AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1997
Registration No. 333-18489
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
NEXAR TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 3571
(State or Other Jurisdiction of (Primary Standard Industrial
Incorporation or Organization) Classification Code Number)
04-3268334
(I.R.S. Employer Identification
Number)
182 TURNPIKE ROAD, WESTBOROUGH, MASSACHUSETTS 01581 (508) 836-8700
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
ALBERT J. AGBAY
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NEXAR TECHNOLOGIES, INC.
182 TURNPIKE ROAD
WESTBOROUGH, MASSACHUSETTS 01581
(508) 836-8700
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service)
Copies to:
STEPHEN K. FOGG, ESQ. MITCHELL C. LITTMAN, ESQ.
WILLIAM C. ROGERS, ESQ. LITTMAN KROOKS ROTH & BALL P.C.
CHOATE, HALL & STEWART 655 THIRD AVENUE
EXCHANGE PLACE, 53 STATE STREET NEW YORK, NEW YORK 10017
BOSTON, MASSACHUSETTS 02109 (212) 490-2020
(617) 248-5000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, 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, 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, check the following box. |_|
--------------------
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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one
to be used in connection with an initial public offering of 2,500,000 shares of
Common Stock by the Company (the "Company Prospectus") and (ii) one to be used
in connection with the secondary sale from time to time of up to 6,700,000
shares of Common Stock by certain Selling Security Holders (the "Selling
Security Holders' Prospectus"). The Company Prospectus and the Selling
Securities Holders' Prospectus will be identical in all respects except for the
alternate pages for the Selling Security Holders' Prospectus which are included
herein after the final page of the Company Prospectus and are labelled
"Alternate Page for Selling Security Holders' Prospectus." Final forms of the
Prospectus will be filed with the Securities and Exchange Commission under Rule
424(b).
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 FEBRUARY 6, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO]
COMMON STOCK
All of the 2,500,000 shares of Common Stock of Nexar Technologies, Inc.
("NEXAR" or the "Company") offered hereby (the "Offering") are being sold by the
Company, an indirect subsidiary of Palomar Medical Technologies, Inc.
("Palomar"). Following the Offering, Palomar will beneficially own approximately
67.4% of the Common Stock (assuming no exercise of the Underwriter's
over-allotment option), including 1,200,000 shares of the Common Stock subject
to a contingent repurchase right of the Company at a nominal price per share in
the event that the Company does not achieve certain performance milestones set
forth in an agreement between the Company and Palomar, and shares of Common
Stock which Palomar may acquire upon conversion of shares of Convertible
Prefered Stock. See "Certain Transactions" and "Description of Capital Stock."
Shares of the Company beneficially owned by Palomar and three
institutional investors are being registered for sale from time-to-time in the
open market. Such transactions are being registered by separate prospectus
concurrently with this offering. The Company will not receive any proceeds from
any sale of such shares.
Prior to the Offering, there has not been a public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $11.00 and $13.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial public offering price. Application has been made to have the Common
Stock quoted on the Nasdaq National Market under the symbol "NEXR."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
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.
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
Per Share $ $ $
- --------------------------------------------------------------------------------
Total(3) $ $ $
================================================================================
(1) Does not reflect additional commission to Sands Brothers & Co., Ltd., the
representative (the "Representative") of the Underwriters, payable by the
Company in the form of warrants entitling the Representative to purchase
up to 250,000 shares of Common Stock during the four-year period
commencing on the first anniversary date of this Prospectus at an
exercise price equal to 120% of the initial public offering price (the
"Representative's Warrants") and a non-accountable expense allowance
equal to two percent of the aggregate price to the public of the shares
of Common Stock offered hereby. For information regarding indemnification
of the Underwriters, see "Underwriting."
(2) Before deducting expenses estimated at $1,000,000 payable by the Company.
(3) The Company has granted to the Underwriters a 45-day option to purchase
up to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised
in full, the total Price to Public, Underwriting Discounts and
Commissions, and Proceeds to Company will be $ ____, $_____ and $_____ ,
respectively.
The shares of Common Stock are being offered by the several
Underwriters named herein, subject to prior sale, when, as and if accepted by
them, and subject to certain conditions. It is expected that certificates for
the shares of Common Stock offered hereby will be available for delivery on or
about ____________, 1997, at the office of Sands Brothers & Co., Ltd., 90 Park
Avenue, New York, New York 10016.
SANDS BROTHERS & CO., LTD.
, 1997
NEXAR
FOR PEOPLE WHO BUY PCS. AND FOR PEOPLE WHO SELL THEM.
[PHOTOGRAPH OF NEXAR PC WITH SIDE PANELS BEING REMOVED]
Every computer end-user market is concerned about obsolescence. Corporate
America and small businesses. The government and the education system. Small and
home offices. This is what makes NEXAR personal computers so refreshing -- they
forestall system obsolescence.
NEXAR offers PCs to its resellers without the CPU, RAM, cache and hard drive
pre-installed, allowing them to configure the PC with their customers' choice of
components. Unlike other upgradeable or modular computers, NEXAR PCs are not
based on a proprietary architecture. Industry-standard components can be used.
The customer, not the manufacturer's technician, is in control of enhancements
to the system. Upgrading can be done in a matter of minutes. Without any tools.
Without training. Without the help of a technician. When more performance is
needed, only specific components need upgrading. Not the whole PC.
The removable hard drive is a feature that's particularly desirable where
security is an issue, or when a user wants portable data to go. It also makes
possible the use of multiple operating systems on a single PC.
NEXAR resellers can precisely meet their customer's technical and budgetary
requirements without exposing themselves to inventory depreciation caused by
the rapid advance of technology coupled with frequent price declines. Today's
best technology at today's best price. [NEXAR LOGO]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL
MARKET, IN THE OVER-THE-COUNTER MARKET, OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
NEXAR TECHNOLOGY
MAKES CUSTOM CONFIGURATIONS EASY!
[PHOTOGRAPH OF RIGHT SIDE OF NEXAR PC WITH SIDE PANEL REMOVED]
Snap off the right side panel of a NEXAR personal computer and uncover the
difference between a NEXAR PC and conventional models: direct access to the key
system defining components. A second side panel on the left side provides access
to expansion card slots.
NEXAR PCs are sold as high performance system platforms, usually shipped to
resellers fully configured except for the CPU, RAM, Cache, and Hard Drive, all
of which can be installed by the reseller in minutes. No tools. No custom parts.
No special training.
This means that NEXAR resellers can offer a competitively priced,
custom-tailored, high-performance PC. Resellers save on labor and are less
exposed to the high costs of holding older inventory.
The new NEXAR 11 supports SDRAM, EDO, or FPM memory, pipeline burst Cache, EIDE
or SCSI Hard Drives, concurrent PCI bus and Universal Serial Bus. All industry
standard components - no proprietary parts.
NEXAR PCs support Pentium processors with MMX multi media extension technology,
while its ISA/PCI controller supports state-of-the-art video, fax, network and
sound cards. Today's PC ready for tomorrow's technology.
3
NEXAR
Easy to customize now.
Easy to upgrade later.
NEXAR offers current and next-generation compatibility combined with an
innovative, patent-pending design which allows the CPU, RAM, and cache to be
accessed without technical assistance and without opening the entire chassis.
This means that the components which become obsolete the fastest can be easily
replaced. The result is an extended lifespan, lower cost of ownership and
investment protection.
* Configures and upgrades easily in seconds - no tools needed.
* CPU, cache and RAM are located at the outside of the cabinet, under a
removable side panel.
* A second removable side panel provides easy access to expansion card
slots.
* Slide-in slide-out hard drive caddy.
* Concurrent PCI bus and universal serial bus (USB).
* Supports 33,600 DSVD modem ISDN and video, fax, network and sound cards
for telephone and video conferencing.
* Upgradable to next-generation Intel Pentium and AMD chips with MMX(TM).
* Upgradable to 128 MB SDRAM
[NEXAR LOGO]
4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. Each prospective investor
should carefully consider the information set forth under the heading "Risk
Factors." Unless otherwise indicated herein, the information in this Prospectus
(i) has been adjusted to give effect to a 120-for-1 stock split of the Company's
common stock, $0.01 par value (the "Common Stock"), effective as of December 18,
1996, (ii) gives effect to the conversion of $10,000,000 of indebtedness owed to
related parties into 1,900,000 shares of Common Stock upon closing of the
Offering, and (iii) assumes no exercise of the Underwriters' over-allotment
option. See "Description of Capital Stock," "Certain Transactions" and
"Underwriting."
THE COMPANY
Nexar Technologies, Inc. develops, manufactures and markets
high-performance, competitively-priced desktop personal computers (PCs) based on
patent-pending technologies. Unlike conventional PCs, NEXAR systems permit an
end-user to (i) purchase a custom-configured PC on demand, and (ii) easily
upgrade or switch important components of the PC to accommodate emerging and
future technologies resulting in a significant extension of the computer's
useful life. NEXAR sells a high-performance system platform which, except for
the key system defining components (microprocessor, memory and hard drive), is
typically shipped to resellers fully configured. This approach:
* Enables the end-user, whether corporate or individual, to buy
a system configured exactly to that customer's technical and
budgetary requirements and, later, to easily upgrade the PC's
key components with industry-standard products.
* Enables the Company's channel resellers to reduce their
exposure to inventory depreciation caused by rapid advances in
technology and frequent price reductions of the key system
components, which typically account for more than 50% of the
cost of a PC.
* Enables the Company's resellers to compete with direct
marketers, such as Dell Computer and Gateway 2000, because a
NEXAR PC provides resellers with the ability to promptly
deliver a custom-configured, high-performance PC at a
competitive price.
* Enables the Company to maintain profit margins unaffected by
the forecasting risks borne by conventional PC manufacturers
who operate within a several-month-long cycle from (i)
component procurement to (ii) assembly to (iii) date-of-sale,
all conducted in an environment of rapid technological
advances and frequent price reductions. Since the key
components of a NEXAR PC are typically installed by a reseller
immediately prior to use or sale, the Company avoids the loss
of profit margin from making inaccurate predictions of the
most desired mix of key system components in the marketplace
several months in the future, from paying yesterday's higher
prices for components, or from discounting aging technology.
The Company's current PCs are based on an industry-standard, open
architecture design, co-engineered by HCL Hewlett Packard Ltd., which allows the
central processing unit (CPU), random access memory (RAM), and cache memory to
be replaced by end-users without technical assistance and without opening the
entire chassis. The Company's current model accepts Intel Corporation's
Pentium(R) and compatible CPUs, including the recently released Pentium
processor with MMX multimedia extension technology. NEXAR PCs also include, as a
standard feature, a removable hard drive, permitting its replacement and the
further advantages of increased data portability and security, and the use of
multiple operating systems in a single PC.
The Company's objective is to become the industry leader in designing
and marketing PCs with technology which enables resellers and end-users, in an
easy and cost-effective manner, to upgrade and transition the CPU and the other
key system defining components in accordance with the known and anticipated
roadmaps of various makers of fundamental and leading-edge PC technology.
Accordingly, NEXAR has developed and will soon market a new generation of PCs
5
featuring the Company's patent-pending Cross-Processor Architecture(TM) (NEXAR
XPA(TM)) in which any one of several state-of-the-art CPUs can be initially
included or later installed, including Intel Corporation's Pentium or Pentium
Pro(R) and compatible CPUs. The NEXAR XPA technology will also accommodate
microprocessors based on other technologies, such as the Alpha(R) CPU made by
Digital Equipment Corporation (DEC) or the PowerPC(R) processor offered jointly
by IBM, Motorola Corporation and Apple Computer.
NEXAR is led by its Chairman and Chief Executive Officer, Albert J.
Agbay, who has more than twenty years experience at various computer companies,
including senior management positions at PC makers such as NEC, Panasonic and
Leading Edge. The Company does not market its products directly to end-users,
but instead distributes its products through a growing network of international,
national and regional distributors, value-added and other resellers, original
equipment manufacturers (OEMs), system integrators, computer superstores, direct
response resellers, and independent dealers.
----------------------------
The Company was incorporated in Delaware in March 1995 as a wholly-owned
subsidiary of Palomar Medical Technologies, Inc., a publicly-held corporation
that develops, manufactures and markets medical laser devices and electronics
products. The Company's principal executive offices are located at 182 Turnpike
Road, Westborough, Massachusetts 01581, and its telephone number is (508)
836-8700. Unless the context otherwise requires, the "Company" and "NEXAR" refer
to Nexar Technologies, Inc. and its wholly-owned subsidiary, Intelesys
Corporation, a Delaware corporation.
SUMMARY SELECTED QUARTERLY OPERATING RESULTS
The following table presents unaudited quarterly consolidated financial
data of the Company for each of the first three quarters in 1996. The Company
was incorporated in March 1995 and first began volume shipments of its patent-
pending PCs in the second quarter of 1996. In view of the Company's recent
growth and other factors, the Company believes that quarter-to-quarter
comparisons of its consolidated financial results are not necessarily meaningful
and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
--------------------
March 31, June 30, Sept. 30,
1996 1996 1996
------ ------ -----
CONSOLIDATED STATEMENTS OF
OPERATIONS:
<S> <C> <C> <C>
Net revenues............................. $117,468 $2,033,811 $9,190,147
Costs of revenues........................ 116,388 1,798,229 7,423,725
------- --------- ---------
Gross profit............................. 1,080 235,582 1,766,422
-------- ---------- ---------
Operating expenses:
Research and development................. 67,318 102,728 130,961
Selling and marketing.................... 327,284 1,678,727 981,200
General and administrative............... 441,627 634,282 619,979
------- ------- -------
Total operating expenses ................ 836,229 2,415,737 1,732,140
Net income (loss)........................ $(835,149) $(2,180,155) $34,282
========= =========== =======
</TABLE>
6
<TABLE>
<CAPTION>
THE OFFERING
<S> <C>
Common Stock offered by the Company........................... 2,500,000 shares
Common Stock to be outstanding after the Offering............. 9,200,000 shares(1)(2)
Use of proceeds............................................... For repayment of $5,000,000 of
indebtedness to related parties and general
corporate purposes, including working
capital, product development and capital
expenditures. See "Use of Proceeds."
Proposed Nasdaq National Market symbol........................ NEXR
</TABLE>
- -------------------
(1) Based on the number of shares of Common Stock outstanding on December 31,
1996. Excludes (i) 3,055,920 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1996 at a weighted average exercise
price of $0.52 per share, of which options to purchase 1,063,973 shares were
then exercisable, and (ii) 800,000 shares of Common Stock reserved for issuance
under stock options to be granted upon the effectiveness of the Offering at an
exercise price equal to the initial public offering price. See "Capitalization,"
"Management--Stock Plans" and "Beneficial Ownership of Management." (2) Includes
1,900,000 of shares of Common Stock which will be issued to related parties upon
conversion of $10,000,000 of indebtedness upon the closing of the Offering. See
"Certain Transactions."
<TABLE>
<CAPTION>
SUMMARY CONSOLIDATED FINANCIAL DATA
Period from Inception (March 7, 1995) Nine Months Ended
to December 31, 1995 September 30, 1996
--------------------- -------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C>
Net revenues................................................ $619,629 $11,341,426
Cost of revenues............................................ 574,611 9,338,342
-------- ---------
Gross profit................................................ 45,018 2,003,084
====== =========
Net loss.................................................... $(2,261,434) $(2,981,022)
============ ============
Pro forma net loss per common and common equivalent share (1): $(0.27) $(0.35)
Pro forma weighted average number of common and common ========= =========
equivalent shares outstanding: 8,421,838 8,421,838
========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------
Pro Forma
Actual Pro Forma(2) As Adjusted(2)(3)
------ ------------ -----------------
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C> <C>
Cash....................................................... $ 8,147,918 $ 8,147,918 $29,166,918
Working capital............................................ 13,616,663 13,616,663 34,868,663
Total assets............................................... 20,183,318 20,183,318 40,800,318
Amounts due to related parties (4) ....................... 19,568,449 5,000,000 ---
Stockholder's (deficit) equity............................. (5,242,056) 9,326,393 35,176,393
</TABLE>
- ------------------
(1) Computed on the basis described in Note 3(b) of Notes to Consolidated
Financial Statements.
(2) Presented on a pro forma basis to give effect to the conversion of
indebtedness to related parties totaling $10,000,000 at September 30, 1996
into 1,900,000 shares of common stock and the conversion of $4,568,449 due
to related parties into 45,684 shares of Convertible Preferred Stock. See
"Certain Transactions."
(3) Adjusted to give effect to the receipt of the net proceeds from the sale of
the 2,500,000 shares of Common Stock offered by the Company hereby at an
assumed initial public offering price of $12.00 per share and includes the
repayment of $5,000,000 of amounts due to related parties. See "Use of
Proceeds" and "Capitalization."
(4) Represents amounts due to Palomar and Palomar Electronics Corporation
(PEC). See Note 2 of Notes to Consolidated Financial Statements.
RISK FACTORS
Certain statements contained herein expressing the beliefs and
expectations of the Company regarding its future results or performance are
forward-looking statements that involve a number of risks and uncertainties. The
Company's actual results could differ significantly from the results discussed
in such forward-looking statements. For a discussion of important factors that
could cause or contribute to such differences, see "Risk Factors" beginning on
page 8.
7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following risk factors, as
well as those discussed elsewhere in this Prospectus, before making an
investment decision with respect to the shares of Common Stock offered hereby.
Prospective investors are advised that statements contained herein
expressing the beliefs and expectations of the Company regarding its future
results or performance are forward-looking statements that involve a number of
risks and uncertainties. The Company's actual results could differ significantly
from the results discussed in such forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below and
elsewhere in this Prospectus.
LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; ACCUMULATED DEFICIT
The Company was incorporated in March 1995 and commenced selling its PCs
in volume in April 1996. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company and its prospects can be based.
The Company's prospects must be evaluated with regard to the risks encountered
by a company in an early stage of development, particularly in light of the
uncertainties relating to the intensely competitive market in which the Company
operates. As of September 30, 1996, the Company had an accumulated deficit of
$5,242,456. Although the Company anticipates realizing revenue growth during the
first six months of 1997, the Company's ability to generate significant revenue
thereafter is subject to substantial uncertainty. In addition, the Company
anticipates that its operating expenses will increase substantially in the
foreseeable future as it further develops its technology, increases its sales
and marketing activities, creates and expands the distribution channels for its
services and broadens its customer support capabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH INTENSE COMPETITION
The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. The Company currently competes in the desktop PC market principally with
Acer America Corporation, Apple Computer Corporation, Compaq Computer, Dell
Computer, Gateway 2000, Hewlett-Packard Company, IBM and Packard Bell NEC, Inc.
In addition, the Company expects to compete in the network server market
commencing in the third quarter of 1997 with a server complementing its desktop
PCs against established companies such as Advanced Logic Research, Inc. (ALR),
Compaq Computer, Dell Computer, Hewlett-Packard and IBM. All of these companies
have stronger brand recognition, significantly greater financial, marketing,
manufacturing, technological and distribution resources, broader product lines
and larger installed customer bases than does the Company. Principal competitive
factors include product features, product performance, quality and reliability,
the ability to deliver product to customers in a timely fashion, customer
service and support, marketing and distribution capabilities and price. Also in
order to compete successfully, the Company must attract and retain a sufficient
number of management sales and technical personnel with high levels of relevant
skills and meaningful experience. Although the Company has assembled an
experienced senior management team, there can be no assurance that the Company
will be able to attract and retain sufficient numbers of additional personnel,
as the need for such individuals increases with the Company's anticipated
growth, or maintain or improve its current position with respect to any of these
or other competitive factors. This intense competition could result in loss of
customers or pricing pressures, which would negatively affect the Company's
results of operations.
The Company's ability to compete favorably is dependent, in significant
part, upon its ability to control costs, react timely and appropriately to
short- and long-term trends and competitively price its products while
preventing erosion of its margins, and there is no assurance that the Company
will be able to do so. Many of the Company's competitors can devote greater
managerial and financial resources than the Company can to
8
develop, promote and distribute products and provide related consulting and
training services. Some of the Company's competitors have established, or may
establish, cooperative arrangements or strategic alliances among themselves or
with third parties, thus enhancing their ability to compete with the Company.
There can be no assurance that the Company will be able to compete successfully
against current or future competitors or that the competitive pressures faced by
the Company will not materially and adversely affect its business, operating
results and financial condition. See "Business--Competition."
DEPENDENCE ON SUBSTANTIAL CUSTOMER
In the nine months ended September 30, 1996, one customer of the Company,
Government Technology Services, Inc. (GTSI), a leading supplier of desktop
systems to United States government agencies, accounted for a majority of the
Company's revenues. The Company expects that GTSI will continue to be an
important customer, but that sales to GTSI as a percentage of total revenues
will decline substantially as the Company further expands its distribution
network and increases its overall sales. The Company has entered into an
agreement with GTSI pursuant to which GTSI serves as the Company's exclusive
federal reseller with respect to Government Services Administration (GSA)
scheduled purchases, provided that GTSI purchases at least $35 million of the
Company's products in 1997. GTSI is under no obligation, however, to purchase
any products of the Company. If GTSI makes fewer purchases in 1997 than the
Company anticipates, that would have a material adverse effect on the Company.
See "Business--Customers" and "Business--Strategy."
MANAGEMENT OF GROWTH
The anticipated rapid growth in the size, geographic scope and complexity
of the Company's business and development of its customer base are expected to
place a significant strain on the Company's management, operations and capital
needs. The Company's continued growth, if any, will require it to attract,
motivate and retain additional highly skilled technical, managerial, consulting,
sales and marketing personnel both in the United States and abroad, and will
also require the Company to enhance its financial and managerial controls and
reporting systems. There is no assurance that the Company can manage its growth
effectively or that the Company will be able to attract and retain the necessary
personnel to meet its business challenges. If the Company is unable to manage
its growth effectively, the Company's business, financial condition and
operating results would be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition of Results of Operations."
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company's capital requirements in connection with its development and
marketing activities have been and will continue to be significant. Although the
Company believes that its existing capital resources, together with the proceeds
of the Offering and interest earned thereon, will be adequate to satisfy its
capital requirements for at least the next twelve months, the Company's future
capital requirements will depend on many factors, some of which are not within
the control of the Company. These factors include sales of its existing
products, the continued progress in, and magnitude of, its research and product
development programs, the costs involved in filing, prosecuting, enforcing and
defending patent claims, competing technological and market developments and the
costs and success of commercialization activities. There can be no assurance
that the Company may not in the future require additional funding. If the
Company requires additional funding, there can be no assurance that it will be
able to obtain such funding on acceptable terms, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON NEW PRODUCTS; MARKET ACCEPTANCE
The Company's future success will be highly dependent upon its ability to
develop, produce and market products that incorporate new technology, are priced
competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be technically advanced or
commercially successful
9
due to the rapid improvements in computer technology and resulting product
obsolescence. There is also no assurance that the Company will be able to
deliver commercial quantities of new products in a timely manner. The success of
new product introductions is dependent on a number of factors, including market
acceptance, the Company's ability to anticipate and manage risks associated with
product transitions, effective product marketing, proper management of inventory
levels in line with anticipated product demand and the timely manufacturing of
products in appropriate quantities to meet anticipated demand. In addition,
although the Company plans to offer in the third quarter of 1997 a network
server complementing its desktop PCs, and plans to commence shipment of NEXAR
XPA PCs by mid-1997, the Company currently has no other product lines, such as
notebook computers or other computer related products, planned. The failure of
the Company to develop, produce and market commercially viable products could
result in the Company's business, operating results and financial condition
being materially and adversely affected. See "Business--Product Development" and
"--Products."
PRODUCT DEVELOPMENT RISKS
The Company's product development efforts will continue to require
substantial investments by the Company for third-party development, refinement
and testing, and there can be no assurance that the Company will have the
resources sufficient to make such investments. Participants in the PC industry
generally rely on the creation and implementation of technology standards to win
the broadest market acceptance for their products. The Company must successfully
monitor and participate in the development of standards while continuing to
differentiate its products in a manner valued by customers. Industry
participants generally accept, and may encourage, the use of their intellectual
property by third parties under license, nonetheless, when intellectual property
owned by competitors or suppliers becomes accepted as an industry standard, the
Company must obtain a license, purchase components utilizing such technology
from the owners of such technology or their licensees, or otherwise acquire
rights to use such technology. The failure of the Company to license, purchase
or otherwise acquire rights to such technologies could result in the Company's
business, operating results and financial condition being materially and
adversely affected. See "Business--Product Development" and "--Products."
DEPENDENCE ON OUTSIDE PRODUCT ENGINEERING
The Company currently has only a limited product development staff. The
Company has entered into a Development Agreement with GDA Technologies,
Inc.(GDA), a provider of computer engineering services, to develop its new
patent-pending NEXAR XPA technology and to implement this technology on several
motherboards to be introduced for use in its PCs by mid-1997. Although the
Company believes that it could find and engage equivalent development and
engineering services elsewhere within a reasonable period of time, or hire
sufficient capable engineers to perform such development work in-house, the
inability of GDA to adequately perform such services on a timely basis could
have a material adverse effect on the Company. See "Business--Product
Development."
UNCERTAINTY REGARDING INTELLECTUAL PROPERTY RIGHTS; POTENTIAL LITIGATION WITH
FORMER EXECUTIVE
The Company's success is dependent, in part, upon its licensed and owned
intellectual property rights. While the Company has applied for a patent on its
Cross-Processor Architecture(TM) (NEXAR XPA(TM)) technology, no such patent has
issued. Similarly, while Technovation Computer Labs, Inc. (Technovation)
represents that it has applied for a patent on the technology it licenses to the
Company as discussed further in the following paragraph, the Company has not
been notified that any such patent has been issued. Accordingly, the Company
currently relies on copyrights, unpatented trade secrets and trademarks to
protect its proprietary technology. No assurance can be given that the Company's
competitors will not independently develop or otherwise acquire substantially
equivalent techniques or otherwise gain access to the Company's proprietary
technology or that the Company can ultimately protect its rights to such
proprietary technology. In addition, there can be no assurance that the Company
will be able to afford the expense of any litigation which may be necessary to
10
enforce its rights under any such patent. The Company also relies on
confidentiality agreements with its collaborators, employees, advisors, vendors
and consultants to protect its proprietary technology. There can be no assurance
that these agreements will not be breached, that the Company would have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known or be independently developed by competitors. Failure to obtain or
maintain patent and trade secret protection, for any reason, could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Business--Intellectual Property."
The Company's current PCs are shipped with motherboards based on
technology licensed from Technovation, which, to the best of the Company's
knowledge, is owned by Babar I. Hamirani, a former executive officer of the
Company whose employment was terminated by the Company on November 29, 1996.
Although no formal claim has been made, an attorney representing Mr. Hamirani
has informed the Company that Mr. Hamirani may file a lawsuit or seek
arbitration proceedings against the Company regarding Mr. Hamirani's employment
termination and the license agreement with Technovation. Under the terms of its
license agreement with Technovation, which the Company believes it is in
compliance with in every material respect, the Company has the exclusive right
to use the licensed technology through August 1998 in exchange for a per unit
sold royalty amount, and a non-exclusive right to use such technology for up to
seven additional years at the same royalty rate. The Company intends to cease
manufacturing PCs with motherboards originally designed under the technology
licensed from Technovation by mid-1997 after it begins shipping PCs with its new
patent-pending NEXAR XPA technology, but the Company does intend to continue to
pay royalties to Technovation to the extent required under the license
agreement. In addition, patent counsel for Mr. Hamirani has informed the Company
that such counsel is in the process of prosecuting a continuation to
Technovation's patent application covering additions and improvements to the
original invention which is the subject of such application. Such counsel has
informed the Company of the nature of such additions and improvements and it
appears to the Company that they may have aspects in common with the Company's
new NEXAR XPA technology. While the Company has not had an opportunity to review
this continuation, it appears that it may conflict with the Company's patent
application. The Company would consider such a claim by Mr. Hamirani to be
without merit and would vigorously defend its intellectual property rights if
such a conflict develops in the patent office.
The Company does not believe that any of Mr. Hamirani's threatened claims
against the Company have merit and it intends to vigorously defend against them
if Mr. Hamirani initiates litigation or arbitration proceedings. There can be no
assurance, however, that the Company would prevail in any such litigation or
arbitration proceedings. Also, any litigation or arbitration proceedings
initiated by Mr. Hamirani as to his employment termination or the license
agreement with Technovation could become extremely protracted and expensive even
if the Company ultimately prevails, and involvement in such litigation or
arbitration and related diversion of management attention and resources could
have a material adverse effect on the business, results of operations and
financial condition of the Company. See "Business -- Intellectual Property" and
"Certain Transactions."
POTENTIAL INFRINGEMENT OF PROPRIETARY TECHNOLOGY
Although the Company believes that its products do not infringe patents
or other proprietary rights of third parties, there can be no assurance that the
Company is aware of all patents or other proprietary rights that may be
infringed by the Company's products, that any infringement does not exist or
that infringement may not be alleged by third parties in the future. If
infringement is alleged, there can be no assurance that the necessary licenses
would be available on acceptable terms, if at all, or that the Company would
prevail in any related litigation. Patent litigation can be extremely protracted
and expensive even if the Company ultimately prevails, and involvement in such
litigation and related diversion of Management attention and resources could
have a material adverse effect on the business, results of operations and
financial condition of the Company. See "Business--Intellectual Property."
11
RISK OF TECHNOLOGICAL OBSOLESCENCE
There can be no assurance that products or technologies of the Company's
competitors will not render the Company's products or technologies
noncompetitive or obsolete. Although the Company's product lines have been
designed to forestall such obsolescence, there can be no assurance that the
Company's products will be competitive with products offered by other
manufacturers. In addition, delays in access to technology developed by
competitors and suppliers could slow the Company's design and manufacture of
components and subsystems that distinguish its products. If the Company is
unable for technological or other reasons to develop and introduce new or
enhanced products and services in a timely and effective manner, the Company's
business, operating results and financial condition would be materially and
adversely affected. See "Business--Product Development" and "--Products."
FORECASTING ISSUES
Because of the pace of technological advances in the computer industry,
the Company must introduce on a timely basis new products that offer customers
competitive technologies while managing the production and marketing cycles of
its existing products. Forecasting demand for newly-introduced products is
complicated by the availability of different product models, which may include
various types of built-in peripherals and software in certain markets. As a
result, while overall demand may be in line with the Company's projections and
manufacturing implementation, local market variations can lead to differences
between expected and actual demand and resulting delays in shipment, which can
affect the Company's financial results. See "Business--Strategy"
and"--Products."
DEPENDENCE UPON WANG LABORATORIES TO PERFORM SERVICE OBLIGATIONS
All of the Company's products are sold with a three year limited warranty
on hardware with one year on-site service. The Company currently lacks the
capability to provide technical support for its PCs in the field and has
contracted with Wang Laboratories, Inc. ("Wang") to perform all of the Company's
warranty obligations with respect to its products. Wang provides NEXAR's
customers on-site hardware support, including diagnostics and repair and also
provides telephone support for software products bundled with NEXAR's systems
for a period of 90 days. While the Company selected Wang based on its belief
that Wang has the capability to perform these warranty obligations on a timely
and efficient basis, the failure of Wang to meet the demands of the end-users of
the Company's products could materially and adversely affect the reputation of
the Company and its products, which in turn could result in lower sales and
profits. See "Business--Customer Service and Support."
DEPENDENCE ON MARKET SUCCESS OF THIRD PARTY CHANNEL DISTRIBUTION
The Company does not sell its products directly to end-users, but relies
instead on a variety of distribution channels, primarily distributors,
value-added and other resellers, OEMs, systems integrators, direct response
resellers, and independent dealers. The Company's revenue is dependent, among
other things, upon the ability of these distribution channels to sell the
Company's products to end-users. Factors affecting the ability of these
distribution channels to develop and sell their products include competition,
their ability to offer products that meet user requirements at acceptable prices
and overall economic conditions in both the United States and foreign markets.
The Company's business, results of operations and financial condition would be
materially adversely affected if these distribution channels are unsuccessful in
selling the Company's products. See "Business--Sales and Marketing."
RELIANCE ON SUPPLIERS; RISK OF DELAY
The Company's manufacturing process requires a high volume of quality
components that are procured from third party suppliers. Reliance on suppliers,
as well as industry supply conditions generally, involves several risks,
including the possibility of defective parts, a shortage of components,
increases in component costs
12
and reduced control over delivery schedules, any or all of which could adversely
affect the Company's financial results. As part of the manufacturing process,
the Company uses industry standard components for its products. Most of these
components are generally available from multiple sources; however, the Company
relies on two outside contractors to manufacture motherboards used in its PCs
and plans to rely on a sole outside contractor to manufacture the motherboards
used in its server product. In addition, the Company has several other single
supplier relationships for less critical components, and the lack of
availability of timely and reliable supply of components from these sources
could adversely affect the Company's business. In some cases, alternative
sources of supply are not readily available for some of the Company's
single-sourced components. In other cases, the Company may establish a working
relationship with a single source, even when multiple suppliers are available,
if the Company believes it is advantageous to do so due to performance, quality,
support, delivery, capacity or price considerations. Where alternative sources
are available, qualification of the alternative suppliers and establishment of
reliable supplies could result in delays, which could adversely affect the
Company's manufacturing processes and results of operations.
The Company occasionally experiences delays in receiving certain
components, which can cause delays in the shipment of some products to
customers. During November 1996, the Company did not have in inventory and was
unable to obtain sufficient quantities of certain key components to meet
outstanding purchase orders, which caused the financial results for such period
to be adversely affected and may adversely affect future sales to customers
whose orders were not promptly shipped. There can be no assurance that the
Company will be able to continue to obtain additional supplies of reliable
components in a timely or cost-effective manner. See "Business--Manufacturing."
RISKS ASSOCIATED WITH INVENTORY LEVELS
Although the design of the NEXAR PC provides the Company with the ability
to operate with reduced inventories of components and finished goods, shifts in
technology and market demand may nevertheless result in excess inventory,
declining inventory values or even obsolescence. Maintaining a low inventory
level is dependent upon the Company's ability to achieve targeted revenue and
product mix. There can be no assurance that the Company will be able to maintain
optimal inventory levels in future periods. See "Business--Manufacturing."
CONCENTRATION OF OWNERSHIP BY PALOMAR AND MANAGEMENT
Upon completion of the Offering, Palomar will beneficially own
approximately 66% of the Company's Common Stock (approximately 64% if the
overallotment option granted to the Underwriters is exercised in full) including
1,200,000 shares which are subject to a repurchase right of the Company at a
nominal price per share in the event the Company fails to meet certain
performance milestones set forth in an agreement among the Company and Palomar.
In addition, 45,684 shares of Convertible Preferred Stock will be issued to
Palomar upon the closing in exchange for retirement of $4,568,449 of
indebtedness owed by the Company to Palomar. Such shares of Convertible
Preferred Stock shall be convertible into shares of Common Stock at the option
of the holders thereof at a price per share equal to 125% of the initial public
offering price of the Common Stock. At an assumed initial public offering price
of $12.00 per share, the 45,684 shares of Convertible Preferred Stock issued to
Palomar upon the closing would be convertible into 304,560 shares of Common
Stock. Prior to any such conversion, the holders of such Convertible Preferred
Stock shares shall have voting rights equal to the number of shares of Common
Stock such Convertible Preferred Stock are convertible into on the record date
of any matter voted on by the stockholders of the Company. The holders of such
shares of Convertible Preferred Stock shall have identical further rights as
holders of shares of Common Stock, with the sole exception that such shares of
Convertible Preferred Stock shall have the additional right to a liquidation
preference of $100 per share ($4,568,400 in the aggregate and equal to $15.00
per share of Common Stock into which such shares of Convertible Preferred Stock
are convertible, assuming an initial public offering price of $12.00 per share),
plus, in the case of each such share of Convertible Preferred Stock, an amount
equal to any dividend declared but unpaid thereon, over the Common Stock. Such
liquidation preference would be payable
13
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company and also upon certain change of control transactions, such as a merger
or a sale of substantially all the assets of the Company. See "Description of
Capital Stock-Preferred Stock."
As a result of its current holdings of and rights to acquire additional
shares of Common Stock, Palomar does and will be able to control the Company
through its ability to determine the outcome of elections of the Company's
directors, amend the Company's Restated Charter and By-laws and take certain
other actions requiring the vote or consent of stockholders of the Company. This
concentration of ownership may have the effect of delaying or preventing a
change in control of the Company. In addition, upon completion of the Offering,
the current executive officers and directors of the Company will hold stock
options exercisable for an aggregate number of shares of Common Stock equal to
approximately 26.7% of the Common Stock assuming the exercise of all such
options (approximately 25.9% if the over-allotment option is exercised in full).
Approximately 65.7% of the shares subject to such options are subject to vesting
based on the option holder's length of service with the Company. See "Principal
Stockholder," "Certain Transactions" and "Beneficial Ownership of Management."
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends to a significant extent on certain
key personnel, including its Chairman and Chief Executive Officer, Albert J.
Agbay, and its other executive officers and certain technical, managerial,
consulting, sales and marketing personnel. The loss of the services of any of
these individuals or group of individuals could have a material adverse effect
on the Company's business, operating results and financial condition. The
Company does not have, and is not contemplating securing, any significant amount
of key-man life insurance on any of its executive officers or other key
employees. See "Business--Strategy" and "Management" and "--Products."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
The Company's quarterly revenues, expenses and operating results are
likely to vary considerably in the future. Such fluctuations can be traced to
many factors, including the timing and terms of large transactions, delays in
customer acceptance, delays in receiving components, the length of sales cycles,
changes in the level of operating expenses, demand for the Company's products
and services, the introduction of new products and product enhancements by the
Company and its competitors, changes in customer budgets, competitive conditions
in the industry and general economic conditions. For example, during November
1996, the Company did not have in inventory and was unable to obtain sufficient
quantities of key components to meet outstanding purchase orders, which caused
the financial results for such period to be adversely affected and may adversely
affect future sales to customers whose orders were not promptly shipped. The
Company budgets its product development and other expenses anticipating future
revenues. If revenues fall below expectations, the Company's business, operating
results and financial condition are likely to be materially and adversely
affected because a proportionately smaller amount of the Company's expenses vary
with its revenues. As a result, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and should
not be relied upon to predict future performance. Due to the foregoing factors,
it is likely that, in some future quarters, the Company's operating results will
fall below the market's or investors' expectations, and, in such event, the
price of the Common Stock would likely be materially and adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
The Company plans to expand its business into international markets. To
date, the Company has minimal experience in marketing and distributing its
products internationally and plans to establish alliances with sales
representative organizations and resellers with particular experience in
international markets. Accordingly, the Company's success in international
markets will be substantially dependent upon the skill and expertise of such
international participants in marketing the Company's products. There can be no
assurance that the Company
14
will be able to successfully market, sell and deliver its products in these
markets. In addition, there are certain risks inherent in doing business in
international markets, such as unexpected changes in regulatory requirements,
export restrictions, tariffs and other trade barriers, difficulties in staffing
and managing foreign operations, political instability and fluctuations in
currency exchange rates and potentially adverse tax consequences, which could
adversely impact the success of the Company's international operations. There
can be no assurance that one or more of such factors will not have a material
adverse effect on the Company's future international operations and,
consequently, on the Company's business, financial condition or operating
results. See "Business--Sales and Marketing."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the Offering. The initial
offering price will be determined by negotiation between the Company and the
Representative based upon several factors. See "Underwriting." The market price
of the Company's Common Stock is likely to be highly volatile and could be
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of technological innovations or new products by the
Company or its competitors, changes in financial estimates by securities
analysts, or other events or factors, many of which are beyond the Company's
control. In addition, the stock market has experienced significant price and
volume fluctuations that have particularly affected the market prices of equity
securities of many high technology companies and that often have been unrelated
to the operating performance of such companies. These broad market fluctuations
may adversely affect the market price of the Company's Common Stock. In the
past, following periods of volatility in the market price for a company's
securities, securities class action litigation has often been instituted. Such
litigation could result in substantial costs and a diversion of management
attention and resources which could have a material adverse effect on the
Company's business, financial condition or operating results.
RISKS ASSOCIATED WITH UNSPECIFIED USE OF PROCEEDS
The principal purposes of the Offering are to increase the Company's
working capital and financial flexibility, to facilitate future access by the
Company to public equity markets and to provide increased visibility,
credibility and name recognition for the Company in a marketplace where many of
its competitors are publicly-held companies. The Company intends to use the net
proceeds to repay certain indebtedness and for working capital and other general
corporate purposes. A portion of the proceeds may be used for the acquisition
and/or development of complementary products, technologies and/or businesses.
The Company has not as yet identified specific uses for a majority of the net
proceeds, and, pending such uses, the Company expects that it will invest net
proceeds in short-term, interest-bearing, investment-grade securities.
Accordingly, the Company's management will have broad discretion as to the use
of such net proceeds without any action or approval of the Company's
stockholders. See "Use of Proceeds."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Restated Certificate of Incorporation
(the "Charter") and Amended and Restated By-laws (the "By-laws") and of Delaware
law could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from attempting to acquire, control of
the Company. Such provisions could limit the price that investors might be
willing to pay in the future for Common Stock. These provisions will require
that the Company have a Board of Directors comprised of three classes of
directors with staggered terms of office, provide for the issuance of "blank
check" preferred stock by the Board of Directors without stockholder approval,
require super-majority approval to amend certain provisions in the Charter and
By-laws, require that all stockholder actions be taken at duly called annual or
special meetings and not by written consent, and impose various procedural and
other requirements that could make it more difficult for stockholders to effect
certain corporate actions. Furthermore, the Company is subject to the
anti-takeover
15
provisions of Section 203 of the Delaware General Corporation Law, which
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 could also have the effect of delaying or preventing
a change of control of the Company. See "Description of Capital Stock."
SUBSTANTIAL NUMBER OF REGISTERED SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market following the Offering could adversely affect the market price for the
Common Stock. Upon the closing of the Offering, the Company will have an
aggregate of 9,200,000 shares of Common Stock outstanding, assuming no exercise
of the Underwriters' over-allotment option and no exercise of outstanding
options to purchase Common Stock. All of these shares, including the 2,500,000
shares sold in the Offering, are freely tradable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Also, as of the date of this Prospectus, employees and directors of the
Company hold options exercisable for the acquisition of 3,855,920 shares of
Common Stock (27.5% of which were exercisable as of December 31, 1996), which
shares the Company intends to register for resale under the Securities Act soon
after consummation of the Offering. "Description of Capital Stock," "Shares
Eligible for Future Sale" and "Certain Transactions."
DILUTION
Purchasers of Common Stock in the Offering will experience immediate and
substantial dilution of $8.68 per share, assuming an initial public offering
price of $12.00 per share, in net tangible book value per share of Common Stock
from the initial public offering. See "Dilution."
16
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered by the Company pursuant to the Offering are estimated to be
$25,850,000 million ($29,877,500 million if the Underwriters exercise their
over-allotment option in full), assuming an initial public offering price of
$12.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company.
The principal purposes of the Offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which will facilitate future access by the Company to the public equity markets,
enhance the ability of the Company to use its Common Stock as consideration for
acquisitions and as a means for attracting and retaining key employees. The
Company intends to use the proceeds of the Offering for general corporate
purposes, including working capital, product development and capital
expenditures and to repay $5,000,000 of non-interest bearing demand indebtedness
to related parties. See "Certain Transactions." The amount and timing of
expenditures may vary significantly depending upon numerous factors including
the success of the Company's currently marketed product, the continued progress
in, and magnitude of the Company's research and product development programs,
market acceptance of the Company's new products, the timing and costs involved
in obtaining regulatory clearances and approvals, the costs involved in filing,
prosecuting, enforcing and defending patent claims, and competing technological
and market developments and the costs and success of its commercialization
activities. Based upon its current operating plan, the Company believes that its
existing capital resources together with the proceeds of the Offering and
interest earned thereon, will be adequate to satisfy its capital requirements
for at least the next twelve months.
A portion of the net proceeds of the Offering may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although the Company has not entered into any commitments or
negotiations with respect to any such transactions. Pending such use, the
Company expects to invest the net proceeds in short-term, interest-bearing,
investment grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any cash dividends in the foreseeable
future. The Company currently intends to retain future earnings to fund the
development and growth of its business.
17
CAPITALIZATION
The following table sets forth the capitalization of the Company (i)
actual as of September 30, 1996 (ii) pro forma as of September 30, 1996 to give
effect to the conversion of $10,000,000 and $4,568,449 due to related parties
into 1,900,000 shares of Common Stock and 45,684 shares of Convertible Preferred
Stock, respectively and (iii) pro forma as adjusted to give effect to the sale
of 2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $12.00 per share and the receipt of the net proceeds
therefrom, after deducting the estimated underwriting discounts and commissions
and estimated offering expenses payable by the Company. See "Use of Proceeds."
This information should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------------------
Pro Forma as
Actual Pro Forma(1) Adjusted(1)(2)
------ ------------ --------------
<S> <C> <C> <C>
Amounts due to related parties(1)................................... $19,568,449 $5,000,000 ---
----------- ---------- ----------
Stockholder's (Deficit) Equity:
Preferred Stock, par value $0.01 per share, 10,000,000
shares authorized; no shares issued and outstanding,
actual; 45,684 issued and outstanding, pro forma and
pro forma as adjusted........................................... --- 457 457
Common Stock, par value $0.01 per share,
30,000,000 shares authorized; 4,800,000 shares issued
and outstanding, actual; 6,700,000 shares issued and
outstanding, pro forma; and 9,200,000 shares issued
and outstanding, pro forma as adjusted......................... 48,000 67,000 92,000
Additional paid-in capital........................................ (47,600) 14,501,392 40,326,392
Accumulated deficit............................................... (5,242,456) (5,242,456) (5,242,456)
----------- ----------- -----------
Total Stockholder's (Deficit) Equity................................ (5,242,056) 9,326,393 35,176,393
----------- --------- ----------
Total Capitalization............................................. $14,326,393 $14,326,393 $35,176,393
=========== =========== ===========
</TABLE>
- -------------------
(1) Adjusted to give effect to the conversion of indebtedness to related
parties totaling $10,000,000 and $4,568,449 at September 30, 1996 into
1,900,000 shares of Common Stock and 45,684 shares of Convertible
Preferred Stock, respectively. See "Certain Transactions."
(2) Adjusted to give effect to the receipt of the net proceeds from the sale
of the 2,500,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $12.00 per share and the
repayment of $5,000,000 of amounts due to related parties and the
conversion of $10,000,000 and $4,568,449 due to related parties into
1,900,000 shares of Common Stock and 45,684 shares of Convertible
Preferred Stock, respectively. See "Use of Proceeds" and "Certain
Transactions."
18
DILUTION
The pro forma net tangible book value of the Company at September 30,
1996 was $4,331,033 or $0.65 per share of Common Stock. Adjusted pro forma net
tangible book value per share is equal to the Company's total tangible assets
less total liabilities, divided by the total number of shares of Common Stock
outstanding and includes the effect of the conversion upon the closing of the
Offering of $10,000,000 of indebtedness to related parties into 1,900,000 shares
of Common Stock). Net tangible book value dilution per share represents the
difference between the amount per share paid by purchasers of shares of Common
Stock in the Offering made hereby and the adjusted pro forma net tangible book
value per share of Common Stock immediately after completion of the Offering.
After giving effect to the sale by the Company of the 2,500,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $12.00 per
share, and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses, the pro forma net tangible book value of the
Company as of September 30, 1996 would have been $30,582,944 or $3.32 per share
of Common Stock. This represents an immediate increase in such adjusted net
tangible book value of $2.67 per share to existing stockholders and an immediate
dilution of $8.68 per share to new investors purchasing shares in the Offering.
If the initial public offering price is higher or lower, the dilution to the new
investors will be, respectively, greater or less. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share..................... $12.00
Pro forma net tangible book value per share as of
September 30, 1996........................................... $0.65
Increase per share attributable to new investors.................... 2.67
----
Adjusted pro forma net tangible book value per share after the
offering .................................................... 3.32
-----
Dilution per share to new investors................................. $ 8.68
======
</TABLE>
The following table summarizes on the pro forma basis described above,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by its
existing stockholder and by new investors (assuming an initial public offering
price of $12.00 per share):
<TABLE>
<CAPTION>
Shares Purchased Total Consideration (1)
---------------- ----------------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 6,700,000 72.8% $ 10,000,400 25.0% $ 1.49
New investors....................... 2,500,000 27.2 30,000,000 75.0% 12.00
--------- ---- ---------- ----
Total............................... 9,200,000 100.0% $40,000,400 100.0%
========= ====== =========== ======
</TABLE>
- ------------------
(1) Gives effect to the conversion of indebtedness to related parties totalling
$10,000,000 at September 30, 1996 into 1,900,000 shares of Common Stock.
The foregoing table excludes (i) 3,055,920 shares of Common Stock
issuable upon exercise of stock options outstanding as of December 31, 1996, at
a weighted average exercise price of $0.52 per share, of which options to
purchase 1,063,973 shares were then exercisable, and (ii) 800,000 shares of
Common Stock reserved for issuance under stock options to be granted upon the
effectiveness of the Offering at an exercise price equal to the initial public
offering price. See "Management--Stock Plans," "Beneficial Ownership of
Management" and "Certain Transactions."
19
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for the
period from inception (March 7, 1995) to December 31, 1995, and for the nine
months ended September 30, 1996, are derived from consolidated financial
statements of the Company audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report thereon included elsewhere in this
Prospectus. The selected consolidated financial data presented below should be
read in conjunction with, and are qualified by reference to, the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
The results of operations for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the full year or
for any future period. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Period from Inception
(March 7, 1995) Nine Months Ended
to December 31, 1995 September 30, 1996
-------------------- ------------------
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<S> <C> <C>
Net revenues............................................... $ 619,629 $ 11,341,426
Cost of revenues........................................... 574,611 9,338,342
------- ---------
Gross profit....................................... 45,018 2,003,084
Operating expenses:
Research and development.............................. 104,383 301,007
Selling and marketing ................................ 581,482 2,987,211
General and administrative............................ 1,620,587 1,695,888
--------- ---------
Total operating expenses................................... 2,306,452 4,984,106
Net loss................................................ $(2,261,434) $(2,981,022)
============ ============
Pro forma net loss per common and common equivalent share (1): $ (0.27) $(0.35)
====== ======
Pro forma weighted average number of common and common
equivalent shares outstanding: 8,421,838 8,421,838
========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1996
------------------------------------------------------
Pro Forma As
Actual Pro Forma(2) Adjusted(2)(3)
------ ------------ --------------
CONSOLIDATED BALANCE SHEETS DATA:
<S> <C> <C> <C>
Cash .................................................. $8,147,918 $8,147,918 $29,166,918
Working capital........................................ 13,616,663 13,616,663 34,868,663
Total assets........................................... 20,183,318 20,183,318 40,800,318
Amounts due to related parties (4)..................... 19,568,449 5,000,000 ---
Stockholder's (deficit) equity......................... (5,242,056) 9,326,393 35,176,393
</TABLE>
- -------------------
(1) Computed on the basis described in Note 3(b) of Notes to Consolidated
Financial Statements.
(2) Presented on a pro forma basis to give effect to the conversion of
indebtedness to related parties totaling $10,000,000 at September 30, 1996
into 1,900,000 shares of Common Stock and the conversion of $4,568,449 due
to related parties into 45,684 shares of Convertible Preferred Stock. See
"Certain Transactions."
(3) Adjusted to give effect to the receipt of the net proceeds from the sale
of the 2,500,000 shares of Common Stock offered by the Company hereby at
an assumed initial public offering price of $12.00 per share and includes
the repayment of $5,000,000 of amounts due to related parties. See "Use of
Proceeds," "Capitalization" and Certain Transactions."
(4) Represents amounts due to Palomar and Palomar Electronics Corporation
(PEC). See Note 2 of Notes to Consolidated Financial Statements.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operation of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and Notes thereto, and the other financial
information included elsewhere in this Prospectus.
OVERVIEW
The Company was incorporated in Delaware on March 7, 1995. Since the
commencement of operations in March 1995, the Company has focused on developing
its products and its marketing and distribution strategies and did not generate
material revenues until April 1996. As a result the Company incurred substantial
losses principally from expenses incurred from the development of its products,
the establishment of its manufacturing operations, sales administration
organization and obtaining key personnel to adequately support the Company's
expected growth. Total revenues from the sale of its PCs for the first nine
months of 1996 were $11,341,426. For the three and six month periods ended
September 30, 1996, the Company generated total revenues of $9,190,147 and
$11,223,958, respectively. During 1997, the Company expects its selling and
marketing, general and administrative expenses and its research and development
expenses will increase significantly. Selling and marketing expenses are
expected to increase significantly as a result of continued expansion of
distribution channels, strategic relationships, headcount, and marketing
programs. Increases in general and administrative expenses are planned as the
Company expands its executive management, finance and administration support,
information systems and other administrative functions required to support the
Company's operations and the costs associated with being a publicly-held
company. The Company's expected levels of research and development expenditures
are based on a plan for current product enhancements and new product
development.
The Company commenced shipment of its proprietary PCs in April 1996. For
the three months ended June 30, 1996 and September 30, 1996, the Company sold
2,317 and 7,920 units, respectively. All of the Company's working capital to
date has been from loans made to it by Palomar and Palomar's wholly-owned
subsidiary, Palomar Electronics Corporation (PEC), which is the direct parent of
the Company. The Company's prospects must be considered in light of the risks,
expenses, difficulties and delays frequently encountered in connection with the
formation and early phases of operations of a new business, combined with the
development and commercialization of new products based on innovative technology
and rapid technological change and the high level of competition in the PC
industry. To address these risks, the Company must, among other things, respond
to competitive developments, continue to attract, retain and motivate qualified
management and other employees, continue to upgrade its technologies and
commercialize products and services which incorporate such technologies, and
achieve market acceptance for its PCs. There can be no assurance that the
Company will be successful in addressing such risks. See "Risk Factors."
The Company has achieved only moderate revenues to date and has been
dependent upon one customer. The Company's ability to generate significant
revenues is subject to substantial uncertainty. The limited operating history of
the Company makes the prediction of future results of operations difficult or
impossible, and therefore, there can be no assurance that the Company will
sustain revenue growth or profitability. Due to all of the foregoing factors, it
is possible that in some future quarter, the Company's operating results may be
below the expectations of public market analysts and investors. In such event,
the price of the Company's Common Stock could be materially and adversely
affected.
RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated quarterly financial
data for each of the four quarters in 1995 and for the three quarters in 1996
and such information expressed as a percentage of the Company's total revenues.
This unaudited quarterly information has been prepared on the same basis as the
audited financial information presented elsewhere herein and, in management's
opinion, includes all adjustments
21
(consisting only of normal recurring adjustments) that the Company considers
necessary for a fair presentation of the information for the quarters presented.
In view of the Company's recent growth and other factors, the Company believes
that quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
<TABLE>
<CAPTION>
PERIOD FROM FISCAL QUARTER ENDED
INCEPTION --------------------------------------------------------------------------------
(MARCH 7, 1995) TO June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30,
MARCH 31, 1995 1995 1995 1995 1996 1996 1996
-------------- ---- ---- ---- ---- ---- ----
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................. $ - $ 212,120 $ 51,379 $ 356,130 $ 117,468 $2,033,811 $9,190,147
Cost of revenues............. - 194,030 33,857 346,724 116,388 1,798,229 7,423,725
--------------- --------- --------- --------- --------- --------- ---------
Gross profit................. - 18,090 17,522 9,406 1,080 235,582 1,766,422
--------- --------- ---------- ---------- -------- ----------
Operating expenses:
Research and development.. - - 24,263 80,120 67,318 102,728 130,961
Selling and marketing..... 6,746 123,486 169,845 281,405 327,284 1,678,727 981,200
General and administrative - 185,230 291,163 1,144,194 441,627 634,282 619,979
------------ ------- ------- --------- ------- ------- -------
Total operating expenses 6,746 308,716 485,271 1,505,719 836,229 2,415,737 1,732,140
----- ------- ------- --------- ------- --------- ---------
Net income (loss)............ $ (6,746) $ (290,626) $(467,749) $ (1,496,313) $ (835,149) $(2,180,155) $34,282
============== =========== ========== ============= =========== ============ =======
Backlog ..................... - - - - - $ 598,455 $2,616,259
AS A PERCENTAGE OF NET
REVENUES:
Net revenues................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............. 91.5 65.9 97.4 99.1 88.4 80.8
---- ---- ---- ---- ---- ----
Gross profit................. 8.5 34.1 2.6 0.9 11.6 19.2
Operating expenses:
Research and development.. 0.0 47.2 22.5 57.3 5.1 1.4
Selling and marketing..... 58.2 330.6 79.0 278.6 82.5 10.7
General and administrative 87.3 566.7 321.3 376.0 31.2 6.7
-------- -------- -------- ----- -------- -------
Total operating expenses.. 145.5% 944.5% 422.8% 711.9% 118.8% 18.8%
------ ------ ------ ------ ------ -----
Net income (loss)............ -- -- -- -- -- 0.4%
==== ==== ==== ==== ==== ====
</TABLE>
Prior to April 1996 the Company only had minimal revenues from sales of
a non-proprietary PC. In addition the Company's operations through April 1996
consisted principally of start-up activity associated with the design,
development, manufacturing and marketing of its upgradeable PC. Accordingly, the
Company generated significant operating losses through June 30, 1996. The
quarter ended September 30, 1996 was the Company's first entire quarter of
manufacturing and shipments of its products. The Company's gross profit as a
percentage of revenues for the three months ended September 30, 1996 was 19.2%.
The Company believes that its gross profit as a percentage of revenues will
continue to improve as the Company realizes labor and material costs savings and
efficiencies from full scale manufacturing operations.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by many factors. These factors
include, among others, the demand for the Company's products, the distribution
of the Company's products, the timing of the introduction of products by the
Company's competitors, the timing and rate at which the Company increases its
expenditures to support projected growth, competitive conditions in the industry
and general economic conditions. The Company believes that period-to-period
comparisons of its operating results are not meaningful and should not be relied
upon as any indication of future performance. Due to the foregoing factors,
among others, it is likely that the Company's future quarterly operating results
from time to time will not meet the expectations of
22
market analysts or investors, which may have an adverse effect on the price of
the Company's Common Stock.
PERIOD FROM INCEPTION (MARCH 7, 1995) TO DECEMBER 31, 1995 AND THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1996
Net Revenues. Net revenues increased to $11,341,426, for the nine
months ended September 30, 1996 from $619,629 for the period from inception to
December 31, 1995. The majority of the revenues generated in 1995 were from the
sale of non-proprietary PCs. The Company stopped the production of these PCs in
June of 1995 to concentrate on the development of its upgradeable PCs. The
increase in revenues during the period ended September 30, 1996 from the period
ended December 31, 1995 was principally due to the introduction of the Company's
upgradeable PC in April 1996. The Company anticipates that revenues will
continue to increase as the Company further expands its production capabilities,
marketing and distribution efforts.
Gross Profit. Gross profit was $2,003,084, or 17.7% of net revenues,
for the nine months ended September 30, 1996 as compared to $45,018, or 7.3% of
net revenues, for the period ended December 31, 1995. The Company began full
scale production of its patent-pending PCs during the second quarter of 1996.
The increase in gross profit was primarily attributable to this introduction and
initial volume shipments of the Company's upgradeable PC in April 1996. As the
Company continues to expand its manufacturing operations and achieve economies
of scale, its gross profit is expected to improve.
Research and Development. Research and development expenses consists
primarily of expenses incurred for the design and development of the Company's
upgradeable PCs. Research and development expenses increased to $301,007, or
188.4%, during the period ended September 30, 1996 from the period ended
December 31, 1995. The Company anticipates a substantial increase in its
research and development expenses to continue its development of its NEXAR XPA
technology and other technologies related to the development of its products.
Selling and Marketing. Selling and marketing expenses consist primarily
of salaries, commissions, consulting fees, trade show expenses and advertising
and marketing costs. Selling and marketing expenses increased 413.7% to
$2,987,211 for the period ended September 30, 1996 from $581,482 for the period
ended December 31, 1995. This increase in selling and marketing expenses was the
result of the addition of sales and marketing personnel, related to establishing
the Company's distribution channels and supporting the introduction of the
Company's upgradeable PC. The Company intends to increase the amount of
expenditures for selling and marketing as a result of its expected growth,
however as a percentage of sales this amount may decrease as revenues are
expected to increase at a greater rate than the expenses incurred for selling
and marketing.
General and Administrative. General and administrative expenses consist
primarily of expenses for finance, office operations, administration and general
management activities including legal, accounting and other professional fees.
General and administrative expenses increased 4.7% to $1,695,888 for the period
ended September 30, 1996 from $1,620,587 for the period ended December 31, 1995.
This increase in expenses during the period ended September 30, 1996 was
attributable to the additional expenditures for general and administrative
expenses as a result of the Company's anticipated growth and a $525,000 charge
to operations in December 1995 to settle a 1995 complaint, regarding a business
dispute, filed against the Company and its Chief Executive Officer. The Company
anticipates that general and administrative expenses will continue to increase
due to its forecasted growth.
23
INCOME TAXES
The Company files a tax return included in the consolidated group with
Palomar. The Company has generated federal net operating loss carryforwards for
federal income tax purposes of approximately $4,976,000. Utilization of the net
operating losses may be subject to an annual limitation due to the changes in
the Company's ownership resulting from the Offering. See Note 5 of the Notes to
Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has financed all of its operations
primarily through loans from related parties, which have provided aggregate net
proceeds to the Company of approximately $19,499,000. At September 30, 1996, the
Company had approximately $8,148,000 in cash.
Net cash used in operating activities was approximately $1,860,000
during the period from inception to December 31, 1995. The combination of
continuing the development of its product and initial manufacturing production,
the increase in its selling and marketing efforts to penetrate its channels of
distribution, as well as the payment of $525,000 to settle a 1995 complaint
regarding a business dispute brought against the Company and its Chief Executive
Officer, resulted in approximately $9,064,000 of cash used in operating
activities during the nine months ended September 30, 1996.
The Company's investing activities used net cash of approximately
$103,000 and $225,000 during the period from inception to December 31, 1995 and
the nine month period ended September 30, 1996, respectively. Expenditures for
property and equipment were approximately $103,000 for the period from inception
to December 31, 1995 and $134,000 for the nine months ended September 30, 1996.
The Company has no material commitments other than its facility and equipment
leases. The Company anticipates a substantial increase in its capital
expenditures for the remainder of 1996 and the first six months of 1997.
The Company has no credit facilities with unaffiliated lenders and
believes that its available cash resources combined with the net proceeds of the
Offering, and interest thereon, as well as anticipated funds from operations
will be sufficient to meet its presently anticipated working capital and capital
expenditure requirements for at least the next 12 months. Thereafter, the
Company may need to raise additional funds. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced products, to respond to competitive pressures or to acquire
complementary businesses or technologies. If additional funds are raised through
the issuance of equity securities, the percentage ownership of the stockholders
of the Company will be reduced, stockholders may experience additional dilution,
or such equity securities may have rights, preferences or privileges senior to
those of the holders of the Common Stock. There can be no assurance that
additional financing will be available when needed on terms favorable to the
Company or at all. Palomar has agreed to continue to fund the Company, if
needed, for at least the next year. If adequate funds are not available or are
not available on acceptable terms, the Company may be unable to develop or
enhance products or services, take advantage of future opportunities, or respond
to competitive pressures, which could have a material adverse effect on the
Company's business, financial condition or operating results. See "Risk Factors"
and "Dilution."
24
BUSINESS
Nexar Technologies, Inc. develops, manufactures and markets
high-performance, competitively-priced desktop personal computers (PCs) based on
patent-pending technologies. Unlike conventional PCs, NEXAR systems permit an
end-user to (i) purchase a custom-configured PC on demand, and (ii) easily
upgrade or switch important components of the PC to accommodate emerging and
future technologies resulting in a significant extension of the computer's
useful life. NEXAR sells a high-performance system platform which, except for
the key system defining components (microprocessor, memory and hard drive), is
typically shipped to resellers fully configured. This approach:
* Enables the end-user, whether corporate or individual, to buy
a system configured exactly to that customer's technical and
budgetary requirements and, later, to easily upgrade the PC's
key components with industry-standard products.
* Enables the Company's channel resellers to reduce their
exposure to inventory depreciation caused by rapid advances in
technology and frequent price reductions of the key system
components, which typically account for more than 50% of the
cost of a PC. Because NEXAR PCs allow the key components to be
installed by the reseller at the point of sale, the reseller
benefits from improved and more stable profit margins and
reduced reliance on an inventory of multiple pre-configured
systems.
* Enables the Company's resellers to compete with direct
marketers, such as Dell Computer Corporation and Gateway 2000,
Inc., because a NEXAR PC provides resellers with the ability
to promptly deliver a custom-configured, high-performance PC
at a competitive price.
* Enables the Company to maintain profit margins unaffected by
the forecasting risks borne by conventional PC manufacturers
who operate within a several-month-long cycle from (i)
component procurement to (ii) assembly to (iii) date-of-sale,
all conducted in an environment of rapid technological
advances and frequent price reductions. Since the key
components of a NEXAR PC are typically installed by a reseller
immediately prior to use or sale, the Company avoids the loss
of profit margin from making inaccurate predictions of the
most desired mix of key system components in the marketplace
several months in the future, from paying yesterday's higher
prices for components, or from discounting aging technology.
The Company's current PCs are based on an industry-standard, open
architecture design, co-engineered by HCL Hewlett Packard Ltd., which allows the
central processing unit (CPU), random access memory (RAM), and cache memory to
be replaced by end-users without technical assistance and without opening the
entire chassis. The Company's current model accepts Intel Corporation's
Pentium(R) and compatible CPUs, including the recently released Pentium
processor with MMX multimedia extension technology. NEXAR PCs also include, as a
standard feature, a removable hard drive, permitting its replacement and the
further advantages of increased data portability and security, and the use of
multiple operating systems in a single PC.
The Company's objective is to become the industry leader in designing
and marketing PCs with technology which enables resellers and end-users, in an
easy and cost-effective manner, to upgrade and transition the CPU and the other
key system defining components in accordance with the known and anticipated
roadmaps of various makers of fundamental and leading-edge PC technology.
Accordingly, NEXAR has developed and will soon market a new generation of PCs
featuring the Company's patent- pending Cross-Processor Architecture(TM) (NEXAR
XPA(TM)) in which any one of several state-of-the-art CPUs can be initially
included or later installed, including Intel Corporation's Pentium or Pentium
Pro(R) and
25
compatible CPUs. The NEXAR XPA technology will also accommodate microprocessors
based on other technologies, such as the Alpha CPU made by Digital Equipment
Corporation (DEC) or the PowerPC processor offered jointly by IBM, Motorola,
Inc. and Apple Computer, Inc.
NEXAR is led by its Chairman and Chief Executive Officer, Albert J.
Agbay, who has more than twenty years experience at various computer companies,
including senior management positions at PC makers such as NEC Technologies,
Panasonic and Leading Edge. See "Management." The Company does not market its
products directly to end-users, but instead distributes its products through a
growing network of international, national and regional distributors,
value-added and other resellers, original equipment manufacturers (OEMs), system
integrators, computer superstores, direct response resellers, and independent
dealers. The Company has entered into an agreement with Wang Laboratories, Inc.
(Wang), pursuant to which Wang provides end-users of NEXAR's PCs with hardware
and software support, including diagnostics and repair, covered by the Company's
three-year limited warranty and optional extended service contracts.
The Company was incorporated in March 1995 as a wholly-owned subsidiary
of Palomar Medical Technologies, Inc., a publicly-held corporation that
develops, manufactures and markets medical laser devices and electronics
products.
INDUSTRY BACKGROUND
The market for PCs is large and growing significantly. According to
forecasts by International Data Corporation (IDC), an independent industry
analyst, 81.6 million PCs with a value of $189.7 billion, including 66 million
desktop PCs (worth $141 billion), will be shipped worldwide in 1997, an increase
of 17.3% over estimated 1996 shipments. In the United States, IDC forecasts that
in 1997, 30.9 million PCs (worth $78.8 billion), including 24.8 million desktops
(worth $59.4 billion), will be shipped. IDC forecasts that worldwide, in the
year 2000, 117.2 million PCs (worth $262.8 billion), including 92.2 million
desktops (worth $192 billion), will be shipped. In the United States, IDC
forecasts that in the year 2000, 42.8 million PCs (worth $111.0 billion),
including 33.1 million desktops (worth $83.4 billion), will be shipped. These
estimates indicate that desktop PCs will continue to represent more than 75% of
worldwide PC sales through the year 2000.
Factors driving the PC industry's growth include continued
price/performance improvements of fundamental PC technologies fueled by intense
competition, the growth of the Internet, and the convergence of content,
technologies, and communications on the PC which broadens its base of
applications and users. Also contributing to growth are the aging installed base
of 386 and 486 CPU systems, the introduction of next generation CPUs, and the
development of applications that more fully utilize the capabilities of the more
advanced microprocessors and require ever increasing amounts of storage
capabilities. The Company believes that as businesses recognize the benefits of
distributed computing and thus increase their interest in distributed
enterprise-wide networks (e.g., "intranets"), and as small business and home
office markets grow worldwide, demand for PCs will further increase.
The PC market has been characterized by intense competition and
substantial technological advances occurring over short periods of time.
Hundreds of vendors compete in today's PC marketplace. Leading manufacturers
include Acer America Corporation, Apple Computer Corporation, Compaq Computer,
Dell Computer, Gateway 2000, Hewlett-Packard Company, IBM, and Packard Bell NEC,
Inc. See "--Competition." Rapid technology advances have resulted in high rates
of product innovation and enhancements, and short product life cycles, creating
difficult choices for both current owners and prospective purchasers of PC
systems. PC users occasionally find that they cannot effectively use the latest
software programs, or even the latest enhancements to their existing software
programs, because their PC has insufficient memory, their CPU is too slow, or
their hard drive is full and cannot store additional data. Consequently, a user
who does not wish to forego the latest technology advancements must either
attempt
26
to upgrade his or her existing PC (to the extent the system can be upgraded and
which typically requires technical assistance) or make a substantial investment
in a newer, more powerful PC.
In recent months, a migration by end-users, especially among corporate
users, to next generation PCs, such as Windows NT(R)/Pentium Pro and competing
systems, has begun to accelerate. The increase in the capabilities of such
systems is occurring concurrently with an increase in the number of variables,
such as compatibility with 32 bit software applications and multimedia
functionality, which PC buyers must consider in making purchasing decisions. The
result is a more intricate outlook for evaluation of PC technology advancements,
one illustration of which is the following recently published assessment of the
x86 microprocessor roadmap focusing on the anticipated availability of Intel's
MMX technology (which enhances performance of multimedia and communications
applications) and 16- versus 32- bit software performance among various vendor
lines:
16-bit performance 32-bit performance
Intel Pentium-200 Cyrix 6x86-P200+* Intel Pentium Pro*
Intel P55C* AMD K6**
Cyrix M2** Intel Klamath***
AMD K6** Intel Deschutes***
Intel Deschutes***
16-bit performance and MMX 32-bit performance and MMX
Intel P55C** Cyrix M2**
Cyrix M2** AMD K6**
AMD K6** Intel Klamath***
Intel Deschutes*** Intel Deschutes***
* Now
** Early 1997
*** Mid-1977
**** Late 1997
Source: BYTE Magazine, November 1996, Reproduced with permission.
(C) by the McGraw-Hill Companies, Inc. New York, NY. All rights reserved.
27
The above chart outlines the choices presented by the following array
of product releases anticipated for the next twelve months: In early 1997,
Intel, Advanced Micro Devices, Inc. (AMD) and Cyrix Corporation are expected to
introduce new microprocessors which incorporate architectural enhancements to
Pentium-class processors which provide significant performance improvements when
running multimedia applications. Intel is expected to introduce MMX into its
P55C model; AMD will support MMX on their K6 CPU and the Cyrix(R) M2 processor
is expected to be MMX compatible. In mid-1997, Intel is expected to introduce
its code-named Klamath processor, a next generation Pentium Pro-class CPU that
supports MMX technology and improves 16-bit software performance (the current
Pentium-Pro, which does not include MMX technology, is designed primarily for
32-bit applications). In late 1997, Intel is expected to release Deschutes, the
code- name for a Pentium Pro CPU processor which is expected to support clock
speeds of 300 to 333 MHz.
Competing with x86 microprocessors in various computer markets are the
RISC (Reduced Instruction Set Computing) microprocessor lines, such as DEC's
Alpha, the PowerPC offered by IBM, Motorola and Apple, and CPUs offered by Sun
Microsystems, Inc., Silicon Graphics, Inc. and others. RISC, which was developed
for use in high performance systems such as UNIX(R) network servers and
workstations, is a modern microprocessor architecture requiring significantly
fewer transistors than the older x86 architecture. RISC processors are highly
scaleable and well-suited for performing high speed calculations. The more
established x86 vendors have dominated the RISC-based lines due in part to
software compatibility issues, which are starting to diminish as more
applications are written to work on RISC processors and enhancements (such as
DEC's FX!32 translation software) become available to permit software which
previously could only run on x86 CPUs to work with a RISC microprocessor. DEC
has recently sharply reduced the price of its Alpha CPU in order to compete in
the PC market, claiming that the Alpha is twice as fast as Intel's Pentium Pro
for Window's NT applications or other complex design analysis for applications
such as image rendering, video editing, video conferencing, and mechanical
design, and applications requiring 3-D graphics, such as modeling, animation or
simulations.
This rapid escalation of technology has caused instability in the PC
industry. Because several months may lapse between the manufacture and the
actual sale date of a conventional, pre-configured system, PC manufacturers face
substantial business risk in forecasting which components to include and the
pricing of the system. As technology advancements and price reductions occur,
vendors which have shipped pre-configured systems to their resellers are forced
to offer price protection by reducing the price of their products and issuing
credits to the reseller. These and other concessions further erode the profit
margin of the manufacturer. Meanwhile, resellers unavoidably accumulate
overpriced and aging inventory, and end-users are offered a discount on
yesterday's technology.
One of the fastest growing segments of the PC market is the telephone
and mail order direct response market. Companies in this market, primarily
Gateway 2000 and Dell Computer, have been able to capitalize on the
destabilizing effect of rapid technological advances and frequent price
reductions. According to IDC, 20 percent of PCs were sold directly to end-users
in 1995, up from 18.7 percent of a smaller market in 1994. Because direct
marketers sell directly to end-users on a build-to-order basis, they can sell
the latest technology to end-users more quickly than traditional PC suppliers.
In addition, because they have large and rapidly changing inventories of
components, direct marketers can also offer more configurations of their PCs at
the latest industry price points than resellers who are subject to longer
manufacturing to date-of-sale cycles. Some PC manufacturers have addressed the
same market challenge by "co-manufacturing" their PCs with their reseller
partners.
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THE NEXAR PC SOLUTION
NEXAR believes that its approach of offering the reseller the ability
to provide systems designed for "just-in-time" delivery of key components and
easy upgradeability not only relieves the dissatisfaction of end-users regarding
rapid obsolescence of their systems, but also provides the channel reseller with
the most comprehensive solution available for addressing the fundamental causes
of the low profitability currently characterizing the PC distribution channel.
Because NEXAR's current and anticipated models simplify upgrades, and because
NEXAR XPA systems will permit cross-processor transitions, the Company believes
its PCs could have useful life cycles up to twice as long as those of most
conventionally designed PCs.
The NEXAR PC. The current NEXAR PC features an innovative architecture
including patent-pending technology which the Company has a license to market on
an exclusive worldwide basis. See "-- Intellectual Property." The key elements
of this architecture are a custom designed main integrated circuit board
("motherboard"), co-engineered by HCL Hewlett Packard Ltd., and a mid-tower
chassis design allowing ease of access through removable side panels, permitting
non-technically trained users to install and replace the key components with
industry-standard, off-the-shelf products. The CPU, RAM and cache of a
conventional PC typically reside on top of a motherboard (usually unaccessible
without opening the entire chassis) which also includes expansion board slots
for peripheral and controller cards for communicating with mass storage and
input/output components. The current NEXAR PC technology places sockets for the
CPU, RAM and cache on the undercarriage of the motherboard, which is accessible
through a removable side panel on the chassis. This design also provides access
through another removable side panel to the expansion slots for cards providing
features such as networking and multimedia functionality. The NEXAR PC also
features a lockable, removable hard disk drive mounted on rails in a design
similar to that used in many laptop computers. This provides the added benefits
of permitting increased portability of data and increased security, attributes
which appeal to many government and corporate buyers, and the use of multiple
operating systems on one PC.
The NEXAR XPA PC. When introduced, the Company's patent-pending NEXAR
XPA systems will offer the industry all of the same features and benefits as the
Company's current PCs and will also permit multiple and cross-processor upgrades
and transitions on a single PC. NEXAR XPA PCs which are scheduled for release in
mid-1997, will allow resellers or end-users to initially select or later vary
the type of microprocessor used in the system from among those based on
competing technologies, such as Pentium, Pentium Pro, Klamath and other x86
CPUs, or the RISC-based processors such as the Alpha and Power PC. The Company
believes this capability will become increasingly important as technology
advances and the demands of personal computing intensify. End-users without the
ability to cost- effectively upgrade or switch microprocessors and operating
platforms will face the daunting task of precisely forecasting their own
increasingly intensive information and other computing system requirements, not
only with regard to speed, memory, and data access, but also to accommodate the
demands of graphics-rich applications, Internet and intranet capability and
diverse multimedia functionality. Customers purchasing a NEXAR XPA system will
be able to not only increase their PC's speed and capacity as such advances
become available, but will also be able to custom-fit their operating platform
to ever-increasing application needs and capabilities by converting their system
from among various x86 or RISC-based processor lines, and from among Windows NT,
OS/2(R), Mac(R)OS, UNIX and other operating systems. The Company believes that
whatever the demands of the end-user, a NEXAR XPA PC will be an optimal solution
to purchasers seeking investment protection of their system infrastructure.
29
NEXAR systems are designed to be sold by the Company without the key
system defining components. The reseller is then able to offer the NEXAR PC at a
competitive price by avoiding the typical PC manufacturer mark-up on those key
components typically representing more than 50% of the cost of the PC.
Conventional PC configurations are customarily determined at the manufacturing
site prior to shipment to the reseller thus forcing the end-user to accept the
manufacturers' pre-determined configuration and a price that includes the
manufacturers' mark-up on more than 50% of the cost of the PC. Unlike other
currently available "modular" PCs, NEXAR PCs are designed to be used with
industry-standard components, which can be obtained from numerous sources at the
optimal time and at a competitive price to the reseller or the end-user.
STRATEGY
The Company's objective is to claim a significant share of the desktop
PC market by offering open-architecture PCs incorporating technology which
enables end-users in an easy and cost-effective manner to upgrade and transition
to the new and varied CPU platforms of different manufacturers in accordance
with expected roadmaps of fundamental and leading-edge PC technology. The
principal elements of NEXAR's strategy to achieve its goal include the
following:
ESTABLISH AND MAINTAIN TECHNOLOGICAL LEADERSHIP IN UPGRADEABLE AND
CROSS-PROCESSOR PCS
The Company intends to devote most of its research and development
efforts to the implementation of the NEXAR XPA technology to a broad range of
microprocessor platforms and to monitoring and participating in developments in
the computer markets in which it competes generally. The Company believes that
these efforts will ensure that its future products offer the distribution
channel and end-users the same benefits of investment protection and technical
flexibility as the Company's current and next generation PCs. The Company
intends to periodically advance the design of its PCs, including the NEXAR XPA
technology, to address announced and anticipated technological advances by
leading makers of the system defining components. See "--Product Development."
FOCUS ON ADVANTAGES OF NEXAR PC DESIGN
The Company believes that its level of success to date (more than $11
million in net sales in the first six months shipping its current PCs) in the
intensely competitive PC marketplace demonstrates that its central focus on
offering state-of-the art PCs which forestall system obsolescence is well
received in the PC marketplace. The Company further believes that the increased
flexibility of its next generation of PCs featuring NEXAR XPA will provide NEXAR
a significant competitive advantage as more variables, such as multimedia
performance and 32-bit software applications, become factors in the purchasing
decisions within the PC markets in which the Company participates. The design of
the Company's existing PCs currently allow, and the upcoming NEXAR XPA systems
will permit, NEXAR resellers to offer a significantly broader range of
configurations than is possible with conventionally designed PCs. The benefits
of NEXAR's PCs to end-users include the following:
* Protects the consumer's PC investment by allowing end-users to
purchase a customized PC and to later upgrade components to
keep up with technology advances without incurring the expense
of a new system.
* Saves MIS departments of large and small enterprises time and
expense upgrading components or replacing outdated systems.
30
* End-users are not locked into the upgrade path of a single
manufacturer, but, instead, can utilize numerous
widely-available, industry-standard components and platforms.
LEVERAGE INDUSTRY EXPERIENCE OF MANAGEMENT TEAM
The Company believes that one of its key competitive advantages is its
sales, marketing and management teams. Several members of the Company's senior
management team, including its Chairman and Chief Executive Officer, Albert J.
Agbay, have worked together for a number of years at various PC companies. Mr.
Agbay has more than twenty years experience working for computer companies,
including PC makers such as NEC, Panasonic and Leading Edge.
FOCUS ON CHANNEL MARKETING
The Company markets its products through multiple channels of
distribution, using a controlled distribution model in which a limited number of
resellers and distributors are given exclusive or shared responsibility for
certain territories or market segments in exchange for best-efforts sales volume
or marketing commitments. The Company is initially targeting commercial entities
rather than the home consumer market. Accordingly, the Company primarily
distributes its PCs not through retail outlets, but through the following
channels:
Distributors and Resellers. The Company plans to expand its network of
distributors and resellers by emphasizing the following advantages attained by
carrying NEXAR PCs:
* Reduced inventory depreciation risk and improved profit
margins enhanced by using one system platform and sourcing
components on a "just-in-time" basis.
* The ability to be "first to market" with the latest technology
on a consistent basis by offering customers "next generation"
components without concern for existing pre- configured
inventory levels.
* Lower inventory costs due to the ability to stock one line of
semi-configured NEXAR systems in place of several lines of
pre-configured PCs.
* The ability to custom-configure a system on a build-to-order
basis in order to compete effectively against direct marketers
such as Gateway 2000 and Dell Computer.
In order to enlist resellers to carry NEXAR PCs, the Company has
established a Reseller Partnership Program, under which resellers receive volume
price discounts negotiated by NEXAR on components, making it possible for
resellers to configure and sell the NEXAR PC at competitive prices.
Government Resellers. The Company believes that, in addition to the
other advantages of NEXAR PCs and the increased security and other benefits of
the removable hard disk drive described herein, the NEXAR PC is particularly
appealing to many government buyers because the time required for ordering
entirely new systems is often prohibitive under government regulations, while
component parts can be more timely requisitioned, thereby allowing a government
office to more easily remain technologically current. The Company has entered
into an agreement with Government Technology Services, Inc. (GTSI), a leading
supplier of desktop systems to the U.S. government, pursuant to which GTSI
serves as NEXAR's exclusive federal reseller with respect to GSA scheduled
purchases provided that GTSI purchase at least $35 million
31
of the Company's products in 1997. GTSI is, however, under no obligation to
purchase any products of the Company. In the nine months ended September 30,
1996, GTSI accounted for a majority of the Company's revenues. The Company
expects that GTSI will continue to be an important customer, but that sales to
GTSI as a percentage of total revenue will decline substantially as the Company
further expands its distribution network and increases its overall sales. See
"--Customers." The Company also pursues relationships with resellers selling to
government agencies not purchasing from the GSA Schedule.
VARs, Systems Integrators and OEMs. The Company believes its PCs enable
value-added resellers (VARs) and systems integrators to offer their clients a
more flexible and cost effective PC and network solution. The Gartner Group,
Inc. has estimated that the average total cost of ownership of a single
Windows(R) 3.x-based PC in a business setting over a five year period is in
excess of $44,000. By offering NEXAR PCs, VARs and system integrators are able
to minimize depreciation of their inventory and deliver a custom configured
system solution virtually on demand, and enable their customers to reduce their
MIS costs. The Company seeks to capture market share in some territories by
entering into agreements with OEMs who will deliver PCs to their customers with
both the OEM's brand name and a product label identifying that the base unit
contains NEXAR technology.
PENETRATE INTERNATIONAL MARKETS
Industry forecasts indicate that the overall international PC market
will grow faster than the domestic market during the next several years.
Initially, the Company's international strategy is to keep its overseas sales
and marketing costs low by partnering with established channel participants,
especially in Europe where end-users are just beginning to migrate to the
Pentium processor. In South America, through an OEM agreement with Bull
Worldwide Information Systems, NEXAR is providing its PCs to Bull's South
American division to enable it to configure systems with components obtained
within the borders of various countries, thereby producing savings on import
taxes and related charges. To enter the Japanese market, NEXAR has entered into
a sales representation agreement with Marubeni Corporation, a leading Asian
distributor of computers and other electronic products.
SALES AND MARKETING
The Company's marketing strategy is channel-based, focused primarily on
distributors, value added and other resellers, system integrators, rather than
to end-users. During its initial marketing period, NEXAR has concentrated on
building awareness of NEXAR and its innovative PC architecture with its channel
resellers. To accomplish this, NEXAR advertises regularly in industry
publications such as Computer Reseller News and VAR Business. To generate
end-user "pull-through" demand, NEXAR also advertises in publications such as PC
Week, PC World and PC Magazine. The current NEXAR PC has been reviewed in
publications such as Windows Sources, Windows Magazine, PC World, Computer
Shopper, Computer Reseller News, Computer Life and Government Computer News.
NEXAR provides broad co-op advertising and joint marketing support to its
channel-reseller customers. In particular, NEXAR has co-marketed extensively
with GTSI, its largest customer, to the federal government market. See
"--Strategy--Government Resellers." The Company conducts its marketing primarily
through meetings with and sales presentations to national and regional
resellers. In addition, the Company displays its products at international trade
shows such as COMDEX and PC Expo.
The Company executes its marketing strategy primarily through the
efforts of a direct sales force and through independent manufacturer sales
representatives. As of November 30, 1996, NEXAR's sales force consisted of 16
people, nine located at its Westborough, Massachusetts headquarters and the
32
remainder in regional locations. The Company intends to increase the size of its
sales force as its revenue grows. As of November 30, 1996, the Company was also
a party to agreements with four independent manufacturer sales representatives.
These sales representatives are primarily responsible for securing sales of
NEXAR products to regional resellers and are paid commissions based on such
sales.
CUSTOMERS
The Company manufactures and sells its PCs to resellers of varying size
and market share, including national and regional distributors, value-added and
other resellers, computer and office superstores, system integrators, mass
merchandisers, direct response resellers, and independent dealers.
The following is a representative listing of NEXAR resellers:
National and Regional Distributors Computer Superstores
- ---------------------------------- --------------------
Ingram Micro, Inc. Fry's Electronics, Inc.
Laguna Corporation Elek-tek, Inc.
Gates/Arrow Distributing, Inc. Nationwide Computers & Electronics, Inc.
MicroMatix Distributing Co., Inc. The Computer Factory
MicroAge Computer Centers, Inc. Communications Expo
Indecon Distributors Inc. Computer Attic
Avnet, Inc.
OEMs and VARs Direct Response Retailer Government Resellers
- ------------- ------------------------ --------------------
Bull Worldwide MicroWarehouse, Inc. Government Technology
Information Services, Inc.
Systems Comstor/GE Capital
CompUSA Inc. Pulsar Data
MJ Distribution
Net Superstore
Supreme Computer Co.
In the nine months ended September 30, 1996, GTSI accounted for a
majority of the Company's revenues. The Company expects that GTSI will continue
to be an important customer, but that sales to GTSI as a percentage of total
revenue will decline substantially as the Company further expands its
distribution network and increases its overall sales. The Company's business
plan for 1997 anticipates that sales to GTSI will represent a significant
portion (but less than a majority)of the Company's sales during the fiscal year.
See "- Strategy - Channel Marketing - Focus on Government Resellers." The
Company has entered into an agreement with GTSI pursuant to which GTSI must
purchase at least $35 million worth of products in order to retain its status as
the Company's exclusive reseller with respect to GSA scheduled purchases, but
GTSI is under no obligation to purchase any products from the Company. The loss
of GTSI as a significant customer, or if GTSI purchases significantly less
products than the Company anticipates, would have a material adverse effect on
the Company.
33
PRODUCTS
The NEXAR PC is a high-performance system platform configured with the
following components: system chassis with removable side panels, custom designed
motherboard, power supply, video controller, input/output controller, floppy
disk drive, caddy for removable hard disk, keyboard, mouse, and hardware
manuals. The Company occasionally includes additional components, including the
key system defining components (CPU, memory and hard drive) and peripherals such
as monitors and modems at the customer's request. NEXAR PCs sold by resellers
fully configured have list prices ranging from $1,200 to $2,500, depending upon
the components included.
The following graphic illustrates the broad range of configurations
made possible by a NEXAR PC:
GRAPHIC DEPICTING NEXAR PC INDICATING ALTERNATIVES AVAILABLE WITH RESPECT TO
REPLACEABLE COMPONENTS. THE GRAPHIC CONTAINS THE FOLLOWING TEXT POINTING TO THE
RELEVANT PORTIONS OF THE PC:
* Removable hard drive caddy slides in and out, and locks in place
* DIMM and SIMM memory (RAM) sockets
* Secondary cache socket
* Easy access to CPU socket for upgrades
* Right side, removable panel to access processor, memory, cache and
voltage regulator module
* Left side, removable panel to access modem, video, audio and network
interface cards
* Voltage regulator module socket to accommodate higher performing CPUs
operating at varying voltages
CPU Alternatives: A single Socket 7 with zero insertion force (ZIF)
lever allows for easy removal and insertion of the microprocessor. The
motherboard is designed to accept current and future Pentium and compatible
processors by adjusting the bus speed and synchronizing the voltage output of
the motherboard. NEXAR's custom designed motherboard not only accommodates these
future processor technologies but allows the end user to install the processor
and make the adjustments to bus speed and voltage without technical assistance.
34
Hard Drive Alternatives: The removable caddy supports industry standard
EIDE or SCSI hard drives. The Company offers a SCSI controller as an option.
Memory Alternatives: For random access memory, the NEXAR PC motherboard
includes 2 SIMM and 2 DIMM sockets supporting up to 128MB of either Fast Page
Mode, Extended Data Output or Synchronous Dynamic Random Access Memory. For
secondary cache memory, a single socket supports either 256K or 512K "cache on a
stick" modules.
NEXAR XPA PCs. NEXAR currently plans to begin shipping its
patent-pending NEXAR Cross-Processor Architecture systems in the second quarter
of 1997. The NEXAR XPA systems will offer all of the same features and benefits
as the Company's current PCs and will also permit cross-processor upgrades on a
single PC. A NEXAR XPA PC will allow resellers or end-users to initially select
or later vary the type of microprocessor used in the system from one of several
state-of-the-art CPU families, and, as NEXAR introduces replaceable circuit
boards compatible with the initial system purchased, RISC-based microprocessors.
Initially, NEXAR XPA systems will enable the use of either Pentium CPUs or the
Pentium Pro CPUs which currently have different socket configurations and are
thus not currently replaceable in conventional PCs. The multi-platform support
will be designed to accept either Microsoft Windows 95, Windows NT or RISC-based
operating systems. In addition, NEXAR XPA systems will support emerging
expansion bus technologies, such as universal serial bus and accelerated
graphics port (AGP).
The NEXAR Server. NEXAR currently plans to offer in the third quarter
of 1997 a state-of-the-art conventionally-designed, high performance file server
offering the option of one to four Pentium Pro CPUs with fault tolerance and
redundant design of critical components to support mission-critical database,
Internet-server and transaction processing applications. This product is being
designed and offered because NEXAR's reseller-customers requested a server of
this design to complete NEXAR's product offerings to the corporate end-users.
In addition to supporting symmetric multi-processing for up to four
Pentium Pro processors, as currently planned, the NEXAR server will allow
hot-swapping of the hard-drives and the multiple power supplies. The super-tower
design accommodates a total of 17 hard disk drives. The system will have a RAID
controller to provide for redundant disk drive data storage and error checking
and correcting memory. The system will be shipped with 64 megabytes of RAM
expandable to two gigabytes with four way memory interleaving. Unlike most
servers, NEXAR's server places the Pentium Pro processors on the main system
board, not a proprietary system board. Nine expansion slots are planned: six
utilizing the 32-bit PCI bus, two 32-bit EISA buses and one PCI/EISA shared
slot. The Company expects that its server will include a software suite that
manages server hardware and gathers performance data. This software will
optimize network performance and ensures maximum server availability by
monitoring network conditions, and automatically alerting the network manager of
errors, failures or overloads.
CUSTOMER SERVICE AND SUPPORT
NEXAR PCs are sold with a three-year limited warranty on hardware with
one-year on-site service. To provide its customers with technical support, NEXAR
has entered into an agreement with Wang, pursuant to which Wang provides NEXAR's
customers with the one year on-site hardware support, including diagnostics and
repair. Wang also provides telephone support for software products bundled with
NEXAR's systems for a period of ninety days after purchase. Wang support is
provided directly to NEXAR's customers. In addition, service contract extensions
are available. Customers can
35
also obtain hardware support via the Internet or a toll free telephone number.
While the Company selected Wang based on its belief that Wang has the capability
to perform these warranty obligations on a timely and efficient basis, the
failure of Wang to meet the demands of the end-users of the Company's products
could materially and adversely affect the reputation of the Company and its
products, which in turn could result in lower sales and profits.
PRODUCT DEVELOPMENT
The market for NEXAR's products is characterized by rapid technological
change involving the application of a number of advanced technologies, including
those relating to computer hardware and software, mass storage devices, and
other peripheral components. The Company's ability to remain competitive depends
upon its ability to anticipate and effectively react to technological change.
The Company currently has only a limited product development staff. The Company
has entered into a Development Agreement with GDA Technologies, Inc., a provider
of computer engineering services (GDA), to develop its new patent-pending
Cross-Processor Architecture and to implement this technology on several main
integrated circuit boards to be introduced for use in NEXAR PCs in mid- 1997.
Although the Company believes that it could find and engage equivalent
development and engineering services elsewhere within a reasonable period of
time, or hire sufficient capable engineers to perform such development work
in-house, the inability of GDA to adequately perform such services on a timely
basis could have a short-term material adverse effect on the Company. The
Company estimates that it will spend approximately $200,000 in the first six
months of 1997 for various product development activities, predominately
engineering services performed by GDA.
From its inception, NEXAR has devoted continuing efforts to research
and development activities both to develop the current line of NEXAR PCs and to
introduce new models that further leverage the Company's proprietary technology
in providing simplified upgradeability of major components and the ability to
accommodate emerging and future technologies. Current development efforts are
principally directed to implementation of its new NEXAR XPA architecture by the
development of multiple motherboards. The Company's future success will be
highly dependent upon its ability to develop, produce and market products that
incorporate new technology, are priced competitively and achieve significant
market acceptance. There can be no assurance that the Company's products will be
technically advanced or commercially successful due to the rapid improvements in
computer technology and resulting product obsolescence. There is also no
assurance that the Company will be able to deliver commercial quantities of new
products in a timely manner. The success of new product introductions is
dependent on a number of factors, including market acceptance, the Company's
ability to anticipate and manage risks associated with product transitions, the
effective management of inventory levels in line with anticipated product demand
and the timely manufacturing of products in appropriate quantities to meet
anticipated demand. The failure of the Company to develop, produce and market
commercially viable products could result in the Company's business, operating
results and financial condition being materially and adversely affected.
The Company's product development efforts will continue to require
substantial investments by the Company for third-party research, refinement and
testing, and there can be no assurance that the Company will have the resources
sufficient to make such investments. Participants in the PC industry generally
rely on the creation and implementation of technology standards to win the
broadest market acceptance for their products. The Company must successfully
manage and participate in the development of standards while continuing to
differentiate its products in a manner valued by customers. While industry
participants generally accept, and may encourage, the use of their intellectual
36
property by third parties under license, nonetheless, when intellectual property
owned by competitors or suppliers becomes accepted as an industry standard, the
Company must obtain a license, purchase components utilizing such technology
from the owners of such technology or their licensees, or otherwise acquire
rights to use such technology. The failure of the Company to license, purchase
or otherwise acquire rights to such technologies could result in the Company's
business, operating results and financial condition being materially and
adversely affected.
MANUFACTURING
The Company operates a 100,000 square foot manufacturing facility in
Hayward, California. The Company's manufacturing operations consist primarily of
assembly, test and quality control of its PC systems. A single shift capacity of
the facility is capable of producing 15,000 units per month, although NEXAR's
actual manufacturing capacity depends in part on the ability of NEXAR's
suppliers to provide it with assembled circuit boards.
The Company uses industry standard components for its products and
contracts with specific vendors to manufacture certain components included in
its products, primarily circuit boards. Most of these components are generally
available from multiple sources; however, NEXAR relies on two contract
manufacturers to manufacture motherboards used in its PCs and plans to rely on a
sole outside contractor to manufacture the motherboard used in its server
product. In November 1996, the Company was unable to obtain sufficient
quantities of certain key components to meet all of its outstanding purchase
orders. It has since taken certain steps, including increasing inventory levels,
developing additional suppliers and improving management procedures, to reduce
the likelihood of such shortages in the future. The Company conducts testing and
quality control evaluations and integrates the circuit boards into the finished
product. The Company intends to seek ISO 9002 certification during 1997.
COMPETITION
The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. The Company currently competes in the desktop PC market principally with
Acer, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000,
Hewlett-Packard, IBM and Packard Bell NEC, Inc. In addition, the Company expects
to compete in the network server market in the first quarter of 1997 with
established companies such as ALR, Compaq, Dell, Hewlett-Packard and IBM. All of
these companies have stronger brand recognition, significantly greater
financial, marketing, manufacturing, technological and distribution resources,
broader product lines and larger installed customer bases than does the Company.
Principal competitive factors include product features, product performance,
quality and reliability, the ability to deliver product to customers in a timely
fashion, customer service and support, marketing and distribution capabilities
and price. Also, in order to compete successfully, the Company must attract and
retain a sufficient number of management, sales, and technical personnel with
high levels of relevant skills and meaningful experience. Although the Company
has assembled an experienced senior management team, there can be no assurance
that the Company will be able to attract and retain sufficient numbers of
additional personnel, as the need for such individuals increase with the
Company's anticipated growth, or maintain or improve its current position with
respect to any of these or other competitive factors. This intense competition
could result in loss of customers or pricing pressures, which would negatively
affect the Company's results of operations.
37
The Company's ability to compete favorably is dependent, in significant
part, upon its ability to control costs, react timely and appropriately to
short- and long-term trends and competitively price its products while
preventing erosion of its margins, and there is no assurance that the Company
will be able to do so. Many of the Company's competitors can devote greater
managerial and financial resources than the Company can to develop, promote and
distribute products and provide related consulting and training services. Some
of the Company's competitors have established, or may establish, cooperative
arrangements or strategic alliances among themselves or with third parties, thus
enhancing their ability to compete with the Company. There can be no assurance
that the Company will be able to compete successfully against current or future
competitors or that the competitive pressures faced by the Company will not
materially and adversely affect its business, operating results and financial
condition.
INTELLECTUAL PROPERTY
The Company relies primarily on copyright, trade secret and trademark
law to protect its technology and trade secrets. While the Company currently has
0no patents, it is prosecuting an application for a United States patent on
portions of its PCs relating to its NEXAR XPA architecture. No such patent has
been issued, however. Similarly, the licensor of the technology included in the
Company's current PCs represents that it has applied for a patent on such
licensor's technology. The Company has not been notified that any such patent
has been issued. There can be no assurance that a patent will be granted
pursuant to either such application, or that if granted, such patent or patents
would survive a legal challenge to its or their validity, or provide adequate
protection. In addition, there can be no assurance that the Company will be able
to afford the expense of any litigation which may be necessary to enforce its
rights under any such patent. The Company generally enters into confidentiality
agreements with its employees, consultants and vendors. There can be no
assurance such measures will effectively protect the Company's trade secrets or
other intellectual property.
The Company's current PCs are shipped with motherboards based on
technology licensed from Technovation Computer Labs, Inc., a Nevada Corporation
(Technovation), which, to the best of the Company's knowledge is owned by Babar
Hamirani, a former executive officer of the Company whose employment was
terminated by the Company on November 29, 1996. Although no formal claim has
been made, an attorney representing Mr. Hamirani has informed the Company that
Mr. Hamirani may file a lawsuit against the Company regarding Mr. Hamirani's
employment termination and the license agreement with Technovation. Under the
terms of its license agreement with Technovation, which the Company believes it
is in compliance with in every material respect, the Company has the exclusive
right to use the licensed technology through August 1998 in exchange for a per
unit sold royalty amount, and a non-exclusive right to use such technology for
up to seven additional years at the same royalty rate. The Company intends to
cease manufacturing PCs with motherboards originally designed under the
technology licensed from Technovation by mid-1997 after it begins shipping PCs
with its new patent-pending NEXAR XPA technology, but the Company does intend,
in any event, to continue to pay royalties to Technovation to the extent
required under the license agreement. In addition, patent counsel for Mr.
Hamirani has informed the Company that such counsel is in the process of
prosecuting a continuation to Technovation's patent application covering
additions and improvements to the original invention which is the subject of
such application. Such counsel has informed the Company of the nature of such
additions and improvements and it appears to the Company that they may have
aspects in common with the Company's new NEXAR XPA technology. While the Company
has not had an opportunity to review this continuation, it appears that it may
conflict with the Company's patent application. Through September 30, 1996,
potential royalties which had accrued
38
under the license agreement were less than the Company's tooling and development
costs, which the Company is entitled to offset against royalties under the
license agreement. See "Litigation" and "Certain Transactions."
The Company's success is dependent, in part, upon its licensed and
owned and other intellectual property rights. While the Company has applied for
a patent on its NEXAR XPA technology, and Technovation has applied for a patent
on its technology, no patents have been issued and the Company currently relies
on copyrights, unpatented trade secrets and trademarks to protect its
proprietary technology. No assurance can be given that the Company's competitors
will not independently develop or otherwise acquire substantially equivalent
techniques or otherwise gain access to the Company's proprietary technology or
that the Company can ultimately protect its rights to such proprietary
technology. The Company also relies on confidentiality agreements with its
collaborators, employees, advisors, vendors and consultants to protect its
proprietary technology. There can be no assurance that these agreements will not
be breached, that the Company would have adequate remedies for any breach or
that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. Failure to obtain or maintain patent and
trade secret protection, for any reason, could have a material adverse effect on
the Company's business, financial condition and results of operations.
Although the Company believes that its products do not infringe patents
or other proprietary rights of third parties, there can be no assurance that the
Company is aware of patents or other proprietary rights that may be infringed by
the Company's products, that any infringement does not exist or that
infringement may not be alleged by third parties in the future. If infringement
is alleged, there can be no assurance that the necessary licenses would be
available on acceptable terms, if at all, or that the Company would prevail in
any related litigation. Patent litigation can be extremely protracted and
expensive even if the Company ultimately prevails, and involvement in such
litigation could have a material adverse effect on the business, results of
operations and financial condition of the Company.
EMPLOYEES
As of December 31, 1996, NEXAR had 71 employees, including executive
officers, sales, marketing, technical support, finance, manufacturing,
engineering, and administrative personnel. Forty of these employees are employed
at the Westborough Massachusetts facility, and 31 are employed at the Hayward,
California facility. In addition, the Company currently utilizes contract labor
to meet its manufacturing needs on an ongoing basis. None of the Company's
employees is represented by a collective bargaining agreement, nor has the
Company experienced work stoppages. The Company believes that its relations with
its employees are satisfactory.
FACILITIES
The Company's headquarters and executive offices are located in a
leased facility in Westborough, Massachusetts. The Westborough facility also
serves as the base for NEXAR's sales, marketing, technical support, and general
and administrative functions. The facility, totaling approximately 7,000 square
feet, is leased through August 1998. The annual rent under the terms of the
lease agreement is approximately $84,000 per year. The Company believes that
suitable additional or alternative space will be available, when needed, on
commercially reasonable terms.
The Company's manufacturing, engineering, and warehousing operations
are located in a leased facility in Hayward, California, which is leased for a
five year period expiring in August 2001, with a
39
five year option to extend. The annual base rent under the lease agreement
begins at approximately $288,000 in the first year and increases annually to
approximately $528,000 in 2001. The Company is also responsible for the
operating expenses and real estate taxes relating to the leased premises. See
"Manufacturing."
LITIGATION
As of the date of this Prospectus, the Company is not a party to any
material legal proceedings, except as arise in the ordinary course of its
business. A former executive officer of the Company whose employment was
terminated by the Company in November 1996 has threatened to initiate litigation
or arbitration proceedings regarding his termination and a technology license
agreement between a company he controls and the Company. See "--Intellectual
Property" above and "Risk Factors -- Uncertainty Regarding Intellectual Property
Rights; Potential Litigation With Former Executive."
40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Albert J. Agbay 48 Chairman of the Board, Chief Executive Officer and
President
Gerald Y. Hattori 45 Vice President of Finance, Chief Financial Officer and
Treasurer
Michael J. Paciello 45 Executive Vice President
Liaqat Y. Khan 45 Executive Vice President of Manufacturing
Victor J. Melfa, Jr. 38 Senior Vice President of Sales
E. Craig Conrad 38 Vice President of Marketing
James P. Lucivero 41 Vice President - Eastern United States Sales
Steven Georgiev 62 Director and Secretary
Joseph E. Levangie (1) 51 Director
Buster C. Glosson (1) 54 Director
Joseph P. Caruso 37 Director and Assistant Secretary
</TABLE>
- ----------------------------------
(1) Member of the Audit Committee
Albert J. Agbay has been Chief Executive Officer and President of the
Company since March 1995 and its Chairman of the Board of Directors since
October 1995. From July 1994 to February 1995, Mr. Agbay served as Chief
Executive Officer of Columbia Advanced Systems Corporation (Columbia Advanced
Systems), a manufacturer of PCs and a subsidiary of Apaq, Inc., also a
manufacturer of PCs. From August 1993 to July 1994, Mr. Agbay served as Chairman
and Chief Executive Officer of Swan Technologies, Inc. (Swan), a direct response
supplier of PCs and peripheral computer products. Swan filed a petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in December
1994. From January 1990 to March 1993, Mr. Agbay served as President and Chief
Executive Officer of Leading Edge Products, Inc. (Leading Edge), a manufacturer
of PCs. From April 1988 to January 1990, Mr. Agbay served in senior management
as Northeast Region General Manager for Panasonic Communications and Systems
Company, a manufacturer of electronics and telecommunications products. From
August 1985 to April 1989, Mr. Agbay worked for Panasonic Industrial Company, in
its Computer Products Division as Northeast Region Manager and later assumed
more territorial responsibility as Group General Manager, Eastern Region.
Gerald Y. Hattori has been Vice President of Finance, Chief Financial
Officer and Treasurer of the Company since October 1996. Prior to joining the
Company, from September of 1987 to September 1996, Mr. Hattori served as
corporate controller at SIPEX Corporation, a manufacturer of analog
semiconductors. Mr. Hattori previously held various corporate and divisional
financial management positions from January 1974 to August 1987 at Sanders, a
Lockheed Martin Company.
41
Michael J. Paciello has been Executive Vice President of the Company
since March 1995. From July 1994 to March 1995, Mr. Paciello served as Executive
Vice President of Columbia Advanced Systems. From August 1993 to July 1994, Mr.
Paciello served as Executive Vice President of Swan. Before joining Swan, Mr.
Paciello served from October 1991 to August 1993 as Executive Vice President,
and from January 1990 to October 1991 as Vice President of Sales, of Leading
Edge.
Liaqat Y. Khan has been Executive Vice President of Manufacturing for
the Company since December 1996. He was Vice President of Manufacturing from
September 1995 to November 1996. From August 1993 to May 1995, Mr. Khan served
as Vice President at Intelligent Computers and Technologies, Inc., a PC
manufacturer which filed a petition for reorganization under Chapter 11 of the
Bankruptcy Code in May 1995. From February 1992 to May 1993, he was Vice
President of Manufacturing for Asina, Inc., which subsequently changed its name
to Apaq, Inc., a computer products manufacturer. From August 1991 to February
1992 Mr. Khan served as Director of Manufacturing for Synergistic Computers,
Inc., a desktop computer manufacturer. During this period, Mr. Khan was also
President of A&M Research, a manufacturer of mechanical components for high tech
applications.
Victor J. Melfa, Jr. has been Senior Vice President of Sales for the
Company since March 1995. From July 1994 to February 1995, Mr. Melfa served as
Vice President of Sales for Columbia. From February 1994 to July 1994, Mr. Melfa
worked at Swan Technologies as Vice President of Marketing. From February 1993
to February 1994, Mr. Melfa served as an Executive Vice President of Ameriquest
Technologies, Inc., a computer products distributor and wholly-owned subsidiary
of Computer 2000. In February of 1993, Ameriquest Technologies acquired Vitronix
Corp., a computer products distributor situated in Westborough, Massachusetts.
Mr. Melfa was President of Vitronix Corp. from September 1984 to February 1993.
E. Craig Conrad is Vice President of Marketing for the Company, a
position he has held since joining the Company in April 1996. From May 1995 to
April 1996, Mr. Conrad served as the Director of Consumer Marketing for Digital
Equipment Corporation in Maynard, Massachusetts. From May 1993 to April 1995,
Mr. Conrad worked at IBM as Program Director of Consumer Desktop Brand
Management for the Aptiva line of PCs and was a Director of Marketing
Communications for AMBRA Computer Corporation, a subsidiary of IBM formed in
1993. From February 1990 to April 1993, Mr. Conrad was Director of Marketing at
Leading Edge.
James P. Lucivero has been Vice President - Eastern United States Sales
of the Company since March 1995. From September 1994 to February 1995 Mr.
Lucivero served as Vice President of Sales at Columbia Advanced Systems. From
September 1993 to July 1994, Mr. Lucivero was Vice President of Sales at Swan
Technologies, Inc. From January 1990 to July 1993, Mr. Lucivero served as Senior
Vice President at Leading Edge Products, Inc.
Steven Georgiev has been a director of the Company since March 1995 and
was Chairman of the Board of Directors from March 1995 to September 1995. He has
served as Chief Executive Officer of Palomar since November 12, 1993, becoming a
full time employee in January 1995. Mr. Georgiev was a consultant to Dymed
Corporation, (Dymed), Palomar's predecessor, from June 1991 until the September
1991 merger of Dymed with Palomar, at which time he became Palomar's Chairman of
its Board of Directors. Mr. Georgiev is a financial and business consultant to a
variety of emerging, high growth companies. Mr. Georgiev has been a director of
Excel Technology, Inc., a publicly-held company located in Hauppauge, New York,
since October 1992, and was a director of Cybernetics Products, Inc., a
publicly-held company, from August 1988 until January 1992. Mr. Georgiev was
Chairman of the Board of Directors of Dynatrend, Inc. a publicly-traded
consulting firm that he co- founded in 1972, until February 1989. Dynatrend,
Inc. was subsequently acquired by EG&G, Inc., a publicly-held company. Mr.
Georgiev is also Chairman of the Board of The American Materials and
Technologies, Inc., a publicly-held company.
42
Joseph E. Levangie has been a director of the Company since March 1995
and a director of Palomar since August 1991. He was a consultant to Dymed from
June 1991, until its merger with Palomar, at which time he became Palomar's
part-time Chief Financial Officer, a position he held until December 1992. He is
currently a part time consultant to Palomar. Mr. Levangie is also Chief
Executive Officer of JEL & Associates, a private financial consulting firm which
he founded in 1980. Currently Mr. Levangie serves as a director for GreenMan
Technologies, Inc., a publicly-held corporation.
Buster C. Glosson has been a director of the Company since December
1996. From 1965 until June 1994, he was an officer in the United States Air
Force (USAF). Most recently, he served as a Lieutenant General and Deputy Chief
of Staff for plans and operations, Headquarters USAF, Washington, D.C. Mr.
Glosson is a veteran of combat missions in Vietnam and, during the Gulf War, he
commanded the 14th Air Force Division and was the architect of the Gulf War Air
Campaign. In 1994 he founded and has since served as President of Eagle Ltd., a
consulting firm concentrating on international business opportunities in the
high-technology arena. He is also Chairman and CEO of Alliance Partners Inc., an
investment holding company developing international oil and power projects. He
has also served as a director of GreenMan Technologies, Inc., a publicly-held
company, since August 1994, of The American Materials and Technologies
Corporation, and of Skysat Communication Network Corporation, a publicly held
company, since July 1996.
Joseph P. Caruso has been a director of the Company since December
1996. He was previously a director from March 1995 to September 1995 and
President of the Company in March 1995. Mr. Caruso joined Palomar in March 1992
as Controller in a part-time capacity, becoming a full-time employee in June
1992 and their Chief Financial Officer in January 1993. From October 1989 to
June 1992, Mr. Caruso was the Chief Financial Officer of Massachusetts
Electrical Manufacturing Co., Inc., a privately held manufacturer of power
distribution equipment.
CLASSES OF DIRECTORS
Each director currently holds office until the next annual meeting of
stockholders and until that director's successor has been elected and qualified.
Pursuant to the Company's Restated Charter, upon the closing of the Offering,
the Company's Board of Directors will be composed of three classes serving
staggered three year terms.
EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of Directors
on an annual basis and serve until the next annual meeting of the Board of
Directors and until their successors have been duly elected and qualified. There
are no family relationships among any of the executive officers or directors of
the Company.
BOARD COMMITTEES
The Company's Board of Directors has established an Audit Committee and
appointed Messrs. Glosson and Levangie to be its members. The Audit Committee
will be responsible for nominating the Company's independent accountants for
approval by the Board of Directors, reviewing the scope, results and costs of
the audit with the Company's independent accountants and reviewing the financial
statements and audit practices of the Company. The Company does not currently
have a Compensation or Nominating Committee, or committees performing equivalent
functions of either a Compensation or Nominating Committee.
43
DIRECTOR COMPENSATION
No compensation has ever been paid to any of the directors of the
Company for service in such capacity to the Company. Non-employee directors of
the Company shall be eligible to receive stock options under the Company's 1996
Non-Employee Director Stock Option Plan after consummation of the Offering. See
"--Stock Plans--Director Plan."
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by
or paid for services rendered to the Company in all capacities during the fiscal
years ended December 31, 1995 and December 31, 1996 by the Company's Chief
Executive Officer and the other four most highly compensated executive officers
of the Company (collectively, the "Named Executive Officers"). Pursuant to rules
of the Securities and Exchange Commission (SEC), information with respect to
years prior to 1996 is not provided with respect to the Named Executive
Officers, other than the Chief Executive Officer, for whom information was
previously filed pursuant to an SEC filing requirement.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
Number of
Annual Compensation Securities
------------------- Other Annual Underlying All Other
Year Salary($) Bonus($) Compensation ($)(1) Options Compensation (2)
---- ---------- -------- ------------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Albert J. Agbay, Chief Exective
Officer and President.................. 1996 $225,000 $51,472 $12,000 1,044,480 $4,750
1995 182,423 -- $12,000 1,651,203(3) --
Michael J. Paciello, Executive Vice
President.............................. 1996 110,000 18,720 6,000 241,080 $4,750
Liaqat Y. Kahn, Exective Vice
President-Manufacturing................ 1996 111,923 15,840 8,250 361,560 $4,750
Victor J. Melfa, Jr., Senior Vice
President-Sales........................ 1996 100,384 16,115 6,000 241,080 $4,750
James P. Lucivero, Vice President
of Sales-Eastern United States......... 1996 100,000 15,645 6,000 241,080 $4,750
- ----------------------
(1) Consists of amounts paid as car allowances.
(2) Consist of the Company's contribution under Palomar's deferred
compensation plan established by Palomar for it and its
subsidiaries under Section 401(k) of the Internal Revenue
Code.
(3) Such option grant was cancelled pursuant to an agreement
between Mr. Agbay and Palomar Electronics Corporation (PEC), a
wholly-owned subsidiary of Palomar, in connection with a
September 1995 reorganization in which the Company became a
wholly-owned subsidiary of PEC. Pursuant to such agreement,
Mr. Agbay received an option exercisable for shares of common
stock of PEC in consideration of his agreement to cancel such
options. Such option grant issuable for common stock of PEC
was subsequently cancelled pursuant to a cancellation
agreement between Mr. Agbay and PEC. Mr. Agbay separately
received a new option grant in 1996 as reflected in his
beneficial ownership set forth in the table appearing under
"Beneficial Ownership of Principal Stockholder and Management"
below.
</TABLE>
44
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION
UNDERLYING EMPLOYEES IN PRICE EXPIRATION FOR OPTION TERMS ($)(3)
NAME OPTIONS GRANTED FISCAL YEAR ($/SH.) DATE 5% 10%
- ---- --------------- ------------- --------- ------ -- ---
<S> <C> <C> <C> <C> <C> <C>
Albert J. Agbay................. 1,044,480(1) 36.0% .0025 01/30/2001 $721.43 $1,594.16
Michael J. Paciello............. 241,080(2) 8.3% .0025 01/30/2001 $166.51 $ 367.95
Liaqat Y. Kahn.................. 361,560(2) 12.5% .0025 01/30/2001 $249.73 $ 551.84
Victor J. Melfa................. 241,080(2) 8.3% .0025 01/30/2001 $166.51 $ 367.95
James P. Lucivero............... 241,080(2) 8.3% .0025 01/30/2001 $166.51 $ 367.95
- -------------------------
(1) Such option was fully exercisable on the date of grant. See
also footnote (3) to the Summary Compensation Table above.
(2) The exercisability of all such options is subject to ratable
vesting over four years.
(3) As required by rules of the SEC, potential values stated are
based on the prescribed assumption that the Company's Common
Stock will appreciate in value from the date of grant to the
end of the option term at rates (compounded annually) of 5%
and 10%, respectively, and therefore are not intended to
forecast possible future rates of appreciation, if any, in the
price of the Company's Common Stock. The total of all stock
options granted to the Company's directors and employees,
including executive officers, during fiscal 1996 was
approximately 71% of the total shares of Common Stock
outstanding at the end of the fiscal year.
</TABLE>
FISCAL YEAR END OPTION VALUES
The following option year-end value table sets forth information with
respect to the unrealized value (the difference between the exercise price and
fair market value of the Common Stock ($12.00) as determined by the Board of
Directors) of unexercised options issued by the Company and held by the Named
Executive Officers on December 31, 1996. No options were exercised by any of the
Named Executive Officers in 1996. Only vested options as of such date were then
exercisable.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FISCAL YEAR END MONEY OPTIONS AT FISCAL YEAR END ($)
(ALL EXERCISABLE AT FISCAL YEAR-END) (ALL EXERCISABLE AT FISCAL YEAR END)
------------------------------------ ------------------------------------
NAME VESTED UNVESTED TOTAL VESTED UNVESTED TOTAL
---- ------ -------- ----- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C>
Albert J. Agbay................ 1,044,480 - 1,044,480 $12,531,149 - $12,531,149
Michael J. Paciello............ - 241,080 241,080 - $2,892,357 2,892,357
Liaqat Y. Khan................. - 361,560 361,560 - 4,337,816 4,337,816
Victor J. Melfa................ - 241,080 241,080 - 2,892,357 2,892,357
James P. Lucivero.............. - 241,080 241,080 - 2,892,357 2,892,357
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company does not have a Compensation Committee. No executive
officer of the Company has served as a director or a member of the compensation
committee (or other committee serving an equivalent function) of another entity,
whose executive officers served as a director of the Company. Mr. Agbay,
Chairman of the Board of Directors and the Chief Executive Officer and President
of the Company, participated in deliberations of the Board of Directors
concerning executive officer compensation.
45
STOCK PLANS
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (the "1995 Plan") was adopted by
the Board of Directors and approved by the sole stockholder of the Company as of
March 1995. The 1995 Plan provides for the grant of stock options to employees,
officers and directors of, and consultants or advisors to, the Company and its
subsidiaries. Under the 1995 Plan, the Company may grant options qualified as
"incentive stock options" under U.S. federal tax law or non-qualified stock
options. Incentive stock options may only be granted to employees of the Company
or its parents or subsidiaries. A total of 4,800,000 shares of Common Stock may
be granted under the 1995 Plan. Unless sooner terminated pursuant to its terms,
the 1995 Plan will terminate in June 2005.
1996 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1996 Employee Stock Purchase Plan (the "Purchase Plan")
was adopted by the Board of Directors in December 1996, and approved by its
stockholders in January 1997 and will become effective upon the closing of the
Offering. The Purchase Plan authorizes the issuance of up to a total of 200,000
shares of Common Stock to participating employees.
All employees of the Company whose customary employment is in excess of
20 hours per week and more than five months per year, other than those employees
who own 5% or more of the stock of the Company, will be eligible to participate
in the Purchase Plan. As of December 31, 1996, approximately 57 of the Company's
employees would have been eligible to participate in the Purchase Plan. The
Purchase Plan will be implemented by one or more offerings of such duration as
the Board of Directors or a committee thereof may determine, provided that no
offering period may be longer than 27 months. An eligible employee participating
in an offering will be able to purchase Common Stock at a price equal to the
lessor of: (i) 85% of its fair market value on the date the right was granted,
or (ii) 85% of its fair market value on the date the right was exercised.
Payment for Common Stock purchased under the Purchase Plan will be through
regular payroll deduction or lump sum cash payment, or both, as determined by
the Board of Directors or a committee thereof. The maximum value of Common Stock
an employee may purchase during an offering period is 10% of the employee's base
salary during such period, calculated on the basis of the employee's
compensation rate on the date the employee elects to participate in that
offering.
DIRECTOR PLAN
The Company's 1996 Non-Employee Director Plan (the "Director Plan") was
adopted by the Board of Directors in December 1996 and approved by its
stockholders in January 1997 and will become effective upon the closing of the
Offering. Under the terms of the Director Plan, options to purchase 15,000
shares of Common Stock (the "Initial Options") will be granted to each person
who becomes a non-employee director after the closing date of the Offering and
who is not otherwise affiliated with the Company, effective as of the date of
election to the Board of Directors. The Initial Options will vest in equal
annual installments over three years after the date of grant. In addition each
non-employee director will receive 10,000 shares ("Annual Options") on the date
of each annual meeting of the Company's stockholders held after the closing of
the Offering. The Annual Options will vest on the first anniversary of the date
of grant. Both Initial Options and Annual Options will be exercisable at the
fair market value of the Common Stock on the date of grant. A total of 100,000
shares of Common Stock may be issued upon the exercise of stock options granted
under the Director Plan. Unless sooner terminated pursuant to its terms, the
Director Options Plan will terminate in December 2006.
46
401(K) PLAN OF PALOMAR
The Company's employees are eligible to participate in Palomar's
deferred compensation plan under 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The 401(k) Plan is available to all employees who are over the
age of 18 and have been employed by the Company for more than six months.
Employees may contribute a maximum of 15% of their salary to the 401(k) Plan and
matching contributions equal to 50% of an employee's contribution is made to a
designated fund of the 401(k) Plan in the form of Palomar common stock. The
Company intends to establish its own 401(k) Plan following the initial public
offering of the Common Stock.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Agbay entered into an employment agreement with the Company for a
five-year term commencing in April 1995. The agreement automatically renews for
five successive one-year periods unless terminated pursuant to its terms. The
agreement provides that Mr. Agbay is entitled to receive an initial annual base
salary of $200,000 subject to annual inflation and is eligible to receive an
annual bonus of not less than $25,000 based upon the achievement of mutually
agreed upon objectives determined annually by the Company's Board of Directors
and Mr. Agbay. Under the agreement, if Mr. Agbay's employment is terminated by
the Company without cause, he shall receive severance compensation in an amount
equal to 12 months base salary. In the event of a change in control (as defined
in the employment agreement) of the Company, or if there is a substantial change
in his duties which is at the direction of the Company's Board of Directors and
not consented to by Mr. Agbay, Mr. Agbay is entitled to receive a lump sum
payment equal to 12 months base salary or the amount equal to the salary due
under the terms of the contract at the time of termination, whichever is less.
Any termination of Mr. Agbay's employment by Mr. Agbay pursuant to a material
change in his duties or responsibilities is deemed to be termination without
cause, and triggers a 12 month severance payment to Mr. Agbay. Pursuant to the
agreement, throughout the term of his employment, Mr. Agbay will serve as Chief
Executive Officer of the Company.
The Company is also party to substantially similar employment
agreements with Messrs. Hattori, Khan, Paciello, Melfa, Lucivero and Conrad,
which provide for either a 1 or 2-year term of employment. The agreements
provide for annual base salaries ranging from $85,000 to $110,000, as well as an
annual bonus based upon the achievement of mutually agreed upon revenue and
profit objectives between the Chairman, the President of the Company and the
employee.
All of the employment agreements described above include a
non-competition covenant pursuant to which executive officers of the Company are
prohibited from competing with the Company during their respective terms of
employment and for a period of either 6 or 12 months thereafter. In addition,
each of the above employment agreements provided for stock option grants to the
executive officers, all of which options were terminated by agreements dated as
of December, 1995 between the Company and each of the executive officers (other
than Mr. Hattori who joined the Company in October 1996). Information with
respect to options subsequently granted to the executive officers is set forth
above in this Executive Compensation section and below under the heading
"Beneficial Ownership of Management."
47
CERTAIN TRANSACTIONS
CONVERSION OF PALOMAR DEBT AND ESCROW OF CONTINGENT SHARES
The Company wishes to advise potential investors that the net income
after taxes, total revenues and per share value of the Common Stock milestones
set forth below are not intended to and do not in any manner constitute a
forecast, projection or expectation of the Company, its management, Palomar or
the Underwriters for the Company's future results of operations or appreciation
in the value of Common Stock. See "Risk Factors."
Palomar and its wholly-owned subsidiary PEC have provided all of the
Company's funds for operations to date in the form of non-interest bearing
loans. The total amount of funds provided by Palomar and PEC has been
$17,543,449 and $2,025,000, respectively, through September 30, 1996. On
December 19, 1996 the Company entered into an agreement with Palomar whereby
upon the closing of the Offerings, $5,000,000 of such indebtedness will be
repaid to Palomar, $4,568,449 will be converted into 45,684 shares of
Convertible Preferred Stock with the terms described below, and $10,000,000 will
be converted into 1,900,000 shares of the Common Stock, of which 700,000 shares
will be issued without restriction. Pursuant to such agreement, the balance of
1,200,000 shares of the Common Stock (the "Contingent Shares") shall be subject
to mandatory repurchase, in whole or in part, by the Company at $0.01 per share
after the 48 month anniversary of the Offering unless earlier released from
escrow as described below. The Contingent Shares shall be placed in escrow,
subject to release to Palomar in installments of 400,000 shares each (upon
achievement of any 3 of the 4 milestones specified below; none, some, or all of
which may occur) as follows:
(a) if the Company achieves $7,000,000 in net income after
taxes or $100 million in total revenues for the fiscal year
ended December 31, 1997;
(b) if the Company achieves $14,000,000 in net income after
taxes or $200 million in total revenues for the fiscal year
ended December 31, 1998;
(c) if the Company achieves $21,000,000 in net income after
taxes or $300 million in total revenues for the fiscal year
ended December 31, 1999; and
(d) if the Company achieves $28,000,000 in net income after
taxes or $400 million in total revenues for the fiscal year
ended December 31, 2000.
Alternatively, all of the Contingent Shares will be released
to Palomar immediately upon the happening of any one of the following:
(y) if the average per share market value closing bid price of
the Company's Common Stock is (i) 175% of the initial public
offering price for ten consecutive trading days at any time
prior to the 12-month anniversary of the Offering, or (ii)
225% of the initial public offering price for ten consecutive
trading days at any time prior to the 24-month anniversary of
the Offering, or (iii) 275% of the initial public offering
price for ten consecutive trading days at any time prior to
the 36-month anniversary of the Offering, or (iv) 325% of the
initial public offering price for ten consecutive trading days
at any time prior to the 48-month anniversary of the Offering;
or
(z) if the Company achieves $70,000,000 in cumulative net
income after taxes for the four fiscal years ended December
31, 2000.
48
If any or all of the alternative conditions for release of the
Contingent Shares has not occurred by the 48-month anniversary of the Offering,
the balance of the Contingent Shares in escrow at such time shall be repurchased
by the Company as described above.
The 45,684 shares of Convertible Preferred Stock issued to Palomar upon
the closing will be convertible into shares of Common Stock at the option of the
holders thereof.
At an assumed initial public offering price of $12.00 per share, the
45,684 shares of Convertible Preferred Stock issued to Palomar upon the closing
shall be convertible into 304,560 shares of Common Stock. Prior to any such
conversion, the holders of shares of such Convertible Preferred Stock shall have
voting rights equal to the number of shares of Common Stock on an "as-converted'
basis on the record date of any matter voted on by the stockholders of the
Company. Other terms of the Convertible Preferred Stock are set forth in this
Prospectus under the caption "Description of Capital Stock."
Palomar and PEC incurred general and administrative expenses on behalf
of the Company, totalling approximately $100,000 and $128,000 for the period
from inception (March 7, 1995) to December 31, 1995 and for the nine months
ended September 30, 1996, respectively. There is no intention by Palomar to
charge management fees to the Company.
OTHER RELATED PARTY TRANSACTIONS
The Company's current PCs are shipped with motherboards based on
technology licensed from Technovation Computer Labs, Inc., a Nevada corporation
which, to the best of the Company's knowledge is owned by Babar I. Hamirani, a
former executive officer of the Company whose employment was terminated by the
Company on November 29, 1996. Liaqat Y. Khan, an executive officer of the
Company, has notified the Company that he is entitled to an ownership interest
in Technovation, but that Mr. Hamirani has disputed Mr. Khan's claim. Under its
license agreement with Technovation, the Company has the exclusive right to use
the licensed technology through August 1998 in exchange for a per unit sold
royalty amount, and a non-exclusive right to use such technology for up to seven
additional years at the same royalty rate. Through September 30, 1996, potential
royalties which had accrued under the license agreement were less than the
Company's tooling and development costs, which the Company is entitled to offset
against royalties under the license agreement. See "Business-- Intellectual
Property."
During the nine month period ended September 30, 1996, the Company was
party to several purchase and sale transactions with Computer Universe, a trade
name of Amerisel, Inc. which was a dealer of the Company's PCs located in San
Francisco, California. The Company believes that Amerisel, Inc. was owned during
such period by Mr. Khan, an executive officer of the Company, by Babar Hamirani,
who was during such period an executive officer of the Company, and members of
Mr. Khan's and Mr. Hamirani's families. Mr. Khan has advised the Company that he
and his wife have since disposed of their ownership in Amerisel, Inc. Such
transactions were in the aggregate approximate amount of $830,000 during such
period, including approximately $430,000 in purchases of components by Computer
Universe. As of September 30, 1996, approximately $271,000 in amounts receivable
owed by Computer Universe were past due and the Company took charges in the
amount of $220,000 with respect to such overdue amounts. The Company believes
that the substantial majority of these transactions were on terms no less
favorable to the Company than could be obtained from unaffiliated parties
considered to be important customers. In December 1996, the Board of Directors
of the Company established a policy for considering transactions with directors,
officers, and shareholders of the Company and their affiliates. Pursuant to this
policy, the Board of Directors of the Company will not approve any such related
party transactions unless the Board of Directors has determined that the terms
of the transaction are no less favorable to the Company than those available
from unaffiliated parties. Because this policy is not contained in the Company's
Certificate Of Incorporation or Bylaws,
49
this policy is subject to change at any time by the vote of the Board of
Directors. It currently is not contemplated that this policy will be changed.
Comtel Corporation ("Comtel"), a wholly-owned subsidiary of Dynaco,
Corporation (a wholly-owned subsidiary of Palomar), is a contract manufacturer
of PC modem cards and PC boards. In the fourth quarter of 1996 the Company
purchased components from Comtel for consideration in the amount of $693,000.
Comtel purchased products from the Company totaling $80,000. As of December 31,
1996, the Company had paid all of its obligations to Comtel for the components
it purchased in the fourth quarter of 1996 but Comtel owed the Company $80,000
for its purchases during such period. The Company believes that all of its
transactions with Comtel were on terms no less favorable to the Company than
could be obtained from unaffiliated parties.
50
STOCKHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of Common Stock as of December 31, 1996 by its
stockholders. Other than Palomar, PEC, certain of their officers and directors,
and Mr. Agbay, Chairman and Chief Executive Officer of the Company, no other
person beneficially owns more than 5% of the Common Stock. Information with
respect to Mr. Agbay is provided in the following table.
NUMBER OF SHARES
NAME AND ADDRESS BENEFICIALLY OWNED PERCENT
- ---------------- --------------------- -------
Palomar Medical 4,200,000(1) 87.4%
Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
The Travelers Insurance 200,000 4.2
Company
One Tower Square
Hartford, Connecticut 06183
GFL Advantage Fund Limited 200,000 4.2
c/o Citco
Kaya Flamboyan 9
Curacao, Netherlands, Antilles
Clearwater Fund IV LLC 200,000 4.2
611 Druid Road East
Suite 200
Clearwater, Florida 34616
- ---------------------
(1) The shares of the Common Stock beneficially owned by Palomar are held
by Palomar Electronics Corporation (PEC), a wholly-owned direct
subsidiary of Palomar. After the sale of the Common Stock in the
Offering, Palomar (through its ownership of PEC) will beneficially own
approximately 66.3% (6,100,000 shares) of the outstanding Common Stock
(approximately 63.7% if the Underwriters' over allotment option is
exercised in full), including 1,900,000 shares of Common Stock that
will be issued upon the closing of the Offering to Palomar and PEC in
exchange for retirement of $10,000,000 of indebtedness owed by the
Company to Palomar and PEC. See "Certain Transactions."
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock as of December 31, 1996, as well as
information regarding the beneficial ownership of the common stock of Palomar as
of October 2, 1996, with respect to (i) each of the Named Executive Officers and
Directors of the Company, and (ii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK PALOMAR COMMON STOCK
-------------------- --------------------
NUMBER OF NUMBER OF
NAME SHARES PERCENT SHARES PERCENT
- ---- ------ ------- ------ -------
<S> <C> <C> <C> <C>
Albert J. Agbay ................................ 1,044,480 (1) 17.9% 50,000 (1) *
Chairman and Chief Executive Officer
c/o Nexar Technologies, Inc
182 Turnpike Road
Westborough, Massachusetts 01581
Michael J. Paciello ............................ 60,270 (1) 1.2
Executive Vice President
Liaqat Y. Kahn ................................. 90,370 (1) 1.8
Executive Vice President -
Manufacturing
Victor J. Melfa, Jr. ........................... 60,270 (1) 1.2
Senior Vice President, Sales
James P. Lucivero .............................. 60,270 (1) 1.2
Vice President,
Eastern United States Sales
Directors and Executives Officers of
Palomar Serving as Nexar Directors**
- ------------------------------------
Steven Georgiev................................ 4,240,170 (2) 88.3 1,004,154 (4) 3.31%
Joseph E. Levangie.............................. 4,240,170 (2) 88.3 632,485 (5) 2.21
Joseph P. Caruso................................ 4,240,170 (2) 88.3 733,493 (6) 2.44
Buster C. Glosson............................... 4,200,000 (2) 87.5 53,333 (7) *
All directors and executive officers as a
Group (12 persons).............................. 5,696,430 (3) 90.5% 2,423,465 8.04%
</TABLE>
- ----------------
* Less than 1%
** Each with an address c/o Palomar as set forth above.
51
(1) Consists entirely of shares issuable upon the exercise of options
exercisable within sixty days of December 31, 1996.
(2) Includes, under the deemed beneficial ownership rules of the Securities
and Exchange Commission, 4,200,000 shares of Common Stock held by PEC,
as to which each such director disclaims beneficial ownership and
shares issuable upon the exercise of options exercisable within sixty
days of December 31, 1996.
(3) Includes 1,484,590 shares issuable upon exercise of options exercisable
within sixty days of December 31, 1996 and 4,200,000 shares held by
PEC, as to which each director deemed to beneficially own such shares
disclaims beneficial ownership.
(4) Includes options to purchase 100,000 shares issuable upon exercise of
five-year options expiring August 26, 2001, at an exercise price of
$8.00 per share; 157,000 shares issuable upon exercise of five-year
warrants granted in July 1995, at an exercise price of $2.00 per share;
80,000 shares issuable upon exercise of five-year warrants granted in
August 1995, at an exercise price of $2.125 per share; and 300,000
shares issuable upon exercise of five-year warrants granted in February
1996, at an exercise price of $6.75 per share.
(5) Includes 60,000 shares issuable upon exercise of five-year warrants
granted in March 1992, at an exercise price of $.60 per share; 150,000
shares issuable upon exercise of five-year warrants granted in July
1995, at an exercise price of $2.00 per share; 100,000 shares issuable
upon exercise of five-year warrants granted in August 1995, at an
exercise price of $2.125 per share; and 150,000 shares issuable upon
exercise of five-year warrants granted in February 1996, at an exercise
price of $6.75 per share.
(6) Includes 30,000 shares issuable upon the exercise for five-year options
expiring June 14, 1998, at an exercise price of $3.50 per share; 70,000
shares of Palomar Common Stock issuable upon exercise of five-year
options expiring April 6, 1999, at an exercise price of $2.375 per
share; 150,000 shares issuable upon exercise of five-year options
expiring July 4, 2000, at an exercise price of $2.00 per share; 66,666
shares issuable upon exercise of five-year options expiring August 26,
2001, at an exercise price of $8.00 per share; 100,000 shares issuable
upon exercise of five-year warrants granted in August 1995, at an
exercise price of $2.125 per share; and 150,000 shares issuable upon
exercise of five-year warrants granted in February 1996, at an exercise
price of $6.75 per share.
(7) Includes 20,000 shares issuable upon exercise of four-year warrants
granted in August 1996, at an exercise price of $2.125; and 33,333
shares issuable upon exercise of five-year warrants granted in August
1996, at an exercise price of $8.00 per share.
52
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of the Restated Charter upon the closing of
the Offering, the authorized capital stock of the Company will consist of
30,000,000 shares of Common Stock, $0.01 par value, and 10,000,000 shares of
preferred stock, $0.01 par value per share (the "Preferred Stock"), which may be
issued in one or more series.
COMMON STOCK
As of December 31, 1996, there were 4,800,000 shares of Common Stock
outstanding, 4,200,000 of which were all held of record by PEC. Based upon the
number of shares outstanding as of that date and giving effect to the issuance
of the 2,500,000 shares of Common Stock offered by the Company hereby and the
issuance of 1,900,000 shares of Common Stock to Palomar and PEC upon conversion
of $10,000,000 of indebtedness (see "Certain Transactions"). but assuming no
exercise of the Underwriters' over-allotment option or exercise of outstanding
stock options, there will be 9,200,000 shares of Common Stock outstanding upon
the closing of the Offering.
Holders of Common Stock are entitled to one vote for each share held on
all matters submitted to a vote of stockholders and do not have cumulative
voting rights. 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, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of the Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable. The rights, preferences and privileges of holders of
Common Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future. Upon the closing of the Offering, there will
be no shares of Preferred Stock outstanding.
PREFERRED STOCK
Upon filing of the Restated Charter, the Board of Directors will be
authorized, subject to certain limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of
10,000,000 shares of Preferred Stock in one of more series and to fix or alter
the designations, preferences, rights and any qualifications, limitations or
restrictions of the shares of each such series thereof, including the dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption
(including sinking fund provisions), redemption price or prices, liquidation
preferences and the number of shares constituting any series or designations of
such series. The Board of Directors has authorized and approved the issuance of
a new series of Preferred Stock designated Convertible Preferred Stock with the
terms thereof being set forth in the Restated Charter as summarized in the
following paragraph. Upon the closing of the Offering, $4,568,449 of
indebtedness owed by the Company to related parties will be converted into
45,684 shares of Convertible Preferred Stock. The issuance of any additional
shares of Preferred Stock may have the effect of delaying, deferring or
preventing a change of control of the Company. The Company has no present plans
to issue any additional shares of Preferred Stock. See "Risk Factors--Effect of
Anti-Takeover Provisions."
Each outstanding share of the Convertible Preferred Stock shall be
entitled to vote on each matter on which the stockholders of the Company shall
be entitled to vote, and each holder of
53
Convertible Preferred Stock shall have the voting rights equal to the number of
shares of Common Stock such Convertible Preferred Stock is convertible into on
the record date of any matter to be voted on by the stockholders of the Company.
The holders of the Convertible Preferred Stock shall have neither preemptive
rights to acquire additional shares of the stock of the Company nor the right to
cumulate their shares for the purpose of electing directors of the Company, or
for any other purpose. The Board of Directors may cause dividends to be paid to
holders of shares of the Convertible Preferred Stock out of funds legally
available for the payment of dividends. Any dividend or distribution on the
Convertible Preferred Stock shall be paid at the same rate and in the same
manner as the Common Stock.
Each share of the Convertible Preferred Stock is convertible into
Common Stock at the option of the holders thereof. At an assumed initial public
offering price of $12.00 per share, the 45,684 shares of Convertible Preferred
Stock issued to Palomar upon the closing shall be convertible into 304,560 share
of Common Stock. In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Company, then, before any distribution or
payment shall be made to or set apart for the holders of Common Stock, the
holders of the Convertible Preferred Stock shall be entitled to receive a
liquidation preference of $100.00 per share plus, in the case of each share, an
amount equal to any dividend declared but unpaid thereon. A merger or
consolidation of the Company into or with any other corporation, a merger of any
other corporation into the Company, or a sale, lease, exchange, transfer or
similar disposition by the Company in one or a series of related transactions of
all or substantially all of its assets may be deemed a liquidation, dissolution
or winding up of the Company and in such case, the holders of the Convertible
Preferred Stock shall be entitled to receive the liquidation preference
described above.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person becomes an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within the prior three years did own) 15% or more of the
corporation's voting stock. The Company may elect not to be governed by Section
203 by means of an amendment to the Company's Restated Charter or By-Laws which
has been approved by stockholders holding a majority of its outstanding voting
securities.
The Restated Charter provides for a classified Board of Directors, that
vacancies on the Board shall be filled solely by the remaining directors, and
that stockholders may remove a director only for cause. The Restated Charter
also provides that stockholders action may be taken only by a vote at a meeting
of stockholders and not by written consent in lieu of a meeting and that special
meetings of stockholders may only be called by the Board or the President.
Finally, the Restated Charter provides that none of its provisions may
be amended except by the vote of two-thirds of the outstanding voting shares
unless such amendment has been proposed and declared advisable by the Board.
The foregoing provisions may discourage unsolicited takeover attempts.
The Company believes that the potential benefits of encouraging persons seeking
to acquire control of the Company to negotiate with the Company outweigh the
potential disadvantages of discouraging such proposals.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is The
First National Bank of Boston.
54
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of the Offering, the Company will have an aggregate of
9,200,000 shares of Common Stock outstanding, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options to
purchase Common Stock. All of these shares, including the 2,500,000 shares sold
in the Offering, are freely tradable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act").
Also, as of December 31, 1996, the date of this Prospectus, employees
and directors of the Company hold options exercisable for the acquisition of
3,055,920 shares of Common Stock (27.5% of which were exercisable as of December
31, 1996), at an average weighted exercise price of $0.52 a share. In addition,
certain employees and directors of the Company shall be granted options upon the
effectiveness of the Offering exercisable for an aggregate of 800,000 shares of
Common Stock at an exercise price equal to the initial public offering price.
Shares acquired upon exercise of options held by "affiliates" of the Company, as
that term is defined in Rule 144 under the Securities Act ("Rule 144"), may
generally only be sold in compliance with the limitations of Rule 144 described
below. In addition to the 6,200,000 shares of Common Stock held by Palomar which
have been registered under the Registration Statement of which this Prospectus
is a part, Palomar, upon the closing of the Offering, will also hold 45,684
shares of Convertible Preferred Stock which would be convertible into 304,563
shares of Common Stock, assuming an initial public offering price of $12.00 per
share. See "Certain Transactions."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially owned
shares for at least two years is entitled to sell, by means of a broken
transaction, within any three-month period commencing 90 days after the
effective date of the Offering (the "Effective Date"), a number of shares that
does not exceed the greater of (i) 1% of the then outstanding shares of Common
Stock (approximately 92,000 shares immediately after the Offering) or (ii) the
average weekly trading volume in the Common Stock during the four calendar weeks
preceding the date on which notice of such sale is filed, subject to certain
restrictions. In addition, a person who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least three years would
be entitled to sell such shares under Rule 144(k) without regard to the
requirements described above. To the extent that shares were acquired from an
affiliate of the Company, such stockholder's holding period for the purpose of
effecting a sale under Rule 144 commences on the date of transfer from the
affiliate. The Securities and Exchange Commission has proposed an amendment to
Rule 144 which would reduce the holding period required for shares subject to
Rule 144 to become eligible for sale in the public market from two years to one
year and from three years to two years in the case of Rule 144(k). Although
Palomar is an affiliate of the Company, because it has registered such shares
under the Registration Statement of which this Prospectus is a part, the volume
and other limitations of Rule 144 are not applicable to the sale of such
registered shares.
Prior to the Offering, there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the market price of
the Common Stock prevailing from time to time. The Company is unable to estimate
the number of shares that may be sold in the public market pursuant to Rule 144,
since this will depend on the market price of the Common Stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of the Common Stock in the public market could adversely
affect the market price of the Company's Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
As of the Effective Date, the Company intends to file a Form S-8
registration statement under the Securities Act to register all shares of Common
Stock issuable under the Company's 1995 Stock Option Plan, the Director Plan and
the Stock Purchase Plan (collectively, the "Stock Plans"). See
55
"Management--Stock Plans." Such registration statement is expected to be become
effective immediately upon filing, and shares covered by that registration
statement will thereupon be eligible for sale in the public markets, subject to
Rule 144 limitations applicable to affiliates, and the "lock-up" agreements
described in the next paragraph.
All directors and executive officers of the Company, who will hold upon
closing of the Offering in the aggregate options exercisable for 3,430,000
shares (30.1% of which were exercisable as of December 31, 1996) shares of
Common Stock, have agreed, pursuant to agreements with Sands Brothers & Co.,
Ltd, who is acting as the representative for the several Underwriters (the
"Representative"), that they will not, without the prior written consent of the
Representative, sell or otherwise dispose of any shares of Common Stock or
options to acquire shares of Common Stock during the 180-day period following
the Effective Date.
Prior to the Offering, there has not been any public market for the
Common Stock of the Company. Further sales of substantial amounts of Common
Stock in the open market may adversely affect the market price of the Common
Stock and could impair the Company's future ability to raise capital through the
sale of its equity securities.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company has agreed to sell to each of the Underwriters named below, for whom
Sands Brothers & Co., Ltd. is acting as the Representative, and each of the
Underwriters has severally agreed to purchase from the Company, the respective
number of shares of Common Stock set forth opposite its name below.
Number
Underwriter of Shares
----------- ---------
Sands Brothers & Co., Ltd. ....................
Total...........................................2,500,000
The Underwriters have agreed, subject to the terms and conditions of
the Underwriting Agreement, to purchase all of the shares of Common Stock
offered hereby if any of such securities are purchased.
The Underwriters have advised the Company that they propose to offer
the shares of Common Stock to the public at the public offering price set forth
on the cover page of this Prospectus. The Underwriters may allow to certain
dealers who are members of the National Association of Securities Dealers, Inc.
(the "NASD") concessions, not in excess of $_____ per share of Common Stock, of
which not in excess of $_____ per share of Common Stock may be reallowed to
other dealers which are members of the NASD.
56
The Company has granted to the Underwriters an option, exercisable
within 45 days from the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price set forth on the
cover page of this Prospectus, less the underwriting discounts and commissions.
The Underwriters may exercise this option in whole or, from time to time in
part, solely for the purpose of covering over-allotments, if any, made in
connection with the sale of shares of Common Stock offered hereby.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 2% of the gross proceeds of this offering, of which $50,000
of which has been paid to date. The Company has also agreed to pay all expenses
in connection with qualifying the shares of Common Stock offered hereby for sale
under the laws of such states as the Underwriters may designate, including
expenses of counsel retained for such purpose by the Underwriters.
The Company has agreed to sell to the Representative or its designees,
for nominal consideration, warrants (the "Representative's Warrants") to
purchase up to 250,000 shares of Common Stock at an exercise price of $_____ per
share (120% of the initial public offering price). The Representative's Warrants
may not be exercised or transferred for one year from the date of this
Prospectus, except to the officers or shareholders of the Representative or
members of the selling group, and are exercisable during the four year period
commencing on the first anniversary date of this Prospectus (the "Warrant
Exercise Term"). During the Warrant Exercise Term, the holders of the
Representative's Warrants are given, at nominal cost, the opportunity to profit
from a rise in the market price of the Company's Common Stock. To the extent
that the Representative's Warrants are exercised, dilution to the interests of
the Company's shareholders will occur. Further, the terms upon which the Company
will be able to obtain additional equity capital may be adversely affected since
the holders of the Representative's Warrants can be expected to exercise them at
a time when the Company would, in all likelihood, be able to obtain any needed
capital on terms more favorable to the Company than those provided in the
Representative's Warrants. Any profit realized by the Representative on the sale
of the Representative's Warrants or the underlying shares of Common Stock may be
deemed additional underwriting compensation. The Representative's Warrants
contain provisions providing for the adjustment of the exercise price upon the
occurrence of certain events, including reclassifications, dividends, splits and
other similar events. Subject to certain limitations and exclusions, the Company
has agreed, at the request of the holders of a majority of the Representative's
Warrants, at the Company's expense, to register the Representative's Warrants
and the shares underlying the Representative's Warrants under the Securities Act
on one occasion during the Warrant Exercise Term and to include the
Representative's Warrants and all such underlying shares in any appropriate
registration statement which is filed by the Company during the five years
following the date of this Prospectus.
The Company and its greater than five percent stockholders have granted
the Representative a three-year right of first refusal to underwrite or place
any public or private sale of debt or equity securities (excluding sales to
employees) of the Company, any subsidiary or successor to the Company, subject
to certain limited exceptions. The foregoing right of first refusal, however,
shall not apply to Company directed private placement transactions of up to $5
million. Additionally, in the context of a contemplated offering of the
Company's securities by a "Bulge Bracket Underwriter" or a top tier technology
underwriter, the Company shall satisfy its right of first refusal obligations to
the Representative if the Company utilizes its best efforts to cause the
Representative to participate in such offering as a co-manager.
The Company has also agreed, for a period commencing the date of this
Prospectus and expiring upon the earlier of (i) three (3) years from the date of
this Prospectus or (ii) such time in which the Company consummates an
underwritten secondary equity public offering, to nominate and use its best
efforts to elect a designee of the Representative as a member of or, at the
Representative's option, as
57
a non-voting advisor to the Board of Directors of the Company. As of the date of
this Prospectus, the Representative has not yet exercised its right to designate
such person.
All of the Company's executive officers and directors have agreed not
to sell or dispose of any securities of the Company for a period of six months
following the date of this Prospectus, without obtaining the prior written
approval of the Representative.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Prior to this offering, there has been no public trading market for the
Common Stock. Consequently, the initial public offering price of the Common
Stock has been determined by negotiations between the Company and the
Representative. Among the factors considered in determining the offering price
were the Company's financial conditions and prospects, market prices of similar
securities of comparable publicly traded companies, certain financial and
operating information of companies engaged in activities similar to those of the
Company and the general conditions of the securities markets.
LEGAL MATTERS
The validity of the shares of Common Stock offered by this Prospectus
will be passed upon for the Company by Choate, Hall & Stewart (a partnership
including professional corporations), Boston, Massachusetts. Certain legal
matters in connection with the Offering will be passed upon for the Underwriters
by Littman Krooks Roth & Ball P.C., New York, New York.
EXPERTS
The financial statements included in this Prospectus or elsewhere in
the Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto and are
included herein upon the authority of said firm as experts in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the shares of Common Stock offered hereby. As permitted by the rules
and regulations of the Commission, this Prospectus omits certain information
contained in the Registration Statement. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to the
Registration Statement and to the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any agreement or
other document filed as an exhibit to the Registration Statement are not
necessarily complete, and in each instance reference is made to the copy of such
agreement filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. The Registration Statement,
including the exhibits and schedules filed therewith, may be inspected without
charge at the Commission's Public Reference Room, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 and at
Northwest Atrium Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
10048. Copies of the Registration Statement may be obtained from the Commission
from its Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. The Registration Statement is also
available on the Commission site on the World Wide Web at http://www.sec.gov.
58
The Company intends to distribute to its stockholders annual reports
containing financial statements audited by its independent accountants and will
make available copies of quarterly reports for the first three quarters of each
fiscal year containing unaudited financial statements.
TRADEMARKS
The Company's logo, Cross-Processor Architecture, Nexar, Nexar
Technologies, NEXAR XPA and XPA are trademarks of the Company. This Prospectus
also includes trademarks of companies other than the Company.
59
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants....................................................... F-2
Consolidated Balance Sheets as of December 31, 1995, September 30, 1996 and
Pro forma as of September 30, 1996 (unaudited)............................................ F-3
Consolidated Statements of Operations for the period from inception (March 7, 1995)
to December 31, 1995 and for the Nine Months Ended September 30, 1996...................... F-4
Consolidated Statements of Stockholder's (Deficit) Equity for the period from
inception (March 7, 1995) to December 31, 1995 and for the Nine Months
Ended September 30, 1996................................................................... F-5
Consolidated Statements of Cash Flows for the period from inception (March 7, 1995)
to December 31, 1995 and for the Nine Months Ended September 30, 1996...................... F-6
Notes to Consolidated Financial Statements ..................................................... F-7
</TABLE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nexar Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of Nexar
Technologies, Inc. (a Delaware corporation and wholly owned subsidiary of
Palomar Medical Technologies, Inc.) and subsidiary as of December 31, 1995 and
September 30, 1996, and the related consolidated statements of operations,
stockholder's (deficit) equity and cash flows for the period from inception
(March 7, 1995) to December 31, 1995 and for the nine months ended September 30,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Nexar Technologies, Inc. and
subsidiary as of December 31, 1995 and September 30, 1996, and the results of
their operations and their cash flows for the period from inception (March 7,
1995) to December 31, 1995 and for the nine months ended September 30, 1996, in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts October
14, 1996 (Except with respect
to the matters discussed in
notes 2,4 and 7(d), as to
which the date is December 19,
1996).
F-2
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
DECEMBER 31,
1995 ACTUAL PRO FORMA
CURRENT ASSETS: (UNAUDITED)
<S> <C> <C> <C>
Cash $ 980,618 $ 8,147,918 $ 8,147,918
Accounts receivable, net of allowance for doubtful accounts of
$12,000 and $60,000, respectively 327,471 8,149,422 8,149,422
Inventories 8,432 2,992,698 2,992,698
Prepaid expenses and other current assets 52,150 183,550 183,550
--------------- --------------- ---------------
Total current assets 1,368,671 19,473,588 19,473,588
--------------- --------------- ---------------
PROPERTY AND EQUIPMENT, NET 100,674 216,819 216,819
--------------- --------------- ---------------
OTHER ASSETS - 492,911 492,911
--------------- --------------- ---------------
$ 1,469,345 $ 20,183,318 $ 20,183,318
=============== =============== ===============
LIABILITIES AND STOCKHOLDER'S (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 178,154 $ 4,804,378 $ 4,804,378
Accrued expenses 609,333 1,052,547 1,052,547
--------------- --------------- ---------------
Total current liabilities 787,487 5,856,925 5,856,925
--------------- --------------- ---------------
DUE TO RELATED PARTIES 2,942,892 19,568,449 5,000,000
--------------- --------------- ---------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDER'S (DEFICIT) EQUITY:
Preferred Stock, $.01 par value-
Authorized-10,000,000 shares
Issued and Outstanding-none at December 31, 1995 and September 30,
1996 and 45,684 shares pro forma - - 457
Common stock, $.01 par value-
Authorized-30,000,000 shares
Issued and outstanding-4,800,000 shares at December 31, 1995
and September 30, 1996 and 6,700,000 shares pro forma 48,000 48,000 67,000
Additional paid-in-capital (47,600) (47,600) 14,501,392
Accumulated deficit (2,261,434) (5,242,456) (5,242,456)
---------------- ---------------- ----------------
Total stockholder's (deficit) equity (2,261,034) (5,242,056) 9,326,393
--------------- ---------------- ---------------
$ 1,469,345 $ 20,183,318 $ 20,183,318
=============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (MARCH 7, NINE MONTHS ENDED
1995) TO SEPTEMBER 30,
DECEMBER 31, 1995 1996
<S> <C> <C>
NET REVENUES $ 619,629 $ 11,341,426
COST OF REVENUES 574,611 9,338,342
--------------- ---------------
Gross profit 45,018 2,003,084
--------------- ---------------
OPERATING EXPENSES:
Research and development 104,383 301,007
Selling and marketing 581,482 2,987,211
General and administrative 1,620,587 1,695,888
--------------- ---------------
Total operating expenses 2,306,452 4,984,106
--------------- ---------------
Net loss $ (2,261,434) $ (2,981,022)
=============== ================
PRO FORMA NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (Note 3) $ (0.27) $ (0.35)
========= =========
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING (Note 3) 8,421,838 8,421,838
=============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S (DEFICIT) EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
NUMBER $.01 ADDITIONAL ACCUMULATED STOCKHOLDER'S
OF SHARES PAR VALUE PAID-IN-CAPITAL DEFICIT (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
INITIAL ISSUANCE OF COMMON STOCK ON 4,800,000 $ 48,000 $ (47,600) $ - $ 400
MARCH 7, 1995
Net loss - - - (2,261,434) (2,261,434)
--------------- --------------- --------------- ---------------- ----------------
BALANCE, DECEMBER 31, 1995 4,800,000 48,000 (47,600) (2,261,434) (2,261,034)
Net loss - - - (2,981,022) (2,981,022)
--------------- --------------- --------------- ---------------- ----------------
BALANCE, SEPTEMBER 30, 1996 4,800,000 $ 48,000 $ (47,600) $ (5,242,456) $ (5,242,056)
=============== ============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION NINE MONTHS
(MARCH 7, 1995) ENDED
TO DECEMBER 31, SEPTEMBER 30,
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (2,261,434) $ (2,981,022)
Adjustments to reconcile net loss to net cash used in operating activities-
Depreciation and amortization 2,119 18,090
Changes in current assets and liabilities-
Accounts receivable (327,471) (7,821,951)
Inventories (8,432) (2,984,266)
Prepaid expenses and other current assets (52,150) (131,400)
Accounts payable 178,154 4,626,224
Accrued expenses 609,333 210,213
--------------- ---------------
Net cash used in operating activities (1,859,881) (9,064,112)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (102,793) (134,235)
Increase in other assets - (90,910)
--------------- ----------------
Net cash used in investing activities (102,793) (225,145)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial issuance of common stock 400 -
Proceeds from related parties 2,942,892 16,456,557
--------------- ---------------
Net cash provided by financing activities 2,943,292 16,456,557
--------------- ---------------
NET INCREASE IN CASH 980,618 7,167,300
CASH, BEGINNING OF PERIOD - 980,618
--------------- ---------------
CASH, END OF PERIOD $ 980,618 $ 8,147,918
============== ===============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Deferred offering costs $ - $ 402,001
============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND ORGANIZATION
Nexar Technologies, Inc. (the Company or Nexar) is in its early stages
and manufactures, markets and sells personal computers with an
unconventional circuit board design that enables end users to easily
upgrade and replace the microprocessor, memory and hard drive components.
The Company markets its products through multiple channels of
distribution.
Nexar Technologies, Inc. was incorporated in Delaware on March 7, 1995.
The Company is a majority owned subsidiary of Palomar Electronics
Corporation (PEC). PEC is a wholly owned subsidiary of Palomar Medical
Technologies Inc. (Palomar).
The Company's personal computers are in the early stage of product
development, and as such, success of future operations is subject to a
number of risks similar to those of other companies in the same stage of
development. Principal among these risks are the successful development
and marketing of its products, short product life cycles, reliance on a
single customer, the need to achieve profitable operations, intense
competition from substitute products and significantly larger companies,
dependence on Palomar for funding and the need to obtain adequate
financing to fund future operations and dependence on key individuals.
(2) RELATIONSHIP WITH PALOMAR MEDICAL TECHNOLOGIES, INC. AND PALOMAR
ELECTRONICS CORPORATION
Palomar and PEC have funded all of the Company's operations to date.
Palomar has agreed to continue to fund the Company for at least the next
year, if needed. The total amount of funds provided by Palomar and PEC
has been $17,543,449 and $2,025,000, respectively, through September 30,
1996. The weighted average balances of these contributions were
approximately $767,000 and $6,496,000 for the periods ended December 31,
1995 and September 30, 1996, respectively. All of these loans have been
non-interest-bearing. On December 19, 1996 the Company entered into an
agreement with Palomar, whereby $10,000,000 of advances from Palomar and
PEC will be converted into 1,900,000 shares of the Company's common stock
upon the closing of the proposed initial public offering contemplated
herein. In addition, by an agreement between the Company, its
underwriters and Palomar, 1,200,000 of these shares will be held in
escrow subject to a contingent repurchase right of the Company, at a
nominal price per share, and will only be released upon the attainment of
certain revenue, net income and stock price milestones, as defined. See
Notes 3(a) and (b). The Company has also agreed to repay Palomar
$5,000,000 upon the closing of the proposed initial public offering
contemplated herein, and convert $4,568,449 due to Palomar and PEC into
45,684 shares of Convertible Preferred Stock.
The pro forma balance sheet at September 30, 1996 reflects the conversion
of $10,000,000 of amounts owed to Palomar and PEC, into 1,900,000 shares
of the Company's common stock and the conversion of $4,568,449 due to
Palomar and PEC into 45,684 shares of Convertible Preferred Stock.
F-7
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(2) RELATIONSHIP WITH PALOMAR MEDICAL TECHNOLOGIES, INC. AND PALOMAR
ELECTRONICS CORPORATION (Continued)
The accompanying consolidated financial statements include the assets,
liabilities, income and expenses of the Company as included in Palomar's
consolidated financial statements, but do not include PEC's general
corporate debt, which is used to finance operations of all of PEC's
respective business segments, or an allocation of PEC's interest expense.
Palomar has incurred certain general and administrative expenses on
behalf of Nexar, totaling approximately $100,000 and $128,000 for the
period from inception (March 7, 1995) to December 31, 1995 and for the
nine months ended September 30, 1996, respectively. These expenses have
been reflected in the historical consolidated financial statements of
Nexar for the respective periods. Management believes the method for
allocating expenses is reasonable and approximates the cost on a
standalone basis.
Included in accounts receivable in the accompanying consolidated balance
sheet at September 30, 1996 is approximately $105,000 due from Palomar
for product purchases. There was no amount due from Palomar at December
31, 1995.
Palomar has issued guarantees to several vendors of the Company for
payment of trade payables on behalf of the Company. The total amount
guaranteed by Palomar at September 30, 1996 was approximately $1,800,000.
In 1995, as part of the Company's organization, the Company agreed to
settle a complaint brought against the Company and its Chief Executive
Officer. As part of the settlement, the Company was required to pay
$525,000 and Palomar agreed to issue warrants to purchase 108,000 shares
of Palomar's common stock at $5.00 per share, the fair value of Palomar
common stock at that date. This warrant had minimal value. The Company
recorded the $525,000 as a general and administrative expense, which is
included in operating expenses in the accompanying consolidated statement
of operations for the period ended December 31, 1995.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the
application of certain accounting policies described below and elsewhere
in the accompanying notes to consolidated financial statements.
F-8
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(a) Unaudited Pro Forma Presentation
The unaudited pro forma consolidated balance sheet as of September 30,
1996, reflects the conversion of $10,000,000 due to Palomar and PEC into
1,900,000 shares of the Company's common stock and the conversion of
$4,568,449 due to Palomar and PEC into 45,684 shares of Convertible
Preferred Stock at an assumed initial public offering price of $12.00 per
share. In connection with this conversion of amounts due to related
parties, by agreement between Palomar and the Company, 1,200,000 of the
common shares will be held in escrow and only be released to Palomar
based upon the Company's achievement of certain revenue, net income and
stock price milestones, as defined, through December 31, 2000.
(b) Pro Forma Net Loss per Common and Common Equivalent Share
Pro forma net loss per common and common equivalent share for the period
from inception (March 7, 1995 to December 31, 1995) and for the nine
months ended September 30, 1996 is computed by dividing the net loss by
the pro forma weighted average number of common and common equivalent
shares outstanding during the period. Pursuant to Securities and Exchange
Commission Staff Accounting Bulletin No. 83, and Accounting Principles
Board (APB) Opinion No. 15 , the pro forma weighted average number of
common and common equivalent shares outstanding assumes the conversion of
$10,000,000 due to Palomar into 700,000 shares of the Company's common
stock (excluding 1,200,000 shares of common stock subject to a contingent
repurchase right of the Company at a nominal price per share and will
only be released upon the attainment of certain revenues net income and
stock price milestones, as defined, in an agreement between Palomar and
the Company), and assumes that all common stock and common stock
equivalents issued within 12 months prior to the registration statement
related to the Company's anticipated initial public offering have been
included in the calculation, using the treasury stock method, as if they
were outstanding for all periods immediately preceding the initial public
offering. Options issued more than 12 months prior to this Registration
Statement have not been included as their effect would be anti-dilutive.
Historical net loss per share has not been presented as such information
is not considered to be relevant or meaningful.
(c) Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary, Intelesys
Corporation (a Delaware Corporation). All significant intercompany
balances and transactions have been eliminated in consolidation.
F-9
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Use of Estimates in the Preparation of the Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(e) Revenue Recognition
The Company recognizes product revenue upon shipment. The Company
has established programs which, under specified conditions,
provide price protection and or enable customers to return
products. The effects of these programs are estimated and current
period revenues and cost of revenues are reduced accordingly. This
is standard industry practice and no other contingencies exist
relating to these programs. Provisions are made at the time of
sale for any applicable warranty costs expected to be incurred.
During the period ended September 30, 1996, the Company recognized
revenue totaling approximately $2,500,000 for products, whose
title passed to a customer and such customer instructed the
Company to hold the product at its manufacturing facility on the
customer's behalf. Through December 31, 1996 approximately
$700,000 of this product had been shipped to this customer and the
remaining balance is anticipated to be shipped during February
1997. Included in accounts receivable at September 30, 1996 is
approximately $2,500,000 due from this customer. This customer
has paid approximately $2,340,000 of this amount subsequent to
September 30, 1996. The Company has recognized this revenue in
accordance with the Securities and Exchange Commission Accounting
and Auditing Enforcement Release No. 108.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out)
or market and consist of the following:
DECEMBER 31, SEPTEMBER 30,
1995 1996
Raw materials $ 8,432 $ 2,197,770
Work-in-process - 104,901
Finished goods - 690,027
--------------- ---------------
$ 8,432 $ 2,992,698
============== ==============
Work-in-process and finished goods inventories consist of
material, labor and manufacturing overhead.
F-10
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(g) Depreciation and Amortization
Property and equipment are stated at cost. The Company provides
for depreciation and amortization on property and equipment using
the straight-line method by charges to operations that allocate
the cost of assets over their estimated useful lives. The cost of
property and equipment and their estimated useful lives are
summarized as follows:
<TABLE>
<CAPTION>
ESTIMATED USEFUL DECEMBER 31, SEPTEMBER 30,
ASSET CLASSIFICATION LIFE 1995 1996
<S> <C> <C> <C>
Machinery and equipment 5 Years $ 102,093 $ 150,893
Computer equipment 5 Years 700 52,385
Leasehold improvements Life of lease - 33,750
-------------- --------------
102,793 237,028
Less--Accumulated depreciation and
amortization 2,119 20,209
-------------- --------------
$ 100,674 $ 216,819
=========== ===========
</TABLE>
F-11
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(h) Other Assets
As of September 30, 1996, the Company has incurred costs of
approximately $402,000 in connection with the proposed initial
public offering of the Company's common stock, contemplated
herein. These costs have been deferred and are included in other
assets in the accompanying September 30, 1996 consolidated balance
sheet. Upon consummation of the proposed initial public offering,
the deferred offering costs will be charged to stockholder's
(deficit) equity as a reduction of the gross proceeds.
(i) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105,
Disclosure of Information About Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with
Concentration of Credit Risk, requires disclosures of any
significant off-balance-sheet and credit risk concentrations. The
Company has no significant off-balance-sheet concentration of
credit risk such as foreign currency exchange contracts, options
contracts or other foreign hedging arrangements. The Company's
accounts receivable credit risk is limited to three customers for
the period from inception (March 7, 1995) to December 31, 1995 who
accounted for approximately $440,000 of total revenues and
approximately $275,000 of accounts receivable at December 31,
1995, and one customer for the nine months ended September 30,
1996, who represented approximately $8,432,000 of total revenues
and approximately $6,082,000 of accounts receivable at September
30, 1996. To reduce risk, the Company routinely assesses the
financial strength of its customers and, as a consequence,
believes that its accounts receivable credit risk exposure is
limited. The Company maintains an allowance for potential credit
losses. During the period ended September 30, 1996, the Company
sold approximately $430,000 of product to a company owned by a
current officer and former officer of Nexar. The Company collected
$211,000 of this amount and wrote off the remaining balance,
approximately, $219,000, as uncollectible during the nine months
ended September 30, 1996. The Company has not experienced any
other significant losses related to individual customers or groups
of customers in any particular industry or geographic area.
(j) Financial Instruments
The estimated fair value of the Company's financial instruments,
which include cash, accounts receivable, accounts payable and
amounts due to related parties, approximates their carrying value.
F-12
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(k) Research and Development Expenses
The Company charges research and development expenses to
operations as incurred.
(l) New Accounting Standard
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, Accounting for Stock-Based
Compensation, which is effective for fiscal years beginning after
December 15, 1995. SFAS No. 123 establishes a fair-value-based
method of accounting for stock-based compensation plans. The
Company has adopted the disclosure only alternative under SFAS No.
123, which requires disclosure of the pro forma effects on
earnings and earnings per share as if SFAS No. 123 had been
adopted, as well as certain other information.
F-13
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(l) New Accounting Standard (Continued)
The Company has computed the pro forma disclosures required under
SFAS No. 123 for all stock options granted as of September 30,
1996 using the Black-Scholes option pricing model prescribed by
SFAS No. 123.
The assumptions used for the period from inception (March 7, 1995)
to December 31, 1995 and for the period ending September 30, 1996
and the weighted average information as of September 30, 1996 are
as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 7, 1995) TO NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
<S> <C> <C>
Risk-free interest rate............ 6.11% 5.74%
Expected dividend yield............ - -
Expected lives..................... 5 years 5 years
Expected volatility................ 51% 51%
Weighted average grant-date fair
value of options granted during the
period............................. $0.001 $0.12
Weighted-average exercise price.... - $0.12
Weighted-average remaining
contractual life of options
outstanding........................ - 4.36 years
Weighted average exercise price
for 1,059,387 options exercisable.. - $0.025
</TABLE>
The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 7, 1995) TO NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
<S> <C> <C>
Pro forma net loss.................. $(2,261,434) $(2,997,092)
Pro forma net loss per share........ $(0.27) $(0.36)
</TABLE>
F-14
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) STOCKHOLDER'S (DEFICIT) EQUITY
(a) Recapitalization
On December 18, 1996, the Company amended its Certificate of
Incorporation increasing the number of authorized shares of the
Company's capital stock to 40,000,000, of which 30,000,000 shares
are designated as common stock, $.01 par value, and 10,000,000
shares are designated as preferred stock, $.01 par value, and also
declared a 120-for-1 stock split of the Company's common stock,
effected in the form of a stock dividend. This stock split has
been retroactively reflected in the accompanying consolidated
financial statements and notes to consolidated financial
statements for all periods presented.
On December 19, 1996, the Board of Directors approved the issuance
of up to 45,684 shares of Convertible Preferred Stock, effective
on the closing of the initial public offering contemplated herein.
The Convertible Preferred Stock will be entitled to voting rights
equal to the number of common shares into which the preferred
stock may be converted. The Convertible Preferred Stock will be
convertible into common shares at the option of the holder thereof
at a price based on the initial public offering price. The holder
of the Convertible Preferred Stock will be able to convert each
share of Convertible Preferred Stock into 6.67 shares of common
stock based on an assumed initial public offering price of $12.00
per share. The Convertible Preferred Shares also have a preference
upon liquidation.
(b) Stock Option Plans
In August 1995 the Company established its 1995 Stock Option Plan
(the Plan) that provides for the issuance of a maximum of
4,800,000 shares of common stock, which may be issued as incentive
stock options (ISOs) or nonqualified stock options. Under the
terms of the Plan, ISOs may not be granted at less than the fair
market value on the date of grant. ISO grants to holders of 10% or
more of the combined voting power of all classes of Company stock
must be granted at an exercise price of 110% of the fair market
value at the date of grant. Pursuant to the Plan, options are
generally exercisable at varying dates over one to three years as
determined by the Board of Directors and must have terms not to
exceed 10 years (five years for 10% or greater stockholders).
F-15
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) STOCKHOLDER'S (DEFICIT) EQUITY (Continued)
(b) Stock Option Plans (continued)
The following table summarizes stock option activity under the
Plan:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
<S> <C> <C>
Inception, March 7, 1995 - $-
Granted 20,640 -
-------------------- -------------------------
Balance, December 31, 1995 20,640 $-
Granted 3,296,840 $.0025-$4.25
-------------------- -------------------------
Balance, September 30, 1996 3,317,480 $.0025-$4.25
==================== =========================
Exercisable, September 30, 1996 1,059,387 $.0025-$4.25
==================== =========================
</TABLE>
On January 30, 1996, July 19, 1996 and October 1, 1996, the Company
granted options to purchase 3,234,480, 83,000 and 100,000 shares of
Common Stock, respectively, at exercise prices of $0.0025, $4.25 and
$10.00 per share, respectively. The price per share was based on the fair
market value of the Company's Common Stock as determined by the Board of
Directors on the date of grant. On December 19, 1996 the Board of
Directors approved the issuance of stock options to purchase 800,000
shares of the Company's common stock at the initial public offering price
upon the effectivity of the proposed initial public offering price to
certain employees, directors and officers of Palomar and the Company.
These stock options vest over a five year period, or earlier, upon the
achievement of certain revenue, net income and stock price milestones, as
defined, through December 31, 2000.
F-16
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(4) STOCKHOLDER'S (DEFICIT) EQUITY (Continued)
(b) Stock Option Plans (continued)
On December 18, 1996, the Director Plan was adopted by the Board of
Directors. The Director Plan will become effective upon the closing of
the proposed initial public offering. Under the terms of the Director
Plan, options (the Initial Options) to purchase 15,000 shares of common
stock will be granted to each person who becomes a non-employee director
after the closing date of the proposed initial public offering and who is
not otherwise affiliated with the Company, effective as of the date of
election to the Board of Directors. The Initial Options will vest in
equal annual installments over three years after the date of grant. In
addition, each non-employee director will receive options to purchase
10,000 shares (Annual Options) on the date of each annual meeting of the
Company's stockholders held after the closing of the initial public
offering. The Annual Options will vest one year from the date. A total of
100,000 shares of common stock may be issued upon the exercise of stock
options granted under the Director Plan. Unless sooner terminated
pursuant to its terms, the Director Plan will terminate in December 2006.
(c) Employee Stock Purchase Plan
On December 19, 1996, the Company's Board of Directors adopted the
Company's 1996 Employee Stock Purchase Plan (the Purchase Plan). The
Purchase Plan will become effective upon the closing of the proposed
initial public offering and authorizes the issuance of up to a total of
200,000 shares of Common Stock to participating employees.
(d) Underwriter's Warrant
Upon consumation of the proposed initial public offering contemplated
herein, the Company will issue to the underwriter, as part of their
investment banking fee, warrants to purchase 250,000 shares of the
Company's common stock at a price equal to 120% of the initial public
offering price per share.
(5) INCOME TAXES
The Company and Palomar file a consolidated income tax return. The
consolidated tax return reflected net operating losses for the year ended
December 31, 1995. If Palomar's equity ownership drops below 80%, which
is anticipated to occur upon the completion of the proposed initial
public offering, the Company will file its own income tax return.
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, on a separate Company basis. Under SFAS No.
109, deferred tax assets or liabilities are computed based on the
differences between the financial statement and income tax bases of
assets and liabilities using currently enacted tax rates. Deferred income
tax expenses or credits are based on changes in the assets or liability
from period to period.
F-17
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(5) INCOME TAXES (Continued)
Through September 30, 1996, the Company had generated net operating loss
carryforwards for federal and state income tax purposes of approximately
$4,976,000 which expire through 2011. The Company also has certain tax
credits available to offset future federal and statement income taxes, if
any. Net operating loss carryforwards and credits are subject to review
and possible adjustment by the Internal Revenue Service and may be
limited in the event of certain cumulative changes in ownership interests
of significant stockholders over a three-year period in excess of 50%, as
defined. The Company may experience a change in ownership in excess of
50% upon completion of the proposed initial public offering, contemplated
herein. The Company does not believe that these changes in ownership will
significantly impact the Company's ability to utilize its net operating
loss carryforwards.
The approximate income tax effect of each type of temporary difference
and carryforward is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
<S> <C> <C>
Net operating loss carryforwards $ 830,000 $ 2,004,000
Other temporary differences 75,000 86,000
----------- ------------
905,000 2,090,000
Valuation allowance (905,000) (2,090,000)
------------ -----------
$ - $ -
============= =============
</TABLE>
Under SFAS No. 109, the Company cannot recognize a deferred tax asset for
the future benefit of the net operating loss carryforwards unless it
concludes that it is "more likely than not" that the deferred tax asset
would be realized. Due to its early stage of development and history of
operating losses, the Company has recorded a full valuation allowance
against its otherwise recognizable deferred tax asset.
F-18
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1996
<S> <C> <C>
Accrued payroll and related costs $ 51,452 $ 252,678
Accrued settlement costs 500,000 -
Other accrued expenses 57,881 799,869
--------------- ---------------
Total $ 609,333 $ 1,052,547
============= =============
</TABLE>
(7) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company leases its corporate office and manufacturing facility
under operating lease arrangements expiring through August 2001.
The Company also leases certain equipment under operating leases
expiring through September 2000.
Future minimum lease payments under all operating leases at
September 30, 1996 are as follows:
Fiscal Year Ended Amount
----------------- ------
1996, 3 months remaining $ 100,000
1997 418,000
1998 450,000
1999 453,000
2000 506,000
2001 352,000
--------------
$ 2,282,000
============
Rent expense related to all operating leases was approximately
$85,000 and $88,000 for the period from inception (March 7, 1995)
to December 31, 1995 and the nine months ended September 30, 1996,
respectively.
F-19
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (Continued)
(b) License Agreements
In August 1995, the Company entered into a license agreement with
Technovation Computer Labs, Inc. (Licensor). The Licensor is
affiliated with a former officer of the Company. The license
agreement gives Nexar the right to manufacture, sell and use a
system designed by the Licensor, which allows external replacement
of certain component parts. In exchange for these rights, the
Company pays a royalty on each unit sold, as defined. The term of
the agreement is for five years (three years on an exclusive
basis), renewable for an additional five-year period at the option
of the Company. For the nine months ended September 30, 1996 and
for the period from inception (March 7, 1995) to December 31,
1995, royalties charged to operations were immaterial.
In March 1996, the Company entered into a software license
agreement with 4-Home Productions (4-Home), a Division of Computer
Associates International, Inc. The license agreement gives the
Company the right to use, reproduce, display and distribute
certain of 4-Home's software application programs within the
United States, Canada and Puerto Rico. In exchange for these
rights, the Company paid 4-Home a nonrefundable fee of $25,000 and
will pay a royalty on all units sold, as defined, that are bundled
with 4-Homes' software applications. The term of the agreement is
for one year and will automatically renew for additional one-year
periods unless written notice of termination is made by either
party 60 days prior to the end of the initial or any subsequent
term. No royalties have been incurred under this agreement as of
September 30, 1996.
F-20
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (Continued)
(c) Service Agreement
In March 1996, the Company entered into a maintenance service
agreement with Wang Laboratories, Inc. (Wang). The agreement
states that Wang will provide certain maintenance services for
certain equipment manufactured by the Company for a term of three
years and, thereafter, on a year-to-year basis at the option of
the Company. The payment terms are based on the greater of certain
minimum amounts or the failure rate, as defined, multiplied by the
number of units sold per month. As of September 30, 1996, the
Company incurred and charged to operations approximately $226,000
under this agreement, of which approximately $189,000 is included
in accrued expenses in the accompanying consolidated balance
sheet.
(d) Development Agreement
In November 1996, the Company entered into a development agreement
with another company (the Developer) whereby the Developer would
develop certain technology for the Company for approximately
$250,000, in accordance with the development agreement. In
addition, the Company may be required to pay additional amounts
based on product sold, not to exceed $500,000.
(e) Milestone Agreement
In connection with the Company's proposed initial public offering,
Palomar will place 1,200,000 shares of the Company's common stock
received for the conversion of certain amounts due to Palomar and
PEC in escrow (see Note 2). These shares will only be released
from escrow upon the achievement by the Company of a minimum
revenue and net income milestone or minimum stock price, as
defined.
F-21
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES (Continued)
(f) Employment Agreement
The Company has employment agreements with substantially all of
its executive officers which provide for severance payments
ranging from 6 to 12 months salary upon termination, as defined,
in the agreement. In addition, the Company's employment agreement
with its Chief Executive Officer provides for a royalty on each
unit sold, as defined. During the nine months ended September 30,
1996 the Company charged $20,400 to cost of revenues under this
agreement.
(g) Contingency
The Company is aware that an attorney for a former executive
officer of the Company may file a lawsuit or seek arbitration
proceeding against the Company regarding this executive's
employment and the Company's license agreement with the Licensor.
Management is negotiating with this former executive and believes
that this contingency will be satisfied by the Company for
consideration up to $3,000,000.
(8) 401(K) PROFIT SHARING PLAN
In April 1996, the Company began participating in a 401(k) plan (the
401(k) Plan) established by Palomar. The 401(k) Plan covers substantially
all employees who have satisfied a six-month service requirement and have
attained the age of 18. Employees may contribute up to 15% of their
salary, as defined, subject to restrictions defined by the Internal
Revenue Service. Matching contributions equal to 50% of all employee
contributions are made in the form of Palomar's common stock. Upon the
closing of the initial public offering contemplated herein, it is
management's intention to establish its own 401(k) plan. The matching
contributions vest ratably over a three-year period. The Company's
expense under this matching contribution has been insignificant through
September 30, 1996.
F-22
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
(9) FINANCING ARRANGEMENTS
In August 1996, the Company entered into a financing program with IBM
Credit Corporation (IBM), whereby IBM will finance all hardware, software
and associated products sold or marketed by the Company to any entity
(Remarketer) that has already executed a financing agreement with IBM to
purchase products from the Company. This financing program gives title of
the products sold by the Company to the Remarketer, and IBM finances the
purchase price of the products. In addition, under certain circumstances,
as defined, IBM has the right to require the Company to repurchase
products upon default by the Remarketer. As of September 30, 1996, the
Company has not received any proceeds under this agreement.
In August 1996, the Company entered into a financing agreement with AT&T
Capital Corporation (AT&T) whereby AT&T would provide to certain
distributors or dealers, financing for the purchase of the Company's
products. Under certain circumstances, as defined, AT&T has the right to
require the Company to repurchase products upon default of payment by the
distributor to AT&T. As of September 30, 1996, the Company has not
received any proceeds under this agreement.
F-23
Product engineering and manufacturing are located in NEXAR's l00,000 sf facility
in Hayward, Calilornia. Corporate headquarters are in Westborough,
Massachusetts.
[PHOTOGRAPHS OF EXTERIOR AND INTERIOR OF CALIFORNIA MANUFACTURING FACILITY]
[NEXAR LOGO]
182 Turnpike Road
Westborough, MA 01581
l -888-NEXAR-PC
================================================================================
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company, the Selling Stockholders, or by any of the
Underwriters. This Prospectus does not constitute an offer of any securities
other than those to which it relates or an offer to sell, or a solicitation of
an offer to buy, those to which it relates in any state to any person to whom it
is not lawful to make such offer in such state. The delivery of this Prospectus
at any time does not imply that the information herein is correct as of any time
subsequent to its date.
--------------------
TABLE OF CONTENTS
Page
Prospectus Summary.....................................................
Risk Factors...........................................................
Use of Proceeds........................................................
Dividend Policy........................................................
Capitalization.........................................................
Dilution...............................................................
Selected Consolidated Financial Data...................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................
Business...............................................................
Management.............................................................
Certain Transactions...................................................
Stockholders...........................................................
Beneficial Ownership of Management.....................................
Description of Capital Stock...........................................
Shares Eligible for Future Sale........................................
Underwriting...........................................................
Legal Matters..........................................................
Experts................................................................
Additional Information.................................................
Trademarks.............................................................
Index to Consolidated Financial Statements.............................
--------------------
Until ______, 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
2,500,000 SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
______________, 1997
--------------------
SANDS BROTHERS & CO., LTD.
================================================================================
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS PROSPECTUS
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 _____________, 1997
PROSPECTUS
6,700,000 SHARES
Nexar
[LOGO]
COMMON STOCK
This Prospectus relates to the resale of up to 6,700,000 shares of
Common Stock of Nexar Technologies, Inc. ("NEXAR" or the "Company") held by
Palomar Medical Technologies, Inc. ("Palomar") and The Travelers Insurance
Company, GFL Advantage Fund Limited and Clearwater Fund IV LLC,(collectively,
the "Selling Security Holders"). Prior to the Company's initial public offering,
as described below, there has not been a public market for the Common Stock of
the Company. The shares of Common Stock being offered hereby were acquired by
the Selling Security Holders pursuant to a private offering of Common Stock in
private transactions exempt from registration under federal and state securities
laws.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS
OF THE COMMON STOCK OFFERED HEREBY.
The Selling Security Holders and their agents, donees, distributees,
pledgees and other successors in interest may offer and sell the remainder of
the shares from time to time in one or more transactions on The Nasdaq Stock
Market, or otherwise, at market prices then prevailing or in negotiated
transactions. The shares may also be sold pursuant to option, hedging or other
transactions with broker-dealers. The shares may also be offered in one or more
underwritten offerings, although no such arrangments have been made. The
underwriters in an underwritten offering, if any, and the terms and conditions
of any such offering will be described in a supplement to this Prospectus. See
"Selling Security Holders" and "Plan of Distribution."
On ___________, 1997, the Company completed an initial public offering (the
"Offering")of 2,500,000 shares of Common Stock through Sands Brothers & Co.,
Ltd. (the "Representative") as the representative of several underwriters. The
Company will not receive any of the proceeds from the sale of the shares by the
Selling Security Holders. See "Use of Proceeds". The Common Stock of the Company
is traded on the National Market of the Nasdaq Stock Market (the "Nasdaq
National Market") under the symbol "NEXR". On ____________, 1997, the last
reported sale price of Common Stock on the Nasdaq National Market was $ ________
per share.
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.
THE DATE OF THIS PROSPECTUS IS ___________, 1997.
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
THE OFFERING
The 6,700,000 shares of Common Stock offered by the Selling Security
Holders are identical to the 2,500,000 shares of Common Stock offered and sold
by the Company in its underwritten initial public offering (the "Offering") by
separate prospectus. Upon completion of the Offering, 9,200,000 shares of Common
Stock were outstanding based on the number of shares of Common Stock outstanding
on December 20, 1996 and excluding (i) 3,055,920 shares of Common Stock issuable
upon exercise of stock options outstanding as of December 20, 1996 at a weighted
average exercise price of $0.51 per share, of which options to purchase
1,061,680 shares were then exercisable, and (ii) 800,000 shares of Common Stock
reserved for issuance under stock option to be granted upon the effectiveness of
the Offering at the initial public offering price. See "Capitalization,"
"Management--Stock Plans" and "Beneficial Ownership of Management." Such
9,200,000 shares outstanding includes 1,900,000 of shares of Common Stock which
were issued to related parties upon conversion of $10,000,000 of indebtedness
upon the closing of the Offering. See "Certain Transactions."
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
USE OF PROCEEDS
The Company will receive no proceeds from the sale of Common Stock by the
Selling Security Holders. The net proceeds to the Company from the sale of the
2,500,000 shares of Common Stock offered by the Company pursuant to the Offering
are estimated to be $25,850,000 million ($29,877,500 million if the Underwriters
exercise their over-allotment option in full), assuming an initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
The principal purposes of the Offering are to increase the Company's
equity capital and to create a public market for the Company's Common Stock,
which will facilitate future access by the Company to the public equity markets,
enhance the ability of the Company to use its Common Stock as consideration for
acquisitions and as a means for attracting and retaining key employees. The
Company intends to use the proceeds of the Offering for general corporate
purposes, including working capital, product development and capital
expenditures and to repay $5,000,000 of non-interest bearing demand indebtedness
to related parties. See "Certain Transactions." The amount and timing of
expenditures may vary significantly depending upon numerous factors including
the success of the Company's currently marketed product, the continued progress
in, and magnitude of the Company's research and product development programs,
market acceptance of the Company's new products, the timing and costs involved
in obtaining regulatory clearances and approvals, the costs involved in filing,
prosecuting, enforcing and defending patent claims, and competing technological
and market developments and the costs and success of its commercialization
activities. Based upon its current operating plan, the Company believes that its
existing capital resources together with the proceeds of the Offering and
interest earned thereon, will be adequate to satisfy its capital requirements
for at least the next twelve months.
A portion of the net proceeds of the Offering may also be used for
investments in or acquisitions of complementary businesses, products or
technologies, although the Company has not entered into any commitments or
negotiations with respect to any such transactions. Pending such use, the
Company expects to invest the net proceeds in short-term, interest-bearing,
investment grade securities.
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
SELLING SECURITY HOLDERS
Set forth below, with respect to each of the Selling Security Holders, is
the number of shares of Common Stock beneficially owned as of December 31, 1996,
the number of shares of Common Stock offered pursuant to this Prospectus and the
number of shares to be owned after completion of this offering (assuming the
sale of all of the shares offered hereby).
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF SHARES
TOTAL NUMBER OF SHARES TO BE TO BE OWNED AFTER
NAME AND ADDRESS SHARES OWNED(1) OFFERED OR SOLD THE OFFERING
- ---------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Palomar Medical 6,100,000 6,100,000 0
Technologies, Inc.
66 Cherry Hill Drive
Beverly, Massachusetts 01915
The Travelers Insurance 200,000 200,000 0
Company
One Tower Square
Hartford, Connecticut 06183
GFL Advantage Fund Limited 200,000 200,000 0
c/o Citco
Kaya Flamboyan 9
Curacao, Netherlands, Antilles
Clearwater Fund IV LLC 200,000 200,000 0
611 Druid Road East
Suite 200
Clearwater, Florida 34616
__________________
(1) The shares of the Common Stock beneficially owned by Palomar are held
by Palomar Electronics Corporation (PEC), a wholly-owned direct
subsidiary of Palomar. After the sale of the Common Stock in the
Offering, Palomar (through its ownership of PEC) will beneficially own
approximately 66.3% (6,100,000 shares) of the outstanding Common Stock
(approximately 63.7% if the Underwriters' over allotment option is
exercised in full), including 1,900,000 shares of Common Stock that
will be issued upon the closing of the Offering to Palomar and PEC in
exchange for retirement of $10,000,000 of indebtedness owed by the
Company to Palomar and PEC. See "Certain Transactions."
</TABLE>
CONCURRENT OFFERING
The Registration Statement of which this Prospectus is a part also covers
2,500,000 shares of Common Stock offered by the Company made pursuant to a
separate prospectus.
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
PLAN OF DISTRIBUTION
The Selling Security Holders and their agents, donees, distributees,
pledgees and other successors in interest may, from time to time, offer for sale
and sell or distribute the shares to be offered by them hereby (a) in
transactions executed on the Nasdaq National Market, or any securities exchange
on which the shares may be traded, through registered broker-dealers (who may
act as principals, pledgees or agents) pursuant to unsolicited orders or offers
to buy, (b) in negotiated transactions, or (c) through other means. The shares
may be sold from time to time in one or more transactions at market prices
prevailing at the time of sale or a fixed offering price, which may be changed,
or at varying prices determined at the time of sale or at negotiated prices.
Such prices will be determined by the Selling Security Holders or by agreement
between the Selling Security Holders and their underwriters, dealers, brokers or
agents. The shares may also be offered in one or more underwritten offerings.
The underwriters in an underwritten offering, if any, and the terms and
conditions of any such offering will be described in a supplement to this
Prospectus.
In connection with distribution of the shares, the Selling Security
Holders may enter into hedging or other option transactions with broker-dealers
in connection with which, among other things, such broker-dealers may engage in
short sales of the shares pursuant to this Prospectus in the course of hedging
the positions they may assume with one or more of the Selling Security Holders.
The Selling Security Holders may also sell shares short pursuant to this
Prospectus and deliver the shares to close out such short positions. The Selling
Security Holders may also enter into option or other transactions with
broker-dealers which may result in the delivery of shares to such broker-dealers
who may sel1 such shares pursuant to this Prospectus. The Selling Security
Holders may also pledge the shares to a broker-dealer and upon default the
broker-dealer may effect the sales of the pledged shares pursuant to this
Prospectus.
The distribution of the shares by the Selling Security Holders is not
subject to any underwriting agreement. Any underwriters, dealers, brokers or
agents participating in the distribution of the shares may receive compensation
in the form of underwriting discounts, concessions, commissions or fees from the
Selling Security Holders and/or purchasers of shares, for whom they may act.
Such discounts, concessions, commissions or fees will not exceed those customary
for the type of transactions involved. In addition, the Selling Security Holders
and any such underwriters, dealers, brokers or agents that participate in the
distribution of shares may be deemed to be underwriters under the Securities
Act, and any profits on the sale of shares by them and any discounts,
commissions or concessions received by any of such persons may be deemed to be
underwriting discounts and commissions under the Securities Act. Those who act
as underwriter, broker, dealer or agent in connection with the sale
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
of the shares will be selected by the Selling Security Holders and may have
other business relationships with the Company and its subsidiaries or affiliates
in the ordinary course of business.
The aggregate proceeds to the Selling Security Holders from the sale of
the shares offered by the Selling Security Holders hereby will be the purchase
price of such shares less any broker's commissions.
In order to comply with the securities laws of certain states, if
applicable, the shares will be sold in such jurisdiction only through registered
or licensed brokers or dealers. In addition, in certain states the shares may
not be sold unless they have been registered or qualified for sale in the
applicable state or an exemption from the registration of qualification
requirement is available and is complied with.
The Selling Security Holders and any broker-dealer, agent or underwriter
that participates with the Selling Security Holders in the distribution of the
shares may be deemed to be "underwriters" within the meaning of the Securities
Act, in which event any commissions received by such broker-dealers, agents or
underwriters and any profit on the resale of the shares purchased by them may be
deemed to be underwriting commissions or discounts under the Securities Act.
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the shares offered hereby may not simultaneously
engage in market making activities with respect to the shares for a period of
two business days prior to the commencement of such distribution. In addition,
and without limiting the foregoing, the Selling Security Holders will be subject
to applicable provisions of the Exchange Act and the rules and regulations
thereunder, including, without limitation, Rules 10b-2, lOb-5, lOb-6 and lOb-7,
which provisions may limit the timing of sales of the shares by the Selling
Security Holders.
There is no assurance that the Selling Security Holders will sell any or
all of the shares described herein and may transfer, devise or gift such
securities by other means not described herein. The Company is permitted to
suspend the use of this Prospectus in connection with sales of the shares by
holders during certain periods of time under certain circumstances relating to
pending corporate developments and public filings with the Commission and
similar events. Expenses of preparing
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
and filing the registration statement and any and all amendments thereto will be
borne by the Company.
================================================================================
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS' PROSPECTUS
No dealer, salesperson or any other person has been authorized to give
any information or to make any representations other than those contained in
this Prospectus in connection with the offer contained herein, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Selling Security Holders. This Prospectus does
not constitute an offer of any securities other than those to which it relates
or an offer to sell, or a solicitation of an offer to buy, those to which it
relates in any state to any person to whom it is not lawful to make such offer
in such state. The delivery of this Prospectus at any time does not imply that
the information herein is correct as of any time subsequent to its date.
--------------------
TABLE OF CONTENTS
Page
Prospectus Summary.....................................................
Risk Factors...........................................................
Use of Proceeds........................................................
Dividend Policy........................................................
Capitalization.........................................................
Dilution...............................................................
Selected Consolidated Financial Data...................................
Management's Discussion and Analysis of
Financial Condition and Results of
Operations...........................................................
Business...............................................................
Management.............................................................
Certain Transactions...................................................
Selling Security Holders...............................................
Beneficial Ownership of Management.....................................
Description of Capital Stock...........................................
Shares Eligible for Future Sale........................................
Underwriting...........................................................
Legal Matters..........................................................
Experts................................................................
Additional Information.................................................
Trademarks.............................................................
Index to Consolidated Financial Statements.............................
================================================================================
================================================================================
ALTERNATE PAGE FOR SELLING SECURITY HOLDERS PROSPECTUS
6,700,000 SHARES
Nexar
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
______________, 1997
--------------------
================================================================================
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Estimated expenses (other than underwriting discounts and commissions)
payable by the Registrant in connection with the sale of the Common Stock
offered hereby are as follows:
SEC Registration fee......................................... $ *
NASD Filing fee.............................................. *
Nasdaq National Market fee................................... *
Printing and mailing expenses................................ *
Legal fees and expenses...................................... *
Accounting fees and expenses................................. *
Blue Sky fees and expenses (including legal fees)............ *
Transfer agent and registrar fees and expenses............... *
Miscellaneous................................................ *
---------
Total........................................................$1,000,000
=========
- ---------------------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation may indemnify a director, officer, employee or agent
against expenses (including attorneys' fees), judgments, fines and for amounts
paid in settlement in respect of or in successful defense of any action, suit or
proceeding if he acted in good faith and in a manner he 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 his
conduct was unlawful.
Article Tenth of the Registrant's Restated Certificate of Incorporation
provides that no director of the Registrant shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law or (iv) for any transaction from which the
director derived an improper personal benefit. Article Tenth further provides
that a director's personal liability shall be eliminated or limited in the
future to the fullest extent permitted from time to time by the Delaware General
Corporation Law.
Article Eleventh of the Registrant's Restated Certificate of Incorporation
provides that the Registrant shall, to the fullest extent permitted from time to
time under the Delaware General Corporation Law, indemnify each of its directors
and officers against all expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement in respect of any action, suit or proceeding in
which such director or officer may be involved or with which he may be
threatened, while in office or thereafter, by reason of his or her actions or
omissions in connection with services to the Registrant, such indemnification to
include prompt payment of expenses in advance of the final disposition of any
such action, suit or proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement,
the Registrant has issued the following securities that were not registered
under the Securities Act:
(a) In March 1995, the Registrant issued 40,000 shares of Common
Stock to Palomar (which subsequently transferred such shares
to PEC without consideration) for consideration of $400.
No underwriters were involved in the foregoing sales of securities.
Such sales were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
sales by an issuer not involving any public offering or the rules and
regulations thereunder. All of the foregoing securities are deemed restricted
securities for the purposes of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
Exhibit Description
+ 1.1 Draft of Underwriting Agreement
+ 3.1 Certificate of Incorporation of the Registrant, as amended
+ 3.2 Form of Restated Certificate of Incorporation to be filed by
the Registrant
+ 3.3 Amended and Restated By-laws of the Registrant
+ 4.1 Articles Fourth, Seventh, Eighth, Ninth, Tenth, Eleventh,
Twelfth and Fifteenth of the Restated Certificate of
Incorporation of the Registrant to be filed by the Registrant
(included in Exhibit 3.2)
+ 4.2 Articles II, III, IV, V, VI, VII, VIII, IX, X, XIV, XXI, XXVI,
XXVII, of the Registrant's By-laws, as amended (included in
Exhibit 3.3)
+ 4.3 Agreement dated December 19, 1996 between Palomar Medical
Technologies, Inc. and the Registrant
*5.1 Opinion of Choate, Hall & Stewart with respect to legality of
the shares of Common Stock of the Registrant being registered
+ 10.1 Lease dated as of July 28, 1995 between the Registrant and
W.D.P. Corp., a Massachusetts corporation
+ 10.2 Lease dated as of August 9, 1996 between the Registrant and IBG
Huntwood Associates, a California general partnership
+**10.3 License Agreement between the Registrant and Technovation
Computer Labs, Inc. dated as of August 1, 1995
+**10.4 International Service Agreement between the Registrant and Wang
Laboratories, Inc. dated September 1, 1996
+**10.5 On-Site Maintenance & Service Agreement between the Registrant
and Wang Laboratories, Inc. dated October 2, 1995
+ 10.6 Letter agreement dated as of December 17, 1996 between the
Registrant and Government Technology Services, Inc.
*10.7 1995 Stock Option Plan
*10.8 1996 Employee Stock Purchase Plan
*10.9 1996 Non-Employee Directors Stock Option Plan
*10.10 Key Employee Agreement between the Registrant and Albert J.
Agbay
*10.11 Key Employee Agreement between the Registrant and Gerald Y.
Hattori
*10.12 Key Employee Agreement between the Registrant and Michael J.
Paciello
*10.13 Key Employee Agreement between the Registrant and Liaqat Khan
II-2
*10.14 Key Employee Agreement between the Registrant and Victor J.
Melfa, Jr.
*10.15 Key Employee Agreement the Registrant and James P. Lucivero
*10.16 Key Employee Agreement the Registrant and E. Craig Conrad
+**10.17 Development Agreement dated as of November 12, 1996 between the
Registrant and GDA Technologies, Inc.
11.1 Statement of Computation of Per Share Earnings
+ 21.1 List of Registrant's subsidiaries
*23.1 Consent of Choate, Hall & Stewart (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
+ 24.1 Power of Attorney
+ 27.1 Financial Data Schedule
- --------------------
+ Previously Filed.
* To be filed by amendment.
** Confidential Treatment requested as to portions of the exhibit indicated
which have been filed separately with the Securities and Exchange
Commission.
(b) Financial Statement Schedules:
Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not
required under the instructions, or all of the information required is set forth
in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) (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
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more
than a 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 no 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.
(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.
(f) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt delivery to each
purchaser.
(h) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to provisions described in Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim of indemnification against such liabilities (other than the payment
by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant 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 such issue.
(i) (1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Pre-Effective Amendment No. 2 to Registration
Statement on Form S-1 to be signed on its behalf by the undersigned, thereunto
duly authorized, in the town of Westborough, Massachusetts on February 6, 1997.
NEXAR TECHNOLOGIES, INC.
By /S/ Albert J. Agbay
----------------------------------------
Albert J. Agbay
Chief Executive Officer, President and
Chairman of the Board
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 2 has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
- --------- -------- ----
<S> <C> <C>
/S/ Albert J. Agbay Chief Executive Officer (Principal Executive February 6, 1997
- ------------------------ Officer), President and Chairman of the
Albert J. Agbay Board of Directors
/S/ Gerald Y. Hattori Vice President of Finance and Chief February 6, 1997
- ------------------------ Financial Officer (Principal Financial and
Gerald Y. Hattori Accounting Officer)
* Director February 6, 1997
- ------------------------
Steven Georgiev
* Director February 6, 1997
- ------------------------
Joseph E. Levangie
* Director February 6, 1997
- ------------------------
Joseph P. Caruso
* Director February 6, 1997
- ------------------------
Buster C. Glosson
* By: /S/ Albert J. Agbay
------------------------
Attorney-in-Fact
</TABLE>
II-4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Nexar Technologies, Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements of Nexar Technologies, Inc. and subsidiary
included in this registration statement and have issued our report thereon dated
October 14, 1996 (except with respect to the matters discussed in Notes 2, 4,
and 7(d), as to which the date is December 19, 1996). Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 16(b) above is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states, in all material respects, the financial data required to
be set forth therein, in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
October 14, 1996 (except with respect
to the matters discussed in Notes 2,
4, and 7(d), as to which the date is
December 19, 1996)
NEXAR TECHNOLOGIES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE, BALANCE,
BEGINNING OF END OF
PERIOD INCREASES DEDUCTIONS PERIOD
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
<S> <C> <C> <C> <C>
December 31, 1995 $ - $ 12,000 $ - $ 12,000
========== ========== ========== ==========
September 30, 1996 $ 12,000 $ 267,143 $ (219,143) $ 60,000
========== ========== =========== ==========
</TABLE>
EXHIBIT 11.1
<TABLE>
<CAPTION>
STATEMENT RE: EARNINGS PER SHARE
--------------------------------
PERIOD FROM
INCEPTION NINE MONTHS
(MARCH 7, 1995) TO ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
------------------- --------------------
<S> <C> <C>
Net loss $(2,261,434) $(2,981,022)
------------ ------------
Weighted average common shares outstanding 4,800,000 4,800,000
Stock issued within twelve months of initial public offering 2,921,838 2,921,838
Pro forma conversion of amounts due to related parties 700,000 700,000
------------ ------------
Weighted average number of common and common equivalent shares outstanding 8,421,838 8,421,838
============ ============
Net loss per share amount $(0.27) $(0.35)
============ ============
</TABLE>
- --------------------------------------------
Pursuant to Securities and Exchange Commission Staff Accounting Bulletin
No. 83, stock, stock options and stock warrants issued at prices below
the initial public offering price during the 12-month period immediately
preceding the initial filing date of the Company's Registration Statement
of its initial public offering have been included as outstanding for all
periods presented. The dilutive effect of the common stock equivalents
was computed in accordance with the treasury stock method.
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 4, 1997
