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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, 1999
[ ] 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, $0.01 par value
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 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-KSB: [ ]
State issuer's revenues for its most recent fiscal year: $3,340,272
The aggregate market value at March 14, 2000 of the Common Stock of the
issuer, its only class of voting stock, was $842,505,431 of which $741,625,710
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 at March 14,
2000 was 36,730,482.
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 computing and
communication systems along with related software solutions designed to enhance
personal productivity and improve the accuracy, timeliness and utilization of
captured data. The Company's current mobile computing and communications product
is the Mobile Assistant(R) IV (MA IV(R)) model.
The MA IV is a wearable Pentium(R) PC which combines the speed, memory,
processing, multimedia and communications capabilities of a desktop personal
computer ("PC") in a lightweight, user-supported unit with hands-free operation
and simultaneous user mobility. The MA IV is a combination of hardware and
software designed to be worn on the body to perform complex and time consuming
tasks such as remote video teleconferencing, installation, 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, or military field operations.
The MA IV incorporates technologically advanced optional features such as
real-time, two-way video and audio communications through radio frequency
transmissions or integrated cellular linkups, global positioning system tracking
capabilities and access to information through the Internet and World Wide Web.
The head-mounted display ("HMD") unit includes a two-way audio system and
optional built-in video camera, weighs approximately l5 ounces and presents a
desk-top quality full VGA color image that is approximately equivalent to that
of a 15" VGA monitor at a distance of two feet. An optional light-weight, 6.4
inch, full VGA color, flat panel display ("FPD"), with integrated digitizer, is
offered for users who either do not desire an HMD, do not need to be hands-free
to perform their job, or need to capture signatures and other forms-related
data. 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 95, 98, Windows
NT(TM), DOS, SCO UNIX(R) and LINUX.
The Company currently offers a multi-media development toolkit and the
linkAssist(TM) software package, which is designed to get user documentation up
and running on the Mobile Assistant(R), or any PC, quickly by providing a
windows-style graphical user interface ("GUI") and the ability to link data
stored in most formats in most locations without disturbing the original data.
This software can also be used on conventional desktop or laptop computers and
features automatic speech enablement of hyperlinks across platforms, formats,
and media. The Company has also established a professional services group to
provide custom solutions development for its customers and to provide needs
assessment and implementation assistance for solutions involving wearable
applications.
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 for investor inquiries 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 that could cause
actual results to differ materially from those discussed in the statement. Such
forward-
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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
There has been an ongoing evolution to personalize the computer by moving
it physically closer to the user, from mainframes, to distributed systems, to
desktops, to notebooks and now to wearable systems. 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. In
addition, the rapid growth in the World Wide Web of the Internet has resulted in
computers increasingly being used as communication tools as well as computing
tools. Advances in wireless communications have accelerated this convergence of
computing and communications as cell phones and personal digital assistants
("PDAs") have added computing or wireless communicating capabilities to serve as
such convergence devices for mobile use. Wireless local area networks ("LANs")
now operate at sufficient speeds to allow the Company's MA IV to function as
"just another node on the network" by running existing desktop applications in a
wireless mode on a network with little to no modification.
The Company believes that users looking for mobile computing and
communications capabilities through cellular phones, pagers, PDAs, portable
email devices and portable computers will increasingly demand that one device
provide these capabilities rather than the many devices that are currently
required. The Company believes that its wearable PC products are uniquely suited
to meet this demand, that limited-capability or special-purpose devices will
eventually be replaced by wearable PCs that provide consistent interfaces and
full functionality no matter whether they are used in an office, travel, home or
automobile environment. The Company believes that the potential to develop a
substantial market for its mobile computing and communication hardware and
software products is demonstrated by the substantial historic and projected
growth in all forms of mobile computing and communication devices.
In conjunction with this personalization of hardware has come a
personalization of software to provide the user with the information they need
to perform the task at hand and the expansion of Enterprise Resource Planning
("ERP") systems that extend computing capabilities across an organization, not
just within certain functions of the organization. A recent study by IDC on
wearable computers stated that approximately half of the workers at large U.S.
companies do not work at a fixed location and do not have access to their
company's information technology as they move around. A study by the Gartner
Group concluded that 137 million workers worldwide do not work at a fixed
location. The Company believes that its products and services are ideally
positioned to provide information access to this pool of workers, and allow the
companies in this situation to leverage their existing investment in information
technology to this "other half" of their workforce. Further, the Company
believes that its products and services are also ideally suited to capture the
growing consumer interest in computing and communications devices.
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BUSINESS STRATEGY
The Company's objective is to be the leading provider of hands-free mobile
computing and communication systems, along with related solutions and software
to enhance productivity in a wide variety of applications. To achieve this
objective, the Company intends to pursue the following strategies:
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 and communications solutions 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 developing new hardware and
software products. Consistent with this strategy, the Company will continue to
focus on the integration of hands-free mobile computing hardware with internally
developed, licensed or acquired software applications and hardware products. To
leverage these core competencies, the Company has established a number of
strategic alliances and intends to continue to have its strategic partners play
a significant role in executing the Company's manufacturing, service, sales and
marketing functions, under close coordination with Company management. The
Company intends to remain focused, able to react quickly to market needs and
world economic changes. The Company believes that this structure will allow the
Company to expand its revenues without the need to add internal resources in
direct proportion to increases in revenues.
DEVELOP AND STRENGTHEN STRATEGIC ALLIANCES. The Company has established
and intends to continue to establish strategic alliances with world-class
partners to provide the execution capabilities required by the Company in such
areas as product development, manufacturing, sales, distribution and marketing.
The benefits that the Company receives from these associations include access to
a larger potential customer base, complementary technologies, reduced capital
investment through utilization of outside resources, and access to manufacturing
expertise and efficiencies of world-class manufacturers.
The Company has entered into distribution and support agreements with En
Pointe Technologies, Academic Distributing, PAMAS and D&H Distributing.
Additionally, large systems integrators, such as DynCorp, provide both
implementation support for Xybernaut customers worldwide as well as 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 these marketing and supporting strategic relationships, the
Company has signed agreements and is executing additional relationships with
organizations such as the Softwarezentrum Boeblingen/ Sindelfingen e.V. (SBS) in
Europe with over 30 software companies serving as a development center for
Linux, speech and wearable applications, and companies in the USA and Asia for
development and field testing of application-specific solutions for industry.
STRENGTHEN PATENT AND INTELLECTUAL PROPERTY. The Company has developed a
portfolio of over 470 patent applications granted or pending worldwide as the
base for its intellectual property for wearable computing and communications and
related software solutions (see "Patents"). The Company intends to continue
building and strengthening this portfolio, which it considers to be one of its
most significant assets and potential revenue sources.
PROVIDE CUSTOM SOFTWARE SOLUTIONS FOR DIVERSE CUSTOMER NEEDS. The Company
intends to continue acquiring, developing or licensing software that enables its
customers to more rapidly create customized software applications for use with
the Mobile Assistant Series and on conventional PCs. This software will be
designed to provide prepackaged application expertise that incorporates the end
user's existing programs, procedures and technical documentation to the greatest
extent possible. 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 USING SELECTED CHANNELS. The Company intends to
continue penetrating its target markets through its direct sales force,
licensing and the effective use of VARs (Value-Added Resellers), ISVs
(Independent Software Vendors) and distributor channels that demonstrate
comprehensive
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market knowledge in their sectors. The objective of the direct sales force is to
establish initial sales and relationships with customers and then turn them over
to the appropriate outside channel for development. The Company believes that by
combining the established customer base of VARs, ISVs, and distributors with the
benefits provided by the Company's products and services, sales can be
accelerated much faster than by using a direct sales force alone. Through the
use of its strategic partners, the Company intends to leverage internal
marketing and sales resources to achieve more rapid foreign and domestic market
penetration. 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 world wide sales. These
reference accounts will also provide the Company's research and development
organization with valuable direct feedback from customers for future product
development. The Company expects large computer and equipment manufacturers will
desire to enter the wearable or user-supported computing marketplace, and that
it will have numerous opportunities to license its 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
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 time, effort and resources expended in developing
the Mobile Assistant 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 Series
will continue to provide a full range of computing and communications
capabilities, such as two-way wireless video communication and access to the
Internet, intranets, remote databases and other computerized reference
resources. The Company also intends to pursue joint developments with its
strategic partners and licensing of its intellectual property to build and
market new technology. The current MA IV Series, for example, was the result of
the Company's successful relationships with Fujitsu, Sony Digital Products,
Hitachi, Shimadzu, Toshiba, JAE and NEC, all under the direction of the
Company's 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. This open approach
has allowed the Company to readily incorporate state-of-the-art wireless
communications, GPS, sensor and other capabilities as soon as they are available
for use in laptops, especially when these capabilities are provided using
industry-standard PCMCIA cards. In addition, this strategy has allowed the
Company to take advantage of developments in operating systems, such as new
generations of Windows and Linux, and applications software, such as speech.
PRODUCTS AND PRODUCT DEVELOPMENT
In order to address the market for body-worn mobile computing and
communication systems, the Mobile Assistant Series has been designed to provide
hands-free wearable operation of computing and communications capabilities on a
"when-needed, where-needed" basis. The hardware used in the MA IV features:
- Intel Pentium(R) processor with 512 KB Level Two (L2) cache, Synchronous
DRAM (SDRAM) currently ranging from 32 Megabytes (MB) to 192 MB, an
internal hard disk of up to 8.1 Gigabytes (GB) with a complete array of
USB, serial, parallel, monitor, keyboard, power and replicator ports.
- Protected internal dual PCMCIA (PC Card) readers, a sealed enclosure to
allow use in a wide range of environmental conditions,
advanced-technology, hot-swappable lithium-ion battery and charger,
integrated pointing device, built-in sound system for speech recognition
and generation, and a wrist-mounted miniature keyboard.
- Head Mounted and/or Flat Panel Displays with a head-mounted camera to
allow for real-time, two-way audio/video teleconferencing. The MA IV uses
a lightweight HMD with 640 X 480 pixels (VGA
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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. The
Active Matrix Liquid Crystal Display (AMLCD) used in the head mounted
display is currently approximately one square inch in size and uses
advanced optics to present an image to the user that is equivalent to a
15" desktop monitor at a distance of two feet. The MA IV uses an optional
light-weight, 6.4 inch, full VGA color 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.
- Mini-port replicator for mobile use and a full port replicator for
complete desk-top functionality.
- Compatibility with MS-DOS, Windows 3.11, Windows 95 and 98, Windows NT,
SCD, UNIX and LINUX operating systems.
The Mobile Assistant Series are full-featured PCs that can be readily used
as a desktop PC and can incorporate 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, test and sensor equipment.
HANDS-FREE CONTROL. From the origination of the concept for wearable
computers, the Company has believed that hands-free control of the computer is
essential to realizing the maximum benefits of wearable computing and
communications. The original method of hands-free control was speech
recognition. The Mobile Assistant supports state-of-the-art speech recognition
software and hardware to allow for hands-free operation using spoken commands in
most languages. The combination of voice recognition and body-worn displays
provide the user of the Mobile Assistant 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. User-independent speech generally requires
little or no training and is ideal for command-and-control applications to
operate the computer from menu-driven software. User-dependent speech systems
generally require some training to provide for a wider usable vocabulary and the
ability to offer dictation. The MA IV currently comes with IBM Via Voice(R) but
can operate most user-dependant and user-independent software systems designed
for PC use. The selection of which speech system to use is generally driven by
the application requirements. In addition to speech control, the Company has
included brain-wave activation, eye tracking and motion tracking in its patents
as alternative approaches to speech for hands-free control.
FLAT PANEL DISPLAY. The MA IV uses an optional light-weight, 6.4 inch,
full VGA color FPD with integrated digitizer. It is offered for users who do not
desire an HMD or do not require full hands-free operation. The FPD can also be
speech-activated and contains a built-in speaker.
COMPUTER SOFTWARE FOR MOBILE, BODY-WORN AND DESK-TOP USE. Currently, the
Company offers linkAssist, which is 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. The Company's linkAssist software
allows users to quickly and easily link information together regardless of the
format of the data or where it is stored, avoiding the need to change, convert
or re-enter and verify the existing information in any manner, or to use the
detailed HTML tagging process. The linked words or phrases can then be activated
by voice automatically, with no development work required by the author of the
documentation or databases, allowing a subject-matter expert to develop
applications with little training. In addition to linkAssist, the Company offers
a multi-media development (MMD) kit, which allows customers to develop
applications using video, audio, text and graphics.
DEVELOPMENT OF FUTURE PRODUCTS. The Company's approach to development of
future products is to establish functional requirements, specifications and
design criteria internally, then to take those criteria to potential development
partners under non-disclosure agreements to evaluate the ability of that
development partner to meet the Company's needs. The Company is in discussions
with IBM and a number of other world-class technology companies regarding
collaboration on its next-generation of wearable computers. The Company's
selection criteria for partners to develop this next-generation will be based on
pricing, the ability to provide reliable, advanced technology, production
capacity and reputation in the worldwide markets for
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technology products. It is expected that future products will allow the Company
to directly address segments of the consumer market.
MARKETING AND SALES
MARKETS
The Company's current marketing efforts are designed to increase awareness
of, and demand for, its products in the commercial, industrial and military
markets while establishing a base for the Company's plans to enter consumer
interests. The following are examples of selected horizontal and vertical
markets that are being 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 Series and its other products. There are many sources
of savings available from use of the Mobile Assistant Series and the
Company's other products in maintenance and repair operations. For example,
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 industries such as manufacturing,
transportation, aerospace, telecommunications, automotive, construction,
power generation, health services, agriculture and the military.
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. 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 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 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 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. 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 ("telemedicine"), 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, transportation, fire protection,
emergency services, inspection and control of national borders.
EDUCATION. The Company believes that its mobile computing systems are
well suited for educational applications. The Mobile Assistant is
especially suited for distance learning as well as 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 current and 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 have 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. For example, the
United States Army has purchased the Mobile Assistant and has tested its use in
the maintenance and repair of the AH64 Apache Attack helicopter and M1A1 battle
tank. 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. Operating and performance data can be downloaded directly from the
Apache, and the Mobile Assistant 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 to simulate 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 to the United States Military, 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 and
services from other companies to form integrated information systems, the
Company believes that it is more effective to sell through distributors, systems
integrators, industrial and commercial equipment manufacturers, independent
software vendors and VARs with defined market niche expertise and presence, as
well as directly to end users. In conjunction with the introduction of the MA
IV, the Company established arrangements with specialized distributors for
higher volume distribution of the MA IV. The Company believes that by forming
relationships with these partners the Company can then reach end users more
rapidly in a variety of industries while minimizing the internal resources
required to reach these end users.
The Company has offered detailed in-house training sessions to prepare and
update personnel for field sales and training. In addition, the Company has
developed 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
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marketing and service partners. The fulfillment of orders will be accomplished
mainly through distribution partners, regardless of which entity effects the
actual sales.
SALES AND BACKLOG
As of December 31, 1999 the Company had a negligible backlog of orders.
While the Company had several blanket purchase orders from customers outstanding
at that time, it does not include these amounts in backlog until specific orders
are received under these blanket purchase orders. Given the Company's current
inventory position, most orders are filled within a short period after the
receipt of the order and management does not feel that backlog is an appropriate
measure of demand at this time. Customers who have placed orders in the past
include, among others, Boeing, Lucent, Niagara Mohawk, DaimlerChrysler, Dyncorp,
BOC Gas, NTT (Nippon Telegraph and Telephone), 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 a
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 the Mobile Assistant.
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.
KEY SUPPLIERS
The Company has entered into design, production, supply and support
agreements with many companies in the USA and overseas for, and in support of,
its products. They include Fujitsu, Sony Digital Products, Hitachi, Shimadzu,
JAE, Toshiba, NEC, Multicosm, IBM, Hokubu Tsushin, the SBS, and others (See
"Production").
Although the Company believes there are multiple sources for many parts and
components, the Company currently depends heavily on its 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 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 could have a material adverse effect on the Company's
results of operations. Any future shortage or limited allocation of components
for the Company's products could have a material adverse effect on the Company.
PRODUCTION
The Company commenced fullscale 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
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developed and manufactured a color HMD for use with the MA IV. Most of the parts
and components for the Mobile Assistant are existing PC components that are
available in high quantity from multiple vendors.
WARRANTIES
The Company currently provides customers with warranty terms that are
competitive with those of the local market. In the U.S., the warranty is
generally one year for parts and six months for labor. Warranty services for the
MA IV is an integrated offering by several vendors. Our distribution partners
are generally responsible for user and software support. The Company currently
provides call center support internally but intends to outsource its call-center
support to a third party service firm.
COMPETITION
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 Series, including CDI, Teltronics, Inc. (a subsidiary of
Interactive Solutions Inc.), ViA Inc., Texas Microsystems, Telxon, Symbol,
Norand, Raytheon and others. The Company believes that as the markets for mobile
computing and communications converge, that its competitors will consist of
these companies as well as companies that offer mobile computing devices with
wireless communications capabilities and from companies that offer wireless
communications devices with computing capabilities. Companies with mobile
computing devices that are adding wireless communications capabilities include
Palm, Inc., a subsidiary of 3 Com, and manufacturers of notebook and handheld
computers such as Fujitsu, Mitsubishi, Toshiba, Compaq, and Sharp. Companies
with wireless communications devices that offer computing capabilities include
Motorola, Nokia, and Ericsson. Some of these devices 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 Series is directed. There can be no
assurance the Company will be able to compete successfully against its
competitors, or competing products, or that the competitive pressures faced by
the Company will not adversely affect its financial performance. However, the
Company believes that the entry into the market for wearable PCs by reputable,
large computer and communications manufacturers will accelerate the validation
of the market for wearable PCs. In addition, the Company believes that its
intellectual property and patent position is such that the Company is in a
strong position to command royalties from such companies.
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 a number of trademarks on the Principal Register of the United States
Patent and Trademark Office ("Patent Office"), including its Mobile Assistant
and Xybernaut trademarks, and with the patent and trademark offices in several
other countries.
In addition, the Company has a total of 25 patent applications in the
United States, with thirteen patents granted and twelve patents pending, and
over 450 corresponding applications granted or pending in over 26 countries
outside the United States, for a total of over 470 patent applications granted
or pending worldwide. Of the patents granted in the United States, four are
design patents that cover a specific design of a wearable system or its
components and the remaining nine are utility patents that cover the concepts in
the patents regardless of specific execution or design. The Company believes
that these patents are a valuable asset of the Company and will present
significant opportunities for royalty revenues in the future. The most
significant utility patents for the Company are described below. All inventions
made by employees of the Company, including those described below, are assigned
to the Company by agreement with the employee upon the initiation of employment
with the Company. The Company retains full title to these patents regardless of
the
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inventor's employment status with the Company. The sections in quotations below
are taken directly from the relevant patents. Complete detail on the patents can
be found on the U.S. Patent Office website at http://www.uspto.gov, then
searching by patent number or by "Xybernaut."
U.S. PATENT 5,305,244, "HANDS-FREE, USER-SUPPORTED PORTABLE
COMPUTERS." The application was made on April 6, 1992 and the patent was issued
on April 19, 1994. This patent describes "A compact, self-contained computing
apparatus is provided which is completely supported by a user for hands-free
retrieval and display of information for the user." This patent has been
successfully upheld in two challenges to the validity of the patent
(re-examination) at the Patent Office that were initiated by a competitor of the
Company.
U.S. PATENT 5,844,824, "HANDS-FREE PORTABLE COMPUTER AND SYSTEM." The
original application was made on October 2, 1995 and the patent was issued on
December 1, 1998. This patent describes "a body-worn, hands-free computer
system. The system does not rely upon a keyboard input or activation apparatus
but rather has various activation means all of which are hands-free. The system
can be used with other systems, other system components and communication
apparatus. Also, various components of the present system can be body worn or
placed in a disconnected location if desired." Specifically, this patent covers:
- A NUMBER OF HANDS-FREE ACTIVATION MEANS, including speech, eye-tracking,
head tracking, arm tracking, muscle and brain-wave activation;
- WIRELESS COMMUNICATIONS AND COMPUTING, "wherein said computer apparatus
has means for communicating and interacting with a communication means
selected from the group consisting of cellular telephones, hard line
telephones, infrared transceivers, two-way radio means and mixtures
thereof;"
- A VARIETY OF MODES OF OPERATION, from having the display, computer and
activation means in one housing worn by the user, to having a number of
users with head-mounted displays with a wireless connection to a single
computer to form a local area network for workgroups;
- WIRELESS NETWORKING AND INTERNET ACCESS, "It goes without saying that the
mobile computer of this invention may be interfaced with or used in
connection with any desired computer local networks such as Novel, Banyan
or Arcnet or wide area networks such as "Internet' or the like;"
- INTEGRATED VOICE/DATA OPERATION, "This [feature] allows for the passing
of voice input signals from the apparatus of this invention through to
the telephone system while maintaining voice-activated computer control
of the telephone system. The interface may be integrated within the
computer apparatus of this invention, attached to it during manufacture
or user installed. This approach provides seamless switching between
voice and data transmission and reception between one or more distant
locations without distracting from the task being performed by the
individual using the computer apparatus of the present invention;"
- DIFFERENT TYPES OF PROCESSOR, "It will be appreciated by those of
ordinary skill in the art that while an Intel 80386 or faster processor
is preferred, any other central processor or microprocessor, either
available presently or in the future, could be used;"
- DIFFERENT TYPES OF DISPLAY TECHNOLOGIES, "Those having ordinary skill in
the art will appreciate that the display screen 110 and display screen
driver module 214 can be implemented using any video technology either
available presently or in the future;"
- VIRTUAL REALITY APPLICATIONS, "While the preferred display screen is a
single screen positioned in front of the left or right eye, a binocular,
head-mounted display (HMD) having two or more screens can be used. This
can be immersive (all top and side visions obscured so that the user can
only see the images on the screens) or as part of the user's vision so
that the user can look over or under the displays. Such devices have
utility in the new technology of virtual reality or where stereoscopic
viewing is needed to relate to the displayed information;"
- FULL VIDEO CAPABILITIES, including remote teleconferencing: "Video Camera
273 contains a miniature video camera capable of high resolution output.
The camera may be monochrome or color capable
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producing conventional NTSC television signals or higher resolution scans
as required by a specific application. Video Interface Module 274
contains circuits for video frame or motion capture, enhancement,
compression and output to the computer Bus 253;" and
- MEDICAL AND HANDICAPPED USE, "Medical Device Controller 275 contains any
one of many specialized medical devices designed to perform medical
procedures or patient therapy. Such devices include muscle stimulators,
bed positioning control, emergency call device and any of various medical
units that would perform activities or sense and monitor a patient's
bodily status and function for the patient in a hands-free environment."
U.S. PATENT 5,948,047, "DETACHABLE COMPUTER STRUCTURE." The original
application was made on August 29, 1996 and the patent was issued on September
7, 1999. U.S. PATENT 5,999,952, "CORE COMPUTER UNIT." The original application
was made on January 20, 1998 and the patent was issued on December 7, 1999. U.S.
PATENT 6,029,183, "TRANSFERABLE CORE COMPUTER." The original application was
made on August 15, 1997 and the patent was issued on February 22, 2000.
These three issued patents, and others pending, cover various aspects of
what the Company calls "core computing," or the use of a small device about the
size of a current PDA that contains a processor, non-volatile storage and other
components that docks into various enclosures to function as a notebook,
desktop, home, wearable computing/communicating device, automobile or embedded
computer. This core computer allows the user to always have his or her preferred
operating system, graphical user interface, applications software and data
available in almost any environment without the need to synchronize these items
among multiple computers in multiple locations. For example, whether the user is
answering email at home, in the office, in a car or while walking around, the
same email settings, wireless communication settings, address book, past emails
and email strings would be available in each of these environments. A field
technician would be able to keep technical information, communication settings,
daily work logging, etc., available whether the technician was on top of a
telephone pole, in a service truck, in the office, or at home.
The Company believes that users will increasingly demand a single device to
handle their range of computing, communications, and task needs such as
schedules, telephone numbers, or to-do lists, rather than having separate PDAs,
notebook computers, cellular telephones, pagers, etc., to handle these
functions. By separating the computing functions from the input and output
functions, the core computing concept allows for standard cores to be
mass-produced at a low cost, and allows the functionality of the enclosure to be
tailored to the environment, applications requirements and the desired price
level. The rate of obsolescence is substantially higher for the elements within
the core, namely the processor and the nonvolatile storage, than for the
input/output devices, such as monitors, CD-ROMs, keyboards, and modems. This
approach allows the user to upgrade the processor and storage capabilities of
the computer without having to replace other functions typically integrated
within a desktop or a laptop computer today. In this matter, the core computer
becomes a truly "personal computer" for the user.
The Company believes that initially the core computer will interface with
the enclosures by means of physical contact. Eventually, the Company believes
that the interface with the enclosures and the user's environment will be done
by radio frequency signals, such as those proposed for the Bluetooth wireless
standard developed to connect computing devices. These developments position the
Company with the products and intellectual property to be at the forefront of
the pervasive computing movement, in which the users have the ability to
constantly interact with their environment and represents the complete
convergence of communications and computing capabilities.
For example, travelers could insert their core computer into an enclosure
in the bed stand of their hotel room upon arrival. The core would then interact
with the hotel computer so the room can be set to the preferred temperature
setting, order room service, and arrange for a wake-up call. In addition, the
room computer could ask if the traveler wanted the next day's plane reservations
confirmed, then check the airline's web site to confirm the flight and the
traveler's reservations. The core could then obtain directions to the locations
of scheduled meetings in the area and interact with the hotel computer system to
provide a list of recommended restaurants, entertainment events, or sporting
events for the traveler. The traveler might then take the core in a rented
enclosure with an integrated global positioning system and take a guided tour of
the
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city, directing the traveler to the location of preferred restaurants or
entertainment events, provide history or background, or allow the traveler to
view listings of companies within the city, sorted by various criteria, to
develop potential list of sales prospects.
In this pervasive computing concept, the Company believes that users will
demand a consistent interface regardless of whether the user is computing,
communicating, or interacting with the environment. The various interfaces,
settings, and limits on Web sites or graphical content that can be presented by
the variety of devices on the market today present a hindrance to use as the
user must constantly adjust settings for the different environments, or carry
multiple devices to handle different situations. The Company believes that the
wearable and core concepts alleviate this problem by providing a single device
that can be used to accommodate all of the user's requirements.
The Company has notified several of its competitors of the existence of one
or more of its patents, which the Company's counsel believes may have been
infringed. The Company intends to take any and all appropriate measures,
including legal action, necessary to maintain and enforce its rights under the
patents held by the Company and to recover any damages suffered as a result of
any alleged infringement.
Most of the Company's revenue for the year ended December 31, 1999 and 1998
was derived from the sale of products included within the scope of the patents.
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, 1999
and 1998 and were $2,462,752 and $2,870,808 respectively. These expenditures
consist primarily of personnel engaged in the research and design of new
hardware products, test components, consulting fees, equipment and purchased
software costs required to conduct the Company's development activities.
The Company expects that as it shifts more of the applied research to its
partners, and focuses instead on basic research to and the establishment of
product requirements and specifications, it will not require increases in
research and development expenditures commensurate with the level of new product
development and introduction. During the second half of fiscal 1999, research
and development expenditures declined over the first half of fiscal 1999 and
last half of fiscal 1998, as the MA IV was finalized during those earlier
periods in design and development activities for the Company's next generation
of products had not yet begun.
EMPLOYEES AND CONSULTANTS
As of December 31, 1999, the Company had 78 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, 5 are executive officers, 20 are technical and
administrative support employees, 18 are engaged in research and development,
and 35 are engaged in sales, marketing and
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customer service. 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. Company employees manage the affairs of the Company and
direct the Company's partners for manufacturing, sales and customer support.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's U.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.
The Company's European facility consists of 856 square feet of office space
located at the SBS Software Center, Otto Lilienthal Strasse 36, D-71034
Boblingen, Germany. The Company's current lease is for a three-year term
expiring on August 31, 2001 with options for up to an additional four years. The
lease requires monthly rent of $944.
The Company's Japanese facility consists of 2,908 square feet of office
space located at Urbansquare, 1-1 Sakae-cho Kanagawa-ka, Yokohama, Japan. The
Company's current lease is for a two-year term expiring September 30, 2001. The
lease requires monthly rent of $10,936.
ITEM 3. LEGAL PROCEEDINGS.
On March 19, 1998, Matrix Corporation ("Matrix") filed a complaint 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 an
agreement between the two companies concluded in December 1997 (the "December
Agreement"), and that the Company should return all goods shipped by Matrix
under both the December Agreement and a prior agreement concluded in June 1997
(the "June Agreement"). The Company and its legal counsel filed a counterclaim
against Matrix stating that Matrix failed to perform to the requirements of both
the June Agreement and the December Agreement and that the Company has been
damaged by this failure to perform. The trial for the case was completed in
August 1999 and on September 22, 1999 the District Court rendered a judgment
against the Company. The Company paid approximately $875,000 to Matrix in the
quarter ending December 31, 1999, in full settlement of this legal proceeding
and, as part of the settlement, received approximately 150 systems and
components for its 133P model. At December 31, 1999, the Company accrued
$150,000 in legal fees incurred in connection with this lawsuit. These amounts
are included in the Company's general and administrative expenses in the related
periods.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting held on December 28, 1999, the following
items were submitted to a vote by the common stockholders and were approved by
the following majority votes:
1. The election of four persons to serve as Class II directors of the
Company for a term of three years and until their successors are duly
elected and qualified. The election of Eugene J. Amobi was approved with
approximate votes of 24,400,000 shares "for," 250,000 shares "against"
or "withheld," and 10,000 shares "abstained." The election of Phillip E.
Pearce was approved with approximate votes of 24,600,000 shares "for,"
75,000 shares "against" or "withheld," and 10,000 shares "abstained."
The election of Lt. Gen. Harry E. Soyster (Ret.) was approved with
approximate votes of 24,600,000 shares "for," 75,000 shares "against" or
"withheld," and 10,000 shares "abstained." The election of Dr. Edwin
Vogt was approved with approximate votes of 24,600,000 shares "for,"
75,000 shares "against" or "withheld," and 10,000 shares "abstained."
2. An amendment to the Company's Certificate of Incorporation to increase
the number of authorized shares of common stock, par value $0.01 per
share, from 40,000,000 to 80,000,000 shares. This item
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was approved with approximate votes of 23,800,000 shares "for," 750,000
shares "against" or "withheld," and 100,000 shares "abstained."
3. The issuance of all shares of common stock which the Company would be
entitled to issue upon conversion of the Company's Series D Convertible
Preferred Stock. This item was approved with approximate votes of
13,100,000 shares "for," 375,000 shares "against" or "withheld," and
300,000 shares "abstained."
4. Approval of the Company's 1999 Stock Incentive Plan, which provides for
up to 3,000,000 shares of common stock to be issued to key employees,
consultants and directors of the Company. This item was approved with
approximate votes of 12,700,000 shares "for," 900,000 shares "against"
or "withheld," and 175,000 shares "abstained."
5. Ratifying the appointment of Grant Thornton LLP as independent auditors
for the 1999 fiscal year. This item was approved with approximate votes
of 24,300,000 shares "for," 75,000 shares "against" or "withheld," and
300,000 shares "abstained."
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
On July 18, 1996, the Company successfully completed its initial public
offering (the "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 currently
trades on the NASDAQ SmallCap Market. The Warrants expired on their own terms on
July 19, 1999.
As of December 31, 1999, there were 399 shareholders of record for the
Company's common stock and over 15,000 holders of common stock in "street name."
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,
1999 and 1998, 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 1998......................................... $2.50 $1.38 $0.41 $0.16
2nd Quarter 1998......................................... 8.44 1.41 1.75 0.13
3rd Quarter 1998......................................... 5.94 4.09 2.00 1.06
4th Quarter 1998......................................... 7.88 3.97 2.34 1.19
1st Quarter 1999......................................... 5.63 3.91 1.72 0.50
2nd Quarter 1999......................................... 4.97 3.00 0.94 0.16
3rd Quarter 1999......................................... 3.44 0.97 0.22 0.03
4th Quarter 1999......................................... 6.38 1.31 -- --
</TABLE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company was founded in October 1990 and commenced operations in
November 1992 to develop, manufacture and sell wearable computing and
communications systems solutions and software. In July 1996, the Company
successfully completed the IPO of its common stock and warrants. The Company's
stock is currently traded on the NASDAQ SmallCap Market and the Company intends
to apply for listing on the Nadaq National Market in the near future.
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The first commercial product in the Mobile Assistant series of wearable
PCs, the Mobile Assistant I, was introduced in 1994 and used "486" based
technology. The Mobile Assistant II was introduced in January 1997 and used
"586" based technology. The Mobile Assistant III used a Pentium processor
running at 133 MHz and was introduced during the third quarter of 1997. In the
fourth quarter of 1998, the Company commenced production of the fourth system in
this product development program, the Mobile Assistant 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. The
Company currently offers 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 virtually any application
without altering the original data.
Since inception, the Company has financed its operations primarily through
private and public sales of equity securities, borrowings under notes and loans,
and to a lesser extent, cash generated from operations. In 1999 and 1998, the
Company received net proceeds of $19,272,368 and $10,426,712, respectively, from
the public and private placements of its equity securities and $3,039,315 and
$1,250,000, respectively, from borrowings under notes and loans.
Historically, the Company has derived its revenues from sales of the Mobile
Assistant Series, consulting services related to the Mobile Assistant, licensing
of its intellectual property and application software for the Mobile Assistant
and other computer platforms. During the years ended December 31, 1999 and 1998,
the Company derived substantially all of its revenues from sales of the Mobile
Assistant. In the future, the Company expects to derive additional revenues from
licensing, services, and the sale of software and additional optional components
of the Mobile Assistant Series. Cost of sales include the cost of components for
the Mobile Assistant Series, inventory obsolescence charges, amortization of
tooling costs and fulfillment and shipping costs.
The Company has incurred operating losses throughout 1999 and expects such
losses to continue in the near term as it expands its product development and
marketing capabilities. At December 31, 1999, the Company had an accumulated
deficit of $48,140,128. 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
negative cash flow from operations and it is expected that it will continue to
experience negative cash flows through 2000 and potentially thereafter.
The Company's independent accountant's report on its financial statements
as of and for the years ended December 31, 1999 and 1998 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 flow from operations to cover the costs of its operations.
The Company intends to continue to make 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 and 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, "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. Through December 31, 1999 the costs eligible for
capitalization under SFAS 86 were immaterial and were not capitalized. Research
and development expenses for the years ended December 31, 1999 and 1998 were
$2,462,752 and $2,870,808, respectively, none of which were capitalized.
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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, Xybernaut K.K., the wholly-owned operating subsidiary in Japan and
Xybernaut GmbH, the wholly-owned operating subsidiary in Germany. The
consolidated financial statements contain eliminations for all material
transactions among the Company and these wholly-owned subsidiaries for all
periods presented.
The Company's consolidated financial statements contain a provision for
income tax expense operations outside the United States. Subject to realization,
the Company has generated net operating losses in the U.S. 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 9 to Consolidated Financial Statements). At December 31,
1999, the Company had approximately $43,665,000 and $1,100,000 of net operating
loss carry forwards for U.S. federal and foreign income tax purposes,
respectively. The U.S. losses begin to expire in 2010 and the losses from
foreign operations do not expire. The use of the U.S. carryforwards may be
limited in any one year under Internal Revenue Code Section 382 if significant
ownership changes occur.
YEAR 2000 ISSUE
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, a
temporary inability to process transactions, send invoices, or engage in similar
normal business activities.
The Company utilized both internal and external resources to test,
reprogram or replace, as needed, the computing and communications hardware and
software for year 2000 modifications. Based on this evaluation, modifications
were made to the Company's computer system and it was determined that these
systems will properly utilize dates beyond December 31, 1999. As such, the
Company is compliant with the year 2000 issue. As a result of the testing, the
old phone system was determined not to be year 2000 compliant. In December 1999
the existing phone system was replaced with one that provides enhanced
capabilities and is year 2000 compliant. The cost to purchase and install the
new phone system was approximately $75,000. Outside of the phone system, the
cost of testing and modifying the Company's computer systems to obtain year 2000
compliance was less than $10,000 in the aggregate.
The Company has contacted all of its significant suppliers and large
customers to determine the possible effect on our operations of their inability
or failure to remediate their own year 2000 issues. While the Company does not
believe that our significant suppliers and customers have potential problems
with the year 2000 issue, there can be no guarantee that the systems of our
customers and suppliers were timely converted successfully to avoid the year
2000 issue, or that any failure to successfully avoid the year 2000 issue by
another company, or a conversion that is incompatible with our systems, would
not have material adverse effect on our operations. The Company does not believe
that it has exposure to contingencies related to the year 2000 issue for the
Company's products. The Company did not experience any significant product or
system failures or miscalculations related to the year 2000 issue on or since
January 1, 2000.
The estimates of the date of completion and the cost of the Company's year
2000 project are based on the best available estimates, which were derived
utilizing numerous assumptions of future events, including the continued
availability of certain resources, third party modification plans and other
factors. The final costs and results of the Company's year 2000 project could
differ materially from estimates due to the lack of availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
17
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues for the years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Revenues.................................................... 100.0% 100.0%
Cost of sales............................................... 85.5 259.8
------ --------
Gross margin........................................... 14.5 (159.8)
------ --------
Operating expenses:
Sales and marketing.................................... 250.8 512.6
General and administrative............................. 193.7 501.0
Research and development............................... 73.7 327.9
------ --------
Total operating expenses.................................... 518.2 1,341.5
------ --------
Interest and other income, net.............................. 2.3 3.8
------ --------
Loss before provision for income taxes...................... (501.4) (1,497.5)
------ --------
Provision for income taxes.................................. 0.9 --
------ --------
Net loss.................................................... (502.2) (1,497.5)
------ --------
Provision for preferred stock............................... 54.5 110.4
------ --------
Net loss applicable to holders of common stock.............. (556.7)% (1,607.9)%
====== ========
</TABLE>
YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
REVENUES. Revenues for the year ended December 31, 1999 were $3,340,272,
an increase of $2,464,712, or 281.5%, compared to $875,560 for the year ended
December 31, 1998. Product revenues for the year ended December 31, 1999 were
$3,301,899, an increase of $2,428,313 or 278.0%, compared to $873,586 for the
corresponding period in 1998. This increase was related to the higher unit sales
of the MA IV in 1999 relative to the unit sales of predecessor models in the
prior year. Consulting, licensing and other revenues for the year ended December
31, 1999 were $38,373, an increase of $36,399, or 1,843.9%, compared to $1,974
for the corresponding period in 1998, resulting from consulting revenues
realized by the Company's Professional Services Group, which was formed during
fiscal 1999.
COST OF SALES. The cost of sales for the year ended December 31, 1999 was
$2,854,456, an increase of $580,001 or 25.5%, compared to $2,274,455 for the
year ended December 31, 1998. In 1999, the Company recognized charges of
approximately $304,000 related to the amortization of capitalized tooling costs
for products sold. 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 1999 and 1998, the Company recognized
charges to decrease the carrying value of inventory by $120,000 and $770,557,
respectively, to reflect the loss of value of older products and technologies.
The cost of sales as a percentage of revenues for the year ended December 31,
1999 was 72.8% before related charges and was 85.5% after related charges,
compared to 119.8% before related charges and 259.8% after related charges for
the year ended December 31, 1999.
SALES AND MARKETING EXPENSES. Sales and marketing expenses for the year
ended December 31, 1999 was $8,377,811, an increase of $3,889,315 or 86.7%,
compared to $4,488,496 for the year ended December 31, 1998. The increase
resulted primarily from increases in consulting expenses related to additional
marketing programs to support the launch of the MA IV, personnel and
infrastructure costs related to support sales, marketing and customer service,
and expenses related to sales activities at the Company's subsidiaries in Japan
and Germany.
18
<PAGE> 19
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the year ended December 31, 1999 were $6,469,922, an increase of $2,083,023
or 47.5%, compared to $4,386,899 for the year ended December 31, 1998. This
increase was related to legal settlements and related fees in 1999 of
$1,700,463, an increase of $1,215,651, compared to $484,813 in 1998, as well as
administrative expenses related to the increased development and sales activity
related to the MA IV and the establishment and staffing of operations in Japan
and Germany.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses for
the year ended December 31, 1999 were $2,462,752, a decrease of $408,056, or
14.2%, compared to $2,870,808 for the year ended December 31, 1998. This
decrease was related to the higher level of development expenditures during 1998
related to the MA IV and the substantial completion of these development
activities by the first quarter of fiscal 1999.
INTEREST AND OTHER INCOME, NET. Other income for the year ended December
31, 1999 was $78,095, an increase of $44,485, or 132.4%, compared to $33,610 for
the year ended December 31, 1998. This increase is primarily the result of
interest and other miscellaneous income from the Company's subsidiaries, which
were formed in 1999.
PROVISION FOR INCOME TAXES. The Company has accrued $29,223 for an income
tax provision in 1999 related to income earned by the Company's foreign
subsidiaries. The Company's U.S. operations had a net loss in 1999 and,
therefore, no provision for U.S. income taxes was made.
DIVIDEND ON CONVERTIBLE PREFERRED STOCK, DEEMED DIVIDEND ACCRETION ON
CONVERTIBLE PREFERRED STOCK. For the year ended December 31, 1999, the amount of
dividends on preferred stock was $311,714, an increase of $252,411 or 425.6%,
compared to $59,303 in 1998. 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 on the
Company's convertible preferred stock issuances was recognized during the
appropriate periods. 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. The amount of this
accretion for the year ended December 31, 1999 was $1,507,376, an increase of
$599,887 or 66.1%, compared to $907,489 in 1998. The dividends and accretion for
the year ended December 31, 1999 related to the Series C, Series D and Series E
Convertible Preferred Stock and for the year ended December 31, 1998 related to
the Series A, Series B and Series C Convertible Preferred Stock.
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, 1999 was $18,594,887 an increase of $4,516,607
or 32.1% compared to $14,078,280 for the year ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until the completion of the IPO, the Company financed
its operations through the private sale of its securities, vendor credit,
short-term loans received from management, stockholders and others. During and
subsequent to the IPO, the Company has financed its operations from public and
private sales of its common and preferred stock, borrowings from financial
institutions and management, proceeds from the exercise of warrants and sales of
its products and services.
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 issued 3,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") for gross proceeds of
$3,000,000. As of December 31, 1998, all Series A Preferred Stock had been
converted into 1,958,981 shares of common stock, which included payment of all
accrued dividends.
19
<PAGE> 20
On November 12, 1997, the Company issued 3,180 shares of Series B
Convertible Preferred Stock (the "Series B Preferred Stock") for gross proceeds
of $3,180,000. In 1998, the Company issued an additional 1,000 shares of Series
B Preferred Stock with identical terms for additional gross proceeds of
$1,000,000. In connection with these issuances, the Company granted to the
underwriter warrants to purchase a total of 100,000 shares of common stock at
prices that ranging from $2.13 to $3.03. As of December 31, 1998, all Series B
Preferred Stock had been converted into 3,172,239 shares of common stock, which
included payment of all accrued dividends. Subsequent to year-end, all warrants
had been exercised and converted into common stock.
On April 13, 1998, the Company entered into an Equity Line of Credit
Agreement (the "Equity Line Agreement") with a private investor. Under the terms
of the Equity Line 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
investor to purchase an additional $10,000,000 worth of common stock at 90% of
the Company's common stock market price (the "Put Rights"). Pursuant to the
terms of the Equity Line Agreement, the Company issued warrants to purchase a
total of 60,000 shares of common stock at a price per share ranging from $1.76
to $2.81, issued 50,000 shares of common stock which could not be traded prior
to April 13, 1999 and paid $60,000 in cash. Upon exercise of a Put Right, the
Company was required to pay issuance costs of approximately 5.5% of the gross
proceeds in cash and issue shares of common stock equal to 5% of the number of
shares issued in the transaction.
On May 22, 1998, the Company issued 375 shares of Series C Convertible
Preferred Stock (the "Series C Preferred Stock") for gross proceeds of $375,000
and 110,294 shares of common stock for additional gross proceeds of $375,000. As
of December 31, 1999, all Series C Preferred Stock had been converted into
165,230 shares of common stock, which included payment of all accrued dividends.
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 the Equity Line Agreement and exercised a
Put Right in the aggregate principal amount of $3,000,000. In connection with
such action, the Company issued 545,454 shares of common stock which were
subject to restrictions on resale during a nine-month period which has
subsequently lapsed. In addition, the Company issued five-year warrants to
purchase up to 300,000 shares of common stock at a price of $5.25 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 its common stock without receiving additional
compensation. The Company has no further obligation to issue additional shares
related to these repricing features.
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
$9.09, $9.58 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
20
<PAGE> 21
exercised separate Put Rights under the Equity Line Agreement. In connection
with such Put Rights, the Company issued 841,356 shares of common stock at
prices ranging from $4.08 to $4.46, repaid the $1,250,000 borrowed from the two
financial institutions and received proceeds of $2,110,000. 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 issued the first tranche of 5,000 shares of
its Series D Convertible Preferred Stock (the "Series D Preferred Stock") for
gross proceeds of $5,000,000. The Company issued an additional 5,000 shares of
Series D Preferred Stock for gross proceeds of $5,000,000 following the
effectiveness of a registration statement covering the resale of the common
stock issuable upon conversion of the Series D Preferred Stock. In connection
with these issuances, the investors received warrants to purchase 20 shares of
common stock for each share of Series D Preferred Stock purchased. The warrants
have an exercise price of $6.09 per share and a term of three years. The Series
D Preferred Stock had a 5% cumulative dividend which is payable, in cash or
through the issuance of common stock, upon the conversion of the Series D
Preferred Stock into common stock. The Series D Preferred Stock may be converted
into shares of common stock by dividing the dollar amount of Series D Preferred
Stock outstanding by the lesser of 100% of the average of the three lowest
closing bids for the common stock during the twenty trading days prior to
conversion or $4.88, the closing bid price of the common stock on the trading
day immediately preceding the closing date of this private placement. The
Company may redeem the Series D Preferred Stock at any time for a premium to
face value that varies depending on the timing of redemption. In connection with
this private placement, the Company issued an additional 500 shares of Series D
Preferred Stock to a finder. As of December 31, 1999, holders of the Series D
Preferred Stock had converted 6,000 shares into 4,059,399 shares of common
stock, which included payment of all accrued dividends on these 6,000 shares of
Series D Preferred Stock. Additionally, during the fourth quarter of 1999, the
Company received notices from the investors to convert 4,000 shares of Series D
Preferred Stock into common stock. In January 2000, the Company converted these
4,000 shares of Series D Preferred Stock, along with related dividends, into
4,039,033 shares of common stock. Subsequent to these conversions, 500 shares of
Series D Preferred Stock were issued and outstanding.
On May 12, 1999, the Company issued 2,000 shares of Series E Convertible
Preferred Stock (the "Series E Preferred Stock") for gross proceeds of
$2,000,000. In connection with this issuance, the investor received warrants to
purchase a total of 50,000 shares of common stock. The warrants have an exercise
price of $4.65 per share and a term of three years. The Series E Preferred Stock
has a 5% cumulative dividend which is payable, in cash or through the issuance
of common stock, upon the conversion of the Series E Preferred Stock. The
Company may redeem the Series E Preferred Stock at any time at a premium to face
value that varies depending on the timing of the redemption, as long as the
price of the common stock is above certain levels. Holders of the Series E
Preferred Stock may convert these securities into shares of common stock at the
lesser of 94% of the average of the three lowest closing bids for the common
stock during the twenty trading days prior to conversion, or $3.72, the closing
bid price of the common stock on the trading day immediately preceding the
closing date of this private placement. In connection with this private
placement, the Company issued an additional 100 shares of Series E Preferred
Stock were issued to a finder. As of December 31, 1999, the Series E Preferred
Stock investor had converted all of its 2,000 shares of Series E Preferred
Stock, along with related dividends, into 1,627,481 shares of common stock.
On various dates during 1999, the Company borrowed $583,500 from several
officers of the Company pursuant to non-interest bearing promissory notes or
agreements. All of these borrowings had been repaid at December 31, 1999 except
for $10,000, which was repaid in February 2000.
In August 1999, the Company entered into a financing agreement with a
lender under which the Company receives 80% of an identified accounts receivable
balance upon presentation to the lender of certain documentation supporting the
underlying sale. The Company receives the remaining 20%, net of a fee paid to
the lender, upon collection by the lender of the original accounts receivable
balance. The lender has recourse to the Company for any uncollected accounts
receivable balances. The Company paid $60,000 in initial placement fees
associated with this facility, all of which was amortized during 1999. During
the year ended
21
<PAGE> 22
December 31, 1999, the Company received $456,315 in proceeds and incurred $9,698
in interest expense related to this facility. The Company owed $24,254 on this
facility at December 31, 1999.
On September 21, 1999, the Company completed a $100,000 private placement
of common stock in which 135,000 restricted shares, as defined in Rule 144
promulgated under the Securities Act, were issued.
During October 1999 through December 1999, the Company borrowed $1,000,000
from an investor pursuant to a secured promissory note. In connection with this
borrowing, the Company issued warrants to purchase 1,000,000 shares of its
common stock at $1.00 per share. On December 31, 1999, the cashless conversion
of these warrants into 1,000,000 shares of the Company's common stock was used
as consideration to fully repay the loan.
During October 1999 through December 1999, the Company issued 545,000
shares of its common stock to investors who exercised warrants granted in
connection with previous financings for proceeds of $838,513.
On November 19, 1999, the Company completed a $3,000,000 private placement
of common stock in which 1,000,000 shares were issued.
On December 2, 1999, the Company entered into a financing facility with IBM
Global Finance (the "IBM Facility"). Borrowings under the IBM Facility are
secured by the Company's equipment, inventory and accounts receivable balances.
The Company paid $60,000 in initial placement fees, which are being amortized
over the six-month period ending May 31, 2000. Under the terms of the facility,
the Company borrowed $1,000,000 under a term loan and was extended a $3,000,000
credit line to finance customer purchases upon presentation to the lender of
certain documentation supporting the underlying sales. The borrowing under the
term loan accrues interest at the prime rate (8.5% at December 31, 1999) plus
2.5% per annum and is to be repaid in three equal installments in February,
April and June, 2000. Borrowings under the credit line accrue interest at up to
the prime rate plus 2.75%, depending on certain characteristics of the
underlying Company sales being financed such as the type of customer and the age
of the accounts receivable balance. The Company owed $1,000,000 at December 31,
1999 and incurred $9,167 in interest expense during 1999 associated with the IBM
Facility.
Subsequent to December 31, 1999, the Company has raised approximately
$13,187,000 through the issuance of common stock, borrowings, and the exercise
of warrants granted in connection with previous financings.
For the year ended December 31, 1999, the Company's operating activities
used cash of $15,803,023. This was primarily the result of a $16,775,797 net
loss and cash used by inventory of $3,989,991, offset by a net increase in
accounts payable and accrued expenses of $4,028,612 and depreciation and
amortization of $1,409,249. Cash used in investing activities for the year ended
December 31, 1999 was $2,236,684 which included $959,073 for the acquisition of
property and equipment, $349,250 related to obtaining and maintaining patents,
$120,000 in capitalized loan costs and $808,545 in capitalized tooling costs.
Proceeds from the Company's financing activities for the year ended December 31,
1999 were $19,056,622, which primarily consisted of $11,418,621 from the
issuance of the Company's Series D and Series E Preferred Stock, net of related
fees, $6,009,834 from the issuance of the Company's common stock, $1,838,513
from the exercise of warrants, and $3,039,315 of proceeds from notes and loans,
offset by payments on notes and loans totaling $3,255,061. As a result of the
above, cash and cash equivalents on hand as of December 31, 1999 was $2,031,143,
an increase of $1,106,494 from the $924,629 of cash on hand as of December 31,
1998.
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
22
<PAGE> 23
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.
At December 31, 1999, the Company had informal agreements with several of
its suppliers to take shipments of additional inventory of parts and components
during the first half of 2000. While the timing and amount of these shipments
may be adjusted, the total amount of inventory and related payment under these
agreements could be approximately as much as $1,500,000 to $2,000,000.
The Company anticipates that its working capital requirements and operating
expenses will increase as the Company expands production and sales of the Mobile
Assistant Series, 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 Mobile Assistant Series, 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 2001. 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, 1999 and 1998 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.
23
<PAGE> 24
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets -- December 31, 1999 and 1998... F-2
Consolidated Statements of Operations -- Years ended
December 31, 1999 and 1998................................ F-3
Consolidated Statements of Stockholders' Equity -- Years
ended December 31, 1999 and 1998.......................... F-4
Consolidated Statements of Cash Flows -- Years ended
December 31, 1999 and 1998................................ F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
24
<PAGE> 25
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Xybernaut Corporation
We have audited the accompanying consolidated balance sheets of Xybernaut
Corporation as of December 31, 1999 and 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Xybernaut Corporation as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. 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/ Grant Thornton, LLP
Vienna, VA
February 25, 2000
F-1
<PAGE> 26
XYBERNAUT CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 2,031,143 $ 924,649
Accounts receivable, net of allowances of $140,968 and
$91,131............................................. 706,850 229,120
Inventory, net of reserves of $120,000 and $770,557... 6,060,455 1,347,668
Prepaid and other current assets...................... 556,042 374,243
------------ ------------
Total current assets.............................. 9,354,490 2,875,680
------------ ------------
Property and equipment, net................................. 695,440 462,384
------------ ------------
Other assets:
Patent costs, net of accumulated amortization of
$520,683 and $313,982............................... 703,174 560,625
Tooling costs, net of accumulated amortization of
$630,890 and $326,752............................... 286,456 370,285
Other................................................. 283,864 142,614
------------ ------------
Total other assets................................ 1,273,494 1,073,524
------------ ------------
Total assets...................................... $ 11,323,424 $ 4,411,588
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes and loans payable............................... $ 1,034,254 $ 1,250,000
Accounts payable...................................... 4,601,631 1,626,897
Accrued expenses and other............................ 2,284,390 786,980
------------ ------------
Total current liabilities......................... 7,920,275 3,663,877
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 6,000,000 shares
authorized:
600 and 188 shares of convertible preferred stock
issued and outstanding at December 31, 1999 and
1998; (liquidation preference $600,000 and
$188,000 at December 31, 1999 and 1998)........... 543,751 182,378
4,000 shares of convertible preferred stock converted
into common stock subsequent to December 31, 1999;
(liquidation preference $4,000,000)............... 3,452,837 --
Common stock, $0.01 par value, 80,000,000 shares
authorized:
29,944,407 and 21,359,751 shares issued and
outstanding....................................... 299,444 213,597
Additional paid-in capital............................ 47,188,704 31,716,067
Foreign currency translation.......................... 58,541 --
Accumulated deficit................................... (48,140,128) (31,364,331)
------------ ------------
Total stockholders' equity........................ 3,403,149 747,711
------------ ------------
Total liabilities and stockholders' equity........ $ 11,323,424 $ 4,411,588
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
<PAGE> 27
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Product sales......................................... $ 3,301,899 $ 873,586
Consulting, licensing and other....................... 38,373 1,974
------------ ------------
Total revenue..................................... 3,340,272 875,560
Cost of sales............................................... 2,854,456 2,274,455
------------ ------------
Gross income (loss)............................... 485,816 (1,398,895)
Operating expenses:
Sales and marketing................................... 8,377,811 4,488,496
General and administrative............................ 6,469,922 4,386,899
Research and development.............................. 2,462,752 2,870,808
------------ ------------
Total operating expenses.......................... 17,310,485 11,746,203
------------ ------------
Operating loss.................................... (16,824,669) (13,145,098)
Interest and other income, net.............................. 78,095 33,610
------------ ------------
Loss before provision for income taxes................ (16,746,574) (13,111,488)
Provision for income taxes.................................. 29,223 --
------------ ------------
Net loss.............................................. (16,775,797) (13,111,488)
Provision for preferred stock dividends..................... 311,714 59,303
Provision for accretion on preferred stock beneficial
conversion feature........................................ 1,507,376 907,489
------------ ------------
Net loss applicable to holders of common stock........ $(18,594,887) $(14,078,280)
============ ============
Net loss per common share applicable to holders of
common stock (basic and diluted).................... $ (0.78) $ (0.80)
============ ============
Weighted average number of common shares Outstanding (basic
and diluted).............................................. 23,842,403 17,670,318
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE> 28
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF SHARES ADDITIONAL ACCUMULATED
---------------------- ------------------------------------- PAID-IN COMPREHENSIVE
PREFERRED COMMON PREFERRED PREFERRED(1) COMMON CAPITAL INCOME
--------- ---------- ----------- ------------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997......... 5,430 14,360,515 $ 4,193,355 $ -- $143,605 $17,181,329 $ --
Issuance of common stock........... -- 2,776,923 -- -- 27,770 9,158,889 --
Issuance of preferred stock........ 1,375 -- 1,240,053 -- -- -- --
Issuance of common stock in
connection with issuance of Series
B Preferred Stock................. -- 50,000 -- 500 97,938 --
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...................... -- -- -- -- -- -- --
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........................... -- -- -- -- -- -- --
------ ---------- ----------- ---------- -------- ----------- -------
BALANCE, DECEMBER 31, 1998......... 188 21,359,751 $ 182,378 $ -- $213,597 $31,716,067 $ --
Issuance of common stock........... -- 1,976,356 -- -- 19,764 5,990,070 --
Issuance of preferred stock........ 12,600 -- 11,418,621 -- -- -- --
Conversion of preferred stock into
common stock...................... (8,188) 5,666,514 (7,604,411) 56,665 7,547,746 --
Conversion of preferred stock into
common stock subsequent to
December 31, 1999................. -- -- (3,452,837) 3,452,837 -- -- --
Exercise of warrants............... -- 1,545,000 -- -- 15,450 1,823,063 --
Exercise of stock options.......... -- 1,800 -- -- 18 5,382 --
Shares and stock options issued for
services and incentives........... -- 2,500 -- -- 25 223,522 --
Cancellation of escrow shares of
common stock...................... -- (750,000) -- -- (7,500) 7,500 --
Value of beneficial conversion
feature on preferred stock........ -- -- (1,507,376) -- -- 1,507,376 --
Accretion of deemed dividend of
preferred stock................... -- -- 1,507,376 -- -- (1,507,376) --
Dividends on preferred stock paid
with common stock................. -- 142,486 -- -- 1,425 187,068 --
Preferred stock dividend
requirements...................... -- -- -- -- -- (311,714) --
Foreign currency translation....... -- -- -- -- -- -- 58,541
Net loss........................... -- -- -- -- -- -- --
------ ---------- ----------- ---------- -------- ----------- -------
Total comprehensive income
(loss)............................ -- -- -- -- -- -- --
------ ---------- ----------- ---------- -------- ----------- -------
BALANCE, DECEMBER 31, 1999......... 4,600 29,944,407 $ 543,751 $3,452,837 $299,444 $47,188,704 $58,541
====== ========== =========== ========== ======== =========== =======
<CAPTION>
TOTAL
ACCUMULATED DEFERRED STOCKHOLDERS'
DEFICIT COMPENSATION EQUITY
------------ ------------ -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1997......... $(18,252,843) $(91,511) $ 3,173,935
Issuance of common stock........... -- -- 9,186,659
Issuance of preferred stock........ -- -- 1,240,053
Issuance of common stock in
connection with issuance of Series
B Preferred Stock................. -- -- 98,438
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 91,511
Cancellation of escrow shares of
common stock...................... -- -- --
Dividends on preferred stock paid
with common stock................. -- -- 127,906
Net loss........................... (13,111,488) -- (13,111,488)
------------ -------- ------------
BALANCE, DECEMBER 31, 1998......... $(31,364,331) $ -- $ 747,711
Issuance of common stock........... -- -- 6,009,834
Issuance of preferred stock........ -- -- 11,418,621
Conversion of preferred stock into
common stock...................... -- -- --
Conversion of preferred stock into
common stock subsequent to
December 31, 1999................. -- -- --
Exercise of warrants............... -- -- 1,838,513
Exercise of stock options.......... -- -- 5,400
Shares and stock options issued for
services and incentives........... -- -- 223,547
Cancellation of escrow shares of
common stock...................... -- -- --
Value of beneficial conversion
feature on preferred stock........ -- -- --
Accretion of deemed dividend of
preferred stock................... -- -- --
Dividends on preferred stock paid
with common stock................. -- -- 188,493
Preferred stock dividend
requirements...................... -- -- (311,714)
Foreign currency translation....... -- -- 58,541
Net loss........................... (16,775,797) -- ( 16,775,797)
------------ -------- ------------
Total comprehensive income
(loss)............................ -- -- (16,717,256)
------------ -------- ------------
BALANCE, DECEMBER 31, 1999......... $(48,140,128) $ -- $ 3,403,149
============ ======== ============
</TABLE>
- ---------------
(1) Represents preferred stock converted into common stock subsequent to
December 31, 1999.
The accompanying notes are an integral part of these
consolidated financial statements
F-4
<PAGE> 29
XYBERNAUT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(16,775,797) $(13,111,488)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 1,409,249 503,143
Gain on disposal of assets............................. (26,562) (6,626)
Provision for inventory................................ 120,000 770,557
Provision for bad debts................................ 49,837 37,920
Non-cash charges for equity securities issued for
services............................................. 223,547 91,511
Reduction of carrying value for equipment and tooling
costs................................................ -- 688,546
Changes in assets and liabilities:
Inventory............................................ (3,989,991) (835,795)
Accounts receivable.................................. (547,097) (50,273)
Prepaid and other current assets..................... (178,951) (39,998)
Other assets......................................... (115,870) 10,737
Accounts payable..................................... 2,505,775 1,364,158
Accrued expenses and other........................... 1,522,837 (121,392)
------------ ------------
Net cash used in operating activities.................. (15,803,023) (10,699,000)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment.............. 834 32,312
Acquisition of property and equipment..................... (959,073) (256,358)
Acquisition of patents, trademarks and related costs...... (349,900) (313,109)
Acquisition of trademarks................................. (650) --
Capitalization of tooling costs........................... (808,545) (448,744)
Capitalization of loan costs.............................. (120,000) --
------------ ------------
Net cash used in investing activities.................. (2,236,684) (985,899)
------------ ------------
Cash flows from financing activities:
Proceeds from:
Preferred stock offerings, net......................... 11,418,621 1,240,053
Common stock offerings, net............................ 6,009,834 9,186,659
Exercise of warrants................................... 1,838,513 --
Exercise of stock options.............................. 5,400 --
Notes and loans........................................ 3,039,815 1,250,000
Payments for:
Notes and loans........................................ (3,255,561) (19,530)
------------ ------------
Net cash provided by financing activities.............. 19,056,622 11,657,182
------------ ------------
Effect of exchange rate changes on cash and cash
equivalents............................................... 89,579 --
Net increase (decrease) in cash and cash equivalents........ 1,106,494 (27,717)
Cash and cash equivalents, beginning of period.............. 924,649 952,366
------------ ------------
Cash and cash equivalents, end of period.................... $ 2,031,143 $ 924,649
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 18,367 $ 5,032
============ ============
Cash paid for taxes.................................... $ 9,419 $ --
============ ============
Supplemental disclosure of non-cash financing activities:
Equity securities issued for payment of services
provided............................................. $ 223,547 $ 91,511
============ ============
Provision for preferred stock dividend requirements.... $ 311,714 $ 59,303
============ ============
Common stock issued for preferred stock dividend
requirements......................................... $ 188,493 $ 134,833
============ ============
Exercise of warrants in consideration of loan
repayment............................................ $ 1,000,000 $ --
============ ============
Issuance of common stock in consideration of loan
repayment............................................ $ 1,250,000 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
<PAGE> 30
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND FINANCING
THE COMPANY
Xybernaut Corporation (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. On July 18, 1996, the Company completed
its Initial Public Offering ("IPO"). Since the commencement of operations in
November 1992, the Company has engaged in the research, development and
commercialization of hardware and software products for wearable computing and
communications. The Company's current mobile computing product is the Mobile
Assistant IV model (the "MA IV(R)"), which is a full-function, body-worn,
voice-controlled computer with a body-worn video display. Additional hardware
and software products are planned for development and use on the Mobile
Assistant series and subsequent proprietary products.
FINANCING
The Company has incurred significant recurring losses from operations since
inception and will require additional capital to fund its operations and meet
its ongoing obligations for 2000 and potentially beyond. Management believes
they will be successful in their efforts to obtain such financing and subsequent
to year-end has raised approximately $13,187,000 (see Note 13). There can be no
assurance that the Company will not incur additional losses or will not require
significant amounts of additional capital. The accompanying consolidated
financial statements have been prepared assuming the Company will continue as a
going concern. If the Company is unable to obtain sufficient 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 subsidiaries: Xybernaut GmbH (Boblingen, Germany),
Xybernaut K.K. (Yokohoma, Japan) and Tech Virginia (Fairfax, Virginia). All
significant intercompany accounts and transactions have been eliminated in the
consolidation. 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 consists primarily of component parts held for resale and
allocated tooling costs and is comprised principally of finished goods.
Inventory is stated at the lower of cost or market, cost being
F-6
<PAGE> 31
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
determined on a first-in, first-out basis. Management periodically assesses the
need to provide for obsolescence of inventory and adjusts carrying values to
their net realizable value when required. As of December 31, 1999 and 1998, the
allowance to reduce inventory balances to net realizable value was $120,000 and
$770,557, respectively. The reserve at December 31, 1999 represents the
Company's estimate of the loss of value of certain of the older peripherals and
components of the MA IV. In the event that sales do not materialize, an
adjustment may be necessary to write down the carrying value of inventory. The
reserve at December 31, 1998 represents the full reduction of all inventory
amounts related to the Company's products prior generations of products.
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>
Furniture and fixtures...................................... 5 years
Equipment................................................... 3-5 years
Leasehold improvements...................................... 3 years
Demonstration units......................................... 1 year
</TABLE>
Expenditures for maintenance and repairs are expensed directly to the
appropriate operating account as incurred. Expenditures determined to represent
additions and betterments are capitalized.
TOOLING COSTS
Capitalized tooling costs consist of payments made to third-party vendors
for reimbursement of their products and services that are used in the design and
manufacturing of the Company's proprietary products. Tooling costs are amortized
into cost of sales expense based upon the ratio of units sold in a given period
to total units expected to be produced and sold. In 1998, the Company recognized
charges of approximately $455,000 related to the write-off of certain
capitalized tooling costs related to the Company's products prior to the MA IV.
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 not been significant. 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 patents and are amortized on a straight-line basis over a
five-year period and are presented as general and administrative expenses in the
accompanying consolidated statements of operations. Amortization expense related
to the patents was $206,701 and $136,906 during 1999 and 1998, respectively.
Costs associated with the upkeep and maintenance of existing patents are
expensed as incurred.
F-7
<PAGE> 32
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
START-UP COSTS
The Company expenses start-up and organization costs as incurred in
accordance with Statement of Position 98-5, "Reporting on Costs of Start-Up
Activities."
IMPAIRMENT OF LONG-LIVED ASSETS
Management of the Company monitors the carrying value of long-lived assets
for potential impairment on an on-going basis. Potential impairment would be
determined by comparing the carrying value of these assets with their related,
expected future net cash flows. Should the sum of the related, expected future
net cash flows be less than the carrying value, management would determine
whether an impairment loss should be recognized. An impairment loss would be
measured by the amount by which the carrying value of the asset exceeds the
future discounted cash flows. No such impairment losses were recorded during
1999 or 1998.
REVENUE RECOGNITION AND WARRANTIES
The Company recognizes revenues upon shipment to end-users pursuant to a
valid purchase order ("sell-to accounting"). Shipments to distributors are
accounted for using "sell-through accounting," under which revenue is recognized
when the distributor ships to an end-user, until such time as an adequate
history of shipments and returns from distributors can be developed to allow for
revenue to be recognized upon shipment offset by an allowance for returns.
Shipments to distributors are treated as revenue upon shipment only if shipped
pursuant to a separate purchase order that stipulates that the products are for
demonstration or testing by the distributor and that the obligation to pay is
binding and not subject to contingencies.
The Company generally provides a one-year warranty on parts and a six-month
warranty on labor. A provision for estimated future warranty costs is recorded
at the time of shipment. However, the Company's suppliers for the significant
components of the MA IV, including the computing unit, flat panel display, head
mounted display, and batteries, provide the Company with similar warranties. The
Company recorded warranty expense of $36,204 and $59,678 during 1999 and 1998,
respectively, and had a warranty reserve of $100,781 and $64,577 at December 31,
1999 and 1998, respectively.
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. The provision for income taxes in 1999 results from the
operations of the Company's international subsidiaries.
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.
F-8
<PAGE> 33
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
ISSUANCE OF EQUITY SECURITIES FOR SERVICES
Periodically, the Company issues shares of common stock and options to
purchase shares of common stock to vendors and consultants in return for goods
or services. These transactions are recorded at either the fair value of the
securities issued or at the fair value of goods received or services performed,
whichever is more reliably measured.
ESCROWED SHARES
Escrowed shares are considered issued and outstanding and reported as such
on the combined balance sheets until their cancellation. At December 31, 1999,
all escrowed shares had been cancelled. 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 losses per share.
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, 1999 and 1998, 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, 1999 and 1998, based upon market prices for the same or
similar debt issues.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of the Company's foreign subsidiaries are translated
at the exchange rate on the balance sheet date. Translation adjustments
resulting from this process are charged or credited to equity. Revenues and
expenses are translated at average exchange rates prevailing during the year.
Gains and losses on foreign currency transactions are included in nonoperating
revenues and expenses.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In 1999, the
required implementation date of SFAS No. 133 was delayed to fiscal years
beginning after June 15, 2000. 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, but may elect to do so to hedge
foreign currency exposure if such exposure becomes significant. 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, 2001.
RECLASSIFICATIONS
Certain 1998 balances and disclosures have been reclassified to conform to
the 1999 presentation.
F-9
<PAGE> 34
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
----------- ----------
<S> <C> <C>
Furniture and fixtures................................... $ 195,896 74,872
Equipment................................................ 695,393 $ 516,669
Leasehold improvements................................... 257,868 153,159
Demonstration units...................................... 922,604 327,872
----------- ----------
2,071,761 1,072,572
Less accumulated depreciation and amortization........... (1,376,321) (610,188)
----------- ----------
$ 695,440 $ 462,384
=========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was
$703,158 and $364,472, respectively.
4. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
---------- --------
<S> <C> <C>
Accrued salaries and benefits............................... $ 863,233 $541,427
Professional fees........................................... 565,496 70,418
Warranty reserve............................................ 100,781 64,577
Dividends on preferred stock................................ 143,466 5,794
Other....................................................... 611,414 104,764
---------- --------
$2,284,390 $786,980
========== ========
</TABLE>
Other accruals consist of amounts related to expenses incurred in the
normal course of business, such as employee travel costs, sales and other taxes,
royalty costs for software sales, and deferred revenues.
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 principal and
accrued interest through the issuance of common stock.
On various dates during 1999, the Company borrowed a total of $583,000 from
several officers of the Company pursuant to non-interest bearing promissory
notes or agreements. All of these borrowings had been repaid at December 31,
1999 except for $10,000, which was repaid in February 2000.
In August 1999, the Company entered into a financing agreement with a
lender under which the Company receives 80% of an accounts receivable balance
upon presentation to the lender of certain documentation supporting the
underlying sale. The Company receives the remaining 20%, net of a fee paid to
the lender, upon collection by the lender of the original accounts receivable
balance. The lender has recourse to the Company for any uncollected accounts
receivable balance. The Company paid $60,000 in initial placement fees
associated with this facility, all of which was amortized during 1999. During
the year ended December 31, 1999, the Company received $456,315 in proceeds and
incurred $9,698 in interest expense related to this facility. The Company owed
$24,254 on this facility at December 31, 1999.
F-10
<PAGE> 35
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES PAYABLE, CONTINUED:
Between October 1999 and December 1999, the Company borrowed $1,000,000
from an investor pursuant to a secured promissory note. On December 31, 1999,
the cashless conversion of warrants issued in connection with this borrowing was
used as consideration to fully repay the loan.
On December 2, 1999, the Company entered into a financing facility with IBM
Global Finance (the "IBM Facility"). Borrowings under the IBM Facility are
secured by the Company's equipment, inventory and accounts receivable balances.
The Company paid $60,000 in initial placement fees, which are being amortized
over the six-month period ending May 31, 2000. Under the terms of the facility,
the Company borrowed $1,000,000 under a term loan and was extended a $3,000,000
credit line to finance customer purchases upon presentation to the lender of
certain documentation supporting the underlying sales. The borrowing under the
term loan accrues interest at up to the prime rate (8.5% at December 31, 1999)
plus 2.5% per annum and is to be repaid in three equal installments in February,
April and June, 2000. Borrowings under the credit line accrue interest up to the
prime rate plus 2.75%, depending on certain specifics of the underlying Company
sales being financed, such as the type of customer and the age of the accounts
receivable balance. The Company owed $1,000,000 at December 31, 1999 and
incurred $9,167 in interest expense during 1999 associated with the IBM
Facility.
6. STOCKHOLDERS' EQUITY
PREFERRED STOCK
As of December 31, 1999, the Company had 6,000,000 shares of authorized
Preferred Stock of which 3,000, 4,180, 375, 10,500, and 2,100 shares had been
designated as Convertible Preferred Stock Series A, B, C, D, and E, respectively
("Series A, B, C, D or E Preferred Stock", respectively). Under the terms of the
Company's Certificate of Incorporation, the Board of Directors may determine the
rights, preferences, and terms of the Company's authorized but unissued shares
of Preferred Stock.
On June 30, 1997, the Company issued 3,000 shares of Series A Preferred
Stock for gross proceeds of $3,000,000. As of December 31, 1998, all Series A
Preferred Stock had been converted into 1,958,981 shares of common stock, which
included payment of all accrued dividends.
On November 12, 1997, the Company issued 3,180 shares of Series B Preferred
Stock for gross proceeds of $3,180,000. In 1998, the Company issued an
additional 1,000 shares of Series B Preferred Stock with identical terms for
additional gross proceeds of $1,000,000. In connection with this issuance, the
Company granted to the underwriter warrants to purchase a total of 100,000
shares of common stock at prices ranging from $2.13 to $3.03. As of December 31,
1998, all Series B Preferred Stock had been converted into 3,172,239 shares of
common stock, which included payment of all accrued dividends.
On May 22, 1998, the Company issued 375 shares of Series C Preferred Stock
for gross proceeds of $375,000. As of December 31, 1999, all Series C Preferred
Stock had been converted into 165,230 shares of common stock, which included
payment of all accrued dividends.
On March 10, 1999, the Company issued the first tranche of 5,000 shares of
Series D Preferred Stock for gross proceeds of $5,000,000. Following the
effectiveness of a registration statement covering the resale of the common
stock issuable upon conversion of the Series D Preferred Stock, the Company
issued an additional 5,000 shares of Series D Preferred Stock for gross proceeds
of $5,000,000. In connection with these issuances, the investors received
warrants to purchase 20 shares of common stock for each share of Series D
Preferred Stock purchased. The warrants have an exercise price of $6.09 per
share and a term of three years. The Series D Preferred Stock has a 5%
cumulative dividend which is payable, in cash or through the issuance of
F-11
<PAGE> 36
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
common stock, upon the conversion of the Series D Preferred Stock into common
stock. The Series D Preferred Stock may be converted into shares of common stock
by dividing the dollar amount of Series D Preferred Stock outstanding by the
lesser of 100% of the average of the three lowest closing bids for the common
stock during the twenty trading days prior to conversion or $4.88, the closing
bid price of the common stock on the trading day immediately preceding the
closing date of this private placement. The Company may redeem the Series D
Preferred Stock at any time for a premium to face value that varies depending on
the timing of redemption. In connection with this private placement, the Company
issued an additional 500 shares of Series D Preferred Stock to a finder. As of
December 31, 1999, holders of the Series D Preferred Stock had converted 6,000
shares into 4,059,399 shares of common stock, which included payment of all
accrued dividends on these 6,000 shares of Series D Preferred Stock.
Additionally, during the fourth quarter of 1999, the Company received notices
from the investors to convert 4,000 shares of Series D Preferred Stock into
common stock. In January 2000, the Company converted these 4,000 shares of
Series D Preferred Stock, along with related dividends, into 4,039,033 shares of
common stock. Subsequent to these conversions, 500 shares of Series D Preferred
Stock remain issued and outstanding.
On May 12, 1999, the Company issued 2,000 shares of Series E Preferred
Stock for gross proceeds of $2,000,000. In connection with this issuance, the
investor received warrants to purchase a total of 50,000 shares of common stock.
The warrants had an exercise price of $4.65 per share and a term of three years.
The Series E Preferred Stock has a 5% cumulative dividend which is payable, in
cash or through the issuance of common stock, upon the conversion of the Series
E Preferred Stock. The Company may redeem the Series E Preferred Stock at any
time at a premium to face value that varies depending on the timing of the
redemption, as long as the price of the common stock is above certain levels.
Holders of the Series E Preferred Stock may convert these securities into shares
of common stock at the lesser of 94% of the average of the three lowest closing
bids for the common stock during the twenty trading days prior to conversion, or
$3.72, the closing bid price of the common stock on the trading day immediately
preceding the closing date of this private placement. In connection with this
private placement, the Company issued an additional 100 shares of Series E
Preferred Stock to a finder. As of December 31, 1999, the Series E Preferred
Stock investor had converted all of its 2,000 shares of Series E Preferred
Stock, along with related dividends, into 1,627,481 shares of common stock.
Subsequent to these conversions, 100 shares of Series E Preferred Stock remain
issued and outstanding.
The Company filed registration statements with the SEC to register the
common stock into which its various convertible preferred stock issuances can be
converted except for the 500 shares of Series D Preferred Stock and the 100
shares of Series E Preferred Stock which were issued to finders in connection
with the respective private placements. As of January 2000, the SEC has declared
effective all such registration statements.
The Company's preferred stock issues have included nondetachable conversion
features that are considered to be "in the money" at the date of issuance (a
"beneficial conversion feature"). The beneficial conversion 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. At December
31, 1999, all of the value associated with the beneficial conversion features
has been fully accreted against additional paid-in capital.
F-12
<PAGE> 37
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
The Company's preferred stock activity is summarized in the following
table:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
-------------------- -------------------- ------------------ --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ----------- ------ ----------- ------ --------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- $ --
====== =========== ====== =========== ==== ========= ====== ===========
Issuance of shares, net............. -- -- -- -- -- -- 10,500 $ 9,442,390
Value of beneficial conversion
feature............................ -- -- -- -- -- -- -- (1,173,024)
Accretion of deemed dividend........ -- -- -- -- -- -- -- 1,173,024
Conversion into common stock........ -- -- -- -- (188) (182,378) (6,000) (5,539,913)
------ ----------- ------ ----------- ---- --------- ------ -----------
Balance, December 31, 1999.......... -- $ -- -- $ -- -- $ -- 4,500 $ 3,902,477
====== =========== ====== =========== ==== ========= ====== ===========
<CAPTION>
SERIES E
--------------------
SHARES AMOUNT
------ -----------
<S> <C> <C>
Balance, December 31, 1997.......... -- --
Issuance of shares, net............. -- --
Value of beneficial conversion
feature............................ -- --
Accretion of deemed dividend........ -- --
Conversion into common stock........ -- --
------ -----------
Balance, December 31, 1998.......... -- $ --
====== ===========
Issuance of shares, net............. 2,100 $ 1,976,231
Value of beneficial conversion
feature............................ -- (334,352)
Accretion of deemed dividend........ -- 334,352
Conversion into common stock........ (2,000) (1,882,120)
------ -----------
Balance, December 31, 1999.......... 100 $ 94,111
====== ===========
</TABLE>
COMMON STOCK
On April 13, 1998, the Company entered into an Equity Line of Credit
Agreement (the "Equity Line Agreement") with a private investor. Under the terms
of the Equity Line Agreement, the Company issued 840,124 shares of common stock
at $1.27 per share and obtained the right to require the investor to purchase an
additional $10,000,000 worth of common stock at 90% of the Company's common
stock market price (the "Put Rights"). Upon exercise of a Put Right, the Company
was required to pay issuance costs of approximately 5.5% of the gross proceeds
in cash and issue shares of common stock equal to 5% of the number of shares
issued in the transaction. Pursuant to the terms of the agreement, the Company
issued warrants to purchase a total of 60,000 shares of common stock at a price
per share ranging from $1.76 to $2.81, issued 50,000 shares of common stock
which could not be traded prior to April 13, 1999 and paid $60,000 in cash.
In July 1998, the Company amended the Equity Line Agreement to allow for
the sale of 545,454 shares of common stock for $5.50 per share and issued
five-year warrants to purchase up to 300,000 shares of common stock at a price
of $5.25 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, concurrent with the sale of the Company's Series C
Preferred Stock, the Company issued 110,294 shares of common stock for $3.40 per
share.
In January 1999, the Company exercised additional Put Rights in which it
issued 841,356 shares of common stock at prices ranging from $4.08 to $4.46 for
cash proceeds of $2,110,000 and for use as consideration for the repayment of
certain notes payable. In addition, the Company issued a warrant to purchase
100,000 shares of common stock at an exercise price of $5.50 per share and a
warrant to purchase 100,000 shares of common stock at an exercise price of $6.00
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 market fluctuations in
the Company's 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 receiving additional compensation. The Company has no further obligation
to issue additional shares related to these repricing features.
F-13
<PAGE> 38
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
On various dates in 1998, the Company received gross proceeds of $3,600,000
pursuant to the terms of several investment agreements whereby the Company
issued 747,047 shares of common stock at prices ranging from $4.04 to $5.72 and
issued warrants to purchase 37,500 shares of common stock at prices of $9.09,
$9.58, and $13.05 per share. These agreements restricted the transfer of the
shares of common stock issued for certain periods, all of which have expired at
December 31, 1999.
During 1999, the Company issued 2,500 shares of common stock and 161,750
options to purchase common stock to certain consultants and vendors as
consideration related to services provided to the Company. The Company recorded
expenses related to these services of $223,547 during 1999 based upon the value
of the services received.
On September 21, 1999, the Company completed a $100,000 private placement
of common stock in which 135,000 restricted shares, as defined in Rule 144
promulgated under the Securities Act, were issued.
On November 19, 1999, the Company completed a $3,000,000 private placement
of common stock in which 1,000,000 shares were issued.
COMMON STOCK WARRANTS
In connection with the Company's IPO and the conversion of debentures
during 1996 and 1997, a total of 3,846,427 warrants to purchase common stock
were issued and outstanding at December 31, 1998. These warrants expired on
their own terms on July 19, 1999 and no warrants were exercised prior to this
date.
During October through December 1999, the Company borrowed $1,000,000 from
an investor pursuant to a secured promissory note. In connection with this
borrowing, the Company issued warrants to purchase 1,000,000 shares of its
common stock at $1.00 per share. On December 31, 1999, the cashless conversion
of these warrants into 1,000,000 shares of the Company's common stock was used
as consideration to fully repay the loan.
In the quarter ended December 1999, the Company issued 545,000 shares of
its common stock to investors who exercised warrants granted in connection with
previous financings for proceeds of $838,513.
Exclusive of the expired warrants issued in connection with the Company's
IPO and the conversion of debentures during 1996 and 1997 discussed above, the
Company has issued warrants to purchase 3,510,560 shares of its common stock in
connection with the Company's various financings at prices that range from $1.00
to $18.00 per share. At December 31, 1999, the Company had warrants outstanding
to purchase 1,842,700 shares of its common stock at prices that range from $1.50
to $18.00 per share. Subsequent to year-end, certain of these warrants were
exercised at an average price of $4.51 per share, resulting in the issuance of
1,565,200 shares of common stock.
ESCROWED SHARES
As a condition to the Company's IPO, a representative of the several
underwriters 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.
The Escrowed Shares were to be released over a three-year period 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 equaled or exceeded
certain per share targets or if the Company's stock price exceeded a certain per
share target price. If such targets were not met, certain amounts of the
Escrowed Shares were to be returned to the Company for each period and canceled.
F-14
<PAGE> 39
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY, CONTINUED:
The Company did not meet the targets for escrow release for the periods
ending September 30, 1997, 1998 or 1999. As a result, 300,000, 750,000 and
750,000 shares, respectively, were canceled from the escrow pool and returned to
the Company, resulting in a reduction of 2.1%, 3.6% and 3.1% of the outstanding
shares of common stock on each of the cancellations, respectively.
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
anti-dilution. Therefore, the cancellation of shares from escrow does not affect
the reported loss per share.
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 "1996 Plan"). At the
annual meeting of stockholders on August 28, 1997, the Company's stockholders
approved the 1997 Stock Incentive Plan (the "1997 Plan"). At the annual meeting
of stockholders on December 28, 1999, the Company's stockholders approved the
1999 Stock Incentive Plan (the "1999 Plan").
Under these plans, the Company may grant incentive stock options,
non-qualified stock options, stock appreciation rights and shares of common
stock to officers, directors, employees and others. The Company's stock options
are generally exercisable in five equal annual installments beginning one year
after the date of grant. Under the terms of these plans, no stock option may be
granted at less than the fair market value of the Company's common stock on the
date of grant.
The 1996 Plan, the 1997 Plan and the 1999 Plan authorize the issuance of
650,000, 1,650,000 and 3,000,000 shares of the Company's common stock,
respectively. At December 31, 1999, 650,000, 1,573,466, and 2,537,845 of the
shares authorized under the 1996 Plan, the 1997 Plan and the 1999 Plan,
respectively, are outstanding.
The following table summarizes information on the Company's stock options:
<TABLE>
<CAPTION>
FISCAL 1999 FISCAL 1998
------------------------- -------------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE PRICE NUMBER AVERAGE PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Beginning balance...................... 1,795,000 $3.59 1,738,430 $3.04
Granted................................ 3,309,278 $3.06 802,550 $4.61
Exercised.............................. (1,800) $3.00 -- --
Cancelled.............................. (341,167) $4.54 (745,980) $3.29
--------- ----- --------- -----
Ending balance......................... 4,761,311 $3.17 1,795,000 $3.59
========= ===== ========= =====
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------ OPTIONS EXERCISABLE
RANGE OF WEIGHTED-AVERAGE ------------------------------
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ----------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.37-$2.50 1,640,061 10 years $1.61 322,971 $1.95
$2.51-$4.00 1,277,250 8 years $3.14 832,680 $2.94
$4.01-$7.31 1,844,000 10 years $4.58 265,700 $5.12
--------- -------- ----- --------- -----
4,761,311 9 years $3.17 1,421,351 $3.12
========= ======== ===== ========= =====
</TABLE>
F-15
<PAGE> 40
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. STOCK OPTIONS, CONTINUED:
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 plans
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,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Net loss -- as reported................................. $(16,775,797) $(13,111,488)
Net loss -- pro forma................................... $(21,844,935) $(13,647,074)
Net loss per share -- as reported....................... $ (0.70) $ (0.74)
Net loss per share -- pro forma......................... $ (0.92) $ (0.77)
</TABLE>
The weighted-average fair values of each option at the date of grant for
1999 and 1998 was $1.53 and $0.67, respectively, and were estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used in 1999 and 1998: dividend yield of 0%;
expected volatility of 70% in 1999 and 60% in 1998; risk-free interest rate of
5.49% in 1999 and 5.20% in 1998; and expected lives of 3 years.
8. SEGMENT AND ENTERPRISE WIDE REPORTING
The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," in the fiscal year ended December 31, 1999.
SFAS No. 131 requires certain financial and supplementary information to be
disclosed on an annual and interim basis of each reportable segment of an
enterprise. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
discrete financial information is evaluated regularly by the chief operating
decision maker or decision making group, in deciding how to allocate resources
and assess performance. The financial information disclosed herein, materially
represents all of the financial information related to the Company's principal
operating segments as a provider of wearable computers. The Company established
foreign subsidiaries in both Germany and Japan in January 1999.
Revenues by geographical destination as a percentage of total revenues for
the year ended December 31, 1999 are as follows:
<TABLE>
<S> <C>
United States............................................... 55%
European countries, principally Germany..................... 18%
Far East countries, principally Japan....................... 20%
Other....................................................... 7%
</TABLE>
F-16
<PAGE> 41
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. SEGMENT AND ENTERPRISE WIDE REPORTING, CONTINUED:
Operations in various geographical areas, since the inception of those
entities, are summarized as follows:
<TABLE>
<CAPTION>
UNITED STATES EUROPE FAR EAST CONSOLIDATED
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Year Ended December 31, 1999:
Total revenues.................. $ 2,085,058 $ 591,314 $ 663,900 $ 3,340,272
============ =========== =========== ============
Net income (loss)............... $(14,482,993) $(1,203,968) $(1,088,836) $(16,775,797)
============ =========== =========== ============
Identifiable assets............. $ 7,125,523 $ 300,422 $ 3,897,479 $ 11,323,424
============ =========== =========== ============
</TABLE>
The following table summarizes the number of customers that individually
comprise greater than 10% of total revenue and/or total accounts receivable and
their aggregate percentage of the Company's total revenues and accounts
receivable.
<TABLE>
<CAPTION>
REVENUE ACCOUNTS RECEIVABLE
------------------------- ----------------------------
PERCENT OF TOTAL
NUMBER OF PERCENT OF NUMBER OF ACCOUNTS
CUSTOMERS TOTAL REVENUE CUSTOMERS RECEIVABLE
--------- ------------- --------- ----------------
<S> <C> <C> <C> <C>
For the Year Ended December 31,
1999.......................................... -- --% 2 22%
1998.......................................... 2 23% 4 62%
</TABLE>
9. SIGNIFICANT VENDOR
One manufacturer currently supplies a significant portion of the Company's
production parts and components. Management believes other manufacturers could
provide the parts and components on similar terms. However, a delay in supply of
the necessary parts and components, as a result of a change in supplier, could
have a material adverse effect on the Company's results of operations.
10. INCOME TAXES
For the years ended December 31, 1999 and 1998 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. In
1999, the Company recognized approximately $29,000 in income tax expense related
to foreign operations.
At December 31, 1999, the Company had approximately $43,665,000 and
$1,100,000 of net operating loss carryforwards for U.S. federal and foreign
income tax purposes, respectively. The U.S. losses begin to expire in 2010 and
the losses from foreign operations do not expire. The use of the U.S.
carryforwards may be limited in any one year under Internal Revenue Code Section
382 if significant ownership changes occur.
F-17
<PAGE> 42
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,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Excess of book over tax depreciation..................... $ 214,000 $ 65,000
Net operating loss carryforwards......................... 16,575,000 10,557,000
Adjustment to accrual basis of accounting................ 148,000 244,000
Accrued expenses and reserves............................ 280,000 517,000
Tax credit carryforwards................................. 63,000 63,000
Foreign tax credits...................................... 28,000 --
Foreign net operating loss carryforwards................. 510,000 --
Foreign other............................................ 9,000 --
Less valuation allowance................................. (17,827,000) (11,446,000)
------------ ------------
Net deferred tax asset................................... -- --
============ ============
</TABLE>
The following table is a reconciliation of the effective income tax rate at
December 31, 9999:
<TABLE>
<CAPTION>
AMOUNT PERCENT
------------ -------
<S> <C> <C>
Pretax book income (loss)................................... $(16,746,573) --
============ ======
Federal, U.S. statutory rate................................ (5,693,835) 34.00%
State, net of federal tax benefit........................... (687,165) 4.10%
Valuation allowance......................................... 6,381,000 (38.10%)
Foreign..................................................... 29,000 (0.17%)
</TABLE>
11. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases operating facilities and certain equipment under various
operating leases expiring on various dates through 2004. Future minimum payments
under noncancelable operating leases at December 31, 1999 are:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
2000........................................................ $ 361,838
2001........................................................ 354,123
2002........................................................ 364,070
2003........................................................ 279,798
2004........................................................ 4,268
----------
$1,364,097
==========
</TABLE>
Total rental expense charged to operations for the year ended December 31,
1999 and 1998 was $321,987 and $292,957, respectively.
LEGAL PROCEEDINGS
On March 19, 1998, Matrix Corporation ("Matrix") filed a complaint 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 an
agreement between the two companies concluded in December 1997 (the "December
F-18
<PAGE> 43
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Agreement"), and that the Company should return all goods shipped by Matrix
under both the December Agreement and a prior agreement concluded in June 1997
(the "June Agreement"). The Company and its legal counsel filed a counterclaim
against Matrix stating that Matrix failed to perform to the requirements of both
the June Agreement and the December Agreement and that the Company has been
damaged by this failure to perform. The trial for the case was completed in
August 1999 and on September 22, 1999 the District Court rendered a judgment
against the Company. The Company paid approximately $875,000 to Matrix in the
quarter ending December 31, 1999, in full settlement of this legal proceeding
and, as part of the settlement, received approximately 150 systems and
components for its 133P model. At December 31, 1999, the Company accrued
$150,000 in legal fees incurred in connection with this lawsuit. These amounts
are included in the Company's general and administrative expenses in the related
periods.
12. RELATED PARTY TRANSACTIONS
The Company uses a Director of the Company as its patent counsel. The
Company incurred expenses for this Director of $239,598 and $164,956 during 1999
and 1998, respectively, in fees and disbursements for legal services rendered on
the behalf of the Company. In addition, this Director served as processing agent
for payments of $224,377 and $148,231 during 1999 and 1998, respectively, made
to domestic and international law firms for fees and expenses related to the
filing and maintenance of the Company's patents and trademarks.
The Company uses a law firm, in which a Director of the Company is a
partner, as its general counsel and for other legal services related to the
Company's financings and litigation. The Company incurred $663,075 and $345,207
in legal expenses during 1999 and 1998, respectively, payable to the Director's
law firm.
The Company uses a law firm, in which a Director of the Company is a
partner, for the Company's litigation and for other general legal services. The
Company incurred $218,687 and $97,238 in legal expenses during 1999 and 1998,
respectively, payable to the Director's law firm.
The Company incurred $94,425 and $97,800 in 1999 and 1998, respectively,
for salaries and automobile allowances payable to a Director of the Company for
services provided to Tech Virginia, and for which $95,000 and $65,000 in 1999
and 1998, respectively, were paid.
The Company incurred expenses of $211,621 and $234,745 in 1999 and 1998,
respectively, for salaries, automobile allowances and travel costs payable to a
Director and Executive Vice President of the Company who is the brother of the
President and Chief Executive Officer and served as a consultant to the Company
during 1999 and 1998. The Company incurred expenses of approximately $50,000
related to salary in 1999 and 1998 for the wife of the Chief Executive Officer.
In 1998, the Company incurred $219,433 for sales and marketing consulting
fees and expenses to two members of the SBS Software Center in Germany who
became employees of the Company when a GmbH Company owned by one of these
members was purchased by the Company at fair market value and renamed Xybernaut
GmbH to establish the Company's operations in Europe.
Xybernaut GmbH has engaged Bit-Solutions and Call-In, members of the SBS,
to serve as the Company's distributors and to provide installation, repair and
services for Company products sold in German-speaking countries. The executive
officers of Bit-Solutions and Call-In are the son and daughter-in-law of one of
the Company's Executive Vice Presidents and Directors. During 1999, the Company
incurred expenses from Bit-Solutions and Call-In of $294,315 for service and
support. During 1999 and 1998, the Company sold approximately $14,500 and
$35,000, respectively, of products to Call-In.
F-19
<PAGE> 44
XYBERNAUT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS, CONTINUED:
On various dates during 1999, the Company borrowed $583,000 from several
officers of the Company pursuant to non-interest bearing promissory notes or
agreements. All of these borrowings had been repaid at December 31, 1999 except
for $10,000, which was repaid in February 2000.
13. SUBSEQUENT EVENTS
In January 2000, the Company borrowed approximately $3,025,000 from several
lenders pursuant to promissory notes that require the Company to repay the
borrowings by January 2001 unless repaid earlier upon a public or private
placement of common stock in excess of $10,000,000. Interest accrues at 10% per
annum. In connection with these borrowings, the Company issued warrants to
purchase approximately 302,500 shares of unregistered common stock at $0.10 per
share.
In January 2000, the Company received $2,460,500 in proceeds through the
issuance of 647,500 shares of common stock in a private placement offering.
In January 2000, an additional 4,000 shares of Series D Preferred Stock
were converted by the investors, along with related dividends, into 4,039,033
shares of common stock.
In January and February of 2000, the Company issued 1,867,700 shares of its
common stock to investors who exercised warrants granted in connection with
previous financings for gross proceeds of $7,082,475. Subsequent to these
exercises, the Company had warrants outstanding to purchase 277,500 shares of
its common stock at prices that range from $4.25 to $18.00.
In January and February of 2000, certain of the Company's employees and
consultants exercised stock options that had been issued pursuant to the
Company's various stock incentive plans. None of these employees or consultants
was considered an "affiliate" as defined in Rule 144 under the Securities Act.
The Company issued 231,842 shares of its common stock and received gross
proceeds of $618,970 related to these exercises.
F-20
<PAGE> 45
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On September 13, 1999, the Company engaged Grant Thornton LLP as its new
independent accountant and dismissed PricewaterhouseCoopers LLP, its previous
independent accountant. On September 17, 1999, the Company filed a Form 8-K
(file #000-21013) in connection with the change in accounting firms.
PART III
Items 9 through 12 will be filed pursuant to a definitive proxy statement or an
amendment to this Form 10-KSB.
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. (5)
3.2 -- Bylaws of the Company (as Amended on September 24, 1998). (5)
3.3 -- Certificate of Designation of the Series D Preferred Stock. (6)
3.4 -- Certificate of Designation of the Series E Preferred Stock. (7)
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)
4.7 -- Form of Securities Purchase Agreement for Series D Preferred (6)
Stock.
4.8 -- Form of Warrant in connection with the placement of Series D (6)
Preferred Stock.
4.9 -- Form of Securities Purchase Agreement for Series E Preferred (7)
Stock.
4.10 -- Form of Warrant in connection with the placement of Series E (7)
Preferred Stock.
4.11 -- Warrant issued in connection with the October 1999 Bridge *
Loan Financing.
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 *
G. Newman.
10.4 -- Form of Employment Agreement between the Company and Steven *
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.
</TABLE>
25
<PAGE> 46
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <C> <S> <C>
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.
10.30 -- Second Amendment to Storage Space Lease Agreement between (5)
Hyatt Plaza Limited Ptr. and the Company.
10.31 -- Second Amendment to Office Lease Agreement between Hyatt (5)
Plaza Limited Ptr. and the Company.
10.32 -- Third Amendment to Office Lease Agreement between Hyatt (5)
Plaza Limited Ptr. and the Company.
10.33 -- Form of Registration Rights Agreement in connection with the (6)
placement of Series D Preferred Stock.
10.34 -- Form of Escrow Agreement in connection with the placement of (6)
Series D Preferred Stock.
10.35 -- Form of finder's agreement in connection with the placement (6)
of Series D Preferred Stock.
10.36 -- Form of Registration Rights Agreement in connection with the (7)
placement of Series E Preferred Stock.
10.37 -- Form of Escrow Agreement in connection with the placement of (7)
Series E Preferred Stock.
10.38 -- Form of finder's agreement in connection with the placement (7)
of Series E Preferred Stock.
10.39 -- Purchase Agreement dated as of November 19, 1999 *
10.40 -- Registration Rights Agreement dated November 19, 1999 *
10.41 -- Escrow Agreement dated as of November 19, 1999 *
10.42 -- 1999 Stock Incentive Plan (8)
10.43 -- Form of Restated Bridge Loan Financing Agreement dated *
October 18, 1999
10.44 -- Form of Employment Agreement between the Company and John F. *
Moynahan.
16 -- Letter on Change in Certifying Accountant (9)
23.1 -- Consent of Grant Thornton LLP *
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.
26
<PAGE> 47
(5) Incorporated by reference in the filing of the Company's 1998 Annual Report
on Form 10KSB, No. 0-15086.
(6) Incorporated by reference to the registration statement on Form S-3, as
amended, file No. 333-77769.
(7) Incorporated by reference to the registration statement on Form S-3, as
amended, file No. 333-80837.
(8) Incorporated by reference to the registration statement on Form S-8, file
No. 333-94463.
(9) Incorporated by reference to the report on Form 8-K, file No. 000-21013.
* Filed herewith.
REPORTS ON FORM 8-K
The Company has not filed any Report on Form 8-K during the last quarter of
fiscal year 1999.
27
<PAGE> 48
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: March 15, 2000
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 March 15, 2000
- ----------------------------------------------------- Officer and Chairman of the
Edward G. Newman Board of Directors
/s/ JOHN F. MOYNAHAN Senior Vice President, Chief March 15, 2000
- ----------------------------------------------------- Financial Officer and
John F. Moynahan Treasurer
/s/ EDWIN VOGT Senior Vice President and March 15, 2000
- ----------------------------------------------------- Director
Edwin Vogt
/s/ STEVEN A. NEWMAN Executive Vice President and March 15, 2000
- ----------------------------------------------------- Vice Chairman of the Board
Steven A. Newman of Directors
/s/ KAZ TOYOSATO Executive Vice President and March 15, 2000
- ----------------------------------------------------- Director
Kaz Toyosato
/s/ MARTIN ERIC WEISBERG Secretary and Director March 15, 2000
- -----------------------------------------------------
Martin Eric Weisberg
/s/ GEORGE ALLEN, ESQ. Director March 15, 2000
- -----------------------------------------------------
George Allen
/s/ EUGENE J. AMOBI Director March 15, 2000
- -----------------------------------------------------
Eugene J. Amobi
/s/ KEITH P. HICKS Director March 15, 2000
- -----------------------------------------------------
Keith P. Hicks
/s/ PHILLIP E. PEARCE Director March 15, 2000
- -----------------------------------------------------
Phillip E. Pearce
</TABLE>
28
<PAGE> 49
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JAMES J. RALABATE Director March 15, 2000
- -----------------------------------------------------
James J. Ralabate
/s/ LT. GEN. HARRY E. SOYSTER Director March 15, 2000
- -----------------------------------------------------
Lt. Gen. Harry E. Soyster
</TABLE>
29
<PAGE> 1
THESE SECURITIES AND THE SECURITIES ISSUABLE UPON THEIR EXERCISE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE TRANSFERRED UNLESS
COVERED BY AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT, A "NO ACTION"
LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION WITH RESPECT TO SUCH
TRANSFER, A TRANSFER MEETING THE REQUIREMENTS OF RULE 144 OF THE SECURITIES AND
EXCHANGE COMMISSION, OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER TO THE
EFFECT THAT ANY SUCH TRANSFER IS EXEMPT FROM SUCH REGISTRATION.
XYBERNAUT CORPORATION
COMMON STOCK PURCHASE WARRANT
1. Issuance. In consideration of good and valuable
consideration, the receipt of which is hereby acknowledged by Xybernaut
Corporation, a Delaware corporation (the "Company"), Crystalite Investments
Ltd., or registered assigns (the "Holder") is hereby granted the right to
purchase at any time until 5:00 P.M., New York City time, on October 1, 2004
(the "Expiration Date"), Five Hundred Thousand (500,000) fully paid and
nonassessable shares of the Company's Common Stock, par value $.01 per share
(the "Common Stock") at an initial exercise price of $1.01 per share (the
"Exercise Price"), subject to further adjustment as set forth in Section 6
hereof.
2. Exercise of Warrants. This Warrant is exercisable in whole or
in part at the Exercise Price per share of Common Stock payable hereunder,
payable in cash or by certified or official bank check, or by "cashless
exercise", by means of tendering this Warrant Certificate to the Company to
receive a number of shares of Common Stock equal in Market Value to the
difference between the Market Value of the shares of Common Stock issuable upon
exercise of this Warrant and the total cash exercise price thereof. Upon
surrender of this Warrant Certificate with the annexed Notice of Exercise Form
duly executed, together with payment of the Exercise Price for the shares of
Common Stock purchased, the Holder shall be entitled to receive a certificate
or certificates for the shares of Common Stock so purchased. For the purposes
of this Section 2, "Market Value" shall be an amount equal to the average
closing bid price of a share of Common Stock for the ten (10) days preceding
the Company's receipt of the Notice of Exercise Form duly executed multiplied
by the number of shares of Common Stock to be issued upon surrender of this
Warrant Certificate.
3. Reservation of Shares. The Company hereby agrees that at all
times during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares").
4. Mutilation or Loss of Warrant. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of
<PAGE> 2
loss, theft or destruction) receipt of reasonably satisfactory indemnification,
and (in the case of mutilation) upon surrender and cancellation of this
Warrant, the Company will execute and deliver a new Warrant of like tenor and
date and any such lost, stolen, destroyed or mutilated Warrant shall thereupon
become void.
5. Rights of the Holder. The Holder shall not, by virtue hereof,
be entitled to any rights of a stockholder in the Company, either at law or
equity, and the rights of the Holder are limited to those expressed in this
Warrant and are not enforceable against the Company except to the extent set
forth herein.
6. Protection Against Dilution.
6.1 Adjustment Mechanism. If an adjustment of the
Exercise Price is required pursuant to this Section 6, the Holder shall be
entitled to purchase such number of additional shares of Common Stock as will
cause (i) the total number of shares of Common Stock Holder is entitled to
purchase pursuant to this Warrant, multiplied by (ii) the adjusted purchase
price per share, to equal (iii) the dollar amount of the total number of shares
of Common Stock Holder is entitled to purchase before adjustment multiplied by
the total purchase price before adjustment.
6.2 Capital Adjustments. In case of any stock split or
reverse stock split, stock dividend, reclassification of the Common Stock,
recapitalization, merger or consolidation, or like capital adjustment affecting
the Common Stock of the Company, the provisions of this Section 6 shall be
applied as if such capital adjustment event had occurred immediately prior to
the date of this Warrant and the original purchase price had been fairly
allocated to the stock resulting from such capital adjustment; and in other
respects the provisions of this Section shall be applied in a fair, equitable
and reasonable manner so as to give effect, as nearly as may be, to the
purposes hereof. A rights offering to stockholders shall be deemed a stock
dividend to the extent of the bargain purchase element of the rights.
7. Transfer to Comply with the Securities Act; Registration
Rights.
(a) This Warrant has not been registered under the Securities Act of
1933, as amended, (the "Act") and has been issued to the Holder for investment
and not with a view to the distribution of either the Warrant or the Warrant
Shares. Neither this Warrant nor any of the Warrant Shares or any other
security issued or issuable upon exercise of this Warrant may be sold,
transferred, pledged or hypothecated in the absence of an effective
registration statement under the Act relating to such security or an opinion of
counsel satisfactory to the Company that registration is not required under the
Act. Each certificate for the Warrant, the Warrant Shares and any other
security issued or issuable upon exercise of this Warrant shall contain a
legend on
2
<PAGE> 3
the face thereof, in form and substance satisfactory to counsel for the
Company, setting forth the restrictions on transfer contained in this Section.
(b) The Company hereby grants to the Holder piggyback registration
rights with respect to the Warrant Shares. In the event the Company is filing a
Registration Statement for itself or on behalf of any of its shareholders, the
Company shall notify the Holder in writing reasonably in advance of such filing
(but at least five business days) and give the Holder the opportunity to
include all or any party of the Warrant Shares (whether or not previously
issued, to the extent permissible under the Act or any regulation promulgated
thereunder. Upon the Holder's notification that the Holder desires to have all
or any portion of the Warrant Shares included in such registration, the Company
shall, at no cost or expense to the Holder, include or cause to be included in
such registration statement the Warrant Shares so identified by the Holder.
(c) In addition to the registration rights referred to in the
preceding provisions of Section (b), effective after the expiration of the
effectiveness of the Registration Statement as contemplated by the Registration
Rights Agreement, the Holder shall have demand piggy-back registration rights
with respect to the Warrant Shares then held by the Holder or then subject to
issuance upon exercise of this Warrant (collectively, the "Remaining Warrant
Shares"), subject to the conditions set forth below. If, at any time after the
Registration Statement has ceased to be effective, the Company participates
(whether voluntarily or by reason of an obligation to a third party) in the
registration of any shares of the Company's stock, the Company shall give
written notice thereof to the Holder and the Holder shall have the right,
exercisable within ten (10) business days after receipt of such notice, to
demand inclusion of all or a portion of the Holder's Remaining Warrant Shares
in such registration statement.
8. Notices. Any notice or other communication required or
permitted hereunder shall be in writing and shall be delivered personally,
telegraphed, telexed, sent by facsimile transmission or sent by certified,
registered or express mail, postage pre-paid. Any such notice shall be deemed
given when so delivered personally, telegraphed, telexed or sent by facsimile
transmission, or, if mailed, two days after the date of deposit in the United
States mails, as follows:
(i) if the to Company, to:
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, Virginia 22033
Fax no.:703-631-6734
Attn: Chief Financial Officer
3
<PAGE> 4
(ii) if to the Holder, to:
Crystalit Investments, Ltd.
111 Arlosorov Street
Tel Aviv, Israel
Fax no.: 011-972-3-691-0476
Any party may be notice given in accordance with this Section to the other
parties designate another address or person for receipt of notices hereunder.
9. Supplements and Amendments; Whole Agreement. This Warrant may
be amended or supplemented only by an instrument in writing signed by the
parties hereto. This Warrant of even date herewith contain the full
understanding of the parties hereto with respect to the subject matter hereof
and thereof and there are no representations, warranties, agreements or
understandings other than expressly contained herein and therein.
10. Governing Law. This Warrant shall be deemed to be a contract
made under the laws of the State of New York and for all purposes shall be
governed by and construed in accordance with the laws of such State applicable
to contracts to be made and performed entirely within such State.
11. Counterparts. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. Descriptive Headings. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of
the __th day of December 1999.
XYBERNAUT CORPORATION
By:
--------------------------
Name: Steve A. Newman
Title: Vice Chairman
Attest:
- -----------------------------
- -----------------------------
Chief Administrative Officer
5
<PAGE> 6
FORM OF
NOTICE OF EXERCISE OF WARRANT
The undersigned hereby irrevocably elects to exercise the right,
represented by the Warrant Certificate dated as of __________, 1999, to
purchase __________ shares of the Common Stock, par value $.01 per share, of
Xybernaut Corporation and tenders herewith payment in accordance with Section 1
of said Common Stock Purchase Warrant.
Please deliver the stock certificate to:
Dated:
CRYSTALITE INVESTMENTS LTD.
By:
--------------------------
6
<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of January 1, 2000 (this
"Agreement"), by and between EDWARD G. NEWMAN (the "Executive"), and XYBERNAUT
CORPORATION, a Delaware Corporation (the "Company").
WHEREAS, the Executive has been employed as the President and
Chief Executive Officer of the Company; and
WHEREAS, the Company desires to continue to employ the Executive
as President and Chief Executive Officer of the Company and the Executive
desires to continue his employment with the Company in the aforementioned
capacity, all upon the terms and provisions, and subject to the conditions set
forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. Definitions. As used in this Agreement the following
terms shall have the meanings set forth in this Section 1:
(a) "Affiliate" of any Person means any stockholder or person or
entity controlling, controlled by under common control with such Person, or any
director, officer or key executive of such Person or any of their respective
relatives. For purposes of this definition, "control," when used with respect to
any Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings that correspond to the foregoing.
(b) "Cause" shall mean (i) the Company being subjected to any
criminal liability under any applicable law as a result of any action or
inaction on the part of the Executive, which the Executive did not, at the time,
reasonably believe to be in the best interests of the Company; (ii) the
conviction or admission of the Executive of, or plea by the Executive of nolo
contendre to, a felony or crime involving moral turpitude which the Board of
Directors concludes is likely to have a material and adverse effect on the
reputation of the Company; (iii) if the Executive is chronically addicted to any
narcotic or other illegal or controlled substance or repeatedly abuses any
alcoholic product or any prescription stimulants or depressant, as determined by
a physician designated by the Company, which in the reasonable opinion of the
Board of Directors of the Company materially interferes with Executive's
performance of his duties and obligations hereunder; (iv) the Executive
committing fraud, or stealing or misappropriating any asset or property of the
Company, including, without limitation, any theft or embezzlement; or (v) a
breach of a material provision of this Agreement by the Executive which is not
cured by the Executive within ten (10) business days after written notice of
such breach is received by the Executive from the Company.
<PAGE> 2
(c) "Change of Control" shall mean the occurrence of any of the
following: (i) a Person or group of Persons, other than any current member of
the Board of Directors, obtains beneficial ownership of at least thirty percent
(30%) of the outstanding capital stock of the Company; or (ii) a change in the
membership of more than fifty percent (50%) of the current Board of Directors in
any twelve (12) month period.
(d) "Common Stock" shall mean the common stock, par value $.01
per share, of the Company, and any other class of common stock of the Company
created after the date of this Agreement in accordance with the Company's
Certificate of Incorporation and applicable law.
(e) "Competing Business" shall mean any business, enterprise or
other Person that as one of its businesses or activities, is engaged in the
business of manufacturing, selling, marketing, licensing or distributing
wearable computers or the solutions associated therewith that are provided by
the Company.
(f) "Confidential and Proprietary Information" shall mean any and
all (i) confidential or proprietary information or material not in the public
domain about or relating to the business, operations, assets or financial
condition of the Company or any Affiliate of the Company or any of the Company's
or any such Affiliate's trade secrets, including, without limitation, research
and development plans or projects; data and reports; computer materials such as
programs, instructions and printouts; formulas; product testing information;
business improvements, processes, marketing and selling strategies; strategic
business plans (whether pursued or not); budgets; unpublished financial
statements; licenses; pricing, pricing strategy and cost data; information
regarding the skills and compensation of executives; the identities of clients
and potential clients; intellectual property strategies and any work on any
patents, trademarks and tradenames, prior to any filing or the use thereof in
commerce; pricing, timing, sales terms, service plans, methods, practices,
strategies, forecasts, know-how and other marketing techniques; and (ii)
information, documentation or material not in the public domain by virtue of any
action by or on the part of the Executive, the knowledge of which gives or may
give the Company or any Affiliate of the Company an advantage over any Person
not possessing such information. For purposes hereof, the term Confidential and
Proprietary Information shall not include any information or material (i) that
is known to the general public other than due to a breach of this Agreement by
the Executive or (ii) was disclosed to the Executive by a Person who the
Executive did not reasonably believe was bound to a confidentiality or similar
agreement with the Company.
(g) "CPI" shall have the meaning given to that term in Section
4(a) hereof.
(h) "Discretionary Bonus" shall have the meaning given to that
term in Section 4(c) hereof.
(i) "Employment Term" shall have the meaning given to that term
in Section 2 hereof.
2
<PAGE> 3
(j) "GAAP" shall mean generally accepted United States accounting
principles, as from time to time in effect.
(k) "Good Reason" shall mean (i) a substantial change to or
reduction in the duties or responsibilities of the Executive such that the
responsibilities of the Executive are no longer commensurate with the
Executive's office with the Company as set forth herein; (ii) the occurrence of
Change of Control; (iii) a change in the Executive's office from that of
President and Chief Executive Officer of the Company which is not concurred in
by the Executive within three (3) months of its occurrence; or (iv) the breach
of a material term or provisions of this Agreement by the Company which is not
cured by the Company within ten (10) business days after written notice of such
breach is received by the Company from the Executive.
(l) "Gross Revenues" for each twelve (12) month period during the
Term shall have the meaning of gross revenues of the Company set forth in the
audited annual financial statements of the Company for the applicable twelve
(12) months and which shall be determined in accordance with GAAP applied on a
consistent basis.
(m) "Incapacity" shall mean any illness or mental or physical
incapacity or disability which prevents the Executive from performing his duties
or obligations hereunder for a continuous period of one hundred twenty (120)
consecutive days or for shorter periods aggregating one hundred eighty (180)
days within any consecutive twelve (12) month period.
(n) "Inventions" shall mean inventions, discoveries, concepts and
ideas, whether patentable or not, including, without limitation, processes,
methods, formulae and techniques, and improvements thereof or know-how related
thereto, concerning any business activity of the Company or any Affiliate of the
Company, with which the Executive becomes, directly or indirectly, involved as a
result in whole or in part, directly or indirectly, of the Executive's
employment by the Company, or any Affiliate of the Company.
(o) "Market Cap" shall mean the aggregate market value of all of
the Company's issued and outstanding shares of Common Stock as of the date of
determination.
(p) "Performance Bonus" shall have the meaning given to that term
in Section 4(d) hereof.
(q) "Person" shall mean, without limitation, any natural person,
corporation, partnership, limited liability company, joint stock company, joint
venture association, trust or other similar entity or firm.
(r) "Salary" shall have the meaning given to that term in Section
4(a) hereof.
(s) "Signing Bonus" shall have the meaning given to that term in
Section 4(b) hereof.
3
<PAGE> 4
(t) "Without Cause" shall mean the termination of the Executive's
employment hereunder by the Company, other than termination by the Company due
to the Executive's death or Incapacity or based upon Cause.
Section 2. Employment and Term. The Company hereby employs the
Executive as the President and Chief Executive Officer of the Company and the
Executive hereby accepts such employment in that capacity, upon the terms and
provisions, and subject to the conditions, set forth in this Agreement, for a
term of three (3) years, commencing on January 1, 2000, and terminating on
December 31, 2002, unless earlier terminated as provided in this Agreement (the
"Employment Term").
Section 3. Executive's Duties. (a) The Executive shall be the
senior and chief executive officer of the Company responsible for the Company's
strategic operations including, without limitation, overseeing the management of
the Company's day-to-day operations and the strategic planning of the Company.
The Executive shall report directly and only to the Board of Directors. The
Executive shall also serve as Chairman of the Board of Directors of the Company.
(a) The Executive shall devote all of his business time, effort,
skill and attention exclusively to the business, operations and affairs of the
Company and to the furtherance of the interests, business and prospects of the
Company. The Executive shall perform the Executive's duties and obligations
hereunder diligently, competently, faithfully and to the best of his ability.
Subject to disclosure to the Company's general corporate counsel, the Executive
may serve on the board of directors or other governing boards of other
corporations or businesses or industry organizations; provided that such service
does not materially interfere with the Executive's performance of his duties and
obligations hereunder.
(b) The Executive agrees to execute policy statements and
agreements that the Company may, from time to time, reasonably require all of
its senior executive officers to execute.
Section 4. Compensation. (a) In consideration of the performance
of all of the duties and obligations to be performed by the Executive hereunder,
the Company agrees to pay, and the Executive agrees to accept, for the first
year of the Employment Term a salary (the "Salary") at an annual rate of
$250,000, payable in accordance with the Company's regular payroll practices as
from time to time in effect, less all withholdings and other deductions required
to be deducted in accordance with any applicable federal, state, local or
foreign law, rule or regulation. In addition, the amount of the Executive's
salary for the period from October 1, 1999 through December 31, 1999 shall be
retroactively adjusted to be at an annual rate of $250,000, any differential
owing to the Executive as a result of such adjustment shall be paid to the
Executive promptly after the execution and delivery of this Agreement. After the
first year during the Employment Term, the annual Salary for each successive
year will be increased by the lesser of (i) 10% and (ii) the percentage
increase, if any, in the CPI for each year just completed measured for the
entire twelve (12) month period, plus three percent (3%). For
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purposes hereof, the term "CPI" means the Consumer Price Index for all Urban
Consumers for the United States for the Washington, D.C. metropolitan area
prepared by the Bureau of Labor Statistics of the U.S. Department of Labor, or
if such index is not then being published, by the U.S. Department of Labor, the
most nearly comparable successor index that the parties may agree upon. By this
Agreement, the Company confirms its prior grant to the Executive of options to
purchase shares of the Company's Common Stock, in respect of a salary deferral
applicable to the Executive for the period from September 1, 1999 through
December 31, 1999 on the same basis as other employees of the Company. Such
options shall vest immediately upon the grant and shall have an exercise price
of $1.78 per share and shall have a term of three (3) years.
(b) In consideration of the Executive's execution and delivery of
this Agreement, upon the execution and delivery of this Agreement the Company
shall make a cash payment of $50,000 (the "Signing Bonus"). By this Agreement,
the Company confirms that its prior grant to the Executive of options to
purchase 300,000 shares of the Company's Common Stock at an exercise price equal
to the average of the closing price for the Company's Common Stock on October 1,
1999 and having a term of seven (7) years, which was ratified by the Company's
Board of Directors on December 27, 1999.
(c) At the sole discretion of the Board of Directors of the
Company the Executive may be paid, in cash, Common Stock, options to purchase
Common Stock, Stock Appreciation Rights ("SAR's") or any combination thereof, an
annual bonus in such an amount, if any, and based upon such criteria as the
Board of Directors of the Company may from time to time consider appropriate
(the "Discretionary Bonus"). In addition, this Agreement shall confirm the prior
grant to the Executive, in recognition of the Executive's past services to the
Company, of a grant to the Executive of options to purchase 100,000 shares of
the Company's Common Stock at an exercise price equal to the closing price of
the Company's Common Stock on December 3, 1999. The options granted pursuant to
this Section 4(b) shall be vested as of the date hereof, and shall be subject to
the terms and provisions of the Company's 1997 Stock Option Plan, the Company's
1999 Stock Option Plan or any subsequently enacted stock option plan, as
applicable, except that they may be exercised in any amount at any time after
being vested until three (3) years from date of termination of employment and
shall be irrevocable during that period. Should there not be sufficient options
available or usable under said stock option Plans then, the Company will use its
best efforts to cause a new stock option plan to be adopted which will cover
such options. If no new stock option plan is adopted, the Company will grant
SAR's or make a cash payment to the Executive of substantially similar value,
within one hundred eighty (180) days from the date that it is determined that a
sufficient number of options are not available.
(d) As additional consideration for Executive's services to the
Company hereunder, the Company shall pay Executive an annual bonus (the
"Performance Bonus"), based upon the Company's performance during the Employment
Term, commencing with the fiscal year from January 1, 2000 through December 31,
2000, and for each fiscal year during the Employment Term thereafter, if earned,
in the form of options to purchase shares of the
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<PAGE> 6
Company's Common Stock, in an amount equal to the greater of (i) one and
one-half percent (1.5%) of the Revenue Goal (as hereinafter defined), if the
Revenue Goal is attained; or (ii) two percent (2%) of the increase, if any, in
the Market Cap from January 1 through December 31 of the applicable fiscal year
during the Employment Term. For purposes hereof, the term "Revenue Goal" shall
mean eighty-five percent (85%) of the Company's revenue goal for each fiscal
year during the Employment Term occurring after the first year of the Employment
Term, as set forth in its business plan for such year; provided that for the
fiscal year from January 1, 2000 through December 31, 2000 the Revenue Goal
shall be $20,000,000. For purposes hereof, the Market Cap Test shall be based on
the average of the number of shares outstanding and closing prices for the
Company's Common Stock for the thirty (30) days ended December 31 of the
applicable year, compared to the comparable thirty (30) day period in the prior
year. The calculation of whether any Performance Bonus is due for any fiscal
year during the Employment Term occurring thereafter, as applicable, shall be
made by the Board of Directors promptly after the end of the fiscal year in
respect of the Market Cap test and upon the Company's issuance of its audited
annual financial statements in respect of the Revenue Goal test. The Performance
Bonus, if earned, shall be paid in the form of options to purchase shares of the
Company's Common Stock valued at an exercise price equal to the average of the
closing market price of the shares of the Company's Common Stock for the thirty
(30) days prior to the end of the applicable fiscal year. Any options issued in
respect of the Performance Bonus shall be subject to the terms and provisions of
the Company's 1999 Stock Option Plan or, if no shares are available under such
Plan, or any subsequently enacted stock option plan, as applicable, except that
they may be exercised in any amount, at any time after being vested until three
(3) years from date of termination of employment and are irrevocable during that
period. Should there not be sufficient options available or usable under said
Stock Option Plans, the Company will use its best efforts to cause a new stock
option plan to be adopted which will cover the options subject to the
Performance Bonus. If no new stock option plan is adopted, the Company will
grant SAR's or make a cash payment to the Executive of substantially similar
value, within one hundred eighty (180) days from the date that it is determined
that a sufficient number of options are not available.
(e) Notwithstanding anything set forth in Section 4(c), in no
event shall the options granted to the Executive, if any, as the Performance
Bonus with respect to any fiscal year during the Employment Term exceed the
greater of (i) options exercisable into 500,000 shares of Common Stock or (ii)
1.5% of the Company's outstanding shares of capital stock.
(f) Should there be a Change of Control of the Company or any
other transaction in which the Company is not the surviving entity during the
Employment Term, then as part of that transaction, the Company will require the
surviving entity to modify the Agreement in an equitable manner to provide the
Executive the same type of benefits that he is entitled to earn pursuant to
Section 4(c) of this Agreement.
(g) All options granted to the Executive pursuant to the
Agreement or referred to herein, to the extent permitted by applicable law,
shall be transferable and assignable. Any
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<PAGE> 7
unvested options granted to the Executive hereunder shall fully vest upon a
Change in Control or upon a termination of this Agreement by the Executive for
Good Reason.
Section 5. Benefits, Vacation. (a) During the Employment Term,
the Executive shall be entitled to such insurance and health and medical
benefits as are generally made available to the senior executives of the
Company, as a group, pursuant to such plans as are from time to time maintained
by the Company; provided, however, that the Executive shall be required to
comply with the conditions of coverage attendant to such plans.
(b) During each contract year of the Employment Term, the
Executive shall be entitled to six (6) weeks of vacation. The Executive shall
take vacation at such time or times as the Executive desires, subject to the
concurrence of the Company based upon the then current business needs and
activities of the Company. Vacation shall accrue if unused during the term of
employment.
(c) During the Employment Term, the Executive shall be eligible
to participate in the profit sharing and other benefit plans that the Company
from time to time makes available to the senior executives of the Company as a
group, subject to the terms, provisions and conditions of such plans, including,
without limitation, any vesting periods and eligibility criteria.
(d) During the Employment Term, the Company shall pay to the
Executive a non-accountable expense allowance of $1,500 per month. In addition,
the Company shall also pay reasonable legal and estate planning expenses of
Executive in an amount not to exceed $5,000 for each calendar year during the
Employment Term. The amounts paid and/or provided for in this Section 5(d) shall
be reported by the Company on Internal Revenue Service Form 1099.
(e) The Company agrees to maintain in full force and effect the
life insurance policy in the face amount aggregating Two Million Dollars
($2,000,000.00), which are made payable to such beneficiary or beneficiaries who
are designated by the Executive. The Company shall pay all premiums due on such
policies during the Employment Term. After the termination or expiration of the
Employment Term, at the request of the Executive, the Company shall assign such
insurance policies to the Executive.
Section 6. Business Expenses. The Executive shall be entitled to
reimbursement for ordinary, necessary and reasonable business expenses actually
incurred by the Executive during the Employment Term in the performance of the
Executive's duties hereunder, if supported by such reasonable documentation as
may be required by the Company in accordance with the Company's policies.
Section 7. Termination of Employment Term. (a) In the event of
the death of the Executive during the Employment Term, the Executive's
employment hereunder shall automatically terminate as of the date of death;
provided, however, that the Executive's estate or
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<PAGE> 8
legal representative, as the case may be, shall be entitled to receive, and the
Company shall pay, any accrued and unpaid Salary for a two (2) year period
following the date of death, any Performance Bonus that would be payable for the
two (2) year period in which the Executive died which are properly owing to the
Executive pursuant to Section 6 hereof.
(b) In the event of the Executive's Incapacity, the Company may,
in its sole discretion, terminate the Executive's employment hereunder upon
written notice to the Executive; provided, however, that the Executive or the
Executive's legal representative, as the case may be, shall be entitled to
receive, and the Company shall pay, (i) any accrued and unpaid Salary for a two
(2) year period from the date of termination, less any amounts received by the
Executive under any disability insurance policy maintained by the Company; and
(ii) any Performance Bonus that would be payable for the two (2) year period
after the Executive's employment is terminated due to Incapacity and
reimbursement of business expenses which are properly owing to the Executive
pursuant to Section 6 hereof, through the date of termination; provided that in
no event shall the amount of the Performance Bonus be less than fifty percent
(50%) of what it would have been for the entire year.
(c) The Company shall have the right to terminate the Executive's
employment under this Agreement at any time for Cause upon written notice to the
Executive. In the event the Executive's employment hereunder is terminated by
the Company for Cause, the Company shall only be obligated to pay accrued and
unpaid Salary through the date of termination and the Company shall pay any
accrued and unreimbursed business expenses which are properly owing to the
Executive pursuant to Section 6 hereof through the date of termination.
(d) The Company shall have the right to terminate the Executive's
employment hereunder Without Cause at any time upon ten (10) days' prior written
notice to the Executive. If the Company terminates the Executive's employment
hereunder Without Cause, the Company shall (i) continue to pay Salary to the
Executive provided for hereunder for a period equal to the greater of (x) 2
years from the date of termination and (y) the remaining period of the
Employment Term and (ii) pay any unreimbursed business expenses which are
properly owing to the Executive pursuant to Section 6 hereof through the date of
termination. In addition, should the Executive's employment hereunder be
terminated Without Cause, the Company shall pay to the Executive the Performance
Bonus, if any, for the entire contract year in which the termination of the
Executive's employment with the Company hereunder occurs and for the contract
year following the year in which the termination occurred. The Executive shall
not be under any obligation to mitigate the Company's obligation pursuant to
this Section 7(d) by securing other employment or otherwise.
(e) The Executive shall have the right to terminate his
employment with the Company hereunder for Good Reason, upon not less than thirty
(30) days prior written notice to the Company. Should the Executive terminate
his employment hereunder for Good Reason, the Company shall be obligated to make
the payments to the Executive provided for in Section 7(d) hereof upon the
termination of the Executive's employment by the Company Without Cause.
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<PAGE> 9
(f) The failure of the Company to continue the employment of the
Executive upon expiration of the entire three (3) year Employment Term shall not
be considered a termination of employment for purposes of this Agreement. The
Company's obligations with respect to the Performance Bonus for the last year of
the Employment Term, if any, shall survive the expiration of this Agreement.
Section 8. Inventions. Any Inventions originated or conceived by
the Executive related to the Company's business, during his employment by the
Company or any Affiliate of the Company or with the use or assistance of the
facilities, materials or personnel of the Company or any Affiliate of the
Company, either solely or jointly with others, during the period of employment
with the Company or any Affiliate of the Company shall be the sole and exclusive
property of the Company. The Executive hereby irrevocably assigns and transfers
to the Company and agrees to transfer and assign to the Company all of his
right, title and interest in and to all Inventions, and to applications for
patents and patents granted upon such Inventions and to all copyrightable
material related thereto developed by the Executive or under his supervision.
The Executive agrees for himself and his heirs and personal representatives,
upon the request of the Company and at the Company's expense, to do such acts,
to execute such documents and instruments and to participate in such legal
proceedings as from time to time may be necessary or required to apply for,
secure, maintain, reissue, extend or defend the worldwide rights of the Company
in the Inventions.
Section 9. Restrictions Respecting Competing Businesses,
Confidential Information, etc. The Executive acknowledges and agrees that by
virtue of the Executive's position and involvement with the business and affairs
of the Company, the Executive will develop substantial expertise and knowledge
with respect to all aspects of the Company's business, affairs and operations
and will have access to all significant aspects of the business and operations
of the Company and to Confidential and Proprietary Information.
(a) The Executive hereby covenants and agrees that, during the
Employment Term and thereafter, unless otherwise authorized by the Company in
writing, the Executive shall not, directly or indirectly, under any
circumstance: (i) disclose to any other Person (other than in the regular course
of business of the Company) any Confidential and Proprietary Information, other
than pursuant to applicable law, regulation or subpoena or with the prior
written consent of the Company; (ii) act or fail to act so as to impair the
confidential or proprietary nature of any Confidential and Proprietary
Information; (iii) use any Confidential and Proprietary Information other than
for the sole and exclusive benefit of the Company; or (iv) offer or agree to, or
cause or assist in the inception or continuation of, any such disclosure,
impairment or use of any Confidential and Proprietary Information. Following the
Employment Term, the Executive shall return all documents, records and other
items containing any Confidential and Proprietary Information to the Company
(regardless of the medium in which maintained or stored), without retaining any
copies, notes or excerpts thereof, or at the request of the Company, shall
destroy such documents, records and items (any such destruction to be certified
by the Executive to the Company in writing).
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<PAGE> 10
(b) The Executive covenants and agrees that, while the Executive
is employed by the Company and for one (1) year after the Executive ceases to be
employed by the Company, if the Executive (i) voluntarily terminates his
employment with the Company for Good Reason or (ii) is terminated by the Company
for Cause, the Executive shall not, directly or indirectly, manage, operate or
control, any Competing Business or, directly or indirectly, induce or influence
any customer or other Person that has a business relationship with the Company,
or any Affiliate of the Company, to discontinue or reduce the extent of such
relationship; provided that in the case of a termination by the Executive
pursuant to clause (i) the Company at all times continues to pay the amounts
owing to the Executive pursuant to Section 7(b) hereof. For purposes of this
Agreement, the Executive shall be deemed to be directly or indirectly
interested in a business if he is engaged or interested in that business as a
stockholder, director, officer, Executive, agent, partner, individual
proprietor, consultant, advisor or otherwise, but not if the Executive's
interest is limited solely to the ownership of not more than 5% of the
securities of any class of equity securities of a corporation or other Person
whose shares are listed or admitted to trade on a national securities exchange
or are quoted on NASDAQ or a similar means if NASDAQ is no longer providing
such information.
(c) While the Executive is employed by the Company and for one
(1) year after the Executive ceases to be an employed by the Company, the
Executive shall not, directly or indirectly, solicit to employ for himself or
others any employee of the Company or any Affiliate of the Company who was an
employee of the Company or any Affiliate of the Company as of the date of the
termination of the Executive's employment with the Company, or to solicit any
such employee to leave such employee's employment or join the employ of another,
then or at a later time; provided that the foregoing shall not apply to any
family member of the Executive who is employed by the Company or any such
Affiliate or the Executive's administrative assistant.
(d) The parties agree that nothing in this Agreement shall be
construed to limit or negate the common law of torts, confidentiality, trade
secrets, fiduciary duty and obligations where such laws provide the Company with
any broader, further or other remedy or protection than those provided herein.
(e) Because the breach of any of the provisions of this Section 9
will result in immediate and irreparable injury to the Company for which the
Company will not have an adequate remedy at law, the Company shall be entitled,
in addition to all other rights and remedies, to seek a degree of specific
performance of the restrictive covenants contained in this Section 9 and to a
temporary and permanent injunction enjoining such breach, without posting bond
or furnishing similar security.
Section 10. Severability. Each term and provision of this
Agreement is severable; the invalidity, illegality or unenforceability or
modification of any term or provision of this Agreement shall not affect the
validity, legality and enforceability of the other terms and
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<PAGE> 11
provisions of this Agreement, which shall remain in full force and effect. Since
it is the desire and intent of the parties that the provisions of this Agreement
be enforced to the fullest extent permissible under the laws and public policies
applied in each jurisdiction in which enforcement is sought, should any
particular provision of this Agreement be deemed invalid, illegal or
unenforceable, the same shall be deemed reformed and amended to delete that
portion that is adjudicated to be invalid, illegal or unenforceable and the
deletion shall apply only with respect to the operation of such provision and to
the extent of such provision and, to the extent that a provision of this
Agreement would be deemed unenforceable by virtue of its scope, but may be made
enforceable by limitation thereon, each party agrees that this Agreement shall
be reformed and amended so that the same shall be enforceable to the fullest
extent permissible under the laws and public policies applied in the
jurisdiction in which enforcement is sought.
Section 11. Assignment. This Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of each of
the parties hereto, the heirs, executors, administrators and legal
representatives of the Executive and the successors and permitted assigns of the
Company. Neither this Agreement nor any rights or benefits hereunder may be
assigned by the Executive or the Company without the prior written consent of
the other party hereto, except that the Company may assign any of its rights or
obligations hereunder to any other Person which purchases all or substantially
all of the common stock or assets of the Company or is the successor to the
Company by merger, consolidation or other similar transaction.
Section 12. Amendment; Entire Agreement. This Agreement may not
be modified, amended, altered or supplemented except by a written agreement
executed by the parties hereto. This Agreement contains the entire agreement and
understanding of the parties hereto with respect to the subject matter of this
Agreement and supersedes all prior and/or contemporaneous agreements and
understandings of any kind and nature (whether written or oral) between the
parties with respect to such subject matter, all of which are merged herein.
Section 13. Waivers. Waiver by either party of either breach of
or failure to comply with any provision of this Agreement by the other party
shall not be construed as, or constitute, a continuing waiver of such provision,
or a waiver of any other breach of, or failure to comply with, any other
provision of this Agreement, any such waiver must be in writing to be limited to
the specific matter and instance for which it is given. No waiver of any such
breach or failure or of any term or condition of this Agreement shall be
effective unless in a written instrument and signed by the waiving party and
delivered, in the manner required for notices generally, to the affected party.
Section 14. Notices. All notices, consents, directions,
approvals, instructions, requests and other communications required or permitted
by the terms of this Agreement to be given to any person shall be in writing,
and shall be delivered personally or sent by certified mail, return receipt
requested (postage prepaid) or by telecopy, to the parties at the following
addresses or telecopy numbers, as applicable:
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If to the Executive:
Mr. Edward G. Newman
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Telecopier: (703) 631-7070
If to the Company:
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Attention: Secretary
Telecopier: (703) 631-6734
With a copy to:
Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: Martin Eric Weisberg, Esq.
Telecopier: (212) 704-6288
or to such other address as a party may have furnished to the other parties in
writing in accordance herewith. Any notice, consent, direction, approval,
instruction, request or other communication given in accordance with this
Section 14 shall be effective after it is received by the intended recipient.
Section 15. Governing Law; Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF VIRGINIA
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD
OR REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAWS. THIS AGREEMENT SHALL BE
CONSTRUED AND INTERPRETED WITHOUT REGARD TO ANY PRESUMPTION AGAINST THE PARTY
CAUSING THIS AGREEMENT TO BE DRAFTED. EACH OF THE PARTIES UNCONDITIONALLY AND
IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
VIRGINIA AND THE FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF VIRGINIA
WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, AND EACH OF THE PARTIES WAIVE ANY RIGHT TO CONTEST THE
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VENUE OF SAID COURTS OR TO CLAIM THAT SAID COURTS CONSTITUTE AN INCONVENIENT
FORUM. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A
TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT.
Section 16. Headings; Counterparts. The headings contained in
this Agreement are inserted for reference purposes only and shall not in any way
affect the meaning, construction or interpretation of this Agreement. This
Agreement may be executed in two (2) counterparts, each of which when executed
shall be deemed to be an original, but both of which, when taken together, shall
constitute one and the same document.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Executive and the Company have executed
this Agreement as of the date first above written.
----------------------------------------
Edward G. Newman
XYBERNAUT CORPORATION
By:
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of January 1, 2000 (this
"Agreement"), by and between STEVEN A. NEWMAN (the "Executive"), and XYBERNAUT
CORPORATION, a Delaware Corporation (the "Company").
WHEREAS, the Company desires to employ the Executive as the
Executive Vice President of the Company and the Executive desires to accept
employment with the Company in the aforementioned capacity, all upon the terms
and provisions, and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. Definitions. As used in this Agreement the following
terms shall have the meanings set forth in this Section 1:
(a) "Affiliate" of any Person means any stockholder or person or
entity controlling, controlled by under common control with such Person, or any
director, officer or key executive of such Person or any of their respective
relatives. For purposes of this definition, "control," when used with respect to
any Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings that correspond to the foregoing.
(b) "Cause" shall mean (i) the Company being subjected to any
criminal liability under any applicable law as a result of any action or
inaction on the part of the Executive, which the Executive did not, at the time,
reasonably believe to be in the best interests of the Company; (ii) the
conviction or admission of the Executive of, or plea by the Executive of nolo
contendre to, a felony or crime involving moral turpitude which the Board of
Directors concludes is likely to have a material and adverse effect on the
reputation of the Company; (iii) if the Executive is chronically addicted to any
narcotic or other illegal or controlled substance or repeatedly abuses any
alcoholic product or any prescription stimulants or depressant, as determined by
a physician designated by the Company, which in the reasonable opinion of the
Board of Directors of the Company materially interferes with Executive's
performance of his duties and obligations hereunder; (iv) the Executive
committing fraud, or stealing or misappropriating any asset or property of the
Company, including, without limitation, any theft or embezzlement; or (v) a
breach of a material term or provision of this Agreement by the Executive which
is not cured within ten (10) business days after written notice of such breach
is received by the Executive from the Company.
(c) "Change of Control" shall mean the occurrence of the
following: (i) a Person or group of Persons, other than any current member of
the Board of Directors, obtain
<PAGE> 2
beneficial ownership of at least thirty percent (30%) of the outstanding capital
stock of the Company; (ii) a change in the membership of more than fifty percent
(50%) of the current Board of Directors in any twelve (12) month period; or
(iii) Edward Newman is no longer Chairman and Chief Executive Officer of the
Company.
(d) "Common Stock" shall mean the common stock, par value $.01
per share, of the Company, and any other class of common stock of the Company
created after the date of this Agreement in accordance with the Company's
Certificate of Incorporation and applicable law.
(e) "Competing Business" shall mean any business, enterprise or
other Person that as one of its businesses or activities, is engaged in the
business of manufacturing, selling, marketing, licensing or distributing
wearable computers or the solutions associated therewith provided by the
Company.
(f) "Confidential and Proprietary Information" shall mean any and
all (i) confidential or proprietary information or material not in the public
domain about or relating to the business, operations, assets or financial
condition of the Company or any Affiliate of the Company or any of the Company's
or any such Affiliate's trade secrets, including, without limitation, research
and development plans or projects; data and reports; computer materials such as
programs, instructions and printouts; formulas; product testing information;
business improvements, processes, marketing and selling strategies; strategic
business plans (whether pursued or not); budgets; unpublished financial
statements; licenses; pricing, pricing strategy and cost data; information
regarding the skills and compensation of executives; the identities of clients
and potential clients; intellectual property strategies and any work on any
patents, trademarks and tradenames, prior to any filing or the use thereof in
commerce; pricing, timing, sales terms, service plans, methods, practices,
strategies, forecasts, know-how and other marketing techniques; and (ii)
information, documentation or material not in the public domain by virtue of any
action by or on the part of the Executive, the knowledge of which gives or may
give the Company or any Affiliate of the Company an advantage over any Person
not possessing such information. For purposes hereof, the term Confidential and
Proprietary Information shall not include any information or material (i) that
is known to the general public other than due to a breach of this Agreement by
the Executive or (ii) was disclosed to the Executive by a Person who the
Executive did not reasonably believe was bound to a confidentiality or similar
agreement with the Company.
(g) "CPI" shall have the meaning given to that term in Section
4(a) hereof.
(h) "Discretionary Bonus" shall have the meaning given to that
term in Section 4(c) hereof.
(i) "Employment Term" shall have the meaning given to that term
in Section 2 hereof.
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<PAGE> 3
(j) "GAAP" shall mean generally accepted United States accounting
principles, as from time to time in effect.
(k) "Good Reason" shall mean a (i) substantial change to or
reduction in the duties or responsibilities of the Executive such that the
responsibilities of the Executive are no longer commensurate with the
Executive's office with the Company as set forth herein; (ii) the occurrence of
a Change of Control; (iii) a change in the Executive's office from that of
Executive Vice President of the Company which is not concurred in by the
Executive within three (3) months of its occurrence; or (iv) the breach of a
material term or provision of this Agreement by the Company which is not cured
by the Company within ten (10) business days after written notice of said breach
is received by the Company from the Executive.
(l) "Gross Revenues" for each twelve (12) month period during the
Term shall have the meaning of gross revenues of the Company set forth in the
annual financial statements of the Company for the respective applicable twelve
(12) months and which shall be determined in accordance with GAAP applied on a
consistent basis.
(m) "Incapacity" shall mean any illness or mental or physical
incapacity or disability which prevents the Executive from performing his duties
or obligations hereunder for a continuous period of one hundred twenty (120)
consecutive days or for shorter periods aggregating one hundred eighty (180)
days within any consecutive twelve (12) month period.
(n) "Inventions" shall mean inventions, discoveries, concepts and
ideas, whether patentable or not, including, without limitation, processes,
methods, formulae and techniques, and improvements thereof or know-how related
thereto, concerning any business activity of the Company or any Affiliate of the
Company, with which the Executive becomes, directly or indirectly, involved as a
result in whole or in part, directly or indirectly, of the Executive's
employment by the Company, or any Affiliate of the Company.
(o) "Market Cap" shall mean the aggregate market value of all of
the Company's issued and outstanding shares of Common Stock as of the date of
determination.
(p) "Performance Bonus" shall have the meaning given to that term
in Section 4(d) hereof.
(q) "Person" shall mean, without limitation, any natural person,
corporation, partnership, limited liability company, joint stock company, joint
venture association, trust or other similar entity or firm.
(r) "Salary" shall have the meaning given to that term in Section
4(a) hereof.
(s) "Signing Bonus" shall have the meaning given to that term in
Section 4(b) hereof.
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(t) "Without Cause" shall mean the termination of the Executive's
employment hereunder by the Company, other than termination by the Company due
to the Executive's death or Incapacity or based upon Cause.
Section 2. Employment and Term. The Company hereby employs the
Executive as the Executive Vice President of the Company and the Executive
hereby accepts such employment in that capacity, upon the terms and provisions,
and subject to the conditions, set forth in this Agreement, for a term of three
(3) years, commencing on January 1, 2000, and terminating on December 31, 2002,
unless earlier terminated as provided in this Agreement (the "Employment Term").
Section 3. Executive's Duties.
(a) The Executive shall be the senior executive officer of the
Company responsible for the Company's strategic operations including, without
limitation, overseeing the Company's merger and acquisition activity, strategic
business development, joint ventures, capital raising (including, without
limitation, liaising with investment banks and financial advisers),
international affairs, the Company's relationships with outside counsel and
other professionals. The Executive shall report directly and only to the
Company's Chief Executive Officer, Mr. Edward G. Newman. The Executive may
perform such other duties as may reasonably be assigned to the Executive by the
Company's Chief Executive Officer, Mr. Edward G. Newman or the Board of
Directors.
(b) The Executive shall devote substantially all of his business
time, effort, skill and attention to the business, operations and affairs of the
Company and to the furtherance of the interests, business and prospects of the
Company. The Executive shall perform the Executive's duties and obligations
hereunder diligently, competently, faithfully and to the best of his ability.
Subject to disclosure to the Company's general corporate counsel, the Executive
may serve on the board of directors or other governing boards of, and as
consultants to, other corporations or businesses or industry organizations;
provided that such service does not materially interfere with the Executive's
performance of his duties and obligations hereunder. The Company acknowledges
that the Executive serves on the board of directors or advisory board of the
corporations set forth on Schedule A attached hereto, and the Company hereby
consents to the Executive serving on such boards.
(c) The Executive agrees to execute policy statements and
agreements that the Company may reasonably from time to time require all of its
senior executive officers to execute.
(d) Notwithstanding anything herein to the contrary, the
Executive shall be able to take such time away from his day-to-day activities on
behalf of the Company to maintain his professional medical licenses and
competence; provided that the same does not materially detract from the
performance of his services hereunder.
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Section 4. Compensation.
(a) In consideration of the performance of all of the duties and
obligations to be performed by the Executive hereunder, the Company agrees to
pay, and the Executive agrees to accept, for the first year of the Employment
Term a salary (the "Salary") at an annual rate of $225,000, payable in
accordance with the Company's regular payroll practices as from time to time in
effect, less all withholdings and other deductions required to be deducted in
accordance with any applicable federal, state, local or foreign law, rule or
regulation. In addition, the amount of the Executive's compensation for the
period from October 1, 1999 through December 31, 1999 shall be retroactively
adjusted to be at an annual rate of $225,000, any differential owing to the
Executive as a result of such adjustment shall be paid to the Executive promptly
after the execution and delivery of this Agreement. After the first year during
the Employment Term, the annual Salary for each successive year will be
increased by the lesser of (i) 10% and (ii) the percentage increase, if any, in
the CPI for each year just completed measured for the entire twelve (12) month
period, plus three percent (3%). For purposes hereof, the term "CPI" means the
Consumer Price Index for all Urban Consumers for the United States for the
Washington, D.C. metropolitan area prepared by the Bureau of Labor Statistics of
the U.S. Department of Labor, or if such index is not then being published, by
the U.S. Department of Labor, the most nearly comparable successor index that
the parties may agree upon. By this Agreement, the Company confirms its prior
grant to the Executive, of options to purchase shares of the Company's Common
Stock in respect of a salary deferral applicable to the Executive for the period
from September 1, 1999 through December 31, 1999, on the same basis as the other
employees of the Company. Such options vest immediately upon the grant, shall
have an exercise price of $1.78 per share and shall have a term of three (3)
years.
(b) In consideration of the Executive's execution and delivery of
this Agreement, upon the execution and delivery of this Agreement the Company
shall make a cash payment of $50,000.00 (the "Signing Bonus"). By this
Agreement, the Company confirms its prior grant to the Executive of options to
purchase 300,000 shares of the Company's Common Stock at an exercise price equal
to the closing price for the Company's Common Stock on October 1, 1999 and
having a term of seven (7) years, which was ratified by the Company's Board of
Directors on December 27, 1999.
(c) At the sole discretion of the Board of Directors of the
Company the Executive may be paid, in cash, Common Stock, options to purchase
Common Stock, Stock Appreciation Rights ("SAR's") or any combination thereof, an
annual bonus in such an amount, if any, and based upon such criteria as the
Board of Directors of the Company may from time to time consider appropriate
(the "Discretionary Bonus"). The minimum amount of the cash portion of the
Discretionary Bonus for fiscal year 2000 shall be $100,000, which minimum amount
shall be paid within five (5) business days after the Executive's request
therefor. In addition, this Agreement shall confirm the prior grant to the
Executive's, in recognition of the Executive's past services to the Company, of
a grant to the Executive of options to purchase 100,000 shares of the Company's
Common Stock at an exercise price equal to the closing price of the Company's
Common Stock on December 3, 1999, which grant was ratified by the
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<PAGE> 6
Company's Board of Directors on December 27, 1999. The options granted as part
of the Discretionary Bonus shall be vested as of the date hereof, and shall be
subject to the terms and provisions of the Company's 1997 Stock Option Plan, the
Company's 1999 Stock Option Plan or any subsequently enacted stock option plan,
as applicable, except that they may be exercised in any amount at any time after
being vested until three (3) years from date of termination of employment and
shall be irrevocable during that period. Should there not be sufficient options
available or usable under said stock option Plans then, the Company will use its
best efforts to cause a new stock option plan to be adopted which will cover
such options. If no new plan is adopted, the Company will grant SAR's or make a
cash payment to the Executive of substantially similar value, within one hundred
eighty (180) days from the date that it is determined that a sufficient number
of options are not available.
(d) As additional consideration for Executive's services to the
Company hereunder, the Company shall pay Executive an annual bonus (the
"Performance Bonus"), based upon the Company's performance during the Employment
Term, commencing with the fiscal year from January 1, 2000 through December 31,
2000, and for each fiscal year during the Employment Term thereafter, if earned,
in the form of options to purchase shares of the Company's Common Stock, in an
amount equal to the greater of (i) one and one-half percent (1.5%) of the
Revenue Goal (as hereinafter defined), if the Revenue Goal is attained; or (ii)
two percent (2%) of the increase, if any, in the Market Cap from January 1
through December 31 of the applicable fiscal year during the Employment Term.
For purposes hereof, the term "Revenue Goal" shall mean eighty-five percent
(85%) of the Company's revenue goal for each fiscal year during the Employment
Term occurring after the first year of the Employment Term, as set forth in its
business plan for such year; provided that for the fiscal year from January 1,
2000 through December 31, 2000 the Revenue Goal shall be $20,000,000. For
purposes hereof, the Market Cap Test shall be based on the average of the number
of shares outstanding and closing prices for the Company's Common Stock for the
thirty (30) days ended December 31 of the applicable year, compared to the
comparable thirty (30) day period in the prior year. The calculation of whether
any Performance Bonus is due for any fiscal year during the Employment Term
occurring thereafter, as applicable, shall be made by the Board of Directors
promptly after the end of the fiscal year in respect of the Market Cap test and
upon the Company's issuance of its audited annual financial statements in
respect of the Revenue Goal test. The Performance Bonus, if earned, shall be
paid in the form of options to purchase shares of the Company's Common Stock
valued at an exercise price equal to the average of the closing market price of
the shares of the Company's Common Stock for the thirty (30) days prior to the
end of the applicable fiscal year. Any options issued in respect of the
Performance Bonus shall be subject to the terms and provisions of the Company's
1999 Stock Option Plan or, if no shares are available under such Plan, or any
subsequently enacted stock option plan, as applicable, except that they may be
exercised in any amount, at any time after being vested until three (3) years
from date of termination of employment and are irrevocable during that period.
Should there not be sufficient options available or usable under said Stock
Option Plans, the Company will use its best efforts to cause a new stock option
plan to be adopted which will cover the options subject to the Performance
Bonus. If no new plan is adopted, the Company will grant SAR's or make a cash
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payment to the Executive of substantially similar value, within one hundred
eighty (180) days from the date that it is determined that a sufficient number
of options are not available.
(e) Notwithstanding anything set forth in this Section 4(d), in
no event shall the options granted to the Executive, if any, as the Performance
Bonus with respect to any fiscal year during the Employment Term exceed the
greater of (i) options exercisable into 500,000 shares of Common Stock or (ii)
1.5% of the Company's outstanding shares of capital stock.
(f) Should there be a Change of Control of the Company or any
other transaction in which the Company is not the surviving entity during the
Employment Term, then as part of that transaction, the Company will require the
surviving entity to modify the Agreement in an equitable manner to provide the
Executive the same type of benefits that he is entitled to earn pursuant to
Section 4(d) of this Agreement.
(g) All options granted to the Executive pursuant to this
Agreement or referred to herein, to the extent permitted by applicable law,
shall be transferable and assignable. Any unvested options granted to the
Executive hereunder shall fully vest upon a Change of Control or upon a
termination of this Agreement by the Executive for Good Reason.
Section 5. Benefits, Vacation.
(a) During the Employment Term, the Executive shall be entitled
to such insurance and health and medical benefits as are generally made
available to the senior executives of the Company, as a group, pursuant to such
plans as are from time to time maintained by the Company; provided, however,
that the Executive shall be required to comply with the conditions of coverage
attendant to such plans.
(b) During each contract year of the Employment Term, the
Executive shall be entitled to six (6) weeks of vacation. The Executive shall
take vacation at such time or times as the Executive desires, subject to the
concurrence of the Company based upon the then current business needs and
activities of the Company. Vacation shall accrue if unused during the term of
employment.
(c) During the Employment Term, the Executive shall be eligible
to participate in the profit sharing and other benefit plans that the Company
from time to time makes available to the senior executives of the Company as a
group, subject to the terms, provisions and conditions of such plans, including,
without limitation, any vesting periods and eligibility criteria.
(d) During the Employment Term, the Company shall pay to the
Executive a non-accountable expense allowance of $2,500 per month. In addition,
the Company shall also pay reasonable legal and estate planning expenses of
Executive in an amount not to exceed $5,000 for each calendar year during the
Employment Term. The amounts paid and/or provided for in this Section 5(d) shall
be reported by the Company on Internal Revenue Service Form 1099.
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<PAGE> 8
(e) The Company shall obtain a life insurance policy in the face
amount aggregating Two Million Dollars ($2,000,000.00), which are made payable
to such beneficiary or beneficiaries who are designated by the Executive. The
Company shall pay all premiums due on such policies during the Employment Term.
After the termination or expiration of the Employment Term, at the request of
the Executive, the Company shall assign such insurance policies to the
Executive.
Section 6. Business Expenses. The Executive shall be entitled to
reimbursement for ordinary, necessary and reasonable business expenses actually
incurred by the Executive during the Employment Term in the performance of the
Executive's duties hereunder.
Section 7. Termination of Employment Term.
(a) In the event of the death of the Executive during the
Employment Term, the Executive's employment hereunder shall automatically
terminate as of the date of death; provided, however, that the Executive's
estate or legal representative, as the case may be, shall be entitled to
receive, and the Company shall pay, any accrued and unpaid Salary for a two (2)
year period following the date of death, any Performance Bonus that would be
payable for the two (2) year period in which the Executive died which are
properly owing to the Executive pursuant to Section 6 hereof.
(b) In the event of the Executive's Incapacity, the Company may,
in its sole discretion, terminate the Executive's employment hereunder upon
written notice to the Executive; provided, however, that the Executive or the
Executive's legal representative, as the case may be, shall be entitled to
receive, and the Company shall pay, (i) any accrued and unpaid Salary for a two
(2) year period from the date of termination, less any amounts received by the
Executive under any disability insurance policy maintained by the Company; and
(ii) any Performance Bonus that would be payable for the two (2) year after the
Executive's employment is terminated due to Incapacity and reimbursement of
business expenses which are properly owing to the Executive pursuant to Section
6 hereof, through the date of termination.
(c) The Company shall have the right to terminate the Executive's
employment under this Agreement at any time for Cause upon written notice to the
Executive. In the event the Executive's employment hereunder is terminated by
the Company for Cause, the Company shall only be obligated to pay accrued and
unpaid Salary through the date of termination and the Company shall pay any
accrued and unreimbursed business expenses which are properly owing to the
Executive pursuant to Section 6 hereof through the date of termination.
(d) The Company shall have the right to terminate the Executive's
employment hereunder Without Cause at any time upon ten (10) days' prior written
notice to the Executive. If the Company terminates the Executive's employment
hereunder Without Cause, the Company shall (i) continue to pay Salary to the
Executive provided for hereunder for a period equal to the greater of (x) 2
years from the date of termination and (y) the remaining period of the
Employment Term and (ii) pay any unreimbursed business expenses which are
properly owing to the Executive pursuant to Section 6 hereof through the date of
termination. In
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addition, should the Executive's employment hereunder be terminated Without
Cause, the Company shall pay to the Executive the Performance Bonus, if any, for
the entire contract year in which the termination of the Executive's employment
with the Company hereunder occurs and for the contract year following the year
in which the termination occurred. The Executive shall not be under any
obligation to mitigate the Company's obligation pursuant to this Section 7(d) by
securing other employment or otherwise.
(e) The Executive shall have the right to terminate his
employment with the Company hereunder for Good Reason, upon not less than thirty
(30) days prior written notice to the Company. Should the Executive terminate
his employment hereunder for Good Reason, the Company shall be obligated to make
the payments to the Executive provided for in Section 7(d) hereof upon the
termination of the Executive's employment by the Company Without Cause.
(f) The failure of the Company to continue the employment of the
Executive upon expiration of the entire three (3) year Employment Term shall not
be considered a termination of employment for purposes of this Agreement. The
Company's obligations with respect to the Performance Bonus for the last year of
the Employment Term, if any, shall survive the expiration of this Agreement.
Section 8. Inventions. Any Inventions originated or conceived by
the Executive related to the Company's business, during his employment by the
Company or any Affiliate of the Company or with the use or assistance of the
facilities, materials or personnel of the Company or any Affiliate of the
Company, either solely or jointly with others, during the period of employment
with the Company or any Affiliate of the Company shall be the sole and exclusive
property of the Company. The Executive hereby irrevocably assigns and transfers
to the Company and agrees to transfer and assign to the Company all of his
right, title and interest in and to all Inventions, and to applications for
patents and patents granted upon such Inventions and to all copyrightable
material related thereto developed by the Executive or under his supervision.
The Executive agrees for himself and his heirs and personal representatives,
upon the request of the Company and at the Company's expense, to do such acts,
to execute such documents and instruments and to participate in such legal
proceedings as from time to time may be necessary or required to apply for,
secure, maintain, reissue, extend or defend the worldwide rights of the Company
in the Inventions.
Section 9. Restrictions Respecting Competing Businesses,
Confidential Information, etc. The Executive acknowledges and agrees that by
virtue of the Executive's position and involvement with the business and affairs
of the Company, the Executive will develop substantial expertise and knowledge
with respect to all aspects of the Company's business, affairs and operations
and will have access to all significant aspects of the business and operations
of the Company and to Confidential and Proprietary Information.
(a) The Executive hereby covenants and agrees that, during the
Employment Term and thereafter, unless otherwise authorized by the Company in
writing, the Executive shall not, directly or indirectly, under any
circumstance: (i) disclose to any other Person (other than in
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<PAGE> 10
the regular course of business of the Company) any Confidential and Proprietary
Information, other than pursuant to applicable law, regulation or subpoena or
with the prior written consent of the Company; (ii) act or fail to act so as to
impair the confidential or proprietary nature of any Confidential and
Proprietary Information; (iii) use any Confidential and Proprietary Information
other than for the sole and exclusive benefit of the Company; or (iv) offer or
agree to, or cause or assist in the inception or continuation of, any such
disclosure, impairment or use of any Confidential and Proprietary Information.
Following the Employment Term, the Executive shall return all documents, records
and other items containing any Confidential and Proprietary Information to the
Company (regardless of the medium in which maintained or stored), without
retaining any copies, notes or excerpts thereof, or at the request of the
Company, shall destroy such documents, records and items (any such destruction
to be certified by the Executive to the Company in writing).
(b) The Executive covenants and agrees that, while the Executive
is employed by the Company and for one (1) year after the Executive ceases to be
employed by the Company, if the Executive (i) voluntarily terminates his
employment with the Company for Good Reason or (ii) is terminated by the Company
for Cause, the Executive shall not, directly or indirectly, manage, operate or
control, any Competing Business or, directly or indirectly, induce or influence
any customer or other Person that has a business relationship with the Company,
or any Affiliate of the Company, to discontinue or reduce the extent of such
relationship; provided that in the case of a termination by the Executive
pursuant to clause (i) the Company at all times continues to pay the amounts
owing to the Executive pursuant to Section 7(b) hereof.
(c) While the Executive is employed by the Company and for one
(1) year after the Executive ceases to be an employed by the Company, the
Executive shall not, directly or indirectly, solicit to employ for himself or
others any employee of the Company or any Affiliate of the Company who was an
employee of the Company or any Affiliate of the Company as of the date of the
termination of the Executive's employment with the Company, or to solicit any
such employee to leave such employee's employment or join the employ of another,
then or at a later time; provided that the foregoing shall not apply to any
family member of the Executive who is employed by the Company or any such
Affiliate or the Executive's administrative assistant.
(d) The parties agree that nothing in this Agreement shall be
construed to limit or negate the common law of torts, confidentiality, trade
secrets, fiduciary duty and obligations where such laws provide the Company with
any broader, further or other remedy or protection than those provided herein.
(e) Because the breach of any of the provisions of this Section 9
will result in immediate and irreparable injury to the Company for which the
Company will not have an adequate remedy at law, the Company shall be entitled,
in addition to all other rights and remedies, to seek a degree of specific
performance of the restrictive covenants contained in this Section 9 and to a
temporary and permanent injunction enjoining such breach, without posting bond
or furnishing similar security.
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Section 10. Severability. Each term and provision of this
Agreement is severable; the invalidity, illegality or unenforceability or
modification of any term or provision of this Agreement shall not affect the
validity, legality and enforceability of the other terms and provisions of this
Agreement, which shall remain in full force and effect. Since it is the desire
and intent of the parties that the provisions of this Agreement be enforced to
the fullest extent permissible under the laws and public policies applied in
each jurisdiction in which enforcement is sought, should any particular
provision of this Agreement be deemed invalid, illegal or unenforceable, the
same shall be deemed reformed and amended to delete that portion that is
adjudicated to be invalid, illegal or unenforceable and the deletion shall apply
only with respect to the operation of such provision and to the extent of such
provision and, to the extent that a provision of this Agreement would be deemed
unenforceable by virtue of its scope, but may be made enforceable by limitation
thereon, each party agrees that this Agreement shall be reformed and amended so
that the same shall be enforceable to the fullest extent permissible under the
laws and public policies applied in the jurisdiction in which enforcement is
sought.
Section 11. Assignment. This Agreement and the rights and
obligations of the parties hereto shall bind and inure to the benefit of each of
the parties hereto, the heirs, executors, administrators and legal
representatives of the Executive and the successors and permitted assigns of the
Company. (Neither this Agreement nor any rights or benefits hereunder may be
assigned by the Executive or the Company without the prior written consent of
the other party hereto, except that the Company may assign any of its rights or
obligations hereunder to any other Person which purchases all or substantially
all of the common stock or assets of the Company or is the successor to the
Company by merger, consolidation or other similar transaction).
Section 12. Amendment; Entire Agreement. This Agreement may not
be modified, amended, altered or supplemented except by a written agreement
executed by the parties hereto. This Agreement contains the entire agreement and
understanding of the parties hereto with respect to the subject matter of this
Agreement and supersedes all prior and/or contemporaneous agreements and
understandings of any kind and nature (whether written or oral) between the
parties with respect to such subject matter, all of which are merged herein.
Section 13. Waivers. Waiver by either party of either breach of
or failure to comply with any provision of this Agreement by the other party
shall not be construed as, or constitute, a continuing waiver of such provision,
or a waiver of any other breach of, or failure to comply with, any other
provision of this Agreement, any such waiver must be in writing to be limited to
the specific matter and instance for which it is given. No waiver of any such
breach or failure or of any term or condition of this Agreement shall be
effective unless in a written instrument and signed by the waiving party and
delivered, in the manner required for notices generally, to the affected party.
Section 14. Notices. All notices, consents, directions,
approvals, instructions, requests and other communications required or permitted
by the terms of this Agreement to be given to any person shall be in writing,
and shall be delivered personally or sent by certified
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mail, return receipt requested (postage prepaid) or by telecopy, to the parties
at the following addresses or telecopy numbers, as applicable:
If to the Executive:
Dr. Steven. Newman
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Telecopier: (703) 222-7660
If to the Company:
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Attention: Secretary
Telecopier: (703) 631-7070
With a copy to:
Parker Chapin LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Attention: Martin Eric Weisberg, Esq.
Telecopier: (212) 704-6288
or to such other address as a party may have furnished to the other parties in
writing in accordance herewith. Any notice, consent, direction, approval,
instruction, request or other communication given in accordance with this
Section 14 shall be effective after it is received by the intended recipient.
Section 15. Governing Law; Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF VIRGINIA
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD
OR REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAWS. THIS AGREEMENT SHALL BE
CONSTRUED AND INTERPRETED WITHOUT REGARD TO ANY PRESUMPTION AGAINST THE PARTY
CAUSING THIS AGREEMENT TO BE DRAFTED. EACH OF THE PARTIES UNCONDITIONALLY AND
IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
VIRGINIA AND THE FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF VIRGINIA
WITH RESPECT TO
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<PAGE> 13
ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, AND
EACH OF THE PARTIES WAIVE ANY RIGHT TO CONTEST THE VENUE OF SAID COURTS OR TO
CLAIM THAT SAID COURTS CONSTITUTE AN INCONVENIENT FORUM. EACH OF THE PARTIES
UNCONDITIONALLY AND IRREVOCABLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.
Section 16. Headings; Counterparts. The headings contained in
this Agreement are inserted for reference purposes only and shall not in any way
affect the meaning, construction or interpretation of this Agreement. This
Agreement may be executed in two (2) counterparts, each of which when executed
shall be deemed to be an original, but both of which, when taken together, shall
constitute one and the same document.
[INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the Executive and the Company have executed
this Agreement as of the date first above written.
----------------------------------------
Steven A. Newman
XYBERNAUT CORPORATION
By:
--------------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT 10.39
PURCHASE AGREEMENT
This PURCHASE AGREEMENT (this "Agreement"), dated as of November 19, 1999,
is entered into by and among XYBERNAUT CORPORATION, a Delaware corporation (the
"Company"), with offices at 12701 Fair Lakes Circle, Fairfax, Virginia 22033,
and BALMORE FUNDS, S.A., a corporation organized under the laws of the British
Virgin Islands, with offices at c/o Trident Trust Company (BVI) Limited, Trident
Chambers, Road Town, Tortola, British Virgin Islands, and AUSTOST ANSTALT
SCHAAN, a corporation organized under the laws of the Liechtenstein, with
offices at Ladstrasse 163, 9494 Furstentums, Vaduz, Liechtenstein (together, the
"Buyers"), for the purchase and sale of shares of the common stock, par value
$.01 per share (the "Common Stock"), of the Company by the Buyers, in the
manner, and upon the terms, provisions and conditions set forth in this
Agreement.
Therefore, in consideration of the representations, warranties and
agreements contained herein and other good and valuable consideration, the
receipt and legal adequacy of which is hereby acknowledged by the parties, the
Company and the Buyers hereby agree as follows:
1. AGREEMENT TO SUBSCRIBE; PRICING.
(a) The Buyers hereby subscribe for a total of 1,000,000 shares of
the Company's Common Stock (the "Shares") at a price of $3.00 per share for an
aggregate purchase price of $3,000,000 (the "Purchase Price").
(b) The Buyers shall pay the Purchase Price by delivering
immediately available good funds in United States Dollars to the escrow agent
(the "Escrow Agent") identified in the Escrow Agreement attached hereto as
Exhibit 1(b) (the "Escrow Agreement").
(c) The closing under this Agreement shall take place at the offices
of Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the Americas, New York,
New York 10036 at 1:00 p.m. E.S.T. upon the satisfaction of each of the
conditions set forth in Section 2 hereof (the Closing Date").
2. CONDITIONS PRECEDENT.
(a) The parties shall have executed and delivered this Agreement and
the Escrow Agreement.
(b) The Company shall have delivered certificates evidencing the
Shares to the Escrow Agent.
(c) The Buyers shall have delivered to the Escrow Agent the funds as
payment in full of the Purchase Price for the Shares in accordance with Section
1(b) hereof and the Escrow Agreement.
3. REGISTRATION STATEMENT. On or before November 30, 1999 (the "Filing
Date") the Company shall cause to be filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-3 (or any other
comparable form) to register
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for resale the Shares purchased by the Buyers pursuant to this Agreement.
Notwithstanding the foregoing, if 500,000 freely tradable shares of Common Stock
have been delivered to the Buyers prior to the filing of a Registration
Statement, the Filing Date shall be within 10 days after the 1999 Annual Meeting
of Stockholders of the Company. The Company shall use its best efforts to take
all steps necessary to cause the Registration Statement to be declared effective
by December 15, 1999, but in no event later than 90 days after the Filing Date.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BUYERS. Each of the
Buyers represents and warrants to the Company, and covenants for the benefit of
the Company, as follows:
(a) This Agreement has been duly authorized, validly executed and
delivered by the Buyers and constitutes a valid and binding agreement and
obligation of the Buyers enforceable against the Buyers in accordance with its
terms, subject to limitations on enforcement by general principles of equity and
bankruptcy or other laws affecting the enforcement of creditors' rights
generally;
(b) The Buyers have received and carefully reviewed copies of the
Public Documents (as hereinafter defined). No representations or warranties have
been made to the Buyers by the Company, the officers or directors of the
Company, or any agent, employee or affiliate of any of them, except as
specifically set forth herein or as set forth in the other documents expressly
referred to herein. Each of the Buyers understands that no Federal, state, local
or foreign governmental body or regulatory authority has made any finding or
determination relating to the fairness of an investment in the Shares and that
no Federal, state, local or foreign governmental body or regulatory authority
has recommended or endorsed, or will recommend or endorse, any investment in the
Shares. Each of the Buyers, in making the decision to purchase the Shares, has
relied upon independent investigation made by it and has not relied on any
information or representations made by third parties;
(c) Each of the Buyers understands that the Shares are being offered
and sold to it in reliance on specific provisions of Federal and state
securities laws and that the Company is relying upon the truth and accuracy of
the representations, warranties, agreements, acknowledgments and understandings
of each of the Buyers set forth herein for purposes of qualifying for exemptions
from registration under the Securities Act, and applicable state securities
laws;
(d) Each of the Buyers is an "accredited investor" as defined under
Rule 501 of Regulation D promulgated under the Securities Act;
(e) Each of the Buyers (i) is and will be acquiring the Shares for
such Buyer's own account, and not with a view to any resale or distribution of
the Shares, in whole or in part, in violation of the Securities Act or any
applicable securities laws and (ii) has not offered or sold any of the Shares
and has no present intention or agreement to divide the Shares with others for
purposes of selling, offering, distributing or otherwise disposing of any of the
Shares;
(f) The offer and sale of the Shares is intended to be exempt from
registration under the Securities Act, by virtue of Section 4(2) and Regulation
D promulgated under the Securities Act. Each of the Buyers understands that the
shares of Common Stock purchased
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<PAGE> 3
hereunder have not been, and may never be, registered under the Securities Act;
that the Shares cannot be sold, transferred, assigned, pledged or subjected to
any lien or security interest unless they are first registered under the
Securities Act and such state and other securities laws as may be applicable or
in the opinion of counsel for the Company an exemption from registration under
the Shares Act is available (and then the Shares may be sold, transferred,
assigned, pledged or subjected to a lien or security interest only in compliance
with such exemption and all applicable state and other securities laws); and
that the following legends will be placed upon the certificate for the Shares:
"The Shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Securities Act"),
and may not be offered for sale, sold or otherwise transferred,
pledged or subjected to any lien or security interest, in the absence
of an effective registration statement under the Securities Act or a
written opinion of counsel for the Company that the Shares may be
offered for sale, sold, transferred, pledged or subjected to a lien or
security interest pursuant to an exemption under the Securities Act
and such state and other securities laws as may be applicable."
(g) Each of the Buyers (i) has such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of an investment in the Company; and (ii) recognizes that such Buyer's
investment in the Company involves a high degree of risk; and
(h) Each of the Buyers is capable of evaluating the risks and merits
of an investment in the Shares by virtue of its experience as an investor and
its knowledge, experience, and sophistication in financial and business matters
and such Buyer is capable of bearing the entire loss of its investment in the
Shares.
(i) None of the Buyers is a registered broker-dealer or an affiliate
of a registered broker-dealer.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY. The Company
represents and warrants to the Buyers, and covenants for the benefit of the
Buyers, as follows:
(a) The Company has been duly incorporated and is validly existing
and in good standing under the laws of the State of Delaware, with full
corporate power and authority to own, lease and operate its properties and to
conduct its business as currently conducted, and is duly registered and
qualified to conduct its business and is in good standing in each jurisdiction
or place where the nature of its properties or the conduct of its business
requires such registration or qualification, except where the failure to
register or qualify is not reasonably anticipated to have a material adverse
effect on the business or financial condition of the Company ("Material Adverse
Effect");
(b) The Company has furnished the Buyers with copies of the
Company's most recent Annual Report on Form 10-KSB (the "Form 10-KSB") filed
with the Commission, its Form 10- QSB for the quarterly period ended September
30, 1999 (the "Form 10-QSB";
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<PAGE> 4
collectively with the Form 10-KSB, the "Public Documents"). The Public Documents
at the time of their filing did not include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements contained therein, in light of the circumstances under which they
were made, not misleading;
(c) The Shares, when paid for by the Buyers, shall be duly
authorized and validly issued and when issued and delivered, will be fully paid
and nonassessable;
(d) This Agreement has been duly authorized, validly executed and
delivered on behalf of the Company and is a valid and binding agreement and
obligation of the Company enforceable against the Company in accordance with its
terms, subject to limitations on enforcement by general principles of equity and
by bankruptcy or other laws affecting the enforcement of creditors' rights
generally, and the Company has full power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
perform its obligations hereunder and thereunder;
(e) The execution and delivery of this Agreement, the issuance of
the Shares and the consummation of the transactions contemplated by this
Agreement by the Company, will not conflict with or result in a breach of or a
default under any of the terms or provisions of, the Company's certificate of
incorporation or by-laws, or of any material provision of any indenture,
mortgage, deed of trust or other material agreement or instrument to which the
Company is a party or by which it or any of its material properties or assets is
bound, any material provision of any law, statute, rule, regulation, or any
existing applicable decree, judgment or order by any court, Federal or state
regulatory body, administrative agency, or other governmental body having
jurisdiction over the Company, or any of its material properties or assets or
will result in the creation or imposition of any material lien, charge or
encumbrance upon any material property or assets of the Company or any of its
subsidiaries pursuant to the terms of any agreement or instrument to which any
of them is a party or by which any of them may be bound or to which any of their
property or any of them is subject;
(f) Except as disclosed herein, and based upon the representations
and warranties of the Buyers set forth herein, no authorization, approval,
filing with or consent of any governmental body is required for the issuance and
sale of the Shares to the Buyers pursuant to this Agreement;
(g) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending against or
affecting the Company, or any of its properties, which would reasonably be
anticipated to result in a Material Adverse Effect, except as disclosed to the
Buyers or set forth in the Public Documents;
(h) Subsequent to the dates as of which information is given in the
Public Documents, except as contemplated herein, the Company has not incurred
any material liabilities or material obligations, direct or contingent, or
entered into any material transactions not in the ordinary course of business,
and there has not been any change in its capitalization or any Material Adverse
Effect; and
(i) The Company has sufficient title and ownership of all
trademarks, service marks, trade names, copyrights, patents, trade secrets and
other proprietary rights necessary for
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<PAGE> 5
its business as now conducted and as proposed to be conducted as described in
the Public Documents without any conflict with or infringement of the rights of
others. Except as set forth in the Public Documents, there are no material
outstanding options, licenses or agreements of any kind relating to the
foregoing, nor is the Company bound by or party to any material options,
licenses or agreements of any kind with respect to the trademarks, service
marks, trade names, copyrights, patents, trade secrets, licenses and other
proprietary rights of any other person or entity.
6. INDEMNIFICATION.
(a) The Company hereby agrees to indemnify and hold harmless the
Buyers and its officers, directors, shareholders, employees, agents and
attorneys against any and all losses, claims, damages, liabilities and expenses
incurred by each such person in connection with defending or investigating any
such claims or liabilities, whether or not resulting in any liability to such
person, to which any such indemnified party may become subject under the
Securities Act, or under any other statute, at common law or otherwise, insofar
as such losses, claims, demands, liabilities and expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact made by the Company, (ii) any omission or alleged omission of a material
fact with respect to the Company, or (iii) any breach of any representation,
warranty or agreement made by the Company in this Agreement.
(b) The Buyers hereby agree to indemnify and hold harmless the
Company and its officers, directors, shareholders, employees, agents and
attorneys against any and all losses, claims, damages, liabilities and expenses
incurred by each such person in connection with defending or investigating any
such claims or liabilities, whether or not resulting in any liability to such
person, to which any such indemnified party may become subject under the
Securities Act, or under any other statute, at common law or otherwise, insofar
as such losses, claims, demands, liabilities and expenses arise out of or are
based upon (i) any untrue statement or alleged untrue statement of a material
fact made by the Buyers, (ii) any omission or alleged omission of a material
fact with respect to the Buyers or (iii) any breach of any representation,
warranty or agreement made by the Buyers in this Agreement.
7. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall be
governed by and interpreted in accordance with the laws of the State of New York
without giving effect to the rules governing the conflicts of laws. Each of the
parties consents to the exclusive jurisdiction of the Federal courts whose
districts encompass any part of the City of New York in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions. Each
party waives its right to a trial by jury. Each party to this Agreement
irrevocably consents to the service of process in any such proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
such party at its address set forth herein or its agent. Each of the Buyers
appoints the Escrow Agent as such Buyer's agent for service of process in any
such proceeding. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
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<PAGE> 6
8. NOTICES. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, express overnight
courier, registered first class mail, overnight courier, or telecopier,
initially to the address set forth below, and thereafter at such other address,
notice of which is given in accordance with the provisions of this Section.
(a) if to the Company:
Xybernaut Corporation
12701 Fair Lakes Circle
Fairfax, Virginia 22033
Attn: Dr. Steven A. Newman
Vice Chairman
Telephone: (703) 631-6925
Telecopier: (703) 631-6734
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
Attn:Martin Eric Weisberg, Esq.
Telephone: (212) 704-6000
Telecopier: (212) 704-6288
(b) if to the Buyers:
Balmore Funds, S.A.
c/o Trident Trust Company (BVI) Limited
Trident Chambers
Road Town
Tortola, British Virgin Islands
Attn: Francois Morax
Telecopier No.: 011-411-201-4800
Austost Anstalt Schaan
Ladstrasse 163
9494 Furstentums
Vaduz, Liechtenstein
Attn: Thomas Hackl
Telecopier No.: 011-431-534-532895
All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; three (3) business days
after being deposited in the mail, postage prepaid, if mailed; the next business
day after being deposited with an overnight courier, if deposited with a
nationally recognized, overnight courier service; when receipt is acknowledged,
if telecopied.
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<PAGE> 7
9. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding
and agreement of the parties with respect to the subject matter hereof and
supersedes all prior and/or contemporaneous oral or written proposals or
agreements relating thereto all of which are merged herein. This Agreement may
not be amended or any provision hereof waived in whole or in part, except by a
written amendment signed by both of the parties.
10. COUNTERPARTS. This Agreement may be executed by facsimile signature
and in counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[end of page]
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<PAGE> 8
IN WITNESS WHEREOF, this Agreement was duly executed on the date first
written above.
XYBERNAUT CORPORATION
By:_______________________________
Name: Steven A. Newman
Title: Vice-Chairman
BALMORE FUNDS, S.A.
By:_______________________________
Name:
Title:
AUSTOST ANSTALT SCHAAN
By:_______________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 10.40
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of November 19, 1999 (this
"Agreement"), is made by and among XYBERNAUT CORPORATION, a Delaware corporation
(the "Company"), and Balmore Funds, S.A., a corporation organized under the laws
of the British Virgin Islands, and Austost Anstalt Schaan, a corporation
organized under the laws of Liechtenstein (the "Investors").
W I T N E S S E T H:
WHEREAS, upon the terms and subject to the conditions of the Purchase
Agreement, dated as of November 19, 1999, by and among the Investors and the
Company (the "Purchase Agreement"), the Company has agreed to issue and sell to
the Investors 1,000,000 shares of common stock, par value $.01 per share (the
"Common Stock"), of the Company, for an aggregate principal amount not exceeding
$3,000,000 (the "Shares"); and
WHEREAS, to induce the Investors to execute and deliver the Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "Securities
Act"), with respect to the Shares;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Investors
hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investors" means the Investors and any permitted transferee or
assignee who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "Potential Material Event" means any of the following: (a) the
possession by the Company of material information not ripe for disclosure in a
registration statement, which shall be evidenced by determinations in good faith
by the Board of Directors of the Company that disclosure of such information in
the registration statement would be detrimental to the business and affairs of
the Company; or (b) any material engagement or activity by the Company which
would, in the good faith determination of the Board of Directors of the Company,
be adversely affected by disclosure in a registration statement at such time,
which determination shall be accompanied by a good faith determination by the
Board of Directors of the Company that the registration statement would be
materially misleading absent the inclusion of such information.
<PAGE> 2
(iii) "Register," "Registered," and "Registration" refer to
registration effected by preparing and filing a Registration Statement or
Statements in compliance with the Securities Act and pursuant to Rule 415 under
the Securities Act or any successor rule providing for offering securities on a
continuous basis ("Rule 415"), and the declaration or ordering of effectiveness
of such Registration Statement by the United States Securities and Exchange
Commission (the "SEC").
(iv) "Registrable Securities" means the Shares.
(v) "Registration Statement" means a registration statement of the
Company under the Securities Act.
(b) Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Purchase Agreement.
2. REGISTRATION.
(a) MANDATORY REGISTRATION. The Company shall prepare and file with the
SEC on or before November 30, 1999 (the "Filing Date") a Registration Statement
on Form S-3 (or such other applicable form), registering for resale by the
Investors all of the Shares, or an amendment to any pending Company Registration
Statement on Form S-3 (or such other applicable form) and such Registration
Statement or amended Registration Statement shall state that, in accordance with
Rule 457 under the Securities Act, it also covers such indeterminate number of
additional shares of Common Stock as may become issuable to prevent dilution
resulting from stock splits, or stock dividends, and the Company shall use its
best efforts to cause the Registration Statement to be declared effective by
December 15, 1999 but in no event later than ninety (90) days after the Filing
Date. Notwithstanding the foregoing, if 500,000 freely tradable shares of Common
Stock have been delivered to the Investors prior to the filing of a Registration
Statement, then the Filing Date shall be within ten (10) days after the 1999
Annual Meeting of Stockholders of the Company, which is scheduled to occur on
December 21, 1999, but in no event later than December 31, 1999. If the Company
is notified orally or in writing by the SEC that the SEC has no comments with
respect to the Registration Statement (the "SEC Notice"), the Company shall use
its best efforts to cause the Registration Statement to be declared effective no
later than five (5) business days after receipt of the SEC Notice.
(b) Payments by the Company.
(i) If the Registration Statement covering the Registrable
Securities required to be filed by the Company pursuant to Section 2(a) hereof
has not been filed by the Filing Date (the "Required Filing Date") and/or has
not been declared effective by the earlier of (i) five (5) business days after
the Company receives the SEC Notice and (ii) ninety (90) days after the Filing
Date (the "Required Effective Date") (except as provided by the last sentence of
Section 2(a) with respect to the registration of additional shares of Common
Stock), then the Company will make payments to the Investors in such amounts and
at such times as shall be determined pursuant to this Section 2(b).
(ii) The amount to be paid by the Company to the Investors as
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<PAGE> 3
liquidated damages for such failure and not as a penalty shall be equal to one
percent (1%) of the purchase price paid by the Investors for all shares of
Common Stock purchased and then outstanding pursuant to the Purchase Agreement
for the initial thirty (30) day period until the Registration Statement has been
filed and/or declared effective, which shall be pro rated for such periods less
than thirty (30) days and two percent (2%) of the purchase price paid by the
Investors for each thirty (30) day period thereafter until the Registration
Statement has been filed and/or declared effective (which shall be also pro
rated, as aforesaid) (the "Periodic Amount"). The liquidated damages shall be
paid by the Company in cash upon demand.
(iii) The parties acknowledge that the damages which may be incurred
by the Investors if the Registration Statement is not filed by the Required
Filing Date or if the Registration Statement has not been declared effective by
the Required Effective Date may be difficult to ascertain. The parties agree
that the Periodic Amount represents a reasonable estimate on the part of the
parties, as of the date of this Agreement, of the amount of such damages.
(iv) Notwithstanding the foregoing, the amounts payable by the
Company pursuant to this provision shall not be payable to the extent any delay
in the effectiveness of the Registration Statement occurs because of an act of,
or a failure to act or to act timely by the Investors or its counsel, or as a
result of force majeure, or in the event all of the Registrable Securities may
be sold pursuant to Rule 144 (without volume limitation) or another available
exemption under the Act. The payment of such liquidated damages shall not
relieve the Company from its obligations to register the Registrable Securities.
If the Company does not pay the liquidated damages in a timely fashion set forth
herein, it will pay to the Investors the reasonable costs of collection,
including attorneys fees, in addition to the liquidated damages.
3. OBLIGATIONS OF THE COMPANY. In connection with the registration of the
Registrable Securities, the Company shall do each of the following.
(a) Prepare promptly and file with the SEC not later than the Filing Date,
a Registration Statement with respect to not less than the number of Registrable
Securities provided in Section 2(a), above, and thereafter use its best efforts
to cause each Registration Statement relating to Registrable Securities to
become effective the earlier of (i) five (5) business days after receipt of the
SEC Notice and (ii) ninety (90) days after the Filing Date and keep the
Registration Statement effective at all times until the earliest (the
"Registration Period") of (i) the date that is two years after the Filing Date,
(ii) the date when the Investors may sell all Registrable Securities pursuant to
Rule 144 under the Securities Act (without volume limitation) or (iii) the date
the Investors no longer owns any of the Registrable Securities, which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading;
(b) Prepare and file with the SEC such amendments (including
post-effective amendments) and supplements to the Registration Statement and the
prospectus used in connection with the Registration Statement as may be
necessary to keep the Registration
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<PAGE> 4
effective at all times during the Registration Period, and, during the
Registration Period, comply with the provisions of the Securities Act with
respect to the disposition of all Registrable Securities of the Company covered
by the Registration Statement until such time as all of such Registrable
Securities have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in the Registration
Statement;
(c) The Company shall permit a single firm of counsel designated by the
Investors to review the Registration Statement and all amendments and
supplements thereto a reasonable period of time (but not less than three (3)
business days) prior to their filing with the SEC, and not file any document in
a form to which such counsel reasonably objects.
(d) Furnish to the Investors whose Registrable Securities are included in
the Registration Statement and its legal counsel identified to the Company, (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one (1) copy of the Registration Statement,
each preliminary prospectus and prospectus, and each amendment or supplement
thereto, and (ii) such number of copies of a prospectus, and all amendments and
supplements thereto and such other documents, as the Investors may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investors;
(e) As promptly as practicable after becoming aware of such event, but in
no event later than one (1) business day thereafter, the Company shall notify
the Investors in writing of (x) the issuance by the SEC of a stop order
suspending the effectiveness of the Registration Statement, (y) the happening of
any event of which the Company has knowledge as a result of which the prospectus
included in the Registration Statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, or (z) the occurrence
or existence of any pending corporate development that, in the reasonable
discretion of the Company, makes it appropriate to suspend the availability of
the Registration Statement, and promptly to prepare and file a supplement or
amendment to the Registration Statement to correct such untrue statement or
omission, and deliver two (2) copies of such supplement or amendment to the
Investors or such additional copies as the Investors may reasonably request;
provided that, for not more than twenty (20) days (or a total of not more than
forty-five (45) days in any twelve (12) month period, the Company may delay the
disclosure of material non-public information concerning the Company (as well as
prospectus or Registration Statement updating) the disclosure of which at the
time is not, in the good faith opinion of the Company, the best interests of the
Company and in the opinion of counsel to the Company (an "Allowed Delay");
provided, further, that the Company shall promptly (i) notify the Investors in
writing of the existence of material non-public information giving rise to an
Allowed Delay and (ii) advise the Investors in writing to cease all sales under
the Registration Statement until the end of the Allowed Delay. Upon expiration
of the Allowed Delay, the Company shall again be bound by the first sentence of
this Section 3(e) with respect to the information giving rise thereto, and shall
be obligated to pay to the Investors any amounts provided for in Section 2(b).
(f) As promptly as practicable after becoming aware of such event, but in
no
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<PAGE> 5
event later than one (1) business day thereafter, notify the Investors who holds
Registrable Securities being sold (or, in the event of an underwritten offering,
the managing underwriters) of the issuance by the SEC of a Notice of
Effectiveness or any notice of effectiveness or any stop order or other
suspension of the effectiveness of the Registration Statement at the earliest
possible time;
(g) Notwithstanding the foregoing, if at any time or from time to time
after the date of effectiveness of the Registration Statement, the Company
notifies the Investors in writing of the existence of a Potential Material
Event, the Investors shall not offer or sell any Registrable Securities, or
engage in any other transaction involving or relating to the Registrable
Securities, from the time of the giving of notice with respect to a Potential
Material Event until the Investors receives written notice from the Company that
such Potential Material Event either has been disclosed to the public or no
longer constitutes a Potential Material Event; provided, however, that the
Company may not so suspend the right to such holders of Registrable Securities
for more than two twenty (20) day periods in the aggregate during any 12-month
period (the "Suspension Period") with at least a ten (10) business day interval
between such periods, during the periods the Registration Statement is required
to be in effect;
(h) Provide a transfer agent and registrar, which may be a single entity,
for the Registrable Securities not later than the effective date of the
Registration Statement;
(i) Cooperate with the Investors who hold Registrable Securities being
offered to facilitate the timely preparation and delivery of certificates for
the Registrable Securities to be offered pursuant to the Registration Statement
and enable such certificates for the Registrable Securities to be in such
denominations or amounts as the case may be, as the Investors may reasonably
request, and, within three (3) business days after a Registration Statement
which includes Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel selected by the Company to
deliver, to the transfer agent for the Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) an appropriate instruction and opinion of such counsel;
(j) Take all other reasonable actions necessary to expedite and facilitate
disposition by the Investors of the Registrable Securities pursuant to the
Registration Statement;
(k) The Company shall register and qualify the securities covered by the
Registration Statement under such other securities or blue sky laws of such
jurisdictions as the Investors shall reasonably request, and do any and all
other acts and things which may be necessary or advisable to enable each
Investor to consummate the public sale or other disposition in such jurisdiction
of the securities owned by such Investor;
4. OBLIGATIONS OF THE INVESTORS. In connection with the registration of
the Registrable Securities, the Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the Company to
complete the registration pursuant to this Agreement with respect to the
Registrable Securities of a particular Investor that such Investor shall furnish
to the Company such information regarding itself, the Registrable Securities
held by it, and the intended method of disposition of the
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<PAGE> 6
Registrable Securities held by it, as shall be reasonably requested by the
Company in writing to effect the registration of such Registrable Securities and
shall execute such documents in connection with such registration as the Company
may reasonably request. At least two (2) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor of the information the Company requires from such Investor (the
"Requested Information"). If at least one (1) business day prior to the filing
date of the Registration Statement the Company has not received the Requested
Information from an Investor (a "Non-Responsive Investor"), then the Company may
file the Registration Statement without including Registrable Securities of such
Non-Responsive Investor;
(b) Each Investor by such Investor's acceptance of the Registrable
Securities agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement; and
(c) Each Investor agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Section 3(e), 3(f) or
3(k), above, such Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by Section 3(e), 3(f) or 3(k)
and, if so directed by the Company, such Investor shall deliver to the Company
(at the expense of the Company) or destroy (and deliver to the Company a
certificate of destruction) all copies in such Investor's possession, of the
prospectus covering such Registrable Securities current at the time of receipt
of such notice.
5. EXPENSES OF REGISTRATION. All reasonable expenses, other than
underwriting discounts and commissions incurred in connection with
registrations, filings or qualifications pursuant to Section 3, but including,
without limitation, all registration, listing, and qualifications fees, printers
and accounting fees, the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. INDEMNIFICATION. In the event any Registrable Securities are included
in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each Investor who holds such Registrable Securities, the directors, if
any, of such Investor, the officers and agents, if any, of such Investor, each
person, if any, who controls any Investor within the meaning of the Securities
Act or the Exchange Act (each, an "Indemnified Person" or "Indemnified Party"),
against any losses, claims, damages, liabilities or expenses (joint or several)
incurred (collectively, "Claims") to which any of them may become subject under
the Securities Act, the Exchange Act or otherwise, insofar as such Claims (or
actions or proceedings, whether commenced or threatened, in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations in the Registration Statement, or any post-effective amendment
thereof, or any prospectus included therein: (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
any
6
<PAGE> 7
post-effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in the final prospectus (as amended or
supplemented, if the Company files any amendment thereof or supplement thereto
with the SEC) or the omission or alleged omission to state therein any material
fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading or
(iii) any violation or alleged violation by the Company of the Securities Act,
the Exchange Act, any state securities law or any rule or regulation under the
Securities Act, the Exchange Act or any state securities law (the matters in the
foregoing clauses (i) through (iii) being, collectively, "Violations"). Subject
to clause (b) of this Section 6, the Company shall reimburse the Investors,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim. Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a) shall not (I) apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto, if such
prospectus was timely made available by the Company pursuant to Section 3(c)
hereof; (II) be available to the extent such Claim is based on a failure of the
Investors to deliver or cause to be delivered the prospectus made available by
the Company; or (III) apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Each Investor will indemnify the
Company and its officers, directors and agents against any claims arising out of
or based upon a Violation which occurs in reliance upon and in conformity with
information furnished in writing to the Company, by or on behalf of such
Investor, expressly for use in connection with the preparation of the
Registration Statement, subject to such limitations and conditions as are
applicable to the Indemnification provided by the Company to this Section 6.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
(b) Promptly after receipt by an Indemnified Person or Indemnified Party
under this Section 6 of notice of the commencement of any action (including any
governmental action), such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be. In case any
such action is brought against any Indemnified Person or Indemnified Party, and
it notifies the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate in, and, to the extent that it may wish,
jointly with any other indemnifying party similarly notified, assume the defense
thereof, subject to the provisions herein stated and after notice from the
indemnifying party to such Indemnified Person or Indemnified Party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such Indemnified Person or Indemnified Party under this Section 6 for
any legal
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<PAGE> 8
or other reasonable out-of-pocket expenses subsequently incurred by such
Indemnified Person or Indemnified Party in connection with the defense thereof
other than reasonable costs of investigation, unless the indemnifying party
shall not pursue the action of its final conclusion. The Indemnified Person or
Indemnified Party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and reasonable
out-of-pocket expenses of such counsel shall not be at the expense of the
indemnifying party if the indemnifying party has assumed the defense of the
action with counsel reasonably satisfactory to the Indemnified Person or
Indemnified Party. The failure to deliver written notice to the indemnifying
party within a reasonable time of the commencement of any such action shall not
relieve such indemnifying party of any liability to the Indemnified Person or
Indemnified Party under this Section 6, except to the extent that the
indemnifying party is prejudiced in its ability to defend such action. The
indemnification required by this Section 6 shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as such
expense, loss, damage or liability is incurred and is due and payable.
7. CONTRIBUTION. To the extent any indemnification by an indemnifying
party is prohibited or limited by law, the indemnifying party agrees to make the
maximum contribution with respect to any amounts for which it would otherwise be
liable under Section 6 to the fullest extent permitted by law; provided,
however, that (a) no contribution shall be made under circumstances where the
maker would not have been liable for indemnification under the fault standards
set forth in Section 6; (b) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation; and (c)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.
8. REPORTS UNDER EXCHANGE ACT. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act or any
other similar rule or regulation of the SEC that may at any time permit the
Investors to sell securities of the Company to the public without registration
("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other documents
required of the Company under the Securities Act and the Exchange Act; and
(c) furnish to each Investor so long as such Investor owns Registrable
Securities, promptly upon request, (i) a written statement by the Company that
it has complied with the reporting requirements of Rule 144, the Securities Act
and the Exchange Act, (ii) a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed by the Company and
(iii) such other information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without registration.
9. ASSIGNMENT OF THE REGISTRATION RIGHTS. The rights to have the Company
register Registrable Securities pursuant to this Agreement shall be
automatically assigned by the
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<PAGE> 9
Investors to any transferee of the Registrable Securities only if: (a) the
Investors agree in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment, (b) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (i) the
name and address of such transferee or assignee and (ii) the securities with
respect to which such registration rights are being transferred or assigned, (c)
immediately following such transfer or assignment the further disposition of
such securities by the transferee or assignee is restricted under the Securities
Act and applicable state securities laws, and (d) at or before the time the
Company received the written notice contemplated by clause (b) of this sentence
the transferee or assignee agrees in writing with the Company to be bound by all
of the provisions contained herein. In the event of any delay in filing or
effectiveness of the Registration Statement as a result of such assignment, the
Company shall not be liable for any damages arising from such delay, or the
payments set forth in Section 2(b) hereof.
10. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this Agreement may
be amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and the Investors. Any amendment or waiver
effected in accordance with this Section 10 shall be binding upon the Investor
and the Company.
11. MISCELLANEOUS. (a) A person or entity is deemed to be a holder of
Registrable Securities whenever such person or entity owns of record such
Registrable Securities. If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed effectively given, (i) on the date delivered, (a) by
personal delivery, or (b) if advance copy is given by fax, (ii) seven business
days after deposit in the United States Postal Service by regular or certified
mail, (iii) three business days mailing by international express courier, with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses, or at such other addresses as a party may
designate by ten days advance written notice to each of the other parties
hereto, (iv) if to the Company, XYBERNAUT CORPORATION, 12701 Fair Lakes Circle,
Suite 550, Fairfax, Virginia 22033, Facsimile no.: (703) 631-7660, ATTN: Dr.
Steven A. Newman, Vice Chairman, with a copy to the Company's Chief Financial
Officer and a copy to Parker Chapin Flattau & Klimpl, LLP, 1211 Avenue of the
Americas, New York, New York 10036, Facsimile no.: (212) 704-6288, ATTN: Martin
Eric Weisberg, Esq.; (v) if to the Investors, BALMORE FUNDS, S.A., c/o Trident
Trust Company (BVI) Limited, Trident Chambers, Road Town, Tortola, British
Virgin Islands, Facsimile no.: 011-411-201-4800, ATTN: Francois Morax and
AUSTOST ANSTALT SCHAAN, Ladstrasse 163, 9494 Furstentums, Vaduz, Liechtenstein,
Facsimile no.: 011-431-534-532-895, ATTN: Thomas Hackl and (vi) if to any other
Investor, at such address as such Investor shall have provided in writing to the
Company, or at such other address as each such party furnishes by notice given
in accordance with this Section 11(b), and shall be effective, when personally
9
<PAGE> 10
delivered, upon receipt and, when so sent by certified mail, four (4) calendar
days after deposit with the United States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof.
(d) This Agreement shall be governed by and interpreted in accordance with
the laws of the State of New York without giving effect to the principles
thereof regarding the conflict of laws. Each of the parties consents to the
exclusive jurisdiction of the Federal courts whose districts encompass any part
of the City of New York in connection with any dispute arising under this
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non conveniens, to the
bringing of any such proceeding in such jurisdictions. Each party waives its
right to a trial by jury. Each party to this Agreement irrevocably consents to
the service of process in any such proceeding by the mailing of copies thereof
by registered or certified mail, postage prepaid, to such party at its address
set forth herein or its agent. Each Investor appoints Parker Chapin Flattau &
Klimpl, LLP as such Investor's agent for service of process in any such
proceeding. Nothing herein shall affect the right of any party to serve process
in any other manner permitted by law.
(e) This Agreement and the Purchase Agreement constitute the entire
agreement among the parties hereto with respect to the subject matter hereof.
There are no restrictions, promises, warranties or undertakings, other than
those set forth or referred to herein and therein. This Agreement supersedes all
prior agreements and understandings among the parties hereto with respect to the
subject matter hereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of each
of the parties hereto.
(g) All pronouns and any variations thereof refer to the masculine,
feminine or neuter, singular or plural, as the context may require.
(h) The headings in this Agreement are for convenience of reference only
and shall not limit or otherwise affect the meaning thereof.
(i) This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original but all of which shall constitute one and the
same agreement. This Agreement, once executed by a party, may be delivered to
the other party hereto by telephone line facsimile transmission of a copy of
this Agreement bearing the signature of the party so delivering this Agreement.
(j) If any provision of this Agreement for any reason be held invalid or
unenforceable, such invalidity or unenforceability shall not affect any other
provision hereof and this Agreement shall be construed as if such invalid or
unenforceable provision had never been contained herein.
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<PAGE> 11
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
XYBERNAUT CORPORATION
By:______________________________
Name: Steven A. Newman
Title: Vice Chairman
BALMORE FUNDS, S.A.
By:______________________________
Name:
Title:
AUSTOST ANSTALT SCHAAN
By:______________________________
Name:
Title:
11
<PAGE> 1
EXHIBIT 10.41
ESCROW AGREEMENT
ESCROW AGREEMENT (the "Escrow Agreement") made as of the 19th day of
November, 1999, by and among XYBERNAUT CORPORATION, a Delaware corporation with
offices at 12701 Fair Lakes Circle, Suite 550, Fairfax, Virginia 22033 (the
"Company"), BALMORE FUNDS, S.A., a corporation organized under the laws of the
British Virgin Islands, with offices at c/o Trident Trust Company (BVI) Limited,
Trident Chambers, Road Town, Tortola, British Virgin Islands and AUSTOST ANSTALT
SCHAAN, a corporation organized under the laws of Liechtenstein corporation,
with offices at Ladstrasse 163, 9494 Furstentums, Vaduz, Liechtenstein
(together, the "Purchasers"), and PARKER CHAPIN FLATTAU & KLIMPL, LLP, a New
York limited liability partnership with offices at 1211 Avenue of the Americas,
New York, New York 10027, as escrow agent (the "Escrow Agent").
W I T N E S S E T H:
WHEREAS, the Company desires to raise capital for general working capital
purposes and acquisitions;
WHEREAS, the Company and the Purchasers have agreed that, in order to raise
capital, the Company shall issue and sell to the Purchasers an aggregate of
1,000,000 shares of the Company's common stock, $0.01 par value per share (the
"Common Stock"), for an aggregate purchase price of $3,000,000.00 (the "Sale");
WHEREAS, pursuant to the Sale, the Company will enter into a Purchase
Agreement dated as of November 19, 1999 (the "Purchase Agreement") with the
Purchasers; and
WHEREAS, the Purchase Agreement contemplates that all funds shall be paid
into escrow and the original certificates representing the Common Stock (the
"Certificates") shall be held in escrow prior to the Closing Date (as defined in
the Purchase Agreement) and the Escrow Agent has agreed to receive, hold and pay
such funds and to receive such Certificates upon the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and for other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties to this Escrow Agreement hereby agree
as follows:
1. Defined Terms. Capitalized terms used and not otherwise defined
herein shall have the meanings respectively assigned to them in the Purchase
Agreement.
2. Escrow of Funds. At or prior to the Closing Date, the following
shall occur: (a) the Purchasers shall remit by wire transfer the Purchase Price
to the Escrow Agent pursuant to this Escrow Agreement as payment in full for the
Common Stock (the "Escrow Amount"); (b) the Company shall deliver or cause to be
delivered to Escrow Agent the
<PAGE> 2
Certificates registered in the name of the Purchasers (or any nominee designated
by the Purchasers within three days before the Closing Date), free and clear of
all liens, claims, charges and encumbrances. The Escrow Agent shall hold the
Escrow Amount and the Certificates and shall deliver them or redeliver them to
the Company or to the Purchasers, as applicable, only in accordance with the
terms and conditions of this Escrow Agreement.
3. Investment of Funds. The Escrow Agent shall invest the monies in
the Escrow Amount in an interest bearing bank account with, or certificates of
deposit or time deposits with maturities of no more than thirty (30) days issued
by, a domestic commercial bank or such other bank or other financial institution
as it normally holds such funds.
4. Release of Funds. (a) The Escrow Agent shall release the Escrow
Amount and the Certificates upon receipt, at any time, of instructions from the
Company and the Purchasers directing the manner in which the return or other
distribution of the funds in the Escrow Amount and the Certificates are to be
made.
(b) Immediately following notification to the Escrow Agent by the
Company and the Purchasers that each of the conditions precedent to the Closing
has been satisfied or waived, the Company shall be paid the Escrow Amount and
the Purchasers shall receive the Certificates.
(c) If no Closing occurs and the Escrow Agent does not receive joint
instructions of the Company and the Purchasers regarding an extension of the
Closing Date, the Escrow Agent shall promptly thereafter return the Escrow
Amount to the Purchasers and the Certificates to the Company.
(d) Any interest earned on the Escrow Amount shall be paid to the
party receiving the Escrow Amount.
5. Further Assurances. The Company and the Purchasers agree to do
such further acts and to execute and deliver such statements, assignments,
agreements, instruments and other documents as the Escrow Agent from time to
time reasonably may request in connection with the administration, maintenance,
enforcement or adjudication of this Escrow Agreement in order (a) to give the
Escrow Agent confirmation and assurance of the Escrow Agent's rights, powers,
privileges, remedies and interests under this Escrow Agreement and applicable
law, (b) to better enable the Escrow Agent to exercise any such right, power,
privilege, remedy or interest, or (c) to otherwise effectuate the purpose and
the terms and provisions of this Escrow Agreement, each in such form and
substance as may be reasonably acceptable to the Escrow Agent.
6. Conflicting Demands. If conflicting or adverse claims or demands
are made or notices served upon the Escrow Agent with respect to the escrow
provided for herein, the Company and the Purchasers agree that the Escrow Agent
shall refuse to comply with any such claim or demand and withhold and stop all
further performance of this escrow so long as such disagreement shall continue.
In so doing, the Escrow Agent shall not be or become liable for damages, losses,
costs, expenses or interest to any or any other person for its failure to
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<PAGE> 3
comply with such conflicting or adverse demands. The Escrow Agent shall be
entitled to continue to so refrain and refuse to so act until such conflicting
claims or demands shall have been finally determined by a court or arbitrator of
competent jurisdiction or shall have been settled by agreement of the parties to
such controversy, in which case the Escrow Agent shall be notified thereof in a
notice signed by such parties. The Escrow Agent may also elect to commence an
interpleader or other action for declaratory judgment for the purpose of having
the respective rights of the claimants adjudicated, and may deposit with the
court all funds held hereunder pursuant to this Escrow Agreement; and if it so
commences and deposits, the Escrow Agent shall be relieved and discharged from
any further duties and obligations under this Escrow Agreement.
7. Disputes. Each of the parties hereto hereby covenants and agrees
that the Federal or state courts located in the Borough of Manhattan, State of
New York shall have jurisdiction over any dispute with the Escrow Agent or
relating to this Escrow Agreement.
8. Expenses of the Escrow Agent. The Company agrees to pay any and
all out-of-pocket costs and expenses incurred by the Escrow Agent in connection
with all waivers, releases, discharges, satisfactions, modifications and
amendments of this Escrow Agreement, the administration and holding of the
Escrow Amount and the investment of such funds, and the enforcement, protection
and adjudication of the parties' rights hereunder by the Escrow Agent,
including, without limitation, the out-of-pocket disbursements and expenses of
the Escrow Agent itself and those of other attorneys it may retain, if any. The
Company shall be liable to the Escrow Agent for any expenses payable by the
Escrow Agent.
9. Reliance on Documents and Experts. The Escrow Agent shall be
entitled to rely upon any notice, consent, certificate, affidavit, statement,
paper, document, writing or communication (which to the extent permitted
hereunder may be by telegram, cable, telex, telecopier, or telephone) reasonably
believed by it to be genuine and to have been signed, sent or made by the proper
person or persons, and upon opinions and advice of legal counsel (including
itself or counsel for any party hereto), independent public accountants and
other experts selected by the Escrow Agent and mutually acceptable to each of
the Company and the Purchasers. The Escrow Agent shall not be responsible to
review the Certificates other than to confirm that it has been signed or to
determine the clearance of checks received for the Escrow Amount.
10. Status of the Escrow Agent, Etc. The Escrow Agent is acting
under this Escrow Agreement as a stakeholder only. No term or provision of this
Escrow Agreement is intended to create, nor shall any such term or provision be
deemed to have created, any joint venture, partnership or attorney-client
relationship between or among the Escrow Agent and the Company or the
Purchasers. This Escrow Agreement shall not be deemed to prohibit or in any way
restrict the Escrow Agent's representation of the Company, who may be advised by
the Escrow Agent on any and all matters pertaining to this Escrow Agreement. To
the extent the Company has been represented by the Escrow Agent, the Company
hereby waives any conflict of interest and irrevocably authorizes and directs
the Escrow Agent to carry out the terms and provisions of this Escrow Agreement
fairly as to all parties, without regard to any such representation and
irrespective of the impact upon the Company. The Escrow Agent's only duties are
those expressly set forth in this Escrow Agreement, and each of the Company and
the
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<PAGE> 4
Purchasers authorize the Escrow Agent to perform those duties in accordance with
its usual practices in holding funds of its own or those of other escrows. The
Escrow Agent may exercise or otherwise enforce any of its rights, powers,
privileges, remedies and interests under this Escrow Agreement and applicable
law or perform any of its duties under this Escrow Agreement by or through its
partners, employees, attorneys, agents or designees.
11. Exculpation. The Escrow Agent and its designees, and their
respective partners, employees, attorneys and agents, shall not incur any
liability whatsoever for the investment or disposition of funds or the taking of
any other action in accordance with the terms and provisions of this Escrow
Agreement, for any mistake or error in judgment, for compliance with any
applicable law or any attachment, order or other directive of any court or other
authority (irrespective of any conflicting term or provision of this Escrow
Agreement), or for any act or omission of any other person selected with
reasonable care and engaged by the Escrow Agent in connection with this Escrow
Agreement (other than for such Escrow Agent's or such person's own acts or
omissions breaching a duty owed to the claimant under this Escrow Agreement and
amounting to gross negligence or willful misconduct as finally determined
pursuant to applicable law by a governmental authority having jurisdiction); and
each of the Company and the Purchasers hereby waives any and all claims and
actions whatsoever against the Escrow Agent and its designees, and their
respective partners, employees, attorneys and agents, arising out of or related
directly or indirectly to any and all of the foregoing acts, omissions and
circumstances. Furthermore, the Escrow Agent and its designees, and their
respective partners, employees, attorneys and agents, shall not incur any
liability (other than for a person's own acts or omissions breaching a duty owed
to the claimant under this Escrow Agreement and amounting to willful misconduct
as finally determined pursuant to applicable law by a governmental authority
having jurisdiction) for other acts and omissions arising out of or related
directly or indirectly to this Escrow Agreement or the Escrow Amount; and each
of the Company and the Purchasers hereby expressly waives any and all claims and
actions (other than those attributable to a person's own acts or omissions
breaching a duty owed to the claimant and amounting to gross negligence or
willful misconduct as finally determined pursuant to applicable law by a
governmental authority having jurisdiction) against the Escrow Agent and its
designees, and their respective partners, employees, attorneys and agents,
arising out of or related directly or indirectly to any and all of the foregoing
acts, omissions and circumstances.
12. Indemnification. The Escrow Agent and its designees, and their
respective partners, employees, attorneys and agents, shall be indemnified,
reimbursed, held harmless and, at the request of the Escrow Agent, defended, by
the Company from and against any and all claims, liabilities, losses and
expenses (including, without limitation, the reasonable disbursements, expenses
and fees of their respective attorneys) that may be imposed upon, incurred by,
or asserted against any of them, arising out of or related directly or
indirectly to this Escrow Agreement or the Escrow Amount, except such as are
occasioned by the indemnified person's own acts and omissions breaching a duty
owed to the claimant under this Escrow Agreement and amounting to willful
misconduct as finally determined pursuant to applicable law by a governmental
authority having jurisdiction.
13. Notices. Any notice required or permitted hereunder shall be
given in writing (unless otherwise specified herein) and shall be deemed
effectively given, (i) on the date
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delivered, (a) by personal delivery, or (b) if advance copy is given by fax,
(ii) seven business days after deposit in the United States Postal Service by
regular or certified mail, or (iii) three business days mailing by international
express courier, with postage and fees prepaid, addressed to each of the other
parties thereunto entitled at the following addresses, or at such other
addresses as a party may designate by ten days advance written notice to each of
the other parties hereto, (iv) if to the Company, XYBERNAUT CORPORATION, 12701
Fair Lakes Circle, Suite 550, Fairfax, Virginia 22033, Facsimile no.: (703)
631-6925, ATTN: Dr. Steven A. Newman, Vice Chairman, with a copy to the
Company's Chief Financial Officer, and a copy to Parker Chapin Flattau & Klimpl,
LLP, 1211 Avenue of the Americas, New York, New York 10036, Facsimile no.: (212)
704-6288, ATTN: Martin Eric Weisberg, Esq.; (v) if to the Purchasers, at such
Purchaser's address set forth in the Purchase Agreement.
14. Section and Other Headings. The section and other headings
contained in this Escrow Agreement are for convenience only, shall not be deemed
a part of this Escrow Agreement and shall not affect the meaning or
interpretation of this Escrow Agreement.
15. Governing Law. This Escrow Agreement shall be governed by and
interpreted in accordance with the laws of the State of New York without giving
effect to the principles thereof regarding the conflict of laws. Each of the
parties consents to the exclusive jurisdiction of the federal courts whose
districts encompass any part of the City of New York in connection with any
dispute arising under this Agreement and hereby waives, to the maximum extent
permitted by law, any objection, including any objection based on forum non
conveniens, to the bringing of any such proceeding in such jurisdictions. Each
party waives its right to a trial by jury. Each party to this Escrow Agreement
irrevocable consents to the service of process in any such proceeding by the
mailing of copies thereof by registered or certified mail, postage prepaid, to
such party at its address set forth herein or its agent. Each of the Purchasers
appoints the Escrow Agent as the Purchaser's agent for service of process in any
such proceeding. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
16. Counterparts. This Escrow Agreement may be executed by the
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original but all such counterparts shall together
constitute one and the same agreement.
17. Resignation of Escrow Agent. The Escrow Agent may, at any time,
at its option, elect to resign its duties as Escrow Agent under this Escrow
Agreement by providing notice thereof to each of the Company and the Purchasers.
In such event, the Escrow Agent shall deposit the Escrow Amount with a successor
escrow agent to be appointed by (a) the Company and the Purchasers within 30
days following the receipt by the parties of such notice of resignation from the
Escrow Agent, or (b) the Escrow Agent if the Company and the Purchasers shall
have not agreed on a successor escrow agent within the aforesaid 30 day period,
upon which appointment and delivery of the Escrow Amount the Escrow Agent shall
be released of and from all liability under this Escrow Agreement.
18. Successors and Assigns; Assignment. Whenever in this Escrow
Agreement reference is made to any party, such reference shall be deemed to
include the
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successors, assigns and legal representatives of such party, and, without
limiting the generality of the foregoing, all representations, warranties,
covenants and other agreements made by or on behalf of each of the Company and
the Purchasers in this Escrow Agreement shall inure to the benefit of any
successor escrow agent hereunder; provided, however, that nothing herein shall
be deemed to authorize or permit the Company or the Purchasers to assign any of
its rights or obligations hereunder to any other person (whether or not an
affiliate of the Company or the Purchasers) without the written consent of each
of the other parties nor to authorize or permit the Escrow Agent to assign any
of its duties or obligations hereunder except as provided in Section 17 hereof.
19. No Third Party Rights. The representations, warranties and other
terms and provisions of this Escrow Agreement are for the exclusive benefit of
the parties hereto, and no other person, including the creditors of the Company
or the Purchasers, shall have any right or claim against any party by reason of
any of those terms and provisions or be entitled to enforce any of those terms
and provisions against any party.
20. No Waiver by Action, Etc. Any waiver or consent respecting any
representation, warranty, covenant or other term or provision of this Escrow
Agreement shall be effective only in the specific instance and for the specific
purpose for which given and shall not be deemed, regardless of frequency given,
to be a further or continuing waiver or consent. The failure or delay of a party
at any time or times to require performance of, or to exercise its rights with
respect to, any representation, warranty, covenant or other term or provision of
this Escrow Agreement in no manner (except as otherwise expressly provided
herein) shall affect its right at a later time to enforce any such term or
provision. No notice to or demand on either the Company or the Purchasers in any
case shall entitle such party to any other or further notice or demand in the
same, similar or other circumstances. All rights, powers, privileges, remedies
and interests of the parties under this Escrow Agreement are cumulative and not
alternatives, and they are in addition to and shall not limit (except as
otherwise expressly provided herein) any other right, power, privilege, remedy
or interest of the parties under this Escrow Agreement or applicable law.
21. Modification, Amendment, Etc. Each and every modification and
amendment of this Escrow Agreement shall be in writing and signed by all of the
parties hereto, and each and every waiver of, or consent to any departure from,
any covenant, representation, warranty or other provision of this Escrow
Agreement shall be in writing and signed by the party granting such waiver or
consent.
22. Entire Agreement. This Escrow Agreement and the Purchase
Agreement contain the entire agreement of the parties with respect to the
matters contained herein and therein and supersedes all prior representations,
agreements and understandings, oral or otherwise, among the parties with respect
to the matters contained herein.
-6-
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
on the date first written above.
XYBERNAUT CORPORATION
By:
-----------------------------
Name: Steven A. Newman
Title: Vice Chairman
BALMORE FUNDS, S.A.
By:
-----------------------------
Name:
Title:
AUSTOST ANSTALT SCHAAN
By:
-----------------------------
Name:
Title:
PARKER CHAPIN FLATTAU & KLIMPL, LLP,
as escrow agent
--------------------------------
Name: Martin E. Weisberg
Title: Partner
-7-
<PAGE> 1
RESTATED BRIDGE LOAN FINANCING AGREEMENT
THIS RESTATED BRIDGE LOAN FINANCING AGREEMENT ("Financing Agreement") is
dated as of October 18, 1999, by and between XYBERNAUT CORPORATION, a Delaware
corporation, with headquarters located at 12701 Fair Lakes Circle, Suite 550,
Fairfax, Virginia 22033 (the "Company"), and CRYSTALITE INVESTMENTS LTD., having
an office at 111 Arlosorov Street, Tel Aviv, Israel (the "Investor").
W I T N E S S E T H
WHEREAS, the Company wishes to induce the Investor to loan to the
Company, and the Investor is willing to loan to the Company, subject to the
terms and conditions set forth herein, up to One Million ($1,000,000) Dollars.
NOW, THEREFORE, for and in consideration of the premises and the mutual
agreement contained herein and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
1. LOAN. Subject to the terms and conditions set forth herein, the
Investor shall loan to the Company One Million ($1,000,000) Dollars (the "Loan")
in one or more installments, by delivery of such amount to the Company in same
day U.S. funds by wire transfer to an account designated by the Company.
2. NOTE. The terms of the Loan shall be set forth in and evidenced by
one or more Secured Promissory Note in substantially the form attached hereto as
Exhibit A in the aggregate
<PAGE> 2
amount of One Million ($1,000,000) Dollars, payable to the order of the Investor
or its assignees (the "Notes").
3. MUTUAL DELIVERIES.
(a) Upon the delivery by the Investor of the loan proceeds from
time to time, as provided in Section 1 above, the Company shall deliver to the
Investor the Notes.
(b) The Company shall also deliver, or cause to be delivered,
the original or execution copies of the following instruments and agreements
duly executed by all parties thereto other than the Investor (together with the
Notes - the "Related Agreements"):
(i) this Agreement with the Security Interest Provisions
(Exhibit A); (ii) the Xybernaut Common Stock Purchase Warrants for 1,000,000
shares in the form attached hereto as Exhibit B (the "Warrants"); and
(iii) the opinion of counsel in the form annexed hereto as
Exhibit C.
4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to the Investor that:
(a) The Company has the corporate power and authority to enter
into this Financing Agreement and the Related Agreements and to perform its
obligations hereunder and thereunder. The execution and delivery by the Company
of this Financing Agreement and the Related Agreements and the consummation by
the Company of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Company. This
Financing Agreement and the Related Agreements have been duly executed and
delivered by the Company and constitute valid and binding obligations of the
Company enforceable against it in accordance with their respective terms,
subject to the effects of any
2
<PAGE> 3
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally and to the application of equitable
principles in any proceeding (legal or equitable).
(b) The execution, delivery and performance by the Company of
this Financing Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby do not and will not breach or
constitute a default under any applicable law or regulation or of any agreement,
judgment, order, decree or other instrument binding on the Company which breach
or default could reasonably by expected to have a material adverse effect on the
Company.
(c) Except as set forth in Schedule 4(d) hereto, the Company is
in material compliance with all applicable laws, regulations, judgments, decrees
and orders material to the conduct of its business.
(d) Except as set forth in Schedule 4(d) hereto, there is no
pending, or to the knowledge of the Company, threatened, judicial,
administrative or arbitral action, claim, suit, proceeding or investigation
which might affect the validity or enforceability of this Financing Agreement or
the Related Agreements or which involves the Company and which if adversely
determined, could reasonably be expected to have a material adverse effect on
the Company.
(e) No consent or approval of, or exemption by, or filing with,
any party or governmental or public body or authority is required in connection
with the execution, delivery and performance under this Financing Agreement or
the Related Agreements or the taking of any action contemplated hereunder or
thereunder.
3
<PAGE> 4
(f) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation. The Company is duly qualified and licensed and in good standing
as a foreign corporation in each jurisdiction in which its current ownership or
leasing of any properties or its ownership or leasing of any properties or the
character of its operations as currently conducted requires such qualification
or licensing, except where the failure to be so qualified would not have a
material adverse effect on the Company. The Company has all corporate power and
authority, and has obtained all necessary authorizations, approvals, orders,
licenses, certificates, franchises and permits of and from all governmental or
regulatory officials and bodies necessary to own or lease its properties and
conduct its business other than those authorizations, approvals and such other
documents the lack of which could not reasonably be expected to have a material
adverse effect on the Company.
(g) The execution, delivery and performance of this Agreement
by the Company and the Related Agreements to be delivered hereunder and the
consummation of the transactions contemplated hereby and thereby will not: (i)
violate any provision of the Company's articles of incorporation or bylaws, (ii)
violate, conflict with or result in the breach of any of the terms of, result in
a material modification of the effect of, otherwise, give any other contracting
party the right to terminate, or constitute (or with notice or lapse of time or
both constitute) a default under, any contract or other agreement to which the
Company is a party or by or to which the Company or any of the Company's assets
or properties may be bound or subject, (iii) violate any order, judgment,
injunction, award or decree of any court, arbitrator or
4
<PAGE> 5
governmental or regulatory body by which the Company, or the assets or
properties of the Company are bound, (iv) to the Company's knowledge, violate
any statute, law or regulation.
(h) Except as set forth in Schedule 4(d) hereto, there has been
no material change in the capitalization, assets, or liabilities of the Company
since the issuance of the financial statements, for the period ending June 30,
1999, delivered to Investor.
5. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor
hereby represents and warrants to the Company that:
(a) The Investor has the corporate power and authority to enter
into this Financing Agreement and the Related Agreements and to perform its
obligations hereunder and thereunder. The execution and delivery by the Investor
of this Financial Agreement and the Related Agreements and the consummation by
the Investor of the transactions contemplated hereby and thereby have been duly
authorized by all necessary corporate action on the part of the Investor. This
Financing Agreement and the Related Agreements have been duly executed and
delivered by the Investor and constitute valid and binding obligations of the
Investor, enforceable against it in accordance with their respective terms,
subject to the effects of any applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and to the
application of equitable principles in any proceeding (legal or equitable).
(b) The execution, delivery and performance by the Investor of
this Financing Agreement and the Related Agreements and the consummation of the
transactions contemplated hereby and thereby do not and will not breach or
constitute a default under any applicable law or regulation or of any agreement,
judgment, order, decree or other instrument binding on the Investor.
5
<PAGE> 6
(c) There is no pending, or to the knowledge of the Investor,
threatened, judicial, administrative or arbitral action, claim, suit, proceeding
or investigation which might affect the validity or enforceability of this
Financing Agreement or the Related Agreements.
(d) No consent or approval of, or exemption by, or filing with,
any party of governmental or public body or authority is required in connection
with the execution, delivery and performance under this Financing Agreement or
the Related Agreements or the taking of any action contemplated hereunder or
thereunder.
(e) The Investor has prior substantial investment experience,
including investment in non-listed and non-registered securities and has had the
opportunity to engage the services of an investment advisor, attorney or
accountant to read all of the documents furnished or made available by the
Company to the Investor in connection with this investment and to evaluate the
merits and risks of this investment.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees that,
so long as the Note shall be outstanding, except as otherwise required under the
Related Agreements, the Company shall:
(a) Promptly pay and discharge all lawful taxes, assessments
and governmental charges or levies imposed upon it or upon its income and
profits, or upon any of its property, before the same shall become in default as
well as all lawful material claims for labor, materials and supplies which, if
unpaid, might become a lien or charge upon such properties or any part thereof;
provided, however, that it shall not be required to pay and discharge any such
tax, assessment, charge, levy or claim so long as the validity thereof shall be
contested in good
6
<PAGE> 7
faith by appropriate proceedings, and the Company shall set aside on its books
adequate reserves with respect to any such tax, assessment, charge, levy or
claim so contested.
(b) Pay, or cause to be paid, all material debts and perform,
or cause to be performed, all material obligations promptly and in accordance
with the respective terms thereof.
(c) Implement and maintain a standard system of accounting in
accordance with generally accepted accounting principles ("GAAP").
(d) Provide to the Investor the following:
(i) as soon as available after the end of each fiscal
year of the Company, a consolidated balance sheet of the Company as at the end
of that fiscal year and the related statement of earnings, stockholders' equity
and changes in financial position of the Company for such fiscal year, in
accordance with GAAP and audited by independent certified public accountants of
recognized standing; and
(ii) as soon as available and in any event within ninety
(90) days after the end of each of the first three quarters of each fiscal year
(commencing the quarter ending September 30, 1999), an unaudited consolidated
balance sheet of the Company as of the end of that quarter, and the related
unaudited statement of earnings of the Company for the period from the beginning
of that fiscal year to the end of that quarter, certified by the principal
financial officer of the Company as having been prepared in accordance with
GAAP, subject to normal year-end adjustments.
(e) Do, or cause to be done, all things that may be necessary
to (i) maintain its due organization, valid existence and good standing under
the laws of its state of incorporation; (ii) preserve and keep in full force and
effect all qualifications, registrations and licenses in those
7
<PAGE> 8
jurisdictions in which the failure to do so could or would have a material
adverse effect; (iii) maintain its power or authority to carry on its business
as now conducted; and (iv) use its best efforts to keep available the services
of its key present employees and agents and maintain its current relations with
suppliers, customers, distributors and joint venture partners (subject to the
business judgment of executive management).
(f) At all times maintain, preserve, protect and keep material
property used and useful in the conduct of its business in good repair, working
order and condition (subject to normal wear and tear), and from time to time
make all needful and proper repairs, renewals, replacements, betterment and
improvements thereto, so that the business carried on in connection therewith
may be properly conducted at all times.
(g) Keep adequately insured all property of a character usually
insured by similar corporations and carry such other insurance as is usually
carried by similar corporations.
(h) At all reasonable times upon the Investor's request and
upon advance notice to the Company and for good reason, permit representatives
designated by the Investor to have access to the books and records relating to
the operations and procedures of the Company (subject to execution of
confidentiality undertakings).
(i) Not assume, guaranty or otherwise, directly or indirectly,
become liable or responsible for the obligations of any other person or entity,
except for 75% or greater owned subsidiaries, for the purpose of paying or
discharging the obligations of such person or entity unless such guarantees
relate to the business of the Company, are incurred in the ordinary course of
its business and do not exceed in the aggregate $100,000.
8
<PAGE> 9
(j) Not declare or pay any cash dividends or authorize or make
any other distribution on any class of equity securities of the Company, except
for the Series D and Series E Convertible Preferred Stock.
(k) Not consolidate with or merge with or into any entity or
sell, lease, transfer, exchange or otherwise dispose of any material part of its
properties and assets except in the ordinary course of business, however, the
Company may engage in any of the foregoing transactions with a parent or
subsidiary of the Company so long as such parent or subsidiary is no less
creditworthy than the Company and such parent or subsidiary assumes the
obligations of the Company hereunder.
(l) To pay to the Investor, fifty (50%) percent of the proceeds
(after related expenses) in excess of $1,000,000 from any and all financings,
whether in the form of debt or equity.
7. ASSIGNMENT. This Financing Agreement and the Related Agreements
may be assigned by the Investor to transferees or assignees of the Note,
provided that the Company consents to the assignment, which consent will not be
unreasonably withheld, and that the Company is, prior to or simultaneously with
such transfer, furnished with written notice of the name and address of such
transferee or assignee, and such assignee agrees in writing to be bound by the
terms hereof and provided further that, if the Note is only assigned or
transferred in part, then such assignment shall only be made in part on an
appropriate proportionate basis. If there is a conflict between this provision
and any provision of the Related Agreements, this provision shall govern.
9
<PAGE> 10
As a condition to any such assignment, the assignee shall warrant,
represent and acknowledge to the Company and to the Investor that: (i) such
assignee has adequate means of providing for its current needs and possible
contingencies, and anticipates no need now or in the foreseeable future to sell
its shares of Common Stock, (ii) such assignee has had an opportunity to ask
questions of and receive answers from the Company concerning its investment as
evidenced by the Loan and Warrant (hereinafter referred to as the "Investment")
in the Company, and all such questions have been answered to its full
satisfaction, (iii) such assignee intends to hold the Warrant, and any shares of
the Common Stock issued upon the exercise of the Warrant, of the Company for its
own account for investment, and not with a view toward any resale or other
distribution of such Common Stock, (iv) the Investment in the Company involves a
high degree of risk, no tax advantages will result from the Investment in the
Company, and such assignee must be able to bear the economic risk of complete
loss of the Investment in the Company, (v) such assignee has received no
representations and warranties from Company other than those otherwise set forth
herein, and (vi) such assignee has the knowledge and experience in financial and
business matters and is capable of evaluating the merits and risks of the
Investment, provided, however, if such assignee does not have such knowledge and
experience, such assignee has consulted with an attorney, accountant or other
financial consultant or advisor, as its Purchaser Representative, and such
person is capable of evaluating the risk of the Investment and of so advising
such assignee thereof.
8. NOTICES. Any notice required or permitted hereunder shall be given
in writing (unless otherwise specified herein) and shall be deemed effectively
given upon personal delivery or seven business days after deposit in the United
States Postal Service, by (a) advance copy by
10
<PAGE> 11
fax, and (b) mailing by express courier or registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses, or at such other addresses as a party may
designate by ten days advance written notice to each of the other parties
hereto.
COMPANY: XYBERNAUT CORPORATION
12701 Fair Lakes Circle
Suite 550
Fairfax, Virginia 22033
ATT: Mr. Steven Newman, Vice Chairman
Telephone No.: (703) 631-6925
Facsimile No.: (703) 631-6734
with a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
ATTN: Martin Eric Weisberg, Esq.
Telephone No.: (212) 704-6000
Facsimile No.: (212) 704-6288
PURCHASER: At the address set forth on the signature page of this Agreement.
ESCROW AGENT: Krieger & Prager, Esqs.
39 Broadway, Suite 1440
New York, New York 10006
Telephone No.: (212) 363-2900
Facsimile No.: (212) 363-2999
9. SEVERABILITY. If a court of competent jurisdiction determines that
any provision of this Financing Agreement is invalid, unenforceable or illegal
for any reason, such determination shall not affect or impair the validity,
legality and enforceability of the other provisions of this Financing Agreement.
If any such invalidity, unenforceability or illegality of a
11
<PAGE> 12
provision of this Financing Agreement becomes known or apparent to any of the
parties hereto, the parties shall negotiate promptly and in good faith in an
attempt to make appropriate changes and adjustments to such provision
specifically and this Financing Agreement generally to achieve as closely as
possible, consistent with applicable law, the intent and spirit of such
provision specifically and this Financing Agreement generally.
10. EXECUTION IN COUNTERPARTS. This Financing Agreement may be
executed in counterparts, each of which shall be deemed an original, but all of
which together shall constitute the same Financing Agreement.
11. The Company shall pay all fees and disbursements of the Investor
with respect to the preparation and enforcement of this Agreement and the
Related Agreements.
12. GOVERNING LAW. This Agreement and the Related Agreements shall be
governed by and construed in accordance with the laws of the State of New York.
Each of the parties consents to the jurisdiction of the federal courts whose
districts encompass any part of the City of New York or the state courts of the
State of New York sitting in the City of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non coveniens, to
the bringing of any such proceeding in such jurisdictions.
13. RESTATED AGREEMENT. As hereby restated, this Agreement supercedes
any prior agreement between the parties with respect to the subject matter
hereof, and the Notes heretofore delivered pursuant to this Agreement shall be
deemed amended in accordance with the provisions hereof.
12
<PAGE> 13
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
13
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Bridge Loan Financing
Agreement as of the date first written above.
XYBERNAUT CORPORATION
By:
--------------------------------------
Name: Steve Newman
Title: Vice Chairman
CRYSTALITE INVESTMENTS LTD.
By:
--------------------------------------
Name:
Title:
14
<PAGE> 15
Exhibit A to Bridge Loan
Financing Agreement
FORM OF NOTE
THIS NOTE HAS NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE OR UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THE NOTE MAY NOT BE OFFERED,
RESOLD, PLEDGED OR TRANSFERRED EXCEPT AS PERMITTED UNDER THE ACT PURSUANT
TO REGISTRATION OR EXEMPTION OR SAFE HARBOR THEREFROM.
No. ___________ US $_________
XYBERNAUT CORPORATION
RESTATED 8% SECURED NOTE DUE MARCH 31, 2000
THIS Note is one of a duly authorized issue of up to $1,000,000 of
XYBERNAUT CORPORATION, a corporation organized and existing under the laws of
the State of Delaware (the "Company") designated as its 8% Secured Notes.
FOR VALUE RECEIVED, the Company promises to pay to CRYSTALITE INVESTMENTS
LTD., the registered holder hereof (the "Holder"), the principal sum of
________________________________ Dollars (US $___________) on ______________,
and to pay interest on the principal sum outstanding from time to time in
arrears on ______________ (the "Maturity Date"), at the rate of 8% per annum
accruing from the date of initial issuance of this Note (the "Issue Date").
Accrual of interest shall commence on the first such business day to occur after
the date hereof and shall continue until payment in full of the principal sum
has been made or duly provided for. The principal of, and interest on, this Note
are payable in such coin or currency of the United States of America as at the
time of payment is legal tender for payment of public and private debts, at the
address last appearing on the Note Register of the Company as designated in
writing by the Holder from time to time. The Company will pay the principal of
and interest upon this Note on the Maturity Date, less any amounts required by
law to be deducted, to the registered holder of this Note as of the tenth day
prior to the Maturity Date and addressed to such holder at the last address
appearing on the Note Register. The forwarding of such check shall constitute a
payment of principal and interest hereunder and shall satisfy and discharge the
liability for principal and interest on this Note to the extent of the sum
represented by such check plus any amounts so deducted.
This Note is subject to the following additional provisions:
1. This Note is issuable in denominations of Ten Thousand Dollars
(US$10,000) and integral multiples thereof at the request of the holder. This
Note is exchangeable for an equal
1
<PAGE> 16
Exhibit A to Bridge Loan
Financing Agreement
aggregate principal amount of Notes of different authorized denominations, as
requested by the Holder surrendering the same. No service charge will be made
for such registration or transfer or exchange.
2. The Company shall be entitled to withhold from all payments of
principal of, and interest on, this Note any amounts required to be withheld
under the applicable provisions of the United States income tax laws or other
applicable laws at the time of such payments, and Holder shall execute and
deliver all required documentation in connection therewith.
3. This Note has been issued subject to investment representations of
the original purchaser hereof and may be transferred or exchanged only in
compliance with the Securities Act of 1933, as amended (the "Act"), and other
applicable state and foreign securities laws. In the event of any proposed
transfer of this Note, the Company may require, prior to issuance of a new Note
in the name of such other person, that it receive reasonable transfer
documentation including legal opinions that the issuance of the Note in such
other name does not and will not cause a violation of the Act or any applicable
state or foreign securities laws. Prior to due presentment for transfer of this
Note, the Company and any agent of the Company may treat the person in whose
name this Note is duly registered on the Company's Note Register as the owner
hereof for the purpose of receiving payment as herein provided and for all other
purposes, whether or not this Note be overdue, and neither the Company nor any
such agent shall be affected by notice to the contrary.
4. Subject to the terms of the Bridge Loan Financing Agreement dated
as of October 18, 1999 (the "Agreement") as restated, between the Company and
the Holder (or the Holder's predecessor in interest), no provision of this Note
shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, and interest on, this Note at the time,
place, and rate, and in the coin or currency, herein prescribed. This Note is a
direct obligation of the Company.
5. No recourse shall be had for the payment of the principal of, or
the interest on, this Note, or for any claim based hereon, or otherwise in
respect hereof, against any incorporator, shareholder, officer or director, as
such, past, present or future, of the Company or any successor corporation,
whether by virtue of any constitution, statute or rule of law, or by the
enforcement of any assessment or penalty or otherwise, all such liability being,
by the acceptance hereof and as part of the consideration for the issue hereof,
expressly waived and released.
6. The Holder of the Note, by acceptance hereof, agrees that this
Note is being acquired for investment and that such Holder will not offer, sell
or otherwise dispose of this Note except under circumstances which will not
result in a violation of the Act or any applicable state Blue Sky or foreign
laws or similar laws relating to the sale of securities.
7. This Note shall be governed by and construed in accordance with
the laws of the State of New York. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
City of New York or the state courts of the State of New York sitting in the
City of New York in connection with any dispute arising under this
2
<PAGE> 17
Exhibit A to Bridge Loan
Financing Agreement
Agreement and hereby waives, to the maximum extent permitted by law, any
objection, including any objection based on forum non coveniens, to the bringing
of any such proceeding in such jurisdictions.
8. The following shall constitute an "Event of Default":
a. The Company shall default in the payment of principal or
interest on this Note and same shall continue for a period
of five (5) days; or
b. Any of the representations or warranties made by the
Company herein, in the Agreement, or in any certificate or
financial or other written statements heretofore or
hereafter furnished by the Company in connection with the
execution and delivery of this Note or the Agreement shall
be false or misleading in any material respect at the time
made; or
c. The Company shall fail to perform or observe, in any
material respect, any other covenant, term, provision,
condition, agreement or obligation of this Note (as defined
in the Agreement, which term includes this Note) and such
failure shall continue uncured for a period of thirty (30)
days after written notice from the Holder of such failure;
or
d. The Company shall fail to perform or observe, in any
material respect, any covenant, term, provision, condition,
agreement or obligation of the Company under the Agreement,
and such failure shall continue uncured for a period of
thirty (30) days after written notice from the Holder of
such failure; or
e. The Company shall (1) admit in writing its inability to pay
its debts generally as they mature; (2) make an assignment
for the benefit of creditors or commence proceedings for
its dissolution; or (3) apply for or consent to the
appointment of a trustee, liquidator or receiver for its or
for a substantial part of its property or business; or
f. A trustee, liquidator or receiver shall be appointed for
the Company or for a substantial part of its property or
business without its consent and shall not be discharged
within ninety (90) days after such appointment; or
g. Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency
shall assume custody or control of the whole or any
substantial portion of the properties or assets of the
Company and shall not be dismissed within ninety (90) days
thereafter; or
h. Any money judgment (other than as set forth on Schedule
4(d) to the Agreement), writ or warrant of attachment, or
similar process in excess of
3
<PAGE> 18
Exhibit A to Bridge Loan
Financing Agreement
Two Hundred Thousand ($200,000) Dollars in the aggregate
shall be entered or filed against the Company or any of its
properties or other assets and shall remain unpaid,
unvacated, unbonded or unstayed for a period of ninety (90)
days or in any event later than five (5) days prior to the
date of any proposed sale thereunder; or
i. Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall
be instituted by or against the Company and, if instituted
against the Company, shall not be dismissed within ninety
(90) days after such institution or the Company shall by
any action or answer approve of, consent to, or acquiesce
in any such proceedings or admit the material allegations
of, or default in answering a petition filed in any such
proceeding; or
j. The Company shall have its Common Stock suspended or
delisted from an exchange or over-the-counter market from
trading for in excess of two trading days.
Then, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by the Holder (which waiver
shall not be deemed to be a waiver of any subsequent default) at the option of
the Holder and in the Holder's sole discretion, the Holder may consider the
Redemption Amount of this Note immediately due and payable within five (5) days
of notice, without presentment, demand, protest or notice of any kinds, all of
which are hereby expressly waived, anything herein or in any note or other
instruments contained to the contrary notwithstanding, and the Holder may
immediately enforce any and all of the Holder's rights and remedies provided
herein or any other rights or remedies afforded by law.
9. Nothing contained in this Note shall be construed as conferring
upon the Holder the right to vote or to receive dividends or to consent or
receive notice as a shareholder in respect of any meeting of shareholders or any
rights whatsoever as a shareholder of the Company, unless and to the extent
converted in accordance with the terms hereof.
10. The obligation of the Company for payment of principal, interest
and all other sums hereunder is secured by Security Interest Provisions between
the Company and the Holder as set forth in the Annex to the Bridge Loan
Financing Agreement.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
Dated: ________________, 1999
XYBERNAUT CORPORATION
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Exhibit A to Bridge Loan
Financing Agreement
By:
-----------------------------------
--------------------------------------
(Print Name)
--------------------------------------
(Title)
<PAGE> 1
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of January 1, 2000 (this "Agreement"),
by and between JOHN F. MOYNAHAN (the "Executive"), and XYBERNAUT CORPORATION, a
Delaware Corporation (the "Company").
WHEREAS, the Executive has been employed as a Senior Vice President
and the Chief Financial Officer of the Company; and
WHEREAS, the Company desires to continue to employ the Executive as a
Senior Vice President and the Chief Financial Officer of the Company and the
Executive desires to continue his employment with the Company in the
aforementioned capacity, all upon the terms and provisions, and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and other good and valuable
consideration, the receipt and legal sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
Section 1. Definitions. As used in this Agreement the
following terms shall have the meanings set forth in this Section 1:
(a) "Affiliate" of any Person means any stockholder or person or
entity controlling, controlled by under common control with such Person, or any
director, officer or key executive of such Person or any of their respective
relatives. For purposes of this definition, "control," when used with respect
to any Person, means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings that correspond to the foregoing.
(b) "Cause" shall mean (i) the Company being subjected to any
criminal liability under any applicable law as a result of any action or
inaction on the part of the Executive, which the Executive did not, at the
time, reasonably believe to be in the best interests of the Company; (ii) the
conviction or admission of the Executive of, or plea by the Executive of nolo
contendre to, a felony or crime involving moral turpitude which the Board of
Directors concludes is likely to have a material and adverse effect on the
reputation of the Company; (iii) if the Executive is chronically addicted to
any narcotic or other illegal or controlled substance or repeatedly abuses any
alcoholic product or any prescription stimulants or depressant, as determined
by a physician designated by the Company, which in the reasonable opinion of
the Board of Directors of the Company materially interferes with Executive's
performance of his duties and obligations hereunder; (iv) the Executive
committing fraud, or stealing or misappropriating any asset or property of the
Company, including, without limitation, any theft
<PAGE> 2
or embezzlement; or (v) a breach of a material term or provision of this
Agreement by the Executive which is not cured by the Executive within ten (10)
business days after written notice of such breach from the Company is received
by the Executive; or (vi) the willful failure of the Executive to follow the
directives of the Chief Executive Officer of the Company or the Board of
Directors of the Company; provided, such directives are lawful and consistent
with the Company's policies and generally accepted accounting principles and
tax principles (if applicable).
(c) "Change of Control" shall mean the occurrence of any of the
following: (i) a Person or group of Persons, other than any current member of
the Board of Directors, obtains beneficial ownership of at least thirty percent
(30%) of the outstanding capital stock of the Company; or (ii) a change in the
membership of more than fifty percent (50%) of the current Board of Directors
in any twelve (12) month period.
(d) "Common Stock" shall mean the common stock, par value $.01
per share, of the Company, and any other class of common stock of the Company
created after the date of this Agreement in accordance with the Company's
Certificate of Incorporation and applicable law.
(e) "Competing Business" shall mean any business, enterprise or
other Person that as one of its businesses or activities, is engaged in the
business of manufacturing, selling, marketing, licensing or distributing
wearable computers or the solutions associated therewith that are provided by
the Company.
(f) "Confidential and Proprietary Information" shall mean any and
all (i) confidential or proprietary information or material not in the public
domain about or relating to the business, operations, assets or financial
condition of the Company or any Affiliate of the Company or any of the
Company's or any such Affiliate's trade secrets, including, without limitation,
research and development plans or projects; data and reports; computer
materials such as programs, instructions and printouts; formulas; product
testing information; business improvements, processes, marketing and selling
strategies; strategic business plans (whether pursued or not); budgets;
unpublished financial statements; licenses; pricing, pricing strategy and cost
data; information regarding the skills and compensation of executives; the
identities of clients and potential clients; intellectual property strategies
and any work on any patents, trademarks and tradenames, prior to any filing or
the use thereof in commerce; pricing, timing, sales terms, service plans,
methods, practices, strategies, forecasts, know-how and other marketing
techniques; and (ii) information, documentation or material not in the public
domain by virtue of any action by or on the part of the Executive, the
knowledge of which gives or may give the Company or any Affiliate of the
Company an advantage over any Person not possessing such information. For
purposes hereof, the term Confidential and Proprietary Information shall not
include any information or material (i) that is known to the general public
other than due to a breach of this Agreement by the Executive or (ii) was
disclosed to the Executive by a Person who the Executive did not reasonably
believe was bound to a confidentiality or similar agreement with the Company.
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<PAGE> 3
(g) "CPI" shall have the meaning given to that term in Section
4(a) hereof.
(h) "Discretionary Bonus" shall have the meaning given to that
term in Section 4(c) hereof.
(i) "Employment Term" shall have the meaning given to that term
in Section 2 hereof.
(j) "GAAP" shall mean generally accepted United States accounting
principles, as from time to time in effect.
(k) "Good Reason" shall mean a substantial change to or reduction
in the duties or responsibilities of the Executive such that the
responsibilities of the Executive are no longer commensurate with the
Executive's office with the Company as set forth herein, or the occurrence of
Change of Control or a change in the Executive's office from that of Senior
Vice President and Chief Financial Officer of the Company which is not
concurred in by the Executive within three (3) months of its occurrence or the
breach of a material term or provision of this Agreement by the Company which
is not cured by the Company within ten (10) business days after written notice
of such breach from the Executive is received by the Company. The failure to
renew this Agreement after the expiration of the Employment Term, shall not
constitute Good Reason.
(l) "Gross Revenues" for each fiscal year during the Term shall
have the meaning of gross revenues of the Company set forth in the audited
annual financial statements of the Company for the applicable fiscal year and
which shall be determined in accordance with GAAP applied on a consistent
basis.
(m) "Incapacity" shall mean any illness or mental or physical
incapacity or disability which prevents the Executive from performing his
duties or obligations hereunder for a continuous period of one hundred twenty
(120) consecutive days or for shorter periods aggregating one hundred eighty
(180) days within any consecutive twelve (12) month period.
(n) "Inventions" shall mean inventions, discoveries, concepts and
ideas, whether patentable or not, patents, patent applications, copyrights and
other intellectual property, including, without limitation, processes, methods,
formulae and techniques, and improvements thereof or know-how related thereto,
concerning any business activity of the Company or any Affiliate of the
Company, with which the Executive becomes, directly or indirectly, involved as
a result in whole or in part, directly or indirectly, of the Executive's
employment by the Company, or any Affiliate of the Company, and whether
conceived of solely by the Executive or jointly with the efforts of others.
(o) "Market Cap" shall mean the aggregate market value of all of
the Company's issued and outstanding shares of Common Stock as of the date of
determination.
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<PAGE> 4
(p) "Performance Bonus" shall have the meaning given to that term
in Section 4(d) hereof.
(q) "Person" shall mean, without limitation, any natural person,
corporation, partnership, limited liability company, joint stock company, joint
venture association, trust or other similar entity or firm.
(r) "Salary" shall have the meaning given to that term in Section
4(a) hereof.
(s) "Signing Bonus" shall have the meaning given to that term in
Section 4(b) hereof.
(t) "Without Cause" shall mean the termination of the Executive's
employment hereunder by the Company, other than termination by the Company due
to the Executive's death or Incapacity or based upon Cause.
Section 2. Employment and Term. The Company hereby employs the
Executive as a Senior Vice President and the Chief Financial Officer of the
Company and the Executive hereby accepts such employment in that capacity, upon
the terms and provisions, and subject to the conditions, set forth in this
Agreement, for a term of three (3) years, commencing on January 1, 2000, and
terminating on December 31, 2002, unless earlier terminated as provided in this
Agreement (the "Employment Term").
Section 3. Executive's Duties. (a) The Executive shall be the senior
financial executive officer of the Company responsible for the Company's
financial operations including, but not limited to, internal and external
financial reporting, accounting, taxation and cash management. The Executive
shall report directly to the Chief Executive Officer of the Company. The
Executive shall perform such other duties as may reasonably be assigned to the
Executive by the Company's Chief Executive Officer or the Board of Directors of
the Company.
(b) The Executive shall devote all of his business time, effort,
skill and attention exclusively to the business, operations and affairs of the
Company and to the furtherance of the interests, business and prospects of the
Company. The Executive shall perform the Executive's duties and obligations
hereunder diligently, competently, faithfully and to the best of his ability.
Subject to disclosure to the Company's general corporate counsel, the Executive
may serve on the board of directors or other governing boards of other
corporations or businesses or industry organizations; provided that such
service does not materially interfere with the Executive's performance of his
duties and obligations hereunder. The Company acknowledges that the Executive
serves on the board of directors of the corporations set forth on Schedule A
attached hereto, and the Company hereby consents to the Executive serving on
such boards.
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<PAGE> 5
(c) The Executive agrees to execute policy statements and
agreements that the Company may, from time to time, reasonably require all of
its senior executive officers to execute.
Section 4. Compensation. (a) In consideration of the performance of
all of the duties and obligations to be performed by the Executive hereunder,
the Company agrees to pay, and the Executive agrees to accept, for the first
year of the Employment Term a salary (the "Salary") at an annual rate of
$170,000, payable in accordance with the Company's regular payroll practices as
from time to time in effect, less all withholdings and other deductions
required to be deducted in accordance with any applicable federal, state, local
or foreign law, rule or regulation. In addition, the amount of the Executive's
salary for the period from October 1, 1999 through December 31, 1999 shall be
retroactively adjusted to be at an annual rate of $170,000, any differential
owing to the Executive as a result of such adjustment shall be paid to the
Executive promptly after the execution and delivery of this Agreement. After
the first year during the Employment Term, the annual Salary for each
successive year will be increased by the lesser of (i) 10% and (ii) the
percentage increase, if any, in the CPI for each year just completed measured
for the entire twelve (12) month period, plus three percent (3%). For purposes
hereof, the term "CPI" means the Consumer Price Index for all Urban Consumers
for the United States for the Washington, D.C. metropolitan area prepared by
the Bureau of Labor Statistics of the U.S. Department of Labor, or if such
index is not then being published, by the U.S. Department of Labor, the most
nearly comparable successor index that the parties may agree upon.
(b) In consideration of the Executive's execution and delivery of
this Agreement, upon the execution and delivery of this Agreement the Company
shall make a cash payment of $25,000 (the "Signing Bonus"). By this Agreement,
the Company confirms: its prior grant to the Executive on May 10, 1999 to
purchase 150,000 shares of stock at the closing price on that date with 50,000
shares vesting on May 10, 2000, 50,000 shares vesting on May 10, 2001 and 50,000
shares vesting on May 10, 2002; and its prior grant to the Executive on
September 24, 1999 in respect of salary deferral by the Executive of 31,741
shares of stock with a strike price of $1.78 with 10,580 vested immediately upon
grant, 10,580 vesting on September 24, 2000 and 10,581 vesting on September 24,
2001; and the prior grant to the Executive of options on December 3, 1999 to
purchase 150,000 shares of stock at the closing price on that grant date, with
50,000 shares vesting immediately upon grant, 50,000 shares vesting on December
3, 2000 and 50,000 shares vesting on December 3, 2001. The shares vesting on
December 3, 2000 and December 3, 2001 shall only vest if the Executive has
performed his duties in a manner reasonably satisfactory to the Compensation
Committee of the Board of Directors of the Company. In the event that the Board
of Directors of the Company determines that the performance of the Executive is
not reasonably satisfactory, it shall so inform the Executive in writing setting
forth the reasons for the unsatisfactory performance. If the Compensation
Committee determines that the Executive has not satisfied the performance
criteria, it will notify the Executive within thirty (30) days of the applicable
December 3 grant and the Executive shall have the right for a period of thirty
(30) days to cure the performance deficiencies to the reasonable satisfaction of
the Compensation Committee. All of the options set forth in this
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<PAGE> 6
Section 4(b) shall fully vest upon the occurrence of a Change in Control or
upon a termination of this Agreement by the Executive for Good Reason.
(c) At the sole discretion of the Board of Directors of the
Company the Executive may be paid, in cash, Common Stock, options to purchase
Common Stock or any combination thereof, an annual bonus for the Company's
fiscal years of 2001 and 2002, in such an amount, if any, and based upon such
criteria as the Board of Directors of the Company Compensation Committee may
from time to time consider appropriate based upon the Executive's performance
during each such year (the "Discretionary Bonus"). The options granted pursuant
to this Section 4(b) shall be vested as of the date hereof, and shall be
subject to all of the terms and provisions of the Company's 1997 Stock Option
Plan, the Company's 1999 Stock Option Plan or any subsequently enacted stock
option plan, as applicable, except that they may be exercised in any amount at
any time after being vested until three (3) years from date of termination of
employment and shall be irrevocable during that period. Should there not be
sufficient options available or useable under said stock option Plans then,
unless otherwise agreed to by the Executive, the Company will nonetheless issue
said options to Executive, outside of said Plans, and register the shares of
Common Stock underlying the options within 180 days of their being issued.
(d) As additional consideration for Executive's services to the
Company hereunder, the Company shall pay Executive an annual bonus (the
"Performance Bonus"), based upon the Company's performance during the
Employment Term, commencing with the fiscal year from January 1, 2000 through
December 31, 2000, and for each fiscal year during the Employment Term
thereafter, if earned, in the form of options to purchase shares of the
Company's Common Stock, in an amount equal to one quarter of one percent
(0.25%) of the Revenue Goal (as hereinafter defined), if the Revenue Goal is
attained; or (ii) three-eighths of one percent (0.375%) of the increase, if
any, in the Market Cap from January 1 through December 31 of the applicable
fiscal year during the Employment Term. For purposes hereof, the term "Revenue
Goal" shall mean eighty-five percent (85%) of the Company's revenue goal for
each fiscal year during the Employment Term occurring after the Initial Period,
as set forth in its business plan for such year; provided that for the fiscal
year from January 1, 2000 through December 31, 2000 the Revenue Goal shall be
$20,000,000. For purposes hereof, the Market Cap Test shall be based on the
average of the number of shares outstanding and closing prices for the
Company's Common Stock for the thirty (30) days ended December 31 of the
applicable year compared to the same thirty (30) day period in the prior year.
The calculation of whether any Performance Bonus is due for any fiscal year
during the Employment Term occurring thereafter, as applicable, shall be made
by the Board of Directors promptly after the end of the fiscal year in respect
of the Market Cap test and upon the Company's issuance of its audited annual
financial statements in respect of the Revenue Goal test. The Performance
Bonus, if earned, shall be paid in the form of options to purchase shares of
the Company's Common Stock valued at an exercise price equal to the average of
the closing market price of the shares of the Company's Common Stock for the
thirty (30) days prior to the end of the applicable fiscal year. Any options
issued in respect of the Performance Bonus shall be subject to all of the terms
and provisions of the Company's 1999 Stock Option Plan or, if no shares are
available under such
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Plan, or any subsequently enacted stock option plan, as applicable, except that
they may be exercised in any amount, at any time after being vested until three
(3) years from date of termination of employment and are irrevocable during
that period. Should there not be sufficient options available or useable under
said Stock Option Plan, the Company will use its best efforts to cause a new
Stock Option Plan to be adopted which cover the shares.
(e) Notwithstanding anything set forth in Section 4(c), in no
event shall the options granted to the Executive, if any, as the Performance
Bonus with respect to any fiscal year during the Employment Term exceed the
greater of (i) options exercisable into 100,000 shares of Common Stock or (ii)
one third of one percent (0.33%) of the Company's outstanding shares of capital
stock.
(f) Should there be a Change of Control of the Company or any
other transaction in which the Company is not the surviving entity during the
Employment Term, then as part of that transaction, the Company will require the
surviving entity to modify the Agreement in an equitable manner to provide the
Executive the same type of benefits that he is entitled to earn pursuant to
Section 4(c) of this Agreement.
Section 5. Benefits, Vacation. (a) During the Employment Term, the
Executive shall be entitled to such insurance and health and medical benefits
as are generally made available to the senior executives of the Company, as a
group, pursuant to such plans as are from time to time maintained by the
Company; provided, however, that the Executive shall be required to comply with
the conditions of coverage attendant to such plans.
(b) During each contract year of the Employment Term, the
Executive shall be entitled to four (4) weeks of vacation. The Executive shall
take vacation at such time or times as the Executive desires, subject to the
concurrence of the Company based upon the then current business needs and
activities of the Company. Vacation shall accrue if unused during the term of
employment.
(c) During the Employment Term, the Executive shall be eligible
to participate in the profit sharing and other benefit plans that the Company
from time to time makes available to the senior executives of the Company as a
group, subject to the terms, provisions and conditions of such plans,
including, without limitation, any vesting periods and eligibility criteria.
(d) During the Employment Term, the Company shall pay to the
Executive a monthly car and non-accountable expense allowance of $2,250 per
month. In addition, the Company shall also pay reasonable legal and estate
planning expenses of Executive in an amount not to exceed $2,500 for each
calendar year during the Employment Term. The amounts paid and/or provided for
in this Section 5(d) shall be reported by the Company on Internal Revenue
Service Form 1099.
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(e) The Company agrees to maintain in full force and effect the
life insurance policy in the face amount aggregating seven hundred and fifty
thousand dollars ($750,000.00), which are made payable to such beneficiary or
beneficiaries who are designated by the Executive. The Company shall pay all
premiums due on such policies during the Employment Term. After the termination
or expiration of the Employment Term, at the request of the Executive, the
Company shall assign such insurance policies to the Executive.
Section 6. Business Expenses. The Executive shall be entitled to
reimbursement for ordinary, necessary and reasonable business expenses actually
incurred by the Executive during the Employment Term in the performance of the
Executive's duties hereunder, if supported by such reasonable documentation as
may be required by the Company in accordance with the Company's policies.
Section 7. Termination of Employment Term. (a) In the event of the
death of the Executive during the Employment Term, the Executive's employment
hereunder shall automatically terminate as of the date of death; provided,
however, that the Executive's estate or legal representative, as the case may
be, shall be entitled to receive, and the Company shall pay, any accrued and
unpaid Salary for a two (2) year period following the date of death, any
Performance Bonus that would be payable for the one (1) year period in which
the Executive died which are properly owing to the Executive pursuant to
Section 6 hereof.
(b) In the event of the Executive's Incapacity, the Company may,
in its sole discretion, terminate the Executive's employment hereunder upon
written notice to the Executive; provided, however, that the Executive or the
Executive's legal representative, as the case may be, shall be entitled to
receive, and the Company shall pay, (i) any accrued and unpaid Salary for a two
(2) year period from the date of termination, less any amounts received by the
Executive under any disability insurance policy maintained by the Company; and
(ii) any Performance Bonus that would be payable for the one (1) year period
after the Executive's employment is terminated due to Incapacity and
reimbursement of business expenses which are properly owing to the Executive
pursuant to Section 6 hereof, through the date of termination; provided that in
no event shall the amount of the Performance Bonus be less than fifty percent
(50%) of what it would have been for the entire year.
(c) The Company shall have the right to terminate the Executive's
employment under this Agreement at any time for Cause upon written notice to
the Executive. In the event the Executive's employment hereunder is terminated
by the Company for Cause, the Company shall only be obligated to pay accrued
and unpaid Salary through the date of termination and the Company shall pay any
accrued and unreimbursed business expenses which are properly owing to the
Executive pursuant to Section 6 hereof through the date of termination.
(d) The Company shall have the right to terminate the Executive's
employment hereunder Without Cause at any time upon ten (10) days' prior
written notice to the Executive. If the Company terminates the Executive's
employment hereunder Without Cause, the Company shall (i) continue to pay
Salary to the Executive provided for hereunder for a
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period equal to the greater of (x) two (2) years from the date of termination
and (y) the remaining period of the Employment Term and (ii) pay any
unreimbursed business expenses which are properly owing to the Executive
pursuant to Section 6 hereof through the date of termination. In addition,
should the Executive's employment hereunder be terminated Without Cause, the
Company shall pay to the Executive the Performance Bonus, if any, for the
entire contract year in which the termination of the Executive's employment
with the Company hereunder occurs and for the contract year following the year
in which the termination occurred. The Executive shall not be under any
obligation to mitigate the Company's obligation pursuant to this Section 7(d)
by securing other employment or otherwise.
(e) The Executive shall have the right to terminate his
employment with the Company hereunder for Good Reason, upon not less than
thirty (30) days prior written notice to the Company. Should the Executive
terminate his employment hereunder for Good Reason, the Company shall be
obligated to make the payments to the Executive provided for in Section 7(d)
hereof upon the termination of the Executive's employment by the Company
Without Cause.
(f) The failure of the Company to continue the employment of the
Executive upon expiration of the entire three (3) year Employment Term shall
not be considered a termination of employment for purposes of this Agreement.
The Company's obligations with respect to the Performance Bonus for the last
year of the Employment Term, if any, shall survive the expiration of this
Agreement.
Section 8. Inventions. Any Inventions originated or conceived by the
Executive related to the Company's business during his employment by the
Company or any Affiliate of the Company or with the use or assistance of the
facilities, materials or personnel of the Company or any Affiliate of the
Company, either solely or jointly with others, during the Employment Term shall
be the sole and exclusive property of the Company. The Executive hereby
irrevocably assigns and transfers to the Company and agrees to transfer and
assign to the Company all of his right, title and interest in and to all
Inventions, and to applications for patents and patents granted upon such
Inventions and to all copyrightable material related thereto developed by the
Executive or under his supervision. The Executive agrees for himself and his
heirs and personal representatives, upon the request of the Company and at the
Company's expense, to do such acts, to execute such documents and instruments
and to participate in such legal proceedings as from time to time may be
necessary or required to apply for, secure, maintain, reissue, extend or defend
the worldwide rights of the Company in the Inventions. The Executive here
grants to the Company a power of attorney, which is irrevocable and coupled
with an interest, to execute any such documents and instruments if the
Executive is unable or fails to do so, after the request by the Company as
provided in the immediately preceding sentence. The Executive shall have no
right to receive any royalties or other payments from the Company with respect
to any inventions.
Section 9. Restrictions Respecting Competing Businesses, Confidential
Information, etc. The Executive acknowledges and agrees that by virtue of the
Executive's position and involvement with the business and affairs of the
Company, the Executive will
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develop substantial expertise and knowledge with respect to all aspects of the
Company's business, affairs and operations and will have access to all
significant aspects of the business and operations of the Company and to
Confidential and Proprietary Information. The Executive acknowledges and agrees
that the Company will be damaged if the Executive were to breach any of the
provisions of this Section 9 or if the Executive were to disclose or make
unauthorized use of any Confidential and Proprietary Information. Accordingly,
the Executive expressly acknowledges and agrees that the Executive is
voluntarily entering into this Agreement and that the terms, provisions and
conditions of this Section 9 are fair and reasonable and necessary to
adequately protect the Company.
(a) The Executive hereby covenants and agrees that, during the
Employment Term and thereafter, unless otherwise authorized by the Company in
writing, the Executive shall not, directly or indirectly, under any
circumstance: (i) disclose to any other Person (other than in the regular
course of business of the Company) any Confidential and Proprietary
Information, other than pursuant to applicable law, regulation or subpoena or
with the prior written consent of the Company; (ii) act or fail to act so as to
impair the confidential or proprietary nature of any Confidential and
Proprietary Information; (iii) use any Confidential and Proprietary Information
related to the Company's business other than for the sole and exclusive benefit
of the Company; or (iv) offer or agree to, or cause or assist in the inception
or continuation of, any such disclosure, impairment or use of any Confidential
and Proprietary Information. Following the Employment Term, the Executive shall
return all documents, records and other items containing any Confidential and
Proprietary Information to the Company (regardless of the medium in which
maintained or stored), without retaining any copies, notes or excerpts thereof,
or at the request of the Company, shall destroy such documents, records and
items (any such destruction to be certified by the Executive to the Company in
writing).
(b) The Executive covenants and agrees that, while the Executive
is employed by the Company and for one (1) year after the Executive ceases to
be employed by the Company, if the Executive (i) voluntarily terminates his
employment with the Company for Good Reason or (ii) is terminated by the
Company for Cause, the Executive shall not, directly or indirectly, manage,
operate or control, or participate in the ownership, management, operation or
control of, or otherwise become interested in (whether as an owner,
stockholder, partner, lender, consultant, Executive, agent, supplier,
distributor or otherwise) any Competing Business or, directly or indirectly,
induce or influence any customer or other Person that has a business
relationship with the Company, or any Affiliate of the Company, to discontinue
or reduce the extent of such relationship; provided that in the case of a
termination by the Executive pursuant to clause (i) the Company at all times
continues to pay the amounts owing to the Executive pursuant to Section 7(b)
hereof. For purposes of this Agreement, the Executive shall be deemed to be
directly or indirectly interested in a business if he is engaged or interested
in that business as a stockholder, director, officer, Executive, agent,
partner, individual proprietor, consultant, advisor or otherwise, but not if
the Executive's interest is limited solely to the ownership of not more than 5%
of the securities of any class of equity securities of a corporation or other
Person whose shares are listed or admitted to trade on a national securities
exchange or are quoted on NASDAQ or a similar means if NASDAQ is no longer
providing such information.
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(c) While the Executive is employed by the Company and for one
(1) year after the Executive ceases to be an employed by the Company, the
Executive shall not, directly or indirectly, solicit to employ for himself or
others any employee of the Company or any Affiliate of the Company who was an
employee of the Company or any Affiliate of the Company as of the date of the
termination of the Executive's employment with the Company, or to solicit any
such employee to leave such employee's employment or join the employ of
another, then or at a later time; provided that the foregoing shall not apply
to any family member of the Executive who is employed by the Company or any
such Affiliate or the Executive's administrative assistant.
(d) The parties agree that nothing in this Agreement shall be
construed to limit or negate the common law of torts, confidentiality, trade
secrets, fiduciary duty and obligations where such laws provide the Company
with any broader, further or other remedy or protection than those provided
herein.
(e) Because the breach of any of the provisions of this Section 9
may result in immediate and irreparable injury to the Company for which the
Company may not have an adequate remedy at law, the Company shall be entitled,
in addition to all other rights and remedies, to a decree of specific
performance of the restrictive covenants contained in this Section 9 and to a
temporary and permanent injunction enjoining such breach, without posting a
bond or furnishing similar security.
Section 10. Severability. Each term and provision of this Agreement is
severable; the invalidity, illegality or unenforceability or modification of
any term or provision of this Agreement shall not affect the validity, legality
and enforceability of the other terms and provisions of this Agreement, which
shall remain in full force and effect. Since it is the desire and intent of the
parties that the provisions of this Agreement be enforced to the fullest extent
permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought, should any particular provision of this Agreement
be deemed invalid, illegal or unenforceable, the same shall be deemed reformed
and amended to delete that portion that is adjudicated to be invalid, illegal
or unenforceable and the deletion shall apply only with respect to the
operation of such provision and to the extent of such provision and, to the
extent that a provision of this Agreement would be deemed unenforceable by
virtue of its scope, but may be made enforceable by limitation thereon, each
party agrees that this Agreement shall be reformed and amended so that the same
shall be enforceable to the fullest extent permissible under the laws and
public policies applied in the jurisdiction in which enforcement is sought.
Section 11. Assignment. This Agreement and the rights and obligations
of the parties hereto shall bind and inure to the benefit of each of the
parties hereto, the heirs, executors, administrators and legal representatives
of the Executive and the successors and permitted assigns of the Company.
Neither this Agreement nor any rights or benefits hereunder may be assigned by
the Executive or the Company without the prior written consent of the other
party hereto, except that the Company may assign any of its rights or
obligations hereunder to any other Person which purchases all or substantially
all of the common stock or assets of the
11
<PAGE> 12
Company or is the successor to the Company by merger, consolidation or other
similar transaction.
Section 12. Amendment; Entire Agreement. This Agreement may not be
modified, amended, altered or supplemented except by a written agreement
executed by the parties hereto. This Agreement contains the entire agreement
and understanding of the parties hereto with respect to the subject matter of
this Agreement and supersedes all prior and/or contemporaneous agreements and
understandings of any kind and nature (whether written or oral) between the
parties with respect to such subject matter, all of which are merged herein,
except that nothing herein shall amend or modify that certain Agreement dated
_____________, between the Executive and the Company relating to the assignment
of intellectual property by the Company.
Section 13. Waivers. Waiver by either party of either breach of or
failure to comply with any provision of this Agreement by the other party shall
not be construed as, or constitute, a continuing waiver of such provision, or a
waiver of any other breach of, or failure to comply with, any other provision
of this Agreement, any such waiver must be in writing to be limited to the
specific matter and instance for which it is given. No waiver of any such
breach or failure or of any term or condition of this Agreement shall be
effective unless in a written instrument and signed by the waiving party and
delivered, in the manner required for notices generally, to the affected party.
Section 14. Notices. All notices, consents, directions, approvals,
instructions, requests and other communications required or permitted by the
terms of this Agreement to be given to any person shall be in writing, and
shall be delivered personally or sent by certified mail, return receipt
requested (postage prepaid) or by telecopy, to the parties at the following
addresses or telecopy numbers, as applicable:
12
<PAGE> 13
If to the Executive:
Mr. John F. Moynahan
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Telecopier: (703) 631-3903
If to the Company:
Xybernaut Corporation
12701 Fair Lakes Circle
Suite 550
Fairfax, VA 22033
Attention: Secretary
Telecopier: (703) 631-7070
With a copy to:
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, NY 10036
Attention: Martin Eric Weisberg, Esq.
Telecopier: (212) 704-6288
or to such other address as a party may have furnished to the other parties in
writing in accordance herewith. Any notice, consent, direction, approval,
instruction, request or other communication given in accordance with this
Section 14 shall be effective after it is received by the intended recipient.
Section 15. Governing Law; Jurisdiction. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF VIRGINIA
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN THAT STATE, WITHOUT REGARD
OR REFERENCE TO ITS PRINCIPLES OF CONFLICTS OF LAWS. THIS AGREEMENT SHALL BE
CONSTRUED AND INTERPRETED WITHOUT REGARD TO ANY PRESUMPTION AGAINST THE PARTY
CAUSING THIS AGREEMENT TO BE DRAFTED. EACH OF THE PARTIES UNCONDITIONALLY AND
IRREVOCABLY CONSENT TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF
VIRGINIA AND THE FEDERAL DISTRICT COURT FOR THE NORTHERN DISTRICT OF VIRGINIA
WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, AND EACH OF THE PARTIES WAIVE ANY RIGHT TO CONTEST THE VENUE OF
SAID COURTS OR TO CLAIM THAT SAID COURTS CONSTITUTE AN
13
<PAGE> 14
INCONVENIENT FORUM. EACH OF THE PARTIES UNCONDITIONALLY AND IRREVOCABLY WAIVES
THE RIGHT TO A TRIAL BY JURY IN ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS AGREEMENT.
Section 16. Headings; Counterparts. The headings contained in this
Agreement are inserted for reference purposes only and shall not in any way
affect the meaning, construction or interpretation of this Agreement. This
Agreement may be executed in two (2) counterparts, each of which when executed
shall be deemed to be an original, but both of which, when taken together,
shall constitute one and the same document.
IN WITNESS WHEREOF, the Executive and the Company have executed this
Agreement as of the date first above written.
----------------------------------------
John F. Moynahan
XYBERNAUT CORPORATION
By:
--------------------------------------
Name:
Title:
14
<PAGE> 1
EXHIBIT 23.1
We have issued our report dated February 25, 2000, accompanying the consolidated
financial statements and schedules incorporated by reference in the Annual
Report of Xybernaut Corporation (the Company) on Form 10-KSB for the year ended
December 31, 1999. We hereby consent to the incorporation by reference of said
report in the Registration Statements of the Company on Forms S-3 (File No.
333-43693, effective January 30, 1998, File No. 333-52567, effective June 11,
1998, File No. 333-68859, effective January 25, 1999, File No. 333-77769,
effective May 17, 1999 and File No 333-80837, effective January 28, 2000) and on
Form S-8 (File No. 333-94463, effective January 12, 2000).
/s/ Grant Thornton, LLP
Vienna, Virginia
February 25, 2000
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<ARTICLE> 5
<CIK> 0001013148
<NAME> XYBERNAUT CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,031
<SECURITIES> 0
<RECEIVABLES> 848
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<INVENTORY> 6,060
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<TOTAL-ASSETS> 11,323
<CURRENT-LIABILITIES> 7,920
<BONDS> 0
0
3,997
<COMMON> 299
<OTHER-SE> (893)
<TOTAL-LIABILITY-AND-EQUITY> 11,323
<SALES> 3,302
<TOTAL-REVENUES> 3,340
<CGS> 2,854
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<OTHER-EXPENSES> 17,310
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<INCOME-PRETAX> (16,747)
<INCOME-TAX> 29
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