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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission File Number: 0-29194
NEXAR TECHNOLOGIES, INC.
Exact name of registrant as specified in charter
DELAWARE 04-3268334
(State or other jurisdiction of incorporation (I.R.S. Employer Identification)
or organization)
257 Turnpike Road
Southborough, Massachusetts 01772
(Address of principal executive office) (Zip code)
(508) 485-7900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of common stock held by non-affiliates of the Registrant
as of February 28, 1998: $19,747,684
Number of shares outstanding of the Registrant's only class of common stock as
of February 28, 1998: 10,009,055
DOCUMENTS INCORPORATED BY REFERENCE:
Part of Form 10-K into which
----------------------------
Document incorporated
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- -Portions of Registrant's Proxy Statement Part III
relating to Registrant's Annual
Meeting of Stockholders scheduled to be
held on June 8, 1998.
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This Form 10-K, future filings of the registrant, press releases of the
registrant, and oral statements made with the approval of an authorized
executive officer of the Registrant may contain forward looking statements.
In connection therewith, please see the cautionary statements and risk factors
contained in Item 1. "Business - Forward Looking Statements; Cautionary
Statement"; "Business - Risk Factors"; Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Developments"
and elsewhere in this report which identify important factors which could cause
actual results to differ materially from those in any such forward-looking
statements.
PART I
ITEM 1. BUSINESS.
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Nexar Technologies, Inc. (the "Company" or "Nexar") is a new class of
personal computer (PC) manufacturer which has developed what it believes is the
industry's first "future-ready" PC that is readily upgradable using industry-
standard components. Nexar PCs, which are based on patented and patent-
pending technologies, enable end-users to reduce total cost of ownership (TCO),
protect their technology investments and extend the lifecycle of their PC.
Unlike conventional PCs, NEXAR systems allow 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 can be shipped to resellers
without the key system-defining components (microprocessor, memory and hard
drive), but which is otherwise fully configured. This ability:
. 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 resellers to offer Build-to-Order
capability in order 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.
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. NEXAR's current PCs feature 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, Pentium Pro, Pentium II, dual Pentium II and compatible
CPUs. The Company also intends to develop the NEXAR XPA technology to
accommodate microprocessors based on other technologies. The NEXAR XPA allows
the CPU, random access memory (RAM), and cache memory to be replaced by
end-users without technical assistance. The Company's PCs also feature a
removable hard drive, permitting its replacement and the further advantages
of increased data portability and security, and the use of multiple operating
systems in a single PC. The Company does not market its products directly to
end-users, but instead distributes its products through a 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.
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INDUSTRY BACKGROUND
The PC market has been characterized by intense competition and
substantial technological advances occurring over short periods of time.
Hundreds of vendors compete in today's PC marketplace. Leading manufacturers
include Acer America Corporation, Apple Computer, Inc., Compaq Computer
Corporation, Dell Computer Corporation, Gateway 2000, Inc., Hewlett-Packard
Company, International Business Machines Corporation (IBM), and Packard Bell
NEC, Inc. See " - Competition." Rapid technology advances have resulted in high
rates of product innovation and enhancements, and short product life cycles,
creating difficult choices for both current owners and prospective purchasers of
PC systems. PC users occasionally find that they cannot effectively use the
latest software programs, or even the latest enhancements to their existing
software programs, because their PC has insufficient memory, their CPU is too
slow, or their hard drive is full and cannot store additional data.
Consequently, a user who does not wish to forego the latest technology
advancements must either attempt 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.
End-users, especially corporate users, are currently migrating to next
generation PCs such as Windows NT(R)/Pentium Pro and competing systems. The
increase in the capabilities of such systems is occurring concurrently with an
increase in the number of variables, such as compatibility with 32-bit
software applications and multimedia functionality, which PC buyers must
consider in making purchasing decisions. The result is a more intricate outlook
for evaluation of PC technology advancements. In the past year, Intel
introduced MMX multimedia extensions into its P55C model, Advanced Micro
Devices, Inc. (AMD(R)) introduced its K6 CPU which, like a microprocessor Cyrix
Corporation also introduced in 1997, incorporates architectural enhancements to
Pentium-class processors providing significant performance improvements when
running multimedia applications. AMD supports MMX on their K6 CPU and the
Cyrix(R) M2 processor is also MMX compatible. Also in 1997 Intel introduced its
Pentium II 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 1998, Intel is expected to release Deschutes, the code-name
for a Pentium II CPU processor which is expected to support clock speeds of 350
to 450 MHz and bus speeds of 100 MHz.
Further complicating the outlook for advances in processor technology
for PC manufacturers and end-users concerned about obsolescence is a recent
trend by industry leader Intel to introduce their CPUs with proprietary
interfaces. Intel's Pentium Pro was the first to use a Socket 8 interface
connecting the CPU to the motherboard, making it incompatible with prior Intel
and Intel-compatible CPUs using the predecessor Socket 7. In 1997 Intel
introduced its Pentium II with yet another interface, the Slot 1, which
represented a major departure from prior standards. The Pentium II was the
first Intel CPU to be enclosed in a sealed plastic housing requiring a special
single edge contact to the motherboard. The NEXAR XPA directly addresses this
trend by permitting cost effective upgrades of the PC's processor from the
current generation of CPUs to future generations by allowing the easy
replacement of not only the CPU itself but also the core logic portion of the
motherboard to which the CPU connects.
The constant and rapid escalation of technology causes instability in
the PC industry. Because several months may lapse between the manufacture and
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.
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The telephone and mail order direct response market continues to be one
of the fastest growing segments of the PC industry. 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.
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, such as
IBM, have addressed the same market challenge by allowing reseller partners to
perform "channel assembly" in completing the configuration of their PCs.
Others, including Compaq, have attempted to mimic Dell's Build to Order model by
assembling to order large volume purchases from large enterprise customers and
handing off channel assembly of smaller orders to their resellers.
THE NEXAR XPA PC ARCHITECTURE
The key elements of NEXAR's patent-pending XPA PC architecture are a
custom designed main integrated circuit board (a "motherboard") which is
separable into two-halves, and a tower chassis design allowing ease of access,
permitting non-technically trained users to install and replace key components
connecting to either half of the motherboard with industry-standard, off-the-
shelf products. The CPU and RAM of a conventional PC typically reside on top of
a motherboard which also includes expansion board slots for peripheral and
controller cards for communicating with mass storage and input/output
components. NEXAR XPA technology places sockets for the CPU and RAM on the core-
logic half of the motherboard, which faces in the opposite direction of the
input/output half of the motherboard, thereby making the sockets and slots for
insertion and removal of the key components more accessible. The design also
provides access to the expansion slots of the PC on the input/output half of the
motherboard for cards providing features such as networking and multimedia
functionality. Because the core-logic half of the motherboard is itself easily
removable and replaceable, the NEXAR XPA also permits multiple and cross-
processor upgrades and transitions on a single PC.
NEXAR XPA PCs 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, dual Pentium
II and other x86 CPUs. The Company believes this capability will become
increasingly important as technology continues to advance and the demands of
personal computing continue to 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 cost-effectively
custom-fit their operating platform to ever-increasing application needs and
capabilities by converting their system from among various x86 processor lines,
and from among Windows NT, OS/2(R), 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. The NEXAR XPA 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.
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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 devotes most of its product development efforts to the
continued 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 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 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 XPA DESIGN
The Company believes that the flexibility of its XPA PCs provides NEXAR
products a competitive differentiation, especially 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 XPA system permits NEXAR resellers the
ability 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.
. Reduces TCO by saving 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.
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:
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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.
Government Resellers. The Company believes that, in addition to the
other advantages of NEXAR XPA PCs and the increased security and other benefits
of the removable hard disk drive described herein, the NEXAR XPA 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 a specified minimum of the Company's
products in 1998. GTSI is, however, under no obligation to purchase any products
of the Company. In the year ended December 31, 1997, GTSI accounted for
approximately 44% 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 further 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 will seek 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 XPA technology.
Private Brand Resellers. The Company intends to increasingly seek out
and enter into reseller arrangements whereby selected channel participants both
nationally and regionally will be permitted to private label NEXAR's XPA
architecture by selling PCs primarily bearing such reseller's names but
crediting NEXAR with the underlying technology. The Company anticipates that
most such private label resellers, especially systems integrators, will purchase
base XPA systems and complete the assembly of the PC themselves, but the Company
also plans to provide fulfillment services using products consigned by such
resellers for such purpose.
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SALES AND MARKETING
The Company's marketing strategy is channel-based, focused primarily on
distributors, value added and other resellers, and 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. 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.
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, 1997, NEXAR's sales force consisted of 15
people, 11 located at its Southborough, 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, 1997, 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.
In the fiscal year ended December 31, 1997, GTSI accounted for
approximately 44% 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 further as the Company further expands its
distribution network and increases its overall sales. The Company's business
plan for 1998 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 a
specified minimum 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 2 of
Notes to Consolidated Financial Statements.
PRODUCTS
NEXAR began shipping its patent-pending NEXAR Cross-Processor
Architecture systems in September 1997. The NEXAR XPA systems features a split
motherboard design consisting of a fixed input/output card and an easily
removable CPU card that permits easy and cost effective cross-processor
upgrades on a single PC. A NEXAR XPA PC allows 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. NEXAR XPA systems
currently enable the use of any of Pentium, Pentium Pro, Pentium II, dual
Pentium II and compatible CPUs which currently have different socket
configurations and are thus not currently easily replaceable in conventional
PCs. The multi-platform support is designed to accept either Microsoft Windows
95 or Windows NT operating systems.
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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
and certain of its resellers have entered into agreements with third party
service providers, including Wang Laboratories, Inc. (WANG), pursuant to which
these companies provide 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. While the Company and its resellers selected these service
providers based on its belief that these providers have the capability to
perform these warranty obligations on a timely and efficient basis, the failure
of these providers 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 Company currently has only a limited product development staff.
The Company engaged GDA Technologies, Inc. (GDA), a provider of computer
engineering services, to develop the XPA technology and to implement this
technology on several motherboards for use in its XPA PCs. 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.
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 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 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 development, engineering,
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
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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 and other components.
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. 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.
During the third quarter of 1997, 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.
COMPETITION
The desktop PC industry is intensely competitive and may become more so
as the result of, among other things, the introduction of new competitors
(including large multi-national, diversified companies) and possibly weakening
demand. The Company currently competes in the desktop PC market principally with
Acer, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000, Hewlett-
Packard, IBM and Packard Bell NEC. 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.
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INTELLECTUAL PROPERTY
The Company's success is dependent in large part upon its intellectual
property rights. In September 1997, the United States Patent and Trademark
Office issued the Company a patent covering the essential technology which
enables the easy installation, removal and replacement of key components in the
Company's original PCs, which was the predecessor to its XPA architecture. The
Company has filed an additional patent application relating to the same
technology covered by the patent which has issued. The Company has also filed
ten domestic and foreign patent applications, the first in late 1996, covering
its XPA technology. See "Business -- Intellectual Property." There can be no
assurance that any patents will be issued pursuant to the pending or any future
patent applications of the Company. In addition, there can be no assurance that
the patent which has issued or any future patents issued 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. 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.
EMPLOYEES
As of December 31, 1997, NEXAR had 78 employees, including executive
officers, sales, marketing, technical support, finance, manufacturing,
engineering, and administrative personnel. Thirty-three of these employees are
employed at the Southborough, Massachusetts facility, and 45 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.
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FORWARD LOOKING STATEMENTS; CAUTIONARY STATEMENT
- ------------------------------------------------
When used anywhere in this Form 10-K, in future filings by the Company
with the Securities and Exchange Commission, in the Company's press releases and
in oral statements made with the approval of an authorized executive officer of
the Company, the words or phrases "will likely result", "are expected to", "will
continue", "is anticipated", "estimated", "project", or "outlook" or similar
expressions (including confirmations by an authorized executive officer of the
Company of any such expressions made by a third party with respect to the
Company) are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
wishes to caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. Such statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. These risks and uncertainties are described above and in the risk
factors set forth below. The Company specifically declines any obligation to
publicly release the result of any revisions which may be made to any forward-
looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statements.
RISK FACTORS
- ------------
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, 1997, the Company had an accumulated deficit of
approximately $23,118,000. The Company's ability to generate significant revenue
growth in the future is subject to substantial uncertainty.
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. The
Company believes that amounts available from cash generated from operations and
the recent sale of securities and future financing transactions which the
Company believes it can consummate as necessary will be sufficient to meet the
Company's cash requirements through at least the next twelve months. Cash
requirements for periods beyond the next twelve months depend on the Company's
profitability, its ability to manage working capital requirements and its growth
rate. The Company may need to raise additional funds sooner in order to fund
more rapid expansion, to develop new or enhanced products, or to respond to
competitive pressures. 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 maybe 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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
11
<PAGE>
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, Apple Computer, Compaq Computer, Dell Computer, Gateway 2000,
Hewlett-Packard, IBM and Packard Bell NEC. 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. See "Business -- Competition."
DEPENDENCE ON SUBSTANTIAL CUSTOMER
In the fiscal year ended December 31, 1997, one customer of the
Company, Government Technology Services, Inc. (GTSI), a leading supplier of
desktop systems to United States government agencies, accounted for
approximately 44% 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 further 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 a
specified minimum of the Company's products in 1998. GTSI is under no
obligation, however, to purchase any products of the Company. If GTSI makes
fewer purchases in 1998 than the Company anticipates, that would have a material
adverse effect on the Company. See "Business -- Customers," "Business --
Strategy" and Note 2 of Notes to Consolidated Financial Statements.
12
<PAGE>
MANAGEMENT OF GROWTH
The anticipated 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."
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 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. 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 engaged 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 for use in its
13
<PAGE>
XPA PCs. 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. In September 1997, the United States Patent and Trademark
Office issued the Company a patent covering the essential technology which
enables the easy installation, removal and replacement of key components in the
Company's original PCs, which was the predecessor to its XPA architecture. The
Company has filed an additional patent application relating to the same
technology covered by the patent which has issued.The Company has also filed ten
domestic and foreign patent applications, the first in late 1996, covering its
XPA technology. See "Business -- Intellectual Property". There can be no
assurance that any patents will be issued pursuant to the pending or future
patent applications of the Company. Even if issued, there can be no assurance
that the patent which has issued or any future 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. 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 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.
Also, NexTrend Technologies, Inc., a manufacturer of computer hardware
has filed a Notice of Opposition at the United States Patent and Trademark
Office to the Company's application to register the NEXAR mark for instructional
manuals in view of NexTrend's use of the NEXSTAR mark. NexTrend claims that the
marks are confusingly similar and that, as between the two parties it used its
NEXSTAR
14
<PAGE>
mark first. The Company has filed an answer to the Notice of Opposition denying
these allegations. Nonetheless, if NextTrend were to prevail in this matter and
then bring an action against Nexar for trademark infringement an adverse
determination of such action could have a material adverse effect on Nexar.
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 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 THIRD PARTIES 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 it and
certain of its resellers have contracted with third party service providers,
including Wang, to perform the Company's warranty obligations with respect to
its products. These companies provide 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 and its resellers selected these providers based on its belief
that these companies have the capability to perform these warranty obligations
on a timely and efficient basis, the failure of these providers to meet the
demands of the end-users of the Company's products could materially and
adversely
15
<PAGE>
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. 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.
The Company occasionally experiences delays in receiving certain
components, which can cause delays in the shipment of some products to
customers. 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.
16
<PAGE>
There can be no assurance that the Company will be able to maintain optimal
inventory levels in future periods. See "Business -- Manufacturing."
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. 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 third
quarter of 1997, 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. 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."
17
<PAGE>
ITEM 2. PROPERTIES.
- --------------------
The Company's headquarters and executive offices are located in a
leased facility in Southborough, Massachusetts. The Southborough facility also
serves as the base for NEXAR's sales, marketing, technical support, and general
and administrative functions. The facility, totaling approximately 20,500 square
feet, is leased through 2002. The annual rent under the terms of the lease
agreement is approximately $422,000 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.
ITEM 3. LEGAL PROCEEDINGS.
- ---------------------------
As of the date of the filing of this report, the Company was not a
party to any material legal proceedings, except as arise in the ordinary course
of its business.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
- -----------------------------------------------------------
None
18
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
- -------------------------------------------------------------------------------
(a) The Company's common stock is traded on the Nasdaq National Market
under the symbol "NEXR". The following table sets forth the high and low bid
quotations for the Company's common stock on The Nasdaq Stock Market during the
periods specified:
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
April 9, 1997* to June 30, 1997 $9.875 $5.75
Third Quarter 1997 $7.375 $3.875
Fourth Quarter 1997 $8.125 $2.00
____________
</TABLE>
*The date of the commencement of the Company's initial public offering.
As of February 28, 1998, the Company had approximately 52 stockholders
of record. No cash dividends have been declared or paid by the Company since
its inception. It is the policy of the Company to retain any cash flow for
future business expansion. The Company anticipates no change in this policy in
the foreseeable future.
(b) The Company filed a Form SR with the Securities and Exchange
Commission on July 18, 1997 reporting through June 30, 1997 the Company's use of
proceeds from its initial public offering (under Form S-1 Registration Statement
No. 333-18489; declared effective April 8, 1997) of its Common Stock, $0.01 par
value. The Company registered and sold 2,500,000 shares of its common stock in
such offering for aggregate gross proceeds of $22,500,000. Net proceeds after
underwriting discounts and commissions and offering expenses were approximately
$18,687,000. The managing underwriters of the offering were Sands Brothers &
Co., Ltd. and Credit Lyonnais Securities (USA) Inc. As of September 30, 1997 the
Company had utilized approximately $7,700,000 and approximately $8,388,000 of
the net offering proceeds for repayment of indebtedness (to the Company's
largest stockholder, Palomar Medical Technologies, Inc.) and working capital,
respectively. During the quarter ended December 31, 1997, the Company utilized
the balance of the net proceeds for working capital.
19
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
- ---------------------------------
The following selected financial data should be read in conjunction
with the Consolidated Financial Statements, including the related notes, and
"Management Discussion and Analysis of Financial Condition and Results of
Operations." The information set forth below is not necessarily indicative of
the results of future operations.
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL DATA
PERIOD FROM
INCEPTION
(MARCH 7,
1995)
TO
DECEMBER 31, YEAR ENDED YEAR ENDED
1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------- ----------------- -----------------
(In thousands except for shares and per share data)
<S> <C> <C> <C>
Consolidated Statements
of Operations
Data:
Net revenues $ 619 $ 18,695 $ 33,608
Cost of revenues 574 16,392 32,868
Gross profit 45 2,303 740
Operating expenses:
Research and
development 104 803 1,551
Selling and Marketing 581 4,819 7,291
General and
administrative 1,621 4,191 5,422
Total operating expenses 2,306 9,813 14,264
Interest Income, net - - 178
Net Loss $ (2,261) $ (7,510) $ (13,346)
Net loss per common
share:
Basic $ (0.47) $ (1.56) $ (1.84)
Diluted (.29) (.98) (1.32)
Weighted average
common shares:
Basic 4,800,000 4,800,000 7,264,320
Diluted 7,672,920 7,672,920 10,116,600
Statement of Financial
Position Data:
Working capital $ 582 $10,425 $ 9,924
Total assets 1,469 19,589 19,909
Long-term debt 2,943 22,818 134
Stockholders' equity
(deficit) (2,261) (9,771) 11,139
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
The following discussion provides information that management believes is
relevant to an understanding of the Company's consolidated financial condition
and results of operations. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements, the Notes thereto and the other
financial information, included elsewhere in this report.
RESULTS OF OPERATIONS
The Company was organized and commenced operations in March of 1995. The
Company has focused on developing its products and its marketing and
distribution strategies and did not generate material revenues until April 1996
when it began shipping its proprietary personal computers. 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, and marketing of its
desktop PCs.
20
<PAGE>
The following table summarizes the results of the Company's operations for
each of the past three years as a percentage of revenues. All percentage amounts
were calculated using the underlying data in thousands.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(MARCH 7, 1995) YEAR ENDED DECEMBER 31,
TO DECEMBER 31,
1995 1996 1997
--------------- ---- ----
<S> <C> <C> <C>
Consolidated Statements of
Operations Data:
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 92.7% 87.7% 97.8%
Gross profit 7.3% 12.3% 2.2%
Operating expenses:
Research and development 16.8% 4.3% 4.6%
Selling and Marketing 93.9% 25.8% 21.7%
General and administrative 261.9% 22.4% 16.1%
Total operating expenses 372.5% 52.5% 42.4%
Interest Income 0.0% 0.0% 20.5%
Net Loss (365.3%) (40.2%) (39.7%)
</TABLE>
The Company has generated significant operating losses since inception.
During the fourth quarter of 1996 and the third quarter of 1997 the Company
experienced revenue shortfalls due to delays in receiving certain key components
necessary to meet outstanding purchase orders. In addition, the Company
increased its spending year to year in its continuing effort to develop and
bring new products to market.
YEAR ENDED DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1996
NET REVENUES
Net revenues increased 79.8% to $33.6 million for the year ended December
31, 1997 from $18.7 million for the comparable period ended December 31, 1996.
The increase in net revenues was attributed to increase unit shipments of the
Company's second generation upgradeable XPA PCs. Unit shipments increased 102.7%
to approximately 37,500 from 18,500 for the same comparable year ended December
31, 1996. The increase in both net revenues and unit shipments reflects the
growing acceptance and validation of the Company's proprietary technology.
The unit volume growth that the Company experienced during 1997 was the
result of the increased demand for the Company's product and the sales efforts
aimed at establishing a broader customer base and increasing the penetration of
existing customer accounts. The Company began shipping its patent-pending XPA
systems in volume in November 1997.
21
<PAGE>
GROSS PROFIT
Gross profit as a percentage of net revenues was 2.2% in 1997, down from
12.3% in 1996. This decrease was due in part to an interruption in the supply of
essential components from the Company's key supplier of its proprietary
technology which resulted in lower than anticipated shipment levels and
unabsorbed factory overhead cost attributed to the lower revenues during the
third quarter of 1997, as well as the higher cost of components. The Company
resumed full scale production in the fourth quarter with the sourcing of
proprietary components from two new manufacturers.
OPERATING EXPENSES
Operating expenses for the year ended December 31, 1997 decreased by 10.1%
as a percentage of revenues. Operating expenses increased by 45.4% year to year
as a result of the Company supporting its new products through advertising and
promotional programs, and increased investment in the area of engineering,
service and support of its increased product development efforts and growing
customer base.
Research and development costs increased as a percentage of revenues, to
4.6% for the year ended December 31, 1997 as compared to 4.3% for the year ended
December 31, 1996. These expenses increased $0.7 million, or 93.2%, year to year
as a result of the Company's introduction of its XPA PC in 1997.
Sales and marketing expenses decreased, as a percentage of revenues, for
the period ended December 31, 1997 to 21.7% as compared to 25.8% for the same
period in 1996. These expenses increased $2.5 million, or 51.3%, from year to
year as a result of increased efforts to establish its markets, distribution and
reseller channels. The Company increased its presence in the market through
increased spending in advertising, promotional programs and trade show
attendance. During 1997, the sales organization was increased in an effort to
generate and meet product demand and to increase regional coverage throughout
the United States and Canada. The Company also established a relationship with
an overseas distributor to market and sell its product in Europe. The Company
anticipates its selling and marketing efforts will increase in connection with
the introductions of new products, entry into new markets, expansion of its
reseller channels, and more emphasis on its technical support and service.
General and administrative expenses decreased, as a percentage of revenues,
to 16.1% as compared to 22.4% for the years ended December 31, 1997 and 1996,
respectively. However, general and administrative expenses increased 29.3% year
to year in support of the Company's growth. These expenses included the hiring
of additional staff, operating costs associated with managing the growth of the
Company and a non-cash deferred compensation charge associated to employment
contracts of certain key company executives.
YEAR ENDED DECEMBER 31, 1996 AND PERIOD FROM INCEPTION (MARCH 7, 1995) TO
DECEMBER 31, 1995
NET REVENUES
Net Revenues increased to $18.7 million for the year ended December 31,
1996 from $0.6 million 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 first generation
upgradeable PC in April 1996.
22
<PAGE>
GROSS PROFIT
Gross profit was $2.3 million, or 12.3% of net revenues, for the year ended
December 31, 1996 as compared to $45,000, or 7.3% of net revenues, for the
period ended December 31, 1995. The Company began full scale production of its
initial upgradeable PCs during the second quarter of 1996. The increase in gross
profit was primarily attributable to this introduction and initial volume
shipments of the first generation upgradeable PC in April 1996.
OPERATING EXPENSES
Research and development expenses consisted 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 $0.8 million
or 672.1%, during the year ended December 31, 1996 as compared to $0.1 million
for the period ended December 31, 1995. The primary reason for this increase was
$0.4 million of management bonuses for 1996 which was funded by an affiliate of
the Company.
Selling and marketing expenses consisted primarily of salaries,
commissions, consulting fees, trade show expenses, advertising and marketing
costs and a charge for the management bonuses described above. Selling and
marketing expenses increased 729.4% to $4.8 million for the year ended December
31, 1996 from $0.6 million 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 first generation
upgradeable PC, and attendance at various trade shows.
General and administrative expenses consisted primarily of expenses for
finance, office operations, administration and general management activities
including legal, accounting and other professional fees. General and
administrative expenses increased 158.5% to $4.2 million for the year ended
December 31, 1996 from $1.6 million for the period ended December 31, 1995. This
increase in expenses during the year ended December 31, 1996 was attributable to
additional expenditures for general and administrative expenses as a result of
the Company's anticipated growth and a charge for management bonuses which was
funded by an affiliate of the Company. For the years ended December 31, 1995 and
1996 litigation costs of $0.5 million and $1.4 million, respectively were
included in the general and administrative expenses. These expenses represented
the costs to settle potential claims against the Company.
LIQUIDITY AND CAPITAL RESOURCES
On April 14, 1997, the Company completed its initial public offering (IPO)
of 2,500,000 shares of common stock at a price of $9.00 per share. The proceeds
raised amounted to approximately $18,687,000, net of the underwriter commissions
and other offering costs totaling approximately $3,813,000. Subsequent to this
offering the Company used a significant portion of these proceeds and issued
additional common and preferred stock to Palomar (its parent prior to the IPO)
to liquidate itself of all of its long term debt.
The Company has been operating from its own working capital balance since
the IPO. The Company's working capital for the year ended December 31, 1997
decreased to $9.9 million from $10.4 million for the comparable period ended
December 31, 1996 primarily due to an unanticipated lower gross profit and its
negative impact on the cash flow from operating activities. The Company's cash
and cash equivalents position was $1.2 million, accounts receivables of $8.8
million and inventory of $5.0 million at December 31, 1997 as compared to cash
and cash equivalents of $2.7 million, accounts receivables of $7.7 million and
inventory of $6.1 million at December 31, 1996.
On March 20, 1998 the Company issued 32,000 shares of Series B Convertible
Preferred Stock at $100 per share for total gross proceeds of $3,200,000. The
Series B Convertible Preferred Stock may be converted, in whole or in part, into
a number of shares of the Company's common stock equal to $100 per
23
<PAGE>
share converted by a conversion price equal to the lesser of $3.25 per share or
75% of the average closing bid price of the Company's common stock in the five
trading days prior to the date of conversion.
The Company's capital requirements in connection with its development and
marketing activities have been and will continue to be significant. The Company
believes that amounts available from cash generated from operations and the
recent sale of securities and future financing transaction which the Company
believes it can consummate as necessary will be sufficient to meet the Company's
cash requirements through at least the next twelve months. Cash requirements for
periods beyond the next twelve months depend on the Company's ability to manage
working capital requirements and its growth rate. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced products, or to respond to competitive pressures (see "Recent
Developments" below). 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.
RECENT DEVELOPMENTS
During 1997 many computer manufacturers, including industry leader Compaq
Computer, began offering PCs to home customers for less than $1,000. This has
led to growth in the home PC market, but also increased pressure on price
margins in the corporate, government and educational PC markets in which the
Company primarily competes. Industry forecasters are predicting that prices for
a wide range of PC hardware products will fall significantly during 1998 and
profit margins for makers of corporate PC systems will generally decline.
Although the Company believes that its relationships with its customers are good
and that its focus on increasing sales through private brand OEM agreements and
other strategic distribution agreements is a sound strategy for growth, there
can be no assurance that the recent trends in the industry identified above will
not have a material adverse effect on the Company and preclude it from achieving
profitability in the foreseeable future. Due to these factors, management of the
Company has determined that it is in the best interests of the Company and its
stockholders to explore the possibility of entering into strategic alliances
with larger industry participants. In March 1998, the Company engaged Southport
Partners, L.P., an investment banking firm based in Southport, Connecticut, to
provide advisory services to the Company concerning possible joint venture,
licensing and other potential transactions. The Company is not currently engaged
in any negotiations with respect to any such potential transaction nor has any
determination been made by the Company whether to enter into any such
transaction.
YEAR 2000
Many computer systems experience problems handling dates beyond the year
1999. Therefore, some computer hardware and software will need to be modified
prior to the year 2000 in order to remain functional. The Company is assessing
both the internal readiness of its computer systems and the compliance of its
computer products sold to customers for handling the year 2000. The Company
expects to implement successfully the systems and programming changes necessary
to address year 2000 issues, and does not believe that the cost of such actions
will have a material effect on the Company's results of operations or financial
condition. There can be no assurance, however, that there will not be a delay
in, or increased costs associated with, the implementation of such changes, and
the Company's inability to implement such changes could have an adverse effect
on future results of operations.
The Company is also assessing the possible effects on the Company's
operations of the year 2000 readiness of key suppliers and subcontractors. The
Company's reliance on suppliers and subcontractors, and, therefore, on the pro-
per functioning of their information systems and software, means that failure to
24
<PAGE>
address year 2000 issues could have a material impact on the Company's
operations and financial results; however, the potential impact and related
costs are not known at this time.
ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
- ---------------------------------------------------------------------
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
- -----------------------------------------------------
The response to this section is set forth in a separate section of this
report. See page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE.
- ---------------------
Not applicable, but see Item 14(b) of this report regarding the filing
with the Commission of current reports on Form 8-Ks by the Company with respect
to the change in the Company's independent auditors in 1997.
25
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
- -------------------------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company and their ages as
of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Position
- ---- --- --------
Albert J. Agbay..................................... 49 Chairman of the Board, Chief Executive
Officer and President
Gerald Y. Hattori................................... 46 Vice President of Finance, Chief Financial
Officer and Treasurer
Michael J. Paciello................................. 46 Executive Vice President of Sales
Liaqat Y. Khan...................................... 46 Executive Vice President of Manufacturing
E. Craig Conrad..................................... 39 Vice President of Marketing
Steven Georgiev..................................... 63 Director
Joseph E. Levangie.................................. 52 Director
Buster C. Glosson................................... 55 Director
</TABLE>
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 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 an Executive Vice President of the
Company since March 1995 and Executive Vice President of Sales since March 1998.
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
26
<PAGE>
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 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.
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.
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
served as Chief Executive Officer of Palomar Medical Technologies, Inc.
("Palomar") from November 12, 1993 until May 1997. He was Chairman of the Board
of Directors of Palomar from September 1991 to September 1997. Mr. Georgiev was
a consultant to Dymed Corporation, (Dymed), Palomar's predecessor, from June
1991 until the September 1991 merger of Dymed with Palomar. 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, a director of Senetek, Plc, a publicly held company, and a director of
DynaGen, Inc., a publicly held-company.
Joseph E. Levangie has been a director of the Company since March
1995. 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. Mr. Levangie was a director of Palomar
from 1991 to February 1997. Mr. Levangie is also Chief Executive 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 company.
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
27
<PAGE>
investment holding company developing international oil and power projects. He
has also served as a director of GreenMan Technologies, Inc., a publicly-held
company, since August 1994, of The American Materials and Technologies, Inc.,
and of Skysat Communications Network Corporation, a publicly-held
company, since July 1996.
EXECUTIVE OFFICERS
Executive officers of the Company are elected by the Board of
Directors on an annual basis. There are no family relationships among any of the
executive officers or directors of the Company.
SECTION 16(A) COMPLIANCE
This information is incorporated by reference to the "Compliance with
Section 16(a) of the Exchange Act" section of the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
- ---------------------------------
This information is incorporated by reference to the "Executive
Compensation" section of the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- -------------------------------------------------------------------------
This information is incorporated by reference to the "Stock Ownership
of Directors and Executive Officers" section of the Proxy Statement.
28
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- ---------------------------------------------------------
CONVERSION OF PALOMAR DEBT AND ESCROW OF CONTINGENT SHARES
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 or its
management for the Company's future results of operations or appreciation in the
value of Common Stock. See Item 1. "Business--Forward Looking Statements;
Cautionary Statement" and "Business-Risk Factors."
Palomar and its wholly-owned subsidiary Palomar Electronics Corporation
("PEC") provided all of the Company's funds for operations prior to the IPO in
the form of non-interest bearing loans. The total amount of funds provided by
Palomar and PEC was $20,792,998 and $2,025,000, respectively, through December
31, 1996.
On March 31, 1997 the Company entered into an agreement with Palomar (the
"Agreement") whereby upon the closing of the IPO, $8,249,549 of such
indebtedness was to be repaid to Palomar, $4,568,449 converted into 45,684
shares of Convertible Preferred Stock with the terms described below, and
$10,000,000 converted into 1,900,000 shares of the Common Stock, of which
700,000 shares were issued without restriction. During 1997 Palomar agreed to
pay $1,000,000 of management bonuses for services rendered to the Company in
1996, which was treated as a contribution to the Company's capital by offset of
the amounts due Palomar under the Agreement. The Company contends that
subsequent to the date of the Agreement, Palomar agreed to a modification to the
Agreement to the effect that Palomar would make, by reduction of the amounts due
Palomar in cash, additional capital contributions to the Company in the
aggregate amount of $3,132,654. Palomar has claimed that such modification was
unauthorized and therefore not binding. Although the Company believes it has
strong grounds to support its position, the $3,132,654 was not recorded as of
December 31, 1997. Nexar paid Palomar $6,700,000 during 1997 pending
resolution of this matter.
Pursuant to the Agreement, the balance of 1,200,000 shares of the Common
Stock (the "Contingent Shares") are subject to mandatory repurchase, in whole or
in part, by the Company at $0.01 per share after the 48 month anniversary of the
IPO unless earlier released from escrow as described below. Palomar sold the
Contingent Shares for $5,000 in December 1997 subject to the Company's
repurchase rights described below. The Contingent Shares were placed in escrow,
subject to release to the holder thereof in installments of 400,000 shares each
(upon achievement of any 3 of the 4 milestones specified below; none, some, or
all (other than with respect to 1997 which were not achieved) 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 the holder
thereof 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) $20.25 for ten consecutive trading days at any time prior to the 24-month
anniversary of the IPO, or (ii) $24.75 for ten consecutive trading days at any
time prior to the 36-month anniversary of the IPO, or (iii) $29.25 for ten
consecutive trading days at any time prior to the 48-month anniversary of the
IPO; 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 IPO, 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 of the IPO are convertible into an aggregate of 406,080 shares of Common
Stock at the option of the holder thereof. 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 RELATED PARTY TRANSACTIONS
The Company's initial upgradable PCs were 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, was 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.
Comtel Corporation ("Comtel"), formerly 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 year ended December 31, 1997, the
Company purchased components from Comtel for consideration in the approximate
amount of approximately $2,600,000. 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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
- ---------------------------------------------------------------------------
(a) Financial Statements, Schedules and Exhibits
1. Financial Statements:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Reports of Independent Certified Public Accountants F-2 to F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Operations for the Period from Inception (March 7,
1995) to December 31, 1995 and for the Years Ended December 31, 1996 and 1997 F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the Period from
Inception (March 7, 1995) to December 31, 1995 and for the Years Ended
December 31, 1996 and 1997 F-6
Consolidated Statements of Cash Flows for the Period from Inception (March 7,
1995) to December 31, 1995 and for the Years Ended December 31, 1996 and 1997 F-7
Notes to Consolidated Financial Statements F-8 to F-34
</TABLE>
2. Financial Statement Schedule:
Not applicable
3. Exhibits: See Index to Exhibits and Financial Statement Schedules
appearing in (c) below.
(b) Reports on Form 8-K:
(i) The Company filed a Form 8-K with the Commission on
November 17, 1997 reporting the resignation of Arthur Andersen LLP as its
independent auditors.
(ii) The Company filed a Form 8-K with the Commission on
December 29, 1997 reporting the appointment of BDO Seidman, LLP as its new
independent auditors.
29
<PAGE>
(C) EXHIBITS
INDEX TO EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Certain of the following exhibits are filed herewith. Certain other
of the following exhibits (denoted by *, **, or ***) have heretofore been filed
with the Commission and are incorporated herein by reference.
<TABLE>
<CAPTION>
No. Document
- --- --------
<S> <C>
3.1 Restated Certificate of Incorporation of the Registrant
3.2 Certificate of Designation of the Series B Convertible Preferred Stock
*3.3 Amended and Restated By-laws of the Registrant
4.1 Articles Fourth, Seventh, Eight, Ninth, Tenth, Eleventh, Twelfth and
Fifteenth of the Restated Certificate of Incorporation of the
Registrant (included in Exhibit 3.1)
*4.2 Articles II, III, IV, V, VI, VII, VIII, IX, X, XIV, XXII, XXVI,
XXVII, of the Registrant's By-laws, as amended (included in Exhibit
3.3)
*4.3 Registration Rights Agreement dated as of December 18, 1996 between
the Registrant and the Travelers Insurance Company
*4.4 Registration Rights Agreement dated as of December 31, 1996 between
the Registrant and GFL Advantage Fund Limited.
**10.1 Lease dated as of July 28, 1995 between the Registrant and Deerfoot
LLC.
*10.2 Lease dated as of August 9, 1996 between the Registrant and IBG
Huntwood Associates, a California general partnership
*10.3 International Service Agreement between the Registrant and Wang
Laboratories, Inc. dated September 1, 1996
*10.4 On-Site Maintenance & Service Agreement between the Registrant and
Wang Laboratories, Inc. dated October 2, 1995
+*10.5 1995 Stock Option Plan, as amended
+*10.6 1996 Employee Stock Purchase Plan
+*10.7 1996 Non-Employee Directors Stock Option Plan
+*10.8 Key Employee Agreement between the Registrant and Albert J. Agbay
+*10.9 Key Employee Agreement between the Registrant and Gerald Y. Hattori
+*10.10 Key Employee Agreement between the Registrant and Michael J. Paciello
</TABLE>
30
<PAGE>
+*10.11 Key Employee Agreement between the Registrant and Liaqat Y. Khan
+*10.12 Amendment to Key Employee Agreement between the Registrant and
Albert J. Agbay
+***10.13 Key Employee Agreement between the Registrant and E. Craig Conrad
+***10.14 Amendment to Key Employee Agreement between the Registrant and
Gerald Y. Hattori
+*10.15 Amendment to Key Employee Agreement between the Registrant and
Michael J. Paciello
+*10.16 Amendment to Key Employee Agreement between the Registrant and
Liaqat Y. Khan
*10.17 Warrant Agreement between the Registrant and Sands Brothers & Co.,
Ltd.
21.1 List of Registrant's subsidiaries
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule for the Year Ended December 31, 1997
27.2 Restated Financial Data Schedule for the Nine Months Ended September
30, 1997
27.3 Restated Financial Data Schedule for the Six Months Ended June 30,
1997
27.4 Restated Financial Data Schedule for the Three Months Ended March 31,
1997
27.5 Restated Financial Data Schedule for the Year Ended December 31, 1996
27.6 Restated Financial Data Schedule for the Nine Months Ended September
30, 1996
___________________
+ Management compensatory plan or arrangement.
* Incorporated by reference to exhibit filed with Registrant's
Registration Statement on Form S-1 (File No. 333-18489).
** Incorporated by reference to exhibit filed with Registrant's
quarterly report on Form 10-Q filed on August 13, 1997.
*** Incorporated by reference to exhibit filed with Registrant's
quarterly report on Form 10-Q filed on November 13, 1997.
(D) FINANCIAL STATEMENT SCHEDULES:
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this Report to
be signed on its behalf by the undersigned, thereunto duly authorized on March
30, 1998.
NEXAR TECHNOLOGIES, INC.
By /s/ Albert J. Agbay
--------------------------------------
Albert J. Agbay
Chief Executive Officer, President and
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities on
the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Signature Title(s) Date
- --------- -------- ----
/s/ Albert J. Agbay Chief Executive Officer (Principal March 30, 1998
- -------------------------- Executive Officer), President and
Albert J. Agbay Chairman of the Board of Directors
/s/ Gerald Y. Hattori Vice President of Finance, Chief Financial March 30, 1998
- -------------------------- Officer (Principal Financial and
Gerald Y. Hattori Accounting Officer) and Treasurer
/s/ Steven Georgiev Director March 30, 1998
- --------------------------
Steven Georgiev
/s/ Joseph E. Levangie Director March 30, 1998
- --------------------------
Joseph E. Levangie
/s/ Buster C. Glosson Director March 30, 1998
- --------------------------
Buster C. Glosson
</TABLE>
<PAGE>
NEXAR TECHNOLOGIES, INC.
AND SUBSIDIARY
CONTENTS
================================================================================
Reports of independent public accountants F-2 to F-3
Consolidated balance sheets as of December 31, 1996 and 1997 F-4
Consolidated statements of operations for the period from
inception (March 7, 1995) to December 31, 1995 and for the
years ended December 31, 1996 and 1997 F-5
Consolidated statements of stockholders' equity (deficit)
for the period from inception (March 7, 1995) to December 31,
1995 and for the years ended December 31, 1996 and 1997 F-6
Consolidated statements of cash flows for the period from
inception (March 7, 1995) to December 31, 1995 and for the
years ended December 31, 1996 and 1997 F-7
Notes to consolidated financial statements F-8 to F-34
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of Nexar Technologies, Inc.
Southborough, Massachusetts
We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. and subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit 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 audit provides 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, 1997 and the results of their operations and their
cash flows for the year then ended in conformity with generally accepted
accounting principles.
BDO Seidman, LLP
Boston, Massachusetts
February 13, 1998 (except for
Note 10 which is as of
March 20, 1998)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nexar Technologies, Inc.:
We have audited the accompanying consolidated balance sheet of Nexar
Technologies, Inc. (a Delaware corporation and majority-owned subsidiary of
Palomar Medical Technologies, Inc.) and subsidiary as of December 31, 1996, and
the related consolidated statements of operations, stockholders' equity
(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, 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 purchased technology matter
discussed in Note 2 as to which
the date is February 28, 1997)
<PAGE>
<TABLE>
<CAPTION>
Nexar Technologies, Inc.
and Subsidiary
Consolidated Balance Sheets
(Note 2)
======================================================================================================================
December 31, 1996 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents 2,738,983 1,184,333
Restricted cash - 630,000
Accounts receivable, net of allowances of $604,000 and
of $1,970,000 in 1996 and 1997, respectively (Note 4) 7,747,007 8,832,312
Inventories 6,112,821 4,973,272
Prepaid expenses and other 368,040 2,190,647
- ----------------------------------------------------------------------------------------------------------------------
Total current assets 16,966,851 17,810,564
Property and equipment, net 254,812 809,763
Purchased technology, less accumulated amortization of $458,340 in 1997 1,375,000 916,660
Other assets 992,458 372,072
$19,589,121 $ 19,909,059
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable (Note 4) 4,537,052 6,177,166
Accrued expenses (Note 5) 2,005,244 1,189,352
Due to related parties (Note 4) - 461,584
Current maturities of obligations under capital lease (Note 7) - 58,492
- ----------------------------------------------------------------------------------------------------------------------
Total current liabilities 6,542,296 7,886,594
Due to related parties (Note 4) 22,817,998 -
Deferred compensation (Note 7) - 750,000
Obligations under capital lease, less current maturities (Note 7) - 133,613
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 29,360,294 8,770,207
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 3, 7, 8, 9 and 10)
Stockholders' equity (deficit) (Notes 3, 4 and 10):
Preferred stock, $.01 par value; authorized 10,000,000
shares; no shares issued at December 31, 1996 and 45,684 shares issued
and outstanding at December 31, 1997 stated at liquidation preference value - 4,568,400
Common stock, $.01 par value; authorized 30,000,000 shares;
4,800,000 and 9,488,715 shares issued and outstanding at
December 31, 1996 and 1997, respectively 48,000 94,887
Additional paid-in capital (47,600) 29,593,518
Accumulated deficit (9,771,573) (23,117,953)
- -----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (9,771,173) 11,138,852
- ----------------------------------------------------------------------------------------------------------------------
$19,589,121 $ 19,909,059
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Nexar Technologies, Inc.
and Subsidiary
Consolidated Statements of Operations
(Note 2)
========================================================================================================================
Period from
Inception
(March 7, 1995) to Year Ended
December 31, December 31, December 31,
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net revenues (Note 4) 619,629 $18,695,364 $ 33,608,063
Cost of revenues (Note 4) 574,611 16,392,483 32,867,912
- --------------------------------------------------------------------------------------------------------------------------
Gross profit 45,018 2,302,881 740,151
- --------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 104,383 803,186 1,551,418
- --------------------------------------------------------------------------------------------------------------------------
Selling and marketing 581,482 4,819,379 7,290,766
General and administrative 1,620,587 4,190,455 5,422,381
- --------------------------------------------------------------------------------------------------------------------------
Total operating expenses 2,306,452 9,813,020 14,264,565
- --------------------------------------------------------------------------------------------------------------------------
Operating loss (2,261,434) (7,510,139) (13,524,414)
Interest income, net of interest expense
of $2,338 in 1997 - - 178,034
- --------------------------------------------------------------------------------------------------------------------------
Net loss $(2,261,434) (7,510,139) $(13,346,380)
- --------------------------------------------------------------------------------------------------------------------------
Net loss per share of common stock:
Basic $(.47) $(1.56) $(1.84)
Diluted $(.29) $ (.98) $(1.32)
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Nexar Technologies, Inc.
and Subsidiary
Consolidated Statements of Stockholders' Equity (Deficit)
(Notes 3, 4 and 10)
===================================================================================================================================
Preferred Stock Common Stock Total
--------------------- ------------------- Additional Stockholders'
Number of $0.01 Number of $0.01 Paid-in Accumulated Equity
Shares Par Value Shares Par Value Capital Deficit (Deficit)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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)
Initial public offering of 2,500,000
shares of common stock at $9.00 per share,
net of $3,812,716 in offering costs - - 2,500,000 25,000 18,662,284 - 18,687,284
Contribution of capital - - - - 1,000,000 - 1,000,000
Conversion of $4,568,449 of related party
debt to 45,684 shares preferred stock 45,684 4,568,400 - - 49 - 4,568,449
Conversion of $10,000,000 of related
party debt to 700,000 shares common stock - - 700,000 7,000 9,993,000 - 10,000,000
Issuance of 1,200,000 shares of common
stock to be held in escrow - - 1,200,000 12,000 (12,000) - -
Issuance of 288,715 shares of common stock
exercised under incentive stock options - - 288,715 2,887 (2,215) - 672
Net loss - - - - - (13,346,380) (13,346,380)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 45,684 $4,568,400 9,488,715 $ 94,887 $29,593,518 $(23,117,953) $ 11,138,852
- -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
Nexar Technologies, Inc.
and Subsidiary
Consolidated Statements of Cash Flows
====================================================================================================================================
Year Ended
Period From Inception -----------------------------------------
(March 7, 1995) to December 31, December 31,
December 31, 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(2,261,434) (7,510,139) $ (13,346,380)
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 33,166 616,799
Deferred compensation - - 750,000
Provision for doubtful accounts - - 1 366,000
Loss on barter transaction - - 69,000
Changes in operating assets and liabilities:
Restricted cash - - (630,000)
Accounts receivable (327,471) (7,419,536) (2,451,305)
Inventories (8,432) (6,104,389) (656,080)
Prepaid expenses and other current assets (52,150) (315,890) (96,578)
Accounts payable 178,154 4,358,898 1,640,114
Accrued expenses 109,333 1,162,911 (129,433)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (1,859,881) (13,419,979) (12,867,863)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flow from investing activities:
Purchases of property and equipment (102,793) (187,304) (662,110)
Inrease in other assets - (306,000) (116,773)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (102,793) (493,304) (778,883)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Capital lease obligation - - 192,105
Due to related parties 2,942,892 15,671,648 (6,787,965)
Net proceeds from issuance of common stock 400 - 18,687,956
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 2,943,292 15,671,648 12,092,096
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 980,618 1,758,365 (1,554,650)
Cash and cash equivalents, beginning of period - 980,618 2,738,983
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 980,618 $2,738,983 $1,184,333
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of noncash investing
and financing activities:
Deferred offering costs $ - $ 686,459 $ (686,459)
Purchase of technology $ - $1,375,000 $ -
Conversion of related party debt to common and preferred stock $ - $ - $14,568,449
Contribution of capital recorded as reduction to related party debt $ - $ - $ 1,000,000
- ------------------------------------------------------------------------------------------------------------------------------------
Cash paid for:
Interest $ - $ - $ 2,338
Income taxes $ - $ - $ -
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
F-7
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
==========================================================================
1. Operations and Nexar Technologies, Inc. (the Company or Nexar)
Organization manufactures and markets a new category of high-
quality personal computer systems that offer
consumer and business users flexibility and
investment protection through customization and
upgradeability. Headquartered in Southborough,
Massachusetts, Nexar sells its systems
through national and regional value-added
resellers (VARs), distributors and system
integrators.
Nexar was incorporated in Delaware on March 7, 1995.
The Company was a majority-owned subsidiary of Palomar
Electronics Corporation (PEC) through December 10,
1997. PEC is a subsidiary of Palomar Medical
Technologies, Inc. (Palomar).
The Company is in the early stage of development, and
as such, success of future operations is subject to a
number or 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
significant customer the need to achieve profitable
operations, intense competition from substitute
products and significantly larger companies, and the
ability to obtain additional financing to fund future
operations.
2. Summary of The accompanying consolidated financial statements
Significant reflect the application of certain accounting policies
Accounting described below in the accompanying notes to
Policies consolidated financial statements.
Cash Equivalents The Company considers all investments with an original
maturity of three months or less to be cash
equivalents. The Company invests its excess cash in
certificates of deposit and money market funds.
Restricted Cash Restricted cash of $630,000 at December 31, 1997
relates to funds held in connection with letters of
credit for certain international purchase commitments.
Net Loss per The Company follows, Statement of Financial Accounting
Share of Common Standards (SFAS) No. 128, Earnings per Share, issued by
Stock the Financial Accounting Standards Board. Under SFAS
No. 128, the basic and diluted net loss pershare of
common stock for the year ended December 31, 1996 and
1997 is computed by dividing the net loss by the
weighted average number of common shares outstanding
during the period, including stock options issued at
nominal amounts within 12 months of the Company's
initial public offering.
F-8
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
<TABLE>
<CAPTION>
2. Summary of
Significant
Accounting
Policies
(Continued)
Net Loss per The weighted average number of common shares
Share of Common outstanding is summarized as follows:
Stock
(Continued) December 31, 1995 1996 1997
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Denominator for basic loss per share:
Weighted average common stock
shares outstanding 4,800,000 4,800,000 7,264,320
Potential dilutive Common Shares:
Common stock stock options issued at
nominal amounts within 12 months of IPO 2,872,920 2,872,920 2,852,280
-------------------------------------------------------------------------------------
Denominator for diluted
loss per share 7,672,920 7,672,920 10,116,600
-------------------------------------------------------------------------------------
</TABLE>
Stock options issued at nominal amounts
within 12 months prior to the Company's
Initial Public Offering (IPO) are considered
outstanding for all periods presented for
the diluted calculation in accordance with
the Securities and Exchange Commission's
Staff Accounting Bulletin No. 98. The
Company's convertible preferred stock and
other convertible instruments are not
considered outstanding for the diluted
calculation since their effect is
antidilutive. The weighted average number of
common shares outstanding excludes 1,200,000
shares of common stock subject to a
contingent repurchase right of the Company.
The 1,200,000 shares 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. At December 31, 1997, such
conditions were not satisfied.
F-9
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Principles of The accompanying consolidated financial statements
Consolidation 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.
Use of Estimates 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.
Revenue The Company generally recognizes product revenue upon
Recognition 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.
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 SEC Accounting and Auditing
Enforcement Release No. 108.
Warranty Cost Provisions are made at the time of sale for warranty
costs expected to be incurred.
F-10
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Inventories Inventories are stated at the lower of cost
(first-in, first-out) or market and consist
of the following:
<TABLE>
<CAPTION>
December 31, 1996 1997
----------------------------------------------------------------------------------
<S> <C> <C>
Raw materials $4,739,097 $4,519,241
Work-in-process 244,230 110,364
Finished goods 1,129,494 343,667
----------------------------------------------------------------------------------
$6,112,821 $4,973,272
----------------------------------------------------------------------------------
</TABLE>
Work-in-process and finished goods
inventories consist of material, labor and
manufacturing overhead.
F-11
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Property and Property and equipment are stated at cost.
Equipment The Company provides for depreciation and
amortization on property and equipment using
the straight-line method over the assets
estimated useful lives. The cost of property
and equipment and their estimated useful
lives are summarized as follows:
<TABLE>
<CAPTION>
Estimated
December 31, Useful Life 1996 1997
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Machinery and equipment 5 years $112 705 $152 237
Computer equipment 5 years 80 744 127 837
Furniture and fixtures 5 years 47 718 212 331
Leasehold improvements Life of lease 48 930 279 548
Furniture under capital lease 5 to 7 years - 180 254
----------------------------------------------------------------------------------
290 097 952 207
Less accumulated depreciation
and amortization 35 285 142 444
----------------------------------------------------------------------------------
$254 812 $809 763
----------------------------------------------------------------------------------
</TABLE>
Purchased On February 28, 1997, Palomar and the Company
Technology entered into an Asset Purchase and Settlement
Agreement (the Agreement) with a former
executive and technology Licensor. Under the
terms of the Agreement, Palomar agreed to
pay the 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 the Company's license
agreement with the Licensor, a patent
application related thereto, and a complete
release and settlement of all claims between
this former executive and the Company.
F-12
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Purchased Palomar acquired the subject technology
Technology and conveyed such technology to the Company
(Continued)
Palomar assigned to the Company all of its
rights and title in the technology received
under the Agreement and charged to the
Company the costs totalling $2,750,000
associated with the purchase of the
technology. The Company allocated $1,375,000
of the consideration to litigation expense,
which is included in general and
administrative expenses in the accompanying
statement of operations for the year ended
December 31, 1996. The remaining
consideration totaling $1,375,000 was
allocated to the purchase of the technology
as of December 31, 1996 and is being
amortized over the technology's estimated
useful life of three years. The allocation
of the purchased technology was based on the
value of anticipated royalty payments due to
the Licensor over a three year period ending
December 31, 1999.
The Company has included $2,750,000 in due
to related parties at December 31, 1996 in
connection with this settlement.
Other Assets At December 31, 1996, the Company had
incurred costs of approximately $686,000 in
connection with the proposed initial public
offering of the Company's common stock.
Upon the consummation of the initial public
offering on April 14, 1997, the deferred
offering costs were charged to stockholders'
equity as a reduction of the gross proceeds.
Prepaid Expenses At December 31, 1997, prepaid expenses and
and Other other includes approximately $1,795,000 of
advertising credits received in connection
with certain barter transactions. During
1997, the Company entered into two separate
barter transactions which involved the
transfer of approximately $1,864,000 of
inventory at cost in exchange for
approximately $1,795,000 of advertising
services. The barter transactions were
recorded at the market value of the
advertising services
F-13
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Prepaid Expenses to be received which approximated the market
and Other value of the Company's inventory exchanged.
(Continued) A loss on barter transactions of $69,000 is
included in operating expenses in the
accompanying consolidated statements of
operations for the year ended December 31,
1997.
Concentration of SFAS No. 105, Disclosure of Information
Credit Risk 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. Certain
cash accounts at December 31, 1997 and 1996
include balances above the FDIC insured
limit of $100,000. However, the Company
places its cash in highly rated financial
institutions. The Company's accounts
receivable included the following
significant customer credit risk:
<TABLE>
<CAPTION>
Percent of Percent of
Number of Accounts Total
December 31, Customers Receivable Revenue
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996 1 55% 66%
1997 2 36% 53%
</TABLE>
To reduce risk, the Company routinely
assesses the financial strength of its
customers and 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.
F-14
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
Financial The estimated fair values of the Company's
Instruments financial instruments, which include cash
and cash equivalents, accounts receivable,
accounts payable, capital leases, and amounts
due to related parties, approximate their
carrying value based on their short term
maturity.
Research and The Company charges research and development
Development expenses to operations as incurred.
Expenses
Advertising The Company expenses advertising costs as
incurred. Advertising expense was
approximately $2,021,000 and $3,724,000 for
the year ended December 31, 1996 and 1997,
respectively.
New Accounting In June 1997, the Financial Accounting
Pronouncements Standards Board issued two new disclosure
standards. Results of operations and
financial position will be unaffected by
implementation of those new standards.
SFAS No. 130, Reporting Comprehensive
Income, establishes standards for reporting
and display of comprehensive income, its
components, and accumulated balances.
Comprehensive income is defined to include
all changes in equity except those resulting
from investments by owners and distributions
to owners. Among other disclosures, SFAS No.
130 requires that all items that are
required to be recognized under current
accounting standards as components of
comprehensive income be reported in a
financial statement that is displayed with
the same prominence as other financial
statements.
F-15
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
2. Summary of
Significant
Accounting
Policies
(Continued)
New Accounting SFAS No. 131, Disclosure about Segments of
Pronouncements an Enterprise and Related Information, which
supersedes SFAS No. 14, Financial Reporting
for Segments of a Business Enterprise,
establishes standards for the way that
public enterprises report information about
operating segments in annual financial
statements and requires reporting of
selected information about operating
segments in interim financial statements
issued to the public. It also establishes
standards for disclosures regarding products
and services, geographic areas, and major
customers. SFAS No. 131 defines operating
segments as components of an enterprise
about which separate financial information
is available that is evaluated regularly by
the chief operating decision maker in
deciding how to allocate resources and in
assessing performance.
Both of these new standards are effective
for financial statements for periods
beginning after December 15, 1997 and
require comparative information for earlier
years to be restated. Due to the recent
issuance of these standards, management has
been unable to fully evaluate the impact, if
any, they may have on future financial
statement disclosures.
F-16
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Equity
(Deficit)
Recapitalization In December 1996, the Company amended its
Certificate of Incorporation, increasing the
number of authorized shares of the Company'
capital stock to 40,000,000, of which
30,000,000 shares are designated as common
stock, $.01 par value, and 10,000,000 share
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.
Initial Public On April 14, 1997, the Company completed its
Offering initial public offering of 2,500,000 shares
of common stock at a price of $9.00 per
share. The proceeds raised amounted to
approximately $18,687,000, net of
underwriter commissions and other offering
costs totalling approximately $3,813,000.
Milestone Agreement In connection with the Company's initial
public offering, Palomar received 1,200,000
shares of the Company's common stock for the
conversion of certain amounts due to Palomar
and a subsidiary of Palomar which are held
in escrow (see Note 4). These shares will
only be released from escrow upon the
achievement by the Company of a minimum
revenue or after tax net income milestones
or minimum stock price, as defined below.
At December 31, 1997, such milestones were
not satisfied.
The following table summarizes net income
and revenue milestones (in millions):
<TABLE>
<CAPTION>
December 31, Net Income Revenues
--------------------------------------------------------------------------------------
<S> <C> <C>
1998 $14 $200
1999 $21 $300
2000 $28 $400
</TABLE>
F-17
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Equity
(Deficit)
(Continued)
Milestone Agreement Alternatively, all of the contingent shares
(Continued) will be released immediately upon the
occurrence of any one of the following:
If the average per share market value
closing bid price of Nexar's common stock is
(i) 175% of the Initial Public Offering
(IPO) price of $9.00 per share for ten
consecutive trading days at any time prior
to the 12 month anniversary of the IPO, or
(ii) 225% of the IPO price for ten
consecutive trading days at any time prior
to the 24 month anniversary of the IPO, or
(iii) 275% of the IPO price for ten
consecutive trading days at any time prior
to the 36 month anniversary of the IPO, or
(iv) 325% of the IPO price for ten
consecutive trading days at any time prior
to the 48 month anniversary of the IPO; or
(v) if Nexar achieves $70,000,000 in
cumulative net income for the four fiscal
years ended December 31, 2000.
Preferred Stock On April 14, 1997, the Company issued 45,684
shares of Convertible Preferred Stock in
exchange for $4,568,449 of debt with Palomar.
Palomar is entitled to voting rights and
dividends equal to the number of common shares
into which the preferred stock may be
converted. The holder of the Convertible
Preferred Stock is able to convert each share
of Convertible Preferred Stock into
approximately 8.89 shares of common stock. The
Convertible Preferred Shares also have a
preference upon liquidation of $100 per share,
resulting in a total liquidation preference of
$4,568,400.
Stock Option In August 1995, the Company established the
Plans 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. During 1997,
the Board of Directors increased the shares
of common stock reserved for issuance 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 the Company's stock must be granted at an
exercise price
F-18
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Equity
(Deficit)
(Continued)
Stock Option
Plans of not less than 110% of the fair market
(Continued) 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. On
July 17, 1997 the Company granted options to
purchase 1,368,000 shares at an exercise
price of $5.50. The price per share was
based on the fair market value of the
Company's Common Stock at the grant date.
In December 1996, The Director Plan was
adopted by the Board of Directors. The
Director Plan became effective upon the
closing of the 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 April 14, 1997
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. During 1997, the Company
issued 15,000 options under the Director
Plan to one director which expired upon the
director's retirement on June 12, 1997.
F-19
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Equity
(Deficit)
(Continued)
Stock Option
Plans The following table summarizes all stock
(Continued) option activity under the Plan:
<TABLE>
<CAPTION>
Number Exercise
of Shares Price
----------------------------------------------------------------------
<S> <C> <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
Granted 1 368 000 5.50
Exercised (288 715) .001 - 0.33
Terminated (198 640) .001 - 10.00
-----------------------------------------------------------------------
Balance, December 31, 1997 3 936 565 .003 - 5.50
-----------------------------------------------------------------------
Exercisable, December 31, 1997 1 829 305 $.003 - $ 5.50
-----------------------------------------------------------------------
</TABLE>
The weighted averge price per share for all
options outstanding was $.001, $0.45 and $1.92
at December 31, 1995, 1996 and 1997,
respectively. The weighted average price per
share for exercisable options at December 31,
1997 was $0.43
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 was effective for fiscal years
beginning after December 15, 1995. SFAS No.
123 established a fair-value-based method of
accounting for stock-based compensation
plans. The Company has adopted the
disclosure-only alternative under SFAS
No. 123, which requires disclosure of the
pro forma effects on earnings and earnings
per share as if SFAS No. 123 had been
adopted, as well as certain other information.
F-20
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Equity
(Deficit)
(Continued)
Stock Option
Plans The Company has computed the pro forma
(Continued) disclosures required under SFAS No. 123 for
all stock options granted as of December 31,
1997 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 and 1997 are as follows:
<TABLE>
<CAPTION>
Period
from Inception
(March 7, 1995) to Year Ended
----------------------------------------------
December 31, December 31, December 31,
1995 1996 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 6.11% 5.23% - 6.51% 6.00%
Expected dividend yield - - -
Expected lives 4.5 years 4.5 years 4.5 years
Expected volatility 51% 51% 46.5%
Weighted average fair value of
options on date of grant $.001 $.28 $3.54
Weighted-average exercise price $.001 $.45 $1.92
Weighed-average remaining
contractual life of options
outstanding 4.58 years 4.58 years 3.28 years
Weighted average exercise price of
5,733, 1,063,973 and 1,829,305 options
exercisable at December 31, 1995,
1996 and 1997, respectively $0.001 $0.0025 $0.44
</TABLE>
F-21
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
3. Stockholders'
Deficit
(Continued)
Stock Option The effect of applying SFAS No. 123 would be
Plans as follows:
(Continued)
<TABLE>
<CAPTION>
Period
from Inception
(March 7, 1995) to Year Ended
-------------------------------------
December 31, December 31, December 31,
1995 1996 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net loss $(2 261 434) $(7 646 716) $(13 974 580)
Pro forma net loss per share:
Basic $ (.47) $ (1.59) $ (1.92)
Diluted $ (.29) $ (1.00) $ (1.38)
</TABLE>
Employee Stock In December 1996, the Company's Board of
Purchase Plan Directors adopted the Company's 1996
Employee Stock Purchase Plan (the Purchase
Plan). The Purchase Plan became 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.
Underwriter's Upon the consummation of the initial public
Warrant offering, the Company issued 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 of $9.00. None of these warrants
were exercised as of December 31, 1997.
F-22
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
4. Related Party Palomar and PEC funded all of the Company's
Transactions operations up to April 14, 1997 (date of
closing of initial public offering). The
total amount of funds provided by Palomar
and PEC amounted to $20,792,998 and
$2,025,000, respectively, through December
31, 1996. At December 31, 1997, the amount
due to Palomar was $461,584. The weighted
average balance of the 1996 funding was
approximately $9,791,000 for the period
ended December 31, 1996. All of these loans
have been non-interest-bearing. On March 31,
1997, the Company entered into an agreement
with Palomar (the Agreement) whereby
$10,000,000 of advances from Palomar and PEC
were converted into 1,900,000 shares of the
Company's common stock upon the closing of
the initial public offering. In addition,
the Agreement provides that 1,200,000 of
these shares are 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, (see Note 3). On December 10,
1997, Palomar sold the 1,200,000 shares
subject to such repurchase right to a third
party for an aggregate purchase price of
$5,000.
As part of the Agreement the Company was to
repay Palomar $8,249,549 upon the closing of
the initial public offering and convert
$4,568,449 due to Palomar and PEC into
45,684 shares of Convertible Preferred Stock
(see Note 3). During 1997, Palomar agreed to
pay bonuses to the Company's management
totaling $1,000,000 for services rendered
during 1996. Pursuant to the Agreement, the
Company offset the amount due to Palomar by
$1,000,000 which is reflected as a
contribution to additional paid-in capital
at December 31, 1997. Nexar paid Palomar
$6,700,000 during 1997 in repayment of
indebtedness pending resolution of various
intercompany accounts.
F-23
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
4. Related Party The accompanying 1996 and 1995 consolidated
Transactions financial statements include the income and
(Continued) expenses of the Company and the 1996 assets
and liabilities 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 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.
Included in accounts receivable in the
accompanying consolidated balance sheet at
December 31, 1996 and 1997 is approximately
$197,000 and $405,000, respectively, due
from Palomar and its affiliates for product
purchases.
During the year ended December 31, 1996 and
1997, the Company purchased inventory
components from affiliated companies
totaling approximately $693,000 and
$2,607,000, respectively, of which
approximately $693,000 and $312,000 is
included in accounts payable in the
accompanying consolidated balance sheet as
of December 31, 1996 and 1997, respectively.
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
general and administrative expenses in the
accompanying consolidated statement of
operations for the period ended December 31,
1995.
F-24
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
5. Accrued Expenses Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
Accrued payroll and related costs $1 128 373 $ 335 155
Other accrued expenses 876 871 854 197
---------------------------------------------------------------------------------------
$2 005 244 $ 1 189 352
---------------------------------------------------------------------------------------
</TABLE>
6. Income Taxes The Company and Palomar filed a consolidate
income tax return through December 31, 1996.
The consolidated tax return reflected net
operating losses for the year ended December
31, 1995 and 1996. Since Palomar's equity
ownership was reduced to below 80% upon the
Company's initial public offering, the
Company will file its own income tax return
for the year ended December 31, 1997.
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 basis 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, 1997, the Company had
generated net operating loss carryforwards
for federal and state income tax purposes of
approximately $20,124,000 that expire
through 2012. 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.
F-25
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
6. Income Taxes The approximate income tax effect of each
(Continued) type of temporary difference and carry-
forward is as approximately follows:
<TABLE>
<CAPTION>
December 31, 1996 1997
-----------------------------------------------------------------------------------
<S> <C> <C>
Net operating loss carryforwards $ 2 567 000 $ 8 150 000
Litigation costs 550 000 -
Management bonuses 403 000 -
Allowance for doubtful accounts
receivable 243 000 798 000
Other temporary differences 142 000 390 000
-----------------------------------------------------------------------------------
Gross deferred tax assets 3 905 000 9 338 000
Less valuation allowance (3 905 000) (9 338 000)
-----------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
-----------------------------------------------------------------------------------
</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-26
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
Leases The Company leases its corporate office,
manufacturing facility and certain equipment
under operating lease arrangements expiring
through September 2002. The Company also
leases office furniture under a capital
lease expiring in 2000.
Future minimum lease payments under all
leases are as follows:
<TABLE>
<CAPTION>
Capital Operating
December 31, Leases Leases
---------------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 72 500 $ 1 043 000
1999 72 500 985 000
2000 72 500 956 000
2001 - 896 000
2002 - 422 000
---------------------------------------------------------------------------------------
Total minimum lease payments 217 500 $4 302 000
==========
Less amount representing interest 25 395
-------------------------------------------------------------
Present value of net minimum
lease payments 192 105
Less current maturities 58 492
-------------------------------------------------------------
Total long term portion $133 613
-------------------------------------------------------------
</TABLE>
Rent expense related to all operating leases
was approximately $85,000, $161,000 and
$726,000 for the period from inception
(March 7, 1995) to December 31, 1995 and for
the year ended December 31, 1996 and 1997,
respectively.
F-27
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
(Continued)
License Agreements In March 1996, the Company entered into a
software license agreement with 4-Home
Productions (4-Home), a Division of Compute
Associates International, Inc. The license
agreement gave the Company the right to use,
reproduce, display and distribute certain of
4-Homes software application programs within
the United States, Canada and Puerto Rico.
In exchange for these rights, the Company
paid 4-Home a nonrefundable fee of $25,000
and was to pay a royalty on all units sold,
as defined, that are bundled with 4-Homes'
software applications. The initial term of
the agreement if commenced was for one year
subject to annual renewal. The Agreement was
terminated in 1997. No royalties have been
incurred under this agreement as of December
31, 1996 and 1997.
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 monthly fees are based on the greater of
$12,500 or the failure rate, as defined,
multiplied by the number of units sold per
month. The Company incurred and charged
to operations approximately $126,000
and $489,000 under this agreement for the
years ended December 31, 1996 and 1997,
respectively.
Development In November 1996, the Company entered into a
Agreement development agreement with another company
(the Developer) whereby the Developer would
develop certain technology for the Company.
During 1997, the Company incurred and
charged to expense approximately $379,000 of
costs with the developer. In addition, the
Company may be required to pay additional
royalty amounts based on product sold, not
to exceed $500,000. Royalties incurred under
this agreement during 1997 amounted to
$17,000. There were no royalties incurred in
1996.
F-28
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
(Continued)
Employment and The Company entered into an employment
Severance agreement with its Chief Executive Officer
Agreements (CEO) 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 for an annual base salary and is
subject to annual increases by the Board of
Directors and an annual incentive bonus upon
the achievement of mutually agreed upon
revenue and net income performance
objectives. The employment agreement also
provides that the CEO 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 the employment agreement, if the CEO
is terminated by the Company without cause
following a "change of control" (as defined
in the agreement), the CEO 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; and (vii) such
additional sums as are necessary for the CEO
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 the CEO's employment
is terminated by the Company without cause
in the absence of such a change of control,
the CEO 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.
F-29
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
(Continued)
Employment and Upon expiration of the CEO's term of
Severance employment, the CEO will receive the
Agreements following severance payments and further
(Continued) 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 eighteen month of
of his highest to date annual bonus earned;
and (v) eighteen months of continuation of
participation in the Company's benefits.
If the CEO 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, the CEO 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
eighteen months of his highest to date
annual bonus earned; and (v) eighteen months
of continuation of participation in the
Company's benefits. If the CEO's employment
were to be terminated for cause (as defined
in the agreement), the CEO 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.
F-30
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
(Continued)
The Company also entered into an employment
Employment and agreement with another executive for a five
Severance year term expiring in October 2001. Unless
Agreements either party chooses otherwise by notice to
(Continued) 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 for an
annual base salary subject to annual
increases by the Board of Directors and an
annual incentive bonus upon the achievement
of mutually agreed upon revenue and net
income performance objectives. The
employment agreement also provides for an
additional bonus equal to $2.00 per personal
computer sold by the Company throughout the
term of his employment with the Company.
Under this employment agreement, if the
executive is terminated by the Company
without cause following a "change of
control" (as defined in the agreement), the
executive will receive the following
severance payments and further benefits: (i)
$750,000, (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; (v)
full immediate vesting of any issued but
unvested stock options; (vi) one year of
continuation of participation in the
Company's benefits; and (vii) such
additional sums as are necessary for 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.
Upon expiration of the executive's
employment, he 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. If employment were
to be terminated for cause (as
F-31
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
7. Commitments and
Contingencies
(Continued)
Employment defined in the agreement), the executive
Severance would be entitled only to full payment of
Agreements any accrued, unpaid, salary, bonus and
(Continued) benefit payments and retention of any fully
vested stock options and similar vested
benefits. The minimum aggregate
obligation of the above agreements amounts
to approximately $3,740,000 of which
$750,000 is recorded as deferred
compensation at December 31, 1997.
The Company is also party to substantially
similar employment agreements with certain
other executives. These agreements provide
for annual base salaries as well as annual
bonuses based upon the achievement of
mutually agreed upon revenue and net income
objectives. Each of these agreements is for
a term expiring in March 2000 and provides
for severance pay equal to twelve months of
the highest monthly base pay if employment
is terminated without cause. The Company's
contingent obligation under these severance
agreements amounted to approximately
$575,000 at December 31, 1997.
Litigation The Company is involved in various legal
matters in the ordinary course of its
business. Each of these matters is subject
to various uncertainties, and some of these
matters may be resolved unfavorably to the
Company. Management believes that any
liability that may ultimately result from
the resolution of these matters will not
have a material adverse effect on the
financial position of the Company.
8. 401(k) Profit In April 1996, the Company began
Sharing Plan participating in a 401(k) plan established
by Palomar. The 401(k) plan covered
substantially all employees who have
satisfied a six-month service requirement
and had attained the age of 18. Employees
could 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 were made in the form of
Palomar's common stock. Upon the closing of
the initial public offering, the Company
established its
F-32
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
8. 401(k) Profit own 401(k) plan. The matching contributions
Sharing Plan vest ratably over a six year period. The
(Continued) Company's expense under this matching
contribution was immaterial through December
31, 1996. The Company's matching expense
amounted to approximately $12,000 for the
year ended December 31, 1997.
9. Financing In August 1996, the Company entered into a
Arrangements 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 and
1997, 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 and 1997, the Company has
not received any proceeds under this
agreement.
F-33
<PAGE>
Nexar Technologies, Inc.
and Subsidiary
Notes to Consolidated Financial Statements
================================================================================
10. Subsequent Events
Preferred Stock On March 20, 1998, the Company issued
Offering 32,000 shares of Series B Convertible
Preferred Stock at $100 per share for total
proceeds of $2,944,000, net of $256,000 in
transaction costs. The Series B Convertible
Preferred Stock will accrue dividends at 5%
per annum and may be converted, in whole or
in part, into a number of shares of the
Company's common stock equal to $100 per
share converted by a conversion price equal
to the lesser of $3.25 per share or 75% of
the average closing bid price of the
Company's common stock in the five trading
days prior to the date of conversion.
Recent
Developments In March 1998, the Company engaged Southport
Partners, an investment banking firm based
in Southport Connecticut, to provide
advisory services to the Company concerning
possible joint venture, licensing and other
potential transactions. The Company is not
currently engaged in any negotiations with
respect to any such potential transaction.
11. Valuation Accounts The following table sets forth the activity
in the Company's valuation accounts for the
years ending December 31, 1996 and 1997:
<TABLE>
<CAPTION>
Increase in
Balance at Provision
Beginning for Estimated Balance at
of Year Bad Debts End of Year
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
For the year ended December 31, 1996:
Allowances for doubtful accounts $ 12,000 $ 592,000 $ 604,000
For the year ended December 31, 1997:
Allowances for doubtful accounts $604,000 $1,366,000 $1,970,000
</TABLE>
F-34
<PAGE>
EXHIBIT 3.1
-----------
FIRST RESTATED
CERTIFICATE OF INCORPORATION
OF
NEXAR TECHNOLOGIES, INC.
Nexar Technologies, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is:
Nexar Technologies, Inc.
2. The Certificate of Incorporation of the corporation was filed with the
Secretary of State of Delaware on March 7, 1995 under its original name,Tantric
Systems Corp. A Certificate of Amendment was filed with the Secretary of State
of Delaware on March 28, 1995 changing the corporation's name to Dynasys Systems
Corporation. Additional Certificates of Amendment were filed with the Secretary
of State of Delaware on January 22, 1996 and March 28, 1996, the latter of which
changed the name of the corporation to Nexar Technologies, Inc.
3. This First Restated Certificate of Incorporation integrates and further
amends the Certificate of Incorporation of the corporation, as previously
restated and amended, by amending Articles Second, Fourth, Eighth, Ninth, Tenth
and Eleventh, and by adding Articles Twelfth, Thirteenth, Fourteenth and
Fifteenth, all as set forth in this First Restated Certificate of Incorporation.
4. This First Restated Certificate of Incorporation was duly proposed and
declared advisable by the Board of Directors of the corporation in accordance
with the applicable provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware. The stockholders of the corporation
duly approved this First Restated Certificate of Incorporation without a meeting
by less than unanimous written consent, and prompt notice has been given to
those stockholders who have not consented in writing, all in accordance with
Section 228 of the General Corporation Law of the State of Delaware. The capital
of the corporation has not been reduced by the amendments effected by this First
Restated Certificate of Incorporation.
5. This First Restated Certificate of Incorporation, as amended and
restated herein, shall upon the effective date hereof, read as follows:
FIRST: The name of the corporation is:
<PAGE>
Nexar Technologies, Inc.
SECOND: The registered office of the corporation in the State of Delaware
is located at 1013 Centre Road, City of Wilmington, County of New Castle and the
name of its registered agent is Corporation Service Company, formerly known as
The Prentice-Hall Corporation System, Inc.
THIRD: The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of capital stock which the corporation
shall have authority to issue is 40,000,000, of which 30,000,000 shall be common
stock, $0.01 par value per share ("Common Stock"), and 10,000,000 shall be
preferred stock, $0.01 par value per share ("Preferred Stock"). The preferences,
qualifications, limitations, restrictions and special or relative rights of each
class of stock are as set forth below:
A. Common Stock. All shares of Common Stock will be identical and will
entitle holders thereof to the same preferences, qualifications,
limitations, restrictions and relative and special rights.
(1) Voting Rights. Each outstanding share of Common Stock shall be
entitled to vote on each matter on which the stockholders of the
corporation shall be entitled to vote, and each holder of Common Stock
shall be entitled to one vote for each share of such Common Stock held
by such holder.
(2) Preemptive Rights. The holders of Common Stock shall not have
preemptive rights to acquire additional shares of the stock of the
corporation.
(3) Cumulative Voting. The holders of Common Stock shall not be entitled
to cumulate their shares for the purpose of electing directors of the
corporation, or for any other purpose.
(4) Dividends. The Board of Directors of the corporation (the "Board of
Directors") may cause dividends to be paid to holders of shares of
Common Stock out of funds legally available for the payment of
dividends. Any dividend or distribution on the Common Stock shall be
subject to the rights of the holders of the Preferred Stock.
(5) Liquidation. In the event of any voluntary or involuntary
<PAGE>
liquidation, dissolution or winding up of the corporation, the holders
of the Common Stock shall be entitled, after payment or provision for
payment of the debts and other liabilities of the corporation and the
payment to the holders of the Preferred Stock of any preference on
distributions in the liquidation, dissolution or winding up of the
corporation, to share on a per share basis in the remaining net assets
of the corporation.
B. Preferred Stock. The Preferred Stock may be divided into, and may be
issued from time to time in, one or more series. The Board of Directors
is authorized from time to time to establish and designate one or more
series of Preferred Stock, in addition to the series established and
designated in this Article FOURTH, by fixing and determining the
variations in the relative rights and preferences as between and among
such series and any other classes of capital stock of the corporation
and fixing or altering the number of shares comprising any such series
and the designation thereof. The authority of the Board of Directors
from time to time with respect to each subsequent series of Preferred
Stock shall include, but not be limited to, determination of the
following: (1) the designation of the series; (2) the number of shares
of the series and (except where otherwise provided in the creation of
the series) any subsequent increase or decrease therein; (3) the
dividends, if any, for shares of the series and the rates, conditions,
times, and relative preferences thereof; (4) the redemption rights, if
any, and price or prices for shares of the series; (5) the terms and
amount of any sinking fund provided for the purchase or redemption of
shares of the series; (6) the relative rights of shares of the series in
the event of any voluntary or involuntary liquidation, dissolution or
winding up of the affairs of the corporation; (7) whether the shares of
the series shall be convertible into shares of any other class or series
of shares of the corporation, and, if so, the specification of such
other class or series, the conversion price or prices or rate or rates,
any adjustments thereof, the date or dates as of which such shares shall
be convertible and all other terms and conditions upon which such
conversion may be made; (8) the voting rights, if any, of the holders of
such series; and (9) such other designations, powers, preferences and
relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereof.
<PAGE>
Subject to the foregoing powers of the Board of Directors with respect
to series of Preferred Stock, the following is a statement of the
designation of a series of Preferred Stock designated Convertible
Preferred Stock, which shall consist of 45,684 shares, and the powers,
preferences and relative rights, qualifications, limitations and
restrictions thereof:
(1) Voting Rights. Each outstanding share of Convertible Preferred Stock
shall be entitled to vote on each matter on which the stockholders of
the corporation 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 corporation.
(2) Preemptive Rights. The holders of Convertible Preferred Stock shall
not have preemptive rights to acquire additional shares of the stock of
the corporation.
(3) Cumulative Voting. The holders of Convertible Preferred Stock shall
not be entitled to cumulate their shares for the purpose of electing
directors of the corporation, or for any other purpose.
(4) Dividends. The Board of Directors may cause dividends to be paid to
holders of shares of 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 on the Common Stock.
(5) Conversion Rights. Each share of the Convertible Preferred Stock
shall be converted at any time at the option of the holder thereof
at the office of the corporation or any transfer agent for the
Convertible Preferred Stock into such number (rounding to the closest
whole number) of fully paid and non-assessable shares of Common Stock of
the corporation as is determined by dividing the number of shares of
Convertible Preferred Stock being converted by 0.1125.
(6) Liquidation.
<PAGE>
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the corporation, 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 from the assets of the corporation, with respect to
each share of Convertible Preferred Stock held, an amount equal to
$100.00 per share (the "Convertible Preferred Liquidation Preference")
(such amount to be adjusted appropriately in the event of any stock
dividend, stock split or a combination, or a similar recapitalization
affecting the Convertible Preferred Stock) plus, in the case of each
share, an amount equal to any dividend declared but unpaid thereon. If,
upon the occurrence of any such liquidation, dissolution or winding up,
the assets to be thus distributed among the holders of the Convertible
Preferred Stock shall be insufficient to permit the payment to such
holders of the full aforesaid preferential amount, then each issued and
outstanding share of Convertible Preferred Stock shall entitle the
holder thereof to a proportion of the assets to be distributed on a pro
rata basis according to the Convertible Preferred Liquidation
Preference, and the holders of the Common Stock shall in no event be
entitled to participate in any such distribution in respect of their
shares.
(b) A merger or consolidation of the corporation into or with any
other corporation, a merger of any other corporation into the
corporation, or a sale, lease, exchange, transfer or similar disposition
(other than a mortgage, grant of a security interest or pledge) by the
corporation in one or a series of related transactions of all or
substantially all of its assets shall be deemed, for purposes of this
section (6) to be a liquidation, dissolution or winding up of the
corporation unless, in the case of any such merger or consolidation, (i)
the holders of Convertible Preferred Stock retain their existing shares
of Convertible Preferred Stock or receive a security of the surviving or
resulting corporation which entitles them to substantially equivalent
rights and obligations as those of the Convertible Preferred Stock held
by them or (ii) the holders of at least sixty percent (60%) of the then
outstanding shares of the Convertible Preferred Stock agree that such
merger or a consolidation or sale shall not be deemed a liquidation,
dissolution or winding up of the corporation. Written notice of any
proposed merger, consolidation, sale, lease, exchange, transfer or
similar disposition meeting the foregoing
<PAGE>
description, in reasonable detail, shall be furnished to the holders of
the Convertible Preferred Stock no later than thirty (30) days prior to
the anticipated effective date thereof.
FIFTH: The name and mailing address of the sole incorporator is as follows:
Name Mailing Address
---- ---------------
N.S. Truax 1013 Centre Road
City of Wilmington, County of New
Castle, Delaware 19904
SIXTH: The corporation is to have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this corporation under
Section 291 of Title 8 of the Delaware Code or on the application of trustees in
dissolution or of any receiver or receivers appoint for this corporation under
Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as consequent of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
EIGHTH: The management of the business and the conduct of the affairs of
the Corporation shall be vested in the Board of Directors. In furtherance and
not in limitation of the powers conferred by statute, the Board of Directors is
expressly authorized:
To make, alter, amend, or repeal the by-laws of the corporation.
To authorize and cause to be executed mortgages and liens upon the real
<PAGE>
and personal property of the corporation.
To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any such
reserve in the manner in which it was created.
When and as authorized by the stockholders in accordance with statute,
to sell, lease or exchange all or substantially all of the property and assets
of the corporation, including its good will and its corporate franchises, upon
such terms and conditions and for such consideration, which may consist in whole
or in part of money or property including shares of stock in, and/or other
securities of, any other corporation or corporations, as its Board of Directors
shall deem expedient and for the best interests of the corporation.
To determine the extent, if any, to which and the time and place at
which, and the conditions under which any stockholder of the Corporation may
examine books and records now or hereafter required by statute to be kept open
for inspection of stockholders of the Corporation.
To provide, in any vote or votes authorizing liquidation of the
Corporation or proceedings for its dissolution, for the distribution pro rata
among the stockholders of the Corporation of assets of the Corporation, wholly
or in part or kind, whether such assets be in cash or other property, that the
board of directors of the Corporation may determine the value of the different
assets of the Corporation for the purpose of such liquidation and that the board
of directors may divide or authorize the division of such assets of the
Corporation or any part thereof among the stockholders and the Corporation so
that each stockholder will receive a proportionate amount in value (determined
as aforesaid) of cash or property of the Corporation upon such liquidation or
dissolution even though every stockholder may not receive a strictly
proportionate part of each such asset.
NINTH: Meetings of stockholders may be held at such place, either
within or without the State of Delaware, as the by-laws may provide. The books
of the corporation may be kept (subject to any provision contained in the
statutes) outside the State of Delaware at such place or places as may be
designated from time to time by the Board of Directors or in the by-laws of the
corporation. Elections of directors need not be by written ballot unless the
by-laws of the corporation shall so provide.
TENTH: Any amendment, repeal, or other alteration of this First
Restated Certificate of Incorporation shall, unless proposed and declared
advisable by the Board of Directors, require the affirmative vote of at least
two-thirds of the outstanding shares of capital stock of the corporation
entitled to vote in the election of directors. Subject to the foregoing, the
corporation reserves the right to amend, alter, change or repeal any provision
<PAGE>
contained in this certificate of incorporation, in the manner now or hereafter
prescribed by statute and this certificate of incorporation, and all rights
conferred upon a stockholder, director or officer herein, are granted subject to
this reservation.
ELEVENTH: Whenever the corporation shall be authorized to issue more
than one class of stock, no outstanding share of any class of stock which is
denied voting power under the provisions of the certificate of incorporation
shall entitle the holder thereof to the right to vote at any meeting of
stockholders except as the provisions of paragraph (2) of subsection (b) of
Section 242 of the General Corporation Law of the State of Delaware shall
otherwise require; provided, that no share of any such class which is otherwise
denied voting power shall entitle the holder thereof to vote upon the increase
or decrease in the number of authorized shares of said class.
TWELFTH: No director of the corporation shall be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability, (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts of
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article TWELFTH to authorize corporate
action further eliminating or limiting the personal liability of directors, then
the liability of a director of the corporation shall be eliminated or limited to
the fullest extent permitted by the Delaware General Corporation Law, as so
amended from time to time. Any repeal or modification of this Article TWELFTH
shall not increase the personal liability of any director of the corporation for
any act or occurrence taking place prior to such repeal or modification, or
otherwise adversely affect any right or protection of a director of the
corporation existing hereunder prior to the time of such repeal or modification.
THIRTEENTH: The corporation shall, to the fullest extent permitted
under the General Corporation Law of the State of Delaware, as amended from time
to time, indemnify each of its directors, officers, employees and agents (each
an "Indemnified Party") against all expenses (including, without limitation,
attorneys' fees and expenses), liabilities, judgments, fines and amounts paid or
otherwise due in respect of any action, suit or proceeding in which such
Indemnified Party may be involved or with which he may be threatened, as a party
or otherwise, whether or not he continues to be such at the time such expenses
and liabilities shall have been imposed or incurred, by reason of his actions or
omissions in connection with services rendered directly or indirectly to the
corporation, such indemnification to include prompt payment of expenses in
advance of the final disposition of any such action, suit or proceeding.
<PAGE>
FOURTEENTH:
(a) Number, Terms and Election of Directors.
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock to elect additional directors under specified circumstances, the
number of directors of the corporation shall be fixed and may be increased or
decreased from time to time by the Board of Directors, but in no case shall the
number be less than three nor more than fifteen.
The directors shall be divided into three classes, as nearly equal in
number as possible. One class of directors has been initially elected for a term
expiring at the annual meeting of stockholders to be held in 1998, another class
of directors has been initially elected for a term expiring at the annual
meeting of stockholders to be held in 1999, and another class of directors has
been initially elected for a term expiring at the annual meeting of stockholders
to be held in 2000, with members of each class to hold office until their
successors are elected and qualified. At each succeeding annual meeting of the
stockholders of the corporation, the successors of the class of directors whose
term expires at that meeting shall be elected by plurality vote of all votes
cast at such meeting to hold office for a term expiring at the annual meeting of
stockholders held in the third year following their year of election.
(b) Newly Created Directorships and Vacancies.
Subject to the rights, if any, of the holders of any and all series of
Preferred Stock to elect additional directors pursuant to the terms and
conditions of such Preferred Stock, newly created directorships resulting from
any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled solely by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the board
of directors, or by a sole remaining director. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors constituting
the Board of Directors shall shorten the term of an incumbent director.
(c) Removal.
Subject to the rights, if any, of the holders of any and all series of
Preferred Stock to elect additional directors pursuant to the terms and
conditions of such Preferred Stock, any director may be removed from office by
the stockholders only for cause and only in the following manner. At any annual
<PAGE>
meeting or special meeting of the stockholders of the corporation, the notice of
which shall state that the removal of a director or directors is among the
purposes of the meeting, the affirmative vote of the holders of at least a
majority of the outstanding shares of capital stock of the corporation entitled
to vote generally in the election of the directors, voting together as a single
class, may remove such director or directors for cause.
FIFTEENTH: Subject to the rights of the holders of any and all series
of Preferred Stock:
(a) any action required or permitted to be taken by the
stockholders of the corporation must be effected at a duly called
annual or special meeting of the stockholders of the corporation and
may not be effected by any consent in writing of such stockholders; and
(b) special meetings of stockholders of the corporation may be
called only by the Chairman of the Board of Directors or the Chief
Executive Officer of the corporation or by the Secretary of the
corporation within ten (10) days after receipt of the written request
of a majority of the Board of Directors.
[Signatures appear on the following page.]
<PAGE>
IN WITNESS WHEREOF, said NEXAR TECHNOLOGIES, INC. has caused its
corporate seal to be hereunto affixed and this First Restated Certificate of
Incorporation to be signed by Albert J. Agbay, its President, and attested by
Steven Georgiev, its Secretary, this 14th day of April, 1997.
By:
Albert J. Agbay, President
ATTEST:
Steven Georgiev, Secretary
[Corporate Seal]
<PAGE>
EXHIBIT 3.2
-----------
Certificate of Designation of Series B Convertible Preferred Stock
NEXAR TECHNOLOGIES, INC.
There is hereby created a series of the Preferred Stock of this corporation to
consist of 32,000 of the shares of Series B Convertible Preferred Stock, $.01
par value per share, which this corporation now has authority to issue.
1. The distinctive designation of the series shall be "Series B Convertible
Preferred Stock" (the "Preferred Stock" or the "Series B Preferred Stock").
The number of shares of Series B Convertible Preferred Stock shall be
32,000.
2. For purposes of this Certificate of Designation and the Company's
Certificate of Incorporation, (i) any series of Preferred Stock of the
Company entitled to dividends and liquidation preference on a parity with
the Series B Preferred Stock shall be referred to as "Parity Preferred
Stock," (ii) any series of Preferred Stock ranking senior to the Series B
and Parity Preferred Stock with respect to dividends and liquidation
preference shall be referred to as "Senior Stock," and (iii) the Common
Stock and any series of Preferred Stock ranking junior to the Series B and
Parity Preferred Stock with respect to dividends and liquidation preference
shall be referred to as "Junior Stock." As of the date of this Certificate
of Designation there is not outstanding any Parity Preferred Stock. Without
limiting the generality of the foregoing, the outstanding 45,684 shares of
the Company's Convertible Preferred Stock are and shall be Junior Stock.
3. In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, after setting apart or paying in full the
preferential amounts due to holders of Senior Stock, the holders of Series
B Preferred Stock and Parity Preferred Stock shall be entitled to receive,
prior and in preference to any distribution of any of the assets or surplus
funds of the Company to the holders of Junior Stock or Common Stock by
reason of their ownership thereof, an amount equal to their full
liquidation preference, which in the case of shares of Series B Preferred
Stock shall be $100 per share, plus accrued and unpaid dividends (the
"Redemption Value"). If, upon such liquidation, dissolution or winding-up
of the Company, the assets of the Company available for distribution to the
holders of its stock be insufficient to permit the distribution in full of
the amounts receivable as aforesaid by the holders of Preferred Stock and
Parity Preferred Stock, then all such assets of the Company shall be
distributed ratably among the holders of Preferred Stock and Parity
Preferred Stock in proportion to the amounts which each would have been
entitled to receive if such assets were sufficient to permit distribution
in full as aforesaid. Neither the consolidation nor merger of the Company
nor the sale, lease or transfer by the Company of all or any part of its
assets shall be deemed to be a liquidation, dissolution or winding-up of
the Company for the purposes of this paragraph.
<PAGE>
4. Certain Definitions and References.
(a) The Preferred Stock is being issued under Private Placement Purchase
Agreements between the Company and the holders of the Preferred Stock
(each, a "Subscription Agreement").
(b) The terms "Registration Statement" and "Closing Date" shall have the
meanings attributed thereto in the Subscription Agreement, and the
term "Effective Date" means the date on which the Registration
Statement shall be declared to be effective.
5. Dividends
(a) The holders of the Preferred Stock shall be entitled to receive a
dividend, payable in arrears quarterly on the last day of each
calendar quarter commencing with the calendar quarter which begins on
April 1, 1998 or on earlier conversion or redemption of the Preferred
Stock, which accrues from the date of issuance at the annual rate of
$5 per share, provided that the annual rate shall be $18 during any
First Delay Period and the annual rate shall be $24 during any
Extended Delay Period.
(i) The reference to the "First Delay Period" shall apply only if the
Effective Date has not occurred by the close of business on June
30, 1998 and means the period which begins on July 1, 1998 and
ends on the earlier of August 31, 1998 or the Effective Date.
(ii) The reference to the "Extended Delay Period" shall apply only if
the Effective Date has not occurred by August 31, 1998 and means
the period which begins on September 1, 1998 and ends on the
Effective Date.
(b) The dividends shall be payable at the option of the Company either in
cash or in shares of Common Stock which on the date of the dividend
payment are convertible into shares of Common Stock which have a value
equal to the dividend, provided that dividends may be paid in Common
Stock only if the public sale thereof is permitted under a then
effective registration statement. The value of each share of Common
Stock for the purposes of any dividend payment shall be equal to the
average of the last reported sales prices therefor on the NASDAQ
National or Small Cap Market on the last five trading days prior to
the date of the payment.
(c) Nothing in this Certificate shall limit any other remedies which may
be available to the Holder by reason of any delay in the filing or the
effectiveness of the Registration Statement.
6. Conversion
2
<PAGE>
(a) The holder shall have the right at any time (whether before or after
the Effective Date or otherwise) in its sole discretion, to convert
the Preferred Stock, in whole or in part, into a number of shares (the
"Conversion Shares") of the Company's common stock (the "Common
Stock") equal to $100 per share converted divided by the Conversion
Price. The Conversion Price means the lesser of (1) $3.25 or (2) 75%
of the average of the closing bid price of a share of Common Stock of
the Company during the five trading days prior to such conversion.
(b) In the event that the holder elects to exercise its conversion rights
hereunder, it shall give to the Company written notice (by fax or
overnight courier service or personal delivery) of such election and
shall surrender his Preferred Stock to the Company for cancellation.
Conversion shall be effective upon the giving of such notice provided
that the certificate for the converted Preferred Stock is received by
the Company within three days thereafter. The Company shall, within
three business days after receipt by the Company of notice of
conversion and the Preferred Stock being converted, deliver
irrevocable instructions to its transfer agent (with a copy to Holder)
to DWAC the shares of Common Stock issuable on such conversion. In
addition to, and without limiting any other remedy available to Holder
for any breach by the Company of its obligation timely to DWAC shares
upon conversion as aforesaid , (1) Holder shall be entitled at its
option by notice to rescind any such conversion, and (2) the Company
shall forthwith upon Holder's demand from time to time or times pay to
Holder $50 per share for each day of delay in fulfilling such
obligation. Such obligation to pay such amount shall accrue interest,
payable on demand, at the rate of 11% per annum.
(c) The Preferred Stock shall on March 1, 2000 automatically convert into
Common Stock at the then Conversion Price, provided that such
conversion shall occur on such date only if the Company's listing on
the NASDAQ Small Cap or National Market has then been in effect at all
times from and after January 1, 1999, and only if all of the Common
Stock issuable upon conversion of the Preferred Stock may then be
resold publicly pursuant to an effective registration statement under
the Securities Act of 1933 or under Rule 144 thereunder. If by reason
of the proviso in the preceding sentence the Preferred Stock shall
not convert automatically on March 1, 2000, the Holder may, in
addition to such Holder's other remedies, by written notice to the
Company, require the Company forthwith to redeem the Preferred Stock
at a redemption price equal to $100 per share plus accrued dividends.
The redemption price shall accrue interest payable on demand at the
rate of 15% per annum.
(d) The Company shall reserve for issuance on conversion and exercise of
the Preferred Stock and the Warrant (as defined in the Subscription
Agreement) the number of shares of Common Stock which would be
issuable under the Preferred Stock if converted at a Conversion Price
of $1.50, and shall reserve additional shares as requisite should the
Conversion Price decline below $1.50. The Company shall use its
diligent efforts promptly to list on NASDAQ all shares of Common Stock
which are issued upon conversion of the Preferred Stock.
3
<PAGE>
(e) The Preferred Stock shall be convertible at any time only to the
extent that Holder would not as a result of such exercise (and after
giving effect to any shares or warrants or other securities owned by
Holder) beneficially own more that 9.99% of the then outstanding
Common Stock. Beneficial ownership shall be defined in accordance with
Rule 13d-3 under the Securities Exchange Act of 1934. The opinion of
counsel to Holder shall prevail in the event of any dispute on the
calculation of Holder's beneficial ownership.
(f) If any consolidation or merger of the Company into another corporation
which has a market capitalization of not less than $75 million, or the
sale or conveyance of all or substantially all of its assets to any
such corporation, shall be effected, then, at the election of the
Company, exercisable by notice (an "Automatic Conversion Notice") to
the Holder given not later than the 20/th/ business day prior to the
consummation of such transaction, the Preferred Stock shall be
deemed automatically converted immediately prior to the consummation
of such transaction as provided above, provided that:
(i) cash shall be payable in respect of the Company's common stock in
the transaction or the securities issuable in respect of the
Company's common stock in the transaction shall be immediately
freely and publicly tradeable; and
(ii) the Company shall give to the holders of the Preferred Stock not
less than 20 days' prior written notice of such transaction. For
purposes of this Section, "market capitalization" shall mean the
product of the number of outstanding shares of the other
corporation's stock multiplied by the average of the closing bid
prices for the other corporation's stock (as quoted on a national
securities exchange or on NASDAQ) during the 20 trading days
prior to the measurement date.
(b) If the Company does not timely give an Automatic Conversion Notice in
respect of a transaction referred to above, or if any other
consolidation, merger or sale shall be effected, or if any capital
reorganization or reclassification of the Common Stock shall be
effected, then, as a condition precedent of such transaction,
appropriate provision shall be made to the end that conversion rights
hereunder (including, without limitation, provisions for appropriate
adjustments) shall thereafter be applicable, as nearly as may be
practicable in relation to the kind of stock, securities or assets
which are deliverable in respect of Common Stock upon the consummation
of such transaction, to the end that the Holder shall have the right
to receive upon conversion the kind of shares of capital stock or
other securities or property which such Holder would have been
entitled to receive upon or as a result of such transaction had the
Preferred Stock been converted immediately prior to such event.
4
<PAGE>
(c) The Company covenants to call a special or annual meeting of
shareholders which will be held on or before June 30, 1998 and at
which the Company's shareholders will be asked to approve the issuance
of shares on conversion of the Preferred Stock and Warrants issued to
the Purchasers (each such terms as defined in the Subscription
Agreement). The Board of Directors of the Company will recommend that
the shareholders of the Company vote in favor of such approval. Until
such approval is obtained, the maximum number of shares which will be
issued on conversion of the Preferred Stock and exercise of the
Warrants is 2,001,810, issuable on a first converted-first exercised
basis. Should such approval not be obtained by the close of business
on June 30, 1998, then until such approval is obtained, the Company
shall on demand by Holder made at any time or times redeem any portion
of the Preferred Stock designated by Holder for redemption (the
"Redeemed Portion") at a redemption price per share equal to $125 plus
accrued dividends. The redemption price shall be payable within five
business days after demand for redemption is made, and shall accrue
interest payable on demand at 11% per annum. The Holders of shares of
common stock issued on conversion of the Preferred Stock shall not
vote their shares of common stock at the meeting aforesaid.
7. Purchase for Investment. The Holder, by acceptance of shares of Preferred
Stock, acknowledges that the Preferred Stock (and the Common Stock into
which the Preferred Stock is convertible) has not been registered under the
Act, covenants and agrees with the Company that such Holder is taking and
holding the Preferred Stock (and the Common Stock into which the Preferred
Stock is convertible) for investment purposes and not with a view to, or
for sale in connection with, a distribution thereof and that the Preferred
Stock (and the Common Stock into which the Preferred Stock is convertible)
may not be assigned, hypothecated or otherwise disposed of in the absence
of an effective registration statement under the Act or an opinion of
counsel for the Holder, which counsel shall be reasonably satisfactory to
the Company, to the effect that such disposition is in compliance with the
Act, and represents and warrants that such Holder is an "accredited
investor" that such Holder has, or with its representative has, such
knowledge and experience in financial and business matters to be capable of
evaluating the merits and risks in respect of this Preferred Stock (and the
Common Stock into which the Preferred Stock is convertible) and is able to
bear the economic risk of such investment.
8. The Company covenants and agrees that all shares of Common Stock which may
be issued upon conversion of this Preferred Stock will, upon issuance, be
duly and validly issued, fully paid and non-assessable and no personal
liability will attach to the holder thereof.
9. Certain Events of Mandatory Redemption.
5
<PAGE>
(a) An "event of redemption" with respect to this Preferred Stock shall
exist if any of the following shall occur, if:
(i) The Company shall breach or fail to comply with any
provision of this Preferred Stock and such breach or failure
shall continue for 15 days after written notice by any
Holder of any Preferred Stock to the Company.
(ii) A receiver, liquidator or trustee of the Company or of a
substantial part of its properties shall be appointed by
court order and such order shall remain in effect for more
than 15 days; or the Company shall be adjudicated bankrupt
or insolvent; or a substantial part of the property of the
Company shall be sequestered by court order and such order
shall remain in effect for more than 15 days; or a petition
to reorganize the Company under any bankruptcy,
reorganization or insolvency law shall be filed against the
Company and shall not be dismissed within 45 days after such
filing.
(iii) The Company shall file a petition in voluntary bankruptcy or
request reorganization under any provision of any
bankruptcy, reorganization or insolvency law, or shall
consent to the filing of any petition against it under any
such law.
(iv) The Company shall make an assignment for the benefit of its
creditors, or admit in writing its inability to pay its
debts generally as they become due, or consent to the
appointment of a receiver, trustee or liquidator of the
Company, or of all or any substantial part of its
properties.
(b) If an event of redemption shall occur, the Holder may, in addition to
such Holder's other remedies, by written notice to the Company, require the
Company forthwith to redeem the Preferred Stock at a redemption price
equal to $100 per share plus accrued dividends. The redemption price shall
accrue interest payable on demand at the rate of 15% per annum.
10. Without the consent of a majority in interest of the holders of the
Preferred Stock, the Company shall not create any class of equity security
which is senior to or on parity with the Preferred Stock in liquidation
rights, other than in connection with the sale of shares to existing
stockholders of the Company; or to an entity whose relationship with the
Company creates intangible value for the Company; or to fund merger and/or
acquisition related activity.
11. All share, redemption and similar amounts are subject to appropriate
adjustment in the event of stock splits, stock dividends, recapitalization
and similar events.
12. The Preferred Stock shall have no voting rights except as otherwise
required by law.
6
<PAGE>
13. Miscellaneous.
(a) All notices and other communications required or permitted to be given
hereunder shall be in writing and shall be given (and shall be deemed to
have been duly given upon receipt) by delivery in person, by telegram, by
facsimile, recognized overnight mail carrier, telex or other standard form
of telecommunications, or by registered or certified mail, postage prepaid,
return receipt requested, addressed as follows: (a) if to the Holder, to
such address as such Holder shall furnish to the Company in accordance with
this Section, or (b) if to the Company, to it at its headquarters office,
or to such other address as the Company shall furnish to the Holder in
accordance with this Section.
(b) The waiver of any event of default or the failure of the Holder to
exercise any right or remedy to which it may be entitled shall not be
deemed a waiver of any subsequent event of default or of the Holder's right
to exercise that or any other right or remedy to which the Holder is
entitled.
(c) The Holder shall be entitled to recover its legal and other costs of
collecting on the Preferred Stock, and such costs shall accrue interest,
payable on demand, at the rate of 15% per annum.
In addition to all other remedies to which the Holder may be entitled hereunder,
Holder shall also be entitled to decrees of specific performance without posting
bond or other security.
7
<PAGE>
EXHIBIT 21.1
------------
Subsidiary
Name Jurisdiction of Incorporation
- ---- -----------------------------
Intelesys Corporation Delaware
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statement on Form S-8 (No. 333-33375) of Nexar
Technologies, Inc. of our report dated January 24, 1997 (except with resepct to
the matter discussed in note 10 as to which the date is February 28, 1997) on
the financial statements on Nexar Technologies, inc. as of December 31, 1995 and
1996, and for the period from inception (March 7, 1995) to December 31, 1995 and
for the year ended December 31, 1996 included in Nexar Technologies, Inc. Form
10-K for the year ended December 31, 1997. It should be noted that we have not
audited any financial statements of Nexar Technologies, Inc. subsequent to
December 31, 1996.
ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED 12/31/97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,814
<SECURITIES> 0
<RECEIVABLES> 10,802
<ALLOWANCES> (1,970)
<INVENTORY> 4,973
<CURRENT-ASSETS> 17,810
<PP&E> 952
<DEPRECIATION> (142)
<TOTAL-ASSETS> 19,909
<CURRENT-LIABILITIES> 7,886
<BONDS> 0
0
4,568
<COMMON> 95
<OTHER-SE> 6,476
<TOTAL-LIABILITY-AND-EQUITY> 19,909
<SALES> 33,608
<TOTAL-REVENUES> 33,608
<CGS> 32,868
<TOTAL-COSTS> 32,868
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 178
<INCOME-PRETAX> (13,346)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,346)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,346)
<EPS-PRIMARY> (1.84)
<EPS-DILUTED> (1.32)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (SEC FILE NO.
333-18849) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION
STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,727
<SECURITIES> 0
<RECEIVABLES> 12,439
<ALLOWANCES> (1,000)
<INVENTORY> 6,698
<CURRENT-ASSETS> 22,200
<PP&E> 555
<DEPRECIATION> (444)
<TOTAL-ASSETS> 24,062
<CURRENT-LIABILITIES> 9,762
<BONDS> 0
0
1
<COMMON> 93
<OTHER-SE> 14,206
<TOTAL-LIABILITY-AND-EQUITY> 24,062
<SALES> 22,399
<TOTAL-REVENUES> 22,399
<CGS> 22,769
<TOTAL-COSTS> 22,769
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> (10,185)
<INCOME-TAX> 0
<INCOME-CONTINUING> (10,185)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,185)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.04)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (SEC FILE NO.
333-18849) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,969
<SECURITIES> 0
<RECEIVABLES> 13,882
<ALLOWANCES> (375)
<INVENTORY> 5,061
<CURRENT-ASSETS> 26,386
<PP&E> 529
<DEPRECIATION> (78)
<TOTAL-ASSETS> 28,269
<CURRENT-LIABILITIES> 8,516
<BONDS> 0
0
1
<COMMON> 92
<OTHER-SE> 19,661
<TOTAL-LIABILITY-AND-EQUITY> 28,269
<SALES> 17,997
<TOTAL-REVENUES> 17,997
<CGS> 16,651
<TOTAL-COSTS> 16,651
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 195
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> (4,731)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,731)
<EPS-PRIMARY> (0.74)
<EPS-DILUTED> (0.51)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH
31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REPORT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,085
<SECURITIES> 0
<RECEIVABLES> 9,664
<ALLOWANCES> (270)
<INVENTORY> 5,984
<CURRENT-ASSETS> 16,864
<PP&E> 365
<DEPRECIATION> (53)
<TOTAL-ASSETS> 19,724
<CURRENT-LIABILITIES> 8,768
<BONDS> 0
0
1
<COMMON> 48
<OTHER-SE> (11,910)
<TOTAL-LIABILITY-AND-EQUITY> 19,724
<SALES> 8,825
<TOTAL-REVENUES> 8,825
<CGS> 8,136
<TOTAL-COSTS> 8,136
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,090)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,090)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,090)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.27)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (SEC FILE NO.
333-18849) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,738,983
<SECURITIES> 0
<RECEIVABLES> 8,350,960
<ALLOWANCES> 603,953
<INVENTORY> 6,112,821
<CURRENT-ASSETS> 16,966,851
<PP&E> 290,097
<DEPRECIATION> 35,285
<TOTAL-ASSETS> 19,589,121
<CURRENT-LIABILITIES> 5,542,296
<BONDS> 0
0
0
<COMMON> 48,000
<OTHER-SE> (47,600)
<TOTAL-LIABILITY-AND-EQUITY> 19,589,121
<SALES> 18,695,364
<TOTAL-REVENUES> 18,695,364
<CGS> 16,392,483
<TOTAL-COSTS> 16,392,483
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,510,139)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,510,139)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,510,139)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (0.98)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (SEC FILE NO.
333-18849) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH REGISTRATION
STATEMENT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 8,147,918
<SECURITIES> 0
<RECEIVABLES> 8,209,422
<ALLOWANCES> (60,000)
<INVENTORY> 2,992,698
<CURRENT-ASSETS> 19,473,588
<PP&E> 237,028
<DEPRECIATION> (20,209)
<TOTAL-ASSETS> 20,183,318
<CURRENT-LIABILITIES> 5,856,925
<BONDS> 19,568,449
0
0
<COMMON> 48,000
<OTHER-SE> (47,600)
<TOTAL-LIABILITY-AND-EQUITY> 20,183,318
<SALES> 11,341,426
<TOTAL-REVENUES> 11,341,426
<CGS> 9,338,342
<TOTAL-COSTS> 9,338,342
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 267,143
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,981,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,981,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,981,022)
<EPS-PRIMARY> (0.62)
<EPS-DILUTED> (0.39)
</TABLE>
