securities.stanford.edu
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
ROBERT H. AYLOR, JR., On Behalf Of
Himself and All Others Similarly Situated,
"-1 F-11r
T ~ OF D
205 APP, 15 Ay 10 : I I
Plaintiff,
V. Civil Action No.
05- 22 2
XYBERNAUT CORPORATION,
EDWARD 0. NEWMAN, STEVEN A.
NEWMAN,M.D., and THOMAS D.
DAVIS,
Defendants,
CLASS ACTION COMPLAINT
FOR VIOLATION F THE
Plaintiff, by his undersigned attorneys, by way of this Complaint, alleges the following, upo n
personal knowledge as to himself and his acts and as to all other matters, upon information and belief,
based upon, inter altar the investigation made by and through his attorneys, including a review of the
public filings*of Xylxruaut Corporation ("Xybemaut" or "the Company") with the United States
Securities & Exchange Commission ("SEC's, as well as certain published reports and news articles .
PARTIES
1 . Plaintiff, Robert H, Aylor, Jr., as set forth in his attached Certification, which is
incorporated herein by reference, is a resident of McMinn County, Tennessee, purchased shares o f
Xybernaut common stock in the open market between M arch 27, 2003 and April 8, 2005, inclusiv e
(the "Class Period', and suffered damages as a result of those purchases.
2. Defendant, Xybernaut, is a Delaware corporation, with its principal executive office s
and headquarters located at 12701 Fair Lakes Circle, Fairfax, Virginia.
3. Defendant, Edward G. Newman ("E. Newman"), at all times relevant hereto, was the
Company's Chief Executive Officer ("CEO's and Chairman of the Board of Directors ("the Hoardl .
4. Defendant, Steven A. Newman, M.D. ("S. Newman"), at all times relevant hereto, was
the Company's President and Chief Operating Officer ("C40'% and Vice Chairman of the Board.
Defendant, Thomas D. Davis ("Davis', was the Company's Chief Financial Officer
("CFO") and senior Vice President from on or about November 14, 2002 through November 17,
2004.
6. Defendants, E. Newman, S Newman, and Davis are referred to collectively herein a s
the "Individual Deftdants ."
VENUS JURISDICTION AND
7 . This Court has jurisdiction over the subject matter of this action under the Securitie s
Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78aa, and 28 U.S.C. §1331 . The claims
asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and
78t(a), as well as Rule IOb-S, 17 CFYt § 240. l Ob-5, as promulgated by the SEC.
8. Venue is proper in this district pursuant to the provisions of the Exchange Act and 2 8
U.S .C . § 1391(b). Xybernaut is a Delaware Corporation that maintains it registered o ffice or agent in
this judicial district .
9. In connection with the acts, conduct and violations of law detailed in this Complaint,
Defendants, at all relevant times, directly and indirectly, utilized the means and instrumentalities o f
-2-
interstate commerce, including the mails, telephone communications and the facilities of the nationa l
securities exchanges .
4 iCC)
10, This is a securities class action brought on behalf of all persons, other than the
Defendants and related parties, who purchased or otherwise acquired shares of Xybernaut common
stock and other securities in the open market during the Class Per iod (the "Class" ,
11. Xybernaut was founded in 1990 by Defend&A E. Newman, and completed its initial
public offering on July 18, 1996. Until the Nasdaq Stock Market (Nasdaq' announced its in tention
to delist the Company's stock as of April 14, 2005, it was traded on the Nasdaq under the symbol
°°X
MXt,"
12, As described in the Company's annual report for fiscal year 2002 (ended December
31, 2042), which was filed with the SEC on Form 10-K on Much 28, 2003 (the "2D0210-K'),
Xybernaut is engaged in, Inter alia, "tbie research, development, manufacture, marketing and sales of
mobile, wearable computing and communication systems ." The Company also offers service-type
software though its wholly-owned subsidiary, Xybernaut Solutions, Inc . ("XSI"), as well as hardwaretype
products through its wholly-owned foreign subsidiaries, Xybernaut K .K. (Japan) and Xybernaut
C3mbH (Germany) .
13. Xybernaut's primary product consists of the Mobile Assistants series, the most current
versions of which are the Mobile Assistant V ("MA V") and the Mobile Assistant TC ("MA TC'),
According to the 2002 10 -K, "[s]ince its commercial introduction in 1995, the Company has
recognized revenue of approximately $19,500,000 on sales of approximately 4,000 units of the MA
-3-
series ." In addition, Xybernaut "derives its revenues from sales of its wearable computers , software
products and consulting services." In 2002, Xybernaut introduced the AtigoTM product line, a family of
wireless web panels that can be used either as stand-alone handheld personal computers or as displays
for an MA system, a laptop, or a conventional PC.
14. As described in the July 1$, 2001 issue of The New-York Ti the MA V is a
wearable comput er, which can attach to a belt, weighs approximately 22 ounces, and is about the siz e
of a Sony Wallanan . The basic model costs about X4000 and is designed for use by government
agencies, the military, the transportation sector, and any line of work that requires free hinds and a hig h
degree of field workforce automation,
15. Emphasizing increased revenues and at reduction in operating expenses, Xybernaut
issued a press release on November 14, 2002 rega rding its financial results for the third quarter of fisca l
year 2002. The press release stated as follows :
Xybernautg Corporation (Nasdaq :XYBR) today annouticed quarterly
revenues of S2 .5 million for its third quarter ended September 30,
2002. This represents an increase of approximately 26% from
revenues during the preceding second quarter of 2002 and an increase
of approximately 10'/. over revenues during the comparable third
quarter of 2001 . The net loss for the third quarter was $7 .9 million, or
$0.10 per share, compared with $8 . 1 million, or $0.15 per ahara, for
the same period in the prior year .
Operating oxpmses, excluding restructuring and other non-recurring
charges, for the third quarter of 2002 were $6 .0 million, a reduction of
41% from the fourth quarter of 2001 and 14% from the preceding
second quarter of 2002,
Revenue for the nine months ended September 30, 2002 was $7 .4
million, representing an increase of 11% versus revenue of $6 .6 million
for the same period a year ago, The Company reported not losses of
$22.5 million for both the first nine months of 2002 and 2001 .
`"Ihroug6out 2002, Xylxrnaut has successfully introduced new produc t
-4-
lines , gained traction in critical industry segments, extended the Team
XybernauqIlVi) partner community, strengthened our intellectual
property position and demonstrated our ability to raise capital despite
difficult market conditions," stated Edward G. Newman, chairman,
president and CEO,
"We continue our drive to profitabi lity and see si gnificant benefits from
the restructuring and cost cutting initiatives we have undertaken
throughout 2002," continued Newman. "We expect to reduce our
operating expenses by 50% over prior levels . We have significantly
reduced our headcount, restructured agreements with vendors and
partners, reduced inventory commitments and implemented vanous
other cost saving strategies such as consolidating international
operations ."
16. In addition to the financ ial results, the November 14* press release also announced the
promotion of Defendant Davis from the Company's vice president of finance and controller to th e
position of CFO, and the change of Davis' predecessor, John F . Moynaluan, to executive vice
president, international operations . The press release further stated as follows :
"Tom has done an excellent job of maintaining a strong focus on cost
management. His business and financial acumen and proven leadership
abilities will serve the Company well as he moves into his new role."
said Newman, "Tom has my utmost confidence as our new CFO and
it is a pleasure to promote him to this position Additionally, we are
fartunatc to have John's continued financial guidance during the
transition period." Davis has over 10 yew of finance and accounting
experience and has served as controller and vice president of finance
since joining Xybennaut in 1999. Prior to Xybernaut, Davis held
various senior finance and accounting positions, including director of
finance at MeriStar Hospitality Corporation . While with MeriStar,
Davis was active in the company's 1996 initial public offering, and
played a key role in raising $3 billion through debt and equity
instruments. Davis also served as a senior auditor and certified public
accountant (CPA) with Deloitte & Tauehe . Davis graduated magna
cum laude from James Madison University .
-5-
17. On January 6, 20Q3, the Company issued a press release containing the, Now You' s
message of Defendant, E. Newman, to Xyberaaut's shareholders and aupporte rs. Commenting on the
Company's "record" backlog and continued reduction in exposes, Defendant, E . Newman, assured
readers that the Company was focused on reaching profitability. The press release further stated:
First, unlike many other technology companies large and small,
Xybernaut is growing and has maintained its leadership position despite
difficult market conditions . ,, . We are focused on reaching profitabil ity
and recognize that to do so we must not only grow r evenues but also
operate as a much more streamlined company. We have signi ficantly
reduced expenses and successfully consolidated many functional areas.
. . . The AtiBo( i'M) product family demonstrates our success in
streamlining product development and delivery to the pointwhere find
shipment (and subsequent revenue recognition) of customized systems
on be less than 120 days from purchase order apt, . .. In ,ary,
we made tangible progress on many fronts in 2002 . 1 hope the above
glimpse of some of these developments gives you a better perspective
ofth e Company as it enters the New Year,
MATERIALLY FALSE AND MISLEADING STATEMENT'S
DURINQTHE CLASS PEUOD
18. The Class Period begins on March 27, 20Q3, with the Company's announeemern of it s
financial results of the fourth quarter and fiscal year 2002 . Before the opening of trading that day, the
Company issued a press release, which stated as follows :
Total revenues for 2002 were $10.0 million, a 2°Ye increase over 2001.
Those results i nclude a 17% increase in 2002 hardware revenues to
$6.1 million. Total revenues for the four th quarter ended December
31, 2002 were $2.6 million, representing an increase of approximately
2% over revenues during the third quarter of 2042. Net operating
expenses for the fourth quarter of 2002 w ere $4.5 million, a reduction
of 56% from the fourth quarter of2001 and 26% from the third quarter
of 2002, , ., Net loss for 2002 decreased 17°Yo from $32.2 million, or
$0.63 per share , for 2001 to 526.6 mi llion, or $0,37 per shire, for
2002.
-6-
"Xybernaut continues to achi eve considerable succes s despite
challenging market conditions," s tated Edward G. Newman, chairman,
president and CEO. . . . "We have reorganized our management
structure and strengthened our corporate governance through the
appointment of two new independent directo rs to our board . . ." added
Newman. "I am very pleased to announce that Xy6arnaut has
surpassed our previously stated targets related to reductions in
operating expenses, as evidenced by the 56% decline in net operating
expenses for the fourth quarter of 2002 over the comparable 2001
period," stated Tom Davis , senior vice president and CFO.
`.Additionally, we have recently been successful in eliminating a
considerabl e amount oflung-team liabilities and commitments relating to
both product and inventory ."
19. In response to this news, almost 2 million shares were traded on March 27, 2003 ,
more than double that of the prev ious trading day's fading volume. The Company's share price closed
down at $0.37 per share.
24. On March 28, 2003, Xybernaut's 2002 10-K, signed by the Individual Defendants,
was filed with the SEC . It reiterated the financial information contained in the March 2'7'h press release .
21. On April 2, 2003, Xybernaut issued a press release, announcing that it had "raised $6 . 1
million through a $2 .0 million private placement of common stock with institutional investors, a longterm
borrowing of $1 .75 million and exercises of approximately $2 .4 million of previously issued
warrants." Defendant, E . Newman, was quoted as saying that the Company's "recent 2002 results
emphasize [that] the Company is achieving considerable accomplishments while utilizing far fewer
resources ."
22. On April 3, 2003, the trading volume was over 4 .8 million, more than double that of the
previous day, The Compaay'8 share price, which had traded as high as $0.45, closed up at $0.42 per
share.
-7-
23. On May 1 , 2003, Xybernaut announced that Defeadaret, E . Newman, was relinquishing
some ofhis management responsibilities to his older brother, S. Newman. The press release stated that
S. Newman had been elevated to the Company's President and CEO, and that Defendant, E .
Newman, would remain as CEO and Chairman of the Board .
24. On May 15, 2003, Xybernaut announced its financial results for the first quarter o f
fiscal year 2003 . The press release stated as follows ;
Total revenues for the three months ended March 31, 2003 were $1 . B
million, a 36% decrease from the comparable period in 2002 . Total
operating expenses for the first quarter of 2003 were $4 .2 million, a
reduction of 52% from the first quarter of 2002 and 59% from the
fourth quarter of 2001 . As a result of the Cumpmy's cost cutting
initiatives, the net loss for the first quarter of 2003 decreased 33% to
$5.4 million, or $0,04 per share, from $8.0 million, or 50.13 per share,
in the first quarter of 2002, "While we are not pleased with the revenue
results for the first quarter, we were able to significantly reduce both
operating expenses and net loss," said Steven A . Newman, president .
"Mew significant accomplishments were the result of a combination of
factors including reductions in headcount and other cost-cutting efforts ."
Newman, who was recently named Company president, pointed ow
that in the first quarter the Company revamped its direct and channel
sales strategy and initiated changes that he believes will lay the
foundation for increasing revenue. "Our revenue results were impacted
by orders that were delayed in the first quarter, a sluggish economy and
a continued slowdown in technology spending. Nonetheless, I take
complete responsibility for our results and I am resolved to both
significantly grow revenues and increase shareholder value," he added,
... Edward G . Newman, chairman and CEO added, "We continue to
see significant benefits from our restructuring and cost cutting efforts,
surpassing our stated goal to reduce operating expenses by 50'rb over
prior levels, and we expect the second quarter to be one of our best
ever."
25. On May 15, 2003, in response to the Company's earnings announcement, tr ading
volume was over 4.5 million, and the price per share closed at $0.41 per share.
-8-
26. That day, the Company filed its financial results for the first quarter of fiscal year 2003
with the SEC on Form 10-Q, which was signed by the Individual Defendants . It reiterated the financial
information contained in the May 15th press release .
27. On June 19, 2003, Xybernaut announced the completion of financing valued at
approximately $7.75 million through private stock placements and the exercise of wan=U. The
Company's press release quoted Defendant, E . Newman, as saying; `"This financing strengthens our
cash position and will allow us to aggressively pursue new business opportunities and partnerships [as
well as] financing for product development, focused sales a nd marketing initiatives and debt rvductioa.
When combined with our recent reductions of operating expenses, the completion of th is financing
allows the company to focus on near term milestones and long term growth."
28 . On July 9, 2003, aCybemaut issued a press release regarding its expected financial
results for the second quarter of fiscal year 2003, ended June 30, 2003, TU Company predicted
revenue would "increase more than 50% compared to revenue for the first quarter of 2003 [and] would
be the highest quarterly percentage increase since the CompaVs acquisition of Xybemaut Solutions
Inc. in 2000," The press release further stated as follows :
"These results reinforce our previous expectations that the second
quarter would be a pivatal quarter in setting the stage for the
Company's future," said Steven A. Newman, president of Xybemaut
Corporation, "Based on what we have seen in the second quarter and
the first few days of the third quarter, we anticipate increased
momentum and success through 2003 and beyond." Newman noted
that this optimism is based on the objective measurement of numerous
strategic Company initiatives including : cost-cutting programs ; beneficial
financings; intellectual property licensing atrategies ; strategic
partnerships and the securing of key accounts in the transportation ,
retail, military and homeland security sectors .
-9.
29. In response to this announcement, the price of Xyberaaut stock traded as high as $0 .76
per share before closing at $0.71 per share, an increase of $0.14. Trading volume was extraord inarily
heavy, exceeding 33 million shares.
30. On August 11, 2003, Xybernaut announced its financial results for the second quarter
of fiscal year 2003, ended on June 30, 2003 . Total revenue was reported as 52,8 million, or "a 56%
increase from the preceding first quarter of 2003, aid a 3$°h incre ase from the comparable period in
2002." S. Newman was quoted as stating that "(t]he Company is moving in the right direction in
virtually all areas," and Defendant Davis stated that "[w]e have continued our cost cutting efforts into
2003 [and] streamlined operations ."
31. On this news, trading volume in the Company's stock approached 20 million, well
above the previous day's volume. Xybernaut stock traded as high as $0 .90 per share, before closing at
$0.80 per share .
32. On August 13, 2003, the Company filed its financial results for the second quarter of
fiscal year 2003 with the SBC on Form 10-Q, which was signed by the Individual Defendants, It
reiterated the financial information contained in the August 11 w press release ,
33, On September 10, 2003, Xybernaut announced that it had been awarded a contac t
worth $1.62 million by the U.S. Department of Defense . On that day, the Company's stock closed at
$1 .25, up $0.10 per share, on trading volume in excess of 51 million shares . Early the next week, on
September 15, 2003, the Company announced a $S 10,000 hardware contract with the U.S .
Department of Defense . Trading volume that day was over 33 million shares, and the Company's
stock price closed at $1 .60 per share .
-10-
34. On September 18, 2003, CBS .MarketWatch repotted that th e Shan price of
Xybernaut stock had reached a new 52-week high. According to this report:
Shares of Xybemaut stretched recent gains on ThuRSdny, pushing to a
new 52-week high that has the stock up mom dim 100 percent in a
mere four sessions . The Fairfax, Va., maker of wearable computer
technology saw intense buying in its stock with 37 million shares
changing hands in less than tree hours of Miding. News issued
Wednesday that the company would unveil a new product Thursday
during a presentation at the DEMOmobile 2003 Conference has
sustained recent interest ... The rally actually began in earnest on Sept
10 when Xybernaut disclosed a S 1 .6 million order from the Department
of Defense, The stock has moved higher in fi ve of the six sessions s ince
that acmotmCemdtL In recent trading, shares changed hands at 52 .54,
up 62 cents, on the day, or 32 percent. The peak for the session
stands at $2.66, a far cry from the issue's dark days last October when
it plummeted to a low of 19 cents. On August 11, Xybecuaut posted a
loss of $3 .3 million, or 2 cents per share, on revenue of $2.9 million for
the second quarter ended June 30. This performance represented a
marked improvement from its loss of$6.7 million, or 10 cents per
share, on revenue of$2 million in the carne period a year earlier.
35. On September 29, 2003, Xybernaut announced the completion of a private stoc k
placement with institutional investors for approximately $7 million, which gave the Company
approximately $13 million in c ash. According to Defendant Davis, this was Xybern"Is "Strongest
financial position since the initial public offering." This press release further stated as follows:
"We've seen positive results in recent quarters from our sales,
marketing and business development efforts ; we've introduced new and
innovative products; we've secured important patents while aggressively
protecting our intellectual property; and we are involved in numerous
business ventures with key partners," said Edward G . Newman,
Xybernaut chairman and CEO. "By taking advantage of this
opportunity to strengthen our capital structure, Xybernaut is in a better
position than ever to extend our recent positive momentum and
continue to deliver the results that our customers and stakeholders
deserve."
-11-
36, On November 13, 2003, the Company announced its financial results for the third
quarter of fiscal year 2003, ended September 30, 2003 . The Company emphasized increased
revenues ($2 .7 million, six percent greater from the third quarter of fiscal year 2002), record cash and
equity balances (as of September 30, 2003, the Company had no debt and "record stockholders'
equity of over $17 million"), and the seventh consecutive quarter of decline in "met operating expenses ."
Defendant Davis was quoted as saying that he continued "co believe that we have the strongest financial
position since our IPO," and E . Newman was quoted as stating that the Company's "future has never
looked brighter., .
37. In response to this news, Xybernaut stock traded as high as $2.23 per share, before
closing at $1 .99 per share that day. Volume was heavy at 16.5 million shares .
38. On November 13, 2003, the Company filed its financial results for the third quarter of
fiscal year 2003 with the SEC on Form 10-Q, which was signed by the Individual Defendants . It
reiterated the financial information contained in the November I3 * press release ,
39, On January 8, 2004, Xybemaut announced that it expected its financial results for the
fourth quarter and full fiscal year 2003 to be at "record levels ." In the Company's press release,
Defendant, E . Newman, was quoted as follows :
"I stated earlier that I was very optimistic about our Q4 results and I
view today's announcement as just the latest validation of the many
strategic initiatives we have undertaken. Management firmly believes
that the best is yet to come and we expect to extend the positive
momentum the Company is currently experiencing."
-12-
40. On March 9, 2004, Xybemaut announced its financial results for fiscal year 2003,
which emphasized that "record revenues," "solid financial position" and "international momentum "
underscored the "strongest year" in the Company's history. The press release further stated as follows:
The Company recorded its highest quarterly revenue ever during the
fourth quarter of 2003 . Revenue for the quarter ended December 31,
2003 was $3.7 million, a 43% increase over the fourth quarter of 2002
and a 3$% increase over the third quarter of 2003 . Total revenue for
the full year 2003 increased 10%to $1 1 .0 million, compared to $10.0
million for 2002 . These yearend results include the highest levels of
both product and consulting services revenues in the Cowpaays
history. The Companys net loss for the fourth quarter of 2 003 was
55.3 million compared to a loss of $4 .0 million in the comparable
quarter of the prior year. The net loss for the entire year ended
December 31, 2003 was $19.6 million compared to a loss of$26.6
million for 2002. At December 31, 2003, the Company had no longterm
debt, cash of $9.5 million and stockholders' equity of $15.9
million. `"Ibe management and gaff at Xybernaut have never been
more focused," said Edward G. Newman, chairman and CEO of
Xybcrnaut .."[MJanagement continues to be optimistic and
encouraged by the prospects for 2004 and beyond, "
41 . That day, the trading volume was over 7 million shares, more than twice that of th e
previous day, The Company's share price traded as high as $1 .78 per share, before closing down at
X1 .58 per shape.
42. On March 12, 2004, the Company filed its financial results for the fourth quarter and
fiscal year 20 03 with the SEC on Form 10 .K, which was signed by the Individual Defendants, I t
reiterated the financial information contained in the March 9t6 p ress release ,
43. On May 4, 2004, Xybernaut announced its financial results for the first quarter of fisc al
year 2004, ended March 31 , 2004, The press please stated that "total revenue for the first quarter-
-13-
was $4.4 million, a 146% increase over the comparable 2003 period." The press release continued as
follows:
This represents the Comp=y's second consecutive quarter of record
revenue. Last quarter, the period ended December 31, 2003, the
Company reported revenue of $3.7 million, a 43% increase in revenue
over the fourth quarter of 2002 . As of the end of the fast quarter
2004, the Company had no long-term debt, cash of $12.5 million and
record stockholdens' oquity of$18.3 million.
"We are pleased to announce back-to-back quarters with record
revenue and strong year-to-year revenue growth,,' said Edward G .
Newman, chairman and CEO of Xybernaut, ... "With low expenses
and our losses decreasing, I continue to remain optimistic and positive
about our prospects for the remainder of 2004 and thereafter,"
continued Newman.
44. Trading in the Company's stock that day exceeded 3 .5 million shares . The share price
closed at $1 .26 per share , a decline of$0.02 from the opening price.
45. On May 7, 2004, the Company filed its financial results for the first quarter offisca l
year 2004 with the SEC on Form 10-Q, which was signed by the Individu4! Defendants. It reiterated
the financial information contained in the May 4a press release .
46. On June 28, 2004, Xybernaut announced that it had been included into the Russel l
3000 index and the small -cap Russell 2000 index. Defendant, E. Newman, was quoted as follows-
"Being recognized for inclusion in the Russell 3000 and 2000 Indexes marks a significant milestone in
our efforts to refocus the Company and also affords us the opportunity to build an even larger
institutional following for Xybernaut common stock ."
47, On August 5, 2004, Xybernaut announced its financial results for the second quarter o f
fiscal year 2004, ended June 30, 2004 . The Company's press release stated that "[t]otal revenue fo r
-14-
the second quarter of 2004 was $3.4 million, a 21% increase from the comparable 2003 period [and]
[t]otal revenue for the six months ended June 30, 2004 was $7.8 million, a 70% increase" from the
same period in 2003 . Defendant, E. Newman, was quoted as stating that "[w]ith revenues up 70 0A , the
value of our intellectual property now being validated and having just come off the Company's strongest
three quarters aver, I am confident that we are not only on the right track but also that our growth in
many areas will now be sharply accelerating as we move forward," The price per share of the
Company's stock closed at $1 .30, down $0.05 from the opening. Volume was just under 1 .5 million.
48. On August 6, 2004, the Company filed its financial results for the second quarter of
fiscal year 2004 with the SEC on Form 10-Q, which was signed by the Individual Defendants . It
reiterated the financial information contained in the August 5* press release ,
49. On November 9, 2004, Xybemaut announced its financial results for the third quarte r
of fiscal year 2004 , ended September 30, 2004, According to the Company's press release, "[t]otal
revenue for the third quarter of 2004 was $3.2 million, a 20'/e increase from the comparable 2003
period [and] [t]otal revenue for the nine months ended September 30, 2004 was $11 .0 million, a 5190
increase from the nine months ended September 30 , 2003." Defendant, E. Newman, was quoted as
follows; "We are well on our way to our most successful you ever. .., This top-line growth is the
direct result of our continued and successful efforts to bring in new and larger customers while still
maintaining our focus on existing partners . . . . I firmly believe that we are poised to continue to deliver
positive resu lts through the rest of 2004 , 2005 and beyond."
50. On this news, the price per share of Xybernaut stack traded as high as $1.23, before
closing at $1 .14. Volume exceeded 4 million shares,
-15-
51. On November 9, 2004, the Company filed its financial results for the *irai quarter of
fiscal year 2004 with the SEC on Form 10-Q, which was eipW by the individual Defendants . It
iterated the financial information contained in the November 91 press release .
52, On December 16, 2404, with the Company's stock trading as high as $1 .40 per share,
Xybernaut issued a press release regarding its annual shareholders meeting. The press release quoted
Defendant, E. Newman, as follows: "2004 continues to be ik banner year for the company as we
anticipate continued success moving forward , Our efforts remain focused on enhancing both near and
long-term shareholder value,"
53. Starting on February 15, 2005, trading prices for Xybernaut common stock began to
decline. That day, the share price closed below $1.00 for the first time since September, 2003 . The
next day, February 16, 2005, trading was unusually heavy - over 8 million shares - and the shire price
never reached $1 .00 a share . On Februaty 1 7, 2005, Xybernaut issued a press release regarding the
drop in the trading price of the Company's shares, and stated "tbW it knows of no business reason or
financial condition that would explain the decline in its stock price," The volume of trading activity
lessened on this news, but the share price still declined, closing at $0.92 per share.
54. On March 14, 2005, Xybernaut announced that it was seeking an extension of time
within which to file its annual report with the SEC, The press release stated that the Company "expects
to complete and Ma its Annual Report on Form 10-K by the March 31, 2005 extension date ."
-16-
55. On March 31, 2005, after the close of trading, Xybernaut belatedly revealed that it wa s
in dire financial and regulatory straits. The Company issued a press release that day, which stated as
follows :
Xybcmaut Corporation (NASDAQ;XYBR) announced today that the
filing of its Form 10-K and other related reports for the year ended
December 31, 2004, anticipated to occur today, will be further
delaycd,.PendinB completion of an internal investigation undertaken by
its Audit Committee, On February 28tb, the Audit Committee engaged
independent counsel -Alston & Bird LLP - to assist it in conducting an
internal investigation of, among other things, concerns brought to the
Audit Committee's attention relating to the Internal control
environment of the Company, the propriety of certain
expeaditara and the documentation of certain expenses of the
Chairman and CEO of the Company, the Company's
transparency and public disclosure process, the accuracy of
certain public disclosures, managements conduct in response to
the investigation, and the propriety of certain major transactions .
The Audit CommiRteo's investigation is continuing, and the filing of the
Company's 10-K will await the conclusions of that investigation. At
this time, the Company is unable to predict when its 10-K will be filed.
On February 1, 2005, the Company received a subpoena from the
Northeast Regional Office of the Securities and Exchange Commission,
seeking documents and other information relating to the sale of
Company securities by any person identified as a selling shareholder in
any Company registration statement or other public filing.
As a result of the delayed filing of its Form 10-K, the Company will
lose its status to file registration statements on form S-3, which has
historically been utilized to expedite the registration of common stock
issued in connection with the Company's financings . The loss of the
right to use form S-3 could have a material impact on the ability of the
Company to raise additional funds in the fitture , and therefore affect its
abil ity to meet its obligations as they come due .
Management is still in [the] process of completing the SaYbanes-Oxley
404 internal control testing for the year ended December 31, 2004,
However, certain material weaknesses currently have been identified
related to the coMrol environment and control activities as it relates to
-17-
the Company's policies and procedures in the expense reimbursement
process, revenue recognition related to certain product sales , and
monitoring of business risks. Management continues to evaluate the
identified issues and is addressing remediatton plans to be implemented.
Xybernaut also announced unaudited results for the year end December
31 , 2004 in addition to 4th quarter results . Revenues for 2004 were
approximately $13 .9 million, with a net loss of approximately $19.7
million. Revenues for the 4th quarter were approximately $2.9 million,
with a net loss of approximately $7.2 million. These unaudited results
do not include possible further adjustments, including but not limited to,
the matters discussed above.
On March 30, 2005 the Company received notice from the NASDAQ
Stock Market that the bid price of the Company 's common stock has
closed below the minimum $1 .00 per share req uirement for the stock's
continued listing ender Marketplace Rule 43I0(cx4) (the "Rule'.
Therefore, the Company has until September 26, 2005 to become
compliant. (Emphasis added.)
56. On this news, the Company's share price was decimated. After closing at $0.42 per
share the previous day, on April 1 . 2005, the price per share dropped almost by half, to close at $0,24.
Over 33 million shares were traded, which was the highest volume in over a year.
57, On April 8, 2005, dW the close of trading, Xybernaut announced that investors coul d
not rely on any of its financ ial statements for the entire Class Period. Specifically, the press release
stated as follows :
XybernautO Corporation (NASDAQ :XYBRE) announced today that
investors and others should refrain from relying upon the
Company's historical financial statements, together with the related
audit reports the Company received from its outside auditors, Grant
Thornton I.I.P, for the years coded December 31, 2002 and 2003,
and interim quarterly reports for the quarters ended March 31,
2003, June 30,2003p September 30, 20p3, March 31, 20Q4, June
30, 2004 and September 30, 2004 . The Company's action was
taken in response to a letter which the Company received from Chant
Thornton LLP . on April 6, 2005, indicating that the nature of the items
disclosed by the Company in its Form 8-K filed on April 1, 2005, an d
- 18-
the uncertainties surrounding the results of the ongoing Audit Committee
investigation disclosed in such Form 8-K, have caused the firm to
question the accuracy and reliabi lity of the Company's accounting and
related disclosures provided in the specified prior period financial
statements. The Audit Committee has reviewed the Company's
disclosure in this press relea se and in the Company's related Form $-K
with Grant Thorson LLP .
Upon completion of the Audit Committee's investigation, the Company
intcnds promptly to implement any recommendations resulting from the
Audit Committee's investigation and to take any other actions necessary
to satisfy the concerns raised by Grant Thornton LLP, The Company
has retained Kalorama Partners, LLC, a consulting firm founded by
farmer SEC Chairman Harvey Pitt, to assist the Company in fulfilling
these commitments,
The Company also announced today that on April 5, 2005, it received
notice from The Nasdaq Stock Market of Nasctaq's intent to delist the
CnmpanY's securities at the opening of business on April 14, 2005,
subject to the Company's right to request a hearing with the Nasdaq
Listing Qualifications Panel in accordance with the Marketplace Rule
4800 Series . In the notice, Nasdaq asserted that the Company is in
violation of Nasdaq Marketplace Rule 4310(ex14) because, as the
Company previously announced, it has not yet filed its Annual Report
on Form 10-K with Nasdaq and the SEC. (Emphasis added.)
58. On this news, trading was again heavy. Volume on April 11, 2005 was over 15 million
shares. The Company's price per share , which had opened at $0, 14 - down $0.05 per share from the
previous trading day's close - ended the day at $0.13 per share,
59. As disclosed by Xybernaut in paragraphs 55 and 57, the Defendants' statements
regarding Xybernaut's financial conditions, as set forth in the foregoing paragraphs (includin g
paragraphs 18, 20-21, 24, 26, 28, 30, 32, 35-36, 39-40, 42-43, 45, 47-49, and 51-52), were fals e
and misleading when issued and Defendants either directly issued these statements or acquiesced t o
-19-
these misrepresentations by sitting idly by while they were in possession of material information that
specifically contradicted theme representations .
EL F'S CLASS ACTIMALLEQATIdNS
60. Plaintiff brings this class action pursuant to Rule 23 of the Federal Rules of Civil
Procedure, on behalf of himself and all other persons who purchased or otherwise acquired Xybcruau t
common stock and/or other securities during the Class Period (1.e., between March 27, 2003 and April
8, 2005, inclusive). Excluded from the Class are Xybcnnaut, its subsidiaries and affiliates, the Individual
Defendants, members of the immediate families of each of the Individual Defendants, any entities in
which any of the Defendants have a controlling iaterr,A and the legal representatives, heir, successors ,
predecessors in interest, affiliates or assigns ofany ofthe Defendants,
61 . This action may properly be maintained as a class action as a result of the followin g
facts ;
a. During the Class Period, hundreds ofthousands ofshares of Xybernaut' s
common stock were issued and outstanding and were actively traded on the Nasdaq, a liquid, efficient
and impersonal trading market . The members of the Class for whose benefit this action is brought are
located throughout the United States, and are so numerous that joinder of all members of the putative
Class is impracticable . Hundreds of thousands of Xybernaut shams were publicly traded during the
Class Period and, upon information and belied there are hundreds or thousands of members of the
Class ;
-20-
b. Plaintiffs claims are typical of the claims of the other members of the Class, and
Plaintiff and all members of the Class sustained damages as a result of the Defendants' wrongfu l
conduct complained of heroin;
c. Plaintiff is a representative party who will fairly and adequately protect th e
interests of the other members of the Class, and has retained counsel competent and experienced i n
class action securities litigation . Plaintiff has no interests antagonistic to, or in conflict with, the Class he
seeks to represent;
d. A class action is superior to all other avail$ble methods for the fair and efficient
adjudication of the claims asserted herein, because joinder of all members is impracticably .
Furthermore, because the damages suffered by the individual Clasp members may be re latively small,
the expense and burden of individual litigation make it virtually impossible for the Class members to
separately redress the wrongs done to them. The likelihood of individual Class members prosecuting
separate claims is remote;
e . Plaintiff anticipates no unusual difficulties in the management of this action as a
class action; and
f, The questions of law and fact common to the members ofthe Class
predominate over any questions affecting any individual members of the Class.
62. The questions of law and fact which are common to the Class include, among others :
a. Whether the federal securities laws were violated by the Defendants' acts as
alleged in this Complaint;
-21-
b. Whether the documents, press releases, reports and/or statements disseminated
to the investing public and to Xybernaut shareholders during the Class Period omitted or
misrepresented material facts about the financial condition, business prospects, and revenue
expectations of Xybernaut ;
C, Whether Defendants failed to correct previously issued statements that they
knew to be false or they recklessly disregarded the truth or falsity of such statements;
d. Whether Defendants failed to disclose material, adverse information at a time
when they were in possession of such information ;
e. Whether the Defendants acted with knowledge or reckless disregard for the
truth in misrepresenting and omitting material facts ;
f. Whether, during the Class Period, the market price ofXybernaut common
stock and other securities was artificially inflated due to the material mistepreseutations and omissions
complained of herein;
g. Whether the Defendants participated in and pursued the common course o f
conduct complained of herein; and
h. Whether the members of the Class have sustained damages and, if so, what is
the proper measure thereof
MAjMU&--UM-MA=TDOCTRINE
63. Plaintiffrelies, in pan, upon the presumption of reliance established by the fraud-onmarket
doctrine. The market for Xybernaut common stock was, at all pertinent times, a liquid and
efficient market for, inter alia, the following reasons:
_22.
a. Xybernaut met the requirements for listing, and was listed an the Nasdaq, a
highly efficient and liquid market;
b. As a regulated issuer, Xybernaut fil ed periodic public reports with the SEC;
c. Xybernaut's securities trading volume was substantial during the Class Period;
d Xybcrnaut was covered by various securities analysts, who wrote report s
which were available through various automated data retrieval services ;
C. Xybernaut disseminated information on a market-wide basis through various
electronic media services, and participated in open conference calls with stock analysts and iwmgors;
and
f The market price of Xybernaut securities reacted rapidly to new informatio n
entering the market
64. The facts identified above reflect the existence ofan efficient market for trading of
Xybernaut securities and make applicable the fraud-on-the-mer[cet doctrine . Similarly, Plaintiff and th e
other members of the Class are entitled to a presumption of reliance with respect to the misstatements
and omissions alleged in this Complaint
pEFFNDAN'TS' DUTIES AND MISCONDUCT
65. As officers, directors and/or controlling persons of a publicly-held company whos e
common stock is registered with the SEC under the Exchange Act, traded on the Nasdaq at all
pertinent times, and governed by the provisions of the Exchange Act, the Individual Defendants had a
duty to disseminate accurate and truthful information in a timely manner with respect to XybernauYs
operations, finances, financial condition, revenues, income, earnings and present and future busines s
-23-
prospects, to correct any previously issued statements from any source that had become untrue, and to
disclose spy kends that would materially affect earnings and the present and future financial operating
results of Xybernaut, so that the market price of the Company's publicly-hided securities would be
based upon truthful and accurate information.
66. During the Class Period, each of the Individual Defiendaats was a senior executive
and/or director of the Company and was privy to confidential and proprietary inforaiatlon concerning
Xybernaut, its operations, finances, financial condition, revenues, income, earnings and present and
future business prospects and regularly received reports regarding the same . As a result of their
possession of such information, each of the Individual Defendants knew or mcklessly disregarded the
fact that Xybcmaut had materially overstated the quality of its financial condition during the Class
Period and had not disclosed critical information to the investing public which would have revealed tha t
the Company's p rior statements were materially misleading and false. As a result of their Board
memberships and/or executive and managerial positions with Xybernaut, each of the Individual
Defendants had access to adverse nonpublic information about the Company's operations, finances,
financial cond ition, products, revenues, expenses and earnings via access to internal corporate
documents, conversations and connections with other corporate officers And employees, and via
reports and other information provided to them in connection with the performance of their duties, In
light of their possession of such information, each of the Individual Defendants knew or recklessly
disregarded the fact that the reported and expected financial results of Xybemaut were materially
overstated during the Class Period .
-24-
67. The Individual Defendants , as a result of their po s itions of control and authority as
officers and/pr directors of the Company, were able to and did control the contents of the various
quarterly reports, SEC filings, press releases and presentations to securities analysts pertaining to the
Company. Each of the Individual Defendants was provided with copies of Xybernaut`s management
reports, press releases and SEC filings alleged in this Complaint to be misleading prior to, or shortly
after, their issuance, and had the ability and opportunity to prevent their issuance or cause them to be
corrected, As a result, each of the Individual Defendants is responsible for the accuracy of the
challenged pub lic reports and releases as "group published" infannadoa and is, therefore, responsible
and liable for the representations contained in those statements .
68 . Each of the Individual Defendants is liable as a direct participant in, and a co -
conspirator with respect to, the wrongs complained of in this Complaint. In addition, the Individual
Defendants, by reason of their status as officers and/or directors of Xybernaut, had access to material,
non-public information, were "controlling persons" within the meaning of Section 20 of the Exchange
Act, and had the power and influence to cause the Company to engage in the unlawful conduct
complained of in this Complaint, As a result of their positions of control, each of the Individual
Defendants were able to and did, directly or indirectly, control the conduct of Xybernaut's business, the
information cotnaiacd in its filings with the SEC and public statements about its business .
69, During the Class Period, Defendants, individually and in concert directly and indirectly,
engaged and participated in a continuous course, of conduct to misrepresent the results of Xybernaut's
operations, and to conceal adverse material inform$tion regarding the financial condition and results
Xybernaut's operations as specified in this Complaint . Defendants employed devices, schemes, and
-25-
artifices to defraud, and engaged in acts, practices, and the course of conduct described herein in an
effort to increase and maintain an artificially high market price for Xybeiaaut common stock and other
securities . This included the formulation, milking and/or participation in the making of untrue statements
of material facts, and the failure to state material facts necessary in order to make the statements made ,
in light of the circumstances under which they were made, not misleading, which operated as a fraud
and deceit upon Plaintiff and the other members of the Class .
COUNT Y
VIOLATION OF sECTTax IOW OF
SRt' 1TiES EXCHANGE ACS' AM ,tJLE t db-5 'I'H
70. Plaintiff incorporates by reference the foregoing paragraphs of this Complaint a s if set
forth herein at length .
71 . Throughout the Class Period, Defendants, singly and in concert, directly or indirectly,
engaged in a common plan, scheme and course of conduct described herein, pursuant to which they
knowingly or recklessly engaged in acts, transactions, practices and a course of conduct whic h
operated as a fraud upon Plaintiff and the other members of the Class; made various false statements of
mewrial facts and omitted material facts to make the statements made not misleading to Plaintiff and the
other members of the Class, and employed manipulative or deceptive devices and contrivances in
connection with the purchase and sale of Xybernaert common stock and other securities .
72. The Individual Defendants, as executive officers and/or directors of Xybernaut, had
actual knowledge of the falsity of the material statements set forth above, and intended to deceive
Plaintiff and the other members of the Class, or, in the Alternative, acted with reckless disregard for the
truth by failing to ascertain and disclose the amfacts in the statements made by them or othe r
-26-
Xybemaut personnel to the SEC and the investing public, including Plaintiff and other members of th e
Class.
73. The facts alleged herein compel a strong inference that the Defendants made material
false and misleading statements to the investing public with scienter, in that the Defendants knew that th e
public statements issued or disseminated in the name of the Company were materially false and
misleading; knew or recklessly disregarded that such statements would be issued or disseminated to the
investing public; and knowingly and substantially participated or acquiesced in the issuance o r
dissemination of such statements as primary viola= of the federal securities laws .
74. As a result of the foregoing, the market price of Xybernaut securities was artificiall y
inflated during the Class Period . In ignorance of the falsity of the, reports and statements, and the
deceptive and manipulative devices and contrivances employed by the Defendants, Plaintiff and the
other members of the Class reasonably relied, to their detriment, on the reports and statements
described above and/or the integrity of the market price of Xybernaut securities during the Clay s Period
in purchasing the Company's securities at prices which were artificially inflated as a result of the
Defendants ' false and misleading statements,
75 , Had Plaintiff and the other members of the Class known of the material adverse
information which the Defendants failed to disclose and/or misrepresented, they would not have
purchased Xybernaut securities at the artificially inflated prices that they did .
76. Defendants' dissemination of this false and misleading material information, and thei r
failure to disclose material information that rendered their other statements false and misleading, served
-27-
only to harm Plaintiff and the other members of the Class who purchased Xybernaut securities, i n
ignorance of the financial risk to them as a result of such false and misleading information.
77. As a direct and proximate result of the wrongful conduct alleged herein, Plaintiff and
other members of the Class have suffered damages in an amount to be established at trial.
78. By reason of the foregoing, Defadamhave violated Section 10(b) of the Exchange
Act and Rule 10 5 promulgated thereunder and are liable to Plaintiff and the other members of the
Class for the substantial damages which they suffered in connection with their purchase of 7Cybernau t
securities during the Class Period.
COUNT 11
VIOLATION CAF ySSMON 2Q(a)
QIF 3t3E SECURITIES EXCHANGE CA T
79. Plaintiff incorporates by reference the foregoing paragraphs of this Compl aint as if set
forth herein at length .
80. During the Class Period, each of the Individual Defendants, by virtue of his office or
offices at, and/or directorship of Xytrernaut and his specific acts, was it controlling person of th e
Company within the meaning of Section 20(a) of the Exchange Act.
81 . Each of the Individual Defendants' positions made them privy to, and provided the m
with actual knowledge ot the material facts that 7Cybeiaaut misrepresented and/or concealed from
Plaintiff and the other members of the Class during the class period .
82. Each ofthe Individual Defendants had the power and Influence , and exercised the
same, to cause Xybmnaut to engage in the ualawfiil conduct and practices complained of herein b y
causing the Company to disseminate the false and misleading information identified above.
-28-
~~.
83. By virtue of the foregoing, the Individual Defendants have violated Section 20(a) of th e
Exchange Act.
84. Byvirtue of the conduct described above, Defendants are liable to Plaintiff and the
other members of the Class for the substantial damages that they have suffered in connection with their
purchase of Xybernaut common stock and other securities during the Clan Period,
WHEREFORE, Plaintiff, on behalf of himself and the other members of the Class, demand s
j udgment against Defendants as follows:
a. Determining that this action is property maintainable as a class action pursuant
to Rule 23 of the Federal Rules of Civil Procedure ;
b. Certifying Plaintiff as the Class Representative and his counsel as Lead Class
Counsel;
c. Declaring and determining that the Defendants violated the federal securities
laws by reason of their conduct as alleged herein;
d. Awarding monetary damages against all ofthe Defendants;
e. Awarding Plaintiff the costs, expenses, and disbursements incurred in
prosecuting this action, including reasonable attorneys' fees and other recoverable expenses o f
litigation ; and
f. Awarding Plaintiff and the other members of the Class such other and further
relief as the Court may deem appropriate and just under all of the circumstances .
-29-
AIRY DEMAND
Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff demands a trial by jury
in this action for all claims against all Defendants .
ROSENTHAL, MONHAIT, GROSS
& GODDESS, P.A.
Jessi (Del. Bar . 3S5
.JW9 Market Sid W4421
P.O. Box 1070
Wilmington, Delaware I9899
(302) 656-4433
jze gdaw•com
Counsel for Plaintif f
OF COUNSEL:
James E. Miller
Patrick A. Kliagmaa
KarenM. Leser
SHEPHERD, FINICELMAN, MILLER & SHAH, LLC
65 Main Street
Chester, Connecticut 06412
(860) 52& 1100
Scott R. Shepherd
James C. Shah
SHEPHERD, FIrIKELMAN, MILLER & $HAH, LLC
35 East State Street
Media, Pennsylvania 19063
(610) 891-9880
Jack Landskroner
Paul Griec o
LANbSKItONER • GRIECO • MADDEN, LTD.
1360 West M Street, suite 200
Cleveland, Ohio 44113
(216) 522-9000
-30-
AndrewM. Schatz
Jaffrey S. Nobel
SCHATZ & NOBEL, P.C.
one Corporate Center
20 Church Street
Dartford, Connecticut 06103
(860) 493-6292
April 15, 2005
-31- |
