As filed with the Securities and Exchange Commission on January __, 1998
Registration No.333-43693
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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XYBERNAUT CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 54-1799851
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12701 FAIR LAKES CIRCLE
FAIRFAX, VIRGINIA 22033
(703) 631-6925
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(Address, including zip code, and
telephone number, Including area code, of
registrant's principal executive offices)
EDWARD G. NEWMAN
12701 FAIR LAKES CIRCLE
FAIRFAX, VIRGINIA 22033
(703) 631-6925
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(Name, address, including zip code, and telephone number,
Including area code, of agent for service)
Copy to:
Martin Eric Weisberg, Esq.
Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of the Americas
New York, New York 10036
(212) 704-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If the only securities on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. |_|
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_| __________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. |_| __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum maximum Amount of
Title of each class of securities Amount to Aggregate price Aggregate registration
to be registered be registered (1) Per share (2) offering price (1) fee
Common Stock, $.01 par value 2,622,663 $1.5938 $4,180,000.00 $1,233.10
per share
====================================== ======================= ========================= ===================== ================
(1) Issuable upon the conversion of Series B Preferred Stock, which is estimated based on conversion terms set forth
in the Certificate of Designation and the Registration Rights Agreement between the Company and the Selling
Stockholders assuming conversion by the holders of 4,180 shares of the Series B Preferred Stock at 85% of the
closing bid price of the Company's Common Stock on December 26, 1997. These amounts are subject to
adjustment and could be materially more or less than such estimated amount depending upon factors that cannot
be predicted by the Company at this time, including, among others, the future market price of the Common Stock.
This is not intended to constitute a prediction as to the number of shares of Common Stock into which the Series
B Preferred Stock will be converted.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c); based on 85% of the
closing bid price of the Company's Common Stock on the Nasdaq SmallCap Market on December 26, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED JANUARY _, 1998
PROSPECTUS
2,622,663 SHARES OF COMMON STOCK*
(par value $.01 per share)
XYBERNAUT CORPORATION
This Prospectus pertains to the offer and sale from time to time of
up to 2,622,663 shares (the "Shares") of common stock, par value $.01 per share
(the "Common Stock"), of Xybernaut Corporation (the "Company") by or for the
account of certain Company stockholders (the "Selling Stockholders"). See
"Selling Stockholders."
The Shares offered hereby may be sold by the Selling Stockholders
directly or through agents, underwriters or dealers as designated from time to
time or through a combination of such methods. The Company will receive none of
the proceeds from any sale of Shares by or for the account of the Selling
Stockholders. The Selling Stockholders and any broker-dealers that participate
with the Selling Stockholders in the distribution of the Shares may be deemed to
be underwriters and any commissions received or profit realized by them in
connection with the resale of the Shares might be deemed to be underwriting
discounts and commissions under the Securities Act of 1933, as amended (the
"Securities Act"). See "Selling Stockholders" and "Plan of Distribution." The
Company has agreed to bear all expenses relating to this registration, other
than underwriting discounts and commissions. In addition, the Company has agreed
to indemnify the Selling Stockholders against certain liabilities, including
liabilities under the Securities Act.
See "Selling Stockholders" and "Plan of Distribution."
The Common Stock is quoted on the NASDAQ SmallCap Market under the
symbol "XYBR". On December 26, 1997, the closing bid price of the Common Stock
as reported by NASDAQ was $1.875.
*The shares of Common Stock offered hereby include the resale of such
presently indeterminate number of shares of Common Stock as shall be issued in
respect of all shares of Common Stock issuable upon conversion of 4,180 shares
of the Company's Series B Preferred Stock, par value $.01 (the "Series B
Preferred Stock"), placed in a private placement in November 1997 (as amended,
the "Private Placement"). The number of shares of Common Stock indicated to be
issuable in connection with such transaction and offered for resale hereby is an
estimate and is based on the conversion set forth in Certificate of Designation
designating the Series B Preferred Stock (the "Certificate of Designation") and
the terms of the Registration Rights Agreement (the "Registration Rights
Agreement") between the Company and one of the Selling Stockholders, and is
subject to adjustment and could be materially more or less than such estimated
amount depending upon factors that cannot be predicted by the Company at this
time, including, among others, the future market price of the Common Stock. If,
however, all 4,180 shares of the Series B Preferred Stock were converted under
the terms of conversion using the closing bid price of the Common Stock as
reported by NASDAQ on December 26, 1997, the Company would be obligated to issue
a total of 2,622,663 shares of Common Stock. This presentation is not intended
to constitute a prediction as to the future market price of the Common Stock or
as to the number of shares of Common Stock into which the Series B Preferred
Stock will be converted. See "Risk Factors -- Series B Preferred Stock" and
"Description of Securities -- Preferred Stock -- Series B Preferred Stock."
The Company's executive offices are located at 12701 Fair Lakes
Circle, Fairfax, Virginia 22033 and its telephone number is (703) 631-6925.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND
PROSPECTIVE PURCHASERS SHOULD CAREFULLY CONSIDER THE
FACTORS SPECIFIED UNDER THE CAPTION "RISK FACTORS"
LOCATED ON PAGE 5 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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THE DATE OF THIS PROSPECTUS IS ______, 1998
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional
Offices of the Commission: New York Regional Office, 7 World Trade Center, Suite
1300, New York, New York 10048; and Chicago Regional Office, Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission also maintains an Internet site on the World Wide Web that contains
reports, proxy and information statements and other information filed
electronically by the Company (http://www.sec.gov). Such reports, proxy
statements and other information can also be inspected at the offices of The
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006.
This Prospectus does not contain all the information set forth in the
Registration Statement on Form S-3 (File No. _____) (the "Registration
Statement") of which this Prospectus forms a part, including exhibits relating
thereto, which has been filed with the Commission in Washington, D.C. Copies of
the Registration Statement and the exhibits thereto may be obtained, upon
payment of the fee prescribed by the Commission, or may be examined without
charge, at the offices of the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's (i) Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996; (ii) Quarterly Reports on Form 10-QSB for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; (iii) Current Report on
Form 8-K dated June 30, 1997; and (iv) the description of the Company's Common
Stock contained in the Company's Registration Statement on Form 8-A filed on
July 15, 1996 under the Exchange Act (File No. 0-15086), each as filed with the
Commission under the Exchange Act, are incorporated into this Prospectus by
reference.
Each document filed subsequent to the date of this Prospectus
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act before the
termination of this offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated herein by reference shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein modifies or supersedes such previous statement.
Any statement so modified or superseded shall not be deemed to be a part hereof
except as so modified or superseded.
THE COMPANY WILL PROVIDE WITHOUT CHARGE TO EACH PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM A COPY OF THIS PROSPECTUS IS DELIVERED, UPON THE
WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF ANY DOCUMENT INCORPORATED
BY REFERENCE IN THIS PROSPECTUS (OTHER THAN EXHIBITS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS). REQUESTS SHOULD BE
DIRECTED TO THE COMPANY, 12701 FAIR LAKES CIRCLE, FAIRFAX, VIRGINIA 22033, (703)
631-6925. ATTENTION: JOHN F.
MOYNAHAN.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
and notes thereto appearing elsewhere or incorporated by reference in this
Prospectus.
To inform investors of the Company's future plans and objectives,
this Prospectus (and other reports and statements issued by the Company and its
officers from time to time) contain certain statements concerning the Company's
future results, future performance, intentions, objectives, plans and
expectations that are or may be deemed to be "forward-looking statements." The
Company's ability to do this has been fostered by the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"), which provides a "safe harbor"
for forward-looking statements to encourage companies to provide prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed in the statement. The Company believes it
is in the best interest of investors to take advantage of the "safe harbor"
provisions of the Reform Act. Such forward-looking statements are subject to a
number of known and unknown risks and uncertainties that, in addition to general
economic and business conditions and those described in "Risk Factors" could
cause the Company's actual results, performance and achievements to differ
materially from those described or implied in the forward-looking statements.
THE OFFERING
Securities Registered..............2,622,663 shares of Common Stock to be issued
upon conversion of the Company's outstanding
Series B Preferred Stock.
Common Stock outstanding
prior to the offering hereby....14,209,112 shares of Common Stock (1)
Common Stock outstanding
after the offering hereby...... 16,831,775 shares of Common Stock (1) (2)
Common Stock trading symbol
on NASDAQ ......................XYBR
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(1) Does not include (i) 1,642,830 shares of Common Stock reserved for
issuance upon the exercise of outstanding options, (ii) 287,860 shares
of Common Stock reserved for issuance upon exercise of outstanding
warrants to purchase Common Stock, (iii) 3,846,429 shares of Common
Stock reserved for issuance upon exercise of outstanding warrants issued
in connection with the Company's initial public offering (the "IPO")
(iv) 1,285,713 shares of Common Stock registered for sale in connection
with the Series A Preferred Stock and (v) 420,000 shares of Common Stock
reserved for issuance upon exercise of an option granted pursuant to the
Company's IPO to purchase 210,000 shares of Common Stock and 210,000
redeemable warrants, each such warrant to purchase one share of Common
Stock at an exercise price of $9.075. See "Risk Factors -- Effect of
Possible Non-Cash Future Charge" and " -- Securities Issuable Pursuant
to Options, Warrants and the Unit Purchase Option."
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(2) Assumes the number of shares of the Common Stock that would be
issuable upon conversion by the holders of all 4,180 shares of the
Series B Preferred Stock outstanding on December 1, 1997 using 85% of
the closing bid price of the Company's Common Stock as at December
26, 1997. See "Risk Factors -Series B Preferred Stock" and
"Description of Securities -- Preferred Stock -- Series B Preferred
Stock."
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a
high degree of risk. Prospective investors should carefully consider the
following risk factors, in addition to the other information set forth in this
Prospectus, in connection with an investment in the shares of Common Stock
offered hereby.
SERIES A PREFERRED STOCK
In June 1997, the Company sold 3,000 shares of the Series A Preferred
Stock, each share with a liquidation preference of $1,000 (the "Series A
Liquidation Preference"), for an aggregate of $3 million. The Series A Preferred
Stock is convertible into Common Stock at discounts from future market prices of
the Common Stock, which could result in substantial dilution to existing holders
of Common Stock. The Company must reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the Series A Preferred Stock, at least such number
of its Common Stock that is sufficient to effect the conversion of all
outstanding shares of the Series A Preferred Stock. The sale or other
disposition (for cash, shares of stock, securities or other consideration), of
all or substantially all of the assets of the Company would entitle the holders
of the Series A Preferred Stock to receive the Series A Liquidation Preference
on all their shares of Series A Preferred Stock plus accrued and unpaid
dividends. The Company has registered 1,285,713 shares of Common Stock
underlying the Series A Preferred Stock in a registration statement filed with
the Commission on September 22, 1997. See "Description of Securities -- Series A
Preferred Stock."
SERIES B PREFERRED STOCK
In November and December 1997, the Company placed 4,000 shares of the
Series B Preferred Stock, each share with a liquidation preference of $1,000
(the "Series B Liquidation Preference"), for an aggregate of $4,000,000 and paid
the placement agent for this sale with 180 shares of the Series B Preferred
Stock. The Series B Preferred Stock is convertible into Common Stock at
discounts from future market prices of the Common Stock, which could result in
substantial dilution to existing holders of Common Stock. The Company must
reserve and keep available out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Series B
Preferred Stock, at least such number of its Common Stock that is sufficient to
effect the conversion of all outstanding shares of the Series B Preferred Stock.
The sale or other disposition (for cash, shares of stock, securities or other
consideration), of all or substantially all of the assets of the Company would
entitle the holders of the Series B Preferred Stock to receive the Series B
Liquidation Preference on all their shares of Series B Preferred Stock plus
accrued and unpaid dividends. The Company has registered the shares of Common
Stock underlying the Series B Preferred Stock in a Registration Statement filed
with the Commission. If the Company does not file the Registration Statement by
December 12, 1997 or the Commission does not declare the Registration Statement
effective by February 10, 1998, the Company must pay each holder of the Series B
Preferred Stock 2% of the outstanding Series B Liquidation Preference of such
holder's Series B Preferred Stock for the first month and 3% of the outstanding
Series B Liquidation Preference for each monthly period thereafter that the
Registration Statement is not filed or is not declared effective. See
"Description of Securities -- Series B Preferred Stock."
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HISTORY AND EXPECTATION OF FUTURE LOSSES; NEED FOR ADDITIONAL FINANCING
The Company was incorporated in October 1990 and commenced operations
in November 1992. In the fiscal years ended March 31, 1994 and 1995, the Company
incurred a net loss of $47,352 and $1,303,892, respectively. In the nine months
ended December 31, 1995, the Company incurred a net loss of $2,141,190. In the
year ended December 31, 1996, the Company incurred a net loss of $5,238,536. In
the nine months ended September 30, 1997, the Company incurred a net loss of
$7,064,518. At September 30, 1997, the Company had an accumulated deficit of
$15,839,457, shareholders equity of $2,910,454, and working capital of
$1,541,989. The Company has a limited operating history and intends to conduct
significant additional research, development and testing that, together with
establishment of marketing and distribution capabilities, are expected to
require substantial funding and to result in continuing operating losses until
such time as sufficient gross margins from revenues are generated to cover
operating costs. There can be no assurance that, notwithstanding these efforts
and the expenditure of substantial funds, the Company ever will achieve
substantial sales of any of its products or profitable operations. The success
of the Company will be affected by expenses, operational difficulties and other
factors frequently encountered in the development of a business enterprise in a
competitive environment, many of which may be beyond the Company's control.
LIQUIDITY; WORKING CAPITAL NEEDS
To meet working capital cash requirements, the Company intends to
reduce operating expenses, obtain a working capital line of credit and/or
complete additional financings. However, there can be no assurance that the
Company can or will obtain sufficient funds to meet, in whole or in part, its
working capital needs from collections of product sales. There can be no
assurance that the Company will be capable of raising additional capital
thereafter or of establishing a working capital line of credit, or that the
terms upon which such capital or line of credit would be available to the
Company would be acceptable, in which case the Company could be required to
curtail materially, suspend or cease operations.
UNCERTAINTY OF MARKET DEVELOPMENT AND PRODUCT ACCEPTANCE
The mobile computing market is emerging and relatively undeveloped.
The Company sold its first Mobile Assistant(R) in 1993 and as of September 30,
1997 had sold and delivered approximately $1.6 million of Mobile Assistant(R)
systems. The Company commenced delivery of the preproduction 586 Mobile
Assistant(R) in March 1997 and delivery of the preproduction Pentium(R) Mobile
Assistant P-133(TM) in August 1997. In September 1997, the Company announced
linkAssist(TM), a software development toolkit, which provides speech linking of
data in almost any format, without altering the original data. The size of the
mobile computing market is currently limited by the high unit prices of mobile
computers as compared to laptops and other portable computers, the specialized
nature of each application and the need for custom applications and system
integration and the limited supply to date of components for completed systems.
The potential size of the market will be limited by the rate at which
prospective customers recognize and accept the functions and capabilities of
integrated mobile computing systems. There can be no assurance that a
significant market will develop for mobile computing systems or, if a market
develops, that the Mobile Assistant(R) series and any of the Company's other
products will become a significant factor in any market that develops.
The commercial success of the Mobile Assistant(R) series,
linkAssist(TM), software toolkits enabling the Company's customers to more
rapidly create customized software applications on a stand-alone basis or for
use with the Mobile Assistant(R) series, and any other product that the Company
may develop will depend upon acceptance by the commercial, healthcare, education
and military markets, of which there can be no assurance.
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The Company believes that any product acceptance will be substantially dependent
upon educating the commercial, healthcare, education and military markets as to
the capabilities, characteristics, benefits and efficacy of the Mobile
Assistant(R) series and any of the Company's other products, of which there can
be no assurance.
COMPETITION
The computer industry is intensely competitive and is characterized
by rapid technological advances, evolving industry standards and technological
obsolescence. Many of the Company's current competitors have longer operating
histories and greater financial, technical, sales, marketing and other resources
than the Company. Several other companies are engaged in the manufacture and
development of body-mounted or hand-held computing systems that compete with the
Mobile Assistant(R) series, including InterVision, Phoenix Group, Computing
Devices International, a division of Ceridian Corporation, ViA Inc., Texas
Microsystems, Telxon, Norand, Interactive Solutions, Inc., a subsidiary of
Teltronics, Inc. and a consortium of Litton and TRW. Personal digital assistants
and laptop and notebook computers also are products that could compete against
the Mobile Assistant(R) in applications where hands-free, voice-activated
operation is not required. Many of these computers are manufactured by major
domestic and foreign computer manufacturers, which possess far more resources
than the Company and can be expected to compete vigorously with the Company for
the market at which the Mobile Assistant(R) is directed. The Company is aware of
at least three competitors that have introduced hands-free mobile computing
systems that compete directly with the Mobile Assistant(R). In addition, new and
competing technologies are being developed in hands-free mobile computing
systems. There can be no assurance that the Company will be able to compete
successfully against its competitors or that the competitive pressures faced by
the Company will not adversely affect its financial performance.
DEPENDENCE UPON SUPPLIERS
To prepare the Mobile Assistant(R) for delivery to customers, the
Company purchases system components from several suppliers, who manufacture,
assemble, integrate and test these components. The Company then combines those
components and performs system tests prior to shipping. Certain components are
currently purchased from single suppliers. The Company has entered into written
agreements with its suppliers for batteries, head-mounted displays and computing
units. Although the Company believes there are multiple sources for many parts
and components, the Company currently depends heavily on its current suppliers.
Although management believes that the Company could adapt to any supply
interruptions, such occurrences could necessitate changes in product design or
assembly methods for the Mobile Assistant(R) series and cause the Company to
experience temporary delays or interruptions in supply while such changes are
incorporated. Further, because the order time for certain components may range
up to approximately three months, the Company also could experience delays or
interruptions in supply in the event the Company is required to find a new
supplier for any of these components. Any disruptions in supply of necessary
parts and components from the Company's key suppliers could have a material
adverse effect on the Company's results of operations. Any future shortage or
limited allocation of components for the Mobile Assistant(R) could have a
material adverse effect on the Company.
SUBSTANTIAL DEPENDENCE UPON SINGLE PRODUCT LINE; POSSIBILITY OF UNSUCCESSFUL NEW
PRODUCT DEVELOPMENT
The Mobile Assistant(R) series currently consists of two products:
one based on an AMD 5x86 processor and the other based on an Intel Pentium(R)
processor. The Mobile Assistant(R) series are the Company's principal products,
and its success will depend upon its commercial acceptance, which cannot be
assured. For single unit purchases, the Mobile Assistant(R) currently is priced
from $4,995 to $8,995, depending upon the model and
-7-
selected features. As technological developments cause declines in hardware
costs, the Company expects that mobile computer sales will be driven by system
capabilities and integration. There is no assurance that the Mobile Assistant(R)
will offer the performance capabilities or features that customers will value
and, if not, the Company could be required to modify the design of the Mobile
Assistant(R). While linkAssist(TM) and the Company's planned software toolkits
are intended for use both with the Mobile Assistant(R) series and independently,
there can be no assurance that a separate market for the Company's existing and
planned software products will develop. There can be no assurance that any
products, if sold, will generate significant revenues or any profits. The
Company is also developing additional products for the Mobile Assistant(R)
series for introduction in the future and intends to modify the Mobile
Assistant(R) series for use in other applications and to develop other products
using its core technologies. Additional product development will result in the
Company incurring significant research and development expenses that may be
unrecoverable should commercialization of new products prove unsuccessful. The
Company also could require additional funding if research and development
expenses are greater than anticipated. There can be no assurance that the
Company will be successful in its future product development efforts or in
diversifying its product line.
UNCERTAIN PROTECTION OF PATENT AND PROPRIETARY RIGHTS; NO ASSURANCE OF
ENFORCEABILITY OR SIGNIFICANT COMPETITIVE ADVANTAGE
The Company considers its patent, trade secrets, and other
intellectual property and proprietary information to be important to its
business prospects. In September 1995, the Company received a notification from
the United States Patent and Trademark Office (the "Patent Office") entitled
"office action in reexamination" which indicated that the Company's claims under
its existing patent for the Mobile Assistant(R) were subject to reexamination
and had been preliminarily rejected. In May 1996, the Patent Officer issued a
Notice of Intent to Issue Reexamination Certificate and Reexamination Reasons
for Patentability/Confirmation with respect to the issues raised by the request
for reexamination wherein it concluded that the Company's claims are patentable
with respect to the issues raised by the request for reexamination. In April
1996 the Company received notification that a second reexamination request had
been filed with the Patent Office by the same party that had initiated the prior
reexamination, and in September 1996 the Company received a notification from
the Patent Office entitled "office action in reexamination," which indicates
that certain claims under the patent were subject to reexamination and were
preliminarily rejected. In November 1996, the Company filed a written response
to the request for reexamination and preliminary rejection. The second
re-examination has been concluded and the Patent Office sent the Company a
"Notice of Intent to Issue Reexamination Certificate" indicating that the Patent
Office ruled in the Company's favor. Subsequently on September 23, 1997, the
Patent Office issued the Reexamination Certificate to the Company indicating
successful results for the company in the second re-examination. Most of the
Company's revenue for the nine months ended December 31, 1996 and for the nine
months ended September 30, 1997 were derived from products included within the
scope of the patent. In October 1995, the Company filed a patent application
covering additional embodiments and extensions of the technologies used in the
Mobile Assistant(R) series. Notwithstanding the foregoing, there can be no
assurance that the Company's pending patent application will issue as a patent,
that any issued patent will provide the Company with significant competitive
advantages or that challenges will not be instituted against the validity or
enforceability of any patent held by the Company. The cost of litigation to
uphold the validity and prevent infringement of patents can be substantial.
There also can be no assurance that others will not independently develop
similar or more advanced products, design patentable alternatives to the
Company's products or duplicate the Company's trade secrets. The Company may in
some cases be required to obtain licenses from third-parties or to redesign its
products or processes to avoid infringement. The Company also relies on trade
secrets and proprietary technology and enters into confidentiality agreements
with its employees and consultants. There can be no assurance that the
obligation to maintain the confidentiality of such trade secrets or proprietary
information
-8-
will not be breached by employees or consultants or that the Company's trade
secrets or proprietary technology will not otherwise become known or be
independently developed by competitors in such a manner that the Company has no
practical recourse.
LIMITED MARKETING AND DIRECT SALES EXPERIENCE; DEPENDENCE ON OTHERS FOR
MARKETING AND SALES.
The Company intends to continue development of a sales organization
to market and sell its mobile computing products to value-added resellers
("VARs"), original equipment manufacturers ("OEMs") and end users. The Company
is also developing a network of VARs and OEMs and to intends to enter into joint
ventures and licensing or other collaborative arrangements to market and sell
its mobile computing products. The Company currently is a party to VAR
agreements with six entities. Such arrangements may result in a loss of control
by the Company over the marketing and sale of its products. There can be no
assurance that the Company will be successful in entering into such additional
arrangements or be able effectively to manage and maintain its relationships
with others, or that any marketing and sales efforts undertaken for the Company
by others will be successful. The Company also markets its products outside of
the United States. A number of risks are inherent in international transactions,
such as the imposition of governmental controls including restrictions on the
exporting of currency, fluctuations in foreign currency exchange rates, export
license requirements, political and economic instability, trade restrictions,
changes in tariffs and difficulties and expenses in managing international
operations. These and other factors beyond the Company's control may adversely
affect the Company's ability to achieve significant sales.
DEPENDENCE UPON AND NEED FOR KEY PERSONNEL; LIMITED MANAGEMENT TEAM
The Company's success depends to a significant extent on Edward G.
Newman, its President, Chief Executive Officer and Chairman of its Board of
Directors. The loss of Mr. Newman would have a material adverse effect on the
Company's progress and ultimate likelihood of success. Because the Company is
substantially dependent on Mr. Newman's services and there are currently only
two other board-elected officers of the Company, the Company may be considered
to have limited management. Although the Company has entered into a three-year
employment agreement with Mr. Newman, this agreement may not assure the Company
the continued services of Mr. Newman. The Company has obtained a key-person life
insurance policy on the life of Mr. Newman in the amount of $2,000,000. The
Company's success also will depend upon its ability to attract and retain highly
qualified and experienced management and technical personnel. The Company faces
competition for such personnel from numerous other entities, many of which have
significantly greater resources than the Company. There can be no assurance that
the Company will be successful in recruiting such personnel or that, if
recruited, such persons would succeed in establishing profitable operations for
the Company.
CUSTOMER CONCENTRATION
For the twelve month period ended December 31, 1996, two of the
Company's customers accounted for 64% and 24%, respectively, of the Company's
revenues. For the nine month period ended September 30, 1997, three customers
accounted for 58% of the Company's revenues. Accordingly, the Company is
significantly dependent on revenues derived from a limited number of customers.
The loss of one or more significant customers may have a material adverse effect
on the ability of the Company to achieve profitability. To the extent the
Company's dependence increases on large corporate customers in the future, the
Company will be subject to an increased risk that the loss of any such customers
will have a material adverse effect on the Company's results of operations. The
Company may remain dependent in the immediate future upon a limited number of
customers (the identity of which may be subject to change) for a material
percentage of its annual operating revenue.
-9-
RAPID TECHNOLOGICAL CHANGE AND RISK OF OBSOLESCENCE
The market for computer products is characterized by rapid
technological advances, evolving industry standards, changes in end user
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render the Company's existing products and products
currently under development obsolete and unmarketable. The Company's success
will depend upon its ability to enhance its current products and develop and
successfully introduce and sell new products that keep pace with technological
developments and respond to evolving end user requirements. Any failure by the
Company to anticipate or respond adequately to technological developments or end
user requirements, or any significant delays in product development or
introduction, could damage the Company's competitive position in the marketplace
and reduce revenues. The Company expects to increase the size of its product
development staff and to use outside resources in the near term to meet these
challenges. There can be no assurance that the Company will be successful in
hiring and training qualified product development personnel to meet its needs.
There can be no assurance that the Company will be successful in developing and
marketing new products or product enhancements on a timely basis. Any failure to
successfully develop and market new products and product enhancements would have
a material adverse effect on the Company's results of operations.
INDUSTRY CYCLICALITY
The computer industry historically has been affected by periodic
downturns, which have had an adverse economic effect on manufacturers of
computer hardware and software as well as upon end users of computers. In
addition, the life cycle of existing computer products and timing of new product
development and introduction can affect demand for computer products. The
Company's results of operations for any particular period may be adversely
affected by numerous factors, such as the loss of key suppliers or customers,
price competition, problems encountered in managing inventories or receivables,
the timing or cancellation of purchase orders with suppliers and the timing of
expenditures in anticipation of increased sales and customer product delivery
requirements, if any. Price competition in the computer industry in which the
Company competes is intense and could result in gross margin declines which
could have an adverse impact on the Company's financial performance.
EFFECT OF POSSIBLE NON-CASH FUTURE CHARGE
As a condition to the Company's initial public offering (the "IPO"),
certain of the Company's stockholders, primarily officers and directors, have
been required to deposit an aggregate of 1,800,000 shares of Common Stock into
an escrow account (the "Escrowed Shares"). The Escrowed Shares are subject to
incremental release over a three-year period only in the event the Company's
gross revenues and earnings (loss) per share for the 12-month periods ending
September 30, 1997, 1998 and 1999 equal or exceed certain gross revenue and
earnings (loss) per share targets. If such per share targets are not met in any
of the relevant 12-month periods (and the price of the Common Stock does not
meet or exceed the price described below), the Escrowed Shares will be returned
to the Company in amounts which have been agreed upon between the Representative
and the Company for each period and canceled. In addition to the foregoing, all
the then Escrowed Shares will be released to the stockholders if the closing
price of the Common Stock as reported on The Nasdaq SmallCap Market following
this offering equals or exceeds $11.00 for 25 consecutive trading days or 30 out
of 35 consecutive trading days during the period ending September 30, 1999. In
the event any Escrowed Shares held by officers, employees and consultants are
released, the difference between the initial offering price and the market value
of such shares at the time of release will be deemed to be additional
compensation expense to the
-10-
Company. Assuming the price of Common Stock is equal to or greater than the IPO
price of $5.50 (of which there can be no assurance), the release of the Escrowed
Shares would result in an earnings charge that would have the effect of reducing
or eliminating any earnings per share and could have a negative effect on the
market price for the Common Stock. The earnings per share target calculation
will be based on the average number of shares issued and outstanding during each
period but excludes shares issued pursuant to a unit purchase option granted
pursuant to the IPO, extraordinary items or compensation expense charged to the
Company related to the release of the Escrowed Shares. The stock and earnings
targets for escrow release for September 30, 1997 were not achieved and 300,000
shares were canceled from the escrow pool, which resulted in a reduction of 2.1%
of the Company's outstanding shares of Common Stock.
CONTROL BY EXISTING STOCKHOLDERS
Following this offering, the Company's executive officers, directors
and principal stockholders will, in the aggregate, beneficially own
approximately 42.9% of the Company's outstanding shares of Common Stock. These
stockholders, if acting together, will be able effectively to control most
matters requiring approval by the stockholders of the Company, including the
election of directors. The voting power of these stockholders under certain
circumstances could have the effect of delaying or preventing a change in
control of the Company.
LIMITATION OF LIABILITY
The Company's Certificate of Incorporation provides that directors of
the Company shall not be personally liable for monetary damages to the Company
or its stockholders for a breach of fiduciary duty as a director, subject to
limited exceptions. Although such limitation of liability does not affect the
availability of equitable remedies such as injunctive relief or rescission,
these provisions of the Certificate of Incorporation could prevent the recovery
of monetary damages against directors of the Company. See "Indemnification for
Securities Act Liabilities."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of the Company's Common Stock
in the public market following this offering could adversely affect the market
price of the Common Stock. Of the 18,117,488 shares of Common Stock that will be
outstanding or registered for sale upon the completion of this offering, the
3,846,429 shares distributed in the IPO, 1,285,713 shares registered in
connection with the Series A Preferred Stock and the 2,622,663 additional shares
of Common Stock registered in this offering will be freely tradeable. The
remaining 10,362,683 shares of the Common Stock are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act, and in
the future may only be sold pursuant to an effective registration statement
under the Securities Act, in compliance with the exemption provisions of Rule
144 or pursuant to another exemption under the Securities Act. In the absence of
any agreement to the contrary, the outstanding restricted Common Stock could be
sold in accordance with Rule 144 commencing 90 days from the date of this
Prospectus and at various times thereafter through November 1997. However,
pursuant to the terms of agreements entered into pursuant to the IPO, the
holders of 9,905,437 shares of Common Stock may not sell or dispose of their
shares of Common Stock until July 18, 1998 without prior written consent of the
representative of the underwriter in the IPO (the "Representative").
-11-
SECURITIES ISSUABLE PURSUANT TO OPTIONS, WARRANTS AND THE UNIT PURCHASE OPTION
At the date of this Prospectus, the Company has reserved an aggregate of
6,197,119 shares of Common Stock for issuance on exercise of outstanding options
and warrants. The exercise prices of the options presently outstanding are $0.01
per share for 250,000 shares granted in September 1994, and $1.37 to $6.00 for
1,392,830 shares granted from April 1, 1995 to December 1, 1997. In order to
retain incentives for directors and current employees during this stage of the
Company's development, the strike price for certain options was reduced to $3.00
per share by the Company's board of directors on August 28, 1997. Current
control persons and board elected officers are not affected by this change. The
exercise price of the 287,860 warrants granted between July 1, 1996 and December
1, 1997 is between $2.38 and $18.00 per share. In connection with the Company's
IPO, warrants to purchase 3,846,429 shares were issued that entitle the holder
to purchase a share of common stock for $9.00 until July 19, 1999. At the
completion of the IPO, the Representative received an option (the "Unit Purchase
Option") to purchase 210,000 Units (the "Units"), each unit consisting of one
share of Common Stock and one Redeemable Warrant (a "Warrant") to purchase one
share of Common Stock, at a price of $9.075 per Unit during a period of four
years commencing July 18, 1997. The Warrants included in the Unit Purchase
Option are exercisable at $12.60 per share. During the terms of the outstanding
options, warrants and the Unit Purchase Option, the holders are given the
opportunity to profit from a rise in the market price of the Common Stock, and
their exercise may dilute the ownership interest of existing stockholders,
including investors in this offering. The existence of the options, the warrants
and the Unit Purchase Option may adversely affect the terms on which the Company
may obtain additional equity financing. Moreover, the holders are likely to
exercise their rights to acquire Common Stock at a time when the Company would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise of such securities.
NO DIVIDENDS ANTICIPATED
The Company has never paid any dividends on its securities and does
not anticipate the payment of dividends in the foreseeable future.
VOLATILITY OF STOCK PRICE
The trading price of the Common Stock has been volatile, and it may
continue to be so. Such trading price could be subject to wide fluctuations in
response to announcements of business and technical developments by the Company
or its competitors, quarterly variations in operating results, and other events
or factors, including expectations by investors and securities analysts and the
Company's prospects. In addition, stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of development stage companies, at times for reasons unrelated to
their operating performance. Such broad market fluctuations may adversely affect
the price of the Common Stock.
IMPACT OF SALE OF COMMON STOCK UPON CONVERSION OF SERIES A AND SERIES B
PREFERRED STOCK ON STOCK PRICE
The Series A and Series B Preferred Stock are convertible into Common
Stock at discounts from future market prices of the Common Stock, which could
result in substantial dilution to existing holders of Common Stock. The sale of
such Common Stock acquired at a discount could have a negative impact on the
trading price of the Common Stock and could increase the volatility in the
trading price of the Common Stock.
-12-
ANTI-TAKEOVER CONSIDERATION; RIGHTS OF PREFERRED STOCK
The Company's Certificate of Incorporation authorizes the issuance of
up to 6,000,000 shares of $.01 par value preferred stock (the "Preferred
Stock"). As of the date of this Prospectus, only the Series A Preferred Stock
and the Series B Preferred Stock are issued and outstanding. The authorized and
unissued Preferred Stock may be issued with voting, conversion or other terms
determined by the Board of Directors which could be used to delay, discourage or
prevent a change of control of the Company. Such terms could include, among
other things, dividend payment requirements, redemption provisions, preferences
as to dividends and distributions and preferential voting rights. The issuance
of Preferred Stock with such rights could have the effect of limiting
stockholder participation in certain transactions such as mergers or tender
offers and could discourage or prevent a change in management of the Company.
The Company has no present intention to issue any additional Preferred Stock.
See "Description of Securities -- Preferred Stock."
-13-
USE OF PROCEEDS
The Shares being offered hereby are being registered for the account
of the Selling Stockholders, and, accordingly, the Company will not receive any
of the proceeds from the sale of the Shares.
SELLING STOCKHOLDERS
The Shares being offered for resale by the Selling Stockholders were
acquired in connection with the November 1997 private placement (as amended, the
"Private Placement") and consist of the Common Stock issuable upon conversion of
the Series B Preferred Stock. Of the 4,180 shares of Series B Preferred Stock
placed in the Private Placement, 4,000 shares were placed with one Selling
Stockholder. Such Selling Stockholder has purchased and the Company has issued
3,000 shares of Series B Preferred Stock (the "Initial Shares"), and such
Selling Stockholder is contractually obligated to purchase the remaining 1,000
shares of Series B Preferred Stock (the "Additional Shares") no later than
February 10, 1998. The Additional Shares must be purchased by such Selling
Stockholder subject only to the effective registration of the Shares and that
the representations and warranties of the Company made on the date the Initial
Shares were purchased are true and correct in all material respects on the date
the Additional Shares are purchased. The other Selling Stockholder was issued
180 shares of Series B Preferred Stock for serving as the placement agent for
the Private Placement. In connection with the Private Placement, the Company
granted the Selling Stockholders certain registration rights pursuant to which
the Company agreed to use its best efforts to keep the Registration Statement,
of which this Prospectus is a part, effective until the earliest of (i) the
second anniversary of the issuance date of the Series B Preferred Stock, (ii)
the date the Selling Stockholders may sell all the Shares under the provisions
of Rule 144 or (iii) the date the Selling Stockholders no longer own any of the
Shares.
The following table sets forth certain information regarding the
ownership of shares of Common Stock by the Selling Stockholders as of December
31, 1997, and as adjusted to reflect the sale of the Shares. The information in
the table concerning the Selling Stockholders who may offer Common Shares
hereunder from time to time is based on information provided to the Company by
such stockholder, except for the assumed conversion ratio of shares of the
Series B Preferred Stock into Common Stock, which is based solely on the
assumptions referenced in footnotes (1) and (2) to the table. Information
concerning the Selling Stockholders may change from time to time and any changes
of which the Company is advised will be set forth in a Prospectus Supplement to
the extent required. See "Plan of Distribution."
Shares of Common Stock Owned
after Offering (2)
----------------------------
Shares of
Common Stock Shares of
Owned Prior to Common Stock
Offering to be Sold (1)(2) Number Percent
--------------------- --------------------- --------------- ----------------
Melcombe Invest. Ltd. (3) -0- 2,472,079 2,472,079 14.7%
Settondown Capital -0- 150,584 150,584 0.9%
International Ltd.
--------- --------- -----
Total -0- 2,622,663 2,622,663 15.6%
========= ========= =====
- -----------------
-14-
(1) Assumes that the Selling Stockholders will convert all of its Series
B Preferred Stock into Common Stock based upon an average of closing
bid and ask price of $1.875. The Selling Stockholder may convert each
share of the Series B Preferred Stock into such number of shares of
Common Stock as is determined by dividing $1,000 by 85% of the
average closing bid price on the Nasdaq SmallCap Market for the five
trading days prior to the date of conversion.
(2) Assumes that each Selling Stockholder sells a pro-rata portion of the
2,622,663 shares of Common Stock offered hereby during the effective
period of the Registration Statement. The actual number of shares of
Common Stock offered hereby is subject to change and could be
materially less than the estimated amount indicated, depending upon
(i) the average closing bid price of the Common Stock for the five
trading days prior to the date of conversion, (ii) whether any of the
Series B Preferred Stock has been redeemed and (iii) whether the
number of shares of the Series B Preferred Stock or the Common Stock
outstanding have been adjusted to account for any stock dividend,
stock split, recapitalization, merger, consolidation or other
adjustment.
(3) Each Selling Stockholder has agreed that neither it nor any
subsequent holder of its Series B Preferred Stock will, following any
conversion of such Series B Preferred Stock, be the beneficial owner
of 4.99% or more of the then issued and outstanding shares of Common
Stock.
The Selling Shareholders are not affiliated with the Company. The
Selling Stockholders have not had any material relationship with the Company
within the past three years.
DESCRIPTION OF SECURITIES
GENERAL
The authorized capital stock of the Company consists of 40,000,000
shares of Common Stock, par value $.01 per share, and 6,000,000 shares of
Preferred Stock, par value $.01 per share. As of the date hereof, 14,209,112
shares of Common Stock are issued and outstanding, 2,250 shares of Series A
Preferred Stock are issued and outstanding and 3,180 shares of Series B
Preferred Stock are issued and outstanding. The Company currently has reserved
6,197,119 shares of Common Stock for issuance pursuant to outstanding options,
warrants and the Unit Purchase Option.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each
share held of record on all matters submitted to a vote of stockholders. The
Company's Certificate of Incorporation and By-Laws do not provide for cumulative
voting rights in the election of directors. Accordingly, holders of a majority
of the shares of Common Stock entitled to vote in any election of directors may
elect all of the directors standing for election. Holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
are entitled to share ratably in the assets remaining after payment of
liabilities. Holders of Common Stock have no preemptive, conversion or
redemption rights. All of the outstanding shares of Common Stock are fully-paid
and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further stockholder
approval, to issue up to 6,000,000 shares of Preferred Stock from time to time
in one or more series, to establish the number of shares to be included in each
such series, and to fix the designations, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof. The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock, if any, or could
-15-
adversely affect the rights and powers, including voting rights, of the holders
of the Common Stock. In certain circumstances, such issuances could have the
effect of decreasing the market price of the Common Stock.
Series A Preferred Stock
On June 30, 1997, the Board of Directors authorized the issuance of a
series of Preferred Stock consisting of 3,000 shares (the "Series A Preferred
Stock"), each such share of Series A Preferred Stock has a stated value of
$1,000 (the "Liquidation Preference"), pursuant to a Certificate of Designation
(the "Certificate of Designation"). On September 29, 1997, the holders of the
Series A Preferred Stock converted a portion of their holdings and as of
December 1, 1997, three different entities owned the remaining 2,250 shares of
the Series A Preferred Stock.
Dividends. The holders of the shares of Series A Preferred Stock are
entitled to receive, when and as declared by the Board of Directors of the
Company, dividends at the rate of five percent of the stated Liquidation
Preference per share per annum, and no more, payable, at the discretion of the
Board of Directors, in Common Stock or \cash. Dividends accrue on each share of
Series A Preferred Stock from the date of initial issuance. Such dividends are
in preference to any distributions on any outstanding shares of Common Stock or
any other equity securities of the Company that are junior to the Preferred
Stock as to the payment of dividends.
Preferences on Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of the Series A Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, an amount equal to the Liquidation Preference for each share of
Series A Preferred Stock owned by such holder, plus all accrued and unpaid
dividends thereon to the date of payment. If upon liquidation, dissolution, or
winding up of the Company, the assets of the Company available for distribution
to its stockholders shall be insufficient to pay the holders of the Series A
Preferred Stock the full Liquidation Preference plus accrued and unpaid
dividends to which they respectively shall be entitled, the holders of the
Series A Preferred Stock together with the holders of any other series of
Preferred Stock ranking on a parity with the Series A Preferred Stock as to the
payments of amounts upon liquidation, dissolution or winding up shall share
ratably in any distribution of assets according to the respective amounts which
would be payable in respect of all such shares held by the respective
stockholders. The sale or other disposition (for cash, shares of stock,
securities or other consideration), of all or substantially all of the assets of
the Company shall be deemed to be a liquidation, dissolution or winding up of
the Company but the merger or consolidation of the Company into or with another
corporation or into or with the Company, shall not be deemed to be a
liquidation, winding up or dissolution of the Company. The holders of Series A
Preferred Stock shall have no priority or preference with respect to
distributions made by the Company in connection with the repurchase of shares of
Common Stock issued to or held by employees, directors or consultants upon
termination of their employment or services pursuant to agreements providing for
the right of said repurchase between the Company and such persons.
Conversion Rights. The holders of Series A Preferred Stock shall have
conversion rights as follows: (i) no shares of Series A Preferred Stock may be
converted prior to September 28, 1997; (ii) at any time after September 28, 1997
through December 31, 1997, up to twenty-five (25%) percent of the shares of
Series A Preferred Stock then outstanding may be converted, at the option of the
holders thereof; and (iii) thereafter, on January 1, 1998, April 1, 1998 and
July 1, 1998, an additional twenty-five (25%) percent of the shares of Series A
Preferred Stock then outstanding may be converted, on a cumulative and pro rata
basis, at the option of the holders thereof. The number of shares of fully-paid
and nonassessable Common Stock into which each share of Series A Preferred Stock
may be converted shall be determined by dividing the Liquidation Preference by
an
-16-
amount (the "Conversion Price") equal to the lesser of (A) 82% of the average
closing bid price of the Common Stock as reported on the Nasdaq SmallCap Market
or any successor exchange in which the Common Stock is listed for the five
trading days preceding the date on which the holder of the Series A Preferred
Stock has telecopied a notice of conversion to the Company (the "Conversion
Date") and (B) $3.50.
In the event the shares of Series A Preferred Stock are not converted
within ten business days of receipt by the Company of a valid notice of
conversion, the Company shall pay to the holder, by wire transfer, as liquidated
damages for such failure and not as a penalty, an amount in cash equal to 1%
percent per day of the purchase price of the shares of Series A Preferred Stock
to be converted which shall run from the initial Conversion Date and the holder
has the option to withdraw the notice of conversion previously sent; provided,
that the Company shall not be responsible for or required to pay such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
No fractional shares of Common Stock shall be issued upon conversion
of the Series A Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Company's Board of Directors. The Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless either the certificates evidencing such
shares of Series A Preferred Stock are delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates.
Upon any conversion of Series A Preferred Stock, the shares of Series
A Preferred Stock that are converted shall not be reissued and shall not be
considered outstanding for any purposes. Upon conversion of all of the then
outstanding Series A Preferred Stock, shares of Series A Preferred Stock shall
not be deemed outstanding for any purpose whatsoever and all such shares shall
be retired and canceled and shall not be reissued.
On June 30, 1999, the holders of the Series A Preferred Stock shall
be required to convert all of their outstanding shares of Series A Preferred
Stock into shares of Common Stock. Until converted, the Company shall be
entitled to redeem shares of Series A Preferred Stock in accordance with the
Certificate of Designation, regardless of whether or not a notice of conversion
has been received by the Company with respect to such shares.
The Company shall at all times when any shares of Series A Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series A
Preferred Stock.
Redemption. At any time after September 28, 1997, the Company may, at
the option of the Board of Directors, redeem up to 50% of the outstanding shares
of the Series A Preferred Stock at the applicable redemption price, provided,
that (x) the Company shall have received a notice of conversion, and (y) the
Conversion Price is at or below $2.625. At any time after September 28, 1997,
the Company may, at the option of the Board of Directors, redeem all or a
portion of the remaining 50% of the outstanding shares of the Series A Preferred
Stock at the applicable redemption price, provided, that (x) the Company shall
have received a notice of conversion, and (y) the Conversion Price is at or
below $1.00. The Company shall give written notice by telecopy, to the holder of
Series A Preferred Stock to be redeemed at least one business day after receipt
of the notice of conversion prior to the date specified for redemption (the
"Redemption Date"). Such notice shall state the Redemption Date, the Redemption
Price (as hereinafter defined), the number of shares of Series A Preferred
-17-
Stock of such holders to be redeemed and shall call upon such holders to
surrender to the Company on the Redemption Date at the place designated in the
notice such holders' redeemed stock. If fewer than all the outstanding shares of
Series A Preferred Stock are to be redeemed, the redemption shall be pro rata
among the holders of Series A Preferred Stock and subject to such other
provisions as may be determined by the Board of Directors. The Redemption Date
shall be no more than 10 days after receipt of written notice from the Company.
If the Company fails to pay the Redemption Price on the Redemption Date, the
Company shall pay to the holder a penalty in an amount in cash equal to 2%
percent of the Redemption Price to be paid on such Redemption Date. If the
Company fails to pay the Redemption Price on the Redemption Date, the holder
shall have the right to convert the Series A Preferred Stock previously
presented to the Company and not redeemed. The Company shall have the right to
redeem the Series A Preferred Stock in any subsequent redemption; provided,
however, that if the Company fails to pay the Redemption Price in a subsequent
redemption within 10 days, the Company shall have the right to redeem the Series
A Preferred Stock thereafter only upon wiring the Redemption Price to the
holders simultaneously with sending the notice of redemption. On or after the
Redemption Date, the holders of shares of Series A Preferred Stock called for
redemption shall surrender the certificates evidencing the shares called for
redemption to the Company at the place designated in such notice and shall
thereupon be entitled to receive payment of the Redemption Price.
The Company shall have the option to redeem the Series A Preferred
Stock at a price determined as follows (each, a "Redemption Price"): (i) any
portion of the first 25% of the outstanding shares of Series A Preferred Stock
at a cash price equal to 110% percent of the Liquidation Preference per share,
together with all unpaid dividends to and including the Redemption Date, or
issue shares of Common Stock at a conversion rate equal to (x) $1,000 divided by
(y) 82% percent of the average closing bid price of the Common Stock as reported
on the Nasdaq SmallCap Market or any successor exchange in which the Common
Stock is listed for the five trading days preceding the Conversion Date; (ii)
any portion of the second 25% percent of the outstanding shares of the Series A
Preferred Stock at a cash price equal to 120% of the Liquidation Preference per
share, together with all unpaid dividends to and including the Redemption Date,
or issue shares of Common Stock at a conversion rate equal to (x) $1,000 divided
by (y) 82% of the average closing bid price of the Common Stock as reported on
the Nasdaq SmallCap Market or any successor exchange in which the Common Stock
is listed for the five trading days preceding the Conversion Date; and (iii) any
portion of the remaining 50% of the outstanding shares of Series A Preferred
Stock, if the Company receives a Notice of Conversion and the Conversion Price
of the Series A Preferred Stock is below $1.00, at a cash price equal to 110% of
the Liquidation Preference per share, together with all accrued and unpaid
dividends to and including the Redemption Date; provided, however, that payment
of the Redemption Price shall be made from any funds of the Company legally
available therefor.
From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
the holders of such shares shall continue), the holders of the shares of the
Series A Preferred Stock called for redemption shall cease to have any rights as
stockholders of the Company, except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series A Preferred Stock, and such shares shall not thereafter be transferred
(except with the consent of the Company) on the books of the Company and shall
not be deemed outstanding for any purpose whatsoever.
There shall be no redemption of any shares of Series A Preferred
Stock of the Company where such action would be in violation of applicable law.
-18-
Call Option. In the event the Company closes on an offering for its
Common Stock at a price per share under $6.00, the Company may, at its option,
call all outstanding shares of Series A Preferred Stock at a call price equal to
200% of the Liquidation Preference.
In the event the Company has an offering for its Common Stock at a
price per share equal to or greater than $6.00, then the holders of the Series A
Preferred Stock shall be required to convert all outstanding shares of Series A
Preferred Stock into shares of Common Stock five business days prior to the
scheduled closing of such offering and each holder may, at its option, sell its
shares of Common Stock as part of such offering.
Voting Rights. Except as otherwise required by law, the holders of
the Series A Preferred Stock shall not be entitled to vote upon any matter
relating to the business or affairs of the Company or for any other purpose.
Status. In case any outstanding shares of Series A Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to be permanently
canceled and shall not resume the status of authorized but unissued shares of
Series A Preferred Stock.
Ranking; Changes Affecting Series A Preferred Stock. The Series A
Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, (i) rank senior to any of the Company's
Common Stock and any other class or series of stock of the Company which by its
terms shall rank junior to the Series A Preferred Stock, and (ii) rank junior to
any other class or series of stock of the Company which by its terms shall rank
senior to the Series A Preferred Stock and (iii) rank on a pari passu basis with
the Series B Preferred Stock and any other series of Preferred Stock of the
Company.
So long as any shares of Series A Preferred Stock are outstanding,
the Company shall not (i) alter or change any of the powers preferences,
privileges, or rights of the Series A Preferred Stock; or (ii) amend the
provisions of the Certificate of Designation affecting the ranking of the Series
A Preferred Stock, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the outstanding shares of Series A Preferred Stock, as to changes affecting the
Series A Preferred Stock.
Registration Rights. The Company has registered the shares of Common
Stock underlying the Series A Preferred Stock in a registration statement filed
with the Commission.
Series B Preferred Stock
On November 12, 1997, the Board of Directors authorized the issuance
of a series of Preferred Stock consisting of 4,180 shares (the "Series B
Preferred Stock"), each such share of Series B Preferred Stock has a stated
value of $1,000 (the "Liquidation Preference"), pursuant to a Certificate of
Designation (the "Certificate of Designation"). As of December 1, 1997, one
entity owned 3,000 shares of the Series B Preferred Stock and another entity
owned 180 shares of the Series B Preferred Stock.
Dividends. The holders of the shares of Series B Preferred Stock are
entitled to receive, when and as declared by the Board of Directors of the
Company, dividends at the rate of five percent of the stated Liquidation
Preference per share per annum, and no more, payable, at the discretion of the
Board of Directors, in Common Stock or cash. Dividends accrue on each share of
Series B Preferred Stock from the date of initial issuance. Such dividends are
in preference to any distributions on any outstanding shares of Common Stock or
any other equity securities of the Company that are junior to the Preferred
Stock as to the payment of dividends.
-19-
Preferences on Liquidation. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of shares of the Series B Preferred Stock then outstanding shall be entitled to
be paid, out of the assets of the Company available for distribution to its
stockholders, an amount equal to the Liquidation Preference for each share of
Series B Preferred Stock owned by such holder, plus all accrued and unpaid
dividends thereon to the date of payment. If upon liquidation, dissolution, or
winding up of the Company, the assets of the Company available for distribution
to its stockholders shall be insufficient to pay the holders of the Series B
Preferred Stock the full Liquidation Preference plus accrued and unpaid
dividends to which they respectively shall be entitled, the holders of the
Series B Preferred Stock together with the holders of any other series of
Preferred Stock ranking on a parity with the Series B Preferred Stock as to the
payments of amounts upon liquidation, dissolution or winding up shall share
ratably in any distribution of assets according to the respective amounts which
would be payable in respect of all such shares held by the respective
stockholders. The sale or other disposition (for cash, shares of stock,
securities or other consideration), of all or substantially all of the assets of
the Company shall be deemed to be a liquidation, dissolution or winding up of
the Company but the merger or consolidation of the Company into or with another
corporation or into or with the Company, shall not be deemed to be a
liquidation, winding up or dissolution of the Company. The holders of Series B
Preferred Stock shall have no priority or preference with respect to
distributions made by the Company in connection with the repurchase of shares of
Common Stock issued to or held by employees, directors or consultants upon
termination of their employment or services pursuant to agreements providing for
the right of said repurchase between the Company and such persons.
Conversion Rights. The holders of Series B Preferred Stock shall have
conversion rights as follows: (i) no shares of Series B Preferred Stock may be
converted prior to the earlier of (x) the effective date of the Registration
Statement covering the Shares and (y) February 10, 1998 (the "First Conversion
Date"); (ii) during the thirty-day period after the First Conversion Date, up to
twenty-five (25%) percent of the shares of Series B Preferred Stock then
outstanding may be converted, at the option of the holders thereof; and (iii)
during each thirty-day period thereafter, an additional twenty-five (25%)
percent of the shares of Series B Preferred Stock then outstanding may be
converted, on a cumulative and pro rata basis, at the option of the holders
thereof. The number of shares of fully-paid and nonassessable Common Stock into
which each share of Series B Preferred Stock may be converted shall be
determined by dividing the Liquidation Preference and at the option of the
Company, accrued and unpaid dividends, by an amount (the "Conversion Price")
equal to the 85% of the average closing bid price of the Common Stock as
reported on the Nasdaq SmallCap Market or any successor exchange or trading
market in which the Common Stock is listed for the five trading days (the
"Average Trading Price") preceding the date on which the holder of the Series B
Preferred Stock has telecopied a notice of conversion to the Company (the
"Conversion Date"). The Conversion Price shall not be greater than 120% of the
Average Trading Price on the date of issuance or less than an initial floor
price of 50% of the Conversion Price on the date of issuance. Commencing thirty
days after the First Conversion Date and at the end of each thirty-day period
thereafter, the initial floor price will be reduced by 10%.
In the event the shares of Series B Preferred Stock are not converted
within ten business days of receipt by the Company of a valid notice of
conversion, the Company shall pay to the holder, by wire transfer, as liquidated
damages for such failure and not as a penalty, an amount in cash equal to 1%
percent per day of the purchase price of the shares of Series B Preferred Stock
to be converted which shall run from the initial Conversion Date and the holder
has the option to withdraw the notice of conversion previously sent; provided,
that the Company shall not be responsible for or required to pay such liquidated
damages if such failure to convert was not caused by any actions or omissions of
the Company.
-20-
No fractional shares of Common Stock shall be issued upon conversion
of the Series B Preferred Stock. In lieu of any fractional shares to which the
holder would otherwise be entitled, the Company shall pay cash equal to such
fraction multiplied by the fair market value of the Common Stock on the
Conversion Date, as determined by the Company's Board of Directors. The Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon conversion unless either the certificates evidencing such
shares of Series B Preferred Stock are delivered to the Company or its transfer
agent as provided above, or the holder notifies the Company or its transfer
agent that such certificates have been lost, stolen or destroyed and executes an
agreement satisfactory to the Company to indemnify the Company from any loss
incurred by it in connection with such certificates.
Upon any conversion of Series B Preferred Stock, the shares of Series
B Preferred Stock that are converted shall not be reissued and shall not be
considered outstanding for any purposes. Upon conversion of all of the then
outstanding Series B Preferred Stock, shares of Series B Preferred Stock shall
not be deemed outstanding for any purpose whatsoever and all such shares shall
be retired and canceled and shall not be reissued.
On November 12, 1999, the holders of the Series B Preferred Stock
shall be required to convert all of their outstanding shares of Series B
Preferred Stock into shares of Common Stock. Until converted, the Company shall
be entitled to redeem shares of Series B Preferred Stock in accordance with the
Certificate of Designation, regardless of whether or not a notice of conversion
has been received by the Company with respect to such shares.
The Company shall at all times when any shares of Series B Preferred
Stock shall be outstanding, reserve and keep available out of its authorized but
unissued stock, such number of shares of Common Stock as shall from time to time
be sufficient to effect the conversion of all outstanding shares of Series B
Preferred Stock.
Redemption. At any time after the date of issuance of the Series B
Preferred Stock, the Company may, at the option of the Board of Directors,
redeem any or all of the outstanding shares of the Series B Preferred Stock at
the applicable redemption price, provided, that the holder shall have the right
to convert shares of Series B Preferred Stock which are eligible for conversion
in the first five (5) days after receiving a notice of redemption up to 20% of
the Series B Preferred Stock in the aggregate owned by such holder. The Company
shall give written notice by telecopy, to the holder of Series B Preferred Stock
to be redeemed, which notice shall specify the date for redemption, which date
shall be no later than five (5) business days after the date on which the notice
is delivered to the holder (the "Redemption Date"), the Redemption Price (as
hereinafter defined), the number of shares of Series B Preferred Stock of such
holders to be redeemed and shall call upon such holders to surrender to the
Company on the Redemption Date at the place designated in the notice such
holders' redeemed stock. If fewer than all the outstanding shares of Series B
Preferred Stock are to be redeemed, the redemption shall be pro rata among the
holders of Series B Preferred Stock and subject to such other provisions as may
be determined by the Board of Directors. The Redemption Date shall be no more
than five (5) business days after receipt of written notice from the Company. If
the Company fails to pay the Redemption Price on the Redemption Date, the
Company shall pay to the holder a penalty in an amount in cash equal to
$100,000. If the Company fails to pay the Redemption Price on the Redemption
Date, the Company shall have the right to redeem the Series B Preferred Stock
thereafter only upon wiring the Redemption Price to the holders simultaneously
with sending the notice of redemption. On or after the Redemption Date, the
holders of shares of Series B Preferred Stock called for redemption shall
surrender the certificates evidencing the shares called for redemption to the
Company at the place designated in such notice and shall thereupon be entitled
to receive payment of the Redemption Price.
The Company shall have the option to redeem all or a portion of the
outstanding shares of Series B Preferred Stock at a cash price equal to 122%
percent of the Liquidation Preference per share, together with all
-21-
unpaid dividends to and including the Redemption Date (the "Redemption Price");
provided, however, that payment of the Redemption Price shall be made from any
funds of the Company legally available therefor.
From and after the Redemption Date (unless default shall be made by
the Company in duly paying the Redemption Price in which case all the rights of
the holders of such shares shall continue), the holders of the shares of the
Series B Preferred Stock called for redemption shall cease to have any rights as
stockholders of the Company, except the right to receive, without interest, the
Redemption Price thereof upon surrender of certificates representing the shares
of Series B Preferred Stock, and such shares shall not thereafter be transferred
(except with the consent of the Company) on the books of the Company and shall
not be deemed outstanding for any purpose whatsoever.
There shall be no redemption of any shares of Series B Preferred
Stock of the Company where such action would be in violation of applicable law.
Voting Rights. Except as otherwise required by law, the holders of
the Series B Preferred Stock shall not be entitled to vote upon any matter
relating to the business or affairs of the Company or for any other purpose.
Status. In case any outstanding shares of Series B Preferred Stock
shall be redeemed, the shares so redeemed shall be deemed to be permanently
canceled and shall not resume the status of authorized but unissued shares of
Series B Preferred Stock.
Ranking; Changes Affecting Series B Preferred Stock. The Series B
Preferred Stock shall, with respect to dividend rights and rights on
liquidation, winding up and dissolution, (i) rank senior to any of the Company's
Common Stock and any other class or series of stock of the Company which by its
terms shall rank junior to the Series B Preferred Stock, and (ii) rank junior to
any other class or series of stock of the Company which by its terms shall rank
senior to the Series B Preferred Stock and (iii) shall rank on a pari passu
basis with the Series A Preferred Stock and any other series of Preferred Stock
of the Company.
So long as any shares of Series B Preferred Stock are outstanding,
the Company shall not (i) alter or change any of the powers preferences,
privileges, or rights of the Series B Preferred Stock; or (ii) amend the
provisions of the Certificate of Designation affecting the ranking of the Series
B Preferred Stock, without first obtaining the approval by vote or written
consent, in the manner provided by law, of the holders of at least a majority of
the outstanding shares of Series B Preferred Stock, as to changes affecting the
Series B Preferred Stock.
Registration Rights. The Company has agreed to register the shares of
Common Stock underlying the Series B Preferred Stock in the Registration
Statement filed with the Commission. If the Commission does not file the
Registration Statement by December 12, 1997 or the Commission does not declare
the Registration Statement effective by February 10, 1998, the Company must pay
each holder of the Series B Preferred Stock 2% of the outstanding Liquidation
Preference of such holder's Series B Preferred Stock for the first month and 3%
of the outstanding Liquidation Preference for each monthly period thereafter
that the Registration Statement is not filed or is not declared effective.
Other Designations of Preferred Stock
-22-
As of the date of this Prospectus, the Company has not designated any
shares of Preferred Stock other than the Series A Preferred Stock and the Series
B Preferred Stock. There are no other shares of Preferred Stock outstanding, and
the Company currently has no plans to issue any other shares of Preferred Stock.
DELAWARE BUSINESS COMBINATION PROVISIONS
As a Delaware corporation, the Company is subject to Section 203
("Section 203") of the Delaware General Corporation Law (the "DGCL"), which
regulates large accumulations of shares, including those made by tender offers.
Section 203 may have the effect of significantly delaying a purchaser's ability
to acquire the entire interest in the Company if such acquisition is not
approved by the Company's Board of Directors. In general, Section 203 prevents
an "Interested Stockholder" (defined generally as a person with 15% or more of a
corporation's outstanding voting stock) from engaging in a "Business
Combination" (defined below) with a Delaware corporation for three years
following the date such person became an Interested Stockholder. For purposes of
Section 203, the term "Business Combination" is defined broadly to include
mergers and certain other transactions with or caused by the Interested
Stockholder, sales or other dispositions to the Interested Stockholder (except
proportionately with the corporation's other stockholders) of assets of the
corporation or a subsidiary equal to 10% or more of the aggregate market value
of the corporation's consolidated assets or its outstanding stock; the issuance
or transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the Interested Stockholder (except for transfers in a
conversion or exchange or a pro-rata distribution or certain other transactions,
none of which increase the Interested Stockholder's proportionate ownership of
any class or series of the corporation's or such subsidiary's stock); or receipt
by the Interested Stockholder (except proportionately as a stockholder),
directly or indirectly, of any loans, advances, guarantees, pledges or other
financial benefits provided by or through the corporation or a subsidiary.
The three-year moratorium imposed on Business Combinations by Section
203 does not apply if: (a) prior to the date on which a stockholder becomes an
Interested Stockholder, the Company's Board of Directors approves either the
Business Combination or the transaction that resulted in the person becoming an
Interested Stockholder, (b) the Interested Stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction that made him or
her an Interested Stockholder (excluding from the 85% calculation shares owned
by directors who are also officers of the corporation and shares held by
employee stock plans which do not permit employees to decide confidentially
whether to accept a tender or exchange offer); or (c) on or after the date a
person becomes an Interested Stockholder, the Company's Board of Directors
approves the Business Combination, and it is also approved at a stockholder
meeting by two-thirds of the voting stock not owned by the Interested
Stockholder.
Under Section 203, the restrictions described above do not apply if,
among other things, the corporation's original certificate of incorporation
contains a provision electing not to be governed by Section 203. The Company's
Certificate of Incorporation does not contain such a provision. The restrictions
described above also do not apply to certain Business Combinations proposed by
an Interested Stockholder following the announcement or notification of one of
certain extraordinary transactions involving the corporation and a person who
had not been an Interested Stockholder during the previous three years or who
became an Interested Stockholder with the approval of a majority of the
corporation's directors.
-23-
PLAN OF DISTRIBUTION
The distribution of the Shares by the Selling Stockholders may be
effected from time to time in one or more transactions (which may involve block
transactions), in special offerings, exchange distributions and/or secondary
distributions, in negotiated transactions, in settlement of short sales of
Common Stock, or a combination or such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Such transactions may be effected on a stock
exchange, on the over-the-counter market or privately. The Selling Stockholders
may effect such transactions by selling the Shares to or through broker-dealers,
and such broker-dealers may receive compensation in the form of underwriting
discounts, concessions or commissions from the Selling Stockholders for whom
they may act as agent (which compensation may be in excess of customary
commissions). Without limiting the foregoing, such brokers may act as dealers by
purchasing any and all of the Shares covered by this Prospectus either as agents
for others or as principals for their own accounts and reselling such securities
pursuant to this Prospectus. The Selling Stockholders and any broker-dealers or
other persons acting on the behalf of parties that participate with such Selling
Stockholders in the distribution of the Shares may be deemed to be underwriters
and any commissions received or profit realized by them on the resale of the
Shares may be deemed to be underwriting discounts and commissions under the
Securities Act. As of the date of this Prospectus, the Company is not aware of
any agreement, arrangement or understanding between any broker or dealer and the
Selling Stockholders with respect to the offer or sale of the Shares pursuant to
this Prospectus.
At the time that any particular offering of Shares is made, to the
extent required by the Securities Act, a prospectus supplement will be
distributed, setting forth the terms of the offering, including the aggregate
number of Shares being offered, the names of any underwriters, dealers or
agents, any discounts, commissions and other items constituting compensation
from the Selling Stockholders and any discounts, commissions or concessions
allowed or reallowed or paid to dealers.
Each of the Selling Stockholders may from time to time pledge the
Shares owned by it to secure margin or other loans made to such Selling
Stockholder. Thus, the person or entity receiving the pledge of any of the
Shares may sell them, in a foreclosure sale or otherwise, in the same manner as
described above for such Selling Stockholder.
The Company will not receive any of the proceeds from any sale of the
Shares by the Selling Stockholders offered hereby.
Pursuant to the Registration Rights Agreements, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act. The Company shall
bear customary expenses incident to the registration of the Shares for the
benefit of the Selling Stockholders in accordance with such agreements, other
than underwriting discounts and commissions directly attributable to the sale of
such securities by or on behalf of the Selling Stockholders.
The Company has agreed to use its best efforts to keep the
Registration Statement of which this Prospectus is a part effective until the
earliest of (i) the second anniversary of the issuance date of the Series B
Preferred Stock, (ii) the date the Selling Stockholders may sell all the Shares
under the provisions of Rule 144 or (iii) the date the Selling Stockholders no
longer own any of the Shares.
-24-
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Section 145 of the DGCL provides, in general, that a corporation
incorporated under the laws of the State of Delaware, such as the registrant,
may indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding (other
than a derivative action by or in the right of the corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such person's conduct was unlawful. In the case of a
derivative action, a Delaware corporation may indemnify any such person against
expenses (including attorneys' fees) actually and reasonably incurred by such
person in connection with the defense or settlement of such action or suit if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or any other court in which such action was brought determines such
person is fairly and reasonably entitled to indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions contained in the Company's Certificate of
Incorporation or as otherwise permitted under Delaware law. Each Indemnification
Agreement may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as a director or officer, against liabilities arising
from willful misconduct of a culpable nature, and to obtain directors' and
officers' liability insurance if available on reasonable terms.
Pursuant to the Registration Rights Agreement, the Company and the
Selling Stockholders have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
-25-
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
the Company by Parker Chapin Flattau & Klimpl, LLP, New York, New York. Martin
Eric Weisberg, Esq., a member of the firm, is a Director and the Secretary of
the Company.
EXPERTS
The consolidated financial statements of the Company incorporated in
this Prospectus by reference to the Company's Annual Report on Form 10-KSB for
the year ended December 31, 1996 have been audited by Coopers & Lybrand L.L.P.,
independent accountants, as set forth in their report dated March 31, 1997,
accompanying such financial statements, and are incorporated herein by reference
in reliance upon the reports of such firm, which report is given upon their
authority as experts in accounting and auditing.
-26-
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS WITH RESPECT TO THE OFFERING MADE HEREBY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE INFORMATION SET
FORTH HEREIN OR IN THE BUSINESS OF THE COMPANY SINCE THE DATE HEREOF.
TABLE OF CONTENTS
PAGE
Available Information............................................2
Incorporation of Certain Documents
by Reference................................................2
Prospectus Summary...............................................3
Risk Factors.....................................................5
Use of Proceeds.................................................13
Selling Stockholders ...........................................13
Description of Securities.......................................14
Delaware Business Combination
Provisions.................................................18
Plan of Distribution ...........................................20
Indemnification for Securities Act Liabilities..................21
Legal Matters...................................................22
Experts ........................................................22
2,622,663 SHARES OF COMMON STOCK
(Issuable upon the exercise of
Series B Preferred Stock)
PROSPECTUS
, 1997
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses which will be
paid by the Company in connection with the issuance and distribution of the
securities being registered on this Registration Statement. The Selling
Stockholders will not incur any of the expenses set forth below. All amounts
shown are estimates.
Filing fee for registration statement.........$ 1,200
Legal fees and expenses.......................$ 30,000
Miscellaneous expenses........................$ 5,000
Total....................................$ 36,200
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") provides, in general, that a corporation incorporated under the
laws of the State of Delaware, such as the registrant, may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (other than a derivative action
by or in the right of the corporation) by reason of the fact that such person is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of a derivative action, a Delaware corporation
may indemnify any such person against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection with the defense
or settlement of such action or suit if such person acted in good faith and in a
manner such person reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery of the State of Delaware or any other court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnity for such expenses.
The Company's Certificate of Incorporation provides that directors
shall not be personally liable for monetary damages to the Company or its
stockholders for breach of fiduciary duty as a director, except for liability
resulting from a breach of the director's duty of loyalty to the Company or its
stockholders, intentional misconduct or wilful violation of law, actions or
inactions not in good faith, an unlawful stock purchase or payment of a dividend
under Delaware law, or transactions from which the director derives improper
personal benefit. Such limitation of liability does not affect the availability
of equitable remedies such as injunctive relief or rescission. The Company's
Certificate of Incorporation also authorizes the Company to indemnify its
officers, directors and other agents, by bylaws, agreements or otherwise, to the
fullest extent permitted under Delaware law. The Company has entered into an
Indemnification Agreement (the "Indemnification Agreement") with each of its
directors and officers which may, in some cases, be broader than the specific
indemnification provisions
II - 1
contained in the Company's Certificate of Incorporation or as otherwise
permitted under Delaware law. Each Indemnification Agreement may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as a
director or officer, against liabilities arising from willful misconduct of a
culpable nature, and to obtain directors' and officers' liability insurance if
available on reasonable terms.
The Company maintains a directors and officers liability policy with
Genesis Insurance Company that contains a limit of liability of $3,000,000 per
policy year.
ITEM 16. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT
4.1 Form of Purchase Agreement
4.2 Form of Registration Rights Agreement
5.1 Opinion of Parker Chapin Flattau & Klimpl, LLP.
23.1 Consent of Coopers & Lybrand L.L.P.
23.2 Consent of Parker Chapin Flattau & Klimpl, LLP (included in their opinion
filed as Exhibit 5.1).
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement. Notwithstanding
the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in
the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement.
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II - 2
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such
liabilities (other than the payment by the small business issuer of expenses
incurred or paid by a director, officer or controlling person of the small
business issuer in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of the issue.
The undersigned small business issuer hereby undertakes that, for
purposes of determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) or section
15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II - 3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Fairfax, State of Virginia on December ___, 1997.
XYBERNAUT CORPORATION
By:/S/ EDWARD G. NEWMAN
--------------------
Edward G. Newman
Chairman of the Board, President
and Chief Executive Officer
II - 4
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
registration statement on Form S-3 has been signed below by the following
persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/S/EDWARD G. NEWMAN Chairman of the Board, January , 1998
- -------------------- President and Chief
Edward G. Newman Executive Officer
* Senior Vice President, Chief January , 1998
- -------------------- Financial Officer, Treasurer
John F. Moynahan and Director
* Secretary and Director January , 1998
- ------------------------
Martin Eric Weisberg
* Director January , 1998
- -----------------------------
Lt. Gen. Harry E. Soyster
* Director January , 1998
- ---------------------
James J. Ralabate
* Director January ,1998
- ------------------
Keith P. Hicks
* Director January ,1998
- --------------------
Steven A. Newman
* Director January ,1998
- ---------------------
Phillip E. Pearce
* Director January ,1998
- -------------------
Eugene J. Amobi
*By: /s/EDWARD G. NEWMAN
-------------------
Edward G. Newman
Attorney-in-fact
II - 5
SECURITIES AND
EXCHANGE
COMMISSION
WASHINGTON, D.C. 20549
--------------
EXHIBITS
TO
FORM S-3
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT
OF 1933
--------------
XYBERNAUT
CORPORATION
(EXACT NAME OF ISSUER AS SPECIFIED
IN ITS CHARTER)
EXHIBIT INDEX
NUMBER DESCRIPTION OF EXHIBIT PAGE NO./REF.
- ------ ---------------------- -------------
4.1 Form of Purchase (A)
Agreement
4.2 Form of Registration (A)
Rights Agreement
5.1 Opinion of Parker E-2
Chapin Flattau &
Klimpl, LLP
23.1 Consent of Parker E-2
Chapin Flattau &
Klimpl, LLP (included
in their opinion filed
as Exhibit 5.1).
23.2 Consent of Coopers & E-3
Lybrand L.L.P.
24.1 Powers of Attorney of certain (B)
directors and officers of the
Company
(A) Incorporated herein by reference to the Company's Registration
Statement on Form S-3 (file number 333-43693) filed with the
Commission on January 2, 1998, which Registration Statement is being
amended by this Amendment No. 1 to Form S-3.
(B) Incorporated herein by reference to the signature page on page II-5
of the Company's Registration Statement on Form S-3 (file number
333-43693) filed with the Commission on January 2, 1998, which
Registration Statement is being amended by this Amendment No. 1 to
Form S-3.