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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
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COMMISSION FILE NUMBER 0-21013
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XYBERNAUT CORPORATION
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
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DELAWARE 54-1799851
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
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12701 FAIR LAKES CIRCLE,
FAIRFAX, VA 22033
(Address of principal executive offices) (Zip Code)
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(703) 631-6925
(Issuer's telephone number, including area code)
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: none
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
Common stock, $.01 par value
Warrants to purchase Common stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KBS: [X]
State issuer's revenues for its most recent fiscal year: $875,560
The aggregate market value at April 12, 1999 of the Common Stock of the
issuer, its only class of voting stock, was $89,613,668, of which $64,928,461
was held by non-affiliates, calculated on the basis of the closing price of such
stock on the National Association of Securities Dealers Automated Quotation
System Small Cap Market on that date. Such market value of non-affiliates
excludes shares owned by all executive officers and directors (but includes
shares owned by their spouses); this should not be construed as indicating that
all such persons are affiliates.
The number of shares outstanding of the issuer's Common Stock as at April
12, 1999 was 22,229,747.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Transitional Small Business Disclosure Format Yes [ ] No [X]
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Xybernaut Corporation, a Delaware corporation (the "Company"), is engaged
in the research, development and commercialization of mobile computer systems
and related software solutions designed to enhance personal productivity,
especially in commercial, industrial and military applications. The Company's
current mobile computing product is the Mobile Assistant(R) IV (MA IV) model,
which is a full-function, body-worn, voice-controlled computer with a
head-mounted video display.
The MA IV is a MMX Pentium(R) PC which 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.
An optional light-weight, 6.4 inch, full VGA color, flat panel display ("FPD"),
with integrated digitizer, is offered for users who do not desire an HMD or do
not need to be 100% hands-free 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 designed to run software applications designed for
Microsoft(R) Windows(R) 3.11, Windows(R) 95 and 98, Windows(R) NT(TM), DOS, SCO
UNIX(R) and LINUX.
The Company offers two software products, linkAssist(TM) and webAssist(TM)
which are designed to get user documentation up and running on the Mobile
Assistant quickly, and which can also be used on conventional desktop or laptop
computers. To date, sale of software products have not been material. In
addition, there can be no assurances that the Company will be able to develop
additional software and generate significant sales from software products.
The Company was incorporated in Virginia as Contemporary Products &
Services, Inc. in October 1990 and changed its name to Computer Products &
Services, Inc. in November 1992. In April 1996, the Company merged with
Xybernaut Corporation, a Delaware corporation, in order to change its name and
reincorporate in Delaware.
The Company's executive and administrative offices are located at 12701
Fair Lakes Circle, Fairfax, Virginia 22033. Its telephone number is (703)
631-6925, and its e-mail address is [email protected].
FORWARD-LOOKING STATEMENTS
To keep investors informed of the Company's future plans and objectives,
this Annual Report on Form 10-KSB (and other reports and statements issued by
the Company and its officers from time to time) contain certain statements
concerning the Company's future results, future performance, intentions,
objectives, plans and expectations that are or may be deemed to be
"forward-looking statements". The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995 which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors
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that could cause actual results to differ materially from those discussed in the
statement. The Company believes it is in the best interests of investors to take
advantage of the "safe harbor" provisions of that Act. Such forward-looking
statements are subject to a number of known and unknown risks and uncertainties
that, in addition to general economic and business conditions, could cause the
Company's actual results, performance, and achievements to differ materially
from those described or implied in the forward-looking statements. Factors that
could cause or contribute to such differences include, but are not limited to,
the Company's ability to profit from the Mobile Assistant(R) as expected (see
"Products and Product Development"), the Company's ability to meet competition
(see "Competition"), the Company's ability to maintain superior technological
capability, foreseeing changes and continuing to identify, develop and
commercialize innovative and competitive products and systems (see "Research and
Development"), the Company's ability to penetrate different markets and
successfully expand its market base (see "Marketing and Sales"), the Company's
ability to attract and retain technologically qualified personnel, particularly
in the areas of research and development (see "Employees"), and the Company's
ability to generate cash flows and obtain financing to support its operations
and growth (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7 of this Annual Report on Form 10-KSB).
INDUSTRY OVERVIEW
Since the introduction of the first large mainframe computers in the
1950's, there has been an ongoing evolution in computer hardware to reduce size
and increase performance and functionality. The commercialization of mobile
computing products combined with significant increases in the number and scope
of software applications has resulted in a multi-billion dollar market. The
Company sees the next phase of this evolution to be body-worn, voice-activated
computers, which will provide hands-free portability. The Company believes that
the potential to develop a substantial market for its mobile computing hardware
and software products is demonstrated by the substantial historic and projected
growth in all forms of mobile and portable computers. According to MarkIntel, a
service which compiles market research reports, total revenues from the overall
portable computer market (20 pounds or lighter), will have an average annual
growth of approximately 13% to over $23 billion through the year 2000. MarkIntel
reports that notebook computers (i.e. weighing from 5 to 8 pounds) currently
constitute over 70% of portable units sold. MarkIntel also states that
sub-notebook computers (3 to 5 pounds) currently constitute approximately 15% of
sales of portable computers and are expected to increase to almost 19% of sales
by the year 2000. Mini-computing and communication devices (3 pounds or less,
and which still are considered to be in an evolutionary cycle) are projected by
MarkIntel to experience an average annual revenue growth rate of 33%. The
Company believes that these projected figures demonstrate the significant
potential size of this still-evolving market for various forms of mobile and
portable computers.
In conjunction with the changes in computer hardware, a similar evolution
has occurred in computer software to move from processing data to providing
information. Mainframe computers were initially used to process vast amounts of
data such as population statistics and corporate accounting information. With
personal computers came software to provide information to users in the form of
analysis, relationships, etc. The Company believes that providing specific
information to users on as-needed basis is the next step in the evolution of the
computer software and one that is well suited for use with body-worn computers.
BUSINESS STRATEGY
The Company's objective is to be the leading provider of hands-free mobile
computing systems and related software to enhance productivity in a wide variety
of applications for commercial, industrial and military customers. To achieve
this objective, the Company intends to pursue the following strategies:
DEVELOP AND STRENGTHEN STRATEGIC ALLIANCES. The Company has established
and intends to continue to establish strategic alliances with world-class
distribution partners, as well as selected systems integrators, independent
software vendors, VARs, OEMs and industrial and commercial equipment and service
providers. The benefits that the Company receives from these associations
include access to a larger potential customer
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base, complementary technologies, reduced capital investment through utilization
of outside resources, and access to manufacturing expertise and efficiencies of
world-class manufacturers.
During 1998, the Company announced signed distribution and support
agreements with En Pointe Technologies for North America, and Hewlett Packard
for European, Middle East and Africa. All of these agreements have resulted in a
world class distribution network to support the launch of the MA IV Series.
Additionally, large systems integrators, such as DynCorp, were signed to both
provide implementation support for Xybernaut customers worldwide as well as to
place our products within their own client bases. The Company has been pursuing,
and will continue to pursue, additional strategic associations to enhance its
product offerings and expand its marketing activities.
In addition to marketing and supporting strategic relationships, the
Company has signed agreements and is executing other relationships with
organizations such as the SBS in Europe (over 30 software companies serving as a
Xybernaut Center of Excellence for speech and wearable applications), and
companies in the USA and Asia for hardware development and field testing of
application-specific solutions for industry.
PROVIDE CUSTOM SOFTWARE SOLUTIONS FOR DIVERSE CUSTOMER NEEDS. The Company
intends to continue acquiring software that enables its customers to more
rapidly create customized software applications for use with the Mobile
Assistant(R)Series and on conventional PC's. This software will be designed to
provide prepackaged application expertise that incorporates the end user's
existing programs, procedures and technical documentation. This will permit the
cost-effective development of productivity-enhancing software applications by
customers. To date, revenue from the sales of software products have not been
material, however, the Company believes that revenue from software will become
an important contributor to operating margins in the future.
PENETRATE TARGET MARKETS THROUGH LICENSEES, OEMS, VARS, DISTRIBUTORS, AND
DIRECT SALES. The Company believes that its mobile computing technology is
especially well suited for the manufacture, repair and maintenance of
commercial, industrial and military equipment and facilities. The Company also
believes that forms-based applications, such as inventory and data collection,
are extremely well-suited for its products. As an example, the flat panel
display configuration is a one pound VGA color display/digitizer worn by the
user instead of their current much heavier pen tablets offering only limited
computing power. The Company intends to penetrate its target markets through
effective use of OEMs, VARs and distributors that demonstrate comprehensive
market knowledge in their markets. Through the use of already approved agents,
the Company intends to leverage internal marketing and sales resources, and
achieve rapid foreign and domestic market penetration resulting in a diversified
customer base. The Company also intends to continue marketing directly to key
national accounts in order to build multiple reference accounts for its
distributors to use to quickly expand their own sales world-wide. These
reference accounts will also provide the Company's RD&E organizations with
valuable unfiltered feedback from customers for future product development. The
Company expects that as large computer and equipment manufacturers attempt to
enter the wearable or user-supported computing marketplace that it will have
numerous opportunities to license its strong intellectual property. Such
licensing, the Company believes, will yield significant revenue as well as
accelerated market penetration of mobile computing hardware and software.
ACHIEVE AND MAINTAIN TECHNOLOGY LEADERSHIP. The Company is committed to
achieving and maintaining technological superiority of the Mobile Assistant(R)
Series and its other mobile computing hardware and software products through the
continuous reassessment of product performance and the utilization and
integration of state of the art hardware and software technologies. The Company
believes that the substantial expenditure of time and effort in developing the
Mobile Assistant(R) Series has resulted in a set of core competencies which
provides the Company with a solid foundation in the hands-free, mobile computing
industry. The Company intends to maintain this advantage through ongoing
research and development, which will ensure that the Mobile Assistant(R) Series
will continue to provide a full range of PC capabilities, including two-way
video communication and access to the Internet, intranets, remote databases and
other computerized reference resources. The Company also intends to rely heavily
on joint developments with its strategic partners worldwide, and cross-licensing
of its valuable intellectual property to build and market new technology. The
current MA IV Series, for example, was the result of the Company's successful
relationships with Fujitsu,
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Sony Digital Products, Hitachi, Shimadzu, Toshiba, JAE and NEC, all under the
auspices of the Company's Japanese staff.
COMMITMENT TO OPEN ARCHITECTURE. The Company utilizes standard PC hardware
and software architectures and designs its products using open systems
technologies, including industry standard operating systems and open system
computer platforms. The Company continually evaluates the feasibility of
integrating its software and hardware products with new technologies as these
are developed and accepted in the marketplace. The Company anticipates that its
current products will be upgraded to incorporate, and its future products
designed to use, open architectures to allow use with existing and emerging
standards in hardware and software technology.
LEVERAGE CORE COMPETENCIES. The Company believes its core competencies,
which have been developed since its inception, are the integration and
adaptation of innovative computer hardware and software technologies into
hands-free, mobile computing products that enhance end user productivity. The
Company will seek to expand applications for its technologies and to capitalize
on the breadth of its expertise by assisting its customers in the development of
new hardware and software products. Consistent with this strategy, the Company
will continue to focus on integration of hands-free mobile computing hardware
with internally developed, or acquired, software applications and hardware
products. The Company's goal is to adhere to the model of an Intellectual
Property-Virtual Hardware-Communications-Software company, concentrating on RD&E
and marketing strategies. It intends to continue to allow its strategic partners
to execute the Company's manufacturing, service, sales and marketing functions,
under close coordination with Company management. The Company intends to remain
small, able to react quickly to market needs and world economic changes.
PRODUCTS AND PRODUCT DEVELOPMENT
In order to address the market, which the Company believes exists for
body-worn mobile computers, the Mobile Assistant(R) Series has been designed
with five key features:
- Compact, lightweight and rugged hardware specifically designed for
mobile, body-worn use
- Easy to use human interface
- Voice command control
- Head-worn miniature display
- Flat panel miniature display/digitizer
COMPACT HARDWARE FOR MOBILE, BODY-WORN USE. The MA IV CPU currently
utilizes standard industry hardware components in a patented body-worn computing
package weighing less than two pounds. Design features for the MA IV and its
related additional products currently include:
- Intel Pentium(R) 200 or 233 MHZ processor w/512 KB L2 cache
- Synchronus DRAM (SDRAM) (currently ranging from 32 Mb to 128 Mb)
- Internal hard disk currently ranging from 2 -- 6 GB (8 GB scheduled for
1999)
- Protected internal dual PC Card readers using CardBus (industry-standard
peripheral cards)
- Enclosure to allow use in a wide range of environmental conditions
- Advanced-technology, hot-swappable lithium-ion battery and charger
- Head Mounted and/or Flat Panel Displays, USB, Power and Replicator ports
- Mini-port replicator for mobile use and a full port replicator for
desk-top use
- Wrist-mounted miniature keyboard
- Miniature integrated full color video camera
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- Compatibility with DOS, Windows(R) 3.11(TM), Windows(R) 95 and 98,
Windows(R) NT(TM), SCO UNIX(R) and LINUX operating systems
- Integrated pointing device (mouse)
- Built-in sound system for speech recognition and generation
The Mobile Assistant(R) Series are full-featured "Wintel" PC's, which can
be readily used as a desktop PC, and allows for the incorporation of a wide
range of capabilities including portable CD-ROM readers, bar code readers,
battery-operated printers, still and motion video cameras, global positioning
technologies, cellular and radio frequency communications and interfaces for
medical and test equipment.
VOICE COMMAND CONTROL. The Mobile Assistant(R) supports state-of-the-art
voice recognition software, hardware and algorithms to communicate digitized
speech as input to the processor through an integrated
analog-to-digital/digital-to-analog circuit. Significant user training generally
is not required because the operable vocabulary is created in advance to be
recognizable by a wide range of users or a phonetic engine is utilized. The
system can also be programmed to "learn" the user, on the job, during real-time
field use. The speaker-independent approach works well for the menu and
button-driven programs used in the Mobile Assistant(R). System accuracy is
improved greatly since the words and phrases for each menu screen can be
predetermined and used to limit recognition ranges to the screen at hand. The
combination of voice recognition and head/flat panel worn displays provide the
user of the Mobile Assistant(R) with hands-free access to information and the
ability to apply this information to operations and tasks with direct lines of
sight and tactile access. In addition to basic command-and-control speech
recognition, the MA IV also offers dictation features, and natural language
speech processing is planned for introduction in 1999. The Company's main speech
is provided through IBM's Via Voice(R).
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 800 X 600, and XGA 1280 X 1024 pixel resolutions, and eventually in
color resolutions comparable to those planned for High-Definition TV. All head
mounted 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. The display is available in monocular form,
and can be worn on a mounting device similar to a runner's visor or sunglasses,
or on helmets, hardhats, soft baseball caps or similar headgear. This high
quality, miniature display presents information in a heads-mounted display
format without completely occluding vision.
FLAT PANEL DISPLAY. The MA IV uses an optional light-weight, 6.4 inch,
full VGA color, flat panel display ("FPD"), with integrated digitizer, which is
offered for users who do not desire a HMD or do not need to be 100% hands-free.
The FPD can also be speech-activated and contain a built-in speaker.
COMPUTER SOFTWARE FOR MOBILE, BODY-WORN AND DESK-TOP USE. The Company
acquired two software products that are offered to the market, and two other
planned products which will be developed for the market. All products, while
designed to speed up the development of applications for the Company's line of
wearable computers, are equally applicable to lap-top and desk-top applications.
Currently, the Company offers two software products, linkAssist(TM) and
webAssist(TM), which are designed to get user documentation up and running on
the Mobile Assistant(TM) quickly, and which can also be used on conventional
desktop or laptop computers. The Company's linkAssist(TM) software allows users
to develop applications that need information to be quickly and easily linked
together regardless of the format of the data or where it is stored, avoiding
the need to change, convert or re-enter the existing information in any manner,
nor to use the very technical and source-altering HTML tagging process. An
interesting and useful feature of this product is that the linked words or
phrases can then be activated by voice automatically, with no development work
by the author of the documentation or databases. The webAssist(TM) software
offered by the Company allows voice navigation of HTML document links such as
those found on web sites on the World Wide Web and intranets. This provides the
user with hands-free access to all of the information found on, for example,
manufacturer and supplier and company-owned, web sites.
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In addition to webAssist(TM) and linkAssist(TM), the Company intends to
develop the mobile Inspector(TM). This will be a toolkit to assist developers in
the creation of inspection applications - whether the item under inspection is a
car, a furnace or a human body. This toolkit, already proven without speech
navigation and entry features, will be updated to incorporate the Company's
speech recognition software offerings.
MARKETING AND SALES
MARKETS
The Company's marketing efforts are designed to increase awareness of, and
demand for, its products in the commercial, industrial and military markets. The
following are examples of selected horizontal and vertical markets that are
being, or will be, addressed by the Company:
COMMERCIAL MAINTENANCE AND REPAIRS. Information from the United
States Bureau of Labor Statistics and Bureau of Census indicates that as of
1996 there were more than 5,460,000 commercial mechanics and technicians in
the United States, all of which the Company believes are potential users of
the Mobile Assistant(R) Series and the Company's other products. There are
many sources of savings available from use of the Mobile Assistant(R)
Series and the Company's other products in maintenance and repair
operations such as: less formal training is required for a similar level of
performance, the time required for diagnostic and repair tasks is reduced
as "just in time" refreshers and improved technical information can be
provided, and personnel can address a wider range of complex tasks or
products with the same level of basic training. While these savings can be
realized in most industries, the Company anticipates that these savings
will be most immediate and apparent in those industries that require a
large investment in equipment and machinery, including the manufacturing,
transportation, aerospace, telecommunications, automotive, construction,
power generation, health services, agriculture and the military. In
industries such as construction or mining, the Company believes downtime on
critical equipment can be material. Accordingly, a reduction measured in
minutes or hours of downtime in these industries can, in the Company's
view, provide ample cost justification for a Mobile Assistant(R). The
telecommunications industry is expected to be a prime candidate for mobile
computing systems given the industry's complex technologies, increased
competition and assets spread over a wide geographic area. The Mobile
Assistant(R) can provide needed knowledge to workers in virtually any
location. Locations may include the top of a telephone pole, 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 and telecommunication capability.
Crews at remote locations can consult with experts using the Company's
two-way audio and/or video communications products.
HEALTH SERVICES. According to the National Center for Health
Statistics, in 1995 the United States spent approximately 13.6% of the U.S.
Gross Domestic Product, or approximately $1 trillion on healthcare, with an
estimated 25% of such expenses consumed by administrative expenses.
According to the National Center for Health Statistics, United States,
1994, the United States has over 6,000 hospitals and over 540 health
maintenance organizations. According to the United States Department of
Labor, in 1994 there were approximately 4,714,000 healthcare workers in the
United States. The Company believes that many of the current processing and
data systems used in healthcare, both in institutions and in the field, are
not well developed or integrated and that hands-free mobile computing
systems could reduce expenses and increase efficiency in this industry. The
Mobile Assistant(R) is believed to present great potential in field medical
operations by providing on-board and remote diagnostics, audio and/or video
communication with doctors for emergency procedures, and transmission of
locations for helicopter pickup through global positioning systems
integrated into the Mobile Assistant(R). Another anticipated benefit of the
Company's hands-free mobile computing technologies is that fewer healthcare
personnel will be needed to perform complex tasks. By providing remote
delivery of medical information, the Company's hands-free mobile computing
systems can become a key component within both managed care and
telemedicine organizations, which are two key submarkets developing within
the healthcare industry.
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PUBLIC SECTOR. The Company has demonstrated the ability of its
technology to aid in law enforcement, fire protection, emergency services
and control of national borders. The North American distributor of
Xybernaut's MA IV, En Pointe Technologies, has recently established
purchasing schedules for its product offerings with most significant city,
state and municipal agencies, thus making the technology readily available.
EDUCATION. The Company believes that its mobile computing systems are
well suited for educational applications. The Mobile Assistant(R) is
especially suited for hands-free applications, such as laboratory work,
field research and dissections, and has the potential to serve as a mobile
student workstation. In addition, it can provide an ideal computing and
control platform for special education and handicapped needs.
MILITARY. There are several potential military applications for the
Company's hands-free mobile computing systems, including intelligence,
maintenance and field operations. The military has long been an early
adopter of advanced weapons technologies and as a result, was one of the
first sectors to experience problems with the ability of personnel to
maintain, diagnose and repair the advanced technology employed in both
weapons and equipment. The downsizing of the United States military and
related budget constraints has compounded these problems. As a result, even
greater pressure will be placed upon the military to maintain its equipment
and weapons platforms with fewer personnel. The Company believes that most
of the estimated 700,000 military maintenance personnel in the United
States could be made more efficient and productive by the Company's
hands-free mobile computing systems.
The United States military's increasingly sophisticated weapon systems
require volumes of operational and technical manuals and have dramatically
increased the importance of, and reliance on, 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 that
can be read by an optional interface for the Mobile Assistant(R). Operating and
performance data can be downloaded directly from the Apache, and the Mobile
Assistant(R) can be used to diagnose existing and potential maintenance and
repair problems. The Company anticipates that manufacturers of complex military
and commercial equipment increasingly will incorporate integrated data
collection and transmission capabilities into their technologies to reduce
downtime, repair and maintenance related costs.
The ability to deliver information to soldiers in combat field operations
is the focus of several development programs sponsored by the United States
Military. The Army and Marine Corps have been conducting simulated combat
maneuvers using body-worn computing components, including those provided by the
Company, to determine effectiveness for use in coordinating troop locations and
movements, determining enemy locations, and using global positioning systems to
provide coordinates for artillery, helicopter pickup and air support.
The Company has already sold systems into the US Army and Navy, and expects
that its sales partners will sell heavily into the armed services both in the
USA and overseas.
MARKETING
Because the Company's products are frequently combined with products from
other manufacturers to form integrated information systems, the Company believes
that it is more effective to sell principally through distributors, systems
integrators, industrial and commercial equipment manufacturers, independent
software vendors and VARs with defined market niche expertise and presence, as
well as to end users. In conjunction with the introduction of the MA IV, the
Company has and is negotiating terms with specialized distributors for higher
volume distribution of the MA IV. The Company believes that by forming
relationships with these partners they can gain entry to various sub-markets and
types of end users, and serve customers or have in-place sales and distribution
channels that identify new customers and sales opportunities. The Company can
then reach end users more rapidly in a variety of industries.
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To try to ensure outstanding partner performance, the Company has offered
detailed in-house training sessions to prepare and update personnel for field
sales and training. In addition, the Company is developing comprehensive sales
and operations manuals to be used by these channels and end-users.
The Company's marketing and sales employees are responsible for
implementing direct marketing plans and sales programs, and coordinating sales
activities with sales and marketing and service partners. All fulfillment will
be accomplished mainly through distribution partners, regardless of which entity
effects the actual sales.
SALES AND BACKLOG
As of December 31, 1998 the Company had sold and delivered approximately
$2.7 million of the Mobile Assistant(R) systems since its commercial
introduction, and had a purchase order backlog of approximately $750,000 which
the Company anticipates will be shipped prior to June 30, 1999, although there
can be no assurance of shipment by that date. The Company does not believe that
the backlog is currently a reliable indicator of future sales since most sales
tend to book and ship within the same quarter as order sizes have been
relatively small to date. The Company expects that in the future, backlog will
emerge as an indicator of future sales as order size increases. Customers who
have placed orders in the past include, among others, AT&T, Dyncorp, Sentel, BOC
Gas, NTT (Nippon Telegraph and Telephone), Eaton Corporation, Fujitsu,
Mitsubishi, Lockheed Martin, and the United States Army. Purchase orders are
generally cancelable by the customers without penalty and are not binding upon
the customer.
LICENSE GRANTED TO THE COMPANY BY DATA DISK
During 1997, the Company entered into a series of agreements with Data-Disk
Technology, Inc., a Virginia-based company, that produces a memory product known
as the Data Disk that consists of a non-volatile memory chip encapsulated in a
rugged polymer casing slightly smaller than a soldier's "dogtag" that is highly
resistant to temperature and environmental conditions. The Company's management
believes that the Data Disk provides an ideal storage medium for body-worn
computer applications, especially those that involve a large number of people,
inspection sites or equipment. These tags can be used to store information such
as medical history, repair history or other data unique to an individual or
piece of equipment and from which information can be read by inserting the tag
into a reader that fits in the existing PC card slots on all models of the
Mobile Assistant(R). The U.S. Department of Defense is evaluating the Data Disk
and competing technologies to replace the current system of stamped metal
dogtags for soldiers. Under the agreement with Data Disk, the Company received
an exclusive, perpetual worldwide license to use and sell present and future
Data Disk technology for user-supported (wearable) computing applications. In
exchange for a license to sell and use Data Disk technology, the Company made
payments of $100,000 in both 1998 and 1997.
KEY SUPPLIERS
The Company has entered into supplier relationships with Sony Digital
Products, Hokubu Tsushin and Shimadzu, among others, for the production of the
MA IV system. (See "Production").
The Company has also entered into design, production, supply and support
agreements with many companies, in the USA and overseas, in order to complete
its wearable line of computers. They include Fujitsu, Sony Digital Products,
Hitachi, Shimadzu, JAE, Toshiba, NEC, Multicosm, IBM, the SBS, etc.
Although the Company believes there are multiple sources for many parts and
components, the Company currently depends heavily on its current suppliers.
While management believes that the Company could adapt to any supply
interruptions, such occurrences could necessitate changes in product design or
assembly methods for the Mobile Assistant(R) Series and cause the Company to
experience temporary delays or interruptions in supply while such changes are
incorporated. Further, because the order time for certain components may range
up to approximately four months, the Company also could experience delays or
interruptions in supply in the event the Company is required to find a new
supplier for any of these components. Any disruptions in supply of necessary
parts and components from the Company's key suppliers
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<PAGE> 10
could have a material adverse effect on the Company's results of operations. Any
future shortage or limited allocation of components for the Mobile Assistant(R)
could have a material adverse effect on the Company.
PRODUCTION
The Company commenced full scale production of the MA IV in the quarter
ended December 31, 1998. The Company has manufacturing agreements with Sony
Digital Products, a subsidiary of Sony Corporation based in Nagano, Japan, and
Hokubu Tsushin for the manufacture of the MA IV. Shimadzu Corporation, a
supplier of head-mounted displays and other commercial technology products based
in Kyoto, Japan, has developed and manufactured a color HMD for use with the MA
IV. Most of the parts and components for the Mobile Assistant(R) are existing PC
components that are available in high quantity from multiple vendors.
WARRANTIES
The Company currently provides customers with a warranty of one year for
parts and six months for labor. Warranty services for the MA IV Series is an
integrated offering by several vendors. Our distribution partners are
responsible for levels one and two service. The Company intends to pass on
levels one and two maintenance and call-center support to a 3rd party service
firm.
COMPETITION
The Company anticipates that ultimately it will face widespread competition
from other portable computing systems manufacturers. Several other companies are
engaged in the manufacture and development of body-mounted or hand-held
computing systems, which can also compete with the Mobile Assistant(R) Series,
including CDI, Teltronics, Inc. (a subsidiary of Interactive Solutions Inc.),
ViA Inc., Texas Microsystems, Telxon, Norand, Raytheon and others. Personal
digital assistants and laptop and notebook computers are also products that
could compete against the Mobile Assistant(R) Series. Some of these computers
are manufactured by major domestic and foreign computer manufacturers which
possess far more resources than the Company and can be expected to compete
vigorously with the Company for the market in which the Mobile Assistant(R)
Series is directed. There can be no assurance the Company will be able to
compete successfully against its competitors or that the competitive pressures
faced by the Company will not adversely affect its financial performance.
However, the Company considers entry by reputable, large computer manufacturers
to be healthy for the marketplace in that it would bring legitimacy to the
market in a more rapid fashion. The Company is also confident in its
intellectual property position.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, trade secret, copyright and
trademark laws and contractual restrictions to establish and protect its
proprietary rights. The Company has entered into confidentiality and invention
assignment agreements with its employees, and enters into non-disclosure
agreements with its suppliers, VARs, OEMs and actual and potential customers to
limit access to and disclosure of its proprietary information. The Company has
registered its Mobile Assistant(R) and Xybernaut(R) trademarks on the Principal
Register of the United States Patent and Trademark Office ("Patent Office") and
the patent and trademark offices in several foreign countries.
In April 1994, U.S. patent number 5,305,244 ("hands-free, user-supported
portable computers") (the "Patent") for the Mobile Assistant(R) Series was
granted to the Company. Employees of the Company previously assigned this patent
to the Company.
The Company has notified several of its competitors of the existence of the
Patent, which the Company's counsel believes may have been infringed by some of
such competitors. The Company intends to take any and all appropriate measures,
including legal action, necessary to maintain and enforce its rights under the
Patent and other patents held by the Company and to recover any damages suffered
as a result of any alleged infringement.
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<PAGE> 11
In December 1998, U.S. patent number 5,844,824 ("hands-free, portable
computer and system") for the Mobile Assistant(R) Series was granted to the
Company. This patent when viewed in the context of the Company's existing
intellectual property, strengthens the near term and strategic patent position
of the Company. It not only addresses the most likely technology embodiments and
applications for wearable computing now and in the foreseeable future, but also,
just as importantly, incorporates all known prior art applicable to the
Company's industry.
Most of the Company's revenue for the year ended December 31, 1998 and 1997
was derived from products included within the scope of the patents.
Since inception, the Company has filed twenty-one patent applications
covering various aspects of computers in general and wearable computers in
particular. Of these twenty-one applications, nine patents have been issued and
twelve patents are pending. Most of these applications have also been filed in
European countries, The People's Republic of China, Japan, Republic of Korea,
Republic of China (Taiwan), Canada and Australia. All patents obtained by
Company employees under pending and future applications have been and will be
assigned to the Company under existing invention assignments.
Notwithstanding the foregoing, there can be no assurance that the Company's
pending patent applications will issue as patents, that any issued patent will
provide the Company with significant competitive advantages or that challenges
will not be instituted against the validity or enforceability of any patent held
by the Company. The cost of litigation to uphold the validity and prevent
infringement of patents can be substantial. There also can be no assurance that
others will not independently develop similar or more advanced products, design
patentable alternatives to the Company's products or duplicate the Company's
trade secrets. The Company may in some cases be required to obtain licenses from
third-parties or to redesign its products or processes to avoid infringement.
The Company also relies on trade secrets and proprietary technology and enters
into confidentiality agreements with its employees and consultants. The Company
has implemented a trade secret management program to further protect the
Company's trade secrets and proprietary information. There can be no assurance
that the obligation to maintain the confidentiality of such trade secrets or
proprietary information will not be breached by employees or consultants or that
the Company's trade secrets or proprietary technology will not otherwise become
known or be independently developed by competitors in such a manner that the
Company has no practical recourse.
RESEARCH AND DEVELOPMENT
Research and development expenditures for the years ended December 31, 1998
and 1997 and were $2,870,808 and $2,350,237 respectively. These expenditures
consist primarily of personnel engaged in the research and design of new
hardware products, test components, consulting fees, equipment and purchase
software costs required to conduct the Company's development activities.
EMPLOYEES AND CONSULTANTS
As of December 31, 1998, the Company had 41 full-time and 13 part-time
employees, and had consulting arrangements with eight individuals or firms for
advice and assistance on selected technical and business issues. Of the
Company's full-time employees, three are executive officers, fourteen (14) are
technical and administrative support employees, nine are engaged in research and
development, and fifteen (15) are engaged in sales and marketing. None of the
Company's employees are represented by a labor organization and management
believes that the Company's relations with its employees are good.
The Company is a party to employment and consulting agreements with certain
of its executive officers and directors. See "Management -- Employment
Agreements; -- Consulting Agreements."
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<PAGE> 12
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's office and development facility consists of 18,842 square
feet located at 12701 Fair Lakes Circle, Fairfax, Virginia. The Company's
current lease is for a five-year term expiring September 30, 2003 and requires
monthly rent of $26,640.
To minimize lodging expenses for visiting employees and consultants, the
Company leases four apartments in Fairfax, Virginia with aggregate monthly
rental costs of $4,651.
During 1998, the Company leased approximately 1,500 square feet of office
space at the Wakadayashi Building, 5-12-6 Kita-Shinagawa, Shinagawa-ku, Tokyo
141, Japan, for use as its Far East representative office. Terms of the lease
are month-month with a base rent of approximately $2,500 per month.
ITEM 3. LEGAL PROCEEDINGS.
On March 19, 1998, Matrix Corporation, with whom the Company had entered
into an agreement in June 1997 (the "June Agreement"), filed a summons against
the Company in the United States District Court, Eastern District of North
Carolina, alleging that: Matrix had been damaged by a purported breach of the
December 1997 Agreement (the "December Agreement") by the Company; that the
Company should return all goods shipped by Matrix under both the June Agreement
and the December Agreement and that the Company did not intend to comply with
the December Agreement and therefore the governing contract between the two
entities should revert to the June Agreement. In addition, this summons requests
that any damages incurred by Matrix as a result of this purported breach of
contract be trebled. On August 6, 1998, the court rendered an order dismissing
all of Matrix's claims, except for the breach of contract claim under the
December Agreement. On September 9, 1998, the Company filed an answer which
denies the material allegations of the complaint, and asserts a counterclaim
alleging that Matrix failed to perform to the requirements of the December
Agreement and that Xybernaut has been damaged by this failure to perform. While
there can be no assurance of the outcome of this legal proceeding, the Company's
management believes that the remaining claim by Matrix is groundless and intends
to rigorously defended against the claim. Management further believes that the
impact of this legal proceeding will not have a material adverse effect on the
Company's operations or financial position. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the 1998 Annual Meeting of Xybernaut Stockholders held on September 24,
1998, the following items were submitted to a vote by the common stockholders
and were approved by a majority vote:
1. The election of three (3) persons to serve as directors of the Company
for a term of three years and until their successors are duly elected
and qualified;
2. An amendment to the Company's Certificate of Incorporation and the
Bylaws to implement an advance notice procedure for the submission of
director nominations and other business to be considered at annual
meetings of stockholders;
3. An amendment to the Company's Certificate of Incorporation and the
Bylaws to permit only the President, the Vice Chairmen of the Board, the
Secretary or the Board of Directors to call special meetings of
stockholders and to limit the business permitted to be conducted at such
meetings to be brought before the meetings by or at the direction of the
Board of Directors;
4. An amendment to the Company's Certificate of Incorporation and the
Bylaws to provide that a member of the Board of Directors may only be
removed by the stockholders of the Company for cause by an affirmative
vote of holders of at least 66 2/3% of the voting power of the then
outstanding shares of any class or series of capital stock of the
Company entitled to vote generally in the election of directors voting
together as a single class (the "Voting Stock");
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<PAGE> 13
5. An amendment to the Company's Bylaws to (a) limit the size of the Board
of Directors to a maximum of twelve directors, the authorized number of
directors to 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, and
(b) 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;
6. An amendment to the Company's Certificate of Incorporation and the
Bylaws to eliminate stockholder action by written consent;
7. An amendment to the Company's Certificate of Incorporation and the
Bylaws to require the approval of holders of 80% of the then outstanding
Voting Stock and/or the approval of 66 2/3% of the directors of the
Company for certain corporate transactions;
8. An amendment to the Company's Certificate of Incorporation and the
Bylaws to 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 proposed herein and;
9. Ratification of the appointment of PricewaterhouseCoopers LLP as
independent auditors for the 1998 fiscal year.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On July 18, 1996, the Company successfully completed its IPO and sold
2,415,000 Units at a price of $5.50 per Unit. Each Unit consisted of one share
of Common Stock and one warrant ("Warrant") to purchase a share of Common Stock
at $9.00 ("Unit"). The Common Stock and Warrants trade on the NASDAQ SmallCap
Market.
As of March 26, 1998, there are approximately 330 registered holders of
Common Stock. There have been no cash dividends paid on the Company's Common
Stock to date and the Company does not anticipate the payment of dividends in
the foreseeable future.
The table below sets forth by quarter, for the years ended December 31,
1998 and 1997, the high and low market prices of the Company's Common Stock and
Warrants.
<TABLE>
<CAPTION>
COMMON STOCK WARRANTS
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
1st Quarter 1997............................................ 4 11/16 1 29/32 1 11/32 13/32
2nd Quarter 1997............................................ 3 1/2 1 5/16 7/16 3/16
3rd Quarter 1997............................................ 5 9/16 2 3/8 23/32 3/16
4th Quarter 1997............................................ 4 1 25/32 17/32 5/32
1st Quarter 1998............................................ 2 1/2 1 3/8 13/32 5/32
2nd Quarter 1998............................................ 8 7/16 1 13/32 1 3/4 1/8
3rd Quarter 1998............................................ 5 15/16 4 3/32 2 1 1/16
4th Quarter 1998............................................ 7 7/8 3 31/32 2 11/32 1 3/16
</TABLE>
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was incorporated as a Virginia company in October 1990 and
commenced operations in November 1992 as Computer Products & Services, Inc. to
develop, manufacture and sell mobile computing systems. Since commencing
operations, the Company has incurred significant operating losses. In April
1996, the Company was merged with Xybernaut Corporation in order to change the
company name and reincorporate in Delaware. In July 1996, the Company
successfully completed the initial public offering ("IPO") of its Common Stock
and Warrants, which are traded on the NASDAQ SmallCap Market.
The first product to be commercialized by the Company is the proprietary
portable computer technology and related software applications embodied in its
Mobile Assistant(R) Series. The first product in this series was introduced in
1994 and used "486" based technology ("486 System") that was produced in a
limited quantity and is no longer manufactured. Product development has been
based on the expectation of the Company that continued improvements in software
for operating systems, applications and speech recognition software will require
continued improvements in the performance and capabilities of the Mobile
Assistant Series. Based on that expectation, the Company undertook a product
development program that resulted in the second product offering in the Mobile
Assistant(R) Series, which was introduced on a preproduction basis in January
1997 and which used "586" based technology ("Mobile Assistant(R) II System").
The Mobile Assistant(R) II was replaced by the third system in this product
development program, which was introduced during the third quarter of 1997 and
used a Pentium(R) processor running at 133 MHz ("133P System"). In the fourth
quarter of 1998, the Company commenced production of the fourth system in this
product development program, the Mobile Assistant(R) IV ("MA IV"), which uses a
Pentium chipset known as the "Tillamook" that runs at 233 MHz.
Additional software products are being developed and are planned for
development for use on the Mobile Assistant and other personal computers. In the
third quarter of 1997, the Company announced the introduction of linkAssist(TM),
a software product which provides a "windows" style graphical user interface
with speech navigation that allows data stored in almost any format, such as
commonly-used word processing, spreadsheet, data base, graphics or media files,
to be linked to most any application without altering the original data. In the
second quarter of 1998, the Company announced the introduction of webAssist(TM),
a software product that allows voice navigation of HTML document links such as
those found on the World Wide Web and Intranets.
Since inception, the Company has financed its operations primarily through
private and public sales of equity securities, and to a lesser extent, cash
generated from operations. In 1998 and 1997, the Company received cash of
$10,426,622 and $5,710,406, respectively, from public and private placements of
its equity securities.
The Company has derived its revenues from sales of the Mobile Assistant(R)
Series, consulting services related to the Mobile Assistant(R), application
software for the Mobile Assistant(R), and other computer platforms. During the
year ended December 31, 1998, the Company derived the majority of its revenues
from sales of the Mobile Assistant(R). For the year ended December 31, 1997, the
Company derived approximately 68% of its revenues from sales of the Mobile
Assistant(R), including fees related to licensing agreements, and 32% of its
revenues from consulting services. In the future, the Company expects to derive
additional revenues from the sale of software and additional optional components
of the Mobile Assistant(R) Series. Cost of sales include the cost of components
for the Mobile Assistant(R) Series, direct labor, direct materials, overhead
allocations, inventory obsolescence charges, amortization of tooling costs and
shipping costs.
The Company has incurred operating losses throughout 1998 and expects such
losses to continue in the near term as it expands its product development and
marketing capabilities. At December 31, 1998, the Company had an accumulated
deficit of $31,364,331. The achievement of profitability is primarily dependent
upon the continued development and commercial acceptance of the Company's
products, the successful management of the business and management's ability to
strategically focus the Company. There can be no assurance as to whether or when
profitable operations will occur. In addition, the Company is experiencing
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<PAGE> 15
negative cash flow from operations and it is expected that it will continue to
experience negative cash flows through 1999 and potentially thereafter.
The Company's independent accountant's report on its financial statements
as of and for the years ended December 31, 1998 and 1997 contains an explanatory
paragraph that the Company's historical operating losses and limited capital
resources raise substantial doubt about its ability to continue as a going
concern. The Company may require substantial additional funds in the future, and
there can be no assurance that any independent accountant's report on the
Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the costs of its operations.
The Company intends to continue expenditures on research and development of
additional hardware and software products. Research and development activities
consist primarily of personnel engaged in the research and design of new
products, test components, consulting fees and equipment costs required to
conduct the Company's development activities. Software development costs are
expensed as incurred until technological feasibility is established in
accordance with Statement of Financial Accounting Standards No. 86 (SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed), after which any additional costs are capitalized until the software
is ready for release. The Company started limited shipments of its
linkAssist(TM) software late in the year ended December 31, 1997, but the costs
eligible for capitalization under SFAS 86 were immaterial during this period and
were not capitalized. Such costs were immaterial in 1998 and are expected to be
immaterial in 1999. Research and development expenses for the years ended
December 31, 1998 and 1997 were $2,870,808 and $2,350,237, respectively, none of
which were capitalized.
The Company's consolidated financial statements, for all periods presented,
include the results of operations of Tech Virginia, a wholly-owned subsidiary
that supplies software and consulting services to the United States government
and others. In July 1996, the Company exercised its option to purchase all of
the capital stock of Tech Virginia and completed payments under this option
during the year ended December 31, 1997. The consolidated financial statements
contain eliminations for all material transactions between the Company and Tech
Virginia for all periods presented.
The Company's consolidated financial statements do not contain a provision
for income tax expense due to net operating losses since inception. Subject to
realization, the Company has generated net operating losses that can be used to
offset taxable operating income in the future. The Company's future operations,
if profitable, will be subject to income tax expense not previously incurred by
the Company (see Note 10 to Consolidated Financial Statements). At December 31,
1998, the Company had approximately $27,692,000 of net operating loss carry
forwards for federal income tax purposes that begin to expire in 2010. The use
of these carry forwards may be limited in any one year under Internal Revenue
Code Section 382 if significant ownership changes occur.
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company has determined that it will be
required to modify or replace portions of our software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Company
believes that it can mitigate the Year 2000 Issue with modifications to existing
software and conversions to new software. However, if the Company fails to make
such modifications and conversions, or if it does not make them on a timely
basis, the Year 2000 Issue could have a material impact on its operations.
The Company has contacted all of its significant suppliers and large
customers to determine the possible effect on its operations of their inability
or failure to remediate its own Year 2000 Issue. Its estimate of the costs to
remediate the Year 2000 issue is based on presently available information.
However, the Company cannot guarantee that the systems of other companies on
which it systems relies will be timely converted, or
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<PAGE> 16
that a failure to convert by another company, or a conversion that is
incompatible with our systems, would not have material adverse effect on its
operations. The Company has no exposure to contingencies related to the Year
2000 Issue for the products we have sold.
The Company utilizes both internal and external resources to reprogram, or
replace, and test the software for Year 2000 modifications. The Company plans to
complete the Year 2000 project within three months and it estimates 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 its results of
operations. To date, the Company has incurred and expensed approximately $1,000
related to its Year 2000 project.
The Company's estimates of the date of completion and cost of our Year 2000
project are based on its best estimates, which it 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 its 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.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Cost of Sales............................................... 259.8 150.8
-------- --------
Gross margin........................................... (159.8) (50.8)
-------- --------
Operating expenses:
Sales and marketing.................................... 512.6 403.7
General and administrative............................. 501.0 433.1
Research and development............................... 327.9 289.3
-------- --------
Total operating expenses.................................... 1,341.5 1,126.1
-------- --------
Interest income, net........................................ 3.8 10.2
-------- --------
Net loss.................................................... (1,497.5) (1,166.7)
-------- --------
Provisions for preferred stock.............................. 110.4 70.4
-------- --------
Net loss applicable to holders of common stock.............. (1,607.9)% (1,237.1)%
======== ========
</TABLE>
YEARS ENDED DECEMBER 31, 1998 AND DECEMBER 31, 1997
REVENUES. Revenues for the year ended December 31, 1998 were $875,560, an
increase of $63,038, or 8%, compared to $812,522 for the year ended December 31,
1997. Product revenues for the year ended December 31, 1998 were $873,586 an
increase of $318,064 or 57%, compared to $555,522 for the corresponding period
in 1997. The increase in product revenues for the year was related to the
introduction of the MA IV and the higher number of 133P Systems that were sold
during that period, compared to the lower number of 133P and Mobile Assistant(R)
II Systems that were sold in the corresponding period in 1997. Consulting and
license revenues for the year ended December 31, 1998 were $1,974, a decrease of
$255,026, or 99%, compared to $257,000 for the corresponding period in 1997. In
1997 the Company recognized licensing revenue of $250,000, which represented the
remaining balance of deferred licensing revenue with
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<PAGE> 17
Rockwell International, who elected to discontinue operating under a license
agreement with the Company due to a restructuring of their business operations.
COST OF SALES. The cost of sales for the year ended December 31, 1998 was
$2,274,455, an increase of $1,048,883 or 86%, compared to $1,225,572 for the
year ended December 31, 1997. The cost of goods sold increased commensurately
with the increase in product sales. Additionally in 1998, the Company recognized
charges of approximately $455,000 related to the write-off of certain
capitalized tooling costs related to the 133P Systems. In 1998 and 1997, the
Company recognized charges to decrease the carrying value of inventory by
$770,557 and $724,978, respectively, to reflect the loss of value of older
products and technologies.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the year
ended December 31, 1998 were $4,488,496, an increase of $1,208,140, or 37%,
compared to $3,280,356 for the year ended December 31, 1997. The increase
resulted mainly from increases in consulting expenses related to additional
marketing programs to support the launch of the MA IV, personnel and
infrastructure costs to support sales, marketing and customer service, and
expenses related to the Company's representative office in Japan which became
fully operational in 1998. Offsetting the 1997 increase was approximately
$253,000 related to receivables which 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, 1998 were $4,386,899 an increase of $868,031 or
25%, compared to $3,518,868 for the year ended December 31, 1997. This increase
resulted primarily from a charge of approximately $230,000 related to the
write-off of software that had no further remaining value to the Company, legal
and accounting fees of approximately $225,000 related to a cancelled offering of
equity securities and increased expenses related to the recruitment of key
personnel.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the year ended December 31, 1998 were $2,870,808, an increase of $520,571, or
22%, compared to $2,350,237 for the year ended December 31, 1997. This increase
reflects the Company's ongoing research and development efforts, including
payments to Sony Digital Products for the design and production of the MA IV,
and the addition of new personnel.
OTHER INCOME, NET. Other income for the year ended December 31, 1998 was
$33,610, a decrease of $48,935, or 59%, compared to $82,545 for the year ended
December 31, 1996. This decrease is primarily the result of lower average
monthly cash balances in fiscal 1998 versus those during fiscal 1997, which
reflected the interest income on proceeds from the Company's initial public
offering that was completed in July 1996.
DIVIDEND ON PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON PREFERRED
STOCK. The Company's Series A Preferred Stock was issued in June 1997 and
accrues dividends at 5% per annum on the outstanding principal amount. The
Company's Series B Preferred Stock was issued in November 1997 and February 1998
and accrues dividends at 4% per annum on the outstanding principal amount. The
Company's Series C Preferred Stock was issued in May 1998 and accrues dividends
at 5% per annum on the outstanding principal amount. For the year ended December
31, 1998, the amount of dividends was $59,303, a decrease of $23,602 or 28%,
compared to $82,905 in 1997. 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", the value of the beneficial conversion feature was
recognized for the Series A and Series B Preferred Stock, which have been fully
accreted. The amount of this accretion for the year ended December 31, 1998 was
$907,489, an increase of $418,796 or 86%, compared to $488,693 in 1997.
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 stockholders' equity. All of the Company's Series A and B
Preferred Stock has been converted as of December 31, 1998.
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, 1998 was $14,078,280, an increase of $4,026,716
or 40% compared to $10,051,564 for the year ended December 31, 1997. Although
the
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Company was subject to taxation during the years ended December 31, 1998 and
1997, the Company incurred net losses during these periods, and therefore no
provision for taxes was made.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of the IPO, the Company has
financed its operations from the private sale of its securities, from vendor
credit, short-term loans received from management, stockholders and others.
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 ("the Unit"). Gross
proceeds from the sale of the Units were $13,282,500 and net proceeds after
expenses were $10,842,487.
On June 30, 1997, the Company completed a private placement of an aggregate
of 3,000 shares of the Company's Series A Preferred Stock, par value $0.01 per
share ("Series A Preferred Stock"), and realized gross proceeds of $3,000,000
and net proceeds of approximately $2,762,000 after related expenses. The holders
of the Series A Preferred Stock converted all such shares resulting in the
issuance of 1,958,984 shares of Common Stock.
On November 12, 1997, the Company completed a private placement of an
aggregate of 3,180 shares of the Company's Series B Preferred Stock, par value
$0.01 per share ("Series B Preferred Stock"), and realized gross proceeds of
$3,180,000 and net proceeds of approximately $2,949,000 after related expenses.
On February 23, 1998, the Company completed a follow-on placement of its Series
B Preferred and realized gross proceeds of $1,000,000 and net proceeds of
approximately $875,000 after related expenses. The holders of the Series B
Preferred Stock converted all such shares resulting in the issuance of 3,172,239
shares of Common Stock.
In April 1998, the Company entered into an equity line of credit agreement
and received an initial gross amount of $1,000,000 in exchange for Common Stock.
Under this line of equity, the Company had the right, but not the obligation, to
obtain up to an additional $10,000,000 in a series of equity drawdowns based on
terms and conditions specified in the line of credit. In connection with this
line of equity, the Company issued five-year warrants to purchase up to 40,000
shares of stock at $1.76 per share and 20,000 shares of stock at $2.81 per share
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, the Company 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 the Company with several
redemption options and allows for the conversion of unredeemed Series C
Preferred Stock in 25% increments on August 15, 1998, November 15, 1998,
February 15, 1999, and May 15, 1999. The holders of the Series C Preferred Stock
have converted 187.5 of such shares resulting in the issuance of 47,781 shares
of Common Stock. Any Series C Preferred Stock outstanding on May 15, 2000 must
be converted into Common Stock at that date.
In June 1998, the Company completed a $1,000,000 private placement of
Common Stock in which 153,846 restricted shares, as defined in Rule 144
promulgated under the Securities Act, were issued at a price of $6.50 per share.
In June 1998, the Company amended and exercised a put option in the
aggregate principal amount of $3,000,000 under the April 1998 private equity
line of credit agreement mentioned above. In connection with such action, the
Company issued 545,454 shares of Common Stock. Such shares are subject to
restrictions on resale for a period of nine months and to repricing upon
occurrences of certain conditions. In addition, the
18
<PAGE> 19
Company issued five-year warrants to purchase up to 300,000 shares of Common
Stock at a price of $5.25 per share. Subsequently the Company has issued an
additional 94,004 shares upon the occurrence of certain repricing events.
In October 1998, the Company entered into a financing agreement with an
investor pursuant to which the Company sold $2,600,000 of Common Stock to the
investor during the period from October 8, 1998 to November 12, 1998. The
Company issued 593,201 shares of Common Stock at prices ranging from $4.04 to
$5.72 under this financing agreement. In addition, the Company issued three
warrants to purchase up to 12,500 shares of Common Stock each, at prices of
$9.58, $9.09 and $13.05 per share, respectively. These warrants are exercisable
at any time starting six months after the closing and ending five years after
closing. The placement agent for this transaction received a cash fee of 6%.
In November 1998, the Company entered into a financing agreement with an
investor pursuant to which the Company sold $1,595,000 of Common Stock to the
investor. The Company issued 290,000 shares of Common Stock at $5.50 per share
under this financing agreement. Such shares were subject to repricing under
certain circumstances. Subsequently the Company issued an additional 150,000
shares upon the occurrence of certain repricing events.
On December 17, 1998, the Company borrowed $1,250,000 from two financial
institutions. The maturity date of the debt was January 29, 1999 and interest
was at 12% per annum. On January 29, 1999, the Company repaid the debt.
In January 1999, the Company exercised separate put options in the
aggregate amount of $3,360,000 under the April 1998 private equity line of
credit agreement mentioned above. In connection with such put options, the
Company issued 841,356 shares of Common Stock at prices ranging from $4.08 to
$4.46. In addition, the Company issued a warrant to purchase 100,000 shares of
Common Stock at an exercise price of $6.00 per share and a warrant to purchase
100,000 shares of Common Stock at an exercise price of $5.50 per share.
On March 10, 1999, the Company completed the first tranche of $5.0 million
of a $10.0 million private placement of an aggregate of 5,000 shares of the
Company's Series D Preferred Stock, par value $.01 per share (the "Series D
Preferred Stock"), and realized gross proceeds of $5.0 million and net proceeds
of approximately $4,990,000 after related expenses. In addition, the Company
issued warrants to purchase an aggregate of 100,000 shares of the Company's
Common Stock. The warrants have an exercise price equal to 125% of the closing
bid price of the Common Stock on the first trading day immediately preceding the
closing date of the first tranche. The warrants have an exercise period which
ends on the three year anniversary of the issuance date of the warrants.
For the year ended December 31, 1998, the Company's operating activities
used cash of $10,699,000. This was primarily the result of a $13,111,488 net
loss and a net increase in inventories of $835,795. These were offset by a net
increase in accounts payable and accrued expenses of $1,242,766, a non-cash
obsolescence inventory charge of $770,557, depreciation and amortization of
$503,143 and a non-cash charge for tooling costs of $455,449. Cash used in
investing activities for the year ended December 31, 1998 was $985,899, which
included $448,744 in capitalized tooling costs, $313,109 related to obtaining
and maintaining patents and $256,358 for the acquisition of property and
equipment. Proceeds from the Company's financing activities for the year ended
December 31, 1998 were $11,657,182 which primarily consisted of $9,186,659 from
the issuance of Common Stock, $1,240,053 from the issuance of the Company's
Series B and Series C Preferred Stock, net of related fees, and $1,250,000 of
proceeds from notes and loans. As a result of the above, cash and cash
equivalents on hand as of December 31, 1998 was $924,649, a decrease of $27,717
from the $952,366 of cash on hand as of December 31, 1997.
For the year ended December 31, 1997, the Company's operating activities
used cash of $10,062,427. This was primarily the result of a $9,479,966 net loss
and cash used by inventory of $1,930,378, offset by a net increase in accounts
payable and accrued expenses of $515,466 and depreciation and amortization of
$277,299. Cash used in investing activities for the year ended December 31, 1997
was $866,228, which included $364,678 for the acquisition of property and
equipment, $231,298 related to obtaining and
19
<PAGE> 20
maintaining patents and $270,252 in capitalized tooling costs. Proceeds from the
Company's financing activities for the year ended December 31, 1997 were
$5,606,054 which primarily consisted of $5,710,406 from the issuance of the
Company's Series A and Series B Preferred Stock, net of related fees, and
$56,500 of proceeds from notes and loans, offset by payments on notes and loans
totaling $72,232, and $16,667 for the remaining payment on the acquisition of
Tech Virginia and repayment of loans. As a result of the above, cash and cash
equivalents on hand as of December 31, 1997 was $952,366, a decrease of
$5,322,601 from the $6,274,967 of cash on hand as of December 31, 1996.
At December 31, 1998, the Company had no material capital commitments.
The Company anticipates that its working capital requirements and operating
expenses will increase as the Company expands production and sales of the Mobile
Assistant(R), and expands its full sales, service and marketing functions, and
develops the support structure for these activities. The timing of increases in
personnel and other expenses, the amount of working capital consumed by
operations, marketing and rollout expenses for the MA IV, and competitive
pressures on gross margins will impact the magnitude and timing of the Company's
cash requirements. Management is currently exploring financing alternatives to
supplement the Company's cash position. Potential sources of additional
financing include private equity financings, mergers, strategic investments,
strategic partnerships or various forms of debt financings. If additional funds
are raised by the Company through the issuance of equity securities, the
percentage of ownership of the then current stockholders of the Company will be
reduced. The Company's management believes that the combination of cash on hand,
operating cash flow, and outside funding will provide sufficient liquidity to
meet the Company's cash requirements until at least March 2000. However, there
can be no assurance that the Company can or will obtain sufficient funds from
operations or from closing additional financings on terms acceptable to the
Company.
The Company's independent accountant's report on its financial statements
as of and for the years ended December 31, 1998 and 1997 contains an explanatory
paragraph that the Company's historical operating losses and limited capital
resources raise substantial doubt about its ability to continue as a going
concern. The Company may require substantial additional funds in the future, and
there can be no assurance that any independent accountant's report on the
Company's future financial statements will not include a similar explanatory
paragraph if the Company is unable to raise sufficient funds or generate
sufficient cash from operations to cover the costs of its operations.
POSSIBLE NON-CASH FUTURE CHARGE
As a condition to the Company's initial public offering (the "IPO"), Royce
Investment Group, the Representative of the several underwriters (the
"Representative"), required certain of the Company's stockholders to deposit a
total of 1,800,000 shares of Common Stock (the "Escrowed Shares"), in escrow
pursuant to an escrow agreement with Continental Stock Transfer & Trust Company,
the escrow agent and the Representative. The Escrowed Shares are subject to the
following terms and conditions:
- The Escrowed Shares will be released incrementally over a three-year
period only in the event the Company's gross revenues and earnings
(loss) per share for the 12-month periods ending September 30, 1997,
1998 and 1999 equal or exceed certain gross revenue and earnings (loss)
per share targets.
- If such per share targets are not met in any of the relevant 12-month
periods and the price of the common stock does not meet or exceed agreed
upon price levels, certain amounts of the Escrowed Shares will be
returned to the Company for each period and canceled.
- 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 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
20
<PAGE> 21
on the price per share, may have the effect of reducing or eliminating any
earnings per share and could have a negative effect on the market price for the
Common Stock.
The Company 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.
Give the start of full-scale production and distribution of the MA IV in
early 1999, the Company's management believes that it is likely that the
Company's gross revenues and allowable losses will not meet the Performance
Targets of the 12-month period ending September 30, 1999. Accordingly, the
release of the escrow shares for this period is only likely if the stock price
equals or exceeds $11.00 for 25 consecutive trading days or 30 out of 35
consecutive trading days prior to September 30, 1999. If conditions are not met
for release from escrow, then 750,000 shares of stock will be returned to the
Company on September 30, 1999 and canceled, resulting in no earnings impact and
a commensurately lower number of outstanding shares.
Since the Company has reported losses, the loss per share for the Company
is calculated using outstanding shares less shares held in escrow to avoid
antidilution. Therefore, the cancellation of shares from escrow does not affect
the reported loss per share.
21
<PAGE> 22
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets -- December 31, 1998 and
1997...................................................... F-2
Consolidated Statements of Operations -- Years ended
December 31, 1998 and 1997................................ F-3
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1998 and 1997.......................... F-4
Consolidated Statements of Cash Flows -- Years ended
December 31, 1998 and 1997................................ F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
22
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Xybernaut Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Xybernaut Corporation and its subsidiary at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion expressed above.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring losses from operations
and will require additional capital to fund its operations. These matters raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers, LLP
McLean, VA
April 14, 1999
F-1
<PAGE> 24
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 924,649 $ 952,366
Accounts receivable, net of allowances of $91,131 and
$53,211.............................................. 229,120 216,767
Inventory, net of reserves of $770,557 and $724,978... 1,347,668 1,607,781
Prepaid and other current assets...................... 374,243 334,245
------------ ------------
Total current assets.............................. 2,875,680 3,111,159
------------ ------------
Property and equipment, net................................. 462,384 505,695
------------ ------------
Other assets:
Patent costs, net of accumulated amortization of
$313,982 and $177,076................................ 560,625 384,422
Tooling costs, net of accumulated amortization of
$326,752 and $47,194................................. 370,285 376,990
Other................................................. 142,614 153,351
------------ ------------
Total other assets................................ 1,073,524 914,763
------------ ------------
Total assets...................................... $ 4,411,588 $ 4,531,617
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable............................... $ 1,250,000 $ 19,530
Accounts payable...................................... 1,626,897 429,780
Accrued expenses...................................... 786,980 908,372
------------ ------------
Total current liabilities......................... 3,663,877 1,357,682
------------ ------------
Commitments and contingencies (Note 11) Stockholders'
equity:
Preferred Stock, $.01 par value, 6,000,000 shares
authorized, 188 and 5,430 shares of convertible
preferred stock issued and outstanding (Note 6)...... 182,378 4,193,355
Common Stock, $.01 par value, 40,000,000 shares
authorized, 21,359,751 and 14,360,515 shares issued
and outstanding...................................... 213,597 143,605
Additional paid-in capital............................ 31,716,067 17,181,329
Deferred compensation................................. -- (91,511)
Accumulated deficit................................... (31,364,331) (18,252,843)
------------ ------------
Total stockholders' equity........................ 747,711 3,173,935
------------ ------------
Total liabilities and stockholders' equity........ $ 4,411,588 $ 4,531,617
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 25
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenue:
Product sales......................................... $ 873,586 $ 555,522
Consulting and license................................ 1,974 257,000
------------ ------------
Total revenue..................................... 875,560 812,522
Cost of sales............................................... 2,274,455 1,225,572
------------ ------------
Gross loss........................................ (1,398,895) (413,050)
Operating expenses:
Sales and marketing................................... 4,488,496 3,280,356
General and administrative............................ 4,386,899 3,518,868
Research and development.............................. 2,870,808 2,350,237
------------ ------------
Total operating expenses.......................... 11,746,203 9,149,461
------------ ------------
Operating loss.................................... (13,145,098) (9,562,511)
Interest income, net........................................ 33,610 82,545
------------ ------------
Net loss.............................................. (13,111,488) (9,479,966)
------------ ------------
Provision for preferred stock dividends..................... 59,303 82,905
Provision for accretion on preferred stock beneficial
conversion feature........................................ 907,489 488,693
------------ ------------
Net loss applicable to holders of common stock........ $(14,078,280) $(10,051,564)
============ ============
Net loss per common share applicable to holders of
common stock (basic and diluted).................... $ (0.80) $ (0.78)
============ ============
Weighted average number of common shares Outstanding (basic
and diluted).............................................. 17,670,318 12,844,974
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 26
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF SHARES ADDITIONAL
---------------------- ----------------------- PAID-IN ACCUMULATED DEFERRED
PREFERRED COMMON PREFERRED COMMON CAPITAL DEFICIT COMPENSATION
--------- ---------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996.......... -- 14,259,112 -- $142,591 $15,520,245 $ (8,772,877) --
Issuance of Series A Preferred
Stock............................. 3,000 -- $ 2,761,669 -- -- -- --
Partial Conversion of Preferred
Stock into common stock........... (750) 250,000 (690,417) 2,500 687,917 -- --
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 -- -- -- --
Exercises of stock options.......... -- 150,000 -- 1,500 -- -- --
Value of beneficial conversion
feature on Preferred Stock........ -- -- (1,219,712) -- 1,219,712 -- --
Accretion of deemed dividend of
Preferred Stock................... -- -- 488,693 -- (488,693) -- --
Preferred Stock dividend
requirements...................... -- -- -- -- (82,905) -- --
Issuance of warrants on common
stock............................. -- -- -- -- 217,000 -- $(217,000)
Compensation related to common stock
warrants.......................... -- -- -- -- -- -- 125,489
Warrants issued in connection with
Series B Preferred stock
offerings......................... -- -- (95,615) -- 95,615 -- --
Dividends on preferred stock paid
with common stock................. -- 3,150 -- 31 9,421 -- --
Net loss............................ -- -- -- -- -- (9,479,966) --
------ ---------- ----------- -------- ----------- ------------ ---------
BALANCE, DECEMBER 31, 1997.......... 5,430 14,360,515 4,193,355 143,605 17,181,329 (18,252,843) (91,511)
Sale of common stock................ -- 2,776,923 -- 27,770 9,158,889 -- --
Issuance of Series B Preferred
Stock............................. 1,000 -- 875,299 -- -- -- --
Issuance of common stock in
connection with Sale of Series B
Preferred Stock................... -- 50,000 -- 500 97,938 -- --
Partial conversion of Preferred
Stock into common stock........... (6,617) 4,827,570 (5,982,049) 48,275 5,933,774 -- --
Value of beneficial conversion
feature on Preferred Stock........ -- -- (176,470) -- 176,470 -- --
Accretion of deemed dividend of
Preferred Stock................... -- -- 907,489 -- (907,489) -- --
Preferred Stock dividend
requirements...................... -- -- -- -- (59,303) -- --
Amortization of deferred
compensation...................... -- -- -- -- -- -- 91,511
Issuance of Series C Preferred
Stock............................. 375 -- 364,754 -- -- -- --
Cancellation of escrow shares of
common stock...................... -- (750,000) -- (7,500) 7,500 -- --
Dividends on Preferred Stock paid
with common stock................. -- 94,743 -- 947 126,959 -- --
Net loss............................ -- -- -- -- -- (13,111,488) --
------ ---------- ----------- -------- ----------- ------------ ---------
BALANCE, DECEMBER 31, 1998.......... 188 21,359,751 $ 182,378 $213,597 $31,716,067 $(31,364,331) $ --
====== ========== =========== ======== =========== ============ =========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
BALANCE, DECEMBER 31, 1996.......... $ 6,889,959
Issuance of Series A Preferred
Stock............................. 2,761,669
Partial Conversion of Preferred
Stock into common stock........... --
Cancellation of escrow shares of
common stock...................... --
Cancellation of accrued shares of
common stock...................... --
Issuance of Series B Preferred
Stock............................. 2,948,737
Exercises of stock options.......... 1,500
Value of beneficial conversion
feature on Preferred Stock........ --
Accretion of deemed dividend of
Preferred Stock................... --
Preferred Stock dividend
requirements...................... (82,905)
Issuance of warrants on common
stock............................. --
Compensation related to common stock
warrants.......................... 125,489
Warrants issued in connection with
Series B Preferred stock
offerings......................... --
Dividends on preferred stock paid
with common stock................. 9,452
Net loss............................ (9,479,966)
------------
BALANCE, DECEMBER 31, 1997.......... 3,173,935
Sale of common stock................ 9,186,659
Issuance of Series B Preferred
Stock............................. 875,299
Issuance of common stock in
connection with Sale of Series B
Preferred Stock................... 98,438
Partial conversion of Preferred
Stock into common stock........... --
Value of beneficial conversion
feature on Preferred Stock........ --
Accretion of deemed dividend of
Preferred Stock................... --
Preferred Stock dividend
requirements...................... (59,303)
Amortization of deferred
compensation...................... 91,511
Issuance of Series C Preferred
Stock............................. 364,754
Cancellation of escrow shares of
common stock...................... --
Dividends on Preferred Stock paid
with common stock................. 127,906
Net loss............................ (13,111,488)
------------
BALANCE, DECEMBER 31, 1998.......... $ 747,711
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE> 27
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(13,111,488) $ (9,479,966)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 503,143 277,299
Gain on disposal of assets............................. (6,626) --
Provision for write-down of inventory.................. 770,557 724,978
Provision for bad debts................................ 37,920 253,211
Non-cash charges for stock and warrants issued for
services............................................. 91,511 125,489
Reduction of equipment carrying value.................. 233,097 --
Reduction of tooling costs carrying value.............. 455,449 --
Changes in assets and liabilities:
Inventory............................................ (835,795) (1,930,378)
Accounts receivable.................................. (50,273) (42,188)
Prepaid and other current assets..................... (39,998) (136,534)
Other assets......................................... 10,737 (119,804)
Accounts payable and accrued expenses................ 1,242,766 515,466
Deferred licensing revenue........................... -- (250,000)
------------ ------------
Net cash used in operating activities.................. (10,699,000) (10,062,427)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 32,312 --
Acquisition of property and equipment..................... (256,358) (364,678)
Acquisition of patents and related costs.................. (313,109) (231,298)
Capitalization of tooling costs........................... (448,744) (270,252)
------------ ------------
Net cash used in investing activities.................. (985,899) (866,228)
------------ ------------
Cash flows from financing activities:
Proceeds from:
Common stock offering, net............................. 9,186,659 --
Notes and loans........................................ 1,250,000 56,500
Preferred stock offerings, net......................... 1,240,053 5,710,406
Payments for:
Notes and loans........................................ (19,530) (72,232)
Acquisition of Tech Virginia........................... -- (16,667)
Other.................................................. -- (71,953)
------------ ------------
Net cash provided by financing activities.............. 11,657,182 5,606,054
------------ ------------
Net decrease in cash and cash equivalents................... (27,717) (5,322,601)
Cash and cash equivalents, beginning of period.............. 952,366 6,274,967
------------ ------------
Cash and cash equivalents, end of period.................... $ 924,649 $ 952,366
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............... $ 5,032 $ 7,124
============ ============
Supplemental disclosure of non-cash financing activities:
Common stock issued for settlement of accrued
liabilities.......................................... $ 226,344 $ --
============ ============
Deferred compensation in connection with stock warrants
granted.............................................. $ -- $ 217,000
============ ============
Issuance of warrants in connection with preferred stock
offering............................................. $ -- $ 96,615
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 28
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.
FINANCING:
The Company has incurred significant recurring losses from operations since
inception and had a working capital deficit of $788,197 as of December 31, 1998.
The Company will require additional capital to fund its operations and meet its
ongoing obligations for 1999 and beyond. Management believes they will be
successful in their efforts to obtain such financing and subsequent to year end
has raised approximately $8,350,000 (see Note 13). The Company also recently
introduced its Mobile Assistant IV(R) product and has plans to continue
acquiring additional software applications for the Mobile Assistant IV(R). There
can be no assurance that the Company will not incur additional losses until its
recently introduced product generates significant revenue. The accompanying
consolidated financial statements have been prepared assuming the Company will
continue as a going concern. If the Company is unable to obtain additional
financing, it will be required to reduce discretionary spending in order to
maintain its operations at a reduced level. Management believes that it will be
able to reduce discretionary spending if required. The accompanying financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All significant intercompany accounts and
transactions have been eliminated. Net gains and losses resulting from foreign
exchange transactions have not been material.
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.
INVENTORY:
Inventory is stated at the lower of cost or market, cost being determined
on a first-in, first-out basis. As of December 31, 1998 and 1997, the allowance
to reduce inventory balances to net realizable value was $770,557
F-6
<PAGE> 29
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
and $724,978, respectively. Most of the reserves and writedowns in inventory
values result from the introduction of new products or technologies resulting in
a reduction or loss of value of older products or technologies.
Inventory consists principally of component parts held for resale.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Equipment................................................... 3-5 years
Furniture and fixtures...................................... 5 years
Demonstrator units.......................................... 1 year
Leasehold improvements...................................... 3 years
</TABLE>
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.
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
products. Capitalized tooling costs are depreciated on a straight-line basis
over an estimated useful life of 12 months. In 1998, the Company recognized
charges of approximately $455,000 related to the write-off of certain
capitalized tooling costs related to the 133P Systems.
SOFTWARE DEVELOPMENT COSTS:
Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86
requires the capitalization of certain software development costs once
technological feasibility is established, which the Company defines as the
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological feasibility and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs. Since the Company is currently in
the planning and development phase for software toolkits, no costs have been
capitalized to date.
PATENT COSTS:
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. Amortization expense related to the
patents was $136,906 and $94,487 during 1998 and 1997, respectively.
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
F-7
<PAGE> 30
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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:
The Company recognizes revenue on the sale of its product when a valid
purchase order is received, collection is probable, shipment occurs and no
significant obligations remain. The Company provides services to its customers
under fixed-price and time-and-materials type contracts and recognize revenue
over the related contract term. The Company generally provides a one year
warranty on parts. A provision for estimated future warranty costs is recorded
at the time of shipment. However, the Company's suppliers for the computing
unit, FPD, HMD and batteries 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 saleable 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 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:
Basic earnings (or loss) per share is 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, 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.
ESCROWED SHARES:
Escrowed shares are considered issued and outstanding and reported as such
on the combined balance sheets. For purposes of computing basic and diluted
earnings per 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, 1998 and 1997, 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, 1998 and 1997, based upon market prices for the same or
similar debt issues.
F-8
<PAGE> 31
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
RECENT ACCOUNTING PRONOUNCEMENTS:
During 1998, the Company adopted SFAS No. 130 Reporting Comprehensive
Income. SFAS 130 established standards for reporting comprehensive income in a
full set of general purpose financial statements either in the statement of
operations or in a separate statement. The Company's comprehensive income is the
same as its net income for all periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. SFAS 133 requires that
all derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on whether a derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. Currently the Company does not utilize derivative instruments,
therefore the adoption of SFAS 133 is not expected to have a significant effect
on the Company's results of operations or its financial position. The Company
will adopt SFAS 133 for the year ending December 31, 2000.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
---------- ---------
<S> <C> <C>
Equipment.................................................. $ 516,669 $ 537,635
Furniture and fixtures..................................... 74,872 74,207
Demonstrator units......................................... 327,872 53,144
Leasehold improvements..................................... 153,159 149,659
---------- ---------
1,072,572 814,645
Less accumulated depreciation and amortization............. (610,188) (308,950)
---------- ---------
$ 462,384 $ 505,695
========== =========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was
$364,472 and $186,761, respectively.
4. ACCRUED EXPENSES
Accrued expenses consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Accrued salaries............................................ $403,391 $396,604
Professional fees........................................... 70,418 120,000
Other....................................................... 313,171 391,768
-------- --------
$786,980 $908,372
======== ========
</TABLE>
Other consists of accruals related to expenses incurred in the normal
course of business, such as employee travel costs and sales commissions.
F-9
<PAGE> 32
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE
On December 17, 1998, the Company borrowed $1,250,000 from two financial
institutions. The maturity date of the debt was January 29, 1999 and interest
was at 12% per annum. On January 29, 1999, the Company repaid the debt.
6. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING AND SALES OF COMMON STOCK:
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 ("the 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.
On April 13, 1998, the Company entered into an Equity Line of Credit
Agreement (the Agreement) with a private investor. Under the terms of the
Agreement, the Company issued 840,124 shares of common stock at a price per
share of $1.27 per share and obtained the right to require the investors to
purchase an additional $10,000,000 worth of common stock at 90% of the Company's
common stock market price (Put Rights). Pursuant to the Agreement, the Company
also agreed to pay the following issuance costs i) issued warrants to purchase a
total of 60,000 shares of the Company's common stock at a price per share
ranging from $1.76 to $2.81 ii) issued 50,000 shares of common stock which
cannot be traded prior to April 13, 1999 and iii) paid $60,000 in cash. Upon
exercise of a Put Right, the Company must pay issuance costs of approximately
5.5% of the gross proceeds in cash and issue common stock equal to 5% of the
number of shares issued in the transaction. On July 1, 1998, the Company amended
the Agreement to allow for the sale of 545,454 shares of common stock for $5.50
per share. The amendment contained certain repricing features which, as a result
of market fluctuations in the Company's common stock, required the Company to
issue an additional 94,004 shares of common stock without receiving additional
compensation. The Company has no further obligation to issue additional shares
related to these repricing features.
On May 22, 1998, in conjunction with the sale of Series C Convertible
Preferred Stock, the Company issued 110,294 shares of common stock for $3.40 per
share.
In November 1998, the Company sold 290,000 shares of common stock for $5.50
per share to a private investor. The terms of the purchase agreement allowed for
an adjustment to the purchase price per share based on of market fluctuations in
the Company common stock. Based on events in December 1998, the Company was
required to issue an additional 150,000 shares of common stock to this investor
without additional compensation. The Company has no further obligation to issue
additional shares related to these repricing features.
In 1998, the Company entered several investment agreements whereby the
Company issued 747,047 shares of common stock at prices ranging from $4.04 to
$5.72. These agreements restricted the transfer of the shares for periods
ranging from six to twelve months.
ESCROWED SHARES:
In connection with the Company's IPO, 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
F-10
<PAGE> 33
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
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 released to the shareholders 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 and 1998 releases were not met and 300,000 and 750,000 shares of Common
Stock, respectively, were canceled from the Escrowed Shares.
COMMON STOCK WARRANTS:
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.
In 1998 and 1997, the Company granted to the underwriters of the Series A
and Series B Preferred Stock warrants to purchase a total of 11,430 and 100,000
shares, respectively, of common stock at prices that range from $2.13 to $4.50
per share. The warrants are exercisable for either a two or three year period
commencing six months from the date of grant. For the year ended December 31,
1997, the Company recorded approximately $95,000 as a reduction of proceeds from
these Preferred Stock offerings.
At December 31, 1998 a total of 3,846,427 warrants to purchase common stock
were issued and outstanding related to the Company's IPO and the conversion of
debentures during 1996 and 1997. These warrants originally entitled 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 the 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 1.50, resulting in an effective exercise price of
$6.01, and 5,762,060 shares of common stock that would be issued upon full
conversion of the warrants.
In connection with the Equity Line of Credit, the Company issued warrants
to purchase 360,000 shares of common stock at an exercise price ranging from
$1.76 to $5.25. The warrants are exercisable for five years and contain
anti-dilutive provisions.
In 1998, the Company issued three warrants to purchase 37,500 shares of
common stock at prices ranging from $9.58 to $13.05, in connection with the sale
of common stock. The warrants are exercisable for a five year period.
PREFERRED STOCK:
As of December 31, 1998, the Company had 6,000,000 shares of authorized
Preferred Stock of which 3,000, 4,180, and 375 had been designated as
Convertible Preferred Stock Series A, B and C, respectively (Series A, B or C
Preferred Stock). 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.
In 1997, the Company issued 3,000 and 3,180 shares of Series A and Series B
Convertible Preferred Stock, respectively, for proceeds of $5,710,406, net of
offering costs of $468,000. In 1998, the Company issued an additional 1,000
shares of Series B Preferred Stock for proceeds of $875,299, net of offering
cost of $124,701. The Series A and B Preferred Stock accrued dividends at a rate
of 5% and 4% per annum, respectively, which were payable in cash or common
stock. As of December 31, 1998, all Series A and
F-11
<PAGE> 34
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
Series B Preferred Stock had been converted into common stock and all accrued
dividends were paid through the issuance of common stock.
On May 22, 1998, the Company issued 375 shares of Series C Preferred Stock
for gross proceeds of $375,000. The Series C Preferred Stock have a 5%
cumulative dividend which is payable when and if declared by the Board of
Directors or at the time of conversion into common stock, whichever date is
earliest. At the Company's discretion, dividends can be paid in cash or through
the issuance of common stock. In the event of liquidation, dissolution, or
winding up of the Company, the holders of Series C Preferred Stock have a
liquidation preference of $1,000 per share, plus accrued dividends, over the
Company's common stockholders. In the event the holders of the Series C
Preferred Stock attempt to convert their shares into common stock when the
Company's common stock market price is below $3.40, the Company may redeem at
its option all outstanding shares of Series C Preferred Stock by issuing to the
holders of the Series C Preferred Stock a number of shares of common stock equal
to $1,000 divided by $3.40 for each share of Series C Preferred Stock redeemed.
Holders of the Series C Preferred Stock can convert their shares into shares of
the Company's common stock in four equal increments commencing August 15, 1998,
and on the fifteenth day of each third month thereafter until May 15, 1999. Any
remaining outstanding shares of Series C Preferred Stock convert into common
stock on May 15, 2000. The Series C Preferred Stock converts into shares of
common stock by dividing the lesser of $4.00 per share or 100% of the average
market price for the 5 trading days immediately preceding conversion. In 1998,
holders of the Series C converted 187 shares into 46,876 shares of common stock.
The preferred stock activity is summarized as follows:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
-------------------- -------------------- ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- ------ ----------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996.................. -- $ -- -- $ -- -- $ --
Issuance of shares, net..................... 3,000 2,761,669 3,180 2,853,122 -- --
Value of beneficial conversion feature...... -- (658,537) -- (561,175) -- --
Accretion of deemed dividend................ -- 329,268 -- 159,425 -- --
Conversion into common stock................ (750) (690,417) -- -- -- --
------ ----------- ------ ----------- ---- ---------
Balance, December 31, 1997.................. 2,250 1,741,983 3,180 2,451,372 -- --
------ ----------- ------ ----------- ---- ---------
Issuance of shares, net..................... -- -- 1,000 875,299 375 364,754
Value of beneficial conversion feature...... -- -- -- (176,470) -- --
Accretion of deemed dividend................ -- 329,269 -- 578,220 -- --
Conversion into common stock................ (2,250) (2,071,252) (4,180) (3,728,421) (187) (182,376)
------ ----------- ------ ----------- ---- ---------
Balance, December 31, 1998.................. -- $ -- -- $ -- 188 $ 182,378
====== =========== ====== =========== ==== =========
</TABLE>
The Preferred Stock included a nondetachable conversion feature that was
"in the money" at the date of issue (a "beneficial conversion feature"). The
beneficial conversion feature was recognized as a return to the preferred
stockholders over the minimum period in which the preferred stockholders could
realize the maximum beneficial conversion. As a result of the accumulated
deficit, the value of the Preferred Stock was not allocated between par value
and additional paid-in capital and the accretion of the value allocated to the
beneficial conversion on the Preferred Stock and the related dividends is
recorded against additional paid-in capital.
7. 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
F-12
<PAGE> 35
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS, CONTINUED:
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 price
less 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:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE PRICE NUMBER AVERAGE PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Beginning balance...................... 1,738,430 $3.04 1,246,030 $2.97
Granted................................ 802,550 $4.61 892,200 $3.04
Exercised.............................. -- -- (150,000) $0.01
Cancelled.............................. (745,980) $3.29 (249,800) $4.85
--------- ----- --------- -----
Ending balance......................... 1,795,000 $3.59 1,738,430 $3.04
========= ===== ========= =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------- -----------------------
WEIGHTED- WEIGHTED-
RANGE OF WEIGHTED-AVERAGE AVERAGE AVERAGE
EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
----------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.37-$2.50 242,200 10 years $1.98 217,600 $2.01
$2.51-$3.00 868,000 10 years $2.90 704,540 $2.92
$3.01-$7.31 684,800 10 years $5.02 52,800 $5.37
--------- -------- ----- ------- -----
$1.37-$7.31 1,795,000 10 years $3.59 974,940 $2.85
========= ======== ===== ======= =====
</TABLE>
The Company complies with the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation". 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 plan awards 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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Net loss -- as reported................................. $(13,111,488) $ (9,479,966)
Net loss -- pro forma................................... $(13,647,074) $(10,170,223)
Net loss per share -- as reported....................... $ (0.74) $ (0.74)
Net loss per share -- pro forma......................... $ (0.77) $ (0.79)
</TABLE>
F-13
<PAGE> 36
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS, CONTINUED:
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 1998 and 1997: dividend yield of 0%; expected
volatility of 60%; risk-free interest rate of 5.20% in 1998 and 6.41% in 1997;
and expected lives of 3 years.
8. CONCENTRATION OF CREDIT RISK:
In 1998, two customers, who individually comprised over 10%, combined to
comprise 23% of revenue and four customers, who individually comprised over 10%,
combined to comprise 62% of accounts receivable. In 1997, two customers, who
individually comprised over 10%, combined to comprise 44% of revenue and four
customers, who individually comprised over 10%, combined to comprise 72% of
accounts receivable. The Company has not experienced any difficulties with
collections of accounts receivables from these customers.
At times, cash balance held at financial institutions were in excess of
federally insured limits.
9. 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.
10. INCOME TAXES:
For the years ended December 31, 1998 and 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, 1998, the Company has approximately $27,809,000 of net
operating loss carryforwards for federal income tax purposes. These losses begin
to expire in 2010. The use of these carryforwards may be limited in any one year
under Internal Revenue Code Section 382 if significant ownership changes occur
in the future.
F-14
<PAGE> 37
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES, CONTINUED:
Net deferred tax assets are comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1997
------------ -----------
<S> <C> <C>
Excess of book over tax depreciation...................... $ 65,000 $ 23,000
Net operating loss carryforwards.......................... 10,557,000 6,084,000
Adjustment to accrual basis of accounting................. 244,000 283,000
Accrued expenses and reserves............................. 517,000 --
Tax credit carryforwards.................................. 63,000 63,000
Less valuation allowance.................................. (11,446,000) (6,453,000)
------------ -----------
Net deferred tax asset.................................... -- --
============ ===========
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
LEASE COMMITMENTS:
The Company leases 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, 1998 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $ 322,413
2000........................................................ 333,436
2001........................................................ 344,844
2002........................................................ 356,651
2003 and thereafter......................................... 274,303
----------
$1,631,647
==========
</TABLE>
Total rental expense charged to operations for the year ended December 31,
1998 and 1997 was $292,957 and $258,071, respectively.
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
believes that the ultimate resolution of this litigation will not have a
material adverse effect on the Company's results of operations or financial
position. 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.
F-15
<PAGE> 38
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
$313,187 and $276,000 in 1998 and 1997, respectively. The Company paid $189,647
and $136,001 in 1998 and 1997, respectively, to a law firm of which one of the
partners is Director of the Company. 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. The Company
accrued $97,800 in 1998 and 1997 for salaries and automobile allowances payable
to a Director of the Company for services provided to Tech Virginia, and paid
$65,000 in 1998.
A Director of the Company, who is the brother of the President and Chief
Executive Officer, serves as a consultant to the Company and during 1997 was
paid $305,000 for consulting fees and $110,000 as reimbursement for expenses.
During 1998, the Company paid $162,869 in consulting payments and $23,789 as
reimbursement for expenses incurred during the year to the same Director. In
addition the Company reserved for approximately $45,000 of advances that were
paid to this consultant during 1998. The Company paid $172,000 in 1997 as
advances on commissions and expenses to an individual consultant who is an uncle
by marriage to the President and Chief Executive Officer of the Company. In
addition, this consultant is the President of Davis Group to whom the Company
sold products during 1998 for approximately $23,000. The wife of the Chief
Executive Officer is employed by the Company and was paid a salary of $50,000 in
1998 and 1997.
During 1998 and 1997, the Company paid approximately $219,433 and $81,000,
respectively, for sales and marketing consulting fees and expenses to two
members of the SBS Software Center in Germany. The Company sold approximately
$135,000 of products to the SBS Software Center in 1997. During 1998 the Company
sold approximately $35,000 of products to Call In, the President of whom is the
son of one of the Company's Directors.
13. SUBSEQUENT EVENTS:
In January 1999, the Company exercised a Put Right under its Equity Line of
Credit (See Note 6) and issued 841,356 shares of common stock for proceeds of
$3,360,000.
On March 10, 1999, the Company issued 5,000 shares of Series D Convertible
Preferred Stock for proceeds of $4,990,000 net of offering costs of $10,000. In
addition, the Company has available an additional $5,000,000 under this
agreement pursuant to which an additional 5,000 shares of Series D Preferred
Stock would be issued within 3 business days of the effective registration
statement being filed with the SEC, which registers the underlying common shares
for these securities.
F-16
<PAGE> 39
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE CLASS POSITION
---- --- ----- --------
<S> <C> <C> <C>
Edward G. Newman................................ 55 III President, Chief Executive
Officer and Chairman of the Board
of Directors
Maarten R. Heybroek............................. 56 -- Senior Executive Vice President,
Chief Operating Officer and Chief
Financial Officer
Kaz Toyosato.................................... 54 I Executive Vice President and
Director
George Allen, Esq. ............................. 46 III Director
Eugene J. Amobi................................. 53 II Director
Keith P. Hicks, Esq.(2)......................... 76 I Director
Steven A. Newman, M.D.(1)(2)(3)................. 53 III Director and Vice Chairman of the
Board of the Board of Directors
Phillip E. Pearce(2)(3)......................... 70 II Director
James J. Ralabate, Esq. ........................ 71 III Director
Lt. Gen. Harry E. Soyster (Ret.)(1)(3).......... 63 II Director
Martin Eric Weisberg, Esq.(1)(3)................ 48 I Secretary and Director
Dr. Edwin Vogt(4)............................... 65 II Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Member of the Nominating Committee.
(4) Appointed to the Board of Directors on September 28, 1998.
Officers are appointed by and serve at the discretion of the Board of
Directors. The Company's Board of Directors is divided into three different
classes. At each annual meeting of stockholders, one class of directors will be
elected for a term of three years to succeed those directors in the class whose
terms then expire. All directors hold office until the third annual meeting of
shareholders following their election or until their successors are elected and
qualified.
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 the Company in October 1996 as Executive Vice President
of Asian Operations. Mr. Toyosato is responsible for overseeing the Company's
operations in Asia, including Japan. Prior to joining the Company, Mr. Toyosato
spent 27 years with Sony Corporation in Japan where his last position was the
23
<PAGE> 40
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. who currently serves as Secretary of the
Company, is a partner of the law firm, Parker Chapin Flattau & Klimpl, LLP,
which serves general counsel to the Company. Mr. Weisberg specializes in the
areas of securities, mergers and acquisitions, financing and international
transactions and has been in the private practice of law for 23 years. Mr.
Weisberg is a summa cum laude graduate of Union College (B.A. 1972) and received
his law degree from The Northwestern University School of Law (1975), where he
graduated summa cum laude, was Articles Editor of the Law Review and was elected
to the Order of the Coif. Mr. Weisberg also attended The London School of
Economics and Political Science.
CLASS II DIRECTORS
EUGENE J. AMOBI has been a director of the Company since January 1996.
Since 1983, Mr. Amobi has been President, a director and a principal stockholder
of Tech International, Inc. ("Tech International"), which provides engineering,
technical support and consulting services to government and domestic and
international commercial clients. Mr. Amobi has been president and director of
Tech International of Virginia Inc. ("Tech Virginia"), 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 of the Company since October 1995.
Mr. Pearce has been an independent business consultant with Phil E. Pearce &
Associates, Chairman and Director of Financial Express Corporation since 1990
and since 1988 has been a principal of Pearce-Henry Capital Corp. Prior to 1988
Mr. Pearce was Senior Vice President and a director of E.F. Hutton, Chairman of
the Board of Governors of the National Association of Securities Dealers, a
Governor of the New York Stock Exchange and a member of the Advisory Council to
the United States Securities and Exchange Commission on the Institutional Study
of the Stock Markets. Mr. Pearce also is a director of RX Medical Services,
Inc., an operator of medical diagnostic facilities and clinical laboratories,
InfoPower International, Inc., a software development company and StarBase
Corporation, a software development company, and United Digital Networks, Inc.,
a provider of voice and data long distance services. Mr. Pearce is a graduate of
the University of South Carolina (B.A. 1953) and attended the Wharton School of
Investment Banking at the University of Pennsylvania.
LT. GEN. HARRY E. SOYSTER (RET.) has been a director of the Company since
January 1995. He is currently Director of Washington Operations and Vice
President of International Operations of Military Professional Resources,
Incorporated. From 1988 until his retirement in 1991, Lieutenant General Soyster
(Ret.) was the Director of the United States Defense Intelligence Agency. Prior
to that time, he was Commander of the United States Army Intelligence and
Security Command and a Deputy Assistant Chief of Staff for Intelligence,
Department of the Army. Lieutenant General Soyster (Ret.) is a graduate of the
United States Military Academy at West Point (B.S. 1957), Penn State University
(M.S. 1963), the University of Southern California (M.S. 1973) and the National
War College (1977).
DR. EDWIN VOGT was appointed a director of the Company 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.
24
<PAGE> 41
Dr. Vogt is a graduate of the University of Stuttgart with a 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. Mr. Allen is a member of the Board
of Directors of Commonwealth Biotechnology, Inc. Mr. Allen is a graduate of the
University of Virginia at Charlottesville (B.A. 1974), with distinction, and
received his law degree from the University of Virginia at Charlottesville (J.D.
1977).
EDWARD G. NEWMAN has been the Company's President since March 1993, Chief
Executive Officer and Chairman of the Board of Directors since December 1994,
and a director since 1990. Mr. Newman served as 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 the company.
STEVEN A. NEWMAN, M.D. has been a director of the Company 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 the 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 of the Company 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).
ADVISORY BOARD
The Company also has an Advisory Board which was established to provide
council and support to the Board of Directors. The members of the Advisory Board
are appointed by the Board of Directors. Its members currently include:
LAWRENCE BERK is currently Senior Managing Director of Brill Securities. He
has been a money manager and has structured and advised companies on financings
and strategic planning, having held executive positions with various investment
banking firms, including Oppenheimer & Co. where he was a partner. Mr. Berk has
also held many leadership roles in the entertainment business. He served as a
member of the Board of the Actors Studio for 15 years where he produced plays;
he was a founding Chairman of the Veterans Ensemble Theatre, a group of writers,
actors and directors from the Vietnam war; he was on the Board of the
25
<PAGE> 42
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.
VICE ADMIRAL STEPHAN F. LOFTUS (RET.) retired from the United States Navy
in May of 1994. Prior to that he served as the Deputy Chief of Naval Operations
(Logistics). Vice Admiral Loftus held previous positions with the U.S. Navy as
Commander, Fleet Air Mediterranean; Director, Office of Budget and Reports; and
Director, Office of Program Appraisal. Vice Admiral Loftus presently serves as
Executive Vice President of Quarterdeck Investment Partners, Inc. (specializing
in merger/acquisitions) and The Spectrum Group (a strategic planning group). He
consults for Lockheed Martin Corporation, SAIC, Johns Hopkins University --
Applied Physics Lab, Systems Planning Corporation, and Global Planning
Corporation. He is on the Board of Directors of AMSEC, 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.
COMMITTEES OF THE BOARD OF DIRECTORS
We have three committees, Compensation, Auditing and Nominating. The
functions of the Audit Committee include:
- the nomination of independent auditors for appointment by the Board;
- meeting with the independent auditors to review and approve the
scope of their audit engagement;
26
<PAGE> 43
- meeting with our financial management and the independent auditors
to review matters relating to internal accounting controls, the
Company's accounting practices and procedures and other matters
relating to our financial condition; and
- 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.
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.
SECTION 16(a) REPORTING
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's directors and executive officers, and persons who own more than
10% of the Company's Common Stock, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Stock and other equity securities of the Company. Officers,
directors and greater than 10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) reports they file. To the
Company's knowledge, based solely on review of the copies of such reports
furnished to the Company during the one-year period ended December 31, 1998, all
Section 16(a) filing requirements applicable to its officers, directors and
greater than ten-percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following sets forth the annual and
long-term compensation for services in all capacities to the Company for the
fiscal years ended December 31, 1998, 1997 and 1996 paid to (i) Edward G.
Newman, the Company's President, Chief Executive Officer and Chairman of the
Board of Directors, (ii) Kaz Toyosato, an Executive Vice President of the
Company, and (iii) John F. Moynahan, the Company's former Vice President, Chief
Financial Officer, Treasurer and a director. Mr. Moynahan resigned from his
various positions with the Company effective June 3, 1998. No other officer of
the Company received annual salary and bonus exceeding $100,000 during the
relevant periods.
27
<PAGE> 44
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
NAME AND -------------------- OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION
------------------ ---- -------- ----- ------------ ------------
<S> <C> <C> <C> <C> <C>
Edward G. Newman................. 1998 $216,171(1) $0 0 $39,600(2)
President and Chief Executive 1997 $211,211(1) $0 $43,600(2)
Officer and Chairman of the 1996 $149,635(1) $0 0 $ 7,034(2)
Board of Directors
Kaz Toyosato..................... 1998 $172,086 $0 0 $ 0
Executive Vice President 1997 $ 77,188(3) $0 0 $ 0
1996 $ 0 $0 0 $ 0
John F. Moynahan................. 1998 $ 93,507(4) $0 0 $ 7,500(2)
Senior Vice President, Chief 1997 $142,083 $0 0 $15,465(2)
Financial Officer and Treasurer 1996 $139,688 $0 0 $ 5,517(2)
</TABLE>
- ---------------
(1) Compensation does not include (i) $50,000, $50,000 and $50,084 paid to
Frances C. Newman, wife of Edward G. Newman in 1998, 1997 and 1996,
respectively, and (ii) $21,276, $23,111 and $87,314 paid by Tech of Virginia
in 1998, 1997 and 1996, as payment of accrued salaries and expenses.
(2) Includes payment of non-accountable expense allowances and car allowances,
but not reimbursement of expenses.
(3) Represents compensation for a eight month period. Mr. Toyosato joined the
Company in 1997.
(4) Mr. Moynahan resigned from his positions with the Company effective June 3,
1998.
OPTION GRANTS TABLE. The following table sets forth information on grants
of stock options during fiscal 1998 to executive officers and directors of the
Company. All such options are exercisable to purchase shares of Common Stock.
<TABLE>
<CAPTION>
PERCENT OF TOTAL
OPTIONS GRANTED EXERCISE OR
OPTIONS GRANTED TO EMPLOYEES BASE PRICE
NAME (SHARES) IN YEAR ($/SHARE) EXPIRATION DATE
---- --------------- ---------------- ----------- ------------------
<S> <C> <C> <C> <C>
Maarten R. Heybroek........ 200,000 26.6% $4.8750 June 1, 2008
George Allen............... 50,000 6.6% $5.4688 September 24, 2008
Eugene J. Amobi............ 10,000 1.3% $4.3125 August 28, 2008
Keith Hicks, Esq. ......... 10,000 1.3% $4.3125 August 28, 2008
Dr. Steven A. Newman....... 10,000 1.3% $4.3125 August 28, 2008
Phillip E. Pearce.......... 10,000 1.3% $4.3125 August 28, 2008
James J. Ralabate, Esq. ... 10,000 1.3% $4.3125 August 28, 2008
Lt. Gen. Harry E.
Soyster.................. 10,000 1.3% $4.3125 August 28, 2008
Kaz Toyosato............... 10,000 1.3% $4.3125 August 28, 2008
Martin Eric Weisberg,
Esq. .................... 10,000 1.3% $4.3125 August 28, 2008
Dr. Edwin Vogt............. 50,000 6.6% $5.4688 September 24, 2008
</TABLE>
28
<PAGE> 45
FISCAL YEAR-END OPTIONS/OPTION VALUES TABLE.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Maarten R. Heybroek.................... 0 200,000 0 0
George Allen........................... 0 50,000 0 0
Eugene J. Amobi........................ 0 10,000 0 1,875
Keith Hicks, Esq. ..................... 0 10,000 0 1,875
Dr. Steven A. Newman................... 0 10,000 0 1,875
Phillip E. Pearce...................... 0 10,000 0 1,875
James J. Ralabate, Esq. ............... 0 10,000 0 1,875
Lt. Gen. Harry E. Soyster.............. 0 10,000 0 1,875
Kaz Toyosato........................... 0 10,000 0 1,875
Martin Eric Weisberg, Esq. ............ 0 10,000 0 1,875
Dr. Edwin Vogt......................... 0 50,000 0 0
</TABLE>
None of the foregoing options were exercisable within 60 days of December
31, 1998.
The Company has no retirement, pension or profit sharing program for the
benefit of its directors, officers or other employees, but the Board of
Directors may recommend one or more such programs for adoption in the future.
PROFIT SHARING PROGRAM
The Company intends to establish a profit sharing program to be
administered by the Board of Directors. Under this program, which will remain in
effect for five years unless extended by the Board of Directors, executives, key
employees and consultants will be eligible to participate in a cash bonus pool.
The amount of the cash bonus pool will be determined annually and will be up to
10% of the amount by which the Company's pretax income exceeds 10% of
stockholders' equity.
EMPLOYMENT AGREEMENTS
The Company entered into employment agreements with Edward G. Newman and
John F. Moynahan. Mr. Moynahan resigned from his positions with the Company
effective June 3, 1998. Mr. Newman's employment agreement provides for a
three-year term through December 31, 1998; initial annual base compensation of
$150,000 subject to a minimum annual increase to $198,000 on January 1, 1997 and
of at least the annual increase in the United States Consumer Price Index
("CPI") plus two percent annually thereafter, an annual cash bonus in an amount
to be determined by the Board of Directors; and a $2,000,000 life insurance
policy payable to his designated beneficiaries. Mr. Newman received payments in
1997 for accrued salaries and expenses related to his employment with Tech
Virginia and continues to provide services to Tech Virginia without contract at
a fixed payment of $1,000 per month with a $650 automobile allowance per month.
The employment agreement with Mr. Newman also entitles him to participate in all
benefits which the Company may offer to its executive officers and employees, as
a group. The Company anticipates that such benefits will include an automobile,
health insurance and expense reimbursement. The employment agreement
automatically renews for an additional three-year term unless terminated in
writing by either party on or before October 31, 1998. The employment agreement
also provides for termination at the option of Mr. Newman in the event of a
change of control (which is defined as Mr. Edward Newman ceasing to serve as
either the Chairman of the Company's Board of Directors or its President and
Chief Executive Officer) and that upon any such termination Mr. Newman is
entitled to at least two years of annual compensation under his employment
agreement.
Mr. Toyosato is employed pursuant to a three-year Employment Agreement with
a term expiring on March 3, 2000. The Employment Agreement provides for an
annual salary of $153,575.23.
29
<PAGE> 46
CONSULTING AGREEMENTS
The Company and Dr. Steven A. Newman entered into a Consulting Agreement
dated as of January 1, 1996, as amended January 1, 1997. Pursuant to the
Consulting Agreement, Dr. Newman will provide consulting services which
includes, among other things, the review and assistance in the preparation of
the Company's business strategies, assisting with the recruitment and hiring of
key executives and provide advice regarding financing, contracting, management,
overseas operations, strategic alliances and ventures. The annual consulting fee
is $150,000 payable on a monthly basis. The Consulting Agreement also provides
for additional compensation, as determined by the Company's Compensation
Committee, for services by Dr. Newman in connection with the successful
completion of financings, mergers, acquisitions, dispositions, joint ventures
and other material transactions. The term of the Consulting Agreement is four
years terminating on December 31, 2000 unless renewed by the parties.
In 1996, the Company entered into a two-year consulting agreement with
Victor J. Lombardi whereby Mr. Lombardi agreed to provide business development
and marketing services to the Company in exchange for warrants which entitle Mr.
Lombardi to purchase 100,000 shares of Common Stock at $6.00 per share through
December 31, 1999.
In May 1995, the Company entered into a three-year consulting agreement
with Dr. Andrew Heller whereby Dr. Heller agreed to provide strategic planning,
business management, strategic product development and market and financial
introductions services to the Company. In consideration of services rendered by
Dr. Heller to the Company prior to that time and as an inducement to enter into
the consulting agreement, Dr. Heller was granted 100,000 shares of Common Stock
which were valued at $5.00 per share for financial reporting purposes.
OMNIBUS STOCK INCENTIVE PLAN
The 1996 Omnibus Stock Incentive Plan (the "1996 Incentive Plan") was
adopted by the Company's Board of Directors effective January 1, 1996. The 1996
Incentive Plan provides for the granting of incentive stock options ("Incentive
Stock Options") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), nonqualified stock options, stock appreciation
rights ("SARs") and grants of shares of Common Stock subject to certain
restrictions ("Restricted Stock") up to a maximum of 650,000 shares to officers,
directors, employees and others. Incentive Stock Options can be awarded only to
employees of the Company at the time of the grant. No options, SARs or
restricted stock ("Restricted Stock") may be granted under the 1996 Incentive
Plan subsequent to December 31, 2006. To date, options have been granted to
purchase all of the 650,000 shares of Common Stock reserved for issuance under
the 1996 Incentive Plan.
The 1996 Incentive Plan is administered by the Compensation Committee of
the Board of Directors (subject to the authority of the full Board of
Directors), which determines the terms and conditions of the options, SARs and
Restricted Stock granted under the 1996 Incentive Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof.
Dr. Steven A. Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg,
Esq. currently are the members of the Compensation Committee.
The exercise price of all Incentive Stock Options granted under the 1996
Incentive Plan must equal at least the fair market value of the Common Stock on
the date of grant. In the case of an optionee who owns stock possessing more
than ten percent of the total combined voting power of all classes of stock of
the Company ("Substantial Stockholders"), the exercise price of Incentive Stock
Options must be at least 110% of the fair market value of the Common Stock on
the date of grant. The exercise price of all nonqualified stock options granted
under the 1996 Incentive Plan shall be determined by the Compensation Committee.
The term of any Incentive Stock Option granted under 1996 the Incentive Plan may
not exceed ten years, or, for Incentive Stock Options granted to Substantial
Stockholders, five years. The 1996 Incentive Plan may be amended or terminated
by the Board of Directors, but no such action may impair the rights of a
participant under a previously granted option.
30
<PAGE> 47
The 1996 Incentive Plan provides the Board of Directors or the Compensation
Committee the discretion to determine when options granted thereunder shall
become exercisable and the vesting period of such options. Upon termination of a
participant's employment or relationship with the Company, all options terminate
and no longer are exercisable unless termination is due to death or disability,
in which case the options are exercisable within one year of termination. The
Compensation Committee has granted extensions of the period before which options
may be exercised for certain terminated employees.
The 1996 Incentive Plan provides that upon a change in control of the
Company, all previously granted options and SARs immediately shall become
exercisable in full and all Restricted Stock immediately shall vest and any
applicable restrictions shall lapse. The 1996 Incentive Plan defines a change of
control as the consummation of a tender offer for 25% or more of the outstanding
voting securities of the Company, a merger or consolidation of the Company into
another corporation less than 75% of the outstanding voting securities of which
are owned in aggregate by the stockholders of the Company immediately prior to
the merger or consolidation, the sale of substantially all of the Company's
assets other than to a wholly-owned subsidiary, or the acquisition by any
person, business or entity other than by reason of inheritance of over 25% of
the Company's outstanding voting securities. The change of control provisions of
the 1996 Incentive Plan may operate as a material disincentive or impediment to
the consummation of any transaction which could result in a change of control.
The 1996 Incentive Plan provides the Board of Directors or the Compensation
Committee discretion to grant SARs in connection with any grant of options. Upon
the exercise of a SAR, the holder shall be entitled to receive a cash payment in
an amount equal to the difference between the exercise price per share of
options then exercised by him and the fair market value of the Common Stock as
of the exercise date. The holder is required to exercise options covering the
number of shares, which are subject to the SAR so exercised. SARs are not
exercisable during the first six months after the date of grant, and may be
transferred only by will or the laws of descent and distribution.
The 1996 Incentive Plan also provides the Board of Directors or the
Compensation Committee discretion to grant to key persons shares of Restricted
Stock subject to certain limitations on transfer and substantial risks of
forfeiture.
1997 STOCK INCENTIVE PLAN
The 1997 Stock Incentive Plan (the "1997 Incentive Plan") was adopted by
the Company's Board of Directors on April 10, 1997. The 1997 Incentive Plan
provides for the granting of Incentive Stock Options within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
nonqualified stock options, SARs and grants of shares of Common stock subject to
certain restrictions (collectively, "Awards") up to a maximum of 1,650,000
shares to officers, directors, key employees and others. Incentive Stock Options
can be awarded only to employees of the Company at the time of the grant. No ISO
may be granted under the 1997 Incentive Plan after April 9, 2007.
The 1997 Incentive Plan is administered by the Board of Directors or a
Committee of the Board of Directors, which determines the terms and conditions
of the Awards granted under the 1997 Incentive Plan, including the exercise
price, number of shares subject to the option and the exercisability thereof.
Dr. Steven A. Newman, Lt. Gen. Harry E. Soyster (Ret.) and Martin Eric Weisberg,
Esq. currently are the members of the Committee.
The exercise price of all Incentive Stock Options granted under the 1997
Incentive Plan must equal at least the fair market value of the Common Stock on
the date of grant. In the case of Substantial Stockholders, the exercise price
of Incentive Stock Options must be at least 110% of the fair market value of the
Common Stock on the date of grant. The exercise price of all nonqualified stock
options granted under the 1997 Incentive Plan shall be determined by the
Compensation Committee. The term of any Incentive Stock Option granted under the
1997 Incentive Plan may not exceed ten years, or, for Incentive Stock Options
granted to Substantial Stockholders, five years. The 1997 Incentive Plan may be
amended or terminated by the Board of Directors, but no such action may impair
the rights of a participant under a previously granted option.
31
<PAGE> 48
The 1997 Incentive Plan provides the Committee the discretion to determine
when options granted thereunder shall become exercisable and the vesting period
of such options. Upon termination of a participant's employment or relationship
with the Company, options may be exercised only to the extent exercisable on the
date of such termination (within three months), but not thereafter, unless
termination is due to death or disability, in which case the options are
exercisable within one year of termination.
The 1997 Incentive Plan provides the Committee discretion to grant SARs to
key employees, consultants and directors. Promptly after exercise of a SAR the
holder shall be entitled to receive in chase, by check or in shares of Common
Stock, an amount equal to the excess of the fair market value on the exercise
date of the shares of Common Stock as to which the SAR is exercised over the
base price of such shares, which shall be determined by the Committee
The 1997 Incentive Plan also provides the Committee discretion to grant to
key persons shares of restricted stock subject to certain contingencies and
restrictions as the Committee may determine.
As of December 31, 1998 a total of 1,795,000 options were outstanding. Each
of the outstanding options has an exercise price at least equal to the fair
market value of the Common Stock on the date of grant. As of December 31, 1998,
there were no SARs outstanding and there has been one grant of Restricted Stock
of 10,000 shares of Common Stock to a former officer of the Company.
32
<PAGE> 49
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS.
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of March 31, 1999, certain information
regarding the ownership of voting securities of the Company by each stockholder
known to the management of the Company to be (i) the beneficial owner of more
than 5% of the Company's outstanding Common Stock, (ii) the directors of the
Company during the last fiscal year, (iii) the executive officers named in the
Summary Compensation Table herein under "Executive Compensation" and (iv) all
executive officers and directors as a group. The Company believes that the
beneficial owners of the Common Stock listed below, based on information
furnished by such owners, have sole investment and voting power with respect to
such shares.
<TABLE>
<CAPTION>
AMOUNT OF SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED OWNED
---- ---------------- ----------
<S> <C> <C>
Edward G. Newman......................................... 3,176,972(1) 14.30%
12701 Fair Lakes Circle, Suite 550
Fairfax, Virginia 22033
Maarten R. Heybroek...................................... 6,500(2) *
12701 Fair Lakes Circle, Suite 550
Fairfax, Virginia 22033
Kaz Toyosato............................................. 50,000(3) *
Kita-Shinagawa 5-12-6,
Wakabayashi Bldg. 2F,
Shinagawa-Ku, Tokyo Japan 141-0001
George Allen, Esq........................................ 300 *
901 East Cary Street
Richmond, Virginia 23219
Eugene J. Amobi.......................................... 360,000(4) 1.62%
100 Jade Drive
Wilmington, Delaware 19810
Keith P. Hicks, Esq...................................... 379,597(4) 1.70%
4121 Roberts Road
Fairfax, Virginia 22032
Steven A. Newman, M.D.................................... 1,704,790(5) 8.13%
303 Avenida Cerritos
Newport Beach, California 92660
Phillip E. Pearce........................................ 60,000(4) *
6624 Glenleaf Court
Charlotte, North Carolina 28270
James J. Ralabate, Esq................................... 113,424(4) *
5792 Main Street
Williamsville, New York 14221
Lt. Gen. Harry E. Soyster (Ret.)......................... 81,712(4) *
1201 E. Abingdon Drive, Suite 425
Alexandria, Virginia 22314
Martin Eric Weisberg, Esq................................ 60,000 *
1211 Avenue of the Americas
New York, New York 10036
</TABLE>
33
<PAGE> 50
<TABLE>
<CAPTION>
AMOUNT OF SHARES
BENEFICIALLY PERCENTAGE
NAME OWNED OWNED
---- ---------------- ----------
<S> <C> <C>
Dr. Edwin Vogt........................................... 6,000(6) *
12701 Fair Lakes Circle, Suite 550
Fairfax, Virginia 22033
John P. Moynahan......................................... 4,167 *
12303 Blair Ridge Road
Fairfax, Virginia 22033
Officers and directors as a group
(13 persons)........................................... 6,123,462(7) 26.92%
</TABLE>
- ---------------
* Less than 1%
(1) Includes 200,000 shares of Common Stock beneficially owned by an irrevocable
trust established by Mr. Newman for the benefit of his children and 500,000
shares registered under the name of Bear Stearns pursuant to a pledge
agreement between Mr. Newman and Bear Stearns. Does not include (a) 776,950
shares of Common Stock beneficially owned by beneficially owned by Mr.
Newman's wife, Francis C. Newman; (b) 28,900 shares of Common Stock
beneficially owned by an irrevocable trust established by Mr. Newman for the
benefit of his sister; and (c) (b) 28,900 shares of Common Stock
beneficially owned by an irrevocable trust established by Mr. Newman for the
benefit of his mother. Mr. Newman disclaims beneficial ownership of all such
shares.
(2) Includes 1,500 shares of Common Stock beneficially owned by Mr. Heybroek's
children and 5,000 shares of Common Stock issuable upon exercise of
currently exercisable options.
(3) Includes 50,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(4) Includes 60,000 shares of Common Stock issuable upon exercise of currently
exercisable options.
(5) Includes 100,000 shares of Common Stock beneficially owned by an irrevocable
trust established by Mr. Newman for the benefit of his children, for which
share Mr. Newman disclaims beneficial ownership; and 500,000 shares
registered under the name of Bear Stearns pursuant to a pledge agreement
between Mr. Newman and Bear Stearns.
(6) Includes 6,000 shares of Common Stock beneficially owned by Dr. Vogt's wife.
Dr. Vogt disclaims beneficial ownership for all of such securities.
(7) Includes 531,500 shares of Common Stock issuable to the group upon exercise
of currently exercisable options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In connection with transactions described below, the Company did not secure
an independent determination of the fairness and reasonableness of such
transactions and arrangements with affiliates of the Company. In each instance
described below, the disinterested directors (either at or following the time of
the transaction) reviewed and approved the fairness and reasonableness of the
terms of the transaction. The Company believes that each transaction was fair
and reasonable to the Company and on terms at least as favorable as could have
been obtained from non-affiliates. Transactions between any corporation and its
officers and directors are subject to inherent conflicts of interest.
TECH INTERNATIONAL AND TECH VIRGINIA
Since December 1992, the Company has maintained various business
relationships with Tech International and since 1994, with Tech Virginia. Tech
International operates a computer software and consulting business. Until
December 30, 1994, Tech International's Virginia operations were conducted
through its Virginia business unit. In December 30, 1994, Tech International
spun-off the Virginia business unit (the "Spin-Off") as Tech Virginia. Edward G.
Newman, a principal stockholder, director and the Chairman,
34
<PAGE> 51
President and Chief Executive Officer of the Company and Steven A. Newman and
Eugene J. Amobi, directors of the Company, were the stockholders, and continue
as officers and directors of Tech Virginia. Eugene J. Amobi is the sole director
and stockholder of Tech International.
MANAGEMENT PERSONNEL AGREEMENTS WITH TECH VIRGINIA
Messrs. Edward G. Newman, Steven A. Newman and Eugene Amobi each had
employment agreements with Tech Virginia under which each of them was entitled
to a salary and each was eligible to receive certain bonuses. The agreements
with Messrs. Edward G. Newman and Steven A. Newman required each of them to
devote only reasonable time and attention to Tech Virginia, provided their
activities for Tech Virginia did not interfere with their obligations to the
Company. Upon the acquisition of Tech Virginia by the Company, such employment
agreements were terminated by agreement with Messrs. Newman, Newman, and Amobi.
Messrs. Newman, Newman and Amobi have continued to provide services to Tech
Virginia since the acquisition without contract but under similar terms and
conditions as their terminated agreements.
CONSULTING AGREEMENT
Steven A. Newman has entered into a consulting agreement with the Company.
See "Executive Compensation -- Consulting Agreements."
LEGAL SERVICES
James J. Ralabate, Esq. was paid $313,187 in fees and disbursements for
legal services rendered to the Company for the year ended December 31, 1998.
Parker Chapin Flattau & Klimpl, LLP, the law firm where Martin Eric
Weisberg, Esq. is a partner, was paid $189,647 in fees and disbursements for
legal services rendered to the Company for the year ended December 31, 1998.
35
<PAGE> 52
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S> <C>
1.1 -- Form of Financial Consulting Agreement between the Company (1)
and the Representative.
3.1 -- Certificate of Incorporation of the Company, as Amended. *
3.2 -- Bylaws of the Company (as Amended on September 24, 1998). *
4.1 -- Warrant Exercise Fee Agreement. (1)
4.2 -- Form of Forfeiture Escrow. (1)
4.3 -- Form of specimen certificate for Units. (1)
4.4 -- Form of specimen certificate for Common Stock. (1)
4.6 -- Form of Warrant. (2)
10.1 -- December 31, 1994 Acquisition Agreement between the Company (1)
and Tech Virginia.
10.2 -- Form of Indemnification Agreement to be entered into between (1)
the Company and each officer and director of the Company.
10.3 -- Form of Employment Agreement between the Company and Edward (1)
G. Newman.
10.4 -- Form of Consulting Agreement between the Company and Steven (1)
A. Newman.
10.5 -- November 30, 1994 Lease Agreement between Hyatt Plaza (1)
Limited Partnership and the Company.
10.6 -- March 22, 1996 Month-to-Month Tenancy Agreement between the (1)
Company and The Original Tollhouse Historical Preservation
Company.
10.7 -- October 27, 1994 Residential Deed of Lease between the (1)
Company and Frank E and Heather H. Moxley.
10.8 -- June 10, 1994 Rockwell International Corporation contract. (1)
10.9 -- January 5, 1996 Kopin Corporation contract. (1)
10.10 -- June 19, 1996 License Agreement for Mobile Inspector (1)
software.
10.11 -- 1996 Omnibus Stock Incentive Plan. (1)
10.12 -- 1997 Omnibus Stock Incentive Plan. (2)
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 (1)
Corporation.
10.16 -- Interim 90-Day Agreement with Kopin Corporation. (1)
10.17 -- Multicosm Ltd. Software Licensing Agreement. (1)
10.18 -- April 4, 1996 Electronic Surveillance Technologies (1)
Corporation VAR Agreement.
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 (1)
Security Agreement By and Between Fairfax Bank & Trust
Company and the Company.
10.22 -- December 10, 1996 Lease Agreement between Autumnwood (3)
Apartments and the Company.
10.23 -- September 10, 1996 Lease Agreement between the Company and (3)
South Beach Warehouse, LLC.
10.24 -- First Amendment to Office Lease Agreement between Hyatt (4)
Plaza Limited Ptr. and the Company.
10.25 -- Form of Agreement between Ed Nixon Davis and the Company. (4)
10.26 -- Form of Exclusive Licensing Agreement between Data Disk (4)
Technology, Inc. and the Company.
10.27 -- Form of Exclusive Licensing Agreement between SBS Vertrieb (4)
GmbH and the Company.
10.28 -- Form of Software Distribution Agreement between Multicosm (4)
LTD and the Company.
10.29 -- First Amendment to Office Lease Agreement between Hyatt (4)
Plaza Limited Partnership and Tech International of
Virginia, L.L.C.
</TABLE>
36
<PAGE> 53
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S> <C>
10.30 -- Second Amendment to Storage Space Lease Agreement between *
Hyatt Plaza Limited Ptr. and the Company.
10.31 -- Second Amendment to Office Lease Agreement between Hyatt *
Plaza Limited Ptr. and the Company.
10.32 -- Third Amendment to Office Lease Agreement between Hyatt *
Plaza Limited Ptr. and the Company.
27.1 -- Financial Data Schedule. *
</TABLE>
- ---------------
(1) Incorporated by reference in the initial filing of the Company's
Registration Statement on Form SB-2, No. 333-4156.
(2) Incorporated by reference in an amendment to the Company's Registration
Statement on Form SB-2, No. 333-65123.
(3) Incorporated by reference in the filing of the Company's 1996 Annual Report
on Form 10KSB, No. 0-15086.
(4) Incorporated by reference in the filing of the Company's 1997 Annual Report
on Form 10KSB, No. 0-15086.
* Filed herewith.
REPORTS ON FORM 8-K
The Company filed one Report on Form 8-K during the year ended December 31,
1998 in connection with the resignation of John Moynahan from his positions with
the Company effective June 3, 1998.
37
<PAGE> 54
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
XYBERNAUT CORPORATION
By: /s/ EDWARD G. NEWMAN
------------------------------------
Edward G. Newman
President, Chief Executive Officer
and Chairman of the Board of
Directors
Date: April 14, 1999
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Company and the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ EDWARD G. NEWMAN President, Chief Executive April 14, 1999
- ----------------------------------------------------- Officer and Chairman of the
Edward G. Newman Board of Directors
/s/ MAARTEN R. HEYBROEK Chief Operating Officer and April 14, 1999
- ----------------------------------------------------- Chief Financial Officer
Maarten R. Heybroek
/s/ KAZ TOYOSATO Executive Vice President April 14, 1999
- -----------------------------------------------------
Kaz Toyosato
/s/ GEORGE ALLEN, ESQ. Director April 14, 1999
- -----------------------------------------------------
George Allen
/s/ EUGENE J. AMOBI Director April 14, 1999
- -----------------------------------------------------
Eugene J. Amobi
/s/ KEITH P. HICKS Director April 14, 1999
- -----------------------------------------------------
Keith P. Hicks
/s/ STEVEN A. NEWMAN Director and Vice Chairman of April 14, 1999
- ----------------------------------------------------- the Board of Directors
Steven A. Newman
/s/ PHILLIP E. PEARCE Director April 14, 1999
- -----------------------------------------------------
Phillip E. Pearce
/s/ JAMES J. RALABATE Director April 14, 1999
- -----------------------------------------------------
James J. Ralabate
/s/ LT. GEN. HARRY E. SOYSTER Director April 14, 1999
- -----------------------------------------------------
Lt. Gen. Harry E. Soyster
</TABLE>
38
<PAGE> 55
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MARTIN ERIC WEISBERG Secretary and Director April 14, 1999
- -----------------------------------------------------
Martin Eric Weisberg
/s/ EDWIN VOGT Director April 14, 1999
- -----------------------------------------------------
Edwin Vogt
</TABLE>
39
<PAGE> 1
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:
<PAGE> 2
(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,
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
<PAGE> 3
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 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).
<PAGE> 4
(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).
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
<PAGE> 5
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 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
<PAGE> 6
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) ("Anti-Takeover
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> 7
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
<PAGE> 1
EXHIBIT 3.2
BYLAWS
of
XYBERNAUT CORPORATION
As adopted April 15, 1996
and
Amended on August 28, 1997
and
September 24, 1998
<PAGE> 2
XYBERNAUT CORPORATION
A DELAWARE CORPORATION
AMENDED AND RESTATED
BYLAWS
ARTICLE I
STOCKHOLDERS
SECTION I.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 I.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 I.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 I.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 I.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> 3
SECTION I.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 I.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 I.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;
<PAGE> 4
(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.
SECTION I.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 I.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
<PAGE> 5
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).
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
<PAGE> 6
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 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.
<PAGE> 7
(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 II.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 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 II.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.
<PAGE> 8
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 II.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 II.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 II.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
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
<PAGE> 9
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 II.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 II.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 III.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 III.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.
ARTICLE IV
RESIGNATIONS, REMOVALS, AND VACANCIES
SECTION IV.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 IV.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
<PAGE> 10
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 IV.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 V.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 V.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 V.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 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 V.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
<PAGE> 11
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 V.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 VI.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 VI.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 VI.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 VI.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 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
<PAGE> 12
SECTION VI.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.
<PAGE> 1
EXHIBIT 10.30
SECOND AMENDMENT TO STORAGE SPACE RENTAL AGREEMENT
THIS SECOND AMENDMENT TO STORAGE SPACE RENTAL AGREEMENT (this "Second
Amendment") is made and entered into this 28th day of August, 1998, by and
between HYATT PLAZA LIMITED PARTNERSHIP, a Virginia limited partnership (the
"Landlord") and XYBERNAUT CORPORATION, a Delaware corporation, formerly known
as Computer Products and Services, Inc. (the "Tenant"), with reference to the
following:
RECITALS
A. Landlord leased to Tenant certain Premises (as defined
therein) pursuant to the terms and conditions of that certain Office Lease
Agreement dated November 1, 1994 (the "Original Lease"), as amended by (i) that
certain First Amendment to Office Lease Agreement dated July 1, 1997 (the
"First Amendment") and (ii) that certain Second Amendment to Office Lease
Agreement dated April 30, 1998 (the "Second Amendment") (the Original Lease,
First Amendment and Second Amendment are hereinafter collectively referred to
as the "Lease").
B. Pursuant to that certain Storage Space Rental Agreement dated
as of January 15, 1997 (the "Original Agreement"), as amended by that certain
First Amendment to Storage Space Rental Agreement dated September 2, 1997 (the
"First Amendment") (the Original Agreement and First Amendment are hereinafter
collectively referred to as the "Agreement") by and between Landlord and
Tenant, Landlord leased to Tenant certain storage space more particularly
described therein in the building commonly known as Hyatt Plaza, 12701 Fair
Lakes Circle, Fairfax, Virginia 22033 (the "Building"). All capitalized terms
used herein unless specifically defined shall have the same meaning and
definition as used in the Agreement.
C. Landlord and Tenant desire to amend the Agreement as more
particularly described herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, Landlord and Tenant agree as
follows:
1. All capitalized terms used herein, unless specifically defined
herein, shall have the same meaning and definition as used in the Agreement.
2. Landlord and Tenant desire to extend the Term for an
additional five (5) year period (the "Extension Term"), commencing as of
October 1, 1998 (the "Extension Term Commencement Date") and expiring
co-terminously with the Lease.
3. Tenant agrees to accept the Storage Space for the Extension
Term in its "as is" and "where is" condition, and Landlord will have no
obligation to make any improvements or modifications to the Storage Space.
1
<PAGE> 2
4. Landlord and Tenant agree that the Base Rent for the Extension
Term shall be $7,505.50 per year ($624.46 per month), based on $8.50 per square
foot of Rentable Area in the entire Storage Space (883 rentable square feet),
subject to adjustment pursuant to Section 4.02 of the Agreement.
5. During the Extension Term, the Rental Adjustment Date defined
in Section 4.02 of the Agreement shall be changed to October 1st and the first
Rental Adjustment Date of the Extension Term shall be October 1, 1999.
6. Except as expressly modified by this Second Amendment, the
Agreement remains unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Second
Amendment as of the day and year first above written.
LANDLORD:
--------
HYATT PLAZA LIMITED PARTNERSHIP
a Virginia limited partnership
By: FAIR LAKES HYATT LIMITED
PARTNERSHIP, a Virginia limited
partnership, its general partner
By: Fair Lakes of Virginia, Inc., a Virginia
corporation, its general partner
By: /s/ MILTON V. PETERSON
---------------------------------
Name: MILTON V. PETERSON
----------------------------------
Title: PRESIDENT
---------------------------------
TENANT:
------
XYBERNAUT CORPORATION, formerly known as
Computer Products and Services, Inc.
a Delaware corporation
By: /s/ E. NEWMAN
---------------------------------
Name: E. NEWMAN
---------------------------------
Title: PRESIDENT
---------------------------------
2
<PAGE> 1
EXHIBIT 10.31
SECOND AMENDMENT TO OFFICE LEASE AGREEMENT
THIS SECOND AMENDMENT TO OFFICE LEASE AGREEMENT (this "Second
Amendment") is made and entered into this 30th day of April, 1998 (the
"Effective Date"), between HYATT PLAZA LIMITED PARTNERSHIP, a Virginia limited
partnership ("Landlord"), and XYBERNAUT CORPORATION, a Delaware corporation,
formerly known as Computer Products and Services, Inc. ("Tenant"), with
reference to the following:
RECITALS
A. Pursuant to the terms of that certain Office Lease Agreement
dated November 1, 1994 (the "Original Lease"), as amended by that certain First
Amendment to Office Lease Agreement dated July 1, 1997 (the "First Amendment")
(the Original Lease and First Amendment are hereinafter collectively referred
to as the "Lease"), by and between Landlord and Tenant, Landlord has leased to
Tenant certain premises, more particularly described therein. All capitalized
terms used in this Second Amendment shall, unless defined herein, have the same
meaning and definition as used in the Lease.
B. Landlord and Tenant have agreed to amend certain terms and
provisions of the Lease.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
agree as follows:
1. As of midnight on the Effective Date, Landlord and Tenant
shall reduce the size of the Premises by 2,283 square feet by removing that
certain portion of the Premises on the fourth (4th) floor of the Building (the
"Released Premises") as the same is more particularly described on Exhibit "A"
attached hereto and by this reference made a part hereof.
2. Tenant shall vacate the Released Premises as of the Effective
Date and shall leave the Released Premises in a broom clean condition. From and
after the Effective Date, Landlord and Tenant will be relieved and released
from any liability to the other arising under the Lease after the Effective Date
as the same relates solely to the Released Premises. Notwithstanding the
foregoing sentence, Tenant specifically acknowledges that (i) Tenant shall not
be released from and shall remain liable to Landlord for all Rent accruing
under the Lease prior to the Effective Date and (ii) Landlord reserves all
rights and remedies under the Lease for the non-payment of such Rent.
3. From and after the Effective Date, the following terms shall
have the following meanings:
(a) Premises: 7,276 rentable square feet located on
the first (1st) and fifth (5th) floors of the Building as the same is more
particularly shown on Exhibit "B" attached hereto and made a part hereof.
(b) Tenant's Proportionate Share: 2.92%
1
<PAGE> 2
4. Except as expressly modified by this Second Amendment, the
Lease remains unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Second
Amendment as of the day and year first above written.
LANDLORD:
--------
HYATT PLAZA LIMITED PARTNERSHIP
a Virginia limited partnership
By: FAIR LAKES HYATT LIMITED
PARTNERSHIP, a Virginia limited
partnership, its general partner
By: Fair Lakes of Virginia, Inc., a Virginia
corporation, its general partner
By: /s/ JAMES W. TODD
-----------------------------------
Name: James W. Todd
-----------------------------------
Title: VICE PRESIDENT
-----------------------------------
TENANT:
------
XYBERNAUT CORPORATION, formerly known as
Computer Products and Services, Inc.
a Delaware corporation
By: /s/ ED NEWMAN
-----------------------------------
Name: ED NEWMAN
-----------------------------------
Title: PRESIDENT
-----------------------------------
2
<PAGE> 3
EXHIBIT A
[MAP OF HYATT PLAZA FLOOR 4]
<PAGE> 4
EXHIBIT B
[MAP OF HYATT PLAZA FLOOR 1]
<PAGE> 5
EXHIBIT B
[MAP OF HYATT PLAZA FLOOR 5]
<PAGE> 1
EXHIBIT 10.32
THIRD AMENDMENT TO OFFICE LEASE AGREEMENT
THIS THIRD AMENDMENT TO OFFICE LEASE AGREEMENT (this "Third
Amendment") is made and entered into this 28th day of JULY, 1998 (the "Effective
Date"), between HYATT PLAZA LIMITED PARTNERSHIP, a Virginia limited partnership
("Landlord"), and XYBERNAUT CORPORATION, a Delaware corporation, formerly known
as Computer Products and Services, Inc. ("Tenant"), with reference to the
following:
RECITALS
A. Pursuant to the terms of that certain Office Lease Agreement
dated November 1, 1994 (the "Original Lease"), as amended by (i) that certain
First Amendment to Office Lease Agreement dated July 1, 1997 (the "First
Amendment") and (ii) that certain Second Amendment to Office Lease Agreement
dated April 30, 1998 (the "Second Amendment") (the Original Lease, First
Amendment and Second Amendment are hereinafter collectively referred to as the
"Lease"), by and between Landlord and Tenant, Landlord has leased to Tenant
certain premises, more particularly described therein. All capitalized terms
used in this Third Amendment shall, unless defined herein, have the same
meaning and definition as used in the Lease.
B. Landlord and Tenant have agreed to amend certain terms and
provisions of the Lease.
NOW, THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant
agree as follows:
1. As an exercise of Tenant's Renewal Option provided for in
Article 3 of the Lease, Landlord and Tenant hereby extend the Term for an
additional five (5) year period (the "Renewal Term"), commencing as of October
1, 1998 (the "Renewal Term Commencement Date") and expiring September 30, 2003
(the "Renewal Term Expiration Date").
2. Landlord and Tenant hereby agree to expand the Premises by
adding an additional 5,683 square feet of Rentable Area located on the fifth
(5th) floor of the Building (3,027 square feet known as the "Tech International
Space" and 2,656 square feet known as the "Training Room Space", collectively
the "Expansion Space", as the same is more fully described and set forth on
Exhibit "A" attached hereto and made a part hereof by this reference). Landlord
and Tenant acknowledge and agree that the commencement date with respect to the
Expansion Space shall be deemed to occur upon the Renewal Term Commencement
Date. The Expiration Date with respect to the Expansion Space shall be the
Renewal Term Expiration Date.
3. As of the Renewal Term Commencement Date, the Base Rent for
the Renewal Term (including the Expansion Space) shall be $312,188.25 per year
($26,015.69 per month) which is computed as follows:
(i) 1,654 square feet on the first (1st) floor shall be
computed at the rate of $23.00 per square foot of Rentable Area, or
the sum of $38,042.00 per year ($3,170.17 per month) (the "First
Floor Base Rent").
1
<PAGE> 2
(ii) 11,305 square feet on the fifth (5th) floor (5,622
square feet of existing space and 5,683 square feet of Expansion
Space) shall be computed at the rate of $24.25 per square foot of
Rentable Area, or the sum of $274,146.25 per year ($22,845.52 per
month) (the "Fifth Floor Base Rent").
4. On each annual anniversary of the Renewal Term Commencement
Date, the Base Rent shall be increased by three and a half percent (3.5%) (the
"Renewal Term Adjustment Factor").
5. Tenant agrees to accept the Premises and Expansion Space for
the Renewal Term in its "as is" and "where is" condition, and Landlord shall
have no obligation to make any improvements or modifications to the Premises or
to the Expansion Space.
6. As of the Renewal Term Commencement Date, (i) the Base
Operating Expenses Amount shall be the Operating Expenses, as defined in the
Lease, for Calendar Year 1999; and (ii) the Base Real Estate Taxes Amount shall
be the Real Estate Taxes, as defined in the Lease, for Calendar Year 1999.
7. From and after the Renewal Term Commencement Date, the
following terms shall have the following meanings:
(a) Premises: 12,959 rentable square feet located on
the first (1st) and fifth (5th) floors of the Building as the same is more
particularly shown on Exhibit "A" attached hereto and made a part hereof.
(b) Expiration Date: September 30, 2003
(c) Tenant's Proportionate Share: 5.20%
(d) Base Rent: $312,188.25 per year ($26,015.69 per
month).
(e) Base Operating Expenses Amount: The Operating
Expenses, hereinafter defined, incurred by Landlord during the Calendar Year
1999.
(f) Base Real Estate Taxes Amount: The Real Estate Taxes,
hereinafter defined, incurred by Landlord during the Calendar Year 1999.
(g) Adjustment Factor: 3.5%
2
<PAGE> 3
8. Except as expressly modified by this Third Amendment, the
Lease remains unchanged and in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Third
Amendment as of the day and year first above written.
LANDLORD:
--------
HYATT PLAZA LIMITED PARTNERSHIP
a Virginia limited partnership
BY: FAIR LAKES HYATT LIMITED
PARTNERSHIP, a Virginia limited
partnership, its general partner
By: Fair Lakes of Virginia, Inc., a Virginia
corporation, its general partner
BY: /s/ MILTON V. PETERSON
----------------------------------------
Name: MILTON V. PETERSON
----------------------------------------
Title: PRESIDENT
----------------------------------------
TENANT:
------
XYBERNAUT CORPORATION, formerly known as
Computer Products and Services, Inc.
a Delaware corporation
By: /s/ E. NEWMAN
---------------------------------------
Name: E. NEWMAN
---------------------------------------
Title: PRESIDENT
---------------------------------------
3
<PAGE> 4
EXHIBIT A
[MAP OF HYATT PLAZA FLOOR 5]
<PAGE> 5
EXHIBIT A
[MAP OF HYATT PLAZA FLOOR 1]
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001013148
<NAME> XYBERNAUT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 924,469
<SECURITIES> 0
<RECEIVABLES> 320,251
<ALLOWANCES> (91,131)
<INVENTORY> 1,347,668
<CURRENT-ASSETS> 2,875,680
<PP&E> 1,072,572
<DEPRECIATION> (610,188)
<TOTAL-ASSETS> 4,411,588
<CURRENT-LIABILITIES> 3,663,877
<BONDS> 0
0
182,378
<COMMON> 213,597
<OTHER-SE> 351,736
<TOTAL-LIABILITY-AND-EQUITY> 4,411,588
<SALES> 873,586
<TOTAL-REVENUES> 875,560
<CGS> 2,274,455
<TOTAL-COSTS> 14,020,658
<OTHER-EXPENSES> (33,610)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,032
<INCOME-PRETAX> (13,111,488)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,111,488)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,111,488)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.74)
</TABLE>
