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
67.7% of the Common Stock (assuming no exercise of the Underwriters'
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
Preferred Stock. See "Certain Transactions" and "Description of Capital Stock."
In addition to the shares offered hereby, 6,700,000 shares of Common Stock
are being registered for sale by Palomar and three institutional investors from
time-to-time in the open market. See "Shares Eligible for Future Sale." Such
transactions are being registered by separate prospectus concurrently with the
Offering. The Company will not receive any proceeds from any sale of such
shares. Palomar has advised the Underwriters' representatives that it has no
current intention to sell any of its shares in the foreseeable future, but it is
not precluded from doing so in its discretion. See "Risk Factors -- Substantial
Number of Registered Shares Eligible for Future Sale."
Prior to the Offering, there has not been a public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial public offering price. The Common Stock
has been approved for quotation on the Nasdaq National Market under the symbol
"NEXR."
----------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 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.
<TABLE>
<CAPTION>
================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share ..................... $9.00 $0.72 $8.28
Total(3) ...................... $22,500,000 $1,800,000 $20,700,000
</TABLE>
================================================================================
(1) Does not reflect additional compensation to Sands Brothers & Co., Ltd.,
the lead representative of the Underwriters, payable by the Company in the
form of warrants entitling Sands Brothers & Co., Ltd. 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 $14.85 per share (the "Warrants") and a non-accountable expense
allowance equal to 2% 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 $25,875,000, $2,070,000 and
$23,805,000 , 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 April
14, 1997, at the offices of Sands Brothers & Co., Ltd., 90 Park Avenue, New
York, New York 10016.
SANDS BROTHERS & CO., LTD. CREDIT LYONNAIS SECURITIES (USA) INC.
April 8, 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 educational 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)
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THE OFFERING
AND MAY BID FOR, AND PURCHASE, SHARES OF THE COMMON STOCK IN THE OPEN MARKET.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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.
2-A
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)
2-B
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.
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 (i)
resellers to offer a custom-configured PC on demand, and (ii) end-users to
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 which is typically shipped to
resellers without the key system-defining components (microprocessor, memory and
hard drive), but which is otherwise 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.
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 central processing unit
(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. 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, system integrators, computer superstores, direct
response resellers, and independent dealers.
The Company's current PCs are based on an industry-standard, open
architecture design, co-engineered by HCL Hewlett Packard Ltd., which allows the
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.
NEXAR has developed and expects to 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's Pentium or Pentium Pro and
compatible CPUs. The NEXAR XPA technology is being designed to also accommodate
microprocessors based on other technologies, such as the Alpha CPU made by
Digital Equipment Corporation.
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.
3
THE OFFERING
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"), effected on 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."
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 $8,249,549 of
indebtedness to related
parties and general
corporate purposes,
including working capital,
product development and
capital expenditures. See
"Use of Proceeds."
Nasdaq National Market symbol ................ NEXR
- ------------
(1) Based on the number of shares of Common Stock outstanding on December 31,
1996. Includes 1,200,000 shares of Common Stock to be held by Palomar
subject to a contingent repurchase right of the Company at a nominal price
per share in the event the Company does not achieve certain performance
milestones. Such 1,200,000 shares are not includable in the computation of
earnings per common and common equivalent share while subject to such
contingency. See Note 3 of Notes to Consolidated Financial Statements.
(2) 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, (ii) 406,080 shares of Common Stock reserved
for issuance upon conversion of shares of Convertible Preferred Stock, and
(iii) 1,050,000, 50,000 and 50,000 shares of Common Stock reserved for
issuance under stock options granted upon the effectiveness of the Offering
at exercise prices equal to 100%, 85% and 50%, respectively, of the initial
public offering price. See "Certain Transactions," "Capitalization,"
"Management -- Stock Plans" and "Beneficial Ownership of Management."
RISK FACTORS
Each prospective investor should carefully consider the information set
forth under the heading "Risk Factors" beginning on page 6 before making an
investment decision with respect to the shares of Common Stock offered hereby.
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. Important factors that could cause or contribute to
such differences are set forth under "Risk Factors" and elsewhere in this
Prospectus.
-------------------
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.
4
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 7, 1995) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues ....................................................... $ 619,629 $18,695,364
Cost of revenues ................................................... 574,611 16,392,483
------- ----------
Gross profit ....................................................... 45,018 2,302,881
Total operating expenses(1) ........................................ 2,306,452 9,813,020
--------- ---------
Net loss ........................................................... $(2,261,434) $(7,510,139)
=========== ===========
Pro forma net loss per common and common equivalent share(2): ...... $ (0.89)
===========
Pro forma weighted average number of common and common
equivalent shares outstanding: .................................. 8,421,838
=========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(3)(4)
---------- ------------ -----------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash ...................................................... $ 2,738,983 $ 2,738,983 $ 15,192,892
Working capital ........................................... 10,424,555 10,424,555 23,111,464
Total assets .............................................. 19,589,121 19,589,121 31,356,572
Amounts due to related parties(5) ......................... 22,817,998 8,249,549 --
Stockholders' (deficit) equity ............................ (9,771,173) 4,797,276 25,047,276
</TABLE>
(1) Includes $525,000 and $1,375,000 of non-recurring litigation costs in 1995
and 1996, respectively. See Notes 2 and 10 of Notes to Consolidated
Financial Statements.
(2) Computed on the basis described in Note 3(b) of Notes to Consolidated
Financial Statements.
(3) Presented on a pro forma basis to give effect to the conversion of
indebtedness to related parties totaling $10,000,000 at December 31, 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."
(4) Adjusted to give effect to (i) the receipt of the net proceeds from the
sale of the 2,500,000 shares of Common Stock offered by the Company hereby
at the initial public offering price of $9.00 per share and includes the
repayment of $8,249,549 of amounts due to related parties and (ii) the
contribution by Palomar of $1,000,000 for payment of management bonuses.
See "Use of Proceeds," "Capitalization" and "Certain Transactions."
(5) Represents amounts due to Palomar and Palomar Electronics Corporation
(PEC). See Note 2 of Notes to Consolidated Financial Statements.
5
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 December 31, 1996, the Company had an accumulated deficit of
$9,771,573. 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, Inc., Compaq Computer Corporation,
Dell Computer Corporation, Gateway 2000, Inc., Hewlett-Packard Company,
International Business Machines Corporation (IBM) and Packard Bell NEC, Inc. In
addition, the Company is planning to compete in the network server market
commencing by late 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 develop, promote and distribute
products and provide related consulting and training services. Some of the
Company's competitors have established, or may
6
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 fiscal year ended December 31, 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," "Business -- Strategy" and Note 3(i) of Notes to
Consolidated Financial Statements.
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 and 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 its 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 due to the rapid improvements in computer technology and
resulting product obsolescence. There
7
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 by late 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
The Company's success is dependent in large part upon its intellectual
property rights. The Company has rights to two pending patent applications
covering the essential technology which enables the easy installation, removal
and replacement of key components in the Company's PCs. The Company filed a
patent application in late 1996 covering its proprietary Cross Processor
Architecture(tm) (NEXAR XPA(tm)) technology, which is expected to be used in the
Company's PCs by mid-1997. Also, the Company recently acquired a patent
application originally filed in March 1995, together with the related technology
which, until such acquisition, had been issued to the Company on an exclusive
worldwide basis, and which is included in the Company's current PCs. See
"Business -- Intellectual Property" and "Certain Transactions -- Other Related
Party Transactions." Although the Company has been advised that a Notice of
Allowance has been issued by the United States Patent and Trademark Office with
respect to certain of the claims made in the recently acquired patent
application, there can be no assurance that this determination will result in
the issuance of a patent or that a patent will be issued with respect to the
Company's XPA patent application. Even if issued, there can be no assurance that
any such patents would survive a legal challenge to their validity or provide
adequate protection. In addition, the Company has not conducted any formal study
of prior art and, therefore, has not determined what effect any prior art may
have on any such patents that may issue. The Company also relies on copyrights,
unpatented trade secrets and trademarks to protect its
8
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 enforce its
rights under any such patents that may issue. 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."
In addition, the Company has recently been advised by counsel for NEXOR Ltd.
("NEXOR"), an electronic messaging software company based in the United Kingdom,
that such company claims prior use of the name NEXOR and intends to oppose the
Company's registration of its NEXAR trademark, which is currently pending before
the United States Patent and Trademark Office. Such counsel has proposed an
agreement pursuant to which, among other things, the parties would each consent
to the other's use of their respective names so long as the respective parties
do not market classes of goods or services falling within the other party's
classes of goods or services. While the Company believes that it will be able to
resolve this potential dispute and continue to use the NEXAR trademark on its
current and anticipated products, there can be no assurance that an agreement
with NEXOR acceptable to the Company will be reached. The failure to reach a
satisfactory agreement could result in the inability of the Company to obtain
registration for the name NEXAR and/or litigation with NEXOR. An adverse
determination of any such litigation could result in the Company having to cease
use of the NEXAR trademark, which could have a material adverse effect on the
Company.
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."
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
9
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, original equipment manufacturers (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 and 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 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 to be used in its planned server product. In
addition, the Company relies on a single supplier to produce its customized
chassis and 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.
Also, the Company ultimately is reliant on major suppliers of key components,
such as CPUs and chipsets sold by Intel, which are included in the Company's
products, either at the request of a customer prior to shipment or by the
Company's resellers. Occasionally, such components are subject to allocations
and the Company has at times experienced difficulty in obtaining sufficient
quantities of such products. 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.
10
The Company occasionally experiences delays in receiving certain components,
which can cause delays in the shipment of some products to customers. During the
fourth quarter of 1996, the Company did not have in inventory and was unable to
obtain on a timely basis 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. The Company was also been unable to
obtain sufficient quantites of certain components in the first quarter of 1997,
which caused delays in some shipments. 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 outstanding 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 between the Company and Palomar. In addition, 45,684
shares of Convertible Preferred Stock will be issued to Palomar upon the closing
of the Offering 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. The 45,684 shares of Convertible Preferred Stock issued to Palomar
upon the closing will be convertible into 406,080 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 $11.25 per share of
Common Stock into which such shares of Convertible Preferred Stock are
convertible), 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 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 Certificate of Incorporation 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 27.4% of the outstanding Common Stock assuming the
exercise of all such options (approximately 26.7% if the over-allotment option
is exercised in full). Approximately 70.0% of the shares subject to such options
are subject to vesting based on the option holder's length of service with the
Company. See "Stockholders," "Certain Transactions" and "Beneficial Ownership of
Management."
11
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
intends to seek to obtain key-man life insurance on Mr. Agbay. The Company is
not contemplating securing any significant amount of key-man life insurance on
any of its other executive officers or other key employees. See "Business --
Strategy," "-- Products" and "Management."
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 the fourth
quarter of 1996, the Company did not have in inventory and was unable to obtain
on a timely basis sufficient quantities of key components to meet outstanding
purchase orders, which caused the financial results for such period to be
adversely affected and which may adversely affect future sales to customers
whose orders were not promptly shipped. The Company was also unable to obtain
sufficient quantities of certain components in the first quarter of 1997, which
caused delays in some shipments. 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 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 has been determined by negotiation between the Company and the
Representatives based upon several factors. See "Underwriting." The market price
of the Company's
12
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 to related parties in the amount of $8,249,549 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 First Restated Certificate of
Incorporation (the "Restated 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 Restated 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 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
December 31, 1996, employees and directors of the Company held options
exercisable for the acquisition of 3,055,920 shares of Common Stock
(approximately 65% of
13
which shall be exercisable upon consummation of the Offering) and the Company
will grant options exercisable for 1,050,000, 50,000 and 50,000 shares of Common
Stock upon the effectiveness of the Offering at exercise prices equal to 100%,
85% and 50%, respectively, of the initial public offering price. The Company
intends to register all such shares subject to options for resale from time to
time under the Securities Act soon after consummation of the Offering. See
"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 $6.95 per share in net tangible book value per share of
Common Stock from the initial public offering. See "Dilution."
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
$19,250,000 ($22,287,000 if the Underwriters exercise their over-allotment
option in full) after deducting 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 to repay non-interest
bearing demand indebtedness to related parties, which was $8,249,549 at December
31, 1996 (including $2,750,000 incurred by Palomar on the Company's behalf to
settle claims of a former executive officer and to acquire certain technology;
see "Certain Transactions") and for general corporate purposes, including
working capital, product development and capital expenditure. 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.
14
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) actual
as of December 31, 1996 (ii) pro forma as of December 31, 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 the initial public
offering price of $9.00 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 DECEMBER 31, 1996
-------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(1) ADJUSTED(1)(2)(3)
------ ------------ --------------
<S> <C> <C> <C>
Amounts due to related parties(1) ............ $22,817,998 $ 8,249,549 --
----------- ----------- ------------
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 34,726,392
Accumulated deficit ........................ (9,771,573) (9,771,573) (9,771,573)
---------- ---------- ----------
Total stockholders' (deficit) equity ......... (9,771,173) 4,797,276 25,047,276
---------- ---------- ----------
Total capitalization .................... $13,046,825 $13,046,825 $25,047,276
=========== =========== ===========
</TABLE>
- ---------------
(1) Adjusted to give effect to the conversion of indebtedness to related
parties totaling $10,000,000 and $4,568,449 at December 31, 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 the
initial public offering price of $9.00 per share and the repayment of
$8,249,549 of amounts due to related parties. See "Use of Proceeds" and
"Certain Transactions."
(3) Adjusted to give effect to the contribution by Palomar of $1,000,000 for
the payment of management bonuses. See "Certain Transactions."
15
DILUTION
The pro forma negative net tangible book value of the Company at December
31, 1996 was ($2,072,631) or ($0.31) per share of Common Stock. 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 the initial public offering price of $9.00 per share,
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses, and adding the contribution by Palomar of
$1,000,000 for the payment of management bonuses, the pro forma net tangible
book value of the Company as of December 31, 1996 would have been $18,863,827 or
$2.05 per share of Common Stock. This represents an immediate increase in such
adjusted net tangible book value of $2.36 per share to existing stockholders and
an immediate dilution of $6.95 per share to new investors purchasing shares in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share ............. $9.00
Pro forma negative net tangible book value per share as of
December 31, 1996 ...................................... $(0.31)
Increase per share attributable to new investors ......... 2.36
----
Adjusted pro forma net tangible book value per share after the
offering .................................................... 2.05
----
Dilution per share to new investors ......................... $6.95
=====
</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 stockholders and by new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION(1)
---------------- ---------------------- AVERAGE
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------ ------- ------ ------- -----
<S> <C> <C> <C> <C> <C>
Existing stockholders ................... 6,700,000 72.8% $11,000,400 32.8% $ 1.64
New investors ........................... 2,500,000 27.2 22,500,000 67.2% $ 9.00
--------- ---- ---------- ----
Total ................................. 9,200,000 100.0% $33,500,400 100.0%
========= ===== =========== =====
</TABLE>
(1) Gives effect to (i) the conversion of indebtedness to related parties
totalling $10,000,000 at December 31, 1996 into 1,900,000 shares of Common
Stock and (ii) the contribution by Palomar of $1,000,000 for the payment of
management bonuses. See "Use of Proceeds", "Capitalization" and "Certain
Transactions."
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) 1,050,000, 50,000 and 50,000
shares of Common Stock reserved for issuance under stock options to be granted
upon the effectiveness of the Offering at exercise prices equal to 100%, 85% and
50%, respectively, of the initial public offering price. See "Management --
Stock Plans," "Beneficial Ownership of Management" and "Certain Transactions."
16
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 year
ended December 31, 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. 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) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net revenues .......................................................... $ 619,629 $ 18,695,364
Cost of revenues ...................................................... 574,611 16,392,483
--------- ---------
Gross profit ................................................... 45,018 2,302,881
Operating expenses:
Research and development ........................................... 104,383 803,186
Selling and marketing .............................................. 581,482 4,819,379
General and administrative ......................................... 1,095,587 2,815,455
Litigation costs ................................................... 525,000 1,375,000
--------- ---------
Total operating expenses .............................................. 2,306,452 9,813,020
--------- ---------
Net loss ....................................................... $(2,261,434) $(7,510,139)
=========== ===========
Pro forma net loss per common and common equivalent share(1): $ (0.89)
-----------
Pro forma weighted average number of common and common
equivalent shares outstanding: 8,421,838
=========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(2) ADJUSTED(2)(3)
------ ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash .................................................. $ 2,738,983 $ 2,738,983 $ 15,192,892
Working capital ....................................... 10,424,555 10,424,555 23,111,464
Total assets .......................................... 19,589,121 19,589,121 31,356,572
Amounts due to related parties(4) ..................... 22,817,998 8,249,549 --
Stockholders' (deficit) equity ........................ (9,771,173) 4,797,276 25,047,276
</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 December 31, 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 the
initial public offering price of $9.00 per share and includes the repayment
of $8,249,549 of amounts due to related parties and (ii) to give effect to
the contribution by Palomar of $1,000,000 for payment of management
bonuses. See "Use of Proceeds," "Capitalization" and "Certain
Transactions."
(4) Represents amounts due to Palomar and Palomar Electronics Corporation. See
Note 2 of Notes to Consolidated Financial Statements.
17
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
year ended December 31, 1996 were $18,695,364. For the three and nine month
periods ended December 31, 1996, the Company generated total revenues of
$7,353,938 and $18,577,896, respectively. During 1997, the Company expects its
selling and marketing expenses, 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, September 30, 1996 and December 31, 1996, the
Company sold approximately 2,317, 7,920 and 6,786 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 its 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 continue 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. 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. See "Risk Factors."
RESULTS OF OPERATIONS
The following table sets forth unaudited consolidated quarterly financial data
for each of the four quarters in 1995 and 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 (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.
18
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-------------------------------------------------------------------------------------------------------
PERIOD FROM
INCEPTION
(MARCH 7,
1995) TO
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- ------------ ------------ --------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Net revenues $ -- $ 212,120 $ 51,379 $ 356,130 $ 117,468 $ 2,033,811 $9,190,147 $ 7,353,938
Cost of revenues -- 194,030 33,857 346,724 116,388 1,798,229 7,423,725 7,054,141
--------- ---------- ---------- ------------ ---------- ----------- ---------- -----------
Gross profit -- 18,090 17,522 9,406 1,080 235,582 1,766,422 299,797
--------- ---------- ---------- ------------ ---------- ----------- ---------- -----------
Operating expenses:
Research and
development -- -- 24,263 80,120 67,318 102,728 130,961 502,179
Selling and marketing 6,746 123,486 169,845 281,405 327,284 1,678,727 981,200 1,832,168
General and
administrative -- 185,230 291,163 619,194 441,627 634,282 619,979 1,119,567
Litigation costs -- -- -- 525,000 -- -- -- 1,375,000
--------- ---------- ---------- ------------ ---------- ----------- ---------- -----------
Total operating expenses 6,746 308,716 485,271 1,505,719 836,229 2,415,737 1,732,140 4,828,914
--------- ---------- ---------- ------------ ---------- ----------- ---------- -----------
Net income (loss) $ (6,746) $ (290,626)$ (467,749) $ (1,496,313) $ (835,149) $(2,180,155) $ 34,282 $(4,529,117)
======== ========== ========== ============ ========== =========== ========== ===========
Backlog -- -- -- -- -- $ 598,455 $2,616,259 $4,101,400
======== ========== ========== ============ ========== =========== ========== ===========
AS A PERCENTAGE OF NET REVENUES:
Net revenues 100.0% 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 95.9
---------- ---------- ------------ ---------- ----------- ---------- -----------
Gross profit 8.5 34.1 2.6 0.9 11.6 19.2 4.1
Operating expenses:
Research and development -- 47.2 22.5 57.3 5.1 1.4 6.8
Selling and marketing 58.2 330.6 79.0 278.6 82.5 10.7 24.9
General and administrative 87.3 566.7 173.9 376.0 31.2 6.7 15.2
Litigation costs -- -- 147.4 -- -- -- 18.7
---------- ---------- ------------ ---------- ----------- ---------- -----------
Total operating expenses 145.5% 944.5% 422.8% 711.9% 118.8% 18.8% 65.6%
---------- ---------- ------------ ---------- ----------- ---------- -----------
Net income (loss) -- -- -- -- -- 0.4% (61.5)%
========== ========== ============ ========== =========== ========== ===========
</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's gross profit as a percentage of revenues was 4.1% for the three
months ended December 31, 1996. This decrease from the prior quarter was due to
revenue shortfalls caused primarily by a delay in receiving certain key
components necessary to meet outstanding purchase orders. The Company believes
that its gross profit as a percentage of revenues will improve during 1997 as
the Company strengthens its procurement procedures and realizes labor and
material costs savings and efficiencies from full scale manufacturing
operations. During the quarters ended December 31, 1995 and 1996, the Company
incurred $525,000 and $1,375,000, respectively, in litigation costs to settle
potential claims against the Company. The Company also recorded management
bonuses to be paid by Palomar totaling $1,000,000 in the quarter ended December
31, 1996. The 57% increase in product order backlog from the third to the fourth
quarter of 1996 was primarily due to delays in shipments caused by the inability
of the Company to obtain on a timely basis sufficient quantities of circuit
boards and chassis. One customer represented 69%, 10% and 25% of the Company's
total backlog for the quarters ended June 30, 1996, September 30, 1996 and
December 31, 1996, respectively. See "Business -- Backlog."
The Company has experienced and expects to continue 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
19
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 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 YEAR
ENDED DECEMBER 31, 1996
Net Revenues. Net revenues increased to $18,695,364, for the year ended
December 31, 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 ceased the production of these PCs in June of
1995 to concentrate on the development of its upgradeable PCs. The increase in
revenues during the year ended December 31, 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 $2,302,881, or 12.3% of net revenues, for the
year ended December 31, 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 consist
primarily of expenses incurred for the design and development of the Company's
upgradeable PCs and a charge for management bonuses. Research and development
expenses increased to $803,186, or 669.5%, during the year ended December 31,
1996 as compared to $104,383 for the period ended December 31, 1995. The primary
reason for this increase is $375,000 of management bonuses for 1996 to be paid
by Palomar. 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, advertising and
marketing costs and a charge for management bonuses to be paid by Palomar.
Selling and marketing expenses increased 728.8% to $4,819,379 for the year ended
December 31, 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, supporting the introduction of the Company's upgradeable
PC, and attendance of various trade shows. 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 157.0% to $2,815,455 for the year
ended December 31, 1996 from $1,095,587 for the period ended December 31, 1995.
This increase in expenses during the year ended December 31, 1996 was
attributable to the additional expenditures for general and administrative
expenses as a result of the Company's anticipated growth and a charge for
management bonuses to be paid by Palomar. The Company anticipates that general
and administrative expenses will continue to increase due to its forecasted
growth.
Litigation Costs. Litigation costs represent the expenses to settle
potential claims against the Company. See Notes 2 and 10 of the Notes to the
Consolidated Financial Statements.
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 $6,375,000. 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.
20
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 $22,818,000. At December 31, 1996, the
Company had approximately $2,739,000 in cash.
Net cash used in operating activities was approximately $1,860,000 during
the period from inception to December 31, 1995. Net cash used in operations was
approximately $13,420,000 for the year ended December 31, 1996. The significant
use of cash by operating activities was the result of a net loss of
approximately $7.5 million during the year together with cash used to finance a
significant increase in accounts receivable and inventory purchases.
The Company's investing activities used net cash of approximately $103,000
and $493,000 during the period from inception to December 31, 1995 and the year
ended December 31, 1996, respectively. Expenditures for property and equipment
were approximately $103,000 for the period from inception to December 31, 1995
and $187,000 for the year ended December 31, 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 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 earned 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 twelve months. In
addition, Palomar has agreed to continue to fund the Company, if needed, through
December 31, 1997.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. 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."
21
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 (i)
resellers to offer a custom-configured PC on demand, and (ii) end-users to
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 which is typically shipped to
resellers without the key system-defining components (microprocessor, memory and
hard drive), but which is otherwise 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 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 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 central processing unit
(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.
The Company's current PCs are based on an industry-standard, open
architecture design, co-engineered by HCL Hewlett Packard Ltd., which allows the
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.
NEXAR has developed and expects to 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 and compatible CPUs. The NEXAR XPA technology is being designed to also
accommodate microprocessors based on other technologies, such as the Alpha CPU
made by Digital Equipment Corporation (DEC).
22
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. 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 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 at a strong rate, although more
moderately than in the early 1990s. According to forecasts by International Data
Corporation (IDC), an independent industry analyst, 81.5 million PCs with a
value of $182.5 billion, including 64.9 million desktop PCs (worth $128.1
billion), will be shipped worldwide in 1997, an increase of 16.7% over estimated
1996 shipments. In the United States, IDC forecasts that in 1997, 30.6 million
PCs (worth $68.6 billion), including 23.9 million desktops (worth $46.0
billion), will be shipped. IDC forecasts that worldwide, in the year 2000, 117.6
million PCs (worth $247.7 billion), including 91.0 million desktops (worth
$169.9 billion), will be shipped. In the United States, IDC forecasts that in
the year 2000, 42.0 million PCs (worth $89.3 billion), including 31.2 million
desktops (worth $56.1 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, Apple
Computer, Compaq Computer, Dell Computer, Gateway 2000, Hewlett-Packard, IBM,
and Packard Bell NEC. 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 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,
23
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 then 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****
* 1996
** Early 1997
*** Mid-1977
**** Late 1997
Source: BYTE Magazine. November, 1996. Reproduced with permission.
(C)by The McGraw-Hill Companies, Inc. New York, N.Y. All rights reserved.
The above chart outlines the choices presented by the following product
releases: Intel introduced MMX into its P55C model in January 1997. In April
1997, Advanced Micro Devices, Inc. (AMD(R)) introduced its K6 CPU which, like a
microprocessor Cyrix Corporation is scheduled to introduce in the first half of
1997, incorporates architectural enhancements to Pentium-class processors
providing significant performance improvements when running multimedia
applications. 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 Pentium II (previously 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.
24
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
and Dell, 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. This trend appears to have accelerated in recent
months. According to IDC, while the still healthy growth rate of worldwide PC
shipments slowed in the fourth quarter of 1996, as compared to the fourth
quarter of 1995, Dell's shipments grew 69 percent worldwide and Gateway's
shipments grew 39 percent in the United States (where most of Gateway's sales
occur). 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 allowing reseller
partners to perform "channel assembly" in completing the configuration of their
PCs.
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
upgradability 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 competing with the direct marketers
and 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.
NEXAR systems are designed to be sold by the Company without the key system
defining components. The reseller is then able to offer a NEXAR PC at a
competitive price by avoiding the typical PC manufacturer mark-up on the key
components, which typically represent more than 50 percent 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 the key
25
components. Unlike other previously marketed "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.
The NEXAR PC. The current NEXAR PC features an innovative architecture
including patent-pending technology recently acquired by the Company and
previously licensed to the Company on an exclusive worldwide basis. See " --
Intellectual Property" and "Certain Transactions." 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 expects that its
patent-pending NEXAR XPA systems will offer its resellers and end-users all of
the same ease of upgradability features and benefits within a CPU family. NEXAR
XPA 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, Pentium II (Klamath) and other x86
CPUs, or the RISC-based processors such as DEC's Alpha. The Company believes
this capability will become increasingly important as technology advances and
the demands of personal computing intensify. End-users without this 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. The Company expects that 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 in most cases, regardless of the demands of the
end-user, a NEXAR XPA PC will be an optimal solution to purchasers seeking
investment protection of their system infrastructure.
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 UPGRADABLE AND
CROSS-PROCESSOR PCS
The Company intends to devote most of its product 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. These efforts
26
seek to ensure that the Company's 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 central focus on offering state-of-the-art PCs
which forestall system obsolescence will be 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 enhanced multimedia performance
and 32-bit software applications, become factors in the purchasing decisions
within the PC markets in which the Company does and intends to participate. The
design of the Company's existing PCs currently allow, and the upcoming NEXAR XPA
systems are being designed to 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 management information systems (MIS) departments of large and small
enterprises time and expense upgrading components or replacing outdated
systems.
* 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. See "Management."
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.
27
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 of the Company's
products in 1997. GTSI is, however, under no obligation to purchase any products
of the Company. In the year ended December 31, 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. 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 is
growing and will continue to 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. The Company is currently negotiating with Bull
HN Information Systems to provide NEXAR PCs to Bull's South American division,
which would enable Bull to configure systems with components obtained within the
borders of various countries, thereby producing savings on import taxes and
related charges.
SALES AND MARKETING
The Company's marketing strategy is channel-based, focused primarily on
distributors, value added and other resellers, system integrators, rather than
on 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 national and
international trade shows such as COMDEX and PC Expo.
28
The Company executes its marketing strategy primarily through the efforts of
a direct sales force and through independent manufacturer sales representatives.
As of December 31, 1996, NEXAR's sales force consisted of 16 people, eight
located at its Westborough, Massachusetts headquarters and the remainder in
regional locations. The Company intends to increase the size of its sales force
as its revenue grows. As of December 31, 1996, the Company was also a party to
agreements with five 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, direct
response resellers, and independent dealers.
The following is a representative listing of NEXAR resellers:
<TABLE>
<CAPTION>
<S> <C>
NATIONAL AND REGIONAL DISTRIBUTORS COMPUTER SUPERSTORES
- ---------------------------------- --------------------
Ingram Micro, Inc. Fry's Electronics, Inc.
Gates/Arrow Distributing, Inc. Elek-Tek, Inc.
MicroAge Computer Centers, Inc. Nationwide Computers & Electronics, Inc.
Avnet Computer Marketing Group The Computer Factory
Computer Attic
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
OEMS AND VARS GOVERNMENT RESELLERS DIRECT RESPONSE RETAILER
- ------------- -------------------- ------------------------
Bull HN Information Government Technology MicroWarehouse, Inc.
Systems Services, Inc. (GTSI)
CompUSA Inc. Comstor/GE Capital
GSMBSoft Systems, Inc. Pulsar Data Systems Inc.
Gibraltar Computer
Bay Resources Inc.
</TABLE>
In the fiscal year ended December 31, 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 continue to represent a significant portion
of the Company's sales during the fiscal year. 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. See
"-- Strategy -- Focus on Channel Marketing -- Government Resellers" and Note 3
of Notes to Consolidated Financial Statements.
29
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 generally 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.
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.
FUTURE PRODUCTS
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
30
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 product 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 by late 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
planned because some of NEXAR's resellers have requested a server of this design
to complete NEXAR's product offerings to the corporate end-users.
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 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 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. (GDA), a
provider of computer engineering services, 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 $500,000 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 upgradability 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. 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
31
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
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. The single shift capacity
of the facility is up to 15,000 units produced 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 addition, the Company relies on a single supplier to produce its
customized chassis and has several other single supplier relationships for less
critical components. In the fourth quarter of 1996, the Company was unable to
obtain on a timely basis sufficient quantities of certain key components to meet
all of its outstanding purchase orders. The Company was also unable to obtain
sufficient quantities of certain components in the first quarter of 1997, which
caused delays in some shipments. 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.
BACKLOG
The Company had $4,101,400 of unfilled firm purchase orders as of December
31, 1996, a 57% increase from September 30, 1996. This level of and increase in
backlog was primarily due to delays in meeting outstanding purchase orders
during the fourth quarter of 1996 because the Company was unable to obtain on a
timely basis sufficient quantities of key components. The Company does not
believe that its current and future product order backlogs are or will be a
meaningful indicator of the Company's business prospects as it expects it will
generally be able to ship its products within 30 days of the receipt of orders.
See "-- Manufacturing," "Management's Discussion and Analysis of Financial
Condition and Results of Operation," and "Risk Factors -- Reliance on
Suppliers."
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
32
Acer, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000,
Hewlett-Packard, IBM and Packard Bell NEC. In addition, the Company plans to
compete in the network server market by late 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 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 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's success is dependent in large part upon its intellectual
property rights. The Company has rights to two pending patent applications
covering the essential technology which enables the easy installation, removal
and replacement of key components in the Company's PCs. The Company filed a
patent application in late 1996 covering its proprietary Cross Processor
Architecture(tm) (NEXAR XPA(tm)) technology, which is expected to be used in the
Company's PCs by mid-1997. Also, the Company recently acquired a patent
application originally filed in March 1995 together with the related technology
which, until such acquisition, had been licensed to the Company on an exclusive
worldwide basis, and which is included in the Company's current PCs. See
"Certain Transactions -- Other Related Party Transactions." Although the Company
has been advised that a Notice of Allowance has been issued by the United States
Patent and Trademark Office with respect to certain of the claims made in the
recently acquired patent application, there can be no assurance that this
preliminary determination will result in the issuance of a patent or that a
patent will be issued with respect to the Company's XPA patent application. Even
if issued there can be no assurance that any such patents would survive a legal
challenge to their validity or provide adequate protection. In addition, the
Company has not conducted any formal study of prior art and, therefore, has not
determined what effect any prior art may have on any such patents that may
issue. The Company also relies on copyrights, unpatented trade secrets and
trademarks to protect its 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 enforce its rights under any such patent. Also, 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.
33
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 24, 1996, NEXAR had 67 employees, including executive
officers, sales, marketing, technical support, finance, manufacturing,
engineering, and administrative personnel. Twenty-eight of these employees are
employed at the Westborough, Massachusetts facility, and 39 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 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.
34
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and director nominee of the Company and
their ages as of December 31, 1996 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
Morton Goldman 67 Director Nominee
</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.
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 May 1993 to August 1995, Mr. Khan served
as Executive Vice President at Intelligent Computers and
35
Technologies, Inc., a PC manufacturer which filed a petition for reorganization
under Chapter 11 of the Bankruptcy Code in May 1995. From February 1991 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 March 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.
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.
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.
36
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.
MORTON GOLDMAN has agreed to become a director of the Company upon
consummation of the Offering. Since July 1994, Mr. Goldman has been a private
investor. From 1982 to July 1994 Mr. Goldman was Chairman of the Board of
Elek-Tek, Inc., a publicly held reseller of personal computers and related
products. Mr. Goldman co-founded Elek-Tek in 1979 and held numerous senior
management positions with the company from 1979 to May 1992, including Chief
Advertising and Marketing Director.
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 consummation 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.
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 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 for the fiscal year ended December 31, 1996 by 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 with respect to
1995, pursuant to an SEC filing requirement.
37
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------- ------------
NUMBER OF
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
YEAR SALARY($) BONUS($) COMPENSATION($)(1) OPTIONS COMPENSATION(2)
---- --------- -------- ------------------ ------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Albert J. Agbay 1996 $225,000 $395,046(3)(4) $12,000 1,044,480 $ 4,750
Chief Exective Officer and
President
1995 182,423 -- 12,000 1,651,203(5) --
Liaqat Y. Kahn 1996 118,653 340,840(3) 8,250 361,560 4,750
Executive Vice President of
Manufacturing
Michael J. Paciello 1996 110,000 83,720(3) 6,000 241,080 4,750
Executive Vice President
Victor J. Melfa, Jr. 1996 100,384 81,115(3) 6,000 241,080 4,750
Senior Vice President of Sales
James P. Lucivero 1996 100,000 80,645(3) 6,000 241,080 4,750
Vice President of Sales --
Eastern United States
</TABLE>
- ---------
(1) Consists of amounts paid as car allowances.
(2) Consists 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) Includes $325,000, $325,000, $65,000, $65,000 and $65,000 in bonuses to be
paid by Palomar to Messrs. Agbay, Khan, Paciello, Melfa and Lucivero,
respectively.
(4) Includes $34,046 in bonus payments payable at a rate of $2.00 per PC sold
by the Company. See "--Employment and Severence Agreements."
(5) Such option grant was cancelled pursuant to an agreement between Mr. Agbay
and Palomar Electronics Corporation (PEC), a wholly-owned subsidiary of
Palomar, in connection with a September 1995 reorganization in which the
Company became a wholly-owned subsidiary of PEC. Pursuant to such
agreement, Mr. Agbay received an option exercisable for shares of common
stock of PEC in consideration of his agreement to cancel such options. Such
option grant issuable for common stock of PEC was subsequently cancelled
pursuant to a cancellation agreement between Mr. Agbay and PEC. Mr. Agbay
separately received a new option grant in 1996 as reflected in the table
above.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK PRICE
APPRECIATION
FOR OPTION TERMS($)(3)
----------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME 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
Liaqat Y. Kahn 361,560(2) 12.5% .0025 01/30/2001 $249.73 $ 551.84
Michael J. Paciello 241,080(2) 8.3% .0025 01/30/2001 $166.51 $ 367.95
Victor J. Melfa, Jr. 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
(5) to the Summary Compensation Table above.
(2) The exercisability of all such options were initially granted subject to
ratable annual vesting over four years. The respective employment
agreements of each of the indicated Named Executive Officers provide that
half of all such option shares shall vest upon consummation of the Offering
and that such option shares shall vest in full on the first anniversary
date of the Offering or upon a change in control transaction. See "--
Employment and Severance Agreements."
(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>
38
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 ($12.00) as determined by the Board of
Directors) of unexercised options issued by the Company and held by the Named
Executive Officers on December 31, 1996. No options were exercised by any of the
Named Executive Officers in 1996. Only vested options as of such date were then
exercisable.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL YEAR END OPTIONS AT FISCAL YEAR END($)
(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
Liaqat Y. Khan -- 361,560 361,560 -- 4,337,816 4,337,816
Michael J. Paciello -- 241,080 241,080 -- 2,892,357 2,892,357
Victor J. Melfa, Jr. -- 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, participates in deliberations of the Board of Directors concerning
executive officer compensation.
STOCK PLANS
1995 STOCK OPTION PLAN
The Company's 1995 Stock Option Plan (as amended, the "1995 Plan") was
adopted by the Board of Directors and approved by the sole stockholder of the
Company as of March 1995. An amendment and restatement of the 1995 Plan was
adopted by the Board and approved by the Company's stockholders in February
1997. 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 5,300,000 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 February 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 66 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
39
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 February 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 effective 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 Plan will terminate in December 2006.
401(K) PLAN OF PALOMAR
The Company's employees are eligible to participate in Palomar's deferred
compensation plan under Section 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 are made to a
designated fund of the 401(k) Plan invested solely in Palomar common stock. The
Company intends to establish its own 401(k) Plan following completion of the
Offering.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Mr. Agbay and the Company are parties to an employment agreement for a five
year term expiring in March 2002. Unless either party chooses otherwise by
notice to the other, the agreement automatically extends at the end of each year
for an additional year throughout the term of the agreement. The agreement
provides that Mr. Agbay is entitled to receive an annual base salary of $250,000
in 1997 subject to annual increases by the Board of Directors (or a duly formed
compensation committee thereof) and is eligible to receive an annual incentive
bonus upon the achievement of mutually agreed upon revenue and net income
performance objectives determined annually by the Board of Directors or
compensation committee thereof and Mr. Agbay. The employment agreement also
provides that Mr. Agbay shall receive an additional bonus equal to $2.00 per
personal computer sold (subject to reduction for returns, credit, set-offs and
allowances) by the Company throughout the term of his employment with the
Company.
Under his employment agreement, if Mr. Agbay's employment is terminated by
the Company without cause following a "change of control" (as defined in the
agreement), Mr. Agbay will receive the following severance payments and further
benefits: (i) $2,250,000, (ii) full payment of any accrued, unpaid salary, bonus
and benefit payments; (iii) a sum equal to three years of his highest to date
annual base pay; (iv) a sum equal to three times his highest to date annual
bonus earned; (v) full immediate vesting of any issued but unvested stock
options; (vi) three years of continuation of participation in the Company's
benefits (to the extent not received by Mr. Agbay in another position),
including health, disability and life insurance, qualified and non-qualified
retirement and pensions plans or, if any, the then current value of the same in
cash if the terms of such plans preclude such continued participation; and (vii)
such additional sums as are necessary for Mr. Agbay to meet any additional
federal taxes due to the payment of severance pay and other benefits having been
contingent upon a change in control. If Mr. Agbay's employment is terminated by
the Company without cause in the absence of such a change of control, Mr. Agbay
will be entitled to all of the foregoing severance payments and other benefits,
other than any additional sums required for the payment of federal taxes in the
event of a change in control transaction and in lieu of a cash payment of
$2,250,000, Mr. Agbay shall be
40
entitled to a minimum (the "Minimum Amount") of (i) $1,000,000 if he is
terminated on or prior to December 31, 1997, or (ii) $1,500,000 if he is
terminated on or after January 1, 1998, subject in either case to increase as
follows:
(x) If the Company achieves $150,000,000 in total revenues in any fiscal
year prior to his termination, Agaby shall be entitled to $3,000,000; and
(y) if (x) is not achieved, Mr. Agbay shall receive a sum equal to (but not
greater, in any event, than $3,000,000) the applicable Minimum Amount plus
either (i) if the Minimum Amount is $1,000,000, an amount equal to the product
of $2,000,000 multiplied by the quotient (the "Quotient Amount") of (A) the
amount by which the Company's total revenues for the four previous completed
fiscal quarters of the Company prior to the date of Mr. Agbay's termination
exceeds $70,000,000, divided by (B) $80,000,000, or (ii) if the Minimum Amount
is $1,500,000, an amount equal to the product of $1,500,000 multiplied by the
Quotient Amount.
In addition, if Mr. Agbay's termination occurs after January 1, 2000, and
the remaining term of Mr. Agbay's contract immediately prior to his termination
is more than three years, Mr. Agbay shall receive an amount of cash equal to (at
the highest prior levels) the amount of both his base pay and incentive pay
which would be paid out over such remaining period of time rather than three
years of such base and incentive pay. If Mr. Agbay were to resign following a
reduction in his responsibilities or pay or change in location, his agreement
deems such a termination as having been effected by the Company.
Upon expiration of Mr. Agbay's term of employment, Mr. Agbay will receive
the following severance payments and further benefits: (i) $2,250,000, but only
if the Company has achieved cumulative total revenues of $150,000,000 for the
period commencing on January 1, 1997 to the date of expiration, (ii) full
payment of any accrued, unpaid salary, bonus and benefit payments; (iii) a sum
equal to eighteen months of his highest to date annual base pay; (iv) a sum
equal to one and one-half of his highest to date annual bonus earned; and (v)
eighteen months of continuation of participation in the Company's benefits (to
the extent not received by Mr. Agbay in another position), including health,
disability and life insurance, qualified and non-qualified retirement and
pensions plans or, if any, the then current value of the same in cash if the
terms of such plans preclude such continued participation. If Mr. Agbay were to
resign prior to the expiration of the term of employment agreement and absent a
reduction in his responsibilities or pay or change in location, Mr. Agbay will
receive the following severance payments and further benefits: (i) $1,000,000 if
he resigns on or after January 1, 2000, (ii) full payment of any accrued, unpaid
salary, bonus and benefit payments; (iii) a sum equal to eighteen months of his
highest to date annual base pay; (iv) a sum equal to one and one-half of his
highest to date annual bonus earned; and (v) eighteen months of continuation of
participation in the Company's benefits (to the extent not received by Mr. Agbay
in another position), including health, disability and life insurance, qualified
and non-qualified retirement and pensions plans or, if any, the then current
value of the same in cash if the terms of such plans preclude such continued
participation. If Mr. Agbay's employment were to be terminated for cause (as
defined in the agreement), Mr. Agbay would be entitled only to full payment of
any accrued, unpaid, salary, bonus and benefit payments and retention of any
fully vested stock options and similar vested benefits. Pursuant to the
agreement, throughout the term of his employment, Mr. Agbay will serve as Chief
Executive Officer of the Company.
Mr. Khan and the Company are parties to an employment agreement for a five
year term expiring in October 2001. Unless either party chooses otherwise by
notice to the other, the agreement automatically extends at the end of each year
for an additional year throughout the term of the agreement. The agreement
provides that Mr. Khan is entitled to receive an annual base salary of $150,000
in 1997 subject to annual increases by the Board of Directors (or a duly formed
compensation committee thereof) and is eligible to receive an annual incentive
bonus upon the achievement of mutually agreed upon revenue and net income
performance objectives determined annually by the Chief Executive Officer and
Mr. Khan. The employment agreement also provides that Mr. Khan shall receive an
additional bonus equal to $2.00 per personal computer sold by the Company
throughout the term of his employment with the Company.
Under his employment agreement, if Mr. Khan's employment is terminated by
the Company without cause following a "change of control" (as defined in the
agreement), Mr. Khan will receive the following severance payments and further
benefits: (i) $750,000, (ii) full payment of any accrued, unpaid salary, bonus
41
and benefit payments; (iii) a sum equal to one year of his highest to date
annual base pay; (iv) a sum equal to his highest to date annual bonus earned;
(v) full immediate vesting of any issued but unvested stock options; (vi) one
year of continuation of participation in the Company's benefits (to the extent
not provided to Mr. Khan in another position), including health, disability and
life insurance, qualified and non-qualified retirement and pensions plans or, if
any, the then current value of the same in cash if the terms of such plans
preclude such continued participation; and (vii) such additional sums as are
necessary for Mr. Khan to meet any additional federal taxes and/or penalties due
to the payment of severance pay and other benefits having been contingent upon a
change in control. If Mr. Khan's employment is terminated by the Company without
cause in the absence of such a change of control, Mr. Khan will be entitled to
all of the foregoing severance payments and other benefits, other than any
additional sums required for the payment of federal taxes and/or penalities in
the event of a change in control transaction.
Upon expiration of Mr. Khan's term of employment, Mr. Khan will receive the
following severance payments and further benefits: (i) $750,000, but only if the
Company has achieved cumulative total revenues of $150,000,000 for the period
commencing on January 1, 1997 to the date of expiration, (ii) full payment of
any accrued, unpaid salary, bonus and benefit payments; (iii) a sum equal to one
year of his highest to date annual base pay; (iv) a sum equal to his highest to
date annual bonus earned; and (v) one year of continuation of participation in
the Company's benefits (to the extent not received by Mr. Khan in another
position), including health, disability and life insurance, qualified and
non-qualified retirement and pensions plans or, if any, the then current value
of the same in cash if the terms of such plans preclude such continued
participation. If Mr. Khan's employment were to be terminated for cause (as
defined in the agreement), Mr. Khan would be entitled only to full payment of
any accrued, unpaid, salary, bonus and benefit payments and retention of any
fully vested stock options and similar vested benefits.
The Company is also party to substantially similar employment agreements
with each of the other Named Executive Officers: Messrs. Paciello, Melfa and
Lucivero. These agreements provide for annual base salaries ranging from
$110,000 to $150,000, as well as annual bonuses based upon the achievement of
mutually agreed upon revenue and net income objectives between the Chief
Executive Officer of the Company and the respective Named Executive Officers.
Each of these agreements is for a term expiring in March 2000. Each of these
agreements provides for severance pay equal to twelve months of the Named
Executive Officer's highest monthly base pay if employment is terminated without
cause.
In addition, each of the employment agreements described above (other than
Mr. Agbay's) provides that fifty percent of all shares subject to stock options
held by each of the Named Executive Officers will vest upon consummation of the
Offering and all such option shares will vest in full one year after
consummation of the Offering and upon a change of control (as defined in the
agreements). Each of the employment agreements described in the preceding
paragraphs include a non-competition covenant pursuant to which the Named
Executive Officers of the Company are prohibited from competing with the Company
during their respective terms of employment and for a period of 12 months
thereafter. Also, each of the agreements described above provides for car
allowances ranging from $600 to $1,000 per month. Original employment agreements
with each of the Named Executive Officers provided for stock option grants to
such executive officers, all of which options were terminated by agreements
dated as of December 1, 1995 between the Company and each of the Named Executive
Officers. 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."
42
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
$20,792,998 and $2,025,000, respectively, through December 31, 1996. The amount
owed to Palomar includes $2,750,000 incurred by Palomar on behalf of the Company
to settle claims of a former executive officer and to acquire certain
technology. See "-- Other Related Party Transactions" below. On March 31, 1997
the Company entered into an agreement with Palomar whereby upon the closing of
the Offering, $8,249,549 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:
(x) 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
(y) if the Company achieves $70,000,000 in cumulative net income after
taxes for the four fiscal years ended December 31, 2000, or if the Company
is party to any merger (other than a merger with a subsidiary or in which
the Company is the survivor and "acquiror"), a sale of substantially all
assets of the Company or similar change in control transaction.
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.
43
The 45,684 shares of Convertible Preferred Stock issued to Palomar upon the
closing shall be convertible into 406,080 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."
All of the 1,900,000 shares of Common Stock and 45,684 shares of Convertible
Preferred Stock (and shares of Common Stock issuable upon conversion thereof)
describd above shall be issued by the Company following the consummation of the
Offering in private transactions exempt from registration under federal and
state securities laws.
Palomar and PEC incurred general and administrative expenses on behalf of
the Company, totaling approximately $100,000 and $128,000 for the period from
inception (March 7, 1995) to December 31, 1995 and for the year ended December
31, 1996, respectively. There is no intention by Palomar to charge management
fees to the Company. During the year ended December 31, 1996 Palomar and its
subsidiaries other than the Company purchased approximately $197,000 of products
from the Company. All such amounts due the Company were outstanding at December
31, 1996 and the Company anticipates it will be paid all such amounts upon
consummation of the Offering. Palomar agreed to pay $1,000,000 of management
bonuses for services rendered to the Company in 1996 in order to conserve the
Company's capital resources. This amount will be treated as a contribution to
the Company's capital. See Note 2 of Notes to Consolidated Financial Statements.
OTHER RELATED PARTY TRANSACTIONS
The Company's current PCs are shipped with motherboards based on technology
previously licensed from Technovation Computer Labs, Inc. (Technovation), 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. The Company acquired all
such technology and a patent application related thereto, and settled all claims
between Mr. Hamirani and the Company, on April 1, 1997 pursuant to an Asset
Purchase and Settlement Agreement by and among Mr. Hamirani, Technovation, the
Company and Palomar dated as of February 28, 1997 (the "Asset Purchase and
Settlement Agreement"). Pursuant to the Asset Purchase and Settlement Agreement
and a separate asset purchase agreement between the Company and Palomar, Palomar
acquired the subject technology and then conveyed such technology to the
Company. See Note 10 of Notes to Consolidated Financial Statements. Through
December 31, 1996, potential royalties which had accrued under the license
agreement were less than the Company's tooling and development costs, which the
Company was entitled to offset against royalties under the license agreement.
See "Business -- Intellectual Property."
During the year ended December 31, 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 Liaqat Y. Khan, an executive officer of the Company, by Mr. 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 December 31, 1996, approximately $220,000 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. Pursuant to the Asset Purchase and
Settlement Agreement described in the preceding paragraph, the Company released
Computer Universe and its affiliates from all liabilities with respect to
amounts owed to the Company relating to such transactions and any other claims
of the Company arising on or before the date of such agreement against Computer
Universe and its affiliates, including Mr. Hamirani. 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
44
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, 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 approximate amount of
$693,000. 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.
Mr. Goldman, a nominee for director of the Company, is a greater than 10
percent stockholder of Elek-Tek, Inc., a customer of the Company. In the fiscal
year ended December 31, 1996, the Company sold approximately $105,000 in
products to Elek-Tek. All such sales were on terms based on arms length
negotiation.
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.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
BENEFICIALLY
NAME AND ADDRESS OWNED PERCENT
---------------- ----- -------
<S> <C> <C>
Palomar Medical Technologies, Inc. 4,200,000(1) 87.4%
66 Cherry Hill Drive
Beverly, Massachusetts 01915
The Travelers Insurance Company 200,000 4.2
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
</TABLE>
- ----------
(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%
(6,100,000 shares) of the outstanding Common Stock (approximately 64% 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."
45
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of December 31, 1996
regarding the beneficial ownership of the Common Stock, as well as information
regarding the beneficial ownership of the common stock of Palomar and PEC, with
respect to (i) each of the Named Executive Officers, Directors and Director
Nominee of the Company, and (ii) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
COMPANY COMMON STOCK PALOMAR COMMON STOCK PEC COMMON STOCK
-------------------- -------------------- ----------------
NUMBER OF NUMBER OF NUMBER OF
NAME SHARES SHARES SHARES
BENEFICIALLY BENEFICIALLY BENEFICIALLY
OWNED PERCENT OWNED PERCENT OWNED PERCENT
---- ------ ------- ------ ------- ------ -------
<S> <C> <C> <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
Liaqat Y. Kahn 90,390(1)(2) 1.8 11,250(1) *
Executive Vice President of
Manufacturing
Michael J. Paciello 60,270(1)(3) 1.2
Executive Vice President
Victor J. Melfa, Jr. 60,270(1)(3) 1.2 2,450 *
Senior Vice President, Sales
James P. Lucivero 60,270(1)(3) 1.2
Vice President, Eastern United
States Sales
Morton Goldman
Director Nominee
DIRECTORS AND EXECUTIVE OFFICERS OF
PALOMAR SERVING AS NEXAR DIRECTORS**
- ------------------------------------
Steven Georgiev 4,240,170(4)(5) 88.3 1,070,820(8) 3.4%
Joseph E. Levangie 4,240,170(4)(5) 88.3 612,985(9) 2.0
Joseph P. Caruso 4,240,170(4)(5) 88.3 691,825(10) 2.2
Buster C. Glosson 4,208,250(4)(6) 87.5 53,333(11) *
All directors, director nominee
and executive officers as a
group (13 persons) 5,684,610(7) 90.5% 2,485,913 7.92% 11,250 *
</TABLE>
- --------
* Less than 1%.
** Each with an address c/o Palomar as set forth above.
(1) Consists entirely of shares issuable upon the exercise of options or
warrants exercisable within sixty days of December 31, 1996.
(2) Excludes 90,390 option shares which vest in full upon consummation of the
Offering.
(3) Excludes 60,270 option shares which vest in full upon consummation of the
Offering.
(4) 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 and warrants exercisable within sixty days of
December 31, 1996.
(5) Excludes 40,170 option shares which vest in full upon consummation of the
Offering.
(6) Excludes 8,250 option shares which vest in full upon consummation of the
Offering.
46
(7) Includes 1,492,840 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. Excludes 490,130 shares which vest upon consummation
of the Offering.
(8) 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; 66,666 shares issuable upon exercise of five-year
warrants granted in December 1996 at an exercise price of $6.00 per share.
(9) Includes 4,500 shares held by Mr. Levangie's wife, beneficial ownership of
which Mr. Levangie disclaims. Also 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; 50,000 shares issuable upon exercise
of five-year warrants granted in August 1996 at an exercise price of $8.00
per share; 50,000 shares issuable upon exercise of five-year warrants
granted in December 1996 at an exercise price of $6.00 per share.
(10) 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; 75,000
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; 100,000
shares issuable upon exercise of five-year options expiring October 6, 1999
at an exercise price of $2.375 per share; 33,333 shares issuable upon
exercise of five-year warrants granted in December 1996 at an exercise
price of $6.00 per share.
(11) Includes 20,000 shares issuable upon exercise of four-year warrants granted
in August 1995, 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.
47
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists 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.
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 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
48
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. The 45,684 shares of Convertible
Preferred Stock issued to Palomar upon the closing shall be convertible into
406,080 shares 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 Company's By-Laws
provide that a stockholder may nominate candidates for directorships only upon
written notice delivered to the Company not less than 90 days prior to any
meeting of stockholders. The Restated Charter also provides that stockholder
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.
49
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, employees and directors of the Company held
options exercisable for the acquisition of 3,055,920 shares of Common Stock
(approximately 65% of which shall be exercisable upon consummation of the
Offering), at an average weighted exercise price of $0.52 a share. In addition,
certain employees and directors of the Company were granted options upon the
effectiveness of the Offering exercisable for an aggregate of 1,050,000, 50,000
and 50,000 shares of Common Stock at exercise prices equal to 100%, 85% and 50%,
respectively, of the initial public offering price. Unless registered for
resale, 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 6,100,000 shares of Common Stock to be 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 will be convertible into
406,080 shares of Common Stock. See "Certain Transactions."
In general, under Rule 144 (giving effect to recent changes to the holding
periods described below adopted by the Securities and Exchange Commission to
become effective April 29, 1997) a person (or persons whose shares are
aggregated), including an affiliate, who has beneficially owned shares for at
least one year is entitled to sell, by means of a broker 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 two 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. 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
under this Registration Statement.
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 date of this Prospectus, 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 "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.
50
All directors and executive officers of the Company, who will hold upon
closing of the Offering in the aggregate options exercisable for 3,485,280
shares (approximately 56% of which shall be exercisable upon consummation of the
Offering) shares of Common Stock, have agreed, pursuant to agreements with Sands
Brothers & Co., Ltd, who is acting as the lead 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 date of this Prospectus. Neither Palomar nor the three
instititutional investors who will collectively hold an aggregate of 6,700,000
shares upon closing of the Offering will be subject to any such lock-up
agreement.
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. ("Sands Brothers") and Credit Lyonnais Securities
(USA) Inc. are acting as the Representatives, 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.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ------
<S> <C>
Sands Brothers & Co., Ltd. 1,085,000
Credit Lyonnais Securities (USA) Inc. 500,000
Bear Stearns & Co. Inc. 60,000
BT Securities Corporation 60,000
Donaldson, Lufkin & Jenrette Securities Corporation 60,000
Goldman, Sachs & Co. 60,000
Lehman Brothers 60,000
Oppenheimer & Co., Inc. 60,000
Prudential Securites Incorporated 60,000
Saloman Brothers Inc. 60,000
Smith Barney Inc. 60,000
Allen & Company Incorporated 30,000
Cruttenden Roth Incorporated 30,000
EVEREN Securities, Inc. 30,000
Jefferies & Company, Inc. 30,000
Josephthal Lyon & Ross Incorporated 30,000
Ladenburg, Thalmann & Co., Inc. 30,000
Needham & Company, Inc. 30,000
The Robinson-Humphrey Company Inc. 30,000
RBC Dominion Securities Corp. 30,000
Unterberg Harris 30,000
Wedbush Morgan Securities Inc. 30,000
Black & Co., Inc. 15,000
H.J. Meyers & Co., Inc. 15,000
Van Kasper & Company 15,000
---------
TOTAL 2,500,000
=========
</TABLE>
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
51
may allow to certain dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") concessions, not in excess of $0.40 per
share of Common Stock, of which not in excess of $0.16 per share of Common Stock
may be reallowed to other dealers which are members of the NASD.
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 Sands Brothers a non-accountable expense
allowance of 2% of the gross proceeds of this offering, $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 Sands Brothers or its designees, for
nominal consideration, warrants (the "Warrants") to purchase up to 250,000
shares of Common Stock at an exercise price of $14.85 per share (165% of the
initial public offering price). The 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, 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 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 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 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 Warrants. Any profit realized by Sands
Brothers on the sale of the Warrants or the underlying shares of Common Stock
may be deemed additional underwriting compensation. The 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 Warrants, at the
Company's expense, to register the shares underlying the Warrants under the
Securities Act on one occasion during the Warrant Exercise Term and to include
the 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 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, at Sands Brother's request, to
nominate and use its best efforts to elect a designee of Sands Brothers as a
member of or, at Sands Brothers' option, as a non-voting advisor to the Board of
Directors of the Company. As of the date of this Prospectus, Sands Brothers 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 180 days
following the date of this Prospectus, without first obtaining the prior written
approval of Sands Brothers, which can withhold such approval in its sole
discretion.
In order to facilitate the offering of the Common Stock, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Stock. Specifically, the Underwriters may over-allot in
connection with the offering, creating a short position in the Common Stock for
their own account. In addition, to cover over-allotments or to stabilize the
price of the Common Stock, the Underwriters may bid for, and purchase, shares of
Common Stock in the open market. Finally, the underwriting syndicate may reclaim
selling concessions allowed to an Underwriter or a dealer for distributing the
Common Stock in the offering, if the syndicate repurchases previously
distributed Common Stock in transactions to cover syndicate short positions, in
stabilization transac-
52
tions or otherwise. Any of these activities may stabilize or maintain the market
price of the Common Stock above independent market levels. The Underwriters are
not required to engage in these activities, and may end any of these activities
at any time.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
Prior to the 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
Representatives. 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. Littman Krooks Roth
& Ball P.C., New York, New York, has acted as counsel for the Underwriters in
connection with the Offering.
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, amendments thereto, 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,
and amendments thereto, 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.
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.
53
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 and 1996, and Pro forma as of
December 31, 1996 (Unaudited) F-3
Consolidated Statements of Operations for the period from inception (March 7, 1995)
to December 31, 1995 and for the Year Ended December 31, 1996 F-4
Consolidated Statements of Stockholders' Deficit for the period from
inception (March 7, 1995) to December 31, 1995 and for the Year Ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the period from inception
(March 7, 1995) to December 31, 1995 and for the Year Ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7
</TABLE>
F-1
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 majority-owned subsidiary of
Palomar Medical Technologies, Inc.) and subsidiary as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
deficit and cash flows for the period from inception (March 7, 1995) to December
31, 1995 and for the year ended December 31, 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 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 year ended December 31, 1996, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Boston, Massachusetts January 24, 1997 (except with respect to the matter
discussed in Note 10 as to which the date is February 28, 1997)
F-2
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, DECEMBER 31, 1996
1995 1996 PRO FORMA
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 980,618 $ 2,738,983 $ 2,738,983
Accounts receivable, net of allowance of $12,000 and
$603,953 in 1995 and 1996, respectively 327,471 7,747,007 7,747,007
Inventories 8,432 6,112,821 6,112,821
Prepaid expenses and other current assets 52,150 368,040 368,040
------------ ------------ -----------
Total current assets 1,368,671 16,966,851 16,966,851
------------ ------------ -----------
PROPERTY AND EQUIPMENT, NET 100,674 254,812 254,812
------------ ------------ -----------
PURCHASED TECHNOLOGY -- 1,375,000 1,375,000
------------ ------------ -----------
OTHER ASSETS -- 992,458 992,458
------------ ------------ -----------
$ 1,469,345 $ 19,589,121 $ 19,589,121
============ ============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 178,154 $ 4,537,052 $ 4,537,052
Accrued expenses 609,333 2,005,244 2,005,244
------------ ------------ -----------
Total current liabilities 787,487 6,542,296 6,542,296
------------ ------------ -----------
DUE TO RELATED PARTIES 2,942,892 22,817,998 8,249,549
------------ ------------ -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred Stock, $.01 par value --
Authorized -- 10,000,000 shares
Issued and Outstanding -- None at December 31, 1995 and
1996; 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 1996; 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) (9,771,573) (9,771,573)
------------ ------------ -----------
Total stockholders' (deficit) equity (2,261,034) (9,771,173) 4,797,276
------------ ------------ -----------
$ 1,469,345 $ 19,589,121 $ 19,589,121
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 7, 1995) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
NET REVENUES $ 619,629 $ 18,695,364
COST OF REVENUES 574,611 16,392,483
----------- ------------
Gross profit 45,018 2,302,881
----------- ------------
OPERATING EXPENSES:
Research and development 104,383 803,186
Selling and marketing 581,482 4,819,379
General and administrative 1,095,587 2,815,455
Litigation costs (Notes 2 and 10) 525,000 1,375,000
----------- ------------
Total operating expenses 2,306,452 9,813,020
----------- ------------
Net loss $(2,261,434) $ (7,510,139)
============ ============
PRO FORMA NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE (Note 3(b)) $ (0.89)
============
PRO FORMA WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (Note 3(b)) 8,421,838
============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK
TOTAL
NUMBER OF $.01 ADDITIONAL ACCUMULATED STOCKHOLDERS'
SHARES PAR VALUE PAID-IN CAPITAL DEFICIT (DEFICIT) EQUITY
--------- --------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
INITIAL ISSUANCE OF COMMON STOCK,
MARCH 7, 1995 4,800,000 $ 48,000 $ (47,600) $ -- $ 400
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 -- -- -- (7,510,139) (7,510,139)
--------- --------- --------------- ----------- --------------
BALANCE, DECEMBER 31, 1996 4,800,000 $ 48,000 $ (47,600) $(9,771,573) $ (9,771,173)
========= ======== =============== ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 7, 1995) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,261,434) $ (7,510,139)
Adjustments to reconcile net loss to net cash used
in operating activities --
Litigation costs 500,000 1,375,000
Management bonuses to be paid by Palomar -- 1,000,000
Depreciation and amortization 2,119 33,166
Changes in current assets and liabilities --
Accounts receivable (327,471) (7,419,536)
Inventories (8,432) (6,104,389)
Prepaid expenses and other current assets (52,150) (315,890)
Accounts payable 178,154 4,358,898
Accrued expenses 109,333 1,162,911
---------- -----------
Net cash used in operating activities (1,859,881) (13,419,979)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (102,793) (187,304)
Increase in other assets -- (306,000)
---------- -----------
Net cash used in investing activities (102,793) (493,304)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to related parties 2,942,892 15,671,648
Proceeds from initial issuance of common stock 400 --
---------- -----------
Net cash provided by financing activities 2,943,292 15,671,648
---------- -----------
NET INCREASE IN CASH 980,618 1,758,365
CASH, BEGINNING OF PERIOD -- 980,618
---------- -----------
CASH, END OF PERIOD $ 980,618 $ 2,738,983
============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Deferred offering costs $ -- $ 686,459
============ ============
Purchase of technology $ -- $ 1,375,000
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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 of
manufacturing, marketing and selling 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 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, if needed, at least through December
31, 1997. The total amount of funds provided by Palomar and PEC has been
$20,792,998 and $2,025,000, respectively, through December 31, 1996. The
weighted average balances of these contributions were approximately $767,000 and
$9,791,000 for the period ended December 31, 1995 and the year ended December
31, 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 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 $8,249,549 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 at an assumed initial
public offering price of $9.00 per share.
The pro forma consolidated balance sheet at December 31, 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.
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 PECs 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 year ended December
31, 1996, respectively. Palomar also agreed to pay bonuses to the Company's
management totaling $1,000,000 for the year ended December 31, 1996. These
expenses have been reflected in the historical consolidated financial statements
of Nexar for the respective periods. Palomar will contribute this amount to the
Company in 1997. This amount will be reflected as a contribution to additional
paid in capital in 1997. Management believes the method for allocating expenses
is reasonable and approximates the cost on a stand-alone basis.
Included in accounts receivable in the accompanying consolidated balance
sheet at December 31, 1996 is approximately $197,000 due from Palomar and its
majority-owned subsidiaries for product purchases. There was no amount due from
Palomar at December 31, 1995.
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)
During the year ended December 31, 1996, the Company purchased inventory
components from affiliated companies totaling approximately $693,000, of which
approximately $693,000 is included in accounts payable in the accompanying
consolidated balance sheet as of December 31, 1996.
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 litigation 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.
(a) Unaudited Pro Forma Presentation
The unaudited pro forma consolidated balance sheet as of December 31, 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 $9.00 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 year ended
December 31, 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 revenue, 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 initial filing of 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-8
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 revenue and cost of revenue 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 year ended December 31, 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. Subsequent to December 31, 1996
all of this product had been shipped to this customer. Included in accounts
receivable at December 31, 1996 is approximately $160,000 due from this customer
related to this transaction. 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:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ -----------
<S> <C> <C>
Raw materials ..................... $ 8,432 $ 4,214,097
Work-in-process ................... -- 244,230
Finished goods .................... -- 1,129,494
------- -----------
$ 8,432 $ 5,587,821
======= ===========
</TABLE>
Work-in-process and finished goods inventories consist of material, labor
and manufacturing overhead.
(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 DECEMBER 31, DECEMBER 31,
ASSET CLASSIFICATION USEFUL LIFE 1995 1996
-------------------- ----------- ---- ----
<S> <C> <C> <C>
Machinery and equipment .......................... 5 Years $ 76,614 $ 112,705
Computer equipment ............................... 5 Years 700 80,744
Furniture and fixtures ........................... 5 Years 25,479 47,718
Leasehold improvements ........................... Life of lease -- 48,930
--------- ----------
102,793 290,097
Less -- Accumulated depreciation and amortization 2,119 35,285
--------- ----------
$ 100,674 $ 254,812
========= ==========
</TABLE>
F-9
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
(h) Other Assets
As of December 31, 1996, the Company has incurred costs of approximately
$686,000 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 consolidated balance sheet as
of December 31, 1996. Upon the consummation of the proposed initial public
offering, the deferred offering costs will be charged to stockholders' 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 Concentrations of Credit Risk, requires disclosures
of any significant off-balance-sheet and credit risk concentrations. The Company
has no significant off-balance-sheet concentrations of credit risk such as
foreign currency exchange contracts, options contracts or other foreign hedging
arrangements. Financial instruments that subject the Company to credit risk
consist primarily of cash and trade accounts receivable. The Company places its
cash in highly rated financial institutions. 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 year ended December 31, 1996, who represented
approximately $12,270,000 of total revenues and approximately $4,256,000 of
accounts receivable at December 31, 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 year ended
December 31, 1996, the Company sold approximately $430,000 of product to a
company owned by a current and former officer of Nexar. The Company collected
$210,000 of this amount and wrote off the remaining balance, approximately
$220,000, as uncollectible during the year ended December 31, 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 values of the Company's financial instruments, which
include cash, accounts receivable, accounts payable and amounts due to related
parties, approximate their carrying value.
(k) Research and Development Expenses
The Company charges research and development expenses to operations as
incurred.
(4) STOCKHOLDERS' DEFICIT
(a) Recapitalization
In December 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.
In December 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
F-10
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' DEFICIT -- (Continued)
(a) Recapitalization (Continued)
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 $9.00 per share. The Convertible
Preferred Shares also have a preference upon liquidation of $100 per share,
resulting in a total liquidation preference of $4,568,400.
(b) Stock Option Plans
In August 1995, the Company established the 1995 Stock Option Plan (the
Plan), which 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. Subsequent to December 31, 1996 the Board of
Directors increased the number of shares issuable under the Plan to 5,300,000.
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).
On January 30, 1996 and July 19, 1996 the Company granted options to
purchase 3,234,480 and 83,000 respective shares of the Company's Common Stock at
an exercise price of $0.0025 and $4.25 per share. 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.
The Company has also agreed, as a condition to the employment of two
employees, to issue, upon consummation of the initial public offering, options
to purchase 50,000 and 50,000 shares of the Company's common stock at 85% and
50% of the initial public offering price, respectively. Upon the granting of
these options, the Company will record deferred compensation expense for the
difference between the exercise price and the price of the initial public
offering, if any. In addition, the Board of Directors approved the issuance of
stock options to purchase 1,050,000 shares of the Company's common stock at the
initial public offering price upon the effectiveness of the proposed initial
public offering price to certain employees, directors and officers of Palomar
and the Company. These stock options will vest over periods ranging from four to
five years, except for stock options to purchase 800,000 shares of the Company's
common stock, which may vest earlier, upon the achievement of certain revenue,
net income and stock price milestones, as defined, through December 31, 2000.
In December 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, initial 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 annually
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 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 Plan will terminate in December 2006.
Subsequent to December 31, 1996, the Board of Directors authorized
amendments to employment agreements accelerating the vesting of certain options
to purchase 451,950 shares of the Company's common stock upon the closing of the
initial public offering contemplated herein. In addition, the Board of Directors
approved amendments to employment agreements accelerating the vesting of options
to purchase 903,900 shares of the Company's common stock to vest one year from
the closing of the initial public offering contemplated herein.
F-11
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' DEFICIT -- (CONTINUED)
(b) Stock Option Plans (Continued)
The Company accounts for its stock-based compensation plans under APB
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.
The Company has computed the pro forma disclosures required under SFAS No.
123 for all stock options granted as of December 31, 1996 using the
Black-Scholes option pricing model prescribed by SFAS No. 123.
The assumptions used and the weighted average information for the period
from inception (March 7, 1995) to December 31, 1995 and for the year ended
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 7, 1995) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Risk-free interest rates 6.11% 5.23%-6.51%
Expected dividend yield -- --
Expected lives 4.5 years 4.5 years
Expected volatility 51% 51%
Weighted average grant-date fair value of
options granted during the period $0.001 $0.28
Weighted-average exercise price $0.001 $0.45
Weighed-average remaining contractual life of
options outstanding 4.58 years 4.13 years
Weighted average exercise price of 5,733 and
1,063,973 options exercisable at December 31,
1995 and 1996, respectively $0.001 $0.0025
</TABLE>
The effect of applying SFAS No. 123 would be as follows:
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 7, 1995) TO YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Pro forma net loss ................. $ (2,261,434) $ (7,646,716)
============ ============
Pro forma net loss per share ....... $ (0.27) $ (0.91)
============ ============
</TABLE>
The following table summarizes all stock option activity under the Plan:
<TABLE>
<CAPTION>
NUMBER EXERCISE
OF SHARES PRICE
---------- --------------
<S> <C> <C>
Inception, March 7, 1995 -- $ --
Granted .............................. 20,640 .001
========= ==============
Balance, December 31, 1995 ............. 20,640 .001
Granted .............................. 3,396,840 .0025-10.00
Terminated ........................... (361,560) .0025
--------- --------------
Balance, December 31, 1996 ............. 3,055,920 $ .001--$10.00
========= ==============
Exercisable, December 31, 1996 ......... 1,063,973 $ .001-$0.0025
========= ==============
</TABLE>
F-12
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) STOCKHOLDERS' DEFICIT -- (CONTINUED)
(c) Employee Stock Purchase Plan
In December 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 the consummation 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 165% 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. It is anticipated the consolidated tax return will also
reflect a net operating loss for the year ended December 31, 1996. 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.
As of December 31, 1996, the Company had generated net operating loss
carryforwards for federal and state income tax purposes of approximately
$6,375,000 that expire through 2011. The Company also has certain tax credits
available to offset future federal and state 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 Companys 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>
1995 1996
---------- -----------
<S> <C> <C>
Net operating loss carryforwards .......... $ 830,000 $ 2,567,000
Litigation costs .......................... -- 550,000
Management bonuses ........................ -- 403,000
Other temporary differences ............... 75,000 385,000
---------- ------------
905,000 3,905,000
Less -- Valuation allowance ............... (905,000) (3,905,000)
---------- ------------
-- $ --
========== =============
</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 assets.
F-13
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
----------- -----------
<S> <C> <C>
Accrued payroll and related costs $ 51,452 $ 1,128,373
Accrued settlement costs 500,000 --
Other accrued expenses 57,881 876,871
-------- -----------
Total $609,333 $ 2,005,244
======== ===========
</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 December 31,
1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED AMOUNT
- ----------------- ------
<S> <C>
1997 ..................................... $ 418,000
1998 ..................................... 450,000
1999 ..................................... 453,000
2000 ..................................... 506,000
2001 ..................................... 352,000
-----------
$ 2,179,000
===========
</TABLE>
Rent expense related to all operating leases was approximately $85,000 and
$161,000 for the period from inception (March 7, 1995) to December 31, 1995 and
for the year ended December 31, 1996, respectively.
(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 period from
inception (March 7, 1995) to December 31, 1995 and for the year ended December
31, 1996, royalties charged to operations were immaterial. Subsequent to
December 31, 1996, Palomar and the Licensor entered into an Asset Purchase and
Settlement Agreement, see Note 10.
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-Homes software application
F-14
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES -- (CONTINUED)
(b) License Agreements (Continued)
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 December 31,
1996.
(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 December 31, 1996, the Company incurred and charged to
operations approximately $126,000 under this agreement.
(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. No royalties
have been incurred under this agreement as of December 31, 1996.
(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) Employment Agreements
The Company has an employment agreement with its Chief Executive Officer
(CEO) expiring in March 2002, unless extended. The agreement provides for annual
salary and bonus for the CEO and a bonus of $2.00 per personal computer sold by
the Company. Upon termination of employment with the Company, as defined, the
CEO will be entitled to amounts ranging from $1,000,000 to $3,000,000 in cash,
three to five years of salary, bonus and participation in the Company's benefit
plans, immediate vesting of unvested stock options and an income tax "gross up"
for all of the above items in the event of a change of control, as defined.
The Company has an employment agreement with another executive officer
expiring in March 2002, unless extended. The agreement provides for annual
salary and bonus for the officer and a bonus of $2.00 per personal computer sold
by the Company. Upon termination of employment with the Company, as defined, the
officer will be entitled to up to $750,000 in cash, one year of salary, bonus
and participation in the Company's benefit plans, immediate vesting of unvested
stock options and an income tax "gross up" for all of the above items in the
event of a change of control, as defined.
The Company has substantially similar employment agreements with certain
other executive officers that provide for annual salaries and bonuses to the
officers and expire in March 2000. Each of these agreements provide for 12
months severance upon termination of employment, as defined.
F-15
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) 401(K) PROFIT SHARING PLAN
In April 1996, the Company began participating in a 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 managements 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 was immaterial through December 31,
1996.
(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
December 31, 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
December 31, 1996, the Company has not received any proceeds under this
agreement.
(10) SUBSEQUENT EVENTS
In 1996, an attorney for a former executive officer of the Company
threatened to file a lawsuit or seek arbitration proceeding against the Company
regarding the Company's termination of this executive's employment and the
Company's license agreement with the Licensor.
On February 28, 1997, Palomar and the Company entered into an Asset Purchase
and Settlement Agreement with this former executive and Licensor. Under the
terms of this agreement, Palomar has agreed to pay this former executive and
certain of his affiliates $1,250,000 in cash and deliver $1,500,000 worth of
Palomar's common stock in exchange for all right, title and interest in and to
all the technology licensed under Company's license agreement with the Licensor
and a patent application related thereto and a complete release and settlement
of all claims between this former executive and the Company. Palomar will first
acquire the subject technology and then convey such technology to the Company.
Accordingly, Palomar paid $75,000 upon the execution of this agreement. Palomar
will issue its common shares and remit $475,000 to this former executive on the
earlier of April 30, 1997 or the closing of the initial public offering,
contemplated herein. The $700,000 balance of the cash consideration will be held
in escrow, subject to release to the former executive and/or Licensor in the
absence of a breach of a representation, warranty or covenant within one year
after the closing.
Palomar has agreed to assign to the Company all of its rights and title in
the technology to be received under the Asset Purchase and Settlement Agreement
immediately upon the receipt thereof, and has charged to the Company the costs
associated with this claim and the purchase of the technology. The Company has
allocated $1,375,000 of the consideration to settle this claim and has
F-16
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) SUBSEQUENT EVENTS -- (CONTINUED)
reflected this amount as litigation expense in its statement of operations for
the year ended December 31, 1996. The remaining consideration totaling
$1,375,000 has been allocated to the purchase of the technology as of December
31, 1996 and will be amortized over the technology's estimated useful life. The
allocation of the purchased technology was based on the value of anticipated
royalty payments due to the licensor over the three years ended December 31,
1999.
The Company has included $2,750,000 in Due to Related Parties as of December
31, 1996 in connection with this settlement.
F-17
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, 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ....................................................... 3
Risk Factors ............................................................. 6
Use of Proceeds .......................................................... 14
Dividend Policy .......................................................... 14
Capitalization ........................................................... 15
Dilution ................................................................. 16
Selected Consolidated Financial Data ..................................... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................................. 18
Business ................................................................. 22
Management ............................................................... 35
Certain Transactions ..................................................... 43
Stockholders ............................................................. 45
Beneficial Ownership of Management ....................................... 46
Description of Capital Stock ............................................. 48
Shares Eligible for Future Sale .......................................... 50
Underwriting ............................................................. 51
Legal Matters ............................................................ 53
Experts .................................................................. 53
Additional Information ................................................... 53
Trademarks ............................................................... 53
Index to Consolidated Financial Statements ............................... F-1
</TABLE>
UNTIL MAY 3, 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
----------
SANDS BROTHERS & CO., LTD.
Credit Lyonnais Securities (USA) Inc.
April 8, 1997
================================================================================
