available information. However, we
cannot guarantee that the systems of other companies on which our systems rely
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with our systems, would not have material
adverse effect on our operations. We have no exposure to contingencies related
to the Year 2000 Issue for the products we have sold.
We will utilize both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. We plan to complete
the Year 2000 project within six months and estimate the total remaining cost of
the Year 2000 project at $6,000. Approximately $1,700 of the total project cost
is attributable to the purchase of new software which will be capitalized. The
remaining $4,300, which will be expensed as incurred over the next six months,
is not expected to have a material effect on our results of operations. To date,
we have incurred and expensed approximately $1,000 related to our Year 2000
project.
Our estimates of the date of completion and cost of our Year 2000
project are based on our best estimates, which we derived utilizing numerous
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. The costs and
completion date of our Year 2000 project could differ materially from our
estimates due to the lack of availability and cost of personnel trained in this
area, our ability to locate and correct all relevant computer codes, and similar
uncertainties.
Effect of Possible Non-Cash Future Charge
As a condition to our initial public offering, certain of our
stockholders, primarily officers and directors, deposited an aggregate of
1,800,000 shares of Common Stock into an escrow account (the "Escrowed Shares").
The Escrowed Shares are subject to the following terms and conditions:
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<PAGE>
o The Escrowed Shares will be released incrementally over a
three-year period only in the event our 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.
o 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 agreed upon price levels, certain amounts of the
Escrowed Shares will be returned to us for each period and
canceled.
o All the 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.
The difference between the initial offering price and the market value
(at the time of release) of any Escrowed Shares released will be deemed to be an
additional compensation expense. Such expense, depending on the price per share,
may have the effect of reducing or eliminating any earnings per share and could
have a negative effect on the market price for our Common Stock.
We did not meet the targets for escrow release for September 30, 1997
and September 30, 1998. As a result, 300,000 and 750,000 shares, respectively,
were canceled from the escrow pool resulting in a reduction of 2.1% and 3.6% of
our outstanding shares of Common Stock.
High Concentration of Common Stock Held by Existing Stockholders
Following this offering, our executive officers, directors and
principal stockholders will, in the aggregate, beneficially own approximately
29.3% of our outstanding shares of Common Stock. These stockholders, if acting
together, will be able to effectively control most matters requiring approval by
our stockholders. 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
Our Certificate of Incorporation provides that, subject to limited
exceptions, our directors will not be personally liable for monetary damages to
us or our stockholders for a breach of fiduciary duty as a director. 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 our directors. See "Indemnification for Securities Act Liabilities."
Shares Eligible for Future Sale
Sales of a substantial number of shares of our Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock. Of the 23,621,583 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering,
22,391,426 will be freely tradeable without restriction or further registration
under the Securities Act. This includes:
o 19,250,246 shares of Common Stock which are issued and outstanding;
o 141,700 unissued shares of Common Stock registered in connection
with the Series C Preferred Stock,
o 899,480 unissued shares of Common Stock registered in connection
with the April 1998 Equity Line of Credit Private Placement; and
o the 2,100,000 unissued shares of Common Stock registered in
connection with the Financing Arrangement.
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<PAGE>
The remaining 1,014,140 shares include 750,000 shares of Common Stock
which are "Escrowed Shares" (see "Executive Compensation -- Escrowed Shares")
and are subject to incremental release over a one-year period if certain share
targets are met, and 480,157 shares of the Common Stock are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. The restricted shares may be sold pursuant to an effective registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the Securities Act. In the
absence of any agreement to the contrary, the outstanding restricted Common
Stock could be sold in accordance with one or more other exemptions under the
Securities Act (including Rule 144). Rule 144, as amended, permits sales of
restricted securities by any person (whether or not an affiliate) after one
year, at which time sales can be made subject to the Rule's existing volume and
other limitations and by non-affiliates without adhering to Rule 144's existing
volume or other limitations after two years. Future sales of substantial amounts
of shares in the public market, or the perception that such sales could occur,
could adversely affect the price of the shares in any market that may develop
for the trading of such shares.
No Dividends Anticipated
We have never paid any dividends on our securities and do not
anticipate the payment of dividends in the foreseeable future.
Volatility of Stock Price
The trading price of the Common Stock has been, and may continue to be,
volatile. Such trading price could be subject to wide fluctuations in response
to our announcements of business and technical developments or those by our
competitors, quarterly variations in operating results, and other events or
factors, including our prospects and expectations by investors and securities
analysts. 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 our Common Stock.
Anti-takeover Consideration; Rights of Preferred Stock
Our Certificate of Incorporation authorizes the issuance of up to
6,000,000 shares of $.01 par value preferred stock (the "Preferred Stock"). As
of the date of this Prospectus, only the Series C Preferred Stock are issued and
outstanding. The authorized and unissued Preferred Stock may be issued with
voting, conversion or other terms determined by the Board of Directors which
could be used to delay, discourage or prevent a change of control. 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 our
management. We have no present intention to issue any additional Preferred
Stock. See "Description of Securities -- Preferred Stock."
We have a classified or staggered Board of Directors which limits an
outsider's ability to effect a rapid change of control of the Board. In
addition, at the 1998 Annual Meeting of Stockholders held on September 24, 1998,
our shareholders approved measures to amend our Certificate of Incorporation and
Bylaws, where applicable, to:
o implement an advance notice procedure for the submission of
director nominations and other business to be considered at annual
meetings of stockholders;
o permit only the President, the Vice Chairmen of the Board, the
Secretary or the Board of Directors to call special meetings of
stockholders and to limit the business permitted to be
- 14 -
<PAGE>
conducted at such meetings to be brought before the meetings by or
at the direction of the Board of Directors;
o provide that a member of the Board of Directors may only be
removed for cause by an affirmative vote of holders of at least 66
2/3% of the voting power of the then outstanding shares entitled
to vote generally in the election of directors voting together as
a single class (the "Voting Stock");
o fix the size of the Board of Directors at a maximum of twelve
directors, with the authorized number of directors set at ten, and
the Board of Directors having the sole power and authority to
increase or decrease the number of directors acting by an
affirmative vote of at least a majority of the total number of
authorized directors most recently fixed by the Board of
Directors;
o provide that any vacancy on the Board of Directors may be filled
for the unexpired term (or for a new term in the case of an
increase in the size of the board) only by an affirmative vote of
at least a majority of the remaining directors then in office even
if less than a quorum, or by the sole remaining director;
o eliminate stockholder action by written consent;
o require the approval of holders of 80% of the then outstanding
Voting Stock and/or the approval of 66 2/3% of the directors for
certain corporate transactions; and
o require an affirmative vote of 66 2/3% of the Voting Stock in
order to amend or repeal any adopted amendments to the Certificate
of Incorporation and Bylaws adopted at the meeting.
Such measures, combined with the ability of the Board of Directors to
issue "blank check" Preferred Stock and the staggered Board of Directors, could
have the effect of delaying, deterring or preventing a change in control without
any further action by the shareholders. In addition, issuance of Preferred
Stock, without shareholder approval, on such terms as the Board of Directors may
determine, could adversely affect the voting power of the holders of the Common
Stock, including the loss of voting control to others. See "Description of
Securities."
- 15 -
<PAGE>
FINANCING ARRANGEMENT
Pursuant to the Financing Arrangement, immediately following the
effective date of the Registration Statement of which this Prospectus is an
integral part, we, at our option, may present the Investor with a weekly,
monthly or quarterly draw down request for the purchase of up to $600,000,
$2,400,000 and $7,200,000, respectively, of the our Common Stock (each request a
"Draw Down Request"). We may present a Draw Down Request during the twelve month
period commencing on the date of the initial draw down.
The purchase price of such shares shall be equal to the lesser of (1)
the average of the daily volume weighted average price of the Common Stock on
NASDAQ SmallCap Market for a certain number of consecutive trading days
preceding the funding date of the draw down and (2) $8.00. However, the Investor
is not obligated to accept any draw down if the purchase price of the shares is
less than $3.00.
We will set the lowest price at which we will issue our shares under
the Financing Arrangement (the "Threshold Price"). The Threshold Price may not
be set below $3.00. If the average daily price on a given trading day is less
than the Threshold Price then the Investor's payment obligation under the draw
down will be reduced by 1/5th, 1/20th or an agreed upon fraction for a weekly,
monthly or quarterly draw down, respectively.
Upon acceptance of our Draw Down Request, the Investor, at its option,
may purchase an additional amount of Common Stock up to the maximum amount of
each draw down. The price of such shares will be equal to the daily volume
weighted average price of our Common Stock on the NASDAQ Small Cap Market as
reported by Bloomberg Financial using the AQR function on the date we present
our Draw Down Request. The Investor's right to purchase additional shares of our
Common Stock may be exercised only with respect to each Draw Down Request and is
waived for the period it remains unexercised.
The Investor will receive a Warrant to purchase 12,500, 50,000 and
150,000 shares of Common Stock for each weekly, monthly and quarterly draw down,
respectively. Each Warrant will have a three-year exercise period commencing six
months from the funding date of the draw down. The exercise price of each
Warrant will be 225% of the average daily price of the Common Stock on the date
we present our Draw Down Request.
The shares issuable upon acceptance of all Draw Down Requests and upon
exercise of the Warrants are the subject of this Prospectus.
The term of the Financing Arrangement is for twelve months from the
initial Draw Down, unless earlier terminated by either party or extended by
mutual consent of the parties.
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<PAGE>
USE OF PROCEEDS
We will receive proceeds from the draw downs, the Call Options, if any,
and the exercise of the Warrants issued pursuant to the Financing Arrangement.
We expect to use the net proceeds (after deduction of estimated offering
expenses) from the Financing Arrangement for general corporate purposes.
DIVIDEND POLICY
We have never declared or paid cash dividends on our Common Stock. We
currently anticipate that we will retain all available funds for use in the
operation of our business. As such, we do not anticipate paying any cash
dividends on our Common Stock in the foreseeable future.
MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
On July 18, 1996, we successfully completed our initial public offering
and sold 2,415,000 Units at a price of $5.50 per Unit. Each Unit consisted of
one share of Common Stock and one Redeemable Warrant to purchase a share of
Common Stock at $9.00. Units were traded on the NASDAQ SmallCap Market from July
18, 1996 until August 20, 1996, at which time the Units were delisted from the
exchange. The Common Stock and the Redeemable Warrants have traded separately on
the NASDAQ SmallCap Market since July 29, 1997 under the symbols "XYBR" and
"XYBRW".
As of September 30, 1998, we had approximately 1,200 holders of our
Common Stock. We have not paid any cash dividends on our Common Stock to date.
We do not anticipate the payment of dividends in the foreseeable future.
The table below sets forth by quarter, for the periods indicated, the
high and low market prices of our Common Stock and Redeemable Warrants.
Quotations reflect prices between dealers, without retail mark-up, mark down or
commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Common Stock Redeemable Warrants
------------ -------------------
High Low High Low
---- --- ---- ---
Fiscal 1996
<S> <C> <C> <C> <C>
1st Quarter.................... -- -- -- --
2nd Quarter................... -- -- -- --
3rd Quarter................... 12 4 1/2 6 1/4 1 3/8
4th Quarter................... 4 7/8 1 1/2 2 1/4 5/8
Fiscal 1997
1st Quarter.................... 4 11/16 1 29/32 1 11/32 13/32
2nd Quarter.................... 3 1/2 1 5/16 7/16 3/16
3rd Quarter.................... 5 9/16 2 3/8 23/32 3/16
4th Quarter.................... 4 1 25/32 17/32 5/32
Fiscal 1998
1st Quarter.................... 2 1/2 1 3/8 13/32 5/32
2nd Quarter.................... 8 7/16 1 13/32 1 3/4 1/8
3rd Quarter.................... 5 15/16 3 3/16 2 1 1/16
</TABLE>
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data as of December 31, 1997, and for
each of the two years then ended, have been derived from our consolidated
financial statements. Our financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, as set forth in their
report dated March 31, 1998, which includes an explanatory paragraph, concerning
our ability to continue as a going concern.
The selected financial data as of June 30, 1998 and for the six months
ended June 30, 1998 and 1997, have been derived from our unaudited consolidated
financial statements, which, in our opinion contain all adjustments (consisting
only of normal and recurring adjustments) necessary for a fair presentation of
such data. The result of the interim periods are not necessarily indicative of
the results of a full year. You should read all of the financial data set forth
below in conjunction with our consolidated financial statements and the notes
thereto included elsewhere in this Prospectus. You should also read carefully
the information appearing under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Year Ended December 31, Six Months Ended June 30,
1997 1996 1998 1997
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $555,522 $ 928,732 $356,861 $220,458
Consulting and license 257,000 164,609 1,839 30,000
------- ------- ---------- -----------
Total revenue 812,522 1,093,341 358,700 250,458
Cost of sales 1,225,572 1,081,197 379,476 409,790
--------- --------- ------- -------
Gross profit (loss) (413,050) 12,144 (20,776) (159,332)
Operating expenses:
Sales and marketing 3,280,356 1,442,146 1,151,147 1,489,195
General and administrative 3,518,868 2,158,212 1,617,879 1,885,214
Research and development 2,350,237 1,773,015 1,010,769 1,196,319
--------- --------- --------- ---------
Total operating expenses 9,149,461 5,373,373 3,779,795 4,570,728
--------- --------- --------- ---------
Operating loss (9,562,511) (5,361,229) (3,800,571) (4,730,060)
Interest income, net 82,545 122,693 8,066 49,129
------ ------- ------ -------
Net loss (9,479,966) (5,238,536) (3,792,505) (4,680,931)
---------- ---------- ----------- -----------
Provisions for preferred stock 571,598 --- 2,344 ---
------------- ---------- ----------- -----------
Net loss applicable to holders of
common stock $(10,051,564) $5,238,536 $3,794,849 $4,680,931
============= =========== ========== ==========
Net loss per share applicable to
holders of common stock $ (0.78) $ (0.47) $ (0.22) $ (0.38)
=============== ============ =========== ============
Weighted average number of common
shares outstanding (basic and diluted) 12,844,974 11,121,594 17,016,067 12,459,112
=============== ========== =========== ==========
</TABLE>
December 31, 1997 June 30, 1998
----------------- -------------
Balance Sheet Data:
Working capital........................ $1,753,477 $4,492,263
Total assets........................... 4,531,617 7,433,903
Total liabilities...................... 1,357,682 1,277,405
Stockholders' equity................... 3,173,935 6,156,498
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our
consolidated financial statements of and notes thereto. This Section is
qualified in its entirety by the financial statements as a whole and by other
more detailed financial information appearing elsewhere in this Prospectus.
Results of Operations
The following table sets forth certain consolidated financial data as a
percentage of revenues for the years ended December 31, 1997 and 1996 and the
six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, December 31, June 30, June 30,
1997 1996 1998 1997
<S> <C> <C> <C> <C>
Revenues................. 100.0% 100.0% 100% 100%
Cost of sales............ 150.8 98.9 105.8 163.6
----- ---- ----- -----
Gross margin........... (50.8) 1.1 (5.8) (63.6)
------ --- ----- ------
Operating expenses:
Sales and marketing................. 403.7 131.9 320.9 594.6
General and administrative.......... 433.1 197.4 451.0 752.7
Research and development............ 289.3 162.2 281.8 477.7
----- ----- ----- -----
Total operating expenses.............. 1,126.1 491.5 1,053.7 1,825.0
------- -----
Interest income, net.................. 10.2 11.3 2.2 19.6
---- ---- --- ----
Net loss.............................. (1,166.7) (479.1) (1,057.3) (1,869.0)
-------- ------ --------- ---------
Provisions for preferred stock........ 70.3 - 0.6 -
--------- ------ -------- ---------
Net loss applicable to holders of
common stock................... (1,237.1)% (479.1) (1,057.9%) (1,869.0%)
========== ======= ========== ==========
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues. Total revenues for the six months ended June 30, 1998 were
$358,700, an increase of $108,242, or 43%, compared to $250,458 for the
corresponding period in 1997. Product revenues for the six months ended June 30,
1998 were $356,861, an increase of $136,403, or 62%, compared to $220,458 for
the corresponding period in 1997. The increase in product revenues for the three
months ended June 30, 1998 was related to the higher number of 133P Systems that
we sold during that period, compared to the lower number of 486 and 586 Systems
that we sold in the corresponding period in 1997. The decrease in consulting and
license revenues was due to the lack of sales activity under our license
agreement with Rockwell International that was related to the restructuring of
Rockwell's operations.
Cost of sales. The cost of goods sold for the six months ended June 30,
1998 was $379,476, a decrease of $30,314, or 7%, compared to $409,790 for the
corresponding period in 1997. The cost of goods sold increased commensurately
with the increase in sales but were offset by (1) charges in 1997 of
approximately $97,000 of parts for 586 Systems that were replaced and written
off, and (2) a full reserve for obsolescence of approximately $225,000 for the
remaining computing units used in 486 Systems, which we believe are saleable,
but whose value is uncertain given changes in technology and advances in the
market.
Sales and marketing expenses. Sales and marketing expenses for the six
months ended June 30, 1998 were $1,151,147, a decrease of $338,048, or 23%,
compared to $1,489,195 for the corresponding period in 1997. This decrease was
due to (1) a change in compensation structure for sales personnel which
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<PAGE>
resulted in lower base salaries, (2) a reduction in travel related expenses due
to the centralization of sales staff, and (3) a decrease in the use of outside
consultants for sales and marketing programs.
General and administrative expenses. General and administrative
expenses for the six months ended June 30, 1998 were $1,617,879, a decrease of
$267,335, or 14%, compared to $1,885,214 for the corresponding period in 1997.
This decrease resulted primarily from a reduction in personnel and related
occupancy expenses, along with a decrease in travel expenses. These were
partially offset by an increase in activities related to international
operations.
Research and development expenses. Research and development expenses
for the six months ended June 30, 1998 were $1,010,769, a decrease of $185,550,
or 16%, compared to $1,196,319 for the corresponding period in 1997. This
decrease resulted primarily from reduced activity and related expense given the
substantial completion of development for the head-mounted display and the
body-worn computing unit for the 133P, and the sharing of development expenses
for the Mobile Assistant IV System with our development and manufacturing
partners.
Interest income, net. Net interest income for the six months ended June
30, 1998 was $8,066, a decrease of $41,063, or 84%, compared to $49,129 for the
corresponding period in 1997. This decrease is the result of reduced interest
income from the lower average cash balances in the six months ended June 30,
1998 than for the corresponding period in 1997, which reflected the interest
income on proceeds from our July 1996 initial public offering.
Dividend on preferred stock. We issued our Series C Preferred Stock on
May 15, 1998. The Series C Preferred Stock accrues dividends at 5% per annum on
the outstanding principal amount. For the six months ended June 30, 1998, the
amount of accrued dividend was $2,344, with no comparable item for the
corresponding period in 1997.
Net loss attributable to common stock. As a result of the factors
described above, the net loss for the six months ended June 30, 1998 was
$3,794,849, a decrease of $886,082, or 19%, compared to $4,680,931 for the
corresponding period in 1997. Although we were subject to taxation during the
six months ended June 30, 1998 and the six months ended June 30, 1997, we
incurred net losses during these periods and no provision for taxes was made.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Revenues for the year ended December 31, 1997 were $812,522,
a decrease of $280,819, or 26%, compared to $1,093,341 for the year ended
December 31, 1996. Product revenues for the year ended December 31, 1997 were
$555,522, a decrease of $373,210 or 40%, compared to $928,732 for the
corresponding period in 1996. The reduction in product revenues for the year was
related to the lower number of 133P Systems and Mobile Assistant(R) II Systems
that were sold during that period, compared to the higher number of 486 Systems
that were sold in the corresponding period in 1996. Consulting and license
revenues for the year ended December 31, 1997 were $257,000, an increase of
$92,391, or 56%, compared to $164,609 for the corresponding period in 1996.
During the year ended December 31, 1997, our licensee elected to not continue
with its business activities under our license as a result of the restructuring
of its business operations. A portion of the consideration we received in March
1996 for granting this license was a $300,000 cash payment, which we recorded as
deferred license revenue. We amortized this amount over a five year period.
Given the licensee's stated intent to not to continue conducting business
operations under the license, we recorded the remaining deferred licensing
revenue of $220,000 as of June 30, 1997 as revenue in the three months ended
September 30, 1997.
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Cost of sales. The cost of sales for the year ended December 31, 1997
was $1,225,572, an increase of $144,375, or 13%, compared to $1,081,197 for the
year ended December 31, 1996. The cost of goods sold decreased commensurately
with the decrease in product sales but was offset by charges of approximately
$725,000 to reduce the carrying value of the computing unit for the 486 System
and the Mobile Assistant(R) II to estimated market value and to reduce carrying
values of several components of our head-mounted displays to estimated market
value.
Research and development expenses. Research and development expenses
for the year ended December 31, 1997 were $2,350,237, an increase of $577,222,
or 33%, compared to $1,773,015 for the year ended December 31, 1996. This
increase reflects our ongoing research and development efforts, including the
addition of new personnel, the operation of the design center in California, the
internal development of a head-mounted display, the development of the body-worn
computing unit for the Mobile Assistant(R) II, the 133P and the MA IV, and
software development.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1997 were $3,280,356, an increase of $1,838,210, or 128%,
compared to $1,442,146 for the year ended December 31, 1996. This increase
resulted mainly from increases in personnel, related travel, infrastructure
costs to support sales, VAR training programs, customer service, additional
marketing programs to support the launch of new products, and public and
investor relations efforts, expenses related to the establishment of a
representative office in Tokyo, Japan and negotiations with potential licensees
in the Far East and Europe, along with charges of approximately $253,000 related
to a receivables whose collectability was deemed to be doubtful and were written
off and an expense of approximately $125,000 related to the issuance of warrants
to a consultant.
General and administrative expenses. General and administrative
expenses for the year ended December 31, 1997 were $3,518,868, an increase of
$1,360,656, or 63%, compared to $2,158,212 for the year ended December 31, 1996.
This increase resulted primarily from an increase in personnel, consulting, and
travel expenses related to the expansion and continued development of our
infrastructure, and activities related to discussions regarding certain
strategic partnerships and international operations.
Interest income, net. Net interest income for the year ended December
31, 1997 was $82,545, an decrease of $40,148, or 33%, compared to net interest
income of $122,693 for the year ended December 31, 1996. This decrease is
primarily the result of lower average monthly cash balances in fiscal 1997
versus those during fiscal 1996, when we received cash from our initial public
offering.
Dividend on preferred stock, deemed dividend accretion on preferred
stock. We issued our Series A Preferred Stock on June 30, 1997. The Series A
Preferred Stock accrues dividends at 5% per annum on the outstanding principal
amount. We issued our Series B Preferred Stock on November 11, 1997. The Series
B Preferred Stock accrues dividends at 4% per annum on the outstanding principal
amount. For the year ended December 31,1997, the amount of accrued dividend was
$82,905, with no comparable item for the corresponding period in 1996. In
accordance with the Emerging Issues Task Force report from the Securities and
Exchange Commission titled "Accounting for the Issuance of Convertible Preferred
Stock and Debt Securities with a Nondetachable Conversion Feature," a deemed
dividend was assumed for the Series A and Series B Preferred Stock, which will
be accreted periodically as portions of the Series A and Series B Preferred
Stock are convertible into Common Stock. The amount of this accretion for the
year ended December 31, 1997 was $488,693, with no comparable item for the
corresponding period in 1996. Additional paid in capital is reduced by the
amount of accretion and preferred stock is increased by the amount of accretion,
resulting in no impact on the overall amount of stockholder's equity.
Net loss attributable to holders of common stock. As a result of the
factors described above, the net loss attributable to holders of Common Stock
for the year ended December 31, 1997 was $10,051,564, an
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increase of $4,813,028, or 92% compared to $5,238,536 for the year ended
December 31, 1996. Although we were subject to taxation during the year ended
December 31, 1997 and the year ended December 31, 1996, we incurred net losses
during these periods and no provision for taxes was made.
Liquidity and Capital Resources
Since our inception until the completion of our initial public
offering, we have financed our operations from the private sale of our
securities, from vendor credit and from short-term loans received from
management, stockholders and others.
From October 1994 to August 1995, we raised approximately $1,243,000
from the private sale of shares of Common Stock at $6.00 per share. In November
1995, we raised $1,505,000 through the private placement of convertible
debentures and in April 1996, we raised $1,000,000 through a second private
placement of convertible debentures. We received approximately $2,140,000 from
these financings net of offering costs. We carried the placement fees in respect
of these financings as interest-bearing loans which we repaid from the proceeds
of our initial public offering. We realized gross proceeds of approximately
$13,280,000 and net proceeds of approximately $10,840,000 after related
expenses.
On June 30, 1997, we completed a $3 million private placement of 3,180
shares of Series A Preferred Stock, par value $0.01 per share ("Series A
Preferred Stock"), from which we realized gross proceeds of $3,000,000 and net
proceeds of approximately $2,762,000 after related expenses. The holders of the
Series A Preferred Stock converted all of such shares resulting in the issuance
of 1,958,984 shares of Common Stock.
On November 12, 1997, we completed a $3 million private placement of
3,000 shares of Series B Preferred Stock, par value $0.01 per share ("Series B
Preferred Stock"), from which we realized gross proceeds of $3,180,000 and net
proceeds of approximately $2,950,000 after related expenses. On February 23,
1998, we completed a follow-on placement of Series B Preferred Stock and
realized gross proceeds of $1,000,000 and net proceeds of approximately $990,000
after related expenses. The holders of the Series B Preferred Stock converted
all of such shares resulting in the issuance of 3,172,239 shares of Common
Stock.
In April 1998, we entered into an equity line of credit agreement from
which we received an initial gross amount of $1,000,000 in exchange for Common
Stock. Under this line of equity, we have the right, but not the obligation, to
obtain up to an additional $10,000,000 in a series of equity draw downs based on
terms and conditions specified in the line of credit. In connection with this
line of equity, we issued five-year warrants to purchase up to 40,000 shares of
stock at $1.76 and 20,000 shares of stock at $2.81 at any time starting six
months after closing. The placement agent for this transaction received a cash
fee of 5% and 50,000 shares of unregistered stock.
In May 1998, we completed a $750,000 private placement of 375 shares of
Series C Preferred Stock, par value $0.01 per share ("Series C Preferred Stock")
and 110,294 shares of Common Stock. The Series C Preferred Stock has a stated
value of $1,000 per share. A holder of the Series C Preferred Stock is entitled
to receive, if and when declared, a dividend equal to 5% of the stated value per
share per annum, payable in shares of Common Stock or in cash, payable upon
conversion of the Series C Preferred Stock. The Certificate of Designation of
the Series C Preferred Stock provides us with several redemption options and
allows for the periodic conversion of portions of unredeemed Series C Preferred
Stock over a two-year period ending May 15, 2000. Any Series C Preferred Stock
outstanding on May 15, 2000 must be converted into Common Stock at that date.
In June 1998, we completed a $1,000,000 private placement in which we
issued 153,846 unregistered shares of Common Stock at a price of $6.50 per
share.
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In June 1998, we amended and exercised a put option in the aggregate
principal amount of $3,000,000 under the April 1998 private equity line of
credit agreement mentioned above. In connection with such action, we issued
545,454 shares of Common Stock. Such shares are subject to restrictions on
resale for a period of nine months and to repricing upon occurrences of certain
conditions. In addition, we issued five-year warrants to purchase up to 300,000
shares of Common Stock at a price of $5.25.
We used cash of $3,366,073 in our operating activities for the six
months ended June 30, 1998. This amount was primarily the result of a $3,792,505
net loss. The net loss was offset by a net decrease in inventories of $109,731,
depreciation and amortization of $152,185 and non-cash charges for tooling costs
of $138,682. We used cash of $198,765 for investing activities for the six
months ended June 30, 1998 which included $91,190 related to patents and $74,060
in capitalized tooling costs. We received proceeds of $6,627,195 from our
financing activities for the six months ended June 30, 1998 which primarily
consisted of $5,307,048 from our issuance of Common Stock, net of related fees
and $1,348,496 from our issuance of Series B and Series C Preferred Stock, net
of related fees. As a result, cash and cash equivalents on hand as of June 30,
1998 were $4,014,723, an increase of $3,062,357 from the $952,366 of cash and
cash equivalents on hand as of December 31, 1997.
We used cash of $4,986,509 in our operating activities for the six
months ended June 30, 1997. This amount was primarily the result of a $4,680,931
net loss, an increase in inventories of $295,792 largely related to the
production of the 586 System and our head mounted display, an increase in
prepaid and other current assets of $184,312, offset by depreciation and
amortization costs of $160,547 and non-cash compensation costs of $125,488. We
used cash of $747,144 for investing activities for the six months ended June 30,
1997 which included $306,962 for the acquisition of property and equipment,
$284,294 in capitalized tooling costs related to the production of the 586
System and our head mounted display, and $155,188 related to patents. We
received proceeds of $2,951,076 from our financing activities for the six months
ending June 30, 1997 which primarily consisted of $2,785,000 from our issuance
of Series A Preferred Stock and deferred placement fees of $215,000. As a
result, cash and cash equivalents on hand as of June 30, 1997, were $3,492,390,
a decrease of $2,782,577 from the $6,274,967 of cash and cash equivalents on
hand as of December 31, 1996.
We used cash of $10,062,427 in our operating activities for the year
ended December 31, 1997 compared to cash of $5,133,942 we used for the year
ended December 31, 1996. The net use of cash during the year ended December 31,
1997 was primarily the result of a $9,479,966 net loss and cash used by
inventory of $1,930,378, offset by a net increase in accounts payable and
accrued expenses of $515,466 and depreciation and amortization of $277,299. We
used cash of $866,228 for investing activities for the year ended December 31,
1997, which included $364,678 for the acquisition of property and equipment,
$231,298 related to obtaining and maintaining patents and $270,252 in
capitalized tooling costs. We received proceeds of $5,606,054 from our financing
activities for the year ended December 31, 1997. This amount primarily consisted
of $5,710,406 from the issuance of our Series A Preferred Stock and Series B
Preferred Stock, and $56,500 of proceeds from notes and loans, offset by
payments on notes and loans totaling $72,232, and $16,667 for the remaining
payment on the acquisition of Tech Virginia and repayment of loans. As a result,
cash and cash equivalents on hand as of December 31, 1997 were $952,366, a
decrease of $5,322,601 from the $6,274,967 of cash on hand as of December 31,
1996.
We used cash of $5,133,942 in our operating activities for the year
ended December 31, 1996. This amount was primarily the result of a $5,238,536
net loss combined with $354,871 of cash used by inventories, $337,065 used by
accounts receivable and $177,094 for prepaid and other assets, offset by an
increase in accounts payable and accrued expenses of $177,619 and an increase in
deferred licensing revenue of $250,000. We used cash of $315,257 in investing
activities in the year ended December 31, 1996 for the acquisition of property
and equipment, $114,618 related to the acquisition of patents, and $106,738 of
capitalized tooling and other assets. We received proceeds of $11,436,856 from
our financing activities in
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the year ended December 31, 1996 which consisted primarily of $13,282,500 raised
at our initial public offering and $1,000,000 from the placement of Convertible
Debentures prior to our initial public offering, offset by fees of $2,561,149
and net loan repayments of $251,161.
At June 30, 1998, we had no material capital commitments and working
capital of $4,492,263.
In September 1998, we entered into the Financing Arrangement with the
Investor pursuant to which, we may, at our option, sell up to $31,200,000 of
Common Stock to the Investor during a twelve month period. The Investor may
exercise its Call Option for an additional $31,200,000. To fully utilize the
Financing Arrangement, we may need to register additional shares of Common
Stock. See "Financing Arrangement."
We have entered into a financing agreement with the same investor on
terms comparable to those of the Financing Arrangement. Under this agreement, we
may sell between $2,700,000 and $5,400,000 of Common Stock to the investor
during the period from October 8, 1998 to November 15, 1998. At the date of this
Prospectus, we have issued 216,017 shares of unregistered Common Stock under
this financing agreement from which we have received $900,000 in gross proceeds.
We anticipate that our working capital requirements and operating
expenses will increase as we expand production and sales of the Mobile
Assistant(R), and expand our full sales, service and marketing functions, and
develop the support structure for these activities. The timing of increases in
personnel and other expenses, the amount of working capital consumed by
operations, marketing and rollout expenses for the MA IV, and competitive
pressures on gross margins will impact the magnitude and timing of the our cash
requirements. To meet working capital needs, we entered into the Financing
Arrangement with the Investor. In the event the Financing Arrangement is
terminated, we may also exercise an existing put option to sell up to $7,000,000
of Common Stock under the April 1998 Private Equity Line of Credit Agreement. In
addition, we intend to use funds from operations, and may obtain a working
capital line of credit and/or complete additional financings, if necessary. We
believe that additional funding arrangements are readily available to us and the
execution of any such arrangement will depend on timing, market conditions and
the final terms and conditions of such arrangements. We will begin full
production of the MA IV model of the Mobile Assistant(R) will begin in the
quarter ending December 31, 1998 and expect receivables from sales of the MA IV
to provide collateral for borrowing facilities at that point. Although we can
provide no assurance that such facilities will be available, we intend to seek
to establish secured borrowing facilities at such time as appropriate collateral
is available. We believe that the combination of cash on hand, operating cash
flow, and outside funding will provide sufficient liquidity to meet our cash
requirements until at least March 1999. However, we can provide no assurance
that we can or will obtain sufficient funds from operations or from a working
capital line of credit or from closing additional financings on terms acceptable
to us.
Possible Impact on Near-Term Revenues
We have agreements with third-party suppliers to manufacture and supply
the body-worn computing unit, the HMD and the batteries for the 133P and the MA
IV. We have substantially curtailed production of the computing unit for the
133P pending the introduction of the MA IV in the fourth quarter, although we
believe that we can restart production to meet large orders. As a result, we
expect revenue growth to be modest through the first three quarters of the year
ending December 31, 1998, until the MA IV suppliers commence full-scale
production and those units are sold in volume, which we expect to begin in the
quarter ending December 31, 1998. Delays, for any reason, in the commencement of
full-scale production of the MA IV units may adversely affect revenues for the
year ending December 31, 1998.
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Exchange rates for some local currencies in countries where we operate
may fluctuate in relation to the U.S. dollar. Such fluctuations may have an
adverse effect on our earnings when local currencies are translated into U.S.
dollars.
Possible Non-Cash Future Charge
As a condition to our initial public offering , certain of our
stockholders, primarily officers and directors, deposited an aggregate of
1,800,000 shares of Common Stock into an escrow account. The difference between
the initial offering price and the market value (at the time of release) of any
Escrowed Shares released will be deemed to be an additional compensation
expense. Such expense, depending on the price per share, may have the effect of
reducing or eliminating any earnings per share and could have a negative effect
on the market price for our Common Stock. See "Risk Factors - Effect of Possible
Non-Cash Future Charge."
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BUSINESS
General
Information About Our Products
We are engaged in the research, development and commercialization of
mobile computer systems and related software solutions designed to enhance
personal productivity, especially in commercial, industrial and military
applications. Our latest available product is the Mobile Assistant(R) 133P
model, which is a full- function, body-worn, voice-controlled 133 MHZ Pentium(R)
computer with a head-mounted video display. We have also commenced production of
the next-generation MMX Pentium(R) Mobile Assistant(R).
The Mobile Assistant(R) combines the speed, memory, processing,
multimedia and communication capabilities of a desktop personal computer in a
lightweight unit with hands-free operation and simultaneous user mobility. The
Mobile Assistant(R) is a combination of hardware and software designed to be
worn on the body to perform complex and time consuming tasks such as
maintenance, repair and inspection of complex technological and mechanical
systems, retrieval and analysis of medical information from remote locations,
and coordination of remote commercial and industrial activities and military
field operations. The Mobile Assistant(R) Series can utilize technologically
advanced features such as real time two-way video and audio communications
through radio frequency transmissions, integrated cellular linkups, global
positioning system tracking capabilities and access to information through the
Internet and World Wide Web. The new head- mounted display unit includes a
two-way audio system and optional built-in video camera, weighs approximately l5
ounces and presents a desk-top quality full VGA color image that is
approximately equivalent to that of a 15" VGA monitor at a distance of
approximately two feet. We also offer an optional light-weight, 6.4 inch, full
VGA color, flat panel display, with integrated digitizer, for users who do not
desire an HMD or do not need to be 100% hands-free and feet-free to perform
their job. The body-worn computing unit is designed to allow operation in
environmental conditions in which conventional portable computers could not
previously operate, weighs less than two pounds and is capable of running
software applications designed for Microsoft(R) Windows(R) 3.11, Windows(R) 95
and 98, Windows(R) NT(TM), DOS, SCO UNIX(R) and LINUX.
We currently offer two novel software products to get user
documentation up and running on the Mobile Assistant quickly. The following
products can be used on the Mobile Assistant(R) or conventional desktop or
laptop computers:
o linkAssist(TM) allows users to link information quickly regardless
of the format of the data or where it is stored, avoiding the need
to change, convert or reenter the existing information or to use
the very technical HTML tagging process. An interesting and useful
feature of this product is that the linked words or phrases can
then be activated by voice automatically, with no development work
by the author of the documentation or databases.
o webAssist(TM) allows voice navigation of HTML document links such
as those found on web sites on the World Wide Web and intranets.
This software provides the user with hands-free access to all of
the information found on, for example, manufacturer and supplier
and company-owned, web sites.
Additional authoring and inspection toolkits are in development and are
expected to available this calendar year.
Industry Overview
There has been an ongoing evolution in computer hardware to reduce size
and increase performance and functionality since the introduction of the first
large mainframe computers in the 1950's. The
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commercialization of mobile computing products combined with significant
increases in the number and scope of software applications has resulted in a
multi-billion dollar market. We see the next phase in this evolution to be
body-worn, voice-activated computers, which will provide hands-free portability.
We believe the substantial historic and projected growth in all forms of mobile
and portable computers will translate into the development of a substantial
market for our mobile computing hardware and software products. According to
MarkIntel, a service which compiles market research reports, the overall
portable computer market (20 pounds or lighter) will have an average annual
growth in revenues of approximately 13% to over $23 billion through the year
2000. MarkIntel also reports that:
o notebook computers (i.e. weighing from 5 to 8 pounds) currently
constitute over 70% of portable units sold;
o sub-notebook computers (3 to 5 pounds) currently constitute
approximately 15% of sales of portable computers and are expected
to increase to almost 19% of sales by the year 2000; and
o mini-computing and communication devices (3 pounds or less, and
which still are considered to be in an evolutionary cycle) will
experience an average annual revenue growth rate of 33%.
The computer software industry has undergone a similar evolution
evident in a shift from processing data to providing information in conjunction
with the changes in computer hardware. For example, mainframe computers were
initially used to process vast amounts of data such as population statistics,
corporate accounting information, etc. However, with personal computers came
software to provide information to users in the form of analysis, relationships,
etc. We believe that providing "how to" knowledge to users is the next step in
the evolution of the computer software and one that is well suited for use with
body-worn computers.
Business Strategy
Our objective is to be the leading provider of voice-activated,
hands-free mobile computing systems and related software. To achieve this
objective, we intend to pursue the following strategies:
Develop and Strengthen Strategic Alliances. We have established, and
intend to continue to establish, strategic alliances with world-class
distribution partners, selected systems integrators, independent software
vendors, VARs, OEMs and industrial and commercial equipment and service
providers. The benefits we receive from these associations include access to a
larger potential customer base, complementary technologies, reduced capital
investment through utilization of outside resources, and access to manufacturing
expertise and efficiencies of world-class manufacturers. We have distribution
and support agreements with EnPointe for North American distribution, Hewlett
Packard for European, Middle East and African distribution and support, and with
Nissho Iwai for Far East distribution. All agreements have resulted in a
worldwide distribution network to be operational this calendar year to support
the launch of the MA IV Series. In addition, we have already contracted with
certain large systems integrators, such as DynCorp, to both provide
implementation support for our customers worldwide as well as to place our
products within their own client bases. We have been pursuing, and will continue
to pursue, additional strategic associations to enhance our product offerings
and expand our marketing activities.
In addition to marketing and establishing strategic relationships, we
have contracted with organizations such as the SBS in Europe (over 30 software
companies serving as a Xybernaut Center of Excellence for speech and wearable
applications), and companies in the USA and Asia for hardware development and
field testing of application-specific solutions.
Provide Custom Software Solutions for Diverse Customer Needs. We intend
to continue the development or acquisition of software that enables our
customers to create customized software applications for use with the Mobile
Assistant(R) Series and on conventional PCs. We will design this software to
provide prepackaged application expertise that incorporates the end user's
existing programs, procedures and technical
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documentation, thereby permitting the cost-effective development of
productivity-enhancing software applications by customers. We believe that
revenue from software will become an important contributor to operating margins
in the future.
Penetrate Target Markets Through Licensees, OEMs, VARs, Distributors,
and Direct Sales. We believe that our mobile computing technology is especially
well suited for the repair and maintenance of commercial, industrial and
military equipment and facilities. We also believe that forms-based
applications, such as inventory and data collection, are extremely well-suited
for our flat panel display configuration, requiring the user to carry only a 1 -
1 1/2 pound VGA color display/digitizer instead of heavier pen tablets which
offer only limited computing power. We intend to penetrate our target markets
through effective use of OEMs, VARs and distributors that demonstrate
comprehensive market knowledge in their markets. We intend to leverage internal
marketing and sales resources, and achieve rapid foreign and domestic market
penetration through the use of already approved, as well as additional
distributors, systems integrators, industrial and commercial equipment
suppliers, independent software suppliers, OEMs and VARs. We also intend to
continue marketing directly to key national accounts in order to build multiple
reference accounts so that our distributors may quickly expand their own sales
world-wide. These reference accounts also provide our research, development and
engineering organizations with valuable unfiltered feedback from customers for
future product development. We expect to have numerous opportunities to license
our intellectual property as large computer and equipment manufacturers attempt
to enter the wearable or user-supported computing marketplace. We believe such
licensing will yield significant revenue as well as accelerated market
penetration.
Achieve and Maintain Technology Leadership. We are committed to
achieving and maintaining technological superiority of the Mobile Assistant(R)
Series and our other mobile computing hardware and software products through the
continuous reassessment of product performance and the utilization and
integration of state of the art hardware and software technologies. We believe
that our substantial expenditure of time and effort in developing the Mobile
Assistant(R) Series has resulted in a set of core competencies which provide us
with a solid foundation in the hands-free, mobile computing industry. We intend
to maintain this advantage through ongoing research and development, which will
ensure that the Mobile Assistant(R) Series will continue to provide a full range
of PC capabilities, including two-way video communication and access to the
Internet, intranets, remote databases and other computerized reference
resources. We also intend to rely heavily on joint developments with our
strategic partners worldwide, and cross-licensing of our valuable intellectual
property to build and market new technology. The current MA IV Series, for
example, is the result of our successful relationships with Fujitsu, Sony
Digital Products, Hitachi, Shimadzu, Toshiba, JAE and Moli Energy, all under the
auspices of our Japanese operations.
Commitment to Open Architecture. We utilize standard PC hardware and
software architectures and design our products using open systems technologies,
including industry standard operating systems and open system computer
platforms. We continually evaluate the feasibility of integrating our software
and hardware products with new technologies as these are developed and accepted
in the marketplace. We anticipate upgrading our current products to incorporate
open architectures to allow use with existing and emerging standards in hardware
and software technology.
Leverage Core Competencies. We believe our core competencies are the
integration and adaptation of innovative computer hardware and software
technologies into hands-free mobile computing products that enhance end-user
productivity. We will seek to expand applications for our technologies and to
capitalize on the breadth of our expertise by assisting our customers in the
development of new hardware and software products. Consistent with this
strategy, we will continue to focus on integration of hands-free mobile
computing hardware with internally developed, or acquired, software applications
and hardware products. Our goal is to adhere to the model of an Intellectual
Property-Virtual Hardware-Communications-Software Company, concentrating on
research, development and engineering, and marketing strategies. We intend to
continue to allow our strategic partners to execute our manufacturing, service,
sales and marketing functions, under the watchful eye of our management. We
intend to remain small and nimble, able to react quickly to market needs and
world economic changes.
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Products and Product Development
In order to address the market, which we believe exists for body-worn
mobile computers, we have designed the Mobile Assistant(R) Series with five key
features:
1. Compact, lightweight and rugged hardware specifically designed for
mobile, body-worn use
2. Easy to use human interface
3. Voice command control
4. Head-worn miniature display
5. Flat panel miniature display/digitizer
Compact Hardware for Mobile, Body-Worn Use. The MA IV currently
utilizes primarily off-the- shelf miniaturized hardware components in a
body-worn computing package weighing under two pounds. Design features for the
MA IV currently include:
o Intel Pentium (R)200 or 233 MHZ processor w/ 512 KB L2 cache.
o Extended Data Output ("EDO") RAM (currently ranging from 32 Mb
to 128 Mb).
o Internal hard disk currently ranging from 2 - 4 GB.
o Protected internal dual PC Card readers using CardBus
(industry-standard peripheral cards).
o Enclosure to allow use in a wide range of environmental
conditions.
o Advanced-technology, hot-swappable lithiumion battery and charger.
o HMD/FPD, USB, Power and Replicator ports.
o Mini-port replicator for mobile use, and desk-top port replicator.
o Wrist-mounted miniature keyboard.
o Miniature integrated full color video camera.
o Compatibility with DOS, Windows(R) 3.11(TM), Windows(R) 95 and
98, Windows(R) NT(TM), SCO UNIX(R) and LINUX operating systems.
o Integrated pointing device (mouse).
o Built-in sound system for speech recognition and generation.
The Mobile Assistant(R) Series are full-featured "Wintel" PCs, which
can readily be used as a desktop PC. The Mobile Assistant(R) Series allows for
the incorporation of a wide range of capabilities including portable CD- ROM
readers, bar code readers, battery-operated printers, still and motion video
cameras, global positioning technologies, cellular and radio frequency
communications and interfaces for medical and test equipment.
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Voice Command Control. The Mobile Assistant(R) Series supports
state-of-the-art voice recognition software, hardware and algorithms to
communicate digitized speech as input to the processor through an integrated
analog-to-digital/digital-to-analog circuit. Generally, significant user
training is not required because the operable vocabulary is created in advance
to be recognized by a wide range of users or a phonetic engine is utilized. The
system can also be programmed to "learn" the user, on the fly, during real-time
field use. The speaker-independent approach works well for the menu and
button-driven programs used in the Mobile Assistant(R). System accuracy can be
improved greatly since the words and phrases for each menu screen can be
predetermined and used to limit recognition ranges to the screen at hand. The
combination of voice recognition and head-worn display provides the user of the
Mobile Assistant(R) with hands-free access to information and the ability to
apply this information to operations and tasks with direct lines of sight and
tactile access. In addition to basic command-and-control speech recognition, the
MA IV also offers dictation features, and natural language speech processing is
planned for introduction in 1999. Our main speech development partners are IBM
and Texas Instruments.
Head-Worn Miniature Display. The MA IV uses a lightweight HMD with 640
X 480 pixels (VGA color). It is anticipated that this display will be offered in
color SVGA, 1280 X 1024 pixel resolution, and eventually in color resolutions
exceeding those planned for High-Definition TV. All displays are approximately
one square inch in size and use advanced optics to present an image to the user
that is equivalent to a 15" desktop monitor at a distance of two feet. These
displays are available in monocular form, and can be worn on a mounting device
similar to a runner's visor, or on helmets, hardhats, soft baseball caps or
similar headgear. These high quality, miniature displays present information in
a heads-mounted display format without completely occluding vision.
Flat Panel Display. The MA IV uses an optional light-weight, 6.4 inch,
full VGA color, flat panel display, with integrated digitizer, which is offered
for users who do not desire an HMD or do not need to be 100% hands-free and
feet-free to perform their job.
Computer Software for Mobile, Body-worn and Desk-top Use. Our
linkAssist(TM) and webAssist(TM) products are ready for the market. See
"--Information About Our Products."
We also have two other products under development and expect to have
them ready for the market in 1999. All products, while designed to speed up the
development of applications for our line of wearable computers, are equally
applicable to lap-top and desk-top applications. Our two software products under
development are:
o Mobile Inspector(TM) - a toolkit to assist developers in the
creation of inspection applications regardless of whether the
item under inspection is a car, a furnace or a human body.
This toolkit, already proven without speech navigation and
entry features, is being updated to incorporate our speech
recognition software offerings.
o The second product, as yet unnamed, is an authoring toolkit to
quickly create Interactive Electronic Technical Manuals
(combinations of expert software and electronic books and
drawings and charts) and on-the-fly training programs.
Marketing and Sales
Markets
We design our marketing efforts to increase awareness of and demand for
our products in the commercial, industrial and military markets. The following
are examples of selected horizontal and vertical markets which we will address
in our continuing marketing efforts:
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Commercial Maintenance and Repairs. Information from the United States
Bureau of Labor Statistics and Bureau of Census indicates that as of 1996 there
were more than 5,460,000 commercial mechanics and technicians in the United
States; all of which, we believe, are potential users of the Mobile Assistant(R)
Series and our other products. There are many sources of savings available from
use of the Mobile Assistant(R) Series and our other products in maintenance and
repair operations such as: less formal training is required for a similar level
of performance, the time required for diagnostic and repair tasks is reduced as
"just in time" refreshers and improved technical information can be provided,
and personnel can address a wider range of complex tasks or products with the
same level of basic training. While these savings can be realized in most
industries, we anticipate that these savings will be most immediate and apparent
in those industries that require a large investment in equipment and machinery,
including the transportation, automotive, construction, power generation, health
services, agriculture and the military. In industries such as construction or
mining, we believe downtime on critical equipment can cost up to $75,000 or more
per day. Accordingly, a reduction measured in minutes or hours of downtime in
these industries can, in our view, provide ample cost justification for a Mobile
Assistant(R). The telecommunications industry is expected to be a prime
candidate for mobile computing systems given the industry's complex
technologies, increased competition and assets spread over a wide geographic
area. The Mobile Assistant(R) can provide needed knowledge to workers on the top
of a telephone pole, at a remote relay station or in a conduit tunnel. Crew
locations can be monitored and coordinated in the field with the Mobile
Assistant(R) through optional global positioning system technology. Crews at
remote locations can consult with experts using two-way audio and/or video
communications.
Healthcare. According to the National Center for Health Statistics, in
the United States spent approximately 13.6% of the U.S. Gross Domestic Product,
or approximately $1 trillion, on healthcare, with an estimated 25% of such
expenses consumed by administrative expenses. According to the National Center
for Health Statistics, United States, 1994, the United States has over 6,000
hospitals and over 540 health maintenance organizations. According to the United
States Department of Labor, in 1994 there were approximately 4,714,000
healthcare workers in the United States. We believe that many of the current
processing and data systems used in healthcare, both in institutions and in the
field, are not well developed or integrated and that hands-free mobile computing
systems could reduce expenses and increase efficiency in this industry. The
Mobile Assistant(R) is believed to present great potential in field medical
operations by providing on-board and remote diagnostics, audio and/or video
communication with doctors for emergency procedures, and transmission of
locations for helicopter pickup through global positioning systems integrated
into the Mobile Assistant(R). Another anticipated benefit of our hands-free
mobile computing technologies is that fewer healthcare personnel will be needed
to perform complex tasks. By providing remote delivery of medical information,
our hands-free mobile computing systems can become a key component within both
managed care and telemedicine organizations, which are two key submarkets
developing within the healthcare industry.
Public Sector. We have demonstrated the ability of our technology to
aid in law enforcement, fire protection, emergency services and control of
national borders. EnPointe, the North American distributor of Xybernaut's MA IV,
has demonstrated the success of establishing purchasing schedules for most
significant city, state and municipal agencies, thus making the technology
readily available.
Education. We believe that our mobile computing systems are well suited
for educational applications. The Mobile Assistant(R) is especially suited for
hands-free applications, such as laboratory work, field research and dissections
and has the potential to serve as a mobile student workstation. In addition, it
can provide an ideal computing and control platform for special education and
handicapped needs.
Military. There are several potential military applications for our
hands-free mobile computing systems, including intelligence, maintenance and
field operations. The military has long been an early user of advanced weapons
technologies and, as a result, was one of the first sectors to experience
problems with the ability of personnel to maintain, diagnose and repair the
advanced technology employed in both weapons and equipment. These problems have
been compounded by the downsizing of the United States military and related
budget constraints. As a result, even greater pressure will be placed upon the
military to maintain its equipment and weapons platforms with fewer personnel.
We believe that most of the estimated 700,000 military maintenance
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personnel in the United States could be made more efficient and productive by
our hands-free mobile computing systems.
The United States military's increasingly sophisticated weapon systems
require volumes of operational and technical manuals and have dramatically
increased the importance of maintenance. The United States Army has purchased
the Mobile Assistant(R) and has tested its use in the maintenance and repair of
the AH64 Apache Attack helicopter. The Apache can send and receive maintenance
data via an industry standard electrical interface which can be read by an
optional interface for the Mobile Assistant(R). Operating and performance data
can be downloaded directly from the Apache and the Mobile Assistant(R) can be
used to diagnose existing and potential maintenance and repair problems. We
anticipate that manufacturers of complex military and commercial equipment
increasingly will incorporate integrated data collection and transmission
capabilities into their technologies to reduce downtime, repair and maintenance
related costs.
The ability to deliver information to soldiers in combat field
operations is the focus of several development programs sponsored by the United
States Army. The Army has been conducting simulated combat maneuvers using
body-worn computing components, including those we provide, to determine
effectiveness for use in coordinating troop locations and movements, determining
enemy locations, and using global positioning systems to provide coordinates for
artillery, helicopter pickup and air support.
We have sold many systems to the US Army and Navy, and expect that our
sales partners will sell heavily into the armed services both in the USA and
overseas.
Marketing
Because our products are frequently combined with products from other
manufacturers to form integrated information systems, we believe that it is more
effective to sell principally through distributors, systems integrators,
industrial and Commercial equipment manufacturers, independent software vendors
and VARs with defined market niche expertise and presence.
In preparation for the introduction of the MA IV, we have contracted
with several specialized distributors for higher volume distribution of the MA
IV. We believe that by forming relationships with these partners we can gain
entry to many various sub-markets and types of end users, and serve customers or
have in-place sales and distribution channels that identify new customers and
sales opportunities. We can then reach end users more rapidly in a variety of
industries.
To ensure outstanding partner performance, we offer detailed in-house
training sessions to prepare and update personnel for field sales and training.
In addition, we are developing comprehensive sales and operations manuals to be
used by these channels and end-users.
Our marketing and sales employees are responsible for implementing
direct marketing plans and sales programs, coordinating sales activities with
sales and marketing and service partners. All fulfillment will be accomplished
through distribution partners, regardless of which entity makes the actual
sales.
License Granted to the Company by Data Disk
During 1997, we entered into a series of agreements with Data-Disk
Technology, Inc., a Virginia-based company. Data-Disk Technology, Inc. produces
the Data Disk, a memory product that consists of a non-volatile memory chip
encapsulated in a rugged polymer casing slightly smaller than a soldier's
"dogtag" that is highly resistant to temperature and environmental conditions.
We believe that the Data Disk provides an ideal storage medium for body-worn
computer applications, especially those that involve a large number of people,
inspection sites or equipment. These tags can be used to store information such
as medical history, repair history or other data unique to an individual or
piece of equipment. Such information can be read by inserting the tag into a
reader that fits in the existing PC card slots on all models of the Mobile
Assistant(R). The U.S. Department of
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Defense is evaluating the Data Disk and competing technologies to replace the
current system of stamped metal dogtags for soldiers. Under the agreements with
Data Disk, we received an exclusive, perpetual worldwide license to use and sell
present and future Data Disk technology for user-supported (wearable) computing
applications.
Key Suppliers
We have supplier relationships with Sony Digital Products and Shimadzu,
among others, for the production of the MA IV system. (See "--Production"). We
have designed a proprietary HMD that is being manufactured by Greenway
Engineering using purchased and fabricated parts. We contracted Greenway to
purchase and manage parts and components inventory, manufacture computer boards,
and assemble and test the HMD of the Mobile Assistant(R), as well as to obtain
Federal Communications Commission certification for the Mobile Assistant(R)
system.
We have also entered into design, production, supply and support
agreements with many companies, in the USA and overseas, in order to complete
our wearable line of computers. They include Fujitsu, Sony Digital Products,
Hitachi, Shimadzu, JAE, Toshiba, Moli Energy, IBM, Texas Instruments, the SBS,
etc.
We currently have subcontracted the manufacture of the body-worn
computing unit, headset and battery portions of the 133P to third-party vendors.
These components are assembled and integrated with the software applications for
the Mobile Assistant(R) at our headquarters.
Although we believe there are multiple sources for many parts and
components, we depend heavily on our current suppliers. While we believe that we
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 us 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, we also could experience
delays or interruptions in supply in the event we are required to find a new
supplier for any of these components. Any disruptions in supply of necessary
parts and components from our key suppliers could have a material adverse effect
on our results of operations. Any future shortage or limited allocation of
components for the Mobile Assistant(R) could have a material adverse effect on
our operations, cash flows, and financial condition.
Production
We are party to a manufacturing agreement with Sony Digital Products, a
subsidiary of Sony Corporation based in Nagano, Japan, for the manufacture of
the MA IV, which is scheduled to begin pre-production in the quarter ending
December 31, 1998. We have been engaged by Shimadzu Corporation, a supplier of
head- mounted displays and other commercial technology products based in Kyoto,
Japan to develop and manufacture a color HMD for use with the MA IV. Most of the
parts and components for the Mobile Assistant(R) are off-the- shelf PC
components that are available in high quantity from multiple vendors. We
currently use a monochrome Active Matrix Liquid Crystal Display ("AMLCD") from
one supplier in its HMD. We have been notified by that supplier that the
monochrome AMLCD has been discontinued and is being replaced by a color AMLCD.
We believe that there are sufficient quantities available of this monochrome
AMLCD to meet currently forecast requirements for the 133P system until the MA
IV system is introduced. If the start of full-scale production of the MA IV
model of the Mobile Assistant(R) is delayed past the quarter ending December 31,
1998, such delay will have an adverse effect on revenues for the twelve months
ending December 31, 1998. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Warranties
We provide customers with a parts and labor warranty for one year.
Warranty services for the 133P are provided by Matrix and warranty services for
our HMD are provided by Greenway Engineering, except for the AMLCD, which is
provided by its manufacturer. Warranty services for the MA IV Series is an
integrated
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<PAGE>
offering by several vendors. Our distribution partners are responsible for
levels one and two service. We intend to pass on Level 3 maintenance and
call-center support to a 3rd party service firm.
Competition
We anticipate that we will face widespread competition from other
portable computing systems manufacturers. Several other companies, including
Computing Devices International, a division of Ceridian Corporation, ViA Inc.,
Texas Microsystems, Telxon, Norand and Teltronics, Inc., a subsidiary of
Interactive Solutions, Inc., Raytheon and a consortium of Litton and TRW, are
engaged in the manufacture and development of body-mounted or hand-held
computing systems that do or could compete with the Mobile Assistant(R) Series.
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 we do and which can be expected to compete
vigorously with us. However, we consider entry by reputable, large computer
manufacturers to be healthy for the marketplace in that it would bring
legitimacy to the market in a more rapid fashion.
Intellectual Property
We consider our patent, trade secrets, and other intellectual property
and proprietary information to be important to our business prospects. We rely
on a combination of patent, trade secret, copyright and trademark laws and
contractual restrictions to establish and protect our proprietary rights. We
have implemented a trade secret management program to protect our trade secrets
and proprietary information. In addition, we have confidentiality and invention
assignment agreements with our employees, and generally enter into
non-disclosure agreements with our suppliers, VARs, OEMs and actual and
potential customers to limit access to and disclosure of our proprietary
information.
We have registered our Mobile Assistant(R) and Xybernaut(R) trademarks
on the Principal Register of the United States Patent and Trademark Office and
the patent and trademark offices in several foreign countries. In April 1994, we
obtained U.S. patent number 5,305,244 ("hands-free, user-supported portable
computers") for the Mobile Assistant(R) Series. We derived most of our revenue
for the twelve months ended December 31, 1997 and 1996 and the six months ended
June 30, 1998 and 1997 from products included within the scope of the Patent. We
have notified several of our competitors of the existence of the Patent, which
our counsel believes may have been infringed by some of such competitors. We
intend to take any and all appropriate measures, including legal action,
necessary to maintain and enforce our rights under the Patent and other patents
held by us.
We have filed twenty patent applications covering various aspects of
computers in general and wearable computers in particular since July 1996. Six
of these patent applications have been issued, one patent has been allowed
pending issuance and thirteen patents are pending. We have also filed most of
these applications in European countries, The People's Republic of China, Japan,
Republic of Korea, Republic of China (Taiwan), Canada and Australia. All patents
issued to our employees under pending and future applications have been and will
be assigned to us under existing invention assignments.
We cannot assure you that our pending patent applications will issue as
patents, that any issued patent will provide us with significant competitive
advantages or that challenges will not be instituted against the validity or
enforceability of any of our patents. The cost of litigation to uphold the
validity and prevent infringement of patents can be substantial. We also can
provide no assurance that others will not independently develop similar or more
advanced products, design patentable alternatives to our products or duplicate
our trade secrets, or that our employees or suppliers will not breach their
confidentiality agreements. In addition, we may be required, in some cases, to
obtain licenses from third-parties or to redesign our products or processes to
avoid infringement.
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<PAGE>
Research and Development
Our research and development expenditures for the years ended December
31, 1997 and 1996 and the six months ended June 30, 1998 and 1997 were
$2,350,237, $1,773,015, $1,010,769 and $1,196,319, respectively. These
expenditures consist primarily of personnel engaged in the research and design
of new hardware and software products, test components, consulting fees,
equipment and purchase software costs required to conduct our development
activities.
Employees and Consultants
As of June 30, 1998, we had 30 full-time and nine part-time employees,
and had consulting arrangements with ten individuals or firms for advice and
assistance on selected technical and business issues. Of our thirty full-time
employees, two are executive officers, eleven are technical and administrative
support employees, five are engaged in research and development, four are
engaged in assembly and testing and eight are engaged in sales and marketing.
None of our employees are represented by a union. We believe that our relations
with our employees are good.
We are party to employment and consulting agreements with certain of
our executive officers and directors. See "Management -- Employment Agreements;
- -- Consulting Agreements."
Properties
Our office and development facility consists of 18,642 square feet
located at 12701 Fair Lakes Circle, Fairfax, Virginia. Our current lease is for
a three-year term expiring September 30, 1998 and requires monthly rent of
approximately $26,000.
To minimize lodging expenses for visiting employees and consultants, we
lease an apartment located at 4401 Sedgehurst Drive, #301, Fairfax, Virginia
22033 pursuant to a month-to-month lease requiring monthly rent of $975. We must
give at least 45 days prior written notice before termination of the lease. We
also lease an apartment at 11842 Federalist Way for a twelve-month period ending
November 30, 1998 with a monthly rent of $1,099 and an apartment at 4705 Quiet
Woods Lane for a twelve-month period ending July 6, 1999 with a monthly rent of
$1,016.
During the year ended December 31, 1997, we leased approximately 650
square feet of office space at FM Building 102, 7-39-5 Nishikamata, Ohta-ku,
Tokyo 144, Japan, for use as our Far East representative office. The initial
lease term is for two years ending April 1999 at a base rent of approximately
$1,700 per month and is renewable at our option for an additional two year
period. Subsequent to year-end, we terminated this lease and moved our offices
to Wakadayashi Building, 5-12-6 Kita-Shinagawa, Shinagawa-ku, Tokyo 141, Japan.
Legal Proceedings
On March 19, 1998, Matrix Corporation, with whom we had entered into a
June 1997 agreement (the "June Agreement"), filed a summons against us in the
United States District Court, Eastern District of North Carolina, alleging that:
o we damaged Matrix by our purported breach of the December 1997
Agreement (the "December Agreement");
o we should return all goods shipped by Matrix under both the
June Agreement and the December Agreement; and
o we did not intend to comply with the December Agreement and
therefore the governing contract between the two entities
should revert to the June Agreement.
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In addition, this summons requests that any damages incurred by Matrix
as a result of this purported breach of contract be trebled. On August 6, 1998,
the Court rendered an Order dismissing all of Matrix's claims, except for the
breach of contract claim under the December Agreement. On September 9, 1998, we
filed an answer which denies the material allegations of the complaint, and
asserts a counterclaim alleging that Matrix failed to perform to the
requirements of the December Agreement and that Xybernaut has been damaged by
this failure to perform. While there can be no assurance of the outcome of this
legal proceeding, we believe that the remaining claim by Matrix is groundless
and that the impact of this legal proceeding will not be materially adverse to
our operations. The maximum amount which we would have to pay under the December
Agreement if Matrix performs defined tasks is approximately $250,000 and the
maximum amount of inventory that we could assume under the December Agreement is
approximately $600,000.
WHERE YOU CAN FIND MORE INFORMATION ABOUT US
We file annual, quarterly and special reports, proxy statements and
other information with the SEC. You may read and copy any document we file at
the SEC's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. Our SEC filings are also available to the public
from the SEC's Website at "http://www.sec.gov."
We have filed with the SEC a registration statement on Form SB-2 to
register shares of our Common Stock. This Prospectus is part of that
registration statement and, as permitted by the SEC's rules, does not contain
all the information included in the registration statement. For further
information with respect to us and the Common Stock, you may refer to the
registration statement and to the exhibits and schedules filed as part of that
registration statement. You can review and copy the registration statement and
its exhibits and schedules at the public reference facilities maintained by the
SEC as described above. The registration statement, including its exhibits and
schedules, is also available on the SEC's Website.
This Prospectus may contain summaries of contracts or other documents.
Because they are summaries, they will not contain all of the information that
may be important to you. If you would like complete information about a contract
or other document, you should read the copy filed as an exhibit to the
registration statement.
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MANAGEMENT
Directors and Executive Officers
Our officers and directors, their ages and present positions are as
follows:
<TABLE>
<CAPTION>
Present Position
Name Age with the Company
- ---- --- ----------------
<S> <C> <C>
Edward G. Newman 55 President, Chief Executive Officer and Chairman of the
Board of Directors
George Allen, Esq. 46 Director
Eugene J. Amobi 52 Director
Keith P. Hicks, Esq. 75 Director
Steven A. Newman, M.D. 52 Director and Vice Chairman of the Board of Directors
Phillip E. Pearce 69 Director
James J. Ralabate, Esq. 70 Director
Lt. Gen. Harry E. Soyster 62 Director
(Ret.)
Kaz Toyosato 54 Executive Vice President and Director
Martin Eric Weisberg, Esq. 47 Director
Dr. Edwin Vogt 65 Director
Maarten Heybroek 56 Chief Operating Officer and Chief Financial Officer
</TABLE>
Our Board of Directors is divided into three different classes. At each
annual meeting of stockholders, one class of directors will be elected to
succeed those directors in the class whose terms then expire, for terms expiring
at the third succeeding annual meeting of stockholders. The following is a brief
summary of the background of each of our directors and executive officers.
Class I Directors
Keith P. Hicks, Esq. has been a director since July 1994 and is
currently a principal in C&H Properties and the owner of Hicks Bonding Co.,
Hicks Auctioneering Co. and Hicks Cattle Company. Mr. Hicks is a graduate of the
University of Denver (B.A. 1954) and LaSalle University School of Law (L.L.B.
1969).
Kaz Toyosato joined us in October 1996 as Executive Vice President of
Asian Operations. Mr. Toyosato is responsible for overseeing our operations in
Asia, including Japan. Prior to joining our organization, Mr. Toyosato spent 27
years with Sony Corporation in Japan where his last position was the Vice
President of Sony USA. He previously helped manage the Sony Walkman product
line, and managed Sony's 8mm video camcorder and its battery line of products.
Martin Eric Weisberg, Esq. is our Secretary. He is a partner of the law
firm, Parker Chapin Flattau & Klimpl, LLP, which serves as our general counsel.
Mr. Weisberg specializes in the areas of securities, mergers and acquisitions,
financing and international transactions and has been in the private practice of
law for 23 years. Mr. Weisberg is a summa cum laude graduate of Union College
(B.A. 1972) and received his law degree from The Northwestern University School
of Law (1975), where he graduated summa cum laude, was Articles Editor of the
Law Review and was elected to the Order of the Coif. Mr. Weisberg also attended
The London School of Economics and Political Science.
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Class II Directors
Eugene J. Amobi has been a director since January 1996. Since 1983, Mr.
Amobi has been President, a director and a principal stockholder of Tech
International, Inc. ("Tech International"), which provides engineering,
technical support and consulting services to government and domestic and
international commercial clients. Mr. Amobi has been president and director of
Tech International of Virginia Inc. ("Tech Virginia"), our wholly-owned
subsidiary, since its spin-off from Tech International. Prior to 1983, Mr. Amobi
was a Senior Engineer with E.I. DuPont de Nemours and a Managing Director of
Stanley Consultants, an international engineering consulting firm. Mr. Amobi is
a graduate of The Technion, Israel Institute of Technology (B.S. 1969),
Princeton University (M.S. 1970) and Syracuse University (M.B.A. 1973).
Phillip E. Pearce has been a director since October 1995. Mr. Pearce
has been an independent business consultant with Phil E. Pearce & Associates,
Chairman and Director of Financial Express Corporation since 1990 and since 1988
has been a principal of Pearce-Henry Capital Corp. Prior to 1988 Mr. Pearce was
Senior Vice President and a director of E.F. Hutton, Chairman of the Board of
Governors of the National Association of Securities Dealers, a Governor of the
New York Stock Exchange and a member of the Advisory Council to the United
States Securities and Exchange Commission on the Institutional Study of the
Stock Markets. Mr. Pearce also is a director of RX Medical Services, Inc., an
operator of medical diagnostic facilities and clinical laboratories, InfoPower
International, Inc., a software development company and StarBase Corporation, a
software development company, and United Digital Networks, Inc., a provider of
voice and data long distance services. Mr. Pearce is a graduate of the
University of South Carolina (B.A. 1953) and attended the Wharton School of
Investment Banking at the University of Pennsylvania.
Lt. Gen. Harry E. Soyster (Ret.) has been a director since January
1995. He is currently Director of Washington Operations and Vice President of
International Operations of Military Professional Resources, Incorporated. From
1988 until his retirement in 1991, Lieutenant General Soyster (Ret.) was the
Director of the United States Defense Intelligence Agency. Prior to that time,
he was Commander of the United States Army Intelligence and Security Command and
a Deputy Assistant Chief of Staff for Intelligence, Department of the Army.
Lieutenant General Soyster (Ret.) is a graduate of the United States Military
Academy at West Point (B.S. 1957), Penn State University (M.S. 1963), the
University of Southern California (M.S. 1973) and the National War College
(1977).
Dr. Edwin Vogt was appointed a director on September 28, 1998 and has
been a consultant since 1996. Mr. Vogt joined IBM in 1961 as Development
Programmer and worked in the fields of hardware development, holding 28 patents,
as well as software development. As manager he was responsible for hardware
projects (IBM /360, /370, 433x) as well as various software projects (a.o. voice
recognition products) before being appointed Director as manager of several
Hardware and Software Product Development Laboratories. As IBM Software Group
Executive he held the worldwide responsibility for the development and marketing
of IBM Workflow products and Reengineering tools until retiring from IBM end of
1995. In early 1996 he was appointed Director for the SBS association
(Softwarezentrum Boeblingen / Sindelfingen e.V.) and, since then, has grown this
center to 39 member companies with over 200 experts, predominantly working in
high-growth areas such as Internet, Workflow, Process Automation, Multimedia.
Dr. Vogt is a graduate of the University of Stuttgart with an M.S. in Electrical
Engineering and Mathematics in Theoretical Electrical Engineering.
Current Class III Directors
George Allen, Esq. is a partner of the law firm of McGuire Woods Battle
& Boothe, LLP. Mr. Allen was Virginia's 67th governor from 1994-1998, during
which period state taxes were cut by $1 billion, $14 billion in new investments
were made in the state resulting in 300,000 net new private sector jobs. Mr.
Allen's term in office also was noted for comprehensive reforms in primary and
secondary education, the abolition of parole, reform of the juvenile justice
systems and the replacement of the welfare system with reforms which promote
work ethic and personal responsibility. Prior to serving as Governor of
Virginia, Mr. Allen was a member of the U.S. House of Representatives in 1991
and a member of the Virginia House of Delegates from 1983-1991.
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<PAGE>
Mr. Allen is a member of the Board of Directors of Commonwealth Biotechnology,
Inc. Mr. Allen is a graduate of the University of Virginia at Charlottesville
(B.A. 1974), with distinction, and received his law degree from the University
of Virginia at Charlottesville (J.D. 1977).
Edward G. Newman has been our President since March 1993, Chief
Executive Officer and Chairman of the Board of Directors since December 1994,
and a director since 1990. Mr. Newman served as our Treasurer from 1993 to 1994.
From 1984 to 1992 Mr. Newman was President of ElectroTech International
Corporation, a software consulting firm. From 1973 to 1981 Mr. Newman was
employed by Xerox Corporation in several management positions in office systems
strategy, legal systems and international financial systems. Mr. Newman served
with the Central Intelligence Agency from 1966 to 1972. Mr. Newman also has been
an Executive Vice President of Tech International since 1990, and a director and
Chief Executive Officer of Tech Virginia since 1994. See "Certain Transactions."
Mr. Newman is a graduate of the University of Maryland (B.A. 1971) and the
University of New Haven (M.B.A. 1984). Mr. Newman is the brother of Steven A.
Newman, M.D., a director of our company.
Steven A. Newman, M.D. has been a director since January 1995, a
consultant since January 1996 and Vice Chairman of the Board of Directors since
August 1997. See "Business - Employees and Consultants." Dr. Newman was our
Executive Vice President and Secretary from December 1994 through October 1995.
Dr. Newman also provides business, management and administrative consulting
services to various medical and business groups. Dr. Newman was President and
Chief Executive Officer of Fed American, Inc., a mortgage banking firm, from
1988 to 1991. Dr. Newman has been a director of Tech Virginia since 1994. See
"Certain Transactions." Dr. Newman is a graduate of Brooklyn College (B.A. 1967)
and the University of Rochester (M.D. 1972). Dr. Newman is the brother of Edward
G. Newman, our President, Chief Executive Officer and Chairman of the Board of
Directors.
James J. Ralabate, Esq. has been a director since January 1995 and
served as our Secretary until August 1997. Mr. Ralabate has been in the private
practice of patent law since 1982. Prior to that time, Mr. Ralabate was General
Patent Counsel for Xerox Corporation, responsible for worldwide patent licensing
and litigation, and an examiner for the Patent Office. Mr. Ralabate is our
intellectual property counsel and is a graduate of Canisius College (B.S. 1950)
and The American University (J.D. 1959).
All directors hold office until the third annual meeting of
shareholders following their election or until their successors are elected and
qualified. Officers are appointed to serve at the discretion of the Board of
Directors. We have three committees, Compensation, Auditing and Nominating.
The functions of the Audit Committee include:
o the nomination of independent auditors for appointment by the Board;
o meeting with the independent auditors to review and approve the scope
of their audit engagement;
o meeting with our financial management and the independent auditors to
review matters relating to internal accounting controls, our
accounting practices and procedures and other matters relating to our
financial condition; and
o reporting to the Board periodically with respect to such matters.
The Audit Committee currently consists of Keith P. Hicks, Dr. Steven A.
Newman and Phillip E. Pearce.
The function of the Compensation Committee is to review and recommend
to the Board of Directors the appropriate compensation of executive officers and
to administer the 1996 Omnibus Stock Incentive Plan and the 1997 Stock Incentive
Plan. The Compensation Committee currently consists of Dr. Steven A. Newman, Lt.
Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg, Esq.
- 39 -
<PAGE>
The function of the Nominating Committee is to select and recommend to
the Board of Directors appropriate candidates for election to the Board of
Directors. The Nominating Committee currently consists of Dr. Steven A. Newman,
Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg, Esq.
We also have an Advisory Board which was established to provide council
and support to the Board of Directors. The members of the Advisory Board are
appointed by the Board of Directors. Its members currently include:
Lawrence Berk is currently Senior Managing Director of Brill
Securities. He has been a money manager and has structured and advised companies
on financings and strategic planning, having held executive positions with
various investment banking firms, including Oppenheimer & Co. where he was a
partner. Mr. Berk has also held many leadership roles in the entertainment
business. He served as a member of the Board of the Actors Studio for 15 years
where he produced plays; he was a founding Chairman of the Veterans Ensemble
Theatre, a group of writers, actors and directors from the Vietnam war; he was
on the Board of the Association of American Dance Companies; and he was a
trustee of the Manhattan Theatre Club. Mr. Berk is a member of the Financial
Investment Analyst Association and the Regional Investment Bankers Association.
Wayne Coleson is at present and since 1994 has been the President and a
Director of Avalon Capital, Inc., a Director of Settondown Capital
International, Ltd. and a Director of Manchester Asset Management, Ltd., each of
which is an investment company which invests in and structures private placement
transactions. Mr. Coleson is a founder of all three companies. During the last
three years Mr. Coleson completed over 75 transactions resulting in $500 million
of investments. Prior to these activities Mr. Coleson was affiliated with
Shoreline Pacific Institutional Finance, Laffer-Warren Investment Brokers and
Lehman Brothers, during which period Mr. Coleson had extensive roles in
structuring, evaluating, negotiating and raising capital for small to micro-cap
companies in the United States and Europe. Mr. Coleson graduated from the
University of Georgia in 1985 with a B.A. in Political Science.
Dr. Andrew Heller has been an advisor to the Board of Directors since
1995. Since 1989 Dr. Heller has been Chairman and Chief Executive Officer of
Heller Associates, a consulting firm to high technology companies. From 1990 to
1993 Dr. Heller was Chairman and Chief Executive Officer of Hal Computer
Systems, Inc., a software and hardware systems development company. From 1966 to
1989 Dr. Heller was employed by IBM (where he was the youngest person ever to be
selected as an IBM Fellow) in a variety of positions including Corporate
Director of Advanced Technology Systems, member of the Executive Committee on
Technology, member of the Technical Review Board, and General Manager, Advanced
Workstation Independent Business Unit. While at IBM, Dr. Heller created and ran
the business unit that created the AIX (UNIX) operating system for IBM and the
RISC RS/6000 family of workstations and servers, from which the current Power PC
was developed. Dr. Heller is a director of Rambus, Inc., Cross/Z, Inc., Network
Translation, Inc., EPR, Inc., Eco Instrumentation, Inc. and UDI Software, Inc.
We have a three-year consulting agreement with Dr. Heller whereby he provides us
with strategic planning, business management, strategic product development and
market and financial introduction services.
Maarten Heybroek has been an advisor to the Board of Directors since
1992. Since 1986, Mr. Heybroek has been employed by Citibank, as Chief of Staff
and Controller for consumer banking activities in Central Europe and, most
recently, as Director, Compliance and Risk Management for Citibank's United
States consumer banking operations. Prior to that time, Mr. Heybroek was
Director, Finance-European Operations and then Director, Corporate Finance for
Intergraph Corporation, a publicly-traded computer hardware and software firm,
and with Xerox Corporation in a variety of financial and management positions.
Mr. Heybroek is a graduate of Pace University.
Vice Admiral Stephan F. Loftus (ret.) retired from the United States
Navy in May of 1994. Prior to that he served as the Deputy Chief of Naval
Operations (Logistics). Vice Admiral Loftus held previous positions with the
U.S. Navy as Commander, Fleet Air Mediterranean; Director, Office of Budget and
Reports; and Director, Office of Program Appraisal. Vice Admiral Loftus
presently serves as Executive Vice President of Quarterdeck
- 40 -
<PAGE>
Investment Partners, Inc. (specializing in merger/acquisitions) and The Spectrum
Group (a strategic planning group). He consults for Lockheed Martin Corporation,
SAIC, Johns Hopkins University - Applied Physics Lab, Systems Planning
Corporation, and Global Planning Corporation. He is on the Board of Directors of
AMSEC, Inc. and LLD, Inc., and serves as a member of the Logistics Panel for the
Defense Science Board. Also, Admiral Loftus serves as the Chairman of the Board
of Trustees at NMCCG Foundation.
General Richard H. Thompson (ret.) retired from the U.S. Army in 1987
after 43 years of service. His last assignment was as the Commander of the U.S.
Army Material Command, an organization of 132,000 personnel at 171 locations
worldwide with an annual budget in excess of $35 billion. Since his retirement,
General Thompson has served on the Board of Directors of several companies, has
consulted with many others, and has participated as a member of several Study
Groups for the National Academy of Sciences and the House of Representatives. He
is currently the Chairman and Chief Executive Officer and actively engaged in
the operations of three companies he has established: Thompson Delstar Inc., TMI
Asia, and TDIS.
- 41 -
<PAGE>
EXECUTIVE COMPENSATION
The following sets forth the annual and long-term compensation of
certain of our executive officers for services in all capacities (i) for the
fiscal year ended December 31, 1997, for the fiscal year ended December 31,
1996, for the nine month transitional year ended December 31, 1995 and the
fiscal year ended March 31, 1995 of Edward G. Newman, President, Chief Executive
Officer and Chairman of the Board of Directors, and (ii) for the fiscal years
ended December 31, 1997 and December 31, 1996, and for the transitional year
dated December 31, 1995 and the fiscal years ended March 31, 1995 of John P.
Moynahan, former Senior Vice President, Chief Financial Officer, Treasurer and
director. Mr. Moynahan resigned from his various positions with our organization
effective June 3, 1998. None of our other officers received annual salary and
bonus exceeding $100,000 during the relevant periods.
<TABLE>
<CAPTION>
Long Term
compensation
awards(1)
Annual compensation (1) --------------
Name and ---------------------------- Options All other
principal position Year Salary Bonus (Shares) compensation
- ------------------ --------- -------------- ------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
Edward G. Newman 1997 $211,211(1) $- 0 - - 0 - $43,600 (2)
President and Chief Executive Officer 1996 $149,635(1) $- 0 - - 0 - $- 0 -
and Chairman of the Board of 1995* $112,500 $- 0 - - 0 - $- 0 -
Directors 1995 $ 68,750 $- 0 - - 0 - $- 0 -
John F. Moynahan 1997 $142,083 $- 0 - - 0 - $15,465 (2)
Senior Vice President, Chief Financial 1996 $139,688 $- 0 - - 0 - $- 0 -
Officer and Treasurer
1995* $105,000 $- 0 - - 0 - $- 0 -
1995 $ 64,167 $- 0 - 200,000 $- 0 -
</TABLE>
- -----------------
* Transitional year ended December 31, 1995.
(1) Compensation does not include (i) $50,000 and $50,084 paid to Frances
C. Newman, wife of Edward G. Newman in 1997 and 1996, respectively, and
(ii)$87,314 paid by Tech of Virginia in 1997 and 1996, as payment of
accrued salaries and expenses.
(2) Includes payment of non-accountable expense allowances and car
allowances.
Options/SAR Grants in Last Fiscal Year
We granted the following stock options to our executive officers and
directors during fiscal 1997. All such options are exercisable to purchase
shares of Common Stock.
<TABLE>
<CAPTION>
Percent of total
Options options granted to Exercise or
granted officers/directors base price
Name (shares) in year ($/Share) Expiration date
- ----- --------------- ------------------ -------------- ----------------------
<S> <C> <C> <C> <C> <C>
Steven A. Newman 50,000 18.5% $2.6125 January 2, 2007
60,000 22.2% $2.8125 August 28, 2007
Eugene J. Amobi 10,000 3.7% $2.8125 August 28, 2007
Keith P. Hicks, Esq. 10,000 3.7% $2.8125 August 28, 2007
Phillip E. Pearce 10,000 3.7% $2.8125 August 28, 2007
James J. Ralabate, Esq. 10,000 3.7% $2.8125 August 28, 2007
Lt. Gen. Harry E. Soyster 10,000 3.7% $2.8125 August 28, 2007
</TABLE>
- 42 -
<PAGE>
<TABLE>
<CAPTION>
Percent of total
Options options granted to Exercise or
granted officers/directors base price
Name (shares) in year ($/Share) Expiration date
- ----- --------------- ------------------ -------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Kaz Toyosato 50,000 18.5% $2.8125 August 28, 2007
Martin Eric Weisberg, Esq. 50,000 18.5% $1.6875 August 28, 2007
10,000 3.7% $2.8125 August 28, 2007
</TABLE>
Fiscal Year-End Options/Option Values Table.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
underlying unexercised options in-the-money options
at fiscal year-end at fiscal year-end ($)
------------------------------------ -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------ ---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Steven A. Newman 110,000 0 0 0
Eugene J. Amobi 60,000 0 0 0
Keith P. Hicks, Esq. 60,000 0 0 0
Phillip E. Pearce 60,000 0 0 0
James J. Ralabate, Esq. 60,000 0 0 0
Lt. Gen. Harry E. Soyster 60,000 0 0 0
Kaz Toyosato 50,000 0 0 0
Martin Eric Weisberg, Esq. 60,000 0 0 0
</TABLE>
None of the foregoing options were exercisable within 60 days of
December 31, 1997.
We do not have a retirement, pension or profit sharing program for the
benefit of our directors, officers or other employees. The Board of Directors
may recommend one or more such programs for adoption in the future.
Employment Agreements
We have an employment agreement with Edward G. Newman which has the
following terms:
o a three-year term through December 31, 1998;
o initial annual base compensation of $150,000 subject to a minimum
annual increase to $198,000 on January 1, 1997 and of at least the
annual increase in the United States Consumer Price Index ("CPI")
plus two percent annually thereafter;
o an annual cash bonus in an amount to be determined by the Board of
Directors; and o a $2,000,000 life insurance policy payable to
his designated beneficiaries.
Mr. Newman received payments in 1997 for accrued salaries and expenses
related to his employment with Tech Virginia and continues to provide services
to Tech Virginia without contract at a fixed payment of $1,000 per month with a
$650 automobile allowance per month. The employment agreement with Mr. Newman
also entitles him to participate in all benefits which we may offer to our
executive officers and employees, as a group. We anticipate that such benefits
will include an automobile, health insurance and expense reimbursement. The
employment agreement automatically renews for an additional three-year term
unless terminated in writing by either party on or before October 31, 1998. The
employment agreement also provides for termination at the option of Mr. Newman
in the event of a change of control (which is defined as Mr. Edward Newman
ceasing to serve as either the Chairman of Board of Directors or our President
and Chief Executive Officer) and that upon any such termination Mr. Newman is
entitled to at least two years of annual compensation under his employment
agreement.
- 43 -
<PAGE>
We employ Mr. Toyosato pursuant to a three-year Employment Agreement
with a term expiring on March 3, 2000. The Employment Agreement provides for an
annual salary of $153,575.23.
Consulting Agreements
We have a consulting agreement with Dr. Steven Newman dated as of
January 1, 1996, as amended January 1, 1997. Pursuant to the Consulting
Agreement, Dr. Newman provides consulting services which include the review and
assistance in the preparation of our business strategies, assisting with the
recruitment and hiring of key executives and provide advice regarding financing,
contracting, management, overseas operations, strategic alliances and ventures.
The annual consulting fee is $150,000 payable on a monthly basis. The Consulting
Agreement also provides for additional compensation, as determined by our
Compensation Committee, for services by Dr. Newman in connection with the
successful completion of financings, mergers, acquisitions, dispositions, joint
ventures and other material transactions. The term of the Consulting Agreement
is four years terminating on December 31, 2000 unless renewed by the parties.
In 1996, we entered into a two-year consulting agreement with Victor J.
Lombardi whereby Mr. Lombardi agreed to provide business development and
marketing services to us in exchange for warrants which entitle Mr. Lombardi to
purchase 100,000 shares of Common Stock at $6.00 per share through December 31,
1999. For the year ended December 31, 1997, we recorded $125,489 in expense
connected with the issuance of these warrants.
Compensation of Directors
We do not pay or accrue salaries or consulting fees to outside
directors for each board or committee meeting attended. While it is our
intention to establish such payments eventually, we do not currently anticipate
doing so. Any payments when implemented will be comparable to those made by
companies of similar size and stage. Directors receive a grant of options for
50,000 shares of Common Stock upon election to the Board of Directors. They are
also entitled to receive a grant of options to purchase 10,000 shares of Common
Stock which vests at the end of such year of service for each full year of
service. We commenced this practice with those directors who were elected at the
1997 Annual Meeting, We adopted an Omnibus Stock Incentive Plan and the 1997
Stock Incentive Plan in which directors are eligible to participate. See
"Executive Compensation - Omnibus Stock Incentive Plan; -- 1997 Stock Incentive
Plan." We have a consulting agreement with Steven A. Newman.
See "Executive Compensation --Consulting Agreements."
Omnibus Stock Incentive Plan
The Board of Directors adopted the 1996 Omnibus Stock Incentive Plan
(the "1996 Incentive Plan") effective January 1, 1996. The 1996 Incentive Plan
provides for the granting of incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), nonqualified stock options, stock appreciation rights
("SARs") and grants of shares of Common Stock subject to certain restrictions
("Restricted Stock") up to a maximum of 650,000 shares to officers, directors,
employees and others. Incentive Stock Options can be awarded only to our
employees. No options, SARs or restricted stock ("Restricted Stock") may be
granted under the 1996 Incentive Plan subsequent to December 31, 2006. To date,
we have granted options to purchase all of the 650,000 shares of Common Stock
reserved for issuance under the 1996 Incentive Plan.
The Compensation Committee administers the 1996 Incentive Plan (subject
to the authority of the full Board of Directors). The Board of Directors
determines the terms and conditions of the options, SARs and Restricted Stock
granted under the 1996 Incentive Plan, including the exercise price, number of
shares subject to the option and the exercisability thereof. Dr. Steven A.
Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg, Esq.
currently are the members of the Compensation Committee.
- 44 -
<PAGE>
The exercise price of all Incentive Stock Options granted under the
1996 Incentive Plan must equal at least the fair market value of the Common
Stock on the date of grant. In the case of an optionee who owns stock possessing
more than ten percent of the total combined voting power of all classes of stock
("Substantial Stockholders"), the exercise price of Incentive Stock Options must
be at least 110% of the fair market value of the Common Stock on the date of
grant. The exercise price of all nonqualified stock options granted under the
1996 Incentive Plan shall be determined by the Compensation Committee. The term
of any Incentive Stock Option granted under 1996 the Incentive Plan may not
exceed ten years, or, for Incentive Stock Options granted to Substantial
Stockholders, five years. The 1996 Incentive Plan may be amended or terminated
by the Board of Directors, but no such action may impair the rights of a
participant under a previously granted option.
The 1996 Incentive Plan provides the Board of Directors or the
Compensation Committee the discretion to determine when options granted
thereunder shall become exercisable and the vesting period of such options. Upon
termination of a participant's employment or relationship, all options terminate
and no longer are exercisable unless termination is due to death or disability,
in which case the options are exercisable within one year of termination. The
Compensation Committee has granted extensions of the period before which options
may be exercised for certain terminated employees.
The 1996 Incentive Plan provides that upon a change in control, all
previously granted options and SARs immediately shall become exercisable in full
and all Restricted Stock immediately shall vest and any applicable restrictions
shall lapse. The 1996 Incentive Plan defines a change of control as the
consummation of a tender offer for 25% or more of our outstanding voting
securities, our merger or consolidation into another corporation less than 75%
of the outstanding voting securities of which are owned in aggregate by our
stockholders immediately prior to the merger or consolidation, the sale of
substantially all of our assets other than to a wholly-owned subsidiary, or the
acquisition by any person, business or entity other than by reason of
inheritance of over 25% of our outstanding voting securities. The change of
control provisions of the 1996 Incentive Plan may operate as a material
disincentive or impediment to the consummation of any transaction which could
result in a change of control.
The 1996 Incentive Plan provides the Board of Directors or the
Compensation Committee discretion to grant SARs in connection with any grant of
options. Upon the exercise of a SAR, the holder shall be entitled to receive a
cash payment in an amount equal to the difference between the exercise price per
share of options then exercised by him and the fair market value of the Common
Stock as of the exercise date. The holder is required to exercise options
covering the number of shares, which are subject to the SAR so exercised. SARs
are not exercisable during the first six months after the date of grant, and may
be transferred only by will or the laws of descent and distribution.
The 1996 Incentive Plan also provides the Board of Directors or the
Compensation Committee discretion to grant to key persons shares of Restricted
Stock subject to certain limitations on transfer and substantial risks of
forfeiture.
1997 Stock Incentive Plan
The Board of Directors adopted the 1997 Stock Incentive Plan (the "1997
Incentive Plan") on April 10, 1997. The 1997 Incentive Plan provides for the
granting of Incentive Stock Options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock
options, SARs and grants of shares of Common stock subject to certain
restrictions (collectively, "Awards") up to a maximum of 1,650,000 shares to
officers, directors, key employees and others. Incentive Stock Options can be
awarded only to employees at the time of the grant. No ISO may be granted under
the 1997 Incentive Plan after April 9, 2007.
The Compensation Committee administers the 1996 Incentive Plan (subject
to the authority of the full Board of Directors). The Board of Directors
determines the terms and conditions of the Awards granted under the 1997
Incentive Plan, including the exercise price, number of shares subject to the
option and the exercisability thereof.
- 45 -
<PAGE>
The exercise price of all Incentive Stock Options granted under the
1997 Incentive Plan must equal at least the fair market value of the Common
Stock on the date of grant. In the case of Substantial Stockholders, the
exercise price of Incentive Stock Options must be at least 110% of the fair
market value of the Common Stock on the date of grant. The exercise price of all
nonqualified stock options granted under the 1997 Incentive Plan shall be
determined by the Compensation Committee. The term of any Incentive Stock Option
granted under the 1997 Incentive Plan may not exceed ten years, or, for
Incentive Stock Options granted to Substantial Stockholders, five years. The
1997 Incentive Plan may be amended or terminated by the Board of Directors, but
no such action may impair the rights of a participant under a previously granted
option.
The 1997 Incentive Plan provides the Compensation Committee the
discretion to determine when options granted thereunder shall become exercisable
and the vesting period of such options. Upon termination of a participant's
employment or relationship, options may be exercised only to the extent
exercisable on the date of such termination (within three months), but not
thereafter, unless termination is due to death or disability, in which case the
options are exercisable within one year of termination.
The 1997 Incentive Plan provides the Committee discretion to grant SARs
to key employees, consultants and directors. Promptly after exercise of a SAR
the holder shall be entitled to receive in chase, by check or in shares of
Common Stock, an amount equal to the excess of the fair market value on the
exercise date of the shares of Common Stock as to which the SAR is exercised
over the base price of such shares, which shall be determined by the Committee
The 1996 Incentive Plan also provides the Compensation Committee
discretion to grant to key persons shares of restricted stock subject to certain
contingencies and restrictions as the Committee may determine.
As of December 31, 1997 we had granted a total of 1,627,430 options.
Each of the outstanding options has an exercise price at least equal to the fair
market value of the Common Stock on the date of grant with the exception of
80,000 shares which are subject to acquisition by one of our officers and 20,000
shares which are subject to acquisition by one of our employees at $0.0l per
share over the period 1995 through 1999. As of December 31, 1997, we had no SARs
outstanding and we had made one grant of Restricted Stock of 10,000 shares of
Common Stock to a former officer.
Escrowed Shares
As a condition to our initial public offering, Royce Investment Group,
the Representative of the several underwriters (the "Representative"), required
certain of our stockholders to deposit a total of 1,800,000 shares of Common
Stock in escrow pursuant to an escrow agreement with Continental Stock Transfer
& Trust Company, the escrow agent and the Representative. Of such Escrowed
Shares, 1,707,210 shares are owned by our officers and directors. The Escrowed
Shares are subject to incremental release to the depositing stockholders based
upon our total revenues and net earnings (loss) for the 12-month periods ending
September 30, 1997, 1998 and 1999. The Escrowed Shares will be released in the
amounts set forth below only upon the achievement by the Company of the
following Performance Targets:
o The Escrowed Shares will be released incrementally over a
three-year period only in the event our gross revenues and
earnings (loss) per share for the 12-month periods ending
September 30, 1997, 1998 and 1999 equal or exceed the following
gross revenue and earnings (loss) per share targets:
o 300,000 shares if we achieve gross revenues of at least
$20,000,000 and a net loss, if any, not in excess of $500,000 for
the 12 months ending September 30, 1997;
o 750,000 shares if we achieve gross revenues of at least
$45,000,000, and earnings per share of at least $1.00 for the 12
months ending September 30, 1998; and
- 46 -
<PAGE>
o
750,000 shares if we achieve gross revenues of at least
$90,000,000 and earnings per share of at least $1.25 for the 12
months ending September 30, 1999.
o 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 agreed upon price levels, certain amounts of the
Escrowed Shares will be returned to us for each period and
canceled.
o All the 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.
The difference between the initial offering price and the market value
(at the time of release) of any Escrowed Shares released will be deemed to be an
additional compensation expense. Such expense, depending on the price per share,
may have the effect of reducing or eliminating any earnings per share and could
have a negative effect on the market price for our Common Stock.
We did not meet the targets for escrow release for September 30, 1997
and September 30, 1998. As a result, 300,000 and 750,000 shares, respectively,
were canceled from the escrow pool resulting in a reduction of 2.1% and 3.6% of
our outstanding shares of Common Stock.
The earnings per share calculation will be based on the fully diluted
earnings per share, but excluding shares issued pursuant to the Unit Purchase
Option granted to the Representative, extraordinary items, or any compensation
expense charged related to the release of the Escrowed Shares. We, in
consultation with our independent auditors, weill make the determination of
earnings per share in accordance with generally accepted accounting principles.
Our determination will be based on our financial statements filed pursuant to
the Securities Exchange Act of 1934, as amended. Escrowed Shares are not
transferable or assignable although they may be voted by the holder.
The Performance Targets and the Nasdaq Price Target were determined the
result of our negotiations with the Representative and do not imply or predict
our future performance.
- 47 -
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth as of September 24, 1998, certain
information regarding the ownership of our voting securities by each stockholder
known to us to be (i) the beneficial owner of more than 5% of our outstanding
Common Stock, (ii) the directors, (iii) the executive officers named in the
Summary Compensation Table herein under "Executive Compensation" and (iv) all
executive officers and directors as a group. We believe that the beneficial
owners of the Common Stock listed below, based on information furnished by such
owners, have sole investment and voting power with respect to such shares.
<TABLE>
<CAPTION>
Amount of Shares
Name(1) Beneficially Percentage Owned Percentage Owned
- ------ ----------------- -----------------
<S> <C> <C>
Edward G. Newman .................. 3,771,721 (2) 18.0%
Dr. Steven A. Newman............... 1,683,897 (3) 8.0%
George Allen....................... ---- *
Eugene J. Amobi.................... 360,000 (4) 1.7%
Keith P. Hicks, Esq................ 414,171 (4) 2.0%
Phillip E. Pearce.................. 60,000 (4) *
James J. Ralabate, Esq............. 108,121 (4) *
Jacques Rebibo..................... 197,500 (5) *
Lt. Gen. Harry E. Soyster (Ret.)... 84,061 (4) *
Kaz Toyosato ...................... 50,000 (6) *
Martin Eric Weisberg, Esq.......... 60,000 (4) *
Officers and directors (13 persons) 7,135,556 (7) %
</TABLE>
(1) The address for Mr. Edward G. Newman and Dr. Steven A. Newman is 12701
Fair Lakes Circle, Suite 550, Fairfax, Virginia 22033; the address for
Mr. Allen is 1 James Center, 901 East Cary Street, Richmond, Virginia
23219; the address for Mr. Amobi is 100 Jade Drive, Wilmington,
Delaware 19810; the address for Mr. Hicks is 4121 Roberts Road,
Fairfax, Virginia 22032; the address for Mr. John P. Moynahan is 12303
Blair Ridge Road, Fairfax, Virginia 22033; the address for Mr. Pearce
is 6624 Glenleaf Court, Charlotte, North Carolina 28270; the address
for Mr. Ralabate is 5792 Main Street, Williamsville, New York 14221;
the address for Mr. Rebibo is 7216 Dulany Drive, McLean, Virginia
22101; the address for Lt. Gen. Soyster (Ret.) is 1201 E. Abingdon
Drive, Suite 425, Alexandria, Virginia 22314; the address for Mr.
Toyosato is Kita-Shinagawa 5-12-6, Wakabayashi Bldg. 2F, Shinagawa-Ku,
Tokyo Japan 141-0001; and the address for Mr. Weisberg is 1211 Avenue
of the Americas, New York, New York 10036.
(2) Excludes 200,000 shares of Common Stock beneficially owned by an
irrevocable trust for Mr. Newman's children and 747,753 shares of
Common Stock beneficially owned by Mr. Newman's wife, Francis C.
Newman. Mr. Newman disclaims beneficial ownership of all such shares.
(3) Includes 110,000 shares of Common Stock issuable upon exercise of
currently exercisable options. Excludes 100,000 shares of Common Stock
beneficially owned by a trust for the benefit of Dr. Newman's children
and 57,800 shares of Common Stock owned by a trust for the benefit of
two relatives of Dr. Newman. Dr. Newman disclaims beneficial ownership
of such shares.
(4) Includes 60,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
- 48 -
<PAGE>
(5) Mr. Rebibo served as a director through August 28, 1997. His holdings
include 10,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(6) Includes 50,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(7) Includes 580,250 shares of Common Stock issuable upon exercise of
currently exercisable options. Also includes the holdings of Frances C.
Newman and Jeffrey Pagano, two additional key executives who hold,
respectively, 797,753 shares of Common Stock (including 50,000 shares
of Common Stock issuable upon currently exercisable options) and 250
shares of Common Stock.
- 49 -
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Please note that we did not secure an independent determination of the
fairness and reasonableness of the transactions and arrangements described
below. In each instance the disinterested directors (either at or following the
time of the transaction) reviewed and approved the fairness and reasonableness
of the terms of the transaction. We believe that each transaction was fair and
reasonable to us and on terms at least as favorable as could have been obtained
from non-affiliates. Transactions between any corporation and its officers and
directors are subject to inherent conflicts of interest.
Tech International and Tech Virginia
Since December 1992, we have maintained various business relationships
with Tech International and since 1994, with Tech Virginia. Tech International
operates a computer software and consulting business. Until December 30, 1994,
Tech International's Virginia operations were conducted through its Virginia
business unit. In December 30, 1994, Tech International spun-off the Virginia
business unit (the "Spin-Off") as Tech Virginia. Edward G. Newman, a principal
stockholder, director and our Chairman, President and Chief Executive Officer
and Steven A. Newman and Eugene J. Amobi, directors, were the stockholders, and
continue as officers and directors of Tech Virginia. Eugene J. Amobi is the sole
director and stockholder of Tech International.
Management Personnel Agreements with Tech Virginia
Messrs. Edward G. Newman, Steven A. Newman and Eugene Amobi each had
employment agreements with Tech Virginia under which each of them was entitled
to a salary and was eligible to receive certain bonuses. The agreements with
Messrs. Edward G. Newman and Steven A. Newman required each of them to devote
only reasonable time and attention to Tech Virginia, provided their activities
for Tech Virginia did not interfere with their obligations to our company. Upon
our acquisition of Tech Virginia, such employment agreements were terminated by
agreement with Messrs. Newman, Newman, and Amobi. Messrs. Newman, Newman and
Amobi have continued to provide services to Tech Virginia since the acquisition
without contract but under similar terms and conditions as their terminated
agreements.
During fiscal 1997, we accrued, but did not pay, approximately $97,800,
respectively, in salaries and automobile allowances payable to Eugene Amobi, a
director, for services provided to Tech Virginia. As of December 31, 1997, the
total amount accrued and owed for such items to Mr. Amobi was approximately
$215,000, which was reduced by $25,000 paid to an entity affiliated with Mr.
Amobi after December 31, 1997.
Consulting Agreement
We have a consulting agreement with Steven A. Newman. See "Executive
Compensation - Consulting Agreements."
Legal Services
James J. Ralabate, Esq. was paid $68,031 and $275,548 in fees and
disbursements for legal services rendered to us during fiscal 1996 and
fiscal 1997, respectively.
Parker Chapin Flattau & Klimpl, LLP, the law firm where Martin Eric
Weisberg, Esq. is a partner, was paid $5,179 and $137,346.15 in fees and
disbursements for legal services rendered to us during fiscal 1996 and fiscal
1997, respectively.
- 50 -
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of our Common Stock in the
public market following this offering could adversely affect the market price of
the Common Stock. Of the 23,621,583 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering,
22,391,426 will be freely tradeable without restriction or further registration
under the Securities Act. This includes:
o 19,250,246 shares of Common Stock which are issued and
outstanding;
o 141,700 unissued shares of Common Stock registered in connection
with the Series C Preferred Stock,
o 899,480 unissued shares of Common Stock registered in connection
with the April 1998 Equity Line of Credit Private Placement; and
o the 2,100,000 unissued shares of Common Stock registered in
connection with the Financing Arrangement.
The remaining 1,014,140 shares include 750,000 shares of Common Stock
which are "Escrowed Shares" (see "Executive Compensation -- Escrowed Shares")
and are subject to incremental release over a one-year period if certain share
targets are met, and 480,157 shares of the Common Stock are "restricted
securities" as that term is defined in Rule 144 promulgated under the Securities
Act. The restricted shares may be sold pursuant to an effective registration
statement under the Securities Act, in compliance with the exemption provisions
of Rule 144 or pursuant to another exemption under the Securities Act. In the
absence of any agreement to the contrary, the outstanding restricted Common
Stock could be sold in accordance with one or more other exemptions under the
Securities Act (including Rule 144). Rule 144, as amended, permits sales of
restricted securities by any person (whether or not an affiliate) after one
year, at which time sales can be made subject to the Rule's existing volume and
other limitations and by non-affiliates without adhering to Rule 144's existing
volume or other limitations after two years. Future sales of substantial amounts
of shares in the public market, or the perception that such sales could occur,
could adversely affect the price of the shares in any market that may develop
for the trading of such shares.
- 51 -
<PAGE>
DESCRIPTION OF SECURITIES
General
Our authorized capital stock consists of 40,000,000 shares of Common
Stock, par value $.01 per share, and 6,000,000 shares of Preferred Stock, par
value $.01 per share. As of the date hereof, there are 20,752,729 shares of
Common Stock and 281 shares of Series C Preferred Stock issued and outstanding.
We have reserved 6,827,952 shares of Common Stock for issuance pursuant to
outstanding options and warrants.
Common Stock
The holders of our Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders. Our
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 our liquidation,
dissolution or winding up, 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. The issuance of Preferred Stock could decrease
the amount of earnings and assets available for distribution to the holders of
Common Stock, if any, or could adversely affect the rights and powers, including
voting rights, of the holders of the Common Stock. In certain circumstances,
such issuances could have the effect of decreasing the market price of the
Common Stock.
Series C Preferred Stock
On May 15, 1998, the Board of Directors authorized the issuance of a
series of Preferred Stock consisting of 375 shares (the "Series C Preferred
Stock"), each such share of Series C Preferred Stock has a stated value of
$1,000 (the "Liquidation Preference"), pursuant to a Certificate of Designation
(the "Certificate of Designation").
Dividends. The holders of the shares of Series C Preferred Stock are
entitled to receive, when and as declared by the Board of Directors, dividends
at the rate of five percent of the stated Liquidation Preference per share per
annum, and no more, payable, at the discretion of the Board of Directors, in
Common Stock or cash. Dividends accrue on each share of Series C Preferred Stock
from the date of initial issuance. Such dividends are in preference to any
distributions on any outstanding shares of our Common Stock or any other of our
equity securities that are junior to the Preferred Stock as to the payment of
dividends.
Conversion Rights. The holders of Series C Preferred Stock shall have
conversion rights as follows: (i) no shares of Series C Preferred Stock may be
converted prior to August 15, 1998; (ii) at any time after August 15, 1998
through November 14, 1998, up to twenty-five (25%) percent of the shares of
Series C Preferred Stock then outstanding may be converted, at the option of the
holders thereof; and (iii) thereafter, on November 15, 1998, February 15, 1999
and May 15, 1999, an additional twenty-five (25%) percent of the shares of
Series C Preferred Stock then outstanding may be converted, on a cumulative and
pro rata basis, at the option of the holders thereof. The number of shares of
fully-paid and nonassessable Common Stock into which each share of
- 52 -
<PAGE>
Series C Preferred Stock may be converted shall be determined by dividing the
Liquidation Preference by an amount (the "Conversion Price") equal to the lesser
of (A) 100% of the average closing bid price of the Common Stock as reported on
the Nasdaq SmallCap Market or any successor exchange in which the Common Stock
is listed for the five trading days preceding the date on which the holder of
the Series C Preferred Stock has telecopied a notice of conversion to us (the
"Conversion Date") and (B) $4.00.
On May 15, 2000, the holders of the Series C Preferred Stock will be
required to convert all of their outstanding shares of Series C Preferred Stock
into shares of Common Stock. Until converted, we will be entitled to redeem
shares of Series C Preferred Stock in accordance with the Certificate of
Designation, regardless of whether or not we received a notice of conversion
with respect to such shares.
We will at all times when any shares of Series C Preferred Stock are
outstanding, reserve and keep available out of our authorized but unissued
stock, such number of shares of Common Stock as, from time to time, will be
sufficient to effect the conversion of all outstanding shares of Series C
Preferred Stock.
Redemption. At any time after May 15, 1998, we may redeem up to 100% of
the outstanding shares of the Series C Preferred Stock at the applicable
redemption price, provided, that (x) we have received a notice of conversion,
and (y) the Conversion Price is below $3.40. We will give written notice by
telecopy, to the holders of Series C Preferred Stock to be redeemed at least one
business day after receipt of the notice of conversion prior to the date
specified for redemption (the "Redemption Date"). Such notice will state the
Redemption Date, the Redemption Price (as hereinafter defined), the number of
shares of Series C Preferred Stock of such holders to be redeemed and shall call
upon such holders to surrender to us on the Redemption Date at the place
designated in the notice such holders' redeemed stock.
We have the option to redeem all or a portion of all the outstanding
shares of Series C Preferred Sock at a cash price equal to $3.40 multiplied by
the number of shares the Series C Preferred Stock would convert into on the date
of redemption.
Voting Rights. Except as otherwise required by law, the holders of the
Series C Preferred Stock are not be entitled to vote upon any matter relating to
our business or affairs or for any other purpose.
Status. In case any outstanding shares of Series C Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to be permanently
canceled and shall not resume the status of authorized but unissued shares of
Series C Preferred Stock.
Other Designations of Preferred Stock
As of the date of this Prospectus, we have not designated any shares of
Preferred Stock other than the Series A Preferred Stock, Series B Preferred
Stock and Series C Preferred Stock. There are no other shares of Preferred Stock
outstanding, and we have no plans to issue any other shares of Preferred Stock.
Transfer Agent and Registrar
Continental Stock Transfer & Trust Company is our Transfer Agent and
Registrar for our Common Stock and the Redeemable Warrants.
- 53 -
<PAGE>
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, we are 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 our organization if such acquisition is not approved by the 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 our
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 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 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. Our 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.
- 54 -
<PAGE>
PLAN OF DISTRIBUTION
We will issue the shares of Common Stock we are registering directly to
the Investor in connection with the Financing Arrangement. See "Financing
Arrangement."
The subsequent distribution of such Shares by the Investor may be
effected from time to time in one or more of the following transactions:
o on any U.S. securities exchange on which our Common Stock may be
listed at the time of such sale;
o in the over-the-counter market;
o in transactions other than on such exchanges or in the over-the-
counter market;
o in connection with short sales;
o in a combination of any of the above transactions.
The Investor may may offer its shares of Common Stock at prevailing
market prices at the time of sale, at prices related to such prevailing market
prices, at negotiated prices or at fixed prices.
The Investor may use broker-dealers to sell its shares of Common Stock.
If this happens, broker-dealers will either receive discounts or commission from
the Investor, or they will receive commissions from purchasers of shares of
Common Stock for whom they acted as agents. 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 Investor and any broker-dealers or other persons acting on the
behalf of parties that participate in the distribution of the Shares may be
deemed to be underwriters. As such, any commissions or profits they receive 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, we are not aware of any agreement,
arrangement or understanding between any broker or dealer and the Investor with
respect to the offer or sale of the Shares pursuant to this Prospectus.
To the extent required under the Securities Act, we will file a
supplemental prospectus to disclose (a) the name of any such broker-dealers, (b)
the number of Shares involved, (c) the price at which such Shares are to be
sold, (d) the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable, (e) that such broker-dealers did not conduct
any investigation to verify the information set out in this Prospectus, as
supplemented, and (f) other facts material to the transaction.
We will receive proceeds from the draw downs, the Call Options, if any,
and the exercise of the Warrants issued pursuant to the Financing Agreement. We
will use such proceeds for general corporate purposes.
The Subscription Agreement for the Financing Arrangement has reciprocal
indemnification provisions against certain liabilities, including liabilities
under the Securities Act, which may be based upon, among other things, any
untrue statement or alleged untrue statement of a material fact or any omission
or alleged omission of a material fact. We have agreed to bear customary
expenses incident to the registration of the Shares for the benefit of the
Investor 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 Investor.
We have agreed to keep the Registration Statement relating to the
offering and sale of the Common Stock to the Investor continuously effective
until the earlier of sale of all the Shares or 12 months.
- 55 -
<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 our company, 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.
Our Certificate of Incorporation provides that directors shall not be
personally liable for monetary damages to us or our stockholders for breach of
fiduciary duty as a director, except for liability resulting from a breach of
the director's duty of loyalty to our 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. Our Certificate of Incorporation also
authorizes us to indemnify our officers, directors and other agents, by bylaws,
agreements or otherwise, to the fullest extent permitted under Delaware law. We
have entered into an Indemnification Agreement (the "Indemnification Agreement")
with each of our directors and officers which may, in some cases, be broader
than the specific indemnification provisions contained in our Certificate of
Incorporation or as otherwise permitted under Delaware law. Each Indemnification
Agreement may require us, 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.
We maintain a directors and officers liability policy with Genesis
Insurance Company that contains a limit of liability of $3,000,000 per policy
year.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
LEGAL MATTERS
Parker Chapin Flattau & Klimpl, LLP, New York, New York will pass upon
the validity of the securities offered hereby. Martin Eric Weisberg, Esq., a
member of the firm, is our Secretary and one of our Directors.
- 56 -
<PAGE>
EXPERTS
The consolidated balance sheets as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the two years then ended included in this Prospectus have been so
included in reliance on the report dated March 31, 1998, which includes an
explanatory paragraph concerning the Company's ability to continue as a going
concern, of PricewaterhouseCoopers LLP, independent accountants, given on their
authority as experts in accounting and auditing.
- 57 -
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Accountants........................................................................ F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 and June 30, 1998 (unaudited)............... F-3
Consolidated Statements of Operations for the years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998 (unaudited) and 1997 (unaudited)....................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and
1997 and the six months ended June 30, 1998 (unaudited)............................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and the
six months ended June 30, 1998 (unaudited) and 1997 (unaudited)....................................... F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F- 1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Xybernaut Corporation and Subsidiary
We have audited the accompanying consolidated balance sheets of Xybernaut
Corporation and Subsidiary (the Company) as of December 31, 1997 and 1996, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Xybernaut
Corporation and Subsidiary as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company experienced a net loss of
$9,479,966 in 1997 and as discussed in Note 1 to the financial statements, is
currently negotiating a commitment for an equity placement and a standby equity
line. The Company's ability to draw upon this line of credit is contingent upon
their ability to file and have the Securities and Exchange Commission declare
effective a registration statement for these securities. In the event the
Company can draw upon this standby equity line of credit, continuation of the
business thereafter is dependent on the Company's ability to achieve a
sufficient cash flow to meet its cash requirements. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plan in regard to these matters is also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
McLean, VA
March 31, 1998
F- 2
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, December 31, June 30,
1997 1996 1998
---------------- ---------------- ----------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 952,366 $ 6,274,967 $ 4,014,723
Accounts receivable 216,767 427,790 182,363
Inventories 1,607,781 402,381 1,172,699
Prepaid and other current assets 334,245 197,711 399,883
---------------- ---------------- ----------------
Total current assets 3,111,159 7,302,849 5,769,668
---------------- ---------------- ----------------
Fixed assets:
Property and equipment, net 505,695 323,828 773,788
---------------- ---------------- ----------------
Other assets:
Patent costs, net 384,422 247,612 414,683
Tooling costs, net 376,990 106,738 312,368
Other 153,351 33,547 163,396
---------------- ---------------- ----------------
Total other assets 914,763 387,897 890,447
---------------- ---------------- ----------------
Total assets $ 4,531,617 $ 8,014,574 $ 7,433,903
================ ================ ================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable $ 19,530 $7,849 $-
Accounts payable 429,780 250,944 468,337
Deferred licensing revenue - 60,000 -
Accrued expenses 908,372 571,742 809,068
---------------- ---------------- ----------------
Total current liabilities 1,357,682 890,535 1,277,405
---------------- ---------------- ----------------
Long-term liabilities:
Notes and loans payable - 44,080 -
Deferred licensing revenue - 190,000 -
---------------- ---------------- ----------------
Total long-term liabilities - 234,080 -
---------------- ---------------- ----------------
Total liabilities 1,357,682 1,124,615 1,277,405
---------------- ---------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 6,000,000, 5,000,000
and 6,000,000 (unaudited), shares authorized in 1997,
1996 and as of June 30, 1998 3,000 shares designated as
Series A, for all periods 2,250 shares issued and
outstanding as of December 31, 1997, no shares issued
and outstanding 1996 or as of June 30, 1998 (unaudited)
3,180 shares designated as Series B for all periods, 3,180
shares issued and outstanding as of December 31, 1997,
no shares issued and outstanding 1996 or as of June 30,
1998 (unaudited); 375 shares designated as Series C,
375 shares issued and outstanding as of June 30, 1998
no shares issued and outstanding;
for 1997 or 1996 4,193,355 - 364,754
Common stock, $.01 par value, 40,000,000, 30,000,000
and 40,000,000 (unaudited) shares authorized in 1997,
1996 and as of June 30, 1998, 14,360,515, 14,259,112
and 20,934,765 (unaudited) shares issued
and outstanding as of December 31, 1997, 1996 and as of
June 30, 1998 143,605 142,591 209,348
Additional paid-in capital 17,181,329 15,520,245 27,636,785
Deferred compensation (91,511) - (9,042)
Accumulated deficit (18,252,843) (8,772,877) (22,045,347)
---------------- ---------------- ----------------
Total stockholders' equity 3,173,935 6,889,959 6,156,498
---------------- ---------------- ----------------
Total liabilities and stockholders' equity $ 4,531,617 $8,014,574 $ 7,433,903
================ ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 3
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, Six Months Ended June 30,
------------------------------------- ---------------------------------------
1997 1996 1998 1997
---------------- ------------------ ------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenue:
Product sales and leases $ 555,522 $ 928,732 $ 356,861 $ 220,458
Consulting and license 257,000 164,609 1,839 30,000
---------------- ------------------ ------------------ ------------------
Total revenue 812,522 1,093,341 358,700 250,458
Cost of sales 1,225,572 1,081,197 379,476 409,790
---------------- ------------------ ------------------ ------------------
Gross profit (loss) (413,050) 12,144 (20,776) (159,332)
Operating expenses:
Sales and marketing 3,280,356 1,442,146 1,151,147 1,489,195
General and administrative 3,518,868 2,158,212 1,617,879 1,885,214
Research and development 2,350,237 1,773,015 1,010,769 1,196,319
---------------- ------------------ ------------------ ------------------
Total operating expenses 9,149,461 5,373,373 3,779,795 4,570,728
---------------- ------------------ ------------------ ------------------
Operating loss (9,562,511) (5,361,229) (3,800,571) (4,730,060)
Interest income, net 82,545 122,693 8,067 49,129
---------------- ------------------ ------------------ ------------------
Net loss (9,479,966) (5,238,536) (3,792,504) (4,680,931)
---------------- ------------------
Provision for preferred stock
dividends 82,905 - 2,344 -
Provision for accretion on
preferred stock beneficial
conversion feature 488,693 - - -
---------------- ------------------
Net loss applicable to holders of
common stock $ (10,051,564) $ (5,238,536) $ (3,794,848) $ (4,680,931)
================ ================== ================== ==================
Per common share (basic and diluted):
Net loss before provisions for
preferred stock $ (0.74) $ (0.47) $ (0.22) $ (0.38)
Total provisions for preferred
stock (0.04) - - -
---------------- ------------------ ------------------ ------------------
Net loss applicable to holders of
common stock $ (0.78) $ (0.47) $ (0.22) (0.38)
================ ================== ================= ==================
Weighted average number of
common shares outstanding
(basic and diluted) 12,844,974 11,121,594 17,016,067 12,459,112
================ ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 4
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Total Value of Shares
Total Number of Shares Additional Total
---------------------- - Paid-in Accumulated Deferred Stockholder's
Common Preferred Common Preferred Capital Deficit Compensation Equity
------ --------- ------ --------- --------- ------------------------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995......... 10,372,489 -- $ 103,725 --$ 2,337,663 $(3,534,341) -- $(1,092,953)
Shares issued pursuant to IPO...... 2,415,000 -- 24,150 -- 10,818,337 -- -- 10,842,487
Shares issued pursuant to conversion
of debentures................... 1,431,427 -- 14,314 -- 2,290,244 -- -- 2,304,558
Shares issued pursuant to redemption
of warrants..................... 20,000 -- 200 -- 34,800 -- -- 35,000
Shares issued for services and incentives 20,496 -- 205 -- 89,201 -- -- 89,406
Acquisition of Tech Virginia....... (300) -- (3) -- (50,000) -- -- (50,003)
Net loss........................... -- -- -- -- -- (5,238,536) -- (5,238,536)
----------- ------ --------- ---------------------- ------------ ---------- ------------
Balance, December 31, 1996......... 14,259,112 -- 142,591 -- 15,520,245 (8,772,877) -- 6,889,959
Issuance of Series A Preferred Stock -- 3,000 -- $2,761,669 -- -- -- 2,761,669
Partial conversion of Series A Stock
into Common Stock.................... 250,000 (750) 2,500 (690,417) 687,917 -- -- --
Cancellation of escrow shares of
Common Stock.................... (300,000) -- (3,000) -- 3,000 -- -- --
Cancellation of accrued shares of
Common Stock.................... (1,747) -- (17) -- 17 -- -- --
Issuance of Series B Preferred Stock -- 3,180 -- 2,948,737 -- -- -- 2,948,737
Exercise of stock options.......... 150,000 -- 1,500 -- -- -- -- 1,500
Value of beneficial conversion featur
on Series A and B Preferred Stock e -- -- -- (1,219,712) 1,219,712 -- -- --
Accretion of deemed dividend of
Preferred Stock................. -- -- -- 488,693 (488,693) -- -- --
Preferred stock dividend requirements -- -- -- -- (82,905) -- -- (82,905)
Issuance of warrants on Common Stock -- -- -- -- 217,000 -- $ (217,000) --
Compensation related to Common Stock
warrants........................ -- -- -- -- -- -- 125,489 125,489
Warrants issued in connection with
Preferred Stock offerings....... -- -- -- (95,615) 95,615 -- -- --
Dividends on preferred stock paid with
Common Stock.................... 3,150 -- 31 -- 9,421 -- -- 9,452
Net loss........................... -- -- -- -- -- (9,479,966) -- (9,479,966)
----------- ------ --------- ---------- ----------- ------------ ---------- ------------
Balance, December 31, 1997......... 14,360,515 5,430 143,605 4,193,355 17,181,329 (18,252,843) (91,511) 3,173,935
Issuance of Series B Preferred Stock
(unaudited)..................... -- 1,000 -- 875,299 -- -- -- 875,299
Issuance of Series C Preferred Stock
(unaudited)..................... -- 375 364,754 364,754
Partial conversion of Series A Preferred (1,887,277)
Stock into Common Stock
(unaudited)..................... 652,649 (2,250) 16,527 1,870,750 -- -- --
Partial conversion of Series B 3,128,045 3,555,602
Preferred Stock into Common
Stock (unaudited) (4,180) 31,280 3,524,322 -- -- --
Sales of Common Stock (unaudited).. 1,649,718 16,498 5,265,556 5,282,054
Issuance of accrued Common Stock
(unaudited)..................... 50,000 500 97,938 98,438
Accretion of deemed dividend of
Preferred Stock (unaudited)..... -- -- -- 374,225 (374,225) -- -- --
Preferred Stock dividend requirements
(unaudited)..................... -- -- -- -- (52,220) -- -- (52,220)
Compensation related to Common
Stock warrants (unaudited)...... -- -- -- -- -- -- 82,469 82,469
Dividends on preferred stock paid
with Common Stock (unaudited)... 96,988 -- 970 -- 126,453 -- -- 127,423
Cancellation of accrued shares of
Common Stock (unaudited)........ (3,150) -- (32) -- (3,118) -- -- (3,150)
Net loss (unaudited)............... -- -- -- -- -- (3,792,504) -- (3,792,504)
----------- ------ --------- ---------- ----------- ------------ ---------- ------------
Balance, June 30, 1998 (unaudited). 20,934,765 375 $209,348 $364,754 $27,636,785 $(22,045,347) $(9,042) $6,156,498
=========== ====== ========= ========== =========== ============ ========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 5
<PAGE>
<TABLE>
<CAPTION>
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
Year Ended December 31, Six Months Ended June 30,
------------------------------- ---------------------------------
1997 1996 1998 1997
-------------- --------------- --------------- ----------------
Cash flows from operating activities: (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (9,479,966) $ (5,238,536) $ (3,792,504) $ (4,680,931)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 277,299 264,699 152,185 160,547
Provision for write-down of inventory 724,978 202,440 - -
Provision for bad debts 253,211 - (30,697) -
Non cash charges for tooling costs - - 138,682 -
Non cash charges for stock and options issued for
services 125,489 89,406 82,469 125,488
Changes in assets and liabilities:
Inventories (1,930,378) (354,871) 109,730 (295,792)
Accounts receivable (42,188) (337,065) 65,101 (2,338)
Prepaid and other current assets (136,534) (177,094) (65,638) (184,312)
Other assets (119,804) (10,540) (10,528) (4,798)
Accounts payable and accrued expenses 515,466 177,619 (14,873) (74,373)
Deferred licensing revenue (250,000) 250,000 - (30,000)
-------------- --------------- --------------- ----------------
Net cash used in operating activities (10,062,427) (5,133,942) (3,366,073) (4,986,509)
-------------- --------------- --------------- ----------------
Cash flows from investing activities:
Acquisition of property and equipment (364,678) (315,257) (33,515) (306,962)
Acquisition of patents and related costs (231,298) (114,618) (91,190) (155,888)
Capitalization of tooling costs and other assets (270,252) (106,738) (74,060) (284,294)
-------------- --------------- --------------- ----------------
Net cash used in investing activities (866,228) (536,613) (198,765) (747,144)
-------------- --------------- --------------- ----------------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings, net 5,710,406 - 1,348,496 2,785,000
Common stock offerings, net - - 5,307,048 -
Debentures - 1,000,000 - -
Notes and loans 56,500 340,000 - -
Initial public offering - 13,282,500 - 215,000
Payments for:
Notes and loans (72,232) (591,161) (19,530) (48,924)
Acquisition of Tech Virginia (16,667) (33,334) - -
Initial public offering and debenture fees - (2,561,149) - -
Other (71,953) - (8,819) -
-------------- --------------- --------------- ----------------
Net cash provided by financing activities 5,606,054 11,436,856 6,627,195 2,951,076
-------------- --------------- --------------- ----------------
Net increase (decrease) in cash and cash equivalents (5,322,601) 5,766,301 3,062,357 (2,782,577)
Cash and cash equivalents, beginning of period 6,274,967 508,666 952,366 6,274,967
-------------- --------------- --------------- ----------------
Cash and cash equivalents, end of period $ 952,366 $ 6,274,967 $ 4,014,723 $ 3,492,390
============== =============== =============== ================
Supplemental disclosure of cash information:
Cash paid during the period for interest $ 7,124 $ 71,750 $ 2,500 $ 8,527
============== =============== ============== ===============
Supplemental disclosure of non-cash financing activities:
Common stock issued for preferred stock dividen
requirements $ 9,421 $ - $ 84,022 $ -
============== =============== =============== ================
Common stock issued for services rendered $ - $ 89,406 $ 98,438 $ -
============== =============== =============== ================
Deferred compensation in connection with stock
warrants granted $ 217,000 $ - $ - $ -
============== =============== =============== ================
Issuance of warrants in connection with preferred
stock offering 95,615 $ $ - $ -
============== =============== =============== ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F- 6
<PAGE>
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Business and Financing:
The Company:
Xybernaut Corporation (the "Company") was originally incorporated in
Virginia in October 1990 as Contemporary Products & Services, Inc. and changed
its name to Computer Products & Services, Inc. ("CPSI") in 1992. In April 1996,
the Company was merged with Xybernaut Corporation to change the Company name and
reincorporate in Delaware. Since the commencement of operations in November
1992, the Company has engaged in the research, development and commercialization
of products intended to bridge the widening gap between people and knowledge.
The first product to be commercialized by the Company is the proprietary
portable computer technology and related software applications embodied in its
Mobile Assistant(R) product. Additional software products are planned for
development and use on the Mobile Assistant(R) and other personal computers.
On July 18, 1996, the Company successfully completed the Initial Public
Offering ("IPO") of its Common Stock and warrants (NASDAQ symbol XYBR and XYBRW)
which are traded on the NASDAQ SmallCap Market.
The Company was a development stage enterprise through March 31, 1995.
Subsequently, the Company has commenced principal operations and, accordingly,
these financial statements are not presented in compliance with Statement of
Financial Accounting Standard No. 7 which describes the financial presentation
for development stage enterprises.
Financing:
The Company has received a commitment for an equity placement of $1
million and a standby equity line of $10 million and is in the process of
finalizing these arrangements. The Company's ability to draw upon this line of
credit is contingent upon its ability to file and have the Securities and
Exchange Commission declare effective a registration statement for these
securities. In the event the Company can draw upon this standby equity line of
credit, continuation of the business thereafter is dependent on the Company's
ability to achieve a sufficient cash flow to meet its cash requirements. This
commitment expires on April 14, 1998. It is the opinion of the Company's
management that such funding arrangements are readily available to the Company
and the execution of any such arrangements is a decision that will depend on
timing, market conditions and the final terms and conditions of such
arrangements. Production of the MA IV model of the Mobile Assistant(R) is
expected to begin in the quarter ending December 31, 1998, and receivables from
sales of the Mobile Assistant(R) are expected to provide significant collateral
for borrowing facilities at that point. Although there can be no assurance that
such facilities will be available, the Company intends to seek to establish
secured borrowing facilities as soon as appropriate collateral is available. The
Company's management believes that the combination of cash on hand, operating
cash flows, and additional outside funding will provide sufficient liquidity to
meet the Company's cash requirements until at least March 1999.
2. Summary of Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Tech International of Virginia Inc.
("TechVirginia"). In connection with the IPO, the Company
F- 7
<PAGE>
exercised its option to acquire all of the capital stock of Tech Virginia.
Financial statements prior to the exercise of the option reflect the combined
financial position and results of operations of the Company and Tech Virginia.
All significant intercompany accounts and transactions have been eliminated.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories:
Inventories, consisting principally of component parts held for resale,
are stated at the lower of cost or market, with cost determined by the first-in,
first-out method. As of December 31, 1997 and 1996, the allowance to reduce
inventory balances to net realizable value was $724,978 and $202,440,
respectively. Most of the reserves and write downs in inventory values result
from the introduction of new products and technology resulting in a reduction or
loss of value of older products or technology. The sales prices of the 133P
model of the Mobile Assistant(R) will be monitored in light of the introduction
of the MA IV model and reserves will be taken as appropriate if the value of the
133P inventory is determined to have been impaired. At this point, the Company's
management does not believe that the value of the 133P model has been
significantly impaired by the introduction of the MA IV.
Property, Equipment, Furniture and Fixtures:
Property, equipment, furniture and fixtures are stated at cost and are
depreciated on a straight-line basis over the estimated useful lives of the
assets, as follows:
Equipment............................. 3-5 years
Furniture and fixtures................ 5 years
Demonstrator units.................... 2 years
Leasehold improvements................ 3 years
Expenditures for maintenance and repairs are charged directly to the
appropriate operating account at the time the expense is incurred. Expenditures
determined to represent additions and betterments are capitalized.
Software Development Costs:
The Company's policy is to capitalize software development costs when
technological feasibility has been established, based on a detailed program
design that is complete, has been confirmed and for which no high-risk
development issues remain.
F- 8
<PAGE>
The establishment of technological feasibility and the ongoing
assessment of the recovery of capitalized software costs requires considerable
judgment by management with respect to certain external factors including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technologies.
Capitalization of software costs will cease when the software is available for
general release to customers, at which time amortization of the costs begins.
These costs will be amortized using the greater of the amount computed using the
straight-line method over the remaining estimated economic life of the product
or the ratio of current gross revenues from the product to the total of current
and anticipated future gross revenues from the product. Since the Company is
currently in the planning and development phase for software toolkits, no costs
have been capitalized to date.
Intangible Assets:
Patent costs consist of legal fees, filing fees and other direct costs
incurred in obtaining and maintaining patents and are amortized on a
straight-line basis over a five-year period.
Tooling Costs:
Tooling costs consist of reimbursed expenses to third-party vendors for
molds to be used exclusively in the manufacturing of the Company's proprietary
head-mounted display ("HMD") and the computing unit for the Mobile Assistant
(R). Capitalized tooling costs will be transferred to inventory based on the
estimated total number of HMDs and computing units to be produced from the
molds. No costs have been transferred to inventory as of December 31, 1997.
Impairment of Long-Lived Assets:
Management of the Company monitors the carrying value of long-lived
assets for potential impairment on an on-going basis. Potential impairment would
be determined by comparing the carrying value of these assets with their
related, expected future net cash flows. Should the sum of the related, expected
future net cash flows be less than the carrying value, management would
determine whether an impairment loss should be recognized. An impairment loss
would be measured by the amount by which the carrying value of the asset exceeds
the future discounted cash flows.
Revenue Recognition and Warranties:
Product sales are recorded on shipment pursuant to a valid customer
purchase order. For equipment shipped under equipment rental or leasing
agreements, revenue is recognized on a straight-line basis over the term of the
rental or lease agreement. Consulting revenue is recognized as the services are
performed pursuant to a written agreement with the client. The Company generally
provides a one-year warranty on parts. The Company's suppliers for the computing
unit and the HMD provide the Company with similar warranties and as a result
warranty reserves are immaterial.
Research and Development Programs:
Research and development costs are charged to operations as incurred,
including the cost of components purchased for testing and product development
that are salable but are intended for development work only.
Income Taxes:
Deferred income tax assets and liabilities are computed annually for
differences between the financial statement and income tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future.
Such deferred income tax asset and liability computations are based on enacted
tax laws and rates applicable to periods in which the differences are expected
to affect taxable income. Income tax expense is the
F- 9
<PAGE>
tax payable or refundable for the period plus or minus the change during the
period in deferred income tax assets and liabilities.
Net Loss Per Share:
Effective December 31, 1997, the Company adopted SFAS No. 128,
"Earnings Per Share," which requires the presentation of basic earnings per
share and diluted earnings per share. Basic earnings per share are based on the
weighted average number of outstanding shares of Common Stock. Diluted earnings
per share adjusts the weighted average for the potential dilution that could
occur if stock options, warrants or other convertible securities were exercised
or converted into Common Stock. For all periods presented herein and for
historical quarterly earnings per share amounts, diluted earnings per share is
the same as basic earnings per share for the Company because the effects of such
items were anti-dilutive given the losses incurred in such periods.
Earnings per share for all periods presented conform to SFAS No. 128.
Escrowed Shares:
Escrowed shares, if any, are considered issued and outstanding and
reported as such on the balance sheet. For purposes of computing the net loss
per common and common equivalent share, they are not considered outstanding
until the conditions for their release are met.
Fair Value of Financial Instruments:
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable and accounts payable approximated fair value as
of December 31, 1997 and 1996, because of the relatively short maturity of these
instruments. The carrying value of the notes and loans payable approximated fair
value as of December 31, 1997 and 1996, based upon market prices for the same or
similar debt issues.
Recent Accounting Pronouncements:
The Financial Accounting Standards Board has issued two new standards
which become effective for reporting periods beginning after December 15, 1997.
SFAS No. 130, "Reporting Comprehensive Income," requires additional disclosures
with respect to certain changes in assets and liabilities that previously were
not required to be reported as results of operations for the period. The Company
will begin making the additional disclosures required by SFAS No. 130 in the
first quarter of 1998. SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," requires financial and descriptive
information with respect to "operating segments" of an entity based on the way
management desegregates the entity for making internal operating decisions. The
Company will begin making the disclosures required by SFAS No. 131 with
financial statements for the period ending December 31, 1998.
Interim results (unaudited):
The accompanying consolidated balance sheet at June 30, 1998, the
consolidated statements of operations and cash flows for the six months ended
June 30, 1998 and 1997 and the consolidated statement of stockholders' equity
for the six months ended June 30, 1998 are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the audited
consolidated financial statements and include all adjustments, consisting of
only normal recurring adjustments necessary for the fair presentation of the
results for the interm periods. The data disclosed in the Notes to Consolidated
Financial Statements for these periods are unaudited. The results of operations
for such periods are not necessarily indicative of the results expected for the
full fiscal year or for any future period.
F- 10
<PAGE>
3. Property and Equipment:
Property and equipment consists of the following:
December, 31,
--------------------------------------
1997 1996
----------------- ----------------
Equipment......................... $ 537,635 $ 227,068
Furniture and fixtures............ 74,207 44,814
Demonstrator units................ 53,144 53,144
Leasehold improvements............ 149,659 124,941
----------------- ----------------
814,645 449,967
Less accumulated depreciation..... (308,950) (126,139)
----------------- ----------------
$ 505,695 $ 323,828
================= ================
Depreciation expense for the years ended December 31, 1997 and 1996 was
$186,761 and $80,231, respectively.
4. Debt:
Effective November 17, 1995, the Company sold $1,505,000 principal
amount of 7% Convertible Debentures due in 1997 (the "November 1995 Debentures")
and paid a placement fee of 10% to the placement agent in the form of an
interest-bearing promissory note due at the time of the IPO. On April 16, 1996,
the Company sold $1,000,000 principal amount of 7% Convertible Debentures due in
1997 (the "April 1996 Debentures") and paid a placement fee of 12% to the
placement agent in the form of an interest-bearing promissory note due at the
time of the IPO.
Under the terms of these debentures, the Company had the right to
redeem all debentures, at a price equal to 105% of principal, plus accrued
interest, if the IPO had not occurred within one year after the closing date.
The November 1995 Debentures and the April 1996 Debentures were to convert into
Units upon a successful IPO by the Company at the rate of one Unit for each
$1.75 in principal. The November 1995 Debentures and the April 1996 Debentures
were converted into 1,431,427 Units on July 18, 1996, concurrent with the
Company's IPO.
5. Stockholders' Equity:
Initial Public Offering
On July 18, 1996, the Company completed its IPO and sold 2,415,000
Units at a price of $5.50 per Unit. Each Unit consisted of one share of Common
Stock and one warrant to purchase a share of Common Stock at $9.00 ("Unit").
Gross proceeds from the sale of the Units were $13,282,500 and net proceeds
after expenses were $10,842,487.
At the completion of the offering, the underwriter received an option
to purchase 210,000 Units at a price equal to 165% of the unit offering price
per unit during a period of four years commencing one year from July 18, 1996.
In connection with this offering, the Company's officers and directors
and certain stockholders deposited an aggregate of 1,800,000 shares of Common
Stock of the Company in an escrow account ("Escrowed Shares"). The Common Stock
in the escrow account is subject to release to such stockholders in increments
over a three year period only in the event the Company's gross revenues and
earnings (loss) per share for the twelve month periods ending September 30,
1997, 1998 and 1999 meet or exceed certain performance targets. If the
performance targets are not met in any of the twelve month periods ending
September 30, 1997, 1998, or 1999, the Escrowed Shares will be returned to the
Company. In addition to the foregoing, all Escrowed Shares will be
F- 11
<PAGE>
released to the stockholders if certain stock price targets are met. The market
value of any Escrowed Shares held by officers, employees or consultants at the
time they are released will be deemed to be additional compensation expense to
the Company. The parameters for the September 30, 1997 release were not met and
300,000 shares were canceled from the Escrowed Shares.
Common Stock (unaudited)
In April 1998, the Company entered into an equity line of credit
agreement in which the Company received an initial gross amount of $1,000,000 in
exchange for 840,124 shares of Common Stock. Under this line of equity the
Company has the right, but not the obligation, to obtain up to an additional
$10,000,000 in a series of equity draw downs based on terms and conditions
specified in the line of equity. In connection with this line of equity, the
Company issued warrants to purchase up to 40,000 shares of stock at $1.76 and
20,000 shares of stock at $2.81 at any time starting six months after closing
and ending five years after closing. The placement agent for this transaction
received a cash fee of 5% and 50,000 shares of unregistered stock.
In May 1998, the Company completed a $375,000 private placement in
which the Company issued 110,294 shares of Common Stock
In June 1998, the Company completed a $1,000,000 private placement in
which the Company issued 153,846 unregistered shares of Common Stock.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the private line of equity
agreement mentioned above. In connection with such action, the Company issued
545,454 shares of Common Stock.
Preferred Stock (unaudited)
In January 1998, the Company placed 1,000 shares of Series B Preferred
Stock and received cash proceeds of approximately $974,000 from this issuance.
In connection with this placement and the placement of 3,000 shares of Series B
Preferred Stock in November 1997, the placement agent received 50,000 shares of
Common Stock in lieu of 60 shares of Series B Preferred, warrants to purchase
25,000 shares of Common Stock at $2.1313 and warrants to purchase 75,000 shares
of Common Stock at $3.025. During the six months ended June 30, 1998, 2,250
shares of Series A Preferred Stock and 4,180 shares of Series B Preferred Stock
were converted to 4,878,074 shares of Common Stock, pursuant to their respective
terms. As of the current date, all of the 3,000 shares of Series A Preferred
Stock and 4,180 shares of Series B Preferred Stock issued by the Company have
been fully converted resulting in the issuance of 1,958,984 and 3,172,239 shares
of Common Stock, respectively.
In May 1998, the Company placed 375 shares of Series C Preferred Stock
and received cash proceeds of $375,000 from this issuance. No shares of Series C
Preferred Stock have been converted as of the date hereof.
F- 12
<PAGE>
The Company's outstanding common stock and preferred stock are
summarized below:
<TABLE>
<CAPTION>
Dec. 31, 1997 Number of Shares Issued and Outstanding
------------ ------------------------------------------
Number of
Par Value Shares December 31, December 31, June 30,
Per Share Authorized 1997 1996 1998
-------------- ------------ ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Common Stock............................... $0.01 40,000,000 14,360,515 14,259,112 20,934,765
Preferred Stock............................ $0.01 6,000,000 -
Series A Preferred stock.......... $0.01 2,250 - -
Series B Preferred stock.......... $0.01 3,180 - -
Series C Preferred stock.......... $0.01 - - 375
</TABLE>
Under the terms of the Company's Articles of Incorporation, the Board
of Directors may determine the rights, preferences, and terms of the Company's
authorized but unissued shares of preferred stock. During the year ended
December 31, 1996, the Company issued 100,000 warrants of Common Stock in
exchange for services provided by an independent contractor, for which
compensation expense of $125,489 was recorded for the year ended December 31,
1997. On June 30, 1997 and November 12, 1997, the Company granted to the
underwriters of the Series A Preferred Stock and Series B Preferred Stock
warrants to purchase a total of 97,860 shares of Common Stock at prices that
range from $3.44 to $4.50 per share. For the year ended December 31, 1997, the
Company recorded approximately $96,000 as a reduction of proceeds from these
preferred stock offerings.
Outstanding Warrants:
At December 31, 1997, outstanding warrants pursuant to the IPO were
2,415,000 and outstanding warrants pursuant to the conversion of the November
1996 Debentures and the April 1997 Debentures were 1,431,427. These 3,846,427
warrants originally entitle the holder to purchase one share of the Company's
Common Stock at an exercise price of $9.00 and expire on July 17, 1999. These
warrants contain anti-dilution provisions that, upon issuance of the Series A
Preferred Stock and the Series B Preferred Stock, have adjusted the number of
shares that can be purchased with one warrant to $1.19, resulting in an
effective exercise price of $7.55, and 4,583,402 shares that would be issued
upon full conversion of the warrants.
6. Stock Options:
On April 18, 1996, the Board of Directors approved, effective January
1, 1996, the Company's 1996 Omnibus Stock Incentive Plan (the "Plan"). Under the
Plan, the Company has reserved 650,000 shares of Common Stock for issuance of
both incentive and non-qualified options, restricted stock awards and stock
appreciation rights ("SARs"). The Plan is administered by the Compensation
Committee of the Board of Directors. At the annual meeting of stockholders on
August 28, 1997, Company stockholders approved the 1997 Stock Incentive Plan,
which provides for up to 1,650,000 shares of the Company's stock. Under these
plans, Options generally become exercisable, beginning one year after the date
granted, in five equal annual installments. No option may be granted at a
priceless than the stock's fair market value on the date of the grant.
Prior to the approved Plan, the Company's Board of Directors approved
250,000 of non-Plan stock options which become exercisable, beginning one year
after the date granted, in five equal annual installments.
Information on options is as follows:
.
F- 13
<PAGE>
<TABLE>
<CAPTION>
Shares Range of Weighted
Under Exercise Average
Option Prices Strike Price
------------ ---------------- -------------------
<S> <C> <C> <C>
Outstanding at December 31, 1995....... 555,530 $ 0.01-6.00 $2.62
Granted................................ 542,000 $2.00-12.00 $3.25
Exercised.............................. - - -
Canceled............................... (103,600) $ 6.00 $6.00
---------
Outstanding at December 31, 1996....... 993,930 $0.01-12.00 $2.97
Granted................................ 1,033,300 $ 1.37-6.00 $3.13
Exercised.............................. (150,000) $ 0.01 $0.01
Canceled............................... (249,800) $ 2.25-6.00 $4.85
---------
Outstanding at December 31, 1997....... 1,627,430 $ 0.01-6.00 $3.04
=========
Exercisable at December 31, 1997....... 271,906 $ 2.25-6.00 $3.55
============
</TABLE>
At December 31, 1997, weighted average remaining contractual life for
options outstanding was 3.69 years. The fair value of the options granted during
the years ended December 31, 1997 and 1996 was $1,246,600 and $1,504,643,
respectively.
During the six months ended June 30, 1998, the Company canceled 575,380
(unaudited) stock options with exercise prices ranging from $0.01 (unaudited) to
$6.00 (unaudited) per share.
In October 1996, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") effective for fiscal years beginning after
December 15, 1996. SFAS No. 123 established financial accounting and reporting
standards for stock-based compensation plans. The Company has adopted the
disclosure-only provisions of SFAS No. 123. In accordance with the provisions of
SFAS No. 123, the Company applies APB Opinion 25 and related interpretations in
accounting for its Plan and, accordingly, does not recognize compensation
expense.
Had compensation expense for the Company's plan been determined based
on the fair value at the grant date for awards in 1997 and 1996 consistent with
the provisions of SFAS No. 123, the Company's net loss and net loss per common
and common equivalent shares outstanding would have been the pro forma amounts
indicated below:
Year Ended Year Ended
December, 31 December 31,
1997 1996
----------------- ----------------
Net loss - as reported................ $ (9,479,966) $ (5,238,536)
Net loss - pro forma.................. $ (10,170,223) $ (5,508,736)
Net loss per share - as reported...... $ (0.74) $ (0.47)
Net loss per share - pro forma........ $ (0.79) $ (0.50)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option- pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996: dividend yield of
0%; expected volatility of 60%; risk-free interest rate of 6.41% in 1997 and
5.92% in 1996; and expected lives of 3 years.
F- 14
<PAGE>
7. Significant Customers:
The percentages of total revenue from sales to customers in excess of
10% of the total for each period were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months
December 31, December 31, Ended
1997 1996 June 30, 1998
----------------- ----------------- -----------------
(unaudited)
<S> <C> <C> <C>
Customer A.......................... 34% 64% --
Customer B.......................... - 24% --
Customer C.......................... 10% - --
</TABLE>
8. Licensing Agreement:
In March 1996, the Company entered into a non-exclusive five-year
licensing agreement with Rockwell International. Pursuant to this agreement, the
Company was granted a price reduction of $1,395,000 related to a purchase order
issued in 1996 and received an initial cash payment of $300,000 that was
recorded as deferred licensing revenue and is being recognized as revenue on a
straight-line basis over the five year term. Revenue of $50,000 related to this
licensing agreement was recognized for the year ended December 31, 1996. During
the year ended December 31, 1997, the Company's licensee informed the Company
that as a result of the restructuring of its business operations, the licensee
had elected to not continue with its business activities under the license. A
portion of the consideration received by the Company in March 1996 for granting
this license was a $300,000 cash payment, which the Company recorded as deferred
license revenue and was amortizing this amount over a five year period. Given
the licensee's stated intent to not to continue conducting business operations
under the license, the remaining deferred licensing revenue of $250,000 as of
December 31, 1996, was recorded as revenue in the year ended December 31, 1997.
9. Income Taxes:
For the year ended December 31, 1997 no income tax benefit has been
provided because the losses could not be carried back and realization of the
benefit of the net operating losses carried forward was not assured. At December
31, 1997, the Company has approximately $16,026,000 of net operating loss carry
forwards for federal income tax purposes. These losses expire in 2012. The use
of these carry forwards may be limited in any one year under Internal Revenue
Code Section 382 if significant ownership changes occurring the future. Net
deferred tax assets are comprised of the following:
December, 31 December 31,
1997 1996
-------------- ---------------
Excess of book over tax depreciation..........$ 23,000 $ 30,000
Net operating loss carryforwards.............. 6,084,000 2,758,000
Adjustment to accrual basis of accounting..... 283,000 56,000
Accrued vacation.............................. - 11,000
Deferred revenue.............................. - 95,000
Tax credit carryforwards...................... 63,000 63,000
Less valuation allowance...................... (6,453,000) (3,013,000)
-------------- ---------------
Net deferred tax asset............... - -
============== ===============
10. Commitments and Contingencies:
Lease Commitments:
During 1994 and 1996, the Company began leasing its operating
facilities and certain equipment under various operating leases expiring on
various dates through 2001. Future minimum payments under noncancelable
operating leases at December 31, 1997 are:
Year Ending December 31,
1998..................................... $ 289,614
1999..................................... 38,891
2000..................................... 21,202
2001..................................... 2,721
2002..................................... -
Total rental expense charged to operations for the year ended December
31,1997 and December 31, 1996 was $258,071 and $202,812, respectively.
Purchase Agreements
The Company has agreements with certain suppliers to purchase
specialized parts and components necessary to produce the Mobile Assistant(R).
Failure of any of these parties to comply with the terms and conditions of
existing agreements could adversely affect the Company's ability to complete and
deliver Mobile Assistant(R) units. The Company is engaged in discussions with
the supplier of the computing unit for its 133P model of the Mobile Assistant(R)
regarding direct assumption by the Company of certain components for the 133P
currently held by this supplier. While the outcome of these discussions is not
certain, if the Company were to assume ownership of the maximum amounts of these
components, approximately $600,000 would be added to inventory and accounts
payable would increase by the same amount.
Patents
The Company considers its patents, trade secrets, and other
intellectual property and other proprietary information to be an important
factor in its business prospects. In September 1995, the Company received a
notification from the United States Patent and Trademark Office ("PTO") entitled
"office action in re-examination" which indicated that the Company's claims
under its existing patent for the Mobile Assistant(R) were subject to
re-examination and had been preliminary rejected. During 1996, this preliminary
rejection was over turned. In April 1997 a second re-examination request was
filed with the PTO and the Company received a notification from the United
States Patent and Trademark Office ("PTO") entitled "office action in
re-examination" which indicated that the Company's claims under its existing
patent for the Mobile Assistant(R) were subject to re-examination and had been
preliminary rejected. During 1997, this preliminary rejection was overturned. In
October 1996, the Company filed a patent application covering additional
embodiments and extensions of the technologies used in the Mobile Assistant(R).
In addition, eight additional patent applications have been filed with the PTO
since the Company's IPO.
Commitments (unaudited)
The Company entered into a Memorandum of Understanding ("MOU") with
Sony Digital Products ("SODP") on May 14, 1998. This agreement obligates the
Company to reimburse SODP Yen 100 million over a ten month period commencing
April 1998. These payments are reimbursements to SODP for engineering and
development of the Company's Mobile Assistant IV(TM). The Company, through June
1998, has remitted to SODP
F- 15
<PAGE>
Yen 15 million under the Memorandum of Understanding in accordance with the
payment terms. The balance of the payments and the related recognition of
expense will occur as the services are provided by SODP to the Company.
11. Legal Proceedings:
On March 19, 1998, Matrix Corporation (see "Key Suppliers") filed a
summons against the Company in the United States District Court, Eastern
District of North Carolina, alleging that: Matrix has been damaged by a
purported breach of the December Agreement by the Company; that the Company
should return all goods shipped by Matrix under both the June Agreement and the
December Agreement; that the Company did not intend to comply with the December
Agreement and therefore the governing contract between the two entities should
revert to the June Agreement. In addition, this summons requests that any
damages incurred by Matrix as a result of this purported breach of contract be
trebled. The Company and its legal counsel have initiated a thorough review of
these allegations and intend to file a counterclaim against Matrix stating that
Matrix failed to perform to the requirements of both the June Agreement and the
December Agreement and that Xybernaut has been damaged by this failure to
perform. While there can be no assurance of the outcome of this legal
proceeding, the Company's management believes that the claims by Matrix are
groundless and that the impact of this legal proceeding will not be adversely
material to the Company's operations. The maximum amount payable by the Company
under the December Agreement if Matrix performs defined tasks is approximately
$250,000 and the maximum amount of inventory that could be assumed by the
Company under the December Agreement is approximately $600,000.
12. Related Party Transactions:
The Company uses a director of the Company as its patent counsel and
paid cash to this director for fees and reimbursement of expenses of
approximately$276,000 in 1997 and for reimbursement of expenses of $93,250 in
1996. An individual who was a director of the Company through August 1997 was
paid$20,750 during 1997 for consulting services pursuant to a contract between
that director and the Company. A director of the Company serves as a consultant
to the Company and during 1997 was paid $305,000 in consulting payments for the
years 1996 and 1997 and $111,000 as reimbursement for expenses incurred during
those two years. The Company accrued, but did not pay in cash, $97,800 in
salaries and automobile allowances payable to a director of the Company for
services provided to Tech Virginia. The Company paid $172,000 as advances on
commissions and expenses to an individual consultant who is an uncle by marriage
to the President of the Company. During 1997, the Company paid approximately
$81,000 for sales and marketing consulting fees and expenses to two members of
the SBS software center in Germany and the Company sold approximately $135,000
of products to the SBS software center during this period.
13. Concentration of Credit Risk Arising from Cash Deposits:
The Company's December 31, 1997 cash and cash equivalent balance
includes approximately $1.0 million of cash invested in a pool of United States
Government and Agency Securities. The amount in excess of insurance provided by
the Federal Deposit Insurance Company is approximately $900,000.
F- 16
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesman or any other _________ Shares
person has been authorized to give any
information or to make any XYBERNAUT CORPORATION
representations, other than those
contained in this Prospectus, and, if
given or made, such information or
representations must not be relied upon
as having been authorized by the Company
or by the Underwriter. This Prospectus
does not constitute an offer to sell, or
a solicitation of an offer to buy, any
securities offered hereby by anyone in
any jurisdiction in which such offer or -----------
solicitation is not qualified and to do
so or to anyone to whom it is unlawful
to make such offer or solicitation.
PROSPECTUS
-------------------------
TABLE OF CONTENTS -----------
Additional Information......................
Prospectus Summary..........................
Risk Factors................................
Financing Arrangement.......................
Use of Proceeds.............................
Dividend Policy.............................
Market for Registrant's Common Equity and
Related Stockholder Matters........
Selected Financial Data.....................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. __________________, 1998
Business ...................................
Management..................................
Executive Compensation......................
Principal Stockholders......................
Certain Relationships and Related
Transactions...........................
Selling Stockholder.........................
Shares Eligible for Future Sale.............
Description of Securities...................
Delaware Business Combination Provisions....
Plan of Distribution........................
Indemnification for Securities Act
Liabilities............................
Legal Matters...............................
Experts ...................................
Index to Consolidated Financial Statements.F-1
- --------------------------------------------------------------------------------
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides, in general, that a corporation incorporated under the
laws of the State of Delaware, such as the registrant, may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or our
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 our
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 our
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 our
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each Indemnification
Agreement may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as a director or officer, against liabilities arising
from willful misconduct of a culpable nature, and to obtain directors' and
officers' liability insurance if available on reasonable terms.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
II-1
<PAGE>
Item 25. Other Expenses of Issuance and Distribution
It is estimated that the following expenses will be incurred in
connection with the proposed offering hereunder. All of such expenses will be
borne by the Company.
Registration fee - Securities and Exchange Commission... $3,321.95
Nasdaq listing expenses................................. $7,500.00
Legal fees and expenses................................. $60,000.00
Accounting fees and expenses............................ $60,000.00
Printing expenses....................................... $5,000.00
Miscellaneous expenses.................................. $5,000.00
Total............................................. $140,821.95
Item 26. Recent Sales of Unregistered Securities
The following sets forth certain information regarding sales of
securities of the Company issued within the past three years, which were not
registered pursuant to the Securities Act of 1933, as amended (the "Securities
Act").
In May 1998, the Company completed a $750,000 private placement of an
aggregate of 375 shares of the Company's Series C Preferred Stock, par value
$0.01 per share ("Series C Preferred Stock") and 110,294 shares of Common Stock
with institutional investors who had formerly invested in the Company. The
110,294 shares of Common Stock issued under this private placement were
unregistered, restricted shares. The shares of Common Stock issuable upon
conversion of the Series C Preferred are the subject of an effective
registration statement of the Company.
In June 1998, the Company completed a $1,000,000 private placement with
an institutional investor who had formerly invested in the Company in which the
Company issued 153,846 unregistered shares of Common Stock at a price of $6.50
per share.
In October 1998, we issued 216,017 shares of Common Stock under the
interim financing arrangement with the Investor from which we have received
$900,000 in gross proceeds. The purchase price of such shares was
$4.166.__________________.
In December 1997, two employees of the Company exercised options
granted to them for an aggregate of 150,000 shares of Common Stock. No shares
have been issued under the Company's 1996 Omnibus Stock Option Plan and 1997
Stock Option Plan.
The securities listed above were (i) sold pursuant to exemptions from
registration under Section 4(2) of the Securities Act and/or (ii) sold to
persons who were neither nationals nor residents of the U.S., and no facilities
or instrumentalities of U.S. interstate commerce were used in connection with
any offer or sale thereof. No underwriter or underwriting discount or commission
was involved in any of such sales.
Item 27. Exhibits and Financial Statement Schedules
The following exhibits are filed as part of this Registration
Statement:
Number Description of Exhibit
------ ----------------------
1.1 Form of Financial Consulting Agreement between the Company
and the Representative.(1)
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Bylaws of the Company (as amended on September 24, 1998).
4.1 Warrant Exercise Fee Agreement.(1)
4.2 Form of Forfeiture Escrow.(1)
4.3 Form of specimen certificate for Common Stock.(1)
4.4 Form of Redeemable Warrant.(1)
4.5 Subscription Agreement.(2)
4.6 Form of Warrant.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP re:
legality.(2)
II-2
<PAGE>
10.1 December 31, 1994 Acquisition Agreement between the Company
and Tech Virginia.(1)
10.2 Form of Indemnification Agreement to be entered into between
the Company and each director and officer of the Company.(1)
10.3 Form of Employment Agreement between the Company and Edward
G. Newman.(1)
10.4 Form of Consulting Agreement between the Company and Steven
A. Newman.(1)
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza
Limited Partnership and the Company.(1)
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the
Company and The Original Tollhouse Historical Preservation
Company.(1)
10.7 October 27, 1994 Residential Deed of Lease between the
Company and Frank E. and Heather H. Moxley.(1)
10.8 June 10, 1994 Rockwell International Corporation
contract.(1)
10.9 January 5, 1995 Kopin Corporation contract.(1)
10.10 June 19, 1995 License Agreement for Mobile
Inspector(TM)software.(1)
10.11 1996 Omnibus Stock Incentive Plan.(1)
10.12 1997 Stock Option Plan.
10.13 November 20, 1995 Consulting Agreement with CMC Services.(1)
10.14 Form of Consulting Agreement with Victor J. Lombardi.(1)
10.15 March 29, 1996 License Agreement with Rockwell International
Corporation.(1)
10.16 Interim 90-Day Agreement with Kopin Corporation.(1)
10.17 December 7, 1995 Multicosm Ltd. software licensing
agreement.(1)
10.18 April 4, 1996 Electronic Surveillance Technologies
Corporation VAR agreement.(1)
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.(1)
10.20 June 18, 1996 NeuroSystems Europe Limited VAR agreement.(1)
10.21 Business Loan Agreement, Promissory Note and Commercial
Security Agreement by and between Fairfax Bank & Trust
Company and the Company.(1)
10.22 October 8, 1998 Agreement with HSBC James Capel Canada, Inc.
23.1 Consent of Parker Chapin Flattau & Klimpl, LLP
(included in Exhibit 5.1).
23.2 Consent of PricewatershouseCoopers LLP.
24.1 Power of Attorney (included in signature page hereto).(2)
27 Financial Data Schedule.(2)
-----------------------
(1) Incorporated by reference to the exhibits filed with the registration
statement on Form SB-2 (Commission file #333-04156).
(2) Filed with the original filing of the Registration Statement on October 1,
1998.
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; and
(iii)To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions,
II-3
<PAGE>
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
of the Registrant in connection with the securities being registered, the
Registrant will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes (i) to provide to the
Underwriter at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriter to permit prompt delivery to each purchaser, (ii) that for purposes
of determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this Registration Statement as of the time
it was declared effective, and (iii) that for purposes of determining any
liability under the Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Fairfax, Commonwealth of Virginia on October 30,
1998.
XYBERNAUT CORPORATION
By: /s/ Edward G. Newman
----------------------------
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form SB-2 has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edward G. Newman Chairman of the Board, October 30, 1998
- -------------------------- President and Chief Executive
Edward G. Newman Officer
* Executive Vice President October 30, 1998
- ---------------------------- Asian Operations and Director
Kaz Toyosato
* Chief Operating Officer October 30, 1998
- ---------------------------- and Chief Financial Officer
Maarten Heybroek
* Secretary and Director October 30, 1998
- ---------------------------
Martin Eric Weisberg
* Director October 30, 1998
- ---------------------------
Lt. Gen. Harry E. Soyster
* Director October 30, 1998
- -------------------------
James J. Ralabate
II-5
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
* Director October 30, 1998
- --------------------------
Keith P. Hicks
* Director October 30, 1998
- --------------------------
Steven A. Newman
* Director October 30, 1998
- --------------------------
Phillip E. Pearce
* Director October 30, 1998
- --------------------------
Eugene J. Amobi
* Director October 30, 1998
- --------------------------
Edwin Vogt
</TABLE>
*By: /s/ Edward G. Newman
----------------------------
Edward G. Newman
Attorney-in-fact
II-6
<PAGE>
SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
-------------
EXHIBITS
TO
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
COMMISSION FILE NUMBER: 333-65123
-------------
XYBERNAUT CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
OCTOBER 30, 1998
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
1.1 Form of Financial Consulting Agreement between the Company and the
Representative.(1)
3.1 Certificate of Incorporation of the Company, as amended.
3.2 Bylaws of the Company (as amended on September 24, 1998).
4.1 Warrant Exercise Fee Agreement.(1)
4.2 Form of Forfeiture Escrow.(1)
4.3 Form of specimen certificate for Common Stock.(1)
4.4 Form of Redeemable Warrant.(1)
4.5 Subscription Agreement.(2)
4.6 Form of Warrant.
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP re: legality.(2)
10.1 December 31, 1994 Acquisition Agreement between the Company and Tech
Virginia.(1)
10.2 Form of Indemnification Agreement to be entered into between the
Company and each director and officer of the Company.(1)
10.3 Form of Employment Agreement between the Company and Edward G.
Newman.(1)
10.4 Form of Consulting Agreement between the Company and Steven A.
Newman.(1)
10.5 November 30, 1994 Lease Agreement between Hyatt Plaza Limited
Partnership and the Company.(1)
10.6 March 22, 1996 Month-to-Month Tenancy Agreement between the Company and
The Original Tollhouse Historical Preservation Company.(1)
10.7 October 27, 1994 Residential Deed of Lease between the Company and
Frank E. and Heather H. Moxley.(1)
10.8 June 10, 1994 Rockwell International Corporation contract.(1)
10.9 January 5, 1995 Kopin Corporation contract.(1)
10.10 June 19, 1995 License Agreement for Mobile Inspector(TM)software.(1)
10.11 1996 Omnibus Stock Incentive Plan.(1)
10.12 1997 Stock Option Plan.
10.13 November 20, 1995 Consulting Agreement with CMC Services.(1)
<PAGE>
10.14 Form of Consulting Agreement with Victor J. Lombardi.(1)
10.15 March 29, 1996 License Agreement with Rockwell International
Corporation.(1)
10.16 Interim 90-Day Agreement with Kopin Corporation.(1)
10.17 December 7, 1995 Multicosm Ltd. software licensing agreement.(1)
10.18 April 4, 1996 Electronic Surveillance Technologies Corporation VAR
agreement.(1)
10.19 January 22, 1996 FC Imaging, Inc. VAR agreement.(1)
10.20 June 18, 1996 NeuroSystems Europe Limited VAR agreement.(1)
10.21 Business Loan Agreement, Promissory Note and Commercial Security
Agreement by and between Fairfax Bank & Trust Company and the Company.(1)
23.1 Consent of Parker Chapin Flattau & Klimpl, LLP ( included in Exhibit
5.1).(2)
23.2 Consent of PricewatershouseCoopers LLP.
24.1 Power of Attorney (included in signature page hereto).(2)
27 Financial Data Schedule.(2)
- -----------------------
(1) Incorporated by reference to the exhibits filed with the registration
statement on Form SB-2 (Commission file #333-04156).
(2) Filed with the original filing of the Registration Statement on
October 1, 1998.
Exhibit 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
XYBERNAUT CORPORATION
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is Xybernaut Corporation.
2. The Certificate of Incorporation of the Corporation
(hereinafter called the "Certificate of Incorporation") is hereby amended by
adding a new Article ELEVENTH, which shall be and read as follows:
"ELEVENTH. Subject to the rights of holders of any class
or series of Preferred Stock,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before an
annual meeting of stockholders
may be made by the Board of Directors or committee appointed
by the Board of Directors or by any stockholder entitled to
vote in the election of directors generally. However, any such
stockholder may nominate one or more persons for election as
directors at an annual meeting or propose business to be
brought before an annual meeting, or both, only if such
stockholder has given timely notice in proper written form of
his or her intent to make such nomination or nominations or to
propose such business. To be timely, a stockholder's notice
must be delivered to or mailed and received by the Secretary
of the Corporation not less than 60 days nor more than 90 days
prior to the annual meeting; provided, however, that in the
event that less than 70 days notice or prior public disclosure
of the date of the annual meeting is given or made to
stockholders, notice by a stockholder, to be timely, must be
received no later than the close of business on the tenth day
following the date on which such notice of the date of the
annual meeting was made or such public disclosure was made,
whichever first occurs. To be in proper written form, a
stockholder's notice to the Secretary shall set forth:
(a) the name and address of the stockholder who
intends to make the nominations or propose the business and,
as the case may be, of the person or persons to be nominated
or of the business to be proposed;
(b) a representation that the stockholder is a holder
of record of stock of the Corporation entitled to vote at such
meeting and, if applicable, intends to appear in person or by
proxy at the meeting to nominate the person or persons
specified in the notice;
<PAGE>
(c) if applicable, a description of all arrangements
or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made
by the stockholder;
(d) such other information regarding each nominee or
each matter of business to be proposed by such stockholder as
would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange
Commission had the nominee been nominated, or intended to be
nominated, or the matter been proposed, or intended to be
proposed, by the Board of Directors, and such other
information about the nominee as the Board of Directors deems
appropriate, including, without limitation, the nominee's age,
business and residence addresses, principal occupation and the
class and number of shares of Common Stock or other capital
stock of the Company beneficially owned by the nominee, or
such other information about the business to be proposed and
about the stockholder making such business proposal before the
annual meeting as the Board of Directors deems appropriate,
including, without limitation, the class and number of shares
of Common Stock or other capital stock beneficially owned by
such stockholder; and
(e) if applicable, the consent of each nominee to
serve as director of the Corporation if so elected. The
chairman of the meeting may refuse to acknowledge the
nomination of any person or the proposal of any business not
made in compliance with the foregoing procedure."
3. The Certificate of Incorporation is hereby amended by
adding a new Article TWELFTH, which shall be and read as follows:
"TWELFTH. Subject to the rights of holders of any
class or series of Preferred Stock, special meetings of
stockholders may be called only by the President, the Vice
Chairmen of the Board, the Secretary or by the Board of
Directors pursuant to a resolution adopted by a majority vote
of the total number of authorized directors (whether or not
there exists any vacancies in previously authorized
directorships) at the time any such resolutions are presented
to the Board for adoption. Such meetings to be held at such
time and such place either within or without the State of
Delaware as may stated in the notice. Stockholders of the
Corporation are not permitted to call a special meeting or to
require that the Board call a special meeting of stockholders.
The business permitted at any special meeting of stockholders
shall be limited to the business brought before the meeting by
or at the direction of the Board."
4. The Certificate of Incorporation is hereby amended by
adding a new Article THIRTEENTH, which shall be and read as follows:
"THIRTEENTH. Any director, or the entire Board of Directors,
may be removed, for cause only, by the affirmative vote of the
holders of at least 66 2/3% of the voting power of the then
outstanding shares of any class or series of capital stock of
the Corporation entitled to vote generally in the election of
directors, voting together as a single class."
5. The Certificate of Incorporation is hereby amended by
adding a new Article FOURTEENTH, which shall be and read as follows:
"FOURTEENTH. Except as otherwise provided in the resolutions
of the Board of Directors designating any series of Preferred
Stock, any action required or permitted to be taken
<PAGE>
by the stockholders of the Corporation must be effected at a
duly called annual or special meeting of stockholders and may
not be effected by a consent in writing by any such
stockholders."
6. The Certificate of Incorporation is hereby amended by
adding a new Article FIFTEENTH, which shall be and read as follows:
"FIFTEENTH. (a) In addition to the affirmative vote
required by law or this Certificate of Incorporation or the
Bylaws of the Corporation, and except as otherwise expressly
provided in Section (b) of this Article, the approval of a
Business Combination (as hereinafter defined) shall require
the affirmative vote of both (1) at least eighty percent (80%)
of the votes entitled to be cast by the holders of all the
then outstanding shares of Voting Stock (as hereinafter
defined), voting together as a single class, and (2) at least
66 2/3% of the votes entitled to be cast by holders of the
Voting Stock, excluding shares owned by an Interested
Stockholder (as hereinafter defined). Such affirmative vote
shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage or separate class vote
may be specified, by law or in any agreement with any national
securities exchange or otherwise.
(b) The provisions of Section (a) of this Article
shall not be applicable to any particular Business
Combination, and such Business Combination shall require only
such affirmative vote, if any, as is required by law or by any
other provision of this Certificate of Incorporation or the
Bylaws of the Corporation, or any agreement with any national
securities exchange, if the Business Combination shall have
been approved by a majority (whether such approval is made
prior to or subsequent to the acquisition of beneficial
ownership of the Voting Stock that caused the Interested
Stockholder (as hereinafter defined) to become an Interested
Stockholder) of the Continuing Directors (as hereinafter
defined).
(c) The following definitions shall apply with
respect to this Article:
1. "Business Combination" shall mean: (a) any
merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with
(i) any Interested Stockholder or (ii) any other company
(whether or not itself an Interested Stockholder) which is or
after merger or consolidation would be an Affiliate or
Associate of an Interested Stockholder; (b) any sale, lease,
exchange, mortgage, pledge, transfer or other disposition or
security arrangement, investment, loan, advance, guarantee,
agreement to purchase, agreement to pay, extension of credit,
joint venture participation or other arrangement (in one
transaction or a series of transactions) with or for the
benefit of any Interested Stockholder or any Affiliate or
Associate of any Interested Stockholder; (c) the adoption of
the plan proposal for the liquidation or dissolution of the
Corporation which is voted for or consented to by any
Interested Stockholder; or (d) any reclassification of
securities (including any reverse stock split), or
recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries
or any other transaction (whether or not with or otherwise
involving an Interested Stockholder) that has the effect,
directly or indirectly, of increasing the proportionate share
of any class or series of Capital Stock, or any securities
convertible into Capital Stock or into equity securities of
any Subsidiary, that is beneficially owned by an Interested
Stockholder or any Affiliate or Associate of any Interested
Stockholder; or (e) any receipt by any Interested Stockholder
of the benefit, directly or indirectly (except proportionally
as a stockholder of the Corporation) of any loans, advances,
guarantees, pledges, or other financial benefits (other than
those expressly permitted in clauses (a) to (d) of this
paragraph), provided by the Corporation or any director or any
direct or indirect majority-owned Subsidiary; or (f) any
agreement, contract or other arrangement providing for any one
or more of the actions specified in the foregoing clauses (a)
to (e).
<PAGE>
2. "Capital Stock" shall mean all capital
stock of the Corporation authorized to be issued from time to
time under the Certificate of Incorporation, and the term
"Voting Stock" shall mean all Capital Stock which by its terms
may be voted on all matters submitted to stockholders of the
Corporation generally.
3. "person" shall mean any individual, firm,
company, partnership, corporation, joint venture, association,
limited liability company or other entity and shall include
any group comprised of any person and any other person or
entity with whom such person or any Affiliate or Associate of
such person has any agreement, arrangement or understanding,
directly or indirectly, for the purpose of acquiring, holding
voting or disposing of Capital Stock.
4. "Interested Stockholder" shall mean any
person (other than the Corporation or any Subsidiary and other
than any profit-sharing employee stock ownership or other
employee benefit plan of the Corporation or any Subsidiary or
any trustee of or fiduciary with respect to any such plan when
acting in such capacity) who (a) is the beneficial owner of
Voting Stock representing fifteen percent (15%) or more of the
votes entitled to be cast by the holders of all then
outstanding shares of Voting Stock; or (b) is an Affiliate or
Associate of the Corporation and at any time within the
three-year period immediately prior to the date in question
was the beneficial owner of Voting Stock representing fifteen
percent (15%) or more of the votes entitled to be cast by the
holders of all the then outstanding shares of Voting Stock;
provided, however, that the term "Interested Stockholder"
shall not include any person who would have qualified as an
Interested Stockholder under either preceding clause
immediately prior to the effective date of this Amendment to
the Corporation's Certificate of Incorporation.
5. A person shall be a "beneficial owner" of
any Capital Stock (a) which such person or any of its
Affiliates or Associates beneficially owns, directly or
indirectly; (b) which such person or any of its Affiliates or
Associates has, directly or indirectly, (i) the right to
acquire (whether such right is exercisable immediately or
subject to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or
otherwise, or (ii) the right to vote pursuant to any
agreement, arrangement or understanding; or (c) which are
beneficially owned, directly or indirectly, by any other
person with such person or any of its Affiliates or Associates
has any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of any
shares of Capital Stock. For the purposes of determining
whether a person is an Interested Stockholder hereunder, the
number of shares of Capital Stock deemed to be outstanding
shall include shares deemed beneficially owned by such person
through application of this Paragraph 5 of Section (c), but
shall not include any other shares of Capital Stock that may
be issuable pursuant to any agreement, arrangement or
understanding, or upon exercise of conversion rights, warrants
or options, or otherwise.
6. The terms "Affiliate" and "Associate"
shall have the respective meanings ascribed to such terms in
the Securities Exchange Act of 1934, as such may be amended
from time to time.
7. "Subsidiary" means any company of which a
majority of any class of equity security is beneficially owned
by the Corporation; provided, however, that for the purposes
of the definition of Interested Stockholder, the term
"Subsidiary" shall mean only a company of which a majority of
each class of equity security is beneficially owned by the
Corporation.
8. "Continuing Director" means any member of
the Board of Directors of the Corporation, while such person
is a member of the Board of Directors, who is not an
Affiliate, Associate or representative of the Interested
Stockholder and was a member of the Board of Directors prior
to the time that the Interested Stockholder became an
Interested Stockholder, and
<PAGE>
any successor of a Continuing Director while such successor is
a member of the Board of Directors, provided that such
successor is not an Affiliate, Associate or representative of
the Interested Stockholder and is recommended or elected to
succeed the Continuing Director by a majority of Continuing
Directors.
(d) A majority of the Continuing Directors shall have
the power and duty to determine for the purposes of this
Article, on the basis of information known to them after
reasonable inquiry, (i) whether a person is an Interested
Stockholder, (ii) the number of shares of Capital Stock or
other securities beneficially owned by any person, and (iii)
whether a person is an Affiliate or Associate of another. Any
such determination made in good faith shall be binding and
conclusive on all parties.
(e) Nothing contained in this Article shall be
construed to relieve any Interested Stockholder from any
fiduciary obligation imposed by law.
(f) The fact that any Business Combination complies
with the provisions of Section (b) of this Article shall not
be construed to impose any fiduciary duty, obligation or
responsibility on the Board of Directors, or any member
thereof to approve such Business Combination or recommend its
adoption or approval to the stockholders or the Corporation,
nor shall such compliance limit, prohibit or otherwise
restrict in any manner the Board of Directors, or any member
thereof, with respect to evaluations of or actions and
responses taken with respect to such Business Combination.
Notwithstanding any other provisions of this Certificate of
Incorporation or the Bylaws of the Corporation (and
notwithstanding the fact that a lesser percentage or separate
class vote may be specified by law, this Certificate of
Incorporation or the Bylaws of the Corporation), the
affirmative vote of the holders of not less than eighty
percent (80%) of the votes to be cast by the holders of all
the then outstanding shares of Voting Stock, voting together
as a single class, shall be required to amend or repeal, or
adopt any provisions inconsistent with this Article."
7. The Certificate of Incorporation is hereby amended by
adding a new Article SIXTEENTH, which shall be and read as
follows:
"SIXTEENTH. (a) Notwithstanding the foregoing and
anything contained in this Certificate of Incorporation to the
contrary, Section 1.2 ("Special Meetings"), Section 1.8
("Advance Notice of Nominations and Proposals"), Section
4.2(b) ("Removal of Directors"), Section 2.1 ("Number of
Directors and Term of Office"), Section 4.3(b) ("Vacancies;
Directors"), and Section 1.9 ("Consent of Stockholders") of
the Corporation's Bylaws and Articles ELEVENTH, TWELFTH,
THIRTEENTH AND FOURTEENTH of this Certificate of Incorporation
shall not be amended or repealed, and no provision
inconsistent with any thereof shall be adopted, without the
affirmative vote of the holders of at least 66 2/3% of the
voting power of the Voting Stock, voting together as a single
class. Section 1.10 ("Supermajority Shareholder Vote for
Certain Transactions") and Section 7.1(b) ("AntiTakeover
Amendments") of the Corporation's Bylaws and Article FIFTEENTH
of this Certificate of Incorporation shall not be amended or
repealed, and no provision inconsistent with any thereof shall
be adopted, without the affirmative vote of the holders of at
least 80% of the voting power of the Voting Stock, voting
together as a single class.
(b) Notwithstanding anything contained in this
Amended and Restated Certificate of Incorporation to the
contrary, the affirmative vote of the holders of at least 80%
of the Voting Stock, voting together as a single class, shall
be required to amend or repeal, or adopt any provision
inconsistent with, any provision of this Article SIXTEENTH."
<PAGE>
3. The amendments of the Certificate of Incorporation herein
certified have been duly adopted in accordance with the provisions of Section
242 of the General Corporation Law of the State of Delaware.
Dated: October 29, 1998
/s/ Edward G. Newman
-------------------------------------
Edward Newman, Chairman, President
and Chief Executive Officer
Attest:
/s/ Martin Eric Weisberg
--------------------------------
Martin Eric Weisberg, Secretary
Exhibit 3.2
BYLAWS
of
XYBERNAUT CORPORATION
As adopted April 15, 1996
and
Amended on August 28, 1997
and
September 24, 1998
<PAGE>
XYBERNAUT CORPORATION
A Delaware Corporation
AMENDED AND RESTATED
BYLAWS
ARTICLE I
STOCKHOLDERS
Section 1.1 Annual Meeting. An annual meeting of stockholders
for the purpose of electing directors and of transacting such other business as
may come before it shall be held each year at such date, time, and place, either
within or without the State of Delaware, as may be specified by the Board of
Directors.
Section 1.2 Special Meetings. Subject to the rights of holders
of any class or series of Preferred Stock, special meetings of stockholders may
be called only by the President, the Vice Chairmen of the Board, the Secretary
or by the Board of Directors pursuant to a resolution adopted by a majority vote
of the total number of authorized directors (whether or not there exists any
vacancies in previously authorized directorships) at the time any such
resolutions are presented to the Board for adoption. Such meetings to be held at
such time and such place either within or without the State of Delaware as may
stated in the notice. Stockholders of the Corporation are not permitted to call
a special meeting or to require that the Board call a special meeting of
stockholders. The business permitted at any special meeting of stockholders
shall be limited to the business brought before the meeting by or at the
direction of the Board.
Section 1.3 Notice of Meetings. Written notice of
stockholders' meetings, stating the place, date, and hour thereof, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called, shall be given by the President or the Secretary to each stockholder
entitled to vote thereat at least ten days but not more than sixty days before
the date of the meeting, unless a different period is prescribed by law.
Section 1.4 Quorum. Except as otherwise provided by law or in
the Certificate of Incorporation or these Bylaws, at any meeting of
stockholders, the holders of a majority of the outstanding shares of each class
of stock entitled to vote at the meeting shall be present or represented by
proxy in order to constitute a quorum for the transaction of any business. In
the absence of a quorum, a majority in interest of the stockholders present or
the chairman of the meeting may adjourn the meeting from time to time in the
manner provided in Section 1.5 of these By-Laws until a quorum shall attend.
Section 1.5 Adjournment. Any meeting of stockholders, annual
or special, may adjourn from time to time to reconvene at the same or some other
place, and notice need not be given of any such adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting, the corporation may transact any business which
might have been transacted at the original meeting. If the adjournment is for
more than thirty days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
<PAGE>
Section 1.6 Organization. The President shall call to order
meetings of stockholders and shall act as chairman of such meetings. The Board
of Directors or, if the Board fails to act, the stockholders may appoint any
stockholder, director, or officer of the corporation to act as chairman of any
meeting in the absence of the President. The Secretary shall act as secretary of
all meetings of stockholders, but, in the absence of the Secretary, chairman of
the meeting may appoint any other person to act as secretary of the meeting.
Section 1.7 Voting. Except as otherwise provided by law or in
the Certificate of Incorporation or these Bylaws and except for the election of
directors, at any meeting duly called and held at which a quorum is present, a
majority of the votes cast at such meeting upon a given question by the holders
of outstanding shares of stock of all classes of stock of the corporation
entitled to vote thereon who are present in person or by proxy shall decide such
question. At any meeting duly called and held for the election of directors at
which a quorum is present, directors shall be elected by a plurality of the
votes cast by the holders (acting as such) of shares of stock of the corporation
entitled to elect such directors.
Section 1.8 Advance Notice of Nominations and Proposals.
Subject to the rights of holders of any class or series of Preferred Stock,
(i) nominations for the election of directors, and
(ii) business proposed to be brought before an annual meeting
of stockholders may be made by the Board of Directors or committee appointed by
the Board of Directors or by any stockholder entitled to vote in the election of
directors generally. However, any such stockholder may nominate one or more
persons for election as directors at an annual meeting or propose business to be
brought before an annual meeting, or both, only if such stockholder has given
timely notice in proper written form of his or her intent to make such
nomination or nominations or to propose such business. To be timely, a
stockholder's notice must be delivered to or mailed and received by the
Secretary of the Corporation not less than 60 days nor more than 90 days prior
to the annual meeting; provided, however, that in the event that less than 70
days notice or prior public disclosure of the date of the annual meeting is
given or made to stockholders, notice by a stockholder, to be timely, must be
received no later than the close of business on the tenth day following the date
on which such notice of the date of the annual meeting was made or such public
disclosure was made, whichever first occurs. To be in proper written form, a
stockholder's notice to the Secretary shall set forth:
(a) the name and address of the stockholder who intends to
make the nominations or propose the business and, as the case may be, of the
person or persons to be nominated or of the business to be proposed;
(b) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and, if
applicable, intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice;
(c) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(d) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, or the matter been proposed, or intended to be proposed, by the
Board of Directors, and such other information about the nominee as the Board of
Directors deems appropriate, including, without limitation, the nominee's age,
<PAGE>
business and residence addresses, principal occupation and the class and number
of shares of Common Stock or other capital stock of the Company beneficially
owned by the nominee, or such other information about the business to be
proposed and about the stockholder making such business proposal before the
annual meeting as the Board of Directors deems appropriate, including, without
limitation, the class and number of shares of Common Stock or other capital
stock beneficially owned by such stockholder; and
(e) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected. The chairman of the meeting may
refuse to acknowledge the nomination of any person or the proposal of any
business not made in compliance with the foregoing procedure.
Section 1.9 Stockholder Action by Written Consent. Except as
otherwise provided in the resolutions of the Board of Directors designating any
series of Preferred Stock, any action required or permitted to be taken by the
stockholders of the corporation must be effected at a duly called annual or
special meeting of stockholders and may not be effected by a consent in writing
by any such stockholders.
Section 1.10 Supermajority Stockholder Vote for Certain
Transactions. (a) In addition to the affirmative vote required by law or this
Certificate of Incorporation or the Bylaws of the Corporation, and except as
otherwise expressly provided in Section (b) of this Article, the approval of a
Business Combination (as hereinafter defined) shall require the affirmative vote
of both (1) at least eighty percent (80%) of the votes entitled to be cast by
the holders of all the then outstanding shares of Voting Stock (as hereinafter
defined), voting together as a single class, and (2) at least 66 2/3% of the
votes entitled to be cast by holders of the Voting Stock, excluding shares owned
by an Interested Stockholder (as hereinafter defined). Such affirmative vote
shall be required notwithstanding the fact that no vote may be required, or that
a lesser percentage or separate class vote may be specified, by law or in any
agreement with any national securities exchange or otherwise.
(b) The provisions of Section (a) of this Article shall not be
applicable to any particular Business Combination, and such Business Combination
shall require only such affirmative vote, if any, as is required by law or by
any other provision of this Certificate of Incorporation or the Bylaws of the
Corporation, or any agreement with any national securities exchange, if the
Business Combination shall have been approved by a majority (whether such
approval is made prior to or subsequent to the acquisition of beneficial
ownership of the Voting Stock that caused the Interested Stockholder (as
hereinafter defined) to become an Interested Stockholder) of the Continuing
Directors (as hereinafter defined).
(c) The following definitions shall apply with respect to
this Article:
1. "Business Combination" shall mean:
(a) any merger or consolidation of the
Corporation or any Subsidiary (as hereinafter defined) with (i) any
Interested Stockholder or (ii) any other company (whether or not itself
an Interested Stockholder) which is or after merger or consolidation
would be an Affiliate or Associate of an Interested Stockholder; (b)
any sale, lease, exchange, mortgage, pledge, transfer or other
disposition or security arrangement, investment, loan, advance,
guarantee, agreement to purchase, agreement to pay, extension of
credit, joint venture participation or other arrangement (in one
transaction or a series of transactions) with or for the benefit of any
Interested Stockholder or any Affiliate or Associate of any Interested
Stockholder; (c) the adoption of the plan proposal for the liquidation
or dissolution of the Corporation which is voted for or consented to by
any Interested Stockholder; or (d) any reclassification of securities
(including any reverse stock split), or recapitalization of the
Corporation, or any merger or consolidation of the Corporation with any
of its Subsidiaries or any other transaction (whether or not with or
otherwise involving an Interested Stockholder) that has the effect,
directly or indirectly, of increasing the proportionate share of any
class or
<PAGE>
series of Capital Stock, or any securities convertible into Capital
Stock or into equity securities of any Subsidiary, that is beneficially
owned by an Interested Stockholder or any Affiliate or Associate of any
Interested Stockholder; or (e) any receipt by any Interested
Stockholder of the benefit, directly or indirectly (except
proportionally as a stockholder of the Corporation) of any loans,
advances, guarantees, pledges, or other financial benefits (other than
those expressly permitted in clauses (a) to (d) of this paragraph),
provided by the Corporation or any director or any direct or indirect
majority-owned Subsidiary; or (f) any agreement, contract or other
arrangement providing for any one or more of the actions specified in
the foregoing clauses (a) to (e).
2. "Capital Stock" shall mean all capital stock of
the Corporation authorized to be issued from time to time under the
Certificate of Incorporation, and the term "Voting Stock" shall mean
all Capital Stock which by its terms may be voted on all matters
submitted to stockholders of the Corporation generally.
3. "person" shall mean any individual, firm, company,
partnership, corporation, joint venture, association, limited liability
company or other entity and shall include any group comprised of any
person and any other person or entity with whom such person or any
Affiliate or Associate of such person has any agreement, arrangement or
understanding, directly or indirectly, for the purpose of acquiring,
holding voting or disposing of Capital Stock.
4. "Interested Stockholder" shall mean any person
(other than the Corporation or any Subsidiary and other than any
profit-sharing employee stock ownership or other employee benefit plan
of the Corporation or any Subsidiary or any trustee of or fiduciary
with respect to any such plan when acting in such capacity) who (a) is
the beneficial owner of Voting Stock representing fifteen percent (15%)
or more of the votes entitled to be cast by the holders of all then
outstanding shares of Voting Stock; or (b) is an Affiliate or Associate
of the Corporation and at any time within the three-year period
immediately prior to the date in question was the beneficial owner of
Voting Stock representing fifteen percent (15%) or more of the votes
entitled to be cast by the holders of all the then outstanding shares
of Voting Stock; provided, however, that the term "Interested
Stockholder" shall not include any person who would have qualified as
an Interested Stockholder under either preceding clause immediately
prior to the effective date of this Amendment to the Corporation's
Certificate of Incorporation.
5. A person shall be a "beneficial owner" of any
Capital Stock (a) which such person or any of its Affiliates or
Associates beneficially owns, directly or indirectly; (b) which such
person or any of its Affiliates or Associates has, directly or
indirectly, (i) the right to acquire (whether such right is exercisable
immediately or subject to the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise,
or (ii) the right to vote pursuant to any agreement, arrangement or
understanding; or (c) which are beneficially owned, directly or
indirectly, by any other person with such person or any of its
Affiliates or Associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or
disposing of any shares of Capital Stock. For the purposes of
determining whether a person is an Interested Stockholder hereunder,
the number of shares of Capital Stock deemed to be outstanding shall
include shares deemed beneficially owned by such person through
application of this Paragraph 5 of Section (c), but shall not include
any other shares of Capital Stock that may be issuable pursuant to any
agreement, arrangement or understanding, or upon exercise of conversion
rights, warrants or options, or otherwise.
<PAGE>
6. The terms "Affiliate" and "Associate" shall have
the respective meanings ascribed to such terms in the Securities
Exchange Act of 1934, as such may be amended from time to time.
7. "Subsidiary" means any company of which a majority
of any class of equity security is beneficially owned by the
Corporation; provided, however, that for the purposes of the definition
of Interested Stockholder, the term "Subsidiary" shall mean only a
company of which a majority of each class of equity security is
beneficially owned by the Corporation.
8. "Continuing Director" means any member of the
Board of Directors of the Corporation, while such person is a member of
the Board of Directors, who is not an Affiliate, Associate or
representative of the Interested Stockholder and was a member of the
Board of Directors prior to the time that the Interested Stockholder
became an Interested Stockholder, and any successor of a Continuing
Director while such successor is a member of the Board of Directors,
provided that such successor is not an Affiliate, Associate or
representative of the Interested Stockholder and is recommended or
elected to succeed the Continuing Director by a majority of Continuing
Directors.
(d) A majority of the Continuing Directors shall have the
power and duty to determine for the purposes of this Article, on the basis of
information known to them after reasonable inquiry, (i) whether a person is an
Interested Stockholder, (ii) the number of shares of Capital Stock or other
securities beneficially owned by any person, and (iii) whether a person is an
Affiliate or Associate of another. Any such determination made in good faith
shall be binding and conclusive on all parties.
(e) Nothing contained in this Article shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
(f) The fact that any Business Combination complies with the
provisions of Section (b) of this Article shall not be construed to impose any
fiduciary duty, obligation or responsibility on the Board of Directors, or any
member thereof to approve such Business Combination or recommend its adoption or
approval to the stockholders or the Corporation, nor shall such compliance
limit, prohibit or otherwise restrict in any manner the Board of Directors, or
any member thereof, with respect to evaluations of or actions and responses
taken with respect to such Business Combination. Notwithstanding any other
provisions of this Certificate of Incorporation or the Bylaws of the Corporation
(and notwithstanding the fact that a lesser percentage or separate class vote
may be specified by law, this Certificate of Incorporation or the Bylaws of the
Corporation), the affirmative vote of the holders of not less than eighty
percent (80%) of the votes to be cast by the holders of all the then outstanding
shares of Voting Stock, voting together as a single class, shall be required to
amend or repeal, or adopt any provisions inconsistent with this Article.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1 Number and Term of Office. The business, property,
and affairs of the Corporation shall be managed by or under the direction of a
Board of Directors. The Board of Directors shall consist of not fewer than six
(6) members and not more than twelve (12) members, with the number of authorized
directors being initially fixed at ten (10), which number may be changed from
time to time by a resolution of the Board of Directors adopted by the
affirmative vote of at least a majority of the total number of authorized
directors most recently fixed by the Board of Directors, except in each case as
may be provided pursuant to
<PAGE>
resolutions of the Board of Directors, adopted pursuant to the provisions of the
Certificate of Incorporation, establishing any series of Preferred Stock and
granting to holders of shares of such series of Preferred Stock rights to elect
additional directors under specified circumstances.
The Board of Directors shall be divided into three classes, designated
Class I, Class II and Class III. Such classes shall be as nearly equal in number
as the then total number of directors constituting the entire Board permits.
The directors shall be elected by the holders of shares entitled to
vote thereon at the annual meeting of stockholders, and each shall serve
(subject to the provisions of Article IV) until his respective successor has
been elected and qualified. At the August 28, 1997 annual meeting of
stockholders, Class I, Class II and Class III directors shall be elected for
initial terms expiring at the next succeeding annual meeting, the second
succeeding annual and the third succeeding annual meeting, respectively, and
until their respective successors are elected and qualified. At each annual
meeting of stockholders after August 28, 1997, the directors chosen to succeed
those in the class whose terms then expire shall be elected by the stockholders
for terms expiring at the third succeeding annual meeting after their election
and until their respective successors are elected and qualified. Newly created
directorships or any decrease in directorships resulting from increases and
decreases in the number of directors shall be so apportioned among the classes
as to make all the classes as nearly equal in number as possible; provided, that
when the Board increases the number of directors and fills the vacancies created
thereby such director will hold office for the term expiring at the annual
meeting of stockholders for the term of the class to which they have been
elected expires.
Section 2.2 Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall from time
to time be determined by the Board. Special meetings of the Board of Directors
shall be held at such time and place as shall be designated in the notice of the
meeting whenever called by the President or by one of the directors then in
office.
Section 2.3 Notice of Special Meetings. The Secretary, or in
his absence any other officer of the corporation, shall give each director
notice of the time and place of holding of special meetings of the Board of
Directors at least twenty-four hours before the meeting, whether by mail,
telegram, cable, radiogram, or personal service. Unless otherwise stated in the
notice thereof, any and all business may be transacted at any meeting without
specification of such business in the notice.
Section 2.4 Quorum and Organization of Meetings. A majority of
the total number of members of the Board of Directors as constituted from time
to time shall constitute a quorum for the transaction of business, but, if at
any meeting of the Board of Directors (whether or not adjourned from a previous
meeting) there shall be less than a quorum present, a majority of those present
may adjourn the meeting to another time and place, and the meeting may be held
as adjourned without further notice or waiver. Except as otherwise provided by
law or in the Certificate of Incorporation or these Bylaws, a majority of the
directors present at any meeting at which a quorum is present may decide any
question brought before such meeting. Meetings shall be presided over by the
President, or in the absence of the President, by such other person as the
directors may select. The Secretary of the corporation shall act as secretary of
the meeting, but in his absence the chairman of the meeting may appoint any
person to act as secretary of the meeting.
Section 2.5 Committees. The Board of Directors may, by
resolution passed by a majority of the whole Board, designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence of disqualification of a member of a
committee, the member or members thereof present at any meeting and not
<PAGE>
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in the resolution of the Board of Directors, shall have
and may exercise all the powers and authority of the Board of Directors in the
management of the business, property, and affairs of the corporation, and may
authorize the seal of the corporation to be affixed to all papers which may
require it; but no such committee shall have power or authority in reference to
amending the Certificate of Incorporation of the corporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of Directors
pursuant to authority expressly granted to the Board of Directors by the
Certificate of Incorporation, fix any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation, or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the same
or any other class or classes of stock of the corporation), adopting an
agreement of merger or consolidation under Section 251 or 252 of the General
Corporation Law of the State of Delaware, recommending to the stockholders the
sale, lease, or exchange of all or substantially all of the corporation, s
property and assets, recommending to the stockholders a dissolution of the
corporation or a revocation of dissolution, or amending these Bylaws; and,
unless the resolution expressly so provided, no such committee shall have the
power or authority to declare a dividend, to authorize the issuance of stock, or
to adopt a certificate of ownership and merger pursuant to Section 253 of the
General Corporation Law of the State of Delaware. Each committee which may be
established by the Board of Directors pursuant to these Bylaws may fix its own
rules and procedures. Notice of meetings of committees, other than of regular
meetings provided for by the rules, shall be given to committee members. All
action taken by committees shall be recorded in minutes of the meetings.
Section 2.6 Action Without Meeting. Nothing contained in these
Bylaws shall be deemed to restrict the power of members of the Board of
Directors or any committee designated by the Board to take any action required
or permitted to be taken by them without a meeting.
Section 2.7 Telephone Meetings. Nothing contained in these
Bylaws shall be deemed to restrict the power of members of the Board of
Directors, or any committee designated by the Board, to participate in a meeting
of the Board, or committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other.
ARTICLE III
OFFICERS
Section 3.1 Executive Officers. The executive officers of the
corporation shall be a President, one or more Vice Presidents, a Treasurer, and
a Secretary, each of whom shall be elected by the Board of Directors. The Board
of Directors may elect or appoint such other officers (including a Controller
and one or more Assistant Treasurers and Assistant Secretaries) as it may deem
necessary or desirable. Each officer shall hold office for such term as may be
prescribed by the Board of Directors from time to time. Any person may hold at
one time two or more offices.
Section 3.2 Powers and Duties. The President shall preside at
all meetings of the stockholders and of the Board of Directors. In the absence
of the President, a Vice President appointed by the President or, if the
President fails to make such appointment, by the Board, shall perform all the
duties of the President. The officers and agents of the corporation shall each
have such powers and authority and shall perform such duties in the management
of the business, property, and affairs of the corporation as generally pertain
to their respective offices, as well as such powers and authorities and such
duties as f rom time to time may be prescribed by the Board of Directors.
<PAGE>
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
Section 4.1 Resignations. Any director or officer of the
corporation, or any member of any committee, may resign at any time by giving
written notice to the Board of Directors, the President, or the Secretary of the
corporation. Any such resignation shall take effect at the time specified
therein or, if the time be not specified therein, then upon receipt thereof. The
acceptance of such resignation shall not be necessary to make it effective.
Section 4.2 Removals. (a) The Board of Directors, by a vote of
not less than a majority of the entire Board, at any meeting thereof, or by
written consent, at any time, may, to the extent permitted by law, remove with
or without cause from office or terminate the employment of any officer or
member of any committee and may, with or without cause, disband any committee.
(b) Any director, or the entire Board of Directors, may be
removed, for cause only, by the affirmative vote of the holders of at least 66
2/3% of the voting power of the then outstanding shares of any class or series
of capital stock of the corporation entitled to vote generally in the election
of directors, voting together as a single class.
Section 4.3 Vacancies. (a) Officers. Any vacancy in the office
of any officer through death, resignation, removal, disqualification, or other
cause, may be filled at any time by a majority of the directors then in office
(even though less than a quorum remains).
(b) Directors. Any vacancy on the Board of Directors,
howsoever resulting, including through an increase in the number of directors,
shall only be filled by the affirmative vote of a majority of the remaining
directors then in office, even if less than a quorum, or by the sole remaining
director. Any director elected to fill a vacancy shall hold office for the same
remaining term as that of his or her predecessor, or if such director was
elected as a result of an increase in the number of directors, then for the term
specified in the resolution providing for such increase.
ARTICLE V
CAPITAL STOCK
Section 5.1 Stock Certificates. The certificates for shares of
the capital stock of the corporation shall be in such form as shall be
prescribed by law and approved, from time to time, by the Board of Directors.
Section 5.2 Transfer of Shares. Shares of the capital stock of
the corporation may be transferred on the books of the corporation only by the
holder of such shares or by his duly authorized attorney, upon the surrender to
the corporation or its transfer agent of the certificate representing such stock
properly endorsed.
Section 5.3 Fixing Record Date. In order that the corporation
may determine the stockholders entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock,
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which, unless otherwise provided by law, shall not be
<PAGE>
more than sixty nor less than ten days before the date of such meeting, nor more
than sixty days prior to any other action.
Section 5.4 Lost Certificates. The Board of Directors or any
transfer agent of the corporation may direct a new certificate or certificates
representing stock of the corporation to be issued in place of any certificate
or certificates theretofore issued by the corporation, alleged to have been
lost, stolen, or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate to be lost, stolen, or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors (or any transfer agent of the corporation authorized to do so by a
resolution of the Board of Directors) may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen, or
destroyed certificate or certificates, or his legal representative, to give the
corporation a bond in such sum as the Board of Directors (or any transfer agent
so authorized) shall direct to indemnify the corporation against any claim that
may be made against the corporation with respect to the certificate alleged to
have been lost, stolen, or destroyed or the issuance of such new certificates,
and such requirement may be general or confined to specific instances.
Section 5.5 Regulations. The Board of Directors shall have
power and authority to make all such rules and regulations as it may deem
expedient concerning the issue, transfer, registration, cancellation, and
replacement of certificates representing stock of the corporation.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Corporate Seal. The corporate seal shall have
inscribed thereon the name of the corporation and shall be in such form as may
be approved from time to time by the Board of Directors.
Section 6.2 Fiscal Year. The fiscal year of the corporation
shall begin on the 1st day of January in each year and terminate on the 31st day
of December in each succeeding year.
Section 6.3 Notices and Waivers Thereof. (a) Whenever any
notice whatever is required by law, the Certificate of Incorporation, or these
Bylaws to be given to any stockholder, director, or officer, such notice, except
as otherwise provided by law, may be given personally, or by mail, or, in the
case of directors or officers, by telegram, cable, or radiogram, addressed to
such address as appears on the books of the corporation. Any notice given by
telegram, cable, or radiogram shall be deemed to have been given when it shall
have been delivered for transmission and any notice given by mail shall be
deemed to have been given when it shall have been deposited in the United States
mail with postage thereon prepaid.
(b) Whenever any notice is required to be given by law, the
Certificate of Incorporation, or these Bylaws, a written waiver thereof, signed
by the person entitled to such notice, whether before or after the meeting or
the time stated therein, shall be deemed equivalent in all respects to such
notice to the full extent permitted by law.
Section 6.4 Stock of Other Corporations or Other Interests.
Unless otherwise ordered by the Board of Directors, the President, the
Secretary, and such attorneys or agents of the corporation as may be from time
to time authorized by the Board of Directors or the President shall have full
power and authority on behalf of this corporation to attend and to act and vote
in person or by proxy at any meeting of the holders of securities of any
corporation or other entity in which this corporation may own or hold shares or
other securities, and at such meetings shall possess and may exercise all the
rights and powers incident to the ownership of such shares or other securities
which this corporation, as the owner or holder thereof, might have possessed and
<PAGE>
exercised if present. The President, the Secretary, or such attorneys or agents,
may also execute and deliver on behalf of this corporation powers of attorney,
proxies, consents, waivers, and other instruments -relating to the shares or
securities owned or held by this corporation.
ARTICLE VII
Section 6.5 Anti-Takeover Amendments. (a) The holders of
shares entitled at the time to vote for the election of directors shall have
power to adopt, amend, or repeal the Bylaws of the corporation by vote of not
less than a majority of such shares, and except as otherwise provided by law,
the Board of Directors shall have power equal in all respects to that of the
stockholders to adopt, amend, or repeal the Bylaws by vote of not less than a
majority of the entire Board. However, any Bylaw adopted by the Board may be
amended or repealed by vote of the holders of a majority of the shares entitled
at the time to vote for the election of directors.
(b) Notwithstanding the foregoing and anything contained in
the Certificate of Incorporation to the contrary, Section 1.2 ("Special
Meetings"), Section 1.8 ("Advance Notice of Nominations and Proposals"), Section
4.2(b) ("Removal of Directors"), Section 2.1 ("Number of Directors and Term of
Office"), Section 4.3(b) ("Vacancies; Directors"), and Section 1.9 ("Consent of
Stockholders") of these Bylaws and Articles ELEVENTH, TWELFTH, THIRTEENTH AND
FOURTEENTH of the Certificate of Incorporation shall not be amended or repealed,
and no provision inconsistent with any thereof shall be adopted, without the
affirmative vote of the holders of at least 66 2/3% of the voting power of the
Voting Stock, voting together as a single class. Section 1.10 ("Supermajority
Shareholder Vote for Certain Transactions") and Section 7.1(b) ("Anti-Takeover
Amendments") of the corporation's Bylaws and Article FIFTEENTH of the
Certificate of Incorporation shall not be amended or repealed, and no provision
inconsistent with any thereof shall be adopted, without the affirmative vote of
the holders of at least 80% of the voting power of the Voting Stock, voting
together as a single class. Notwithstanding anything contained in this Amended
and Restated Bylaws to the contrary, the affirmative vote of the holders of at
least 80% of the Voting Stock, voting together as a single class.
(c) Notwithstanding anything contained in the Amended and
Restated Certificate of Incorporation to the contrary, the affirmative vote of
the holders of at least 80% of the Voting Stock, voting together as a single
class, shall be required to amend or repeal, or adopt any provision inconsistent
with, any provision of Article SIXTEENTH of the Certificate of Incorporation.
Exhibit 4.6
FORM OF WARRANT
THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT") OR ANY OTHER APPLICABLE STATE SECURITIES LAWS AND
HAS BEEN ISSUED IN RELIANCE UPON REGULATION D PROMULGATED UNDER THE SECURITIES
ACT. THIS WARRANT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN
OFFER TO BUY THE WARRANT IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
WOULD BE UNLAWFUL. THIS WARRANT MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR
ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION
WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND
UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN
EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH
TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE WARRANT, WHICH OPINION AND
WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION.
No.__
WARRANT
To Purchase ______ Shares of Common Stock of
XYBERNAUT CORPORATION
THIS CERTIFIES that, for value received, HSBC James Capel
Canada, Inc. (the "Investor"), is entitled, upon the terms and subject to the
conditions hereinafter set forth, at any time on or after __________, 199_ [six
months after the draw down exercise date] and on or prior to _________, 200_
[three years after issuance date] (the "Termination Date") but not thereafter,
to subscribe for and purchase from XYBERNAUT CORPORATION, a corporation
incorporated in the State of Delaware (the "Company"), ____________________
(______) shares (the "Warrant Shares") of Common Stock, par value US $0.01 per
share of the Company (the "Common Stock"). The purchase price of one share of
Common Stock (the "Exercise Price") under this Warrant shall be equal to 225% of
the Average Daily Price (as defined in the Agreement) of the Common Stock on the
date the Company furnishes the Investor with a Draw Down Notice (as defined in
the Agreement). The Exercise Price and the number of shares for which the
Warrant is exercisable shall be subject to adjustment as provided herein. This
Warrant is being issued in connection with the Subscription Agreement dated
September __, 1998 between the Investor and the Company (the "Agreement"), and
is subject to its terms and conditions. In the event of any conflict between the
terms of this Warrant and the Agreement, this Warrant shall control.
1. Title of Warrant. Prior to the expiration hereof and
subject to compliance with applicable laws, this Warrant and all rights
hereunder are transferable, in whole or in part, at the office or agency of the
Company by the holder hereof in person or by duly authorized attorney, upon
surrender of this Warrant together with the Assignment Form annexed hereto
properly endorsed.
2. Authorization of Shares. The Company covenants that all
shares of Common Stock which may be issued upon the exercise of rights
represented by this Warrant will, upon exercise of the rights represented by
this Warrant, be duly authorized, validly issued, fully paid and nonassessable
and free from all
<PAGE>
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Except as provided in Section 4 below,
exercise of the purchase rights represented by this Warrant may be made at any
time or times, before the close of business on the Termination Date, or such
earlier date on which this Warrant may terminate as provided in this Warrant, by
the surrender of this Warrant and the Notice of Exercise Form annexed hereto
duly executed, at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company) and
upon payment of the Exercise Price of the shares thereby purchased; whereupon
the holder of this Warrant shall be entitled to receive a certificate for the
number of shares of Common Stock so purchased. Certificates for shares purchased
hereunder shall be delivered to the holder hereof within three (3) business days
after the date on which this Warrant shall have been exercised as aforesaid.
Payment of the Exercise Price of the shares may be by certified check or
cashier's check or by wire transfer to an account designated by the Company in
an amount equal to the Exercise Price multiplied by the number of Warrant
Shares.
4. No Fractional Shares or Scrip. No fractional shares or
scrip representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for
shares of Common Stock upon the exercise of this Warrant shall be made without
charge to the holder hereof for any issue or transfer tax or other incidental
expense in respect of the issuance of such certificate, all of which taxes and
expenses shall be paid by the Company, and such certificates shall be issued in
the name of the holder of this Warrant or in such name or names as may be
directed by the holder of this Warrant; provided, however, that in the event
certificates for shares of Common Stock are to be issued in a name other than
the name of the holder of this Warrant, this Warrant when surrendered for
exercise shall be accompanied by the Assignment Form attached hereto duly
executed by the holder hereof; and provided further, that upon any transfer
involved in the issuance or delivery of any certificates for shares of Common
Stock, the Company may require, as a condition thereto, the payment of a sum
sufficient to reimburse it for any transfer tax incidental thereto.
6. Closing of Books. The Company will not close its
stockholder books or records in any manner which prevents the timely exercise of
this Warrant for a period of time in excess of five (5) trading days per year.
7. No Rights as Stockholder until Exercise. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company prior to the exercise thereof. Upon the surrender of
this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares
so purchased shall be and be deemed to be issued to such holder as the record
owner of such shares as of the close of business on the later of the date of
such surrender or payment.
8. Assignment and Transfer of Warrant. This Warrant may be
assigned by the surrender of this Warrant and the Assignment Form annexed hereto
duly executed at the office of the Company (or such other office or agency of
the Company as it may designate by notice in writing to the registered holder
hereof at the address of such holder appearing on the books of the Company).
9. Loss, Theft, Destruction or Mutilation of Warrant. The
Company represents and warrants that upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant certificate or any stock certificate relating to the Warrant
Shares, and in case of loss, theft or destruction, of indemnity or security
reasonably satisfactory to it, and upon surrender and cancellation of such
Warrant or stock certificate, if mutilated, the Company will make and deliver a
new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of such Warrant or stock certificate.
<PAGE>
10. Saturdays, Sundays, Holidays, etc. If the last or
appointed day for the taking of any action or the expiration of any right
required or granted herein shall be a Saturday, Sunday or a legal holiday, then
such action may be taken or such right may be exercised on the next succeeding
day not a legal holiday.
11. Effect of Certain Events.
(a) If at any time the Company proposes (i) to sell or
otherwise convey all or substantially all of its assets or (ii) to effect a
transaction (by merger or otherwise) in which more than 50% of the voting power
of the Company is disposed of (collectively, a "Sale or Merger Transaction"), in
which the consideration to be received by the Company or its shareholders
consists solely of cash, then the Warrant shall terminate if the Warrant has not
been exercised by the effective date of such transaction, the Company shall give
the holder of this Warrant thirty (30) days' notice of such termination and of
the proposed effective date of the transaction.
(b) In case the Company shall at any time effect a sale or
merger transaction in which the consideration to be received by the Company or
its shareholders consists in part of consideration other than cash, the holder
of this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
(c) The Company agrees that the Warrant Shares shall be
included in the registration statement to be filed in accordance with the terms
of the Agreement.
12. Adjustments of Exercise Price and Number of Warrant
Shares. The number and kind of securities purchasable upon the exercise of this
Warrant and the Exercise Price shall be subject to adjustment from time to time
upon the happening of any of the following.
In case the Company shall (i) declare or pay a dividend in
shares of Common Stock or make a distribution in shares of Common Stock to
holders of its outstanding Common Stock, (ii) subdivide its outstanding shares
of Common Stock, (iii) combine its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) issue any shares of its capital
stock in a reclassification of the Common Stock, then the number of Warrant
Shares purchasable upon exercise of this Warrant immediately prior thereto shall
be adjusted so that the holder of this Warrant shall be entitled to receive the
kind and number of Warrant Shares or other securities of the Company which he
would have owned or have been entitled to receive had such Warrant been
exercised in advance thereof. Upon each such adjustment of the kind and number
of Warrant Shares or other securities of the Company which are purchasable
hereunder, the holder of this Warrant shall thereafter be entitled to purchase
the number of Warrant Shares or other securities resulting from such adjustment
at an Exercise Price per such Warrant Share or other security obtained by
multiplying the Exercise Price in effect immediately prior to such adjustment by
the number of Warrant Shares purchasable pursuant hereto immediately prior to
such adjustment and dividing by the number of Warrant Shares or other securities
of the Company resulting from such adjustment. An adjustment made pursuant to
this paragraph shall become effective immediately after the effective date of
such event retroactive to the record date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at
any time during the term of this Warrant, reduce the then current Exercise Price
to any amount and for any period of time deemed appropriate by the Board of
Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant
Shares or number or kind of securities or other property purchasable upon the
exercise of this Warrant or the Exercise Price is adjusted, as
<PAGE>
herein provided, the Company shall promptly mail by registered or certified
mail, return receipt requested, to the holder of this Warrant notice of such
adjustment or adjustments setting forth the number of Warrant Shares (and other
securities or property) purchasable upon the exercise of this Warrant and the
Exercise Price of such Warrant Shares (and other securities or property) after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was made.
Such notice, in absence of manifest error, shall be conclusive evidence of the
correctness of such adjustment.
15. Authorized Shares. The Company covenants that during the
period the Warrant is outstanding, it will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of the Warrant Shares upon the exercise of any purchase rights under this
Warrant. The Company further covenants that its issuance of this Warrant shall
constitute full authority to its officers who are charged with the duty of
executing stock certificates to execute and issue the necessary certificates for
the Warrant Shares upon the exercise of the purchase rights under this Warrant.
The Company will take all such reasonable action as may be necessary to assure
that such Warrant Shares may be issued as provided herein without violation of
any applicable law or regulation, or of any requirements of the NASDAQ Small Cap
Stock Market or any domestic securities exchange upon which the Common Stock may
be listed.
16. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant
shall be construed and shall be given effect in all respects as if it had been
issued and delivered by the Company on the date hereof. This Warrant shall be
binding upon any successors or assigns of the Company. This Warrant shall
constitute a contract under the laws of New York without regard to its conflict
of law, principles or rules, and be subject to arbitration pursuant to the terms
set forth in the Agreement.
(b) Restrictions. The holder hereof acknowledges that the
Warrant Shares acquired upon the exercise of this Warrant, if not registered,
will have restrictions upon resale imposed by state and federal securities laws.
Each certificate representing the Warrant Shares issued to the Holder upon
exercise will bear the following legend:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), OR ANY OTHER APPLICABLE SECURITIES LAWS AND HAVE
BEEN ISSUED IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH OTHER SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED,
HYPOTHECATED OR OTHERWISE DISPOSED OF, EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO A
TRANSACTION THAT IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION".
(c) Modification and Waiver. This Warrant and any provisions
hereof may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof by the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
<PAGE>
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant to be
executed by its officer thereunto duly authorized.
Dated:
XYBERNAUT CORPORATION
By______________________________
Edward G. Newman
President and Chief Executive Officer
<PAGE>
NOTICE OF EXERCISE
To: XYBERNAUT CORPORATION
(1) The undersigned hereby elects to purchase ________ shares
of Common Stock, par value $ per shares (the "Common Stock") of XYBERNAUT
CORPORATION pursuant to the terms of the attached Warrant, and tenders herewith
payment of the exercise price in full, together with all applicable transfer
taxes, if any.
(2) Please issue a certificate or certificates representing
said shares of Common Stock in the name of the undersigned or in such other name
as is specified below:
-------------------------------
(Name)
-------------------------------
(Address)
-------------------------------
(3) The shares of Common Stock being issued in connection with
the exercise of the attached Warrant are [not] being issued in connection with
the sale of the Common Stock.
Dated:
------------------------------
Signature
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights
evidenced thereby are hereby assigned to
_______________________________________________ whose address is
- ---------------------------------------------------------------.
- ---------------------------------------------------------------
Dated: ______________, 199_/2000
Holder's Signature: _____________________________
Holder's Address: _____________________________
-----------------------------
Signature Guaranteed: ___________________________________________
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatsoever, and must be guaranteed by a bank or trust company. Officers
of corporations and those acting in an fiduciary or other representative
capacity should file proper evidence of authority to assign the foregoing
Warrant.
Exhibit 10.12
1997 STOCK INCENTIVE PLAN
of
XYBERNAUT CORPORATION
1. PURPOSES OF THE PLAN. This stock incentive plan (the
"Plan") is designed to provide an incentive to key employees (including
directors and officers who are key employees) and to consultants and directors
who are not employees of XYBERNAUT CORPORATION, a Delaware corporation (the
"Company"), or any of its Subsidiaries (as defined in Paragraph 18), and to
offer an additional inducement in obtaining the services of such persons. The
Plan provides for the grant of "incentive stock options" ("ISOs") within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonqualified stock options which do not qualify as ISOs ("NQSOs"),
stock appreciation rights ("SARs") and stock of the Company which may be subject
to contingencies or restrictions (collectively, "Awards"). The Company makes no
representation or warranty, express or implied, as to the qualification of any
option as an "incentive stock option" under the Code.
2. STOCK SUBJECT TO THE PLAN. Subject to the provisions of
Paragraph 11, the aggregate number of shares of Common Stock, $.01 par value per
share, of the Company ("Common Stock") for which Awards may be granted under the
Plan shall not exceed 1,650,000. Such shares of Common Stock may, in the
discretion of the Board of Directors of the Company (the "Board of Directors"),
consist either in whole or in part of authorized but unissued shares of Common
Stock or shares of Common Stock held in the treasury of the Company. Subject to
the provisions of Paragraph 12, any shares of Common Stock subject to an option
or SAR which for any reason expires, is canceled or is terminated unexercised or
which ceases for any reason to be exercisable or a restricted stock Award which
for any reason is forfeited, shall again become available for the granting of
Awards under the Plan. The Company shall at all times during the term of the
Plan reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of the Plan.
3. ADMINISTRATION OF THE PLAN. The Plan shall be administered
by the Board of Directors or a committee of the Board of Directors consisting of
not less than two directors, each of whom shall be a "non-employee director"
within the meaning of Rule 16b-3 (as defined in Paragraph 18) (collectively, the
"Committee"). Unless otherwise provided in the By-laws of the Company or by
resolution of the Board of Directors, a majority of the members of the Committee
shall constitute a quorum, and the acts of a majority of the members present at
any meeting at which a quorum is present, and any acts approved in writing by
all members without a meeting, shall be the acts of the Committee.
Subject to the express provisions of the Plan, the Committee
shall have the authority, in its sole discretion, to determine: the key
employees, consultants and directors who shall be granted Awards; the type of
Award to be granted; the times when an Award shall be granted; the number of
shares of Common Stock to be subject to each Award; the term of each option and
SAR; the date each option and SAR shall become exercisable; whether an option or
SAR shall be exercisable in whole or in installments and, if in installments,
the number of shares of Common Stock to be subject to each installment, whether
the installments shall be cumulative, the date each installment shall become
exercisable and the term of each installment; whether to accelerate the date of
<PAGE>
exercise of any option or SAR or installment thereof; whether shares of Common
Stock may be issued upon the exercise of an option as partly paid and, if so,
the dates when future installments of the exercise price shall become due and
the amounts of such installments; the exercise price of each option and the base
price of each SAR; the price, if any, to be paid for a share Award; the form of
payment of the exercise price of an option; the form of payment upon exercise of
an SAR; whether to restrict the sale or other disposition of a stock Award or
the shares of Common Stock acquired upon the exercise of an option or SAR and,
if so, to determine whether such contingencies and restrictions have been met
and whether and under what conditions to waive any such contingency or
restriction; whether and under what conditions to subject all or a portion of
the grant or exercise of an option or SAR, the vesting of a stock Award or the
shares acquired pursuant to the exercise of an option or SAR to the fulfillment
of certain contingencies or restrictions as specified in the contract referred
to in Paragraph 10 hereof (the "Contract"), including without limitation,
contingencies or restrictions relating to entering into a covenant not to
compete with the Company, any of its Subsidiaries or a Parent (as defined in
Paragraph 18), to financial objectives for the Company, any of its Subsidiaries
or a Parent, a division of any of the foregoing, a product line or other
category, and/or to the period of continued employment of the Award holder with
the Company, any of its Subsidiaries or a Parent, and to determine whether such
contingencies or restrictions have been met; whether an Award holder is Disabled
(as defined in Paragraph 18); the amount, if any, necessary to satisfy the
obligation of the Company, a Subsidiary or Parent to withhold taxes or other
amounts; the Fair Market Value (as defined in Paragraph 18) of a share of Common
Stock; to construe the respective Contracts and the Plan; with the consent of
the Award holder, to cancel or modify an Award, provided, that the modified
provision is permitted to be included in an Award granted under the Plan on the
date of the modification, and further, provided, that in the case of a
modification (within the meaning of Section 424(h) of the Code) of an ISO, such
Award as modified would be permitted to be granted on the date of such
modification under the terms of the Plan; to prescribe, amend and rescind rules
and regulations relating to the Plan; to approve any provision which under Rule
16b-3 requires the approval of the Board of Directors, a committee of
non-employee directors or the stockholders to be exempt (unless otherwise
specifically provided herein); and to make all other determinations necessary or
advisable for administering the Plan. Any controversy or claim arising out of or
relating to the Plan, any Award granted under the Plan or any Contract shall be
determined unilaterally by the Committee in its sole discretion. The
determinations of the Committee on the matters referred to in this Paragraph 3
shall be conclusive and binding on the parties. No member or former member of
the Committee shall be liable for any action, failure to act or determination
made in good faith with respect to the Plan or any Award or Contract hereunder.
4. OPTIONS
(a) GRANT. The Committee may from time to time,
consistent with the purposes of the Plan, grant options to such key employees
(including officers and directors who are key employees) of, and consultants to,
the Company or any of its Subsidiaries, and such Outside Directors, as the
Committee may determine, in its sole discretion. Such options granted shall
cover such number of shares of Common Stock as the Committee may determine, in
its sole discretion, as set forth in the applicable Contract; provided, however,
that the maximum number of shares subject to options or SARs that may be granted
to any employee during any calendar year under the Plan (the "162(m) Maximum")
shall be 350,000 shares; and further, provided, that the aggregate Fair Market
Value (determined at the time the option is granted) of the shares of Common
Stock for which any eligible employee may be granted ISOs under the Plan or any
other plan of the Company, of any of its Subsidiaries or of a Parent, which are
exercisable for the first time by such optionee during any calendar year shall
not exceed $100,000. Such ISO limitation shall be applied by taking ISOs into
account in the order in which
<PAGE>
they were granted. Any option granted in excess of such ISO limitation amount
shall be treated as a NQSO to the extent of such excess.
(b) EXERCISE PRICE. The exercise price of the shares
of Common Stock under each option shall be determined by the Committee, in its
sole discretion, as set forth in the applicable Contract; provided, however,
that the exercise price per share of an ISO shall not be less than the Fair
Market Value of a share of Common Stock on the date of grant; and further,
provided, that if, at the time an ISO is granted, the optionee owns (or is
deemed to own under Section 424(d) of the Code) stock possessing more than 10%
of the total combined voting power of all classes of stock of the Company, of
any of its Subsidiaries or of a Parent, the exercise price per share of such ISO
shall not be less than 110% of the Fair Market Value of a share of Common Stock
on the date of grant.
(c) TERM. The term of each option granted pursuant to
the Plan shall be determined by the Committee, in its sole discretion, as set
forth in the applicable Contract; provided, however, that the term of each ISO
shall not exceed 10 years from the date of grant thereof; and further, provided,
that if, at the time an ISO is granted, the optionee owns (or is deemed to own
under Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, of any of its
Subsidiaries or of a Parent, the term of the ISO shall not exceed five years
from the date of grant. Options shall be subject to earlier termination as
hereinafter provided.
(d) EXERCISE. An option (or any part or installment
thereof), to the extent then exercisable, shall be exercised by giving written
notice to the Company at its then principal office stating which option is being
exercised, specifying the number of shares of Common Stock as to which such
option is being exercised and accompanied by payment in full of the aggregate
exercise price therefor (or the amount due upon exercise if the Contract permits
installment payments) (a) in cash or by certified check or (b) if the applicable
Contract permits, with previously acquired shares of Common Stock having an
aggregate Fair Market Value on the date of exercise equal to the aggregate
exercise price of all options being exercised, or with any combination of cash,
certified check or shares of Common Stock having such value. The Company shall
not be required to issue any shares of Common Stock pursuant to any such option
until all required payments, including any required withholding, have been made.
The Committee may, in its sole discretion, permit payment of
all or a portion of the exercise price of an option by delivery by the optionee
of a properly executed notice, together with a copy of his irrevocable
instructions to a broker acceptable to the Committee to deliver promptly to the
Company the amount of sale or loan proceeds sufficient to pay such exercise
price. In connection therewith, the Company may enter into agreements for
coordinated procedures with one or more brokerage firms.
An optionee entitled to receive Common Stock upon the exercise
of an option shall not have the rights of a stockholder with respect to such
shares of Common Stock until the date of issuance of a stock certificate for
such shares or, in the case of uncertificated shares, until an entry is made on
the books of the Company's transfer agent representing such shares; provided,
however, that until such stock certificate is issued or book entry is made, any
optionee using previously acquired shares of Common Stock in payment of an
option exercise price shall continue to have the rights of a stockholder with
respect to such previously acquired shares.
In no case may an option be exercised with respect to a
fraction of a share of Common Stock. In no case may a fraction of a share of
Common Stock be purchased or issued under the Plan.
<PAGE>
(e) RELOAD OPTIONS. An optionee who, at a time when he is
eligible to be granted options under the Plan, uses previously acquired shares
of Common Stock to exercise an option granted under the Plan (the "prior
option"), shall, upon such exercise, be automatically granted an option (the
"reload option") to purchase the same number of shares of Common Stock so used
(or if there is not a sufficient number of shares available for grant under the
Plan remaining, such number of shares as are then available). Such reload
options shall be of the same type and have the same terms as the prior option
(except to the extent inconsistent with the terms of the Plan); provided,
however, that the exercise price per share of the reload option shall be equal
to the Fair Market Value of a share of Common Stock on the date of grant of the
reload option, and further, provided, that if the prior option was an ISO and at
the time the reload option is granted, the optionee owns (or is deemed to own
under Section 424(d) of the Code) stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company, of any of its
Subsidiaries or of a Parent, the exercise price per share shall be equal to 110%
of the Fair Market Value of a share of Common Stock on the date of grant and the
term of such option shall not exceed five years.
5. STOCK APPRECIATION RIGHTS.
(a) GRANT. The Committee may from time to time,
consistent with the purposes of the Plan, grant SARs to such key employees
(including officers and directors who are key employees) of, and consultants to,
the Company or any of its Subsidiaries, and such Outside Directors, as the
Committee may determine in its sole discretion. An SAR shall entitle the holder
thereof to be paid, promptly after exercise, in cash, by check or with shares of
Common Stock having an aggregate Fair Market Value on the date of exercise or
any combination thereof, as determined by the Committee, in its sole discretion,
an amount equal to the excess, if any, of the Fair Market Value on the exercise
date of the shares of Common Stock as to which the SAR is exercised over the
base price of such shares. The Contract may (but shall not be required to)
provide for such amount to be multiplied by a performance factor as set forth in
the Contract; provided, however, that such performance factor shall meet the
requirements for "qualified performance-based compensation" within the meaning
of Section 162(m) of the Code.
(b) BASE PRICE. The base price of the shares of
Common Stock subject to each SAR shall be determined by the Committee in its
sole discretion; provided, however, that the base price per share shall not be
less than the Fair Market Value of a share of Common Stock on the date of grant.
(c) TERM. The term of each SAR granted pursuant to
the Plan shall be determined by the Committee, in its sole discretion, as set
forth in the applicable Contract; provided, however, that the term of each SAR
shall not exceed 10 years from the date of grant. SARs shall be subject to
earlier termination as provided in the Plan.
(d) EXERCISE. An SAR (or any part or installment
thereof), to the extent then exercisable, shall be exercised by giving written
notice to the Company at its then principle office stating which SAR is being
exercised and specifying the number of shares of Common Stock as to which such
SAR is being exercised.
The holder of an SAR who receives shares of Common Stock upon
the exercise of an SAR shall not have the rights of a stockholder with respect
to such shares of Common Stock until the date of issuance of a stock certificate
for such shares or, in the case of uncertificated shares, until an entry is made
on the books of the Company's transfer agent representing such shares.
<PAGE>
In no case may an SAR be exercised with respect to a fraction
of a share of Common Stock.
6. RESTRICTED STOCK. The Committee may from time, consistent
with the purposes of the Plan, grant shares of Common Stock to such key
employees (including officers and directors who are key employees) of, or
consultants to, the Company or any of its Subsidiaries, as the Committee may
determine, in its sole discretion. The grant may cover such number of shares as
the Committee may determine, in its sole discretion, and require the Award
holder to pay such price per share therefor, if any, as the Committee may
determine, in its sole discretion. Such shares may be subject to such
contingencies and restrictions as the Committee may determine, as set forth in
the Contract. Upon the issuance of the stock certificate for a share Award, or
in the case of uncertificated shares, the entry on the books of the Company's
transfer agent representing such shares, notwithstanding any contingencies or
restrictions to which the shares are subject, the Award holder shall be
considered to be the record owner of the shares, and subject to the
contingencies and restrictions set forth in the Award, shall have all rights of
a stockholder of record with respect to such shares, including the right to vote
and to receive distributions. Upon the occurrence of any such contingency or
restriction, the Award holder may be required to forfeit all or a portion of
such shares back to the Company. The shares shall vest in the Award holder when
all of the restrictions and contingencies lapse. Accordingly, the Committee may
require that such shares be held by the Company, together with a stock power
duly endorsed in blank by the Award holder, until the shares vest in the Award
holder.
7. TERMINATION OF RELATIONSHIP. Except as may otherwise be
expressly provided in the applicable Contract, if an Award holder's relationship
with the Company, its Subsidiaries and Parent as an employee or a consultant has
terminated for any reason (other than as a result of his death or Disability),
the Award holder may exercise the options and SARs granted to him as an employee
of, or consultant to, the Company or any of its Subsidiaries, to the extent
exercisable on the date of such termination, at any time within three months
after the date of termination, but not thereafter and in no event after the date
the Award would otherwise have expired; provided, however, that if such
relationship is terminated either (a) for Cause (as defined in Paragraph 18), or
(b) without the consent of the Company, such option shall terminate immediately.
For the purposes of the Plan, an employment relationship shall
be deemed to exist between an individual and the Company, any of its
Subsidiaries or a Parent if, at the time of the determination, the individual
was an employee of such corporation for purposes of Section 422(a) of the Code.
As a result, an individual on military, sick leave or other bona fide leave of
absence shall continue to be considered an employee for purposes of the Plan
during such leave if the period of the leave does not exceed 90 days, or, if
longer, so long as the individual's right to reemployment with the Company, any
of its Subsidiaries or a Parent is guaranteed either by statute or by contract.
If the period of leave exceeds 90 days and the individual's right to
reemployment is not guaranteed by statute or by contract, the employment
relationship shall be deemed to have terminated on the 91st day of such leave.
Except as may otherwise be expressly provided in the
applicable Contract, options and SARs granted under the Plan shall not be
affected by any change in the status of the Award holder so long as he continues
to be an employee of, or a consultant to, the Company, or any of its
Subsidiaries or a Parent (regardless of having changed from one to the other or
having been transferred from one corporation to another).
Except as may otherwise be expressly provided in the
applicable Contract, if an Award holder's relationship with the Company as an
Outside Director ceases for any reason (other than as a result of his death or
Disability) then options and SARs granted to such holder as an Outside Director
may be exercised, to the
<PAGE>
extent exercisable on the date of such termination, at any time within three
months after the date of termination, but not thereafter and in no event after
the date the Award would otherwise have expired; provided, however, that if such
relationship is terminated for Cause, such Award shall terminate immediately. An
Award granted to an Outside Director, however, shall not be affected by the
Award holder becoming an employee of, or consultant to, the Company, any of its
Subsidiaries or a Parent.
Except as may otherwise be expressly provided in the Contract,
upon the termination of the relationship of an Award holder as an employee of,
or consultant to, the Company, and its Subsidiaries and Parent, or as an Outside
Director, for any reason (including his death or Disability), the share Award
shall cease any further vesting and the unvested portion of such Award as of the
date of such termination shall be forfeited to the Company for no consideration.
Nothing in the Plan or in any Award granted under the Plan
shall confer on any Award holder any right to continue in the employ of, or as a
consultant to, the Company, any of its Subsidiaries or a Parent, or as a
director of the Company, or interfere in any way with any right of the Company,
any of its Subsidiaries or a Parent to terminate the Award holder's relationship
at any time for any reason whatsoever without liability to the Company, any of
its Subsidiaries or a Parent.
8. DEATH OR DISABILITY. Except as may otherwise be expressly
provided in the applicable Contract, if an Award holder dies (a) while he is an
employee of, or consultant to, the Company, any of its Subsidiaries or a Parent,
(b) within three months after the termination of such relationship (unless such
termination was for Cause or without the consent of the Company) or (c) within
one year following the termination of such relationship by reason of his
Disability, the options and SARs that were granted to him as an employee of, or
consultant to, the Company or any of its Subsidiaries, may be exercised, to the
extent exercisable on the date of his death, by his Legal Representative (as
defined in Paragraph 18) at any time within one year after death, but not
thereafter and in no event after the date the option would otherwise have
expired.
Except as may otherwise be expressly provided in the
applicable Contract, if an Award holder's relationship as an employee of, or
consultant to, the Company, any of its Subsidiaries or a Parent has terminated
by reason of his Disability, the options and SARs that were granted to him as an
employee of, or consultant to the Company or any of its Subsidiaries may be
exercised, to the extent exercisable upon the effective date of such
termination, at any time within one year after such date, but not thereafter and
in no event after the date the option would otherwise have expired.
Except as may otherwise be expressly provided in the
applicable Contract, if an Award holder's relationship as an Outside Director
terminates as a result of his death or Disability, the options and SARs granted
to him as an Outside Director may be exercised, to the extent exercisable on the
date of such termination, at any time within one year after the date of
termination, but not thereafter and in no event after the date the Award would
otherwise have expired. In the case of the death of the Award holder, the Award
may be exercised by his Legal Representative.
9. COMPLIANCE WITH SECURITIES LAWS. It is a condition to the
issuance of any share Award and exercise of any option or SAR that either (a) a
Registration Statement under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock to be issued upon
such grant or exercise shall be effective and current at the time of exercise,
or (b) there is an exemption from registration under the Securities Act for the
issuance of the shares of Common Stock upon such exercise. Nothing
<PAGE>
herein shall be construed as requiring the Company to register shares subject to
any Award under the Securities Act or to keep any Registration Statement
effective or current.
The Committee may require, in its sole discretion, as a
condition to the receipt of an Award or the exercise of any option or SAR that
the Award holder execute and deliver to the Company his representations and
warranties, in form, substance and scope satisfactory to the Committee, which
the Committee determines are necessary or convenient to facilitate the
perfection of an exemption from the registration requirements of the Securities
Act, applicable state securities laws or other legal requirement, including,
without limitation, that (a) the shares of Common Stock to be received under the
Award or issued upon the exercise of the option or SAR are being acquired by the
Award holder for his own account, for investment only and not with a view to the
resale or distribution thereof, and (b) any subsequent resale or distribution of
shares of Common Stock by such Award holder will be made only pursuant to (i) a
Registration Statement under the Securities Act which is effective and current
with respect to the shares of Common Stock being sold, or (ii) a specific
exemption from the registration requirements of the Securities Act, but in
claiming such exemption, the Award holder shall prior to any offer of sale or
sale of such shares of Common Stock provide the Company with a favorable written
opinion of counsel satisfactory to the Company, in form, substance and scope
satisfactory to the Company, as to the applicability of such exemption to the
proposed sale or distribution.
In addition, if at any time the Committee shall determine, in
its sole discretion, that the listing or qualification of the shares of Common
Stock subject to any Award or option on any securities exchange, Nasdaq or under
any applicable law, or the consent or approval of any governmental agency or
regulatory body, is necessary or desirable as a condition to, or in connection
with, the granting of an Award or the issuing of shares of Common Stock
thereunder, such Award may not be granted and such option or SAR may not be
exercised in whole or in part unless such listing, qualification, consent or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee.
10. AWARD CONTRACTS. Each Award shall be evidenced by an
appropriate Contract which shall be duly executed by the Company and the Award
holder, and shall contain such terms, provisions and conditions not inconsistent
herewith as may be determined by the Committee. The terms of each Award and
Contract need not be identical.
11. ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Notwithstanding
any other provision of the Plan, in the event of a stock dividend,
recapitalization, merger in which the Company is the surviving corporation,
spin-off, split-up, combination or exchange of shares or the like which results
in a change in the number or kind of shares of Common Stock which is outstanding
immediately prior to such event, the aggregate number and kind of shares subject
to the Plan, the aggregate number and kind of shares subject to each outstanding
Award, the exercise price of each option, the base price of each SAR, any
contingencies and restrictions based on the number or kind of shares, and the
162(m) Maximum shall be appropriately adjusted by the Board of Directors, whose
determination shall be conclusive and binding on all parties. Such adjustment
may provide for the elimination of fractional shares which might otherwise be
subject to Awards without payment therefor.
In the event of (a) the liquidation or dissolution of the
Company, (b) a merger in which the Company is not the surviving corporation or a
consolidation, or (c) any transaction (or series of related transactions) in
which (i) more than 50% of the outstanding Common Stock is transferred or
exchanged for other consideration or (ii) shares of Common Stock in excess of
the number of shares of Common Stock outstanding
<PAGE>
immediately preceding the transaction are issued (other than to stockholder of
the Company with respect to their shares of stock in the Company, any
outstanding options, SARs or unvested stock shall terminate upon the earliest of
any such event, unless other provision is made therefor in the transaction.
12. AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was
adopted by the Board of Directors on April 10, 1997. No ISO may be granted under
the Plan after April 9, 2007. The Board of Directors, without further approval
of the Company's stockholders, may at any time suspend or terminate the Plan, in
whole or in part, or amend it from time to time in such respects as it may deem
advisable, including, without limitation, in order that ISOs granted hereunder
meet the requirements for "incentive stock options" under the Code, to comply
with the provisions of Rule 16b-3, Section 162(m) of the Code, or any change in
applicable law, regulations, rulings or interpretations of any governmental
agency or regulatory body; provided, however, that no amendment shall be
effective without the requisite prior or subsequent stockholder approval which
would (a) except as contemplated in Paragraph 11, increase the maximum number of
shares of Common Stock for which Awards may be granted under the Plan or the
162(m) Maximum, (b) change the eligibility requirements to receive Awards
hereunder, or (c) make any change for which applicable law, regulation, ruling
or interpretation by the applicable governmental agency or regulatory authority
requires stockholder approval. No termination, suspension or amendment of the
Plan shall adversely affect the rights of any Award holder under an Award
without his prior consent. The power of the Committee to construe and administer
any Awards granted under the Plan prior to the termination or suspension of the
Plan nevertheless shall continue after such termination or during such
suspension.
13. NON-TRANSFERABILITY. No option or SAR granted under the
Plan shall be transferable otherwise than by will or the laws of descent and
distribution, and options and SARs may be exercised, during the lifetime of the
Award holder, only by him or his Legal Representatives. Except as may otherwise
be expressly provided in the Contract, a stock Award, to the extent not vested,
shall not be transferable otherwise than by will or the laws of descent and
distribution. Except to the extent provided above, Awards may not be assigned,
transferred, pledged, hypothecated or disposed of in any way (whether by
operation of law or otherwise) and shall not be subject to execution, attachment
or similar process, and any such attempted assignment, transfer, pledge,
hypothecation or disposition shall be null and void ab initio and of no force or
effect.
14. WITHHOLDING TAXES. The Company, a Subsidiary or Parent may
withhold (a) cash or (b) with the consent of the Committee, shares of Common
Stock to be issued under a stock Award or upon exercise of an option or SAR
having an aggregate Fair Market Value on the relevant date, or a combination of
cash and shares having such value, in an amount equal to the amount which the
Committee determines is necessary to satisfy the obligation of the Company, any
of its Subsidiaries or a Parent to withhold federal, state and local taxes or
other amounts incurred by reason of the grant, vesting, exercise or disposition
of an Award, or the disposition of the underlying shares of Common Stock.
Alternatively, the Company may require the holder to pay to the Company such
amount, in cash, promptly upon demand.
15. LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such
legend or legends upon the certificates for shares of Common Stock issued under
a stock Award or upon exercise of an option or SAR under the Plan and may issue
such "stop transfer" instructions to its transfer agent in respect of such
shares as it determines, in its discretion, to be necessary or appropriate to
(a) prevent a violation of, or to perfect an exemption from, the registration
requirements of the Securities Act and any applicable state securities laws, (b)
implement the provisions of the Plan or any agreement between the Company and
the Award holder with respect to such shares of Common Stock, or (c) permit the
Company to determine the occurrence of a
<PAGE>
"disqualifying disposition," as described in Section 421(b) of the Code, of the
shares of Common Stock issued or transferred upon the exercise of an ISO granted
under the Plan.
The Company shall pay all issuance taxes with respect to the
issuance of shares of Common Stock under a stock Award or upon the exercise of
an option or SAR granted under the Plan, as well as all fees and expenses
incurred by the Company in connection with such issuance.
16. USE OF PROCEEDS. The cash proceeds received upon the
exercise of an option, or grant of a stock Award under the Plan shall be added
to the general funds of the Company and used for such corporate purposes as the
Board of Directors may determine.
17. SUBSTITUTIONS AND ASSUMPTIONS OF AWARDS OF CERTAIN
CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding,
the Board of Directors may, without further approval by the stockholders,
substitute new Awards for prior options, SARs or restricted stock of a
Constituent Corporation (as defined in Paragraph 18) or assume the prior options
or restricted stock of such Constituent Corporation.
18. DEFINITIONS. For purposes of the Plan, the following terms
shall be defined as set forth below:
(a) "Cause" shall mean (i) in the case of an employee
or consultant, if there is a written employment or consulting agreement between
the Award holder and the Company, any of its Subsidiaries or a Parent which
defines termination of such relationship for cause, cause as defined in such
agreement, and (ii) in all other cases, cause as defined by applicable state
law.
(b) "Constituent Corporation" shall mean any
corporation which engages with the Company, any of its Subsidiaries or a Parent
in a transaction to which Section 424(a) of the Code applies (or would apply if
the option assumed or substituted were an ISO), or any Subsidiary or Parent of
such corporation.
(c) "Disability" shall mean a permanent and total
disability within the meaning of Section 22(e)(3) of the Code.
(d) "Exchange Act" means the Securities Exchange Act
of 1934, as amended.
(e) "Fair Market Value" of a share of Common Stock on
any day shall mean (i) if the principal market for the Common Stock is a
national securities exchange, the average of the highest and lowest sales prices
per share of Common Stock on such day as reported by such exchange or on a
composite tape reflecting transactions on such exchange, (ii) if the principal
market for the Common Stock is not a national securities exchange and the Common
Stock is quoted on Nasdaq, and (A) if actual sales price information is
available with respect to the Common Stock, the average of the highest and
lowest sales prices per share of Common Stock on such day on Nasdaq, or (B) if
such information is not available, the average of the highest bid and lowest
asked prices per share of Common Stock on such day on Nasdaq, or (iii) if the
principal market for the Common Stock is not a national securities exchange and
the Common Stock is not quoted on Nasdaq, the average of the highest bid and
lowest asked prices per share of Common Stock on such day as reported on the OTC
Bulletin Board Service or by National Quotation Bureau, Incorporated or a
comparable service; provided, however, that if clauses (i), (ii) and (iii) of
this subparagraph are all inapplicable, or if no trades have been made
<PAGE>
or no quotes are available for such day, the Fair Market Value of a share of
Common Stock shall be determined by the Board of Directors by any method
consistent with applicable regulations adopted by the Treasury Department
relating to stock options.
(f) "Legal Representative" shall mean the executor,
administrator or other person who at the time is entitled by law to exercise the
rights of a deceased or incapacitated optionee with respect to an option granted
under the Plan.
(g) "Nasdaq" shall mean the Nasdaq Stock Market.
(h) "Outside Director" shall mean a person who is a
director of the Company, but on the date of grant is not an employee of, or
consultant to, the Company, any of its Subsidiaries or a Parent.
(i) "Parent" shall have the same definition as
"parent corporation" in Section 424(e) of the Code.
(j) "Rule 16b-3" shall mean Rule 16b-3 promulgated
under the Exchange Act, as the same may be in effect and interpreted from time
to time.
(k) "Subsidiary" shall have the same definition as
"subsidiary corporation" in Section 424(f) of the Code.
19. GOVERNING LAW; CONSTRUCTION. The Plan, the Awards and
Contracts hereunder and all related matters shall be governed by, and construed
in accordance with, the laws of the State of Delaware, without regard to
conflict of law provisions that would defer to the substantive laws of another
jurisdiction.
Neither the Plan nor any Contract shall be construed or
interpreted with any presumption against the Company by reason of the Company
causing the Plan or Contract to be drafted. Whenever from the context it appears
appropriate, any term stated in either the singular or plural shall include the
singular and plural, and any term stated in the masculine, feminine or neuter
gender shall include the masculine, feminine and neuter.
20. PARTIAL INVALIDITY. The invalidity, illegality or
unenforceability of any provision in the Plan, any Award or Contract shall not
affect the validity, legality or enforceability of any other provision, all of
which shall be valid, legal and enforceable to the fullest extent permitted by
applicable law.
21. STOCKHOLDER APPROVAL. The Plan shall be subject to
approval by a majority of the votes present in person or by proxy and entitled
to vote hereon at the next duly held meeting of the Company's stockholders at
which a quorum is present. No Award granted hereunder may vest or be exercised
prior to such approval; provided, however, that the date of grant of any Award
shall be determined as if the Plan had not been subject to such approval.
Notwithstanding the foregoing, if the Plan is not approved by a vote of the
stockholders of the Company on or before April 9, 1998, the Plan and any Awards
granted hereunder shall terminate.
Exhibit 10.22
PURCHASE AGREEMENT
THIS PURCHASE AGREEMENT is made and entered into as of this 8th day of
October, 1998 (the "Agreement"), by and between Xybernaut Corporation, a
Delaware corporation ("Xybernaut"), with offices at 12701 Fair Lakes Circle,
Fairfax, Virginia 22033, and HSBC James Capel Canada, Inc., an Ontario company
("HSBC"), with offices at 105 Adelaide Street West, Suite 1200, Toronto, Ontario
M5H 1P9, Canada, providing for the purchase and sale of shares of the common
stock, par value $.01 per share (the "Common Stock"), of Xybernaut, by HSBC or
its designated affiliates (collectively with HSBC, the "Buyer"), in the manner,
and upon the terms, provisions and conditions set forth in this Agreement.
Therefore, in consideration of the representations, warranties and
agreements contained herein and other good and valuable consideration, the
receipt and legal adequacy of which is hereby acknowledged by the parties,
Xybernaut and Buyer hereby agree as follows:
1. Definitions.
(a) "Average Daily Price" shall be the price based on the VWAP
of Xybernaut on the relevant market or exchange.
(b) "Average Price" shall be the average of the Average Daily
Price for the applicable Draw Down Pricing Period on the relevant market or
exchange.
(c) "Draw Down" shall have the meaning assigned to such term
in Section 4(a) hereof.
(d) "Draw Down Exercise Date" shall have the meaning assigned
to such term in Section 4(b) hereof.
(e) "Draw Down Pricing Period" shall mean a period of five (5)
consecutive trading days preceding a Draw Down Exercise Date.
(f) "Effective Date" shall mean the date the Registration
Statement of the Company covering the Shares being subscribed for hereby is
declared effective.
(g) "Material Adverse Effect" shall mean any effect on the
business, operations, properties or financial condition of Xybernaut that is
material and adverse to Xybernaut and its subsidiaries and affiliates, taken as
a whole, and/or any condition, circumstance, or situation that would prohibit or
otherwise interfere with the ability of Xybernaut to enter into and perform any
of its obligations under this Agreement or the Warrant, in any material respect.
(h) "Material Change in Ownership" shall mean that the
officers and directors of Xybernaut shall own less than 20% of the outstanding
Common Stock of Xybernaut.
<PAGE>
(i) "Registration Statement" shall mean the registration
statement under the Securities Act of 1933, as amended, to be filed with the
Securities and Exchange Commission for the registration of the Shares.
(j) "Securities" shall mean, collectively, the shares of
Common Stock of Xybernaut being subscribed for hereunder, the shares of Common
Stock issuable to Buyer upon exercise of the Option and the Warrants, the Option
(as hereinafter defined)and the Warrants.
(k) "Shares" shall mean, collectively, the shares of Common
Stock of Xybernaut being subscribed for hereunder and those shares of Common
Stock issuable to Buyer upon exercise of the Option and the Warrants.
(l) "Threshold Price" is the lowest price that Xybernaut will
issue new shares of Common Stock.
(m) "VWAP" shall mean the daily volume weighted average price
of Xybernaut on the relevant exchange as reported by Bloomberg Financial using
the AQR function.
(n) "Warrants" shall have the meaning assigned to such term in
Section 7 hereof.
2. Agreement to Subscribe; Pricing.
(a) Buyer hereby subscribes for a total of up to Two Million
Seven Hundred Thousand Dollars ($2,700,000) of Xybernaut's Common Stock based
upon (i) the Draw Downs permitted hereunder; provided that no Draw Down may
exceed Seven Hundred Fifty Thousand Dollars ($750,000), and (ii) a per share
purchase price equal to the lesser of (x) 100% of the Average Price for the Draw
Down Pricing Period and (y) $8.00 (the "Purchase Price").
(b) If the Average Daily Price on a given trading day is less
than the Threshold Price then Buyer's payment obligation under the applicable
Draw Down will be reduced by 1/5th. At no time shall the Threshold Price be set
below $3.00; provided, however, that if trading in Xybernaut's Common Stock is
suspended for more than three (3) hours in any trading day, the price of the
Common Stock shall be deemed to be below the Threshold Price for that trading
day.
3. Condition Precedent. The parties recognize that before Buyer shall
be obligated to accept a Draw Down request from Xybernaut, Xybernaut shall have
caused a sufficient number of shares of Common Stock to be authorized to cover
the shares of Common Stock to be issued in connection with such Draw Down.
4. Draw Down Terms. Subject to the satisfaction of the conditions set
forth in Section 3 hereof, the parties agree as follows:
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<PAGE>
(a) During the Exercise Period (as hereinafter defined),
Xybernaut, may, in its sole discretion, issue and exercise Draw Downs, which
Draw Downs the Buyer will be obligated to accept. The initial Draw Down may not
be initiated before Thursday, October 8, 1998. The next Draw Down shall only
occur after the end of the Draw Down Pricing Period for the initial Draw Down
and successive Draw Downs may only occur after the end of the Draw Down Pricing
Period for the immediately preceding Draw Down.
(b) Only one Draw Down shall be allowed in each Draw Down
Pricing Period. The Settlement (as such is hereinafter defined) of the Draw Down
shall occur on the first trading day following the end of the Draw Down Pricing
Period (the "Draw Down Exercise Date"), based on the Average Daily Price during
the Draw Down Pricing Period.
(c) Subject to all restrictions being satisfied, the exercise
of each Draw Down will be automatic without any additional action being
required. The exercise of each Draw Down will be "European Style" ( i.e. the
Draw Down can be exercised only on the Draw Down Exercise Date).
(d) Each Draw Down will expire on the calendar day immediately
following the Draw Down Exercise Date.
(e) Xybernaut must inform Buyer via facsimile transmission as
to the amount of the Draw Down Xybernaut wishes to exercise before trading in
the Common Stock the first day of the Draw Down Pricing Period (the "Draw Down
Notice"). The closing bid price of the Common Stock on each Draw Down Exercise
Date must be greater than $3.00 per share as reported by the relevant market or
exchange. At no time shall Buyer be required to purchase more shares of Common
Stock than amount set forth in the Draw Down Notice. For purposes hereof, the
term "Draw Down" shall mean Xybernaut's exercise of the right to commence a Draw
Down Pricing Period with respect to Buyer's commitment to purchase Common Stock
pursuant to Section 2(a) hereof.
(f) On or before three (3) trading days after the Draw Down
Exercise Date, Xybernaut shall deliver the Shares purchased by Buyer to Buyer or
to The Depositary Trust Company ("DTC") on Buyer's behalf. Xybernaut and Buyer
shall cause such Shares to be credited to the DTC account designated by Buyer
upon receipt by Xybernaut of payment for the Draw Down into an account
designated by Xybernaut. The delivery of the shares of Common Stock into Buyer's
DTC account in exchange for payment therefor shall be referred to herein as
"Settlement". Buyer shall coordinate with Xybernaut each Settlement through DTC.
5. Buyer's Call Option. Buyer shall have the right to purchase an
additional shares of Common Stock in an amount equal to the amount of the Draw
Down as set forth in the Draw Down Notice (the "Option"). For each additional
amount that Buyer exercises the Option pursuant to this Section 5, Buyer must
notify Xybernaut in writing of such exercise, which exercise may be made on a
daily basis throughout the applicable Draw Down Pricing Period; provided that no
exercise may be made later than 5:00 p.m. (East coast time) on the last day of
the applicable Draw Down Pricing
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<PAGE>
Period. If Buyer so exercises its Option to purchase additional shares, the
price for the shares of Common Stock shall be the VWAP for the Common Stock for
each day during the applicable Draw Down Pricing Period that all or a portion of
the Option was exercised. If Buyer does not exercise its right to exercise the
Option by such time on the last day of the applicable Draw Down Pricing Period,
Buyer's right to exercise the Option with respect to the applicable Draw Down
Pricing Period shall terminate.
6. Restrictions. The parties further agree as follows:
(a) Xybernaut must remain listed or admitted for trading, as
applicable, on the NASDAQ Small Cap Market Systems, NASDAQ National Market
Systems, the New York Stock Exchange or the American Stock Exchange for the
entire Draw Down Pricing Period.
(b) Should there occur a Material Adverse Effect or Material
Change in Ownership of Xybernaut during any Draw Down Pricing Period, Buyer
shall not be required to accept the Draw Down, unless Buyer otherwise
determines, in sole and absolute discretion.
(c) All cash payable to Xybernaut upon the Settlement of a
Draw Down or the exercise of an Option shall be paid by Buyer to a mutually
agreed upon escrow account against the concurrent delivery to the escrow agent
of the escrow amount of the shares of Common Stock subject to the Draw Down or
the exercise of the Option, as applicable.
(d) At all times during the term of this Agreement there must
be a minimum of eight (8) active Market Makers for Xybernaut's Common Stock on
the NASDAQ Small Cap Market or NASDAQ National Market Systems, as applicable,
unless Xybernaut's Common Stock is listed on the New York Stock Exchange or the
American Stock Exchange.
(e) The Settlement of all Draw Downs shall take place on the
Draw Down Exercise Date.
7. Registration Statement. Promptly after the day of the Settlement of
the second Draw Down hereunder, Xybernaut shall cause to be filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
on Form S-3 (or any other comparable form) to register for resale the shares of
Common Stock purchased by Buyer pursuant to this Agreement. Xybernaut shall use
its best efforts to take all steps necessary to cause the Registration Statement
to be declared effective by the Commission as reasonably expeditiously as
possible.
8. Warrants; Fees, etc. The parties agree as follows:
(a) For each Draw Down, Buyer will receive warrants
("Warrants") to purchase 12,500 shares of Common Stock. Each Warrant will have a
three (3) year term from its date of issuance. The Common Stock underlying the
Warrants will be registered in the Registration Statement referred to in Section
7 hereof.
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<PAGE>
(b) The Warrant Strike Price shall be 225% of the Average
Daily Price of the Common Stock on the date Xybernaut furnishes Buyer with the
applicable Draw Down Notice to which the Warrants relate.
(c) Settondown Capital International, Ltd. ("Settondown") will
receive a fee of six percent (6%) of the total amount paid for the shares of
Common Stock by Buyer in accordance with this Agreement. Xybernaut acknowledges
that Settondown may use a portion of its fee to compensate other parties
relative to a particular Draw Down.
(d) Notwithstanding the foregoing, should the Registration
Statement not be filed with the Commission within thirty (30) days following the
day of the Settlement of the second Draw Down hereunder, the fee due Settondown
shall be increased by one percent (1%) to seven percent (7%); and therefore the
fee shall be increased by an additional one percent (1%) for each additional
thirty (30) days that the Registration Statement is not filed, if applicable.
(e) Xybernaut will be responsible for the payment of all costs
and expenses incurred by Buyer or Xybernaut related to the transactions
contemplated by this Agreement.
9. Representations, Warranties and Covenants of Buyer. Buyer represents
and warrants to Xybernaut, and covenants for the benefit of Xybernaut, as
follows:
(a) This Agreement has been duly authorized, validly executed
and delivered by Buyer and constitutes a valid and binding agreement and
obligation of Buyer enforceable against Buyer in accordance with its terms,
subject to limitations on enforcement by general principles of equity and
bankruptcy or other laws affecting the enforcement of creditors' rights
generally;
(b) Buyer has received and carefully reviewed copies of the
Public Documents (as hereinafter defined). No representations or warranties have
been made to Buyer by Xybernaut, the officers or directors or Xybernaut, or any
agent, employee or affiliate of any of them, except as specifically set forth
herein or as set forth in the other documents expressly referred to herein.
Buyer understands that no federal, state, local or foreign governmental body or
regulatory authority has made any finding or determination relating to the
fairness of an investment in the Securities and that no federal, state, local or
foreign governmental body or regulatory authority has recommended or endorsed,
or will recommend or endorse, any investment in the Securities. Buyer, in making
the decision to purchase the Securities, has relied upon independent
investigation made by it and has not relied on any information or
representations made by third parties;
(c) Buyer understands that the Securities are being offered
and sold to it in reliance on specific provisions of federal and state
securities laws and that Xybernaut is relying upon the truth and accuracy of the
representations, warranties, agreements, acknowledgments and understandings of
Buyer set forth herein for purposes of qualifying for exemptions from
registration under the Securities Act, and applicable state securities laws;
- 5 -
<PAGE>
(d) Buyer is an "accredited investor" as defined under Rule
501 of Regulation D promulgated under the Securities Act;
(e) The Buyer (i) is and will be acquiring the Securities for
the Buyer's own account, and not with a view to any resale or distribution of
the Securities, in whole or in part, in violation of the Securities Act or any
applicable securities laws and (ii) has not offered or sold any of the
Securities and has no present intention or agreement to divide the Securities
with others for purposes of selling, offering, distributing or otherwise
disposing of any of the Securities Act;
(f) The offer and sale of the Securities is intended to be
exempt from registration under the Securities Act, by virtue of Section 4(2) and
Regulation D promulgated under the Securities Act. Buyer understands that the
shares of Common Stock purchased hereunder (the "Shares") and the shares of
Common Stock underlying the Warrants have not been, and may never be, registered
under the Securities Act; that the Shares cannot be sold, transferred, assigned,
pledged or subjected to any lien or security interest unless they are first
registered under the Securities Act and such state and other securities laws as
may be applicable or in the opinion of counsel for Xybernaut an exemption from
registration under the Securities Act is available (and then the Shares may be
sold, transferred, assigned, pledged or subjected to a lien or security interest
only in compliance with such exemption and all applicable state and other
securities laws); and that the following legends will be placed upon the
certificate for the Shares:
"The Shares represented by this certificate
have not been registered under the Securities
Act of 1933, as amended (the "Securities
Act"), and may not be offered for sale, sold
or otherwise transferred, pledged or
subjected to any lien or security interest,
in the absence of an effective registration
statement under the Securities Act or a
written opinion of counsel for the Company
that the Shares may be offered for sale,
sold, transferred, pledged or subjected to a
lien or security interest pursuant to an
exemption under the Securities Act and such
state and other securities laws as may be
applicable."
(g) Buyer (i) has such knowledge and experience in financial
and business matters as to be capable of evaluating the merits and risks of an
investment in Xybernaut; and (ii) recognizes that the Buyer's investment in
Xybernaut involves a high degree of risk; and
(h) Buyer is capable of evaluating the risks and merits of an
investment in the Securities by virtue of its experience as an investor and its
knowledge, experience, and sophistication in financial and business matters and
Buyer is capable of bearing the entire loss of its investment in the Securities.
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<PAGE>
10. Representations, Warranties and Covenants of Xybernaut. Xybernaut
represents and warrants to Buyer, and covenants for the benefit of Buyer, as
follows:
(a) Xybernaut has been duly incorporated and is validly
existing and in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as currently conducted, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure to
register or qualify is not reasonably anticipated to have a Material Adverse
Effect;
(b) Xybernaut has furnished Buyer with copies of Xybernaut's
most recent Annual Report on Form 10-KSB (the "Form 10-KSB") filed with the
Commission, its Form 10- QSB for the quarterly period ended June 30, 1998 (the
"Form 10-QSB"; collectively with the Form 10-KSB and the Form 10-QSB, the
"Public Documents"). The Public Documents at the time of their filing did not
include any untrue statement of a material fact or omit to state any material
fact necessary in order to make the statements contained therein, in light of
the circumstances under which they were made, not misleading;
(c) The Shares, when paid for by Buyer, shall be duly
authorized and validly issued and when issued and delivered, will be fully paid
and nonassessable;
(d) This Agreement has been duly authorized, validly executed
and delivered on behalf of Xybernaut and is a valid and binding agreement and
obligation of Xybernaut enforceable against Xybernaut in accordance with its
terms, subject to limitations on enforcement by general principles of equity and
by bankruptcy or other laws affecting the enforcement of creditors' rights
generally, and Xybernaut has full power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
perform its obligations hereunder and thereunder;
(e) The execution and delivery of this Agreement, the issuance
of the Shares and the consummation of the transactions contemplated by this
Agreement by Xybernaut, will not conflict with or result in a breach of or a
default under any of the terms or provisions of, Xybernaut's certificate of
incorporation or By-laws, or of any material provision of any indenture,
mortgage, deed of trust or other material agreement or instrument to which
Xybernaut is a party or by which it or any of its material properties or assets
is bound, any material provision of any law, statute, rule, regulation, or any
existing applicable decree, judgment or order by any court, federal or state
regulatory body, administrative agency, or other governmental body having
jurisdiction over Xybernaut, or any of its material properties or assets or will
result in the creation or imposition of any material lien, charge or encumbrance
upon any material property or assets of Xybernaut or any of its subsidiaries
pursuant to the terms of any agreement or instrument to which any of them is a
party or by which any of them may be bound or to which any of their property or
any of them is subject;
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<PAGE>
(f) Except as disclosed herein, and based upon the
representations and warranties of Buyer set forth herein, no authorization,
approval, filing with or consent of any governmental body is required for the
issuance and sale of the Shares to Buyer pursuant to this Agreement;
(g) There is no action, suit or proceeding before or by any
court or governmental agency or body, domestic or foreign, now pending against
or affecting Xybernaut, or any of its properties, which would reasonably be
anticipated to result in a Material Adverse Effect, except as set forth in the
Public Documents;
(h) Subsequent to the dates as of which information is given
in the Public Documents, except as contemplated herein and in connection with
the Other Financing, Xybernaut has not incurred any material liabilities or
material obligations, direct or contingent, or entered into any material
transactions not in the ordinary course of business, and there has not been any
change in its capitalization or any Material Adverse Effect; and
(i) Xybernaut has sufficient title and ownership of all
trademarks, service marks, trade names, copyrights, patents, trade secrets and
other proprietary rights necessary for its business as now conducted and as
proposed to be conducted as described in the Public Documents without any
conflict with or infringement of the rights of others. Except as set forth in
the Public Documents, there are no material outstanding options, licenses or
agreements of any kind relating to the foregoing, nor is Xybernaut bound by or
party to any material options, licenses or agreements of any kind with respect
to the trademarks, service marks, trade names, copyrights, patents, trade
secrets, licenses and other proprietary rights of any other person or entity.
11. Indemnification.
(a) Xybernaut hereby agrees to indemnify and hold harmless
Buyer and its officers, directors, shareholders, employees, agents and attorneys
against any and all losses, claims, damages, liabilities and expenses incurred
by each such person in connection with defending or investigating any such
claims or liabilities, whether or not resulting in any liability to such person,
to which any such indemnified party may become subject under the Securities Act,
or under any other statute, at common law or otherwise, insofar as such losses,
claims, demands, liabilities and expenses arise out of or are based upon (i) any
untrue statement or alleged untrue statement of a material fact made by
Xybernaut (ii) any omission or alleged omission of a material fact with respect
to Xybernaut or (iii) any breach of any representation, warranty or agreement
made by Xybernaut in this Agreement.
(b) Buyer hereby agrees to indemnify and hold harmless
Xybernaut and its officers, directors, shareholders, employees, agents and
attorneys against any and all losses, claims, damages, liabilities and expenses
incurred by each such person in connection with defending or investigating any
such claims or liabilities, whether or not resulting in any liability to such
person, to which any such indemnified party may become subject under the
Securities Act, or under any other statute, at common law or otherwise, insofar
as such losses, claims, demands, liabilities and expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact made by
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<PAGE>
Buyer, (ii) any omission or alleged omission of a material fact with respect to
Buyer or (iii) any breach of any representation, warranty or agreement made by
Buyer in this Agreement.
12. Effective Period. Xybernaut may not issue a Draw Down Notice
hereunder after November 15, 1998 (the "Exercise Period").
13. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of Delaware without giving effect to
the rules governing the conflicts of laws.
14. Expenses. Each of the parties agrees to pay its own expenses
incident to this Agreement and the performance of its obligations hereunder,
except that Xybernaut will pay the reasonable fees and expenses of Buyer's legal
counsel.
15. Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, express overnight
courier, registered first class mail, overnight courier, or telecopier,
initially to the address set forth below, and thereafter at such other address,
notice of which is given in accordance with the provisions of this Section.
if to Xybernaut:
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Attn: Mr. Edward G. Newman
President and Chief Executive Officer
Telephone: (703) 631-6925
Telecopier: (703) 631-6734
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn: Martin Eric Weisberg, Esq.
Telephone: (212) 704-6000
Telecopier: (212) 704-6288
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<PAGE>
if to Buyer:
HSBC James Capel Canada, Inc.
105 Adelaide Street West
Suite 1200
Toronto, Ontario M5H IP9 Canada
Attn: Mr. Isser Elishis
Telephone: (416) 947-2700
Telecopier: (416) 947-9450
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; three (3) business days
after being deposited in the mail, postage prepaid, if mailed; the next business
day after being deposited with an overnight courier, if deposited with a
nationally recognized, overnight courier service; when receipt is acknowledged,
if telecopied.
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<PAGE>
16. Entire Agreement. This Agreement constitutes the entire
understanding and agreement of the parties with respect to the subject matter
hereof and supersedes all prior and/or contemporaneous oral or written proposals
or agreements relating thereto all of which are merged herein. This Agreement
may not be amended or any provision hereof waived in whole or in part, except by
a written amendment signed by both of the parties.
17. Counterparts. This Agreement may be executed by facsimile signature
and in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
Xybernaut Corporation
By: /s/ Steven A. Newman
-------------------------------------
Name: Steven A. Newman
Title: Vice-Chairman
HSBC James Capel Canada, Inc.
By: /s/ HSBC James Capel Canada, Inc.
---------------------------------------
Name:
Title:
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Consent of Independent Accountants
We consent to the inclusion in this registration statement of Xybernaut
Corporation on Form SB-2 of our report, which includes an explanatory paragraph
concerning the Company's ability to continue as a going concern, dated March 31,
1998, on our audits of the consolidated financial statements of Xybernaut
Corporation as of December 31, 1997 and 1996, and for the years then ended. We
also consent to the references to our firm under the captions "Selected
Financial Data: and "Experts". However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified such "Selected
Financial Data."
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
October 30, 1998
