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Filed Pursuant to Rule 424(b)(1)
Registration No. 333-30264
[MOBILITY ELECTRONICS LOGO]
MOBILITY ELECTRONICS, INC.
4,000,000 SHARES
COMMON STOCK
This is the initial public offering of Mobility Electronics, Inc. We are
offering 4,000,000 shares of common stock. The public offering price is $12.00
per share.
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "MOBE."
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS MOBILITY
<S> <C> <C> <C>
Per Share $12.00 $0.84 $11.16
TOTAL $48,000,000 $3,360,000 $44,640,000
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 600,000
additional shares of common stock solely to cover over-allotments, if any. If
all such shares are purchased, the total price to public will be $55,200,000,
the total underwriting discount will be $3,864,000 and the total proceeds to us
will be $51,336,000. See "Underwriting."
The shares of common stock are offered, subject to prior sale, by the
underwriters on a firm commitment basis when, and as if delivered and accepted
by them, and subject to approval of certain legal matters by counsel to the
underwriters and certain other conditions. Delivery of the shares of common
stock offered by this prospectus to underwriters is expected to be made in New
York, New York on or about July 6, 2000.
DEUTSCHE BANC ALEX. BROWN
BANC OF AMERICA SECURITIES LLC
The date of this Prospectus is June 30, 2000
<PAGE> 2
[DESCRIPTION OF GRAPHICS ON INSIDE FRONT COVER PAGE AND GATEFOLD]
The top of the inside front cover will contain the phrase "Revolutionizing
the Remote Bus Industry through Split Bridge(TM) technology." A diagram of a
printed circuit board will appear below the text. The diagram will illustrate
the ability of the Mobility Split Bridge(TM) chip to interface with a remote
secondary PCI bus rather than a traditional secondary PCI bus. The bottom of the
inside front cover will include a Split Bridge(TM) logo depicting the cable for
a remote secondary PCI bus and a picture of the "PCWeek Best of COMDEX" award we
received, which declared our Split Bridge(TM) technology the "Best New
Technology" at the fall 1999 COMDEX trade show.
The left side of the gatefold will contain, in the center of the page, the
text "PCI bridges are commonplace. Mobility's Split Bridge(TM) technology,
because of its unique remote PCI bus architecture, opens up a whole new world of
PCI bus applications never before feasible. Some of the potential markets are
listed here but the possibilities are endless because PCI is everywhere."
Starting in the upper left hand corner of the gatefold, and moving clockwise and
across to the right side of the gatefold, there will be graphics representing
the notebook computer, desktop computer, server/router, modular computer, home
networking, service industry, industrial, automotive, test equipment, business
machines, telecom and hand-held computer markets. These graphics will be
connected to a representation of the Mobility Split Bridge(TM) chip in the
center of the gatefold. The phrase "Because PCI is Everywhere ... the
Possibilities are Endless", accompanied by our company logo, will be written in
larger letters across the center of the entire spread.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 8
Forward-Looking Statements.................................. 20
Use of Proceeds............................................. 20
Dividend Policy............................................. 21
Capitalization.............................................. 22
Dilution.................................................... 24
Selected Consolidated Financial Data........................ 26
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 28
Business.................................................... 38
Management.................................................. 53
Principal Stockholders...................................... 61
Certain Transactions........................................ 63
Description of Capital Stock................................ 66
Shares Eligible For Future Sale............................. 74
Underwriting................................................ 76
Interests of Named Experts and Counsel...................... 79
Experts..................................................... 79
Additional Information Available To You..................... 79
Index to Consolidated Financial Statements.................. F-1
</TABLE>
Mobility Electronics(R), EASi(R), EasiDock(R), Split Bridge(TM) and our
stylized logo are trademarks of Mobility Electronics, Inc. All other tradenames
or trademarks appearing in this prospectus are the property of their respective
owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF OUR COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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(This page intentionally left blank)
<PAGE> 5
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary may not contain all of the information that you should
consider before investing in our common stock. You should carefully read the
entire prospectus including "Risk Factors" and the consolidated financial
statements, before making an investment decision.
OUR BUSINESS
Mobility Electronics designs, develops and markets technology and products
for the computer industry as well as for a broad range of related microprocessor
applications. These technologies and products allow the connection of the
computer to various peripherals using a remote peripheral component interface,
or PCI bus, technology. Our proprietary Split Bridge(TM) technology consists of
a Split Bridge(TM) link, typically two customized semiconductors, or chips, two
connectors and a high-speed cable. Our technology for the first time allows any
computer's primary PCI bus, which is the heart of the computer, to be extended
to a remote location of up to 15 feet with virtually no software requirements or
performance degradation. This enables architectural designs of computer systems
and applications that previously were not feasible.
Unlike traditional communication protocols such as universal serial bus, or
USB, firewire, or IEEE 1394, Ethernet and small computer systems interface, or
SCSI , Split Bridge(TM) offers a combination of simplicity, high performance and
technological superiority. Since Split Bridge(TM) technology extends the PCI
bus, it can accommodate any of the traditional communication protocols in the
remote location as if they are attached to the primary PCI bus. Our Split
Bridge(TM) technology won PC Week's "Best New Technology" award at the fall 1999
COMDEX trade show, and was runner-up for the "Technology Achievement of the Year
Award" at the Mobile Insights 2000 Conference. We have one Split Bridge(TM)
patent that was issued by the U.S. Patent and Trademark Office, and have
received notice of allowance for an additional Split Bridge(TM) patent.
Today the most prevalent computer architecture, which is incorporated into
virtually all computer systems and in many related microprocessor applications,
uses the PCI bus. However, the PCI bus cannot be extended more than a few
inches. This extension is necessary to alleviate the physical printed circuit
board, or PCB, space constraints on the computer motherboard, and restrictions
on the number of lines, or circuits, and electrical loads that can be attached
to the PCI bus. Consequently, the industry today faces a number of difficult
physical and electrical constraints when designing computer systems and
products. Additionally, traditional communication protocols, which attempt to
address these limitations, have numerous disadvantages when compared to our
Split Bridge(TM) technology since they generally require a processor, extensive
software and other related items.
Our Split Bridge(TM) technology eliminates many of these physical and
electrical constraints by allowing one or more Split Bridge(TM) chips to be
attached to a computer's primary PCI bus, with the mating Split Bridge(TM) chips
installed at a remote location along with an extended secondary PCI bus. Split
Bridge(TM) technology thus substantially reduces the need for available physical
space on the primary PCB by eliminating the requirement that all the circuitry
be on the main computer motherboard, and by allowing the extension cable and
connectors to be small and flexible. Moreover, since all of the secondary PCI
bus loads and peripherals do not need to be physically attached to the primary
PCI bus, Split Bridge(TM) technology enables input/output devices, peripherals
and other technologies to be placed in multiple remote locations.
Our first major application for Split Bridge(TM) technology is the creation
of a new universal docking product category which allows users of portable
computers to configure a flexible, high performance docking solution that meets
their individual needs. More importantly, our universal docking products are
compatible with most makes and models of portable computers, thus, facilitating
the use of a portable computer as a true desktop replacement.
According to IDC, a leading industry source, the market for portable
computers, excluding handheld devices, is expected to grow at a compounded
annual growth rate of 13.8% from 15.5 million units in 1998 to approximately
29.6 million units in 2003. In addition, IDC forecasts that the handheld market
will grow at a compounded annual growth rate of over 39.8% from 6.6 million
units in 1998 to approximately
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35.2 million units by 2003. Coupled with this trend toward portability, there
has been an increased demand for computers that are smaller and lighter but have
processing functionality similar to that of the traditional desktop computer. To
make these smaller and lighter computers more convenient to use in the office
and home, docking stations are required to allow users to connect to networks,
peripheral devices and external power sources, providing users with all of the
features and functionality of a traditional desktop computer.
We believe that our Split Bridge(TM) docking station products, which offer
a combination of universality and expandability, create the basis for a
connectivity standard for the portable computer industry. This would allow the
user to replace the desktop computer with a fully integrated, customizable
mobile computing system and purchase docking solutions independent of the choice
of computer.
Our universal docking station product line further provides distributors,
retailers and value-added resellers with the ability to carry a limited number
of universal and expandable docking products, as opposed to many individual
docking stations that only work with one computer model. Thus, distributors,
retailers and value-added resellers can offer flexible choices to their
customers and have products readily available when new computer models are
launched, while at the same time simplifying their dock inventory requirements.
Finally, these products offer computer original equipment manufacturers, or
OEMs, the ability to use our standardized docking solution for all of their
portable computer models.
Our second major application for our Split Bridge(TM) technology is the
provision of additional lower cost expansion and backup capacity, remote access
and enhanced communication among computers in the server, desktop and
keyboard-video-mouse, or KVM, switch markets in partnership with Cybex Computer
Products Corporation. Potential future applications include business machines,
such as copiers and printers, test equipment, modular computers, computer data
storage, in-home remote computer extension and any other application that can
benefit from extending the PCI bus or from enhanced communication among
computers.
In addition to our Split Bridge(TM) technology products, we also design,
develop and market a range of connectivity and power products for portable
computers. Our current major customers include Buy.com, Compaq, CompUSA,
Gateway, Hewlett-Packard, Hitachi, IBM, Ingram Micro, Merisel, Microwarehouse,
Mitsubishi, NEC, Pinacor, Targus, Tech Data and Toshiba. We also have important
strategic relationships with 3Com, Cybex, LSI Logic, Molex, Philips, Silicon
Image, Solectron, Targus and others.
We were formed as a limited liability company under the laws of the State
of Delaware in May 1995, and were converted to a Delaware corporation by a
merger effected in August 1996, in which we were the surviving entity. We
changed our name from "Electronics Accessory Specialists International, Inc." to
"Mobility Electronics, Inc." on July 23, 1998. Our principal executive offices
are located at 7955 East Redfield Road, Scottsdale, Arizona 85260, and our
telephone number is (480) 596-0061. Unless otherwise indicated in this
prospectus, references to "Mobility," "us," "we" and "our" refer to Mobility
Electronics, Inc. and shall include our predecessor, Electronics Accessory
Specialists International, L.L.C. Our website is located at
www.mobilityelectronics.com. The information contained on our website does not
constitute part of this prospectus.
---------------------
Unless otherwise indicated, this prospectus assumes:
- that the underwriters have not exercised their option to purchase
additional shares;
- conversion of 60% of the outstanding convertible debentures into 5,821
shares of common stock, at $7.73 per share, upon the completion of this
offering;
- conversion of all shares of Series C preferred stock into approximately
1,688,865 shares of common stock, on a 1-to-0.68995 basis, upon
completion of this offering;
- conversion of all shares of Series D preferred stock into approximately
438,595 shares of common stock on a 1-to-0.87719 basis, upon the
completion of this offering; and
- the effect of a 1-for-2 reverse split of our common stock that was
consummated on March 31, 2000.
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THE OFFERING
Common stock offered by Mobility....4,000,000 shares
Common stock to be outstanding after
this offering.......................12,831,400 shares
Use of proceeds.....................For working capital and general corporate
purposes including the repayment of debt,
increased spending on sales and marketing,
research and development, potential
acquisitions and expansion of our
operational and administrative
infrastructure. See "Use of Proceeds" for
more detailed information.
Nasdaq National Market Symbol......."MOBE"
The number of shares of common stock to be outstanding upon completion of
this offering is based on the number of shares outstanding as of March 31, 2000,
assuming the conversion of 60% of the outstanding convertible debentures
($45,000) into 5,821 shares of common stock at $7.73 per share, the conversion
of 2,447,808 shares of Series C preferred stock into 1,688,865 shares of common
stock and the conversion of 500,000 shares of Series D preferred stock into
438,595 shares of common stock. This number excludes as of March 31, 2000: (1)
872,095 shares subject to outstanding options and 377,905 shares available for
future option grants under our Amended and Restated 1996 Long Term Incentive
Plan, or the 1996 Plan; (2) 102,828 shares subject to non-plan options; and (3)
2,083,776 shares subject to warrants to purchase common stock.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 5, THREE MONTHS
(INCEPTION) YEAR ENDED DECEMBER 31, ENDED MARCH 31,
TO DECEMBER 31, ------------------------------------------ ------------------
1995 1996 1997 1998 1999 1999 2000
--------------- ------- ------- -------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................... $ 118 $ 5,669 $12,744 $ 21,072 $ 13,952 $ 3,228 $ 5,002
Gross profit (loss)......................... 36 1,217 (591) (2,458) 2,201 433 1,395
Total operating expenses.................... 827 3,224 7,483 13,938 12,236 3,456 3,350
------ ------- ------- -------- -------- ------- -------
Loss from operations........................ (791) (2,007) (8,075) (16,396) (10,034) (3,023) (1,955)
Other expense (income):
Interest expense, net..................... (3) 112 676 1,638 6,297 628 929
Other, net................................ -- (7) 24 (1) 126 (1) (2)
------ ------- ------- -------- -------- ------- -------
Loss before provision for income taxes...... (788) (2,112) (8,775) (18,033) (16,457) (3,650) (2,882)
Provision for income taxes.................. -- -- -- -- -- -- --
------ ------- ------- -------- -------- ------- -------
Net loss.................................... (788) (2,112) (8,775) (18,033) (16,457) (3,650) (2,882)
Cumulative dividends on Series B preferred
stock..................................... -- (160) (317) -- -- -- --
Beneficial conversion cost of preferred
stock..................................... -- -- -- -- (1,450) -- (49)
------ ------- ------- -------- -------- ------- -------
Net loss attributable to common
stockholders.............................. $ (788) $(2,272) $(9,092) $(18,033) $(17,907) $(3,650) $(2,931)
====== ======= ======= ======== ======== ======= =======
Net loss per share:
Basic and diluted......................... $(0.39) $ (1.08) $ (3.45) $ (4.36) $ (3.59) $ (0.80) $ (0.46)
====== ======= ======= ======== ======== ======= =======
Weighted average common shares outstanding:
Basic and diluted......................... 2,035 2,099 2,639 4,136 4,994 4,567 6,324
====== ======= ======= ======== ======== ======= =======
Pro forma net loss attributable to common
stockholders.............................. $(16,815) $(2,562)
======== =======
Pro forma net loss per share:
Basic and diluted......................... $ (2.97) $ (0.37)
======== =======
Pro forma weighted average common shares
outstanding:
Basic and diluted......................... 5,661 6,991
======== =======
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------
PRO FORMA
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,318 $41,389
Working capital............................................. 4,230 43,977
Total assets................................................ 18,079 53,150
Long-term debt, less current installments................... 3,430 24
Total stockholders' equity.................................. 5,137 48,289
</TABLE>
See note 19 to our consolidated financial statements for an explanation of
the determination of shares used in computing net loss per share.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for more detailed information.
The pro forma as adjusted data above adjusts the actual amounts to reflect
the conversion of 60% of outstanding convertible debentures into 5,821 shares of
common stock at $7.73 per share as of March 31, 2000, the conversion of
2,447,808 outstanding shares of Series C preferred stock into 1,688,865 shares
of
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common stock as of March 31, 2000, on a 1-to-0.68995 basis and the conversion of
500,000 shares of outstanding Series D preferred stock into 438,595 shares of
common stock as of March 31, 2000, on a 1-to-0.87719 basis, and the application
of the net proceeds from the sale of 4,000,000 shares of common stock offered by
us at the initial public offering price of $12.00 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
The pro forma net loss and pro forma loss per share reflect the reduction
of approximately $8.0 million of debt from the proceeds of issuing approximately
667,000 shares of common stock upon completion of this offering and give effect
to the reduction in interest expense had the debt reduction taken place at the
beginning of 1999.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks and uncertainties described below and the other information in this
prospectus before deciding whether to invest in shares of our common stock. Any
of the following risks could cause the trading price of our common stock to
decline.
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE.
We have experienced significant operating losses since inception and, as of
March 31, 2000, have an accumulated deficit of approximately $49.5 million. We
expect to continue to incur operating losses in fiscal 2000. If we do not
achieve continued revenue growth sufficient to absorb our recent and planned
expenditures, we could experience additional losses in future periods. These
losses or fluctuations in our operating results could cause the market value of
our common stock to decline.
We anticipate that in the future we will make significant investments in
our operations, particularly to support technological developments and sales
activities and, that as a result, operating expenses will continue to increase.
We intend to make such investments on an ongoing basis, primarily from cash
generated from operations and, to the extent necessary, funds available from our
lines of credit and this offering, as we develop and introduce new products and
expand into new markets such as international, direct and OEM markets. If net
sales do not increase with capital or other investments, we are likely to
continue to incur net losses and our financial condition could be materially
adversely affected. We have not yet achieved profitability, and there can be no
assurance that we will achieve or sustain profitability on a quarterly or annual
basis.
OUR FUTURE SUCCESS IS UNCERTAIN BECAUSE SPLIT BRIDGE(TM) TECHNOLOGY IS NEW TO
OUR BUSINESS.
We began developing the Split Bridge(TM) technology during the first
quarter of 1998, and in the fourth quarter of 1998, we changed our overall
strategy to pursue the application of the Split Bridge(TM) technology as our
primary focus. Prior to changing our business strategy, we developed and
manufactured port replicators and power products. Our new business focus and
strategy may not be successful. In addition, because we have only recently begun
to focus our business on the development and application of the Split Bridge(TM)
technology, we cannot be sure that our business model and future operating
performance will yield the results that we seek. Our operating results for
future periods are subject to all of the risks and uncertainties inherent in the
establishment of new business enterprises. Our future operating results will
depend upon, among other factors:
- computer OEM acceptance of our Split Bridge(TM) technology and products;
- the level of product technology and price competition for our universal
docking, server and Split Bridge(TM) products;
- our ability to defend our patents and patents pending;
- our success in establishing and expanding our direct and indirect
distribution channels with corporate and consumer portable computer
users;
- our success in establishing universal docking products as a retail
product line;
- our success in attracting and retaining strategic partners, joint
ventures and licensing opportunities;
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- our success in attracting and retaining motivated and qualified
personnel, particularly in the technical area; and
- our development and marketing of new products and Split Bridge(TM)
technology applications.
WE MAY NOT ACHIEVE ANTICIPATED REVENUES IF MARKET ACCEPTANCE OF OUR SPLIT
BRIDGE(TM) TECHNOLOGY IS NOT FORTHCOMING.
We believe that revenues from universal docking stations will account for a
material portion of our revenues for the foreseeable future. Our future
financial performance will depend on market acceptance of our Split Bridge(TM)
technology, including our universal connectivity station product line. The
market for docking stations is characterized by ongoing technological
developments, frequent new product announcements and introductions, evolving
industry standards and changing customer requirements. As a result, if our Split
Bridge(TM) technology and universal connectivity product line do not achieve
widespread market acceptance, we may not achieve anticipated revenues. Although
PCI is an industry standard, the operating systems used by our customers may not
be compatible with certain products in our universal docking product line and,
as a result, the available market for our products may be limited.
Our future financial performance also depends in large part on the
existence and continued growth of market demand for universal connectivity
stations. There can be no assurance that the market or demand for universal
connectivity stations, if any, will develop and continue to grow. Any failure of
this market to develop or grow or our failure to develop a universal
connectivity station that satisfies market needs or that works with all computer
makes or models could have a material adverse effect on us. In addition, demand
for our products is primarily driven by the underlying market demand for
portable computers. Should the growth in demand for portable computers be
inhibited, we may not achieve anticipated revenues.
OUR OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS, AND AN
UNANTICIPATED DECLINE IN REVENUES MAY CAUSE OUR STOCK PRICE TO FALL.
It is likely that in some future quarter or quarters our operating results
will be below the expectations of securities analysts and investors. If a
shortfall in revenues occurs, the market price for our common stock may decline
significantly. The factors that may cause our quarterly operating results to
fall short of expectations include:
- our ability to develop and market our new Split Bridge(TM) products in a
timely manner;
- the timing of our, and our competitors, new product or technology
introductions and product enhancements;
- market acceptance of our Split Bridge(TM) products and technology;
- the size and timing of customer orders;
- difficulties with new Split Bridge(TM) production implementation or
supply chain;
- seasonality of sales;
- product defects and other product quality problems due to the recent
development of our Split Bridge(TM) technology;
- our ability to attract and retain strategic partners to continue the
advances necessary for Split Bridge(TM) technology;
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- the degree and rate of growth of the markets in which we compete and the
accompanying demand for our products;
- our ability to expand our internal and external sales forces and build
the required infrastructure to meet anticipated growth; and
- our suppliers' ability to perform under their contracts with us.
Many of these factors are beyond our control. For these reasons, you should
not rely on period-to-period comparisons of our financial results to forecast
our future performance.
WE MAY NOT BE ABLE TO ADEQUATELY MANAGE OUR ANTICIPATED GROWTH, WHICH COULD
IMPAIR OUR EFFICIENCY AND NEGATIVELY IMPACT OUR OPERATIONS.
We may not be able to manage our growth effectively, which could impair our
efficiency, reduce the quality of our solutions, impair further growth and harm
our business, financial condition and operating results. If we do not
effectively manage this growth, we may not be able to operate efficiently or
maintain the quality of our products. Either outcome could harm our operating
results. In the past, we have experienced rapid growth, and we plan to continue
to expand our operations. This expansion is expensive and places a significant
strain on our personnel and other resources. For example, our universal
connectivity station product line is expected to result in a significant
increase in the number of shipments to and from our Scottsdale, Arizona
facility. To manage our expanded operations effectively, we will need to further
improve our operational, financial and management systems and successfully hire,
train, motivate and manage our employees.
OUR FAILURE TO RESPOND TO RAPID TECHNOLOGICAL CHANGES MAY IMPAIR OUR OPERATING
RESULTS.
The market for our universal connectivity station product line is new and
emerging, and is characterized by rapid technological advances, changing
customer needs and evolving industry standards. Accordingly, to realize our
expectations regarding our operating results, we depend on our ability to:
- develop, in a timely manner, new products and services that keep pace
with developments in technology;
- meet evolving customer requirements; and
- enhance our current product and service offerings and deliver those
products and services through appropriate distribution channels.
We may not be successful in developing and marketing, on a timely and
cost-effective basis, either enhancements to our Split Bridge(TM) technology
products or new products which respond to technological advances and satisfy
increasingly sophisticated customer needs. If we fail to introduce new products,
our operating results may suffer. In addition, if new industry standards emerge
that we do not anticipate or adapt to, our products could be rendered obsolete
and our business could be materially harmed. Alternatively, any delay in the
development of technology upon which our products are based could result in our
inability to introduce new products as planned. For example, certain products
that we are currently developing depend upon the availability of USB 2.0. The
success and marketability of technology developed by others is beyond our
control.
WE DEPEND ON LARGE PURCHASES FROM A FEW SIGNIFICANT CUSTOMERS, AND ANY LOSS,
CANCELLATION OR DELAY IN PURCHASES BY THESE CUSTOMERS COULD CAUSE A SHORTFALL IN
REVENUE.
We derive a substantial portion of our product sales through a relatively
small number of OEMs and third-party distributors. For the year ended December
31, 1998, OEMs and
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distributors represented 42.8% and 26.8%, respectively, of our sales during that
period. For the year ended December 31, 1999, OEMs and distributors represented
60.8% and 24.8%, respectively, of our sales during that period.
While our financial performance depends on large orders from a few
significant OEMs and third-party distributors, with the exception of Targus, our
contractual relationships are generally non-exclusive and cancelable upon notice
to us. In addition:
- our distributor agreements generally do not require minimum purchases;
- our customers can stop purchasing and our distributors can stop
distributing our products at any time; and
- our distributor agreements generally are not exclusive and are for one
year terms, with no obligation of the distributors to renew the
agreements.
Sales to Targus totaled 16.2% for the year ended December 31, 1998 and
26.6% for the year ended December 31, 1999. We primarily sell custom products to
Targus. The agreement is renewable in one year increments and does not allow
product returns. Targus is responsible for all costs incurred on custom products
built on its behalf.
Because our expenses are based on our revenue forecasts, a substantial
reduction or delay in sales of our products to, or unexpected returns from OEMs
and distributors, or the loss of any significant customer could harm our
business. Although our largest customers may vary from period-to-period and we
expect to diversify our customers in the future, our operating results for any
given period may continue to depend to a significant extent on large orders from
a small number of customers.
There can be no assurance that our distributors will continue their current
relationships with us or that they will not give higher priority to the sale of
other products, which could include products of our competitors. In addition,
effective distributors must devote significant technical, marketing and sales
resources to an often lengthy sales cycle. There can be no assurance that our
current and future distributors will devote sufficient resources to market our
products effectively or that economic or industry conditions will not adversely
affect such distributors. A reduction in sales efforts or a discontinuance of
distribution of our products by our distributors could lead to reduced sales. In
addition, because we sell a significant portion of our products through
distributors, it is difficult for us to monitor end user demand for our products
on a current basis. For example, third-party distributors may place large
initial orders which may not be indicative of long-term end user demand.
Our operating results could also be materially adversely affected by
changes in distributors' inventory strategies, which could occur rapidly and, in
many cases, may not be related to end user demand. New products may require
different marketing, sales and distribution strategies than those for our
current products. There can be no assurance that our distributors will choose or
be able to effectively market these new products or to continue to market our
products.
OUR RELIANCE ON SINGLE OR LIMITED SOURCES FOR KEY COMPONENTS MAY INHIBIT OUR
ABILITY TO MEET CUSTOMER DEMAND.
The principal components of our docking station products are purchased from
outside vendors. We buy components under purchase orders and generally do not
have long-term agreements with our suppliers. Any termination of or significant
disruption in our relationship with our component suppliers may prevent us from
filling customer orders in a timely manner, as we generally do not maintain
large inventories of our components. We purchase a number of the components for
our products from sole or a limited number of suppliers; for example, Philips
Semiconductors is our sole supplier of Split Bridge(TM) technology ASIC chips,
11
<PAGE> 14
Molex is our sole supplier of certain system connectors for use with our
universal docking products, EFA is the only manufacturer of our USB docking
stations and Solectron is the only company that produces our Split Bridge(TM)
universal docking stations for us. EFA and Solectron are located in the Far
East. We have occasionally experienced and may in the future experience delays
in delivery of such components. Although alternate suppliers are available for
most of the components and services needed to produce our products, the number
of suppliers of some components is limited, and qualifying a replacement
supplier and receiving components from alternate suppliers could take several
months.
We depend upon our suppliers to deliver components that are free from
defects, competitive in functionality and cost and in compliance with our
specifications and delivery schedules. Disruption in supply, a significant
increase in the cost of one or more components, failure of a supplier to remain
competitive in functionality or price, the failure of a supplier to comply with
any of our procurement needs or the financial failure or bankruptcy of a
supplier could delay or interrupt our ability to manufacture or deliver our
products to customers on a timely basis.
OUR RELIANCE ON THIRD-PARTY MANUFACTURING VENDORS TO MANUFACTURE OUR PRODUCTS
MAY CAUSE A DELAY IN OUR ABILITY TO FILL ORDERS.
We rely on third-party manufacturers for assembly and subassembly of our
products. Any termination of or significant disruption in our relationship with
the third-party manufacturers of our products may prevent us from filling
customer orders in a timely manner, as we generally do not maintain large
inventories of our products. Additionally, our use of third-party manufacturers
reduces control over product quality and manufacturing yields and costs. We
depend upon our third-party manufacturers to deliver our products that are free
from defects, competitive in functionality and cost and in compliance with our
specifications and delivery schedules. Moreover, although arrangements with such
manufacturers may contain provisions for warranty obligations on the part of
third-party manufacturers, we remain primarily responsible to our customers for
warranty obligations. Disruption in supply, a significant increase in the cost
of the assembly of our products, failure of a third-party manufacturer to remain
competitive in functionality or price, the failure of a third-party manufacturer
to comply with any of our procurement needs or the financial failure or
bankruptcy of a third-party manufacturer could delay or interrupt our ability to
manufacture or deliver our products to customers on a timely basis.
OUR SUCCESS DEPENDS IN PART UPON SALES TO OEMS, WHOSE UNPREDICTABLE DEMANDS AND
REQUIREMENTS MAY SUBJECT US TO POTENTIAL ADVERSE REVENUE FLUCTUATIONS.
We expect that we will continue to be dependent upon a limited number of
OEMs for a significant portion of our net sales in future periods, although no
OEM is presently obligated either to purchase a specified amount of products or
to provide us with binding forecasts of product purchases for any period. Our
products are typically one of many related products used by portable computer
users. Demand for our products is therefore subject to many risks beyond our
control, including, among others:
- competition faced by our OEM customers in their particular end markets;
- market acceptance of Split Bridge(TM) technology and products by our OEM
customers;
- technical challenges which may or may not be related to the components
supplied by us;
- the technical, sales and marketing and management capabilities of our OEM
customers; and
- the financial and other resources of our OEM customers.
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<PAGE> 15
Certain divisions within our OEM customers have developed products intended
to compete with our products. There can be no assurance that we will not lose
sales in the future as a result of such competing products. The reduction, delay
or cancellation of orders from our significant OEM customers, or the
discontinuance of our products by our end users may subject us to potential
adverse revenue fluctuations.
WE HAVE IN THE PAST EXPERIENCED RETURNS OF OUR PRODUCTS, AND AS OUR BUSINESS
GROWS WE MAY EXPERIENCE INCREASED RETURNS, WHICH COULD HARM OUR REPUTATION AND
NEGATIVELY IMPACT OUR OPERATING RESULTS.
In the past, some of our customers have returned our products to us because
they felt that the product did not meet their expectations, specifications and
requirements. Historically, these returns have been approximately 7.0% of sales.
It is likely that we will experience some level of returns in the future and, as
our business grows, the amount of returns may increase despite our efforts to
minimize them. Also, returns may adversely affect our relationship with affected
customers and may harm our reputation. This could cause us to lose potential
customers and business in the future. We maintain a financial reserve for future
returns that we believe is adequate given our historical level of returns. If
returns increase, however, our reserve may not be sufficient and our operating
results could be negatively affected.
INTENSE COMPETITION IN THE MARKET FOR CONNECTIVITY PRODUCTS COULD PREVENT US
FROM INCREASING REVENUE AND SUSTAINING PROFITABILITY.
Although the market for our universal docking products is relatively new
and emerging and we presently have few direct competitors, we expect that the
markets for our products will become increasingly competitive. The market for
computer products in general is intensely competitive, subject to rapid change
and sensitive to new product introductions or enhancements and marketing efforts
by industry participants. We expect to experience significant and increasing
levels of competition in the future. The principal competitive factors affecting
the markets for our product offerings include:
- corporate and product reputation;
- innovation with frequent product enhancement;
- breadth of integrated product line;
- product design, functionality and features;
- product quality and performance;
- ease-of-use;
- support; and
- price.
Although we believe that our products compete favorably with respect to
such factors, there can be no assurance that we can maintain our competitive
position against current or potential competitors, especially those with greater
financial, marketing, service, support, technical or other competitive
resources.
We currently compete primarily with the internal design efforts of OEMs.
These OEMs, as well as a number of our potential non-OEM competitors, have
larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than we do. We,
however, believe that we have a proprietary position with respect to our Split
Bridge(TM) technology and universal connectivity stations which may pose a
barrier to entry that could keep our competitors from developing similar
products or selling competing products in our markets. There can be, however, no
assurance that such competitors will not be able to respond more quickly to new
or emerging technologies and changes in customer requirements, devote greater
resources to the development, sale and
13
<PAGE> 16
promotion of their products than we do or develop products that are superior to
our products or that achieve greater market acceptance.
Our future success will depend, in part, upon our ability to increase sales
in our targeted markets. There can be no assurance that we will be able to
compete successfully with our competitors or that the competitive pressures we
face will not have a material adverse effect on us. Our future success will
depend in large part upon our ability to increase our share of our target market
and to sell additional products and product enhancements to existing customers.
Future competition may result in price reductions, reduced margins or decreased
sales. See "Business -- Competition."
IF WE ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS NECESSARY OR IF WE
LOSE KEY PERSONNEL, WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR BUSINESS OR
ACHIEVE OUR OBJECTIVES.
We believe our future success will depend in large part upon our ability to
identify, attract and retain highly skilled managerial, engineering, sales and
marketing, finance and operations personnel. Competition for such personnel in
the computer industry is intense, and we compete for such personnel against
numerous companies, including larger, more established companies with
significantly greater financial resources than us. There can be no assurance we
will be successful in identifying, attracting and retaining such personnel.
Our success also depends to a significant degree upon the continued
contributions of our key management, engineering, sales and marketing, finance
and manufacturing personnel, many of whom would be difficult to replace. In
particular, we believe that our future success depends on Charles R. Mollo,
Chief Executive Officer, Jeffrey S. Doss, Executive Vice President, and Richard
W. Winterich, Chief Financial Officer. Except for Mr. Doss, we do not maintain
key person life insurance on any of our executive officers. Except for Messrs.
Doss, Mollo, Winterich and Donald W. Johnson, our new Executive Vice President
of Worldwide Sales, Marketing and Operations, we do not have employment
contracts covering any of our senior management. The loss of the services of any
of our key personnel, the inability to identify, attract or retain qualified
personnel in the future or delays in hiring required personnel could make it
difficult for us to manage our business and meet key objectives, such as timely
product introductions.
IF OUR PRODUCTS CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS, WE COULD INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES AND BE SUBJECT TO PRODUCT
LIABILITY CLAIMS.
Our products are based on new technology and are complex. As such, they may
contain undetected errors or performance problems, particularly during new or
enhanced product launches. Despite product testing prior to introduction, our
products have in the past, on occasion, contained errors that were discovered
after commercial introduction. Errors or performance problems may also be
discovered in the future. Any future defects discovered after shipment of our
products could result in loss of sales, delays in market acceptance or product
returns and warranty costs. We attempt to make adequate allowance in our new
product release schedule for testing of product performance. Because of the
complexity of our products, however, our release of new products may be
postponed should test results indicate the need for redesign and retesting, or
should we elect to add product enhancements in response to customer feedback. In
addition, third-party products, upon which our products are dependent, may
contain defects which could reduce or undermine the performance of our products.
In addition, although our sales agreements with our customers typically
contain provisions designed to limit our exposure to potential product liability
claims, there can be no assurance that such limitations of liability would be
enforceable or would otherwise protect us
14
<PAGE> 17
from liability for damages to a customer resulting from a defect in one of our
products. Although we maintain liability insurance covering certain damages
arising from implementation and use of our products, there can be no assurance
that such insurance would cover or be sufficient to cover any such claims sought
against us.
IF WE FAIL TO PROTECT OUR INTELLECTUAL PROPERTY, OUR BUSINESS AND ABILITY TO
COMPETE COULD SUFFER.
Our success and ability to compete are dependent upon our internally
developed technology and know-how. We rely primarily on a combination of patent
protection, copyright and trademark laws, trade secrets, nondisclosure
agreements and technical measures to protect our proprietary rights. While we
have certain patents and patents pending, there can be no assurance that patents
pending or future patent applications will be issued or that if issued, such
patents will not be challenged, invalidated or circumvented or that rights
granted thereunder will provide meaningful protection or other commercial
advantage to us. Moreover, there can be no assurance that any patent rights will
be upheld in the future or that we will be able to preserve any of our other
intellectual property rights. We typically enter into confidentiality,
noncompete or invention assignment agreements with our key employees,
distributors, customers and potential customers, and limit access to, and
distribution of, our product design documentation and other proprietary
information. Additionally, we believe that, due to the rapid pace of innovation
within the computer industry, factors such as:
- technological and creative skill of personnel;
- knowledge and experience of management;
- name recognition;
- maintenance and support of products;
- the ability to develop, enhance, market and acquire products and
services; and
- the establishment of strategic relationships in the industry
also represent important protections for our technology. There can be no
assurance that our confidentiality agreements, confidentiality procedures,
noncompetition agreements or other factors will be adequate to deter
misappropriation or independent third-party development of our technology or to
prevent an unauthorized third party from obtaining or using information that we
regard as proprietary. See "Business -- Proprietary Rights."
WE MAY BE SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT ARE COSTLY
TO DEFEND AND COULD LIMIT OUR ABILITY TO USE CERTAIN TECHNOLOGIES IN THE FUTURE.
The laws of some foreign countries do not protect or enforce proprietary
rights to the same extent as do the laws of the United States. There can be no
assurance that our competitors will not independently develop technology similar
to existing proprietary rights of others. We expect that computer products will
increasingly be subject to infringement claims as the number of products and
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. There can be no assurance that third
parties will not assert infringement claims against us in the future or, if
infringement claims are asserted, that such claims will be resolved in our
favor. Any such claims, with or without merit, could be time-consuming, result
in costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms favorable to us, if at all. In addition,
litigation may be necessary in the future to protect our trade secrets or other
intellectual property rights, or to determine the validity and scope of the
proprietary rights of others.
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<PAGE> 18
Such litigation could result in substantial costs and diversion of resources.
See "Business -- Proprietary Rights."
OUR ABILITY TO INCREASE INTERNATIONAL SALES AND MANAGE OUR INTERNATIONAL
OPERATIONS IS SUBJECT TO A NUMBER OF RISKS BEYOND OUR CONTROL.
Our success will depend, in part, on additional expansion of our sales in
foreign markets. We have established a relationship with a representative agency
that has exclusive rights to sell our products in Europe. We intend to expand
into other foreign markets. Our failure to expand international sales in a
timely and cost-effective manner could have a material adverse effect on us. In
addition, there can be no assurance we will be able to maintain or increase
international market demand for our products. Our international business
involves a number of risks, including:
- the impact of possible recessionary environments in foreign economies;
- political and economic instability;
- exchange rate fluctuations;
- longer receivable collection periods and greater difficulty in accounts
receivable collection from distributors and customers;
- difficulty in managing distributors or sales representatives;
- increased sales and marketing expense;
- difficulty in staffing foreign operations;
- unexpected changes in regulatory requirements;
- reduced or limited protection for intellectual property rights;
- export restrictions and availability of export licenses;
- tariffs and other trade barriers;
- seasonal reduction in business activities;
- complex foreign laws and treaties including employment laws; and
- potentially adverse tax consequences.
Our international sales are priced in both U.S. dollars and in foreign
currency, each of which presents certain risks and uncertainties. Currency
exchange fluctuations could have a material adverse effect on our sales
denominated in U.S. currency as a decrease in the value of foreign currencies
relative to the U.S. dollar could make our pricing more expensive than, or
non-competitive with, products priced in local currencies. Additionally, due to
the number of foreign currencies involved in our international sales and the
volatility of foreign currency exchange rates, we cannot predict the effect of
exchange rate fluctuations with respect to such sales on future operating
results. We have not engaged in hedging transactions with respect to our net
foreign currency exposure. To the extent we implement hedging activities in the
future with respect to foreign currency transactions, there can be no assurance
that we will be successful in such hedging activities.
Moreover, certain of our customer purchase agreements are governed by
foreign laws, which may differ significantly from U.S. laws. Therefore, we may
be limited in our ability to enforce our rights under such agreements and to
collect amounts owed to us should any customer refuse to pay such amounts. In
addition, we are subject to the Foreign Corrupt Practices Act which may place us
at a competitive disadvantage with respect to foreign companies that are not
subject to that act.
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<PAGE> 19
In January 1999, the new "Euro" currency was introduced in European
countries that are part of the European Monetary Union, or EMU. During 2002, all
EMU countries are expected to completely replace their national currencies with
the Euro. Because a significant amount of uncertainty exists as to the effect
the Euro will have on the marketplace and because all of the final rules and
regulations have not yet been defined and finalized by the European Commission
regarding the Euro currency, we cannot determine the effect this will have on
our business.
RISKS RELATED TO THE OFFERING
OUR EXECUTIVE OFFICERS AND DIRECTORS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL
OVER OUR BUSINESS AFTER THE OFFERING WHICH COULD DELAY OR PREVENT A MERGER OR
OTHER CHANGE IN CONTROL OF US.
Upon completion of this offering, our principal stockholders, executive
officers, directors and affiliated individuals and entities together will
beneficially own approximately 19.73% of the outstanding shares of common stock
(18.88% if the underwriters' over-allotment option is exercised in full). As a
result, these stockholders, acting together, may be able to influence
significantly and possibly control most matters requiring approval by our
stockholders, including approvals of:
- amendments to our certificate of incorporation;
- mergers;
- sale of all or substantially all of our assets;
- going private transactions; and
- other fundamental transactions.
In addition, our certificate of incorporation does not provide for
cumulative voting with respect to the election of directors. Consequently, our
present directors, executive officers, principal stockholders and their
respective affiliates may be able to control the election of the members of the
board of directors. Such a concentration of ownership could have an adverse
effect on the price of the common stock, and may have the effect of delaying or
preventing a change in control, including transactions in which stockholders
might otherwise receive a premium for their shares over then current market
prices.
SOME PROVISIONS OF OUR CHARTER DOCUMENTS MAY HAVE ANTI-TAKEOVER EFFECTS THAT
COULD DISCOURAGE A CHANGE IN CONTROL AND REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Some provisions of our certificate of incorporation and bylaws could make
it more difficult for a third party to acquire us even if a change of control
would be beneficial to our stockholders. These provisions include:
- authorizing the issuance of preferred stock without common stockholder
approval;
- prohibiting cumulative voting in the election of directors; and
- limiting the persons who may call special meetings of stockholders.
See "Description of Capital Stock -- Delaware Anti-Takeover Law and Certain
Charter and Bylaw Provisions" for more information regarding anti-takeover
matters.
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<PAGE> 20
AS OUR COMMON STOCK HAS NOT BEEN PUBLICLY TRADED, OUR STOCK PRICE MAY BE
EXTREMELY VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE
OFFERING PRICE.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been determined through
negotiations between the underwriters and us. You may not be able to resell your
shares at or above the initial public offering price.
Equity markets, particularly the market for technology companies, have
recently experienced significant price and volume fluctuations that are
unrelated to the operating performance of individual companies. These broad
market fluctuations may cause the market price of our common stock to decline.
In addition, the market price of our common stock is likely to be highly
volatile. In the past, securities class action litigation has often been
instituted against companies following periods of volatility in the market price
of their securities. This litigation could result in substantial costs and a
diversion of management's attention and resources.
Significant fluctuations in the market price of our common stock could be
caused by a number of factors, including:
- actual or anticipated fluctuations in our operating results;
- changes in expectations as to our future financial performance;
- changes in financial estimates of securities analysts;
- changes in market valuations of other technology companies;
- announcements by us or our competitors of significant technical
innovations, design wins, contracts, standards or acquisitions; and
- the operating and stock price performance of other comparable companies.
Due to these factors, the value of your investment in our common stock
could be reduced. These market fluctuations may cause our stock price to decline
regardless of our performance.
OUR MANAGEMENT WILL HAVE BROAD DISCRETION TO USE THE PROCEEDS OF THIS OFFERING
AND THEIR USES MAY NOT YIELD A FAVORABLE RETURN.
While we intend to use the net proceeds from this offering principally for
working capital needs and general corporate purposes, including the repayment of
approximately $8.0 million of outstanding debt, product and market development,
acquisitions or investments in complementary businesses or products and the
right to use complementary technologies, most of the net proceeds of this
offering have not been allocated for specific uses. Our management will have
broad discretion to spend the proceeds from this offering in ways with which
stockholders may not agree. The failure of our management to use these funds
effectively could result in unfavorable returns. This could have significant
adverse effects on our financial condition and could cause the price of our
common stock to decline. See "Use of Proceeds."
THE PURCHASERS IN THE OFFERING WILL IMMEDIATELY EXPERIENCE SUBSTANTIAL DILUTION
IN NET TANGIBLE BOOK VALUE.
The initial public offering price is substantially higher than the net
tangible book value per share of the outstanding common stock immediately after
the offering. As a result, purchasers of shares will experience immediate and
substantial dilution of approximately $8.36 in net tangible book value per
share, or approximately 69.7% of the initial public offering price of $12.00 per
share. In contrast, existing stockholders paid an average price of $6.49 per
share.
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<PAGE> 21
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
Upon completion of this offering, we will have 12,831,400 shares of common
stock outstanding. All the shares sold in this offering can be freely traded.
Certain of the remaining 8,831,400 shares of common stock outstanding after this
offering are subject to lock-up agreements that prohibit the sale of the shares
for 180 days after the effective date of the registration statement filed
pursuant to this offering. Immediately after the 180 day lock-up period,
6,936,239 of these shares will become available for sale. The remaining shares
of our common stock will become available at various times thereafter upon the
expiration of a one-year holding period. Sales of a substantial number of shares
of common stock in the public market after this offering or after the expiration
of the lock-up and holding periods could cause the market price of our common
stock to decline. See "Shares Eligible for Future Sale" for a discussion of
potential future sales of our common stock.
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<PAGE> 22
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements that involve risks and
uncertainties. These forward-looking statements include statements under the
captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus. You should not rely on these
forward-looking statements which apply only as of the date of this prospectus.
These statements refer to our future plans, objectives, expectations and
intentions. We use words such as "believe," "anticipate," "expect," "will,"
"intend," "estimate" and similar expressions to identify forward-looking
statements. This prospectus also contains forward-looking statements attributed
to third parties relating to their estimates regarding the growth of certain
markets. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those discussed in these forward-looking
statements. Factors that could contribute to these differences include those
discussed in the preceding pages and elsewhere in this prospectus.
USE OF PROCEEDS
The net proceeds to us from the sale of the 4,000,000 shares being offered
by us at the initial public offering price of $12.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses, are estimated to be $43,107,145, or $49,803,145 if the underwriters'
over-allotment option is exercised in full. We expect to use the net proceeds of
this offering for working capital and general corporate purposes, including
repayment of approximately $8.0 million of debt in the aggregate as described
below, increased spending on sales and marketing, research and development and
expansion of our operational and administrative infrastructure. Specific amounts
for these purposes, other than the repayment of debt, have not yet been
determined. In addition, we may use a portion of the net proceeds to acquire or
invest in complementary businesses, technologies, product lines or products.
However, we have no current plans, agreements or commitments with respect to any
such acquisition, and we are not currently engaged in any negotiations with
respect to any such transaction. Pending these uses, we intend to invest the net
proceeds in short-term, interest-bearing, investment grade securities.
We are using a portion of the proceeds from this offering to fully repay
two revolving loan agreements and one term loan agreement with Bank of America,
N.A. These agreements with Bank of America all mature on March 31, 2001.
Borrowings under the revolvers bear interest at a floating rate of prime plus
2.5% per annum. The amounts outstanding under the revolvers at March 31, 2000
were $1.4 million and $514,000. Borrowings under the term loan bear interest at
a floating rate of prime plus 3.5% per annum. The amount outstanding under the
term loan at March 31, 2000 was $750,000.
We are using a portion of the proceeds from this offering to fully repay
two term loans with Sirrom Capital Corporation, now known as Finova Capital
Corporation, or Finova, each bearing interest at 13.5% per annum and each
maturing on June 23, 2002. At March 31, 2000 the amounts outstanding under the
Finova loans were $1.6 million and $1.75 million. The proceeds from the Finova
loans were used for working capital purposes.
We are using a portion of the proceeds from this offering to fully repay
two outstanding Bridge Note debt offerings. At March 31, 2000, the principal
amount outstanding under the offering that will mature on March 31, 2001,
bearing interest at 14% per annum, was approximately $1.4 million and the
principal amount outstanding under the offering that will mature on July 31,
2000, bearing interest at 13% per annum, was $550,000.
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<PAGE> 23
We have Convertible Debentures that bear interest at 12% per annum with an
aggregate principal amount outstanding as of March 31, 2000 of $75,000 that will
mature on dates ranging from October 2003 to May 2004. Assuming the holders of
the Convertible Debentures exercise their conversion rights prior to the closing
of this offering, we intend to convert 60% of the outstanding principal amount
under the Convertible Debentures into 5,821 shares of our common stock at the
closing of this offering. At such time, we plan to fully repay the remaining
$30,000, or whatever amount remains unconverted under the Convertible
Debentures. The proceeds from the Convertible Debentures were used for working
capital purposes.
In connection with the acquisition of certain assets of Miram
International, Inc., we assumed a promissory note bearing interest at 8% per
annum and maturing on July 31, 2000. At March 31, 2000, $105,000 was outstanding
under this note, which amortizes in equal installments on April 30, 2000 and
July 31, 2000. The April 30, 2000 installment has been paid. We are using a
portion of the proceeds from this offering to fully repay this note.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and any future earnings for use
in the operation of our business and do not anticipate paying any cash dividends
in the foreseeable future. Furthermore, covenants in our loan agreements with
Bank of America prohibit the payment of dividends on common stock without the
consent of Bank of America and the terms of the Series C and Series D preferred
stock prohibit the payment of cash dividends without the consent of the Series C
and Series D preferred stockholders, respectively. See Notes 7, 10 and 20 to our
consolidated financial statements.
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<PAGE> 24
CAPITALIZATION
The following table shows:
- our actual capitalization as of March 31, 2000;
- our capitalization as of that date on a pro forma basis to give effect to
the conversion of 60% of the outstanding convertible debentures into
5,821 shares of common stock at $7.73 per share, the conversion of
2,447,808 shares of Series C preferred stock into 1,688,865 shares of
common stock, on a 1-to-0.68995 basis, and the conversion of 500,000
shares of Series D preferred stock into 438,595 shares of common stock,
on a 1-to-0.87719 basis, upon the closing of this offering; the holders
of the Series C preferred stock have a basis in the underlying common
stock that is less than the offering price, which would indicate that
voluntary conversion is likely although not mandatory, and the Series D
preferred stock by its terms automatically converts to common stock
immediately prior to this offering;
- our capitalization as of such date on a pro forma basis to give effect to
the 1-for-2 reverse stock split of our common stock that was effected on
March 31, 2000, and the post-December 31, 1999 changes in the number of
our authorized shares of common and preferred stock; and
- our capitalization on a pro forma as adjusted basis to reflect our
receipt of the net proceeds from the sale of common stock offered by us
at an offering price of $12.00 per share, and after deducting
underwriting discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 2000
----------------------------------
(IN THOUSANDS)
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
Debt:
Note payable -- Bridge loans.............................. $ 1,935 $ 1,935 $ --
Lines of credit -- Bank of America........................ 1,866 1,866 --
Note payable -- Bank of America........................... 750 750 --
Notes payable -- Finova................................... 3,350 3,350 --
Convertible debt.......................................... 75 30 --
Note payable -- Moroz..................................... 105 105 --
Capital leases............................................ 114 114 114
-------- -------- --------
Total debt........................................ 8,195 8,150 114
Stockholders' equity (deficiency):
Preferred stock, $0.01 par value; 15,000,000 shares
authorized; 2,500 shares of which are designated Series
A preferred stock, none of which are issued and
outstanding; 4,186 shares of which are designated
Series B preferred stock, none of which are issued and
outstanding; 4,500,000 shares of which are designated
Series C preferred stock, 2,447,808 of which are issued
and outstanding; 500,000 shares of which are designated
Series D preferred stock, 500,000 of which are issued
and outstanding........................................ 30 -- --
Common stock $0.01 par value; 90,000,000 shares
authorized; 6,698,119 issued and outstanding; 8,831,400
issued and outstanding pro forma; 12,831,400 issued and
outstanding pro forma as adjusted...................... 67 88 128
Additional paid-in capital.................................. 57,130 57,184 100,251
Accumulated deficit......................................... (49,542) (49,542) (49,542)
Stock subscription and deferred compensation................ (2,548) (2,548) (2,548)
-------- -------- --------
Net stockholders' equity.................................... 5,137 5,182 48,289
-------- -------- --------
Total capitalization.............................. $ 13,332 $ 13,332 $ 48,403
======== ======== ========
</TABLE>
22
<PAGE> 25
The number of shares of capital stock referenced above excludes: (1)
148,152 shares of common stock which may be issued upon the exercise of
currently outstanding vested options issued under the 1996 Plan; (2) options to
purchase 102,828 shares of common stock outside the 1996 Plan at $3.52 per
share; and (3) warrants to purchase 2,083,776 shares of common stock at a
weighted average exercise price of $4.88 per share. See "Management -- Amended
and Restated 1996 Long Term Incentive Plan" and note 11 to our consolidated
financial statements. See notes 10 and 11 to our consolidated financial
statements for more information regarding our equity structure.
23
<PAGE> 26
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. We calculate net tangible book value per
share by dividing the net tangible book value (total assets less intangible
assets and total liabilities) by the number of outstanding shares of common
stock.
Our pro forma net tangible book value at March 31, 2000, was approximately
$3.6 million, or $0.41 per share, based on 8,831,400 shares of our common stock
outstanding after giving effect to the conversion of 60% of the outstanding
convertible debentures into 5,821 shares of common stock at $7.73 per share, the
conversion of 2,447,808 outstanding shares of our Series C preferred stock into
1,688,865 shares of common stock, on a 1-to-0.68995 basis, and the conversion of
500,000 outstanding shares of our Series D preferred stock into 438,595 shares
of common stock, on a 1-to-0.87719 basis, upon the closing of this offering.
After giving effect to the sale of the 4,000,000 shares of common stock by
us at an initial public offering price of $12.00 per share (less the
underwriting discounts and commissions and estimated offering expenses payable
by us), our pro forma as adjusted net tangible book value at March 31, 2000,
would be $46.7 million, or $3.64 per share. This represents an immediate
increase in the pro forma as adjusted net tangible book value of $3.23 per share
to existing stockholders and an immediate dilution of $8.36 per share to new
investors, or approximately 69.7% of the initial public offering price of $12.00
per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Net tangible book value per share before the offering..... $ 0.41
Increase per share attributable to new investors.......... 3.23
------
Pro forma net tangible book value per share after the
offering.................................................. 3.64
------
Dilution per share to new investors......................... $ 8.36
======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 2000,
the differences between existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- -------- ---------
(THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 8,831,400 68.8% $ 57,272 57.1% $ 6.49
New investors.................... 4,000,000 31.2 43,107 42.9 10.78
---------- ---- -------- ----
Totals................. 12,831,400 100% $100,379 100%
---------- ---- -------- ----
</TABLE>
The information in the table is based upon the initial public offering
price of $12.00 per share before deducting underwriting discounts and
commissions and offering expenses payable by us. The information concerning
existing stockholders is based on the number of shares of common stock
outstanding on March 31, 2000 and gives effect to the conversion of 60% of the
outstanding convertible debentures into 5,821 shares of common stock at $7.73
per share, the conversion of 2,447,808 outstanding shares of Series C preferred
stock into 1,688,865 shares of common stock, on a 1-to-0.68995 basis, and the
conversion of 500,000 outstanding shares of our Series D preferred stock into
438,595 shares of common stock, on a 1-to-0.87719 basis, upon completion of this
offering. The information presented with respect
24
<PAGE> 27
to existing stockholders excludes as of March 31, 2000: (1) 872,095 shares
subject to outstanding options and 377,905 shares available for future option
grants under our 1996 Plan; (2) 102,828 shares subject to non-plan options; and
(3) 2,083,776 shares subject to warrants to purchase common stock. The issuance
of common stock in connection with the exercise of these options and warrants
will result in further dilution to new investors. See notes 10 and 11 to our
consolidated financial statements for more information regarding our equity
structure.
25
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data should be read together
with our consolidated financial statements and notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the other information contained in this prospectus. The selected financial data
presented below under the captions "Consolidated Statement of Operations Data"
and "Consolidated Balance Sheet Data" as of December 31, 1998 and 1999 and for
each of the years in the three-year period ended December 31, 1999, are derived
from our consolidated financial statements, which have been audited by KPMG LLP,
independent certified public accountants, included elsewhere in this prospectus.
We derived the consolidated financial data for the period ended December 31,
1995 (unaudited) and the year ended December 31, 1996 from our consolidated
financial statements that are not included in this prospectus. The selected data
presented below for the three months ended March 31, 1999 and 2000, and as of
March 31, 2000, are derived from our unaudited consolidated financial statements
included elsewhere in this prospectus and, in the opinion of management, have
been prepared on a basis consistent with the audited consolidated financial
statements and include all adjustments, which consist only of normal recurring
adjustments necessary to present fairly in all material respects the information
in those statements.
<TABLE>
<CAPTION>
THREE MONTHS
MAY 5, ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
-------------- ------- ------- -------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 118 $ 5,669 $12,744 $ 21,072 $ 13,952 $ 3,228 $ 5,002
Cost of sales............................. 82 4,452 13,335 23,530 11,751 2,795 3,607
------ ------- ------- -------- -------- ------- -------
Gross profit (loss)....................... 36 1,217 (591) (2,458) 2,201 433 1,395
Operating expenses:
General and administrative.............. 283 1,978 1,907 4,446 3,651 829 1,255
Research and development................ 159 711 2,951 4,361 3,377 1,073 951
Marketing and sales..................... 385 535 2,625 5,131 5,208 1,554 1,144
------ ------- ------- -------- -------- ------- -------
Total operating expenses.......... 827 3,224 7,483 13,938 12,236 3,456 3,350
------ ------- ------- -------- -------- ------- -------
Loss from operations...................... (791) (2,007) (8,075) (16,396) (10,035) (3,023) (1,955)
Other expense (income):
Interest expense, net................... (3) 112 676 1,638 6,296 628 929
Other, net.............................. -- (7) 24 (1) 126 (1) (2)
------ ------- ------- -------- -------- ------- -------
Loss before provision for income taxes.... (788) (2,112) (8,775) (18,033) (16,457) (3,650) (2,882)
Provision for income taxes(a)............. -- -- -- -- -- -- --
------ ------- ------- -------- -------- ------- -------
Net loss.................................. (788) (2,112) (8,775) (18,033) (16,457) (3,650) (2,882)
Cumulative dividends on Series B preferred
stock................................... -- (160) (317) -- -- -- --
Beneficial conversion cost of preferred
stock................................... -- -- -- -- (1,450) -- (49)
------ ------- ------- -------- -------- ------- -------
Net loss attributable to common
stockholders............................ $ (788) $(2,272) $(9,092) $(18,033) $(17,907) $(3,650) $(2,931)
====== ======= ======= ======== ======== ======= =======
Net loss per share(b)(c):
Basic and diluted....................... $(0.39) $ (1.08) $ (3.45) $ (4.36) $ (3.59) $ (0.80) $ (0.46)
====== ======= ======= ======== ======== ======= =======
Weighted average common shares
outstanding(b)(c):
Basic and diluted....................... 2,035 2,099 2,639 4,136 4,994 4,567 6,324
====== ======= ======= ======== ======== ======= =======
Pro forma net loss attributable to common
stockholders(d)......................... $(16,815) $(2,562)
======== =======
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
THREE MONTHS
MAY 5, ENDED
(INCEPTION) TO YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, --------------------------------------- -----------------
1995 1996 1997 1998 1999 1999 2000
-------------- ------- ------- -------- -------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net loss per share(b)(c)(d):
Basic and diluted....................... $ (2.97) $ (0.37)
======== =======
Pro forma weighted average common shares
outstanding(b)(c)(d):
Basic and diluted....................... 5,661 6,991
======== =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- MARCH 31,
1995 1996 1997 1998 1999 2000
----------- ------ ------- ------- ------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents......................... $352 $ 290 $ 2,216 $ 2,433 $ 4,792 $ 6,318
Working capital (deficit)......................... 424 388 1,928 (3,511) 5,483 4,230
Total assets...................................... 815 4,380 12,250 12,735 14,899 18,079
Long-term debt, less current installments......... -- 1,168 3,919 3,587 8,051 3,430
Total stockholders' equity (deficiency)........... 568 607 430 (3,496) 2,310 5,137
</TABLE>
------------
(a) During August 1996, Mobility was converted from a limited liability
corporation to a C-corporation. As a limited liability company, we were not
subject to income taxes.
(b) See note 19 to our consolidated financial statements for an explanation of
the determination of the number of shares and share equivalents used in
computing per share amounts.
(c) As adjusted to reflect a 1-for-2 reverse stock split effected on March 31,
2000. All share amounts, share prices and per share information have been
retroactively adjusted to reflect this 1-for-2 reverse split.
(d) The pro forma net loss and pro forma net loss per share reflect the
reduction of approximately $8.0 million of debt from the proceeds of
issuing approximately 667,000 shares of common stock upon completion of
this offering and give effect to the reduction in interest expense had the
debt reduction taken place at the beginning of 1999.
27
<PAGE> 30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with "Selected Consolidated
Financial Data" and our consolidated financial statements and notes thereto
contained in this prospectus. This discussion and analysis contains certain
forward-looking statements that involve risks, uncertainties and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of many factors, including but not
limited to those set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
In the first quarter of 1998 we began to pursue a technology that would
enable us to create a new universal docking product category which allows
portable computer users to configure a flexible, high performance docking
solution that is compatible with essentially all makes and models of portable
computers. The fundamental technology that we developed has far reaching
applications. In the first quarter of 1999 we changed our overall business
strategy to pursue the application of our Split Bridge(TM) technology as our
primary focus.
Mobility was founded in May 1995 to develop products for the portable
computer market. Initial sales were generated primarily from reselling
third-party power products. In mid-1996 we began manufacturing and shipping our
first port replicator and monitor stand products to Toshiba. During 1997 we
expanded our product offering to include port replicators for other computer
original equipment manufacturers, or OEMs, to meet the growing end user demand
for such products. Sales grew from $118,000 in 1995, to $5.7 million in 1996, to
$12.7 million in 1997 and $21.1 million in 1998. Sales in 1999 declined to $14.0
million primarily due to the phase out of the mechanical port replicator product
line. Net losses increased from $788,000 in 1995, to $2.1 million in 1996, to
$8.8 million in 1997, to $18.0 million in 1998 and decreased slightly to $16.5
million in 1999.
After reviewing our financial performance relative to the mechanical port
replicator product line, we determined that we needed to discontinue this
product line. The then available technology required each port replicator to be
unique to each portable computer. It typically took two months to design a unit
and an additional month to implement production and have product available in
the market. Lifecycles of portable computers vary, but they average
approximately nine months. With one-third of the lifecycle consumed in design
and production implementation, it was difficult to generate sufficient unit
volume over the remaining life of the portable computer to amortize the design
and tooling costs. In addition, once the portable computer was replaced in the
market by a new model, we faced the economic issues associated with the
distribution channel's return of unsold product. This resulted in obsolete
inventory, as the unit was model specific to the discontinued portable computer.
In December 1998 we booked reserves for inventory obsolescence, product
returns and tooling equipment impairment. An additional inventory reserve was
established in the amount of $4.5 million, unamortized tooling in the amount of
$275,000 was written off and an additional reserve for product returns was
recorded in the amount of $235,000.
The product line abandonment plan called for an immediate stop to
mechanical port replicator development. The engineering staff supporting this
activity was dismantled in the first quarter of 1999. The port replicator
product offering was reduced to the finished goods on hand and the build out of
existing component inventory. The final build was completed in July 1999, and we
continued to sell out of finished goods inventory throughout the year ended
December 31, 1999. During 1999 we booked an incremental $1.7 million of obsolete
inventory reserve to specifically reserve all remaining mechanical port
replicator inventory.
28
<PAGE> 31
The product line abandonment plan assumed a migration from the mechanical
port replicator product offering to a universal line of docking stations.
Universal docking stations are a natural application for the Split Bridge(TM)
technology. These docking stations will represent the first commercial
application of the technology. A line of products was designed around our Split
Bridge(TM) technology and existing USB technology. The universal nature of the
product line overcomes the issues that made the mechanical port replicator
financially unviable. Specifically, the products are not model specific to
portable computers and therefore provide leverage to the engineering and tooling
cost. In addition, the product is compatible with virtually all PCI-based
computers, which eliminates the inventory obsolescence issues, as the products
will be compatible with new portable computer models into the foreseeable
future.
We also evaluated our basic business strategy relative to the power
products and monitor stand product lines and determined that a fundamental
change was required. During the first half of 1999, we implemented a
manufacturing strategy that migrated in-house production to contract
manufacturers in Taiwan. This decision was made to take advantage of lower costs
offered by contract manufacturers and the ability to reduce in-house fixed
overhead expenses. Implementation of this strategy was completed in September
1999. The outsourcing of manufacturing allows us to concentrate our efforts on
technological development and application.
As a result of the product line abandonment plan and our outsourcing of
manufacturing, we experienced significant improvement in gross margins in the
third quarter of 1999. The new universal connectivity product line has been set
up to use our contract manufacturing partner in Malaysia and the cost of net
sales is predictable based upon committed price quotations.
We sell our products directly to OEMs and the retail channel, as well as
through distributors. We have also established a few select worldwide private
label accounts, most notably IBM, NEC and Targus. A substantial portion of our
sales are concentrated among a number of OEMs, including Compaq, Dell,
Hewlett-Packard, IBM, NEC, Targus and Toshiba. Direct sales to OEMs accounted
for approximately 60.8% of net sales in the twelve months ended December 31,
1999. Direct sales to OEMs have declined as a percentage of sales as we have
expanded our channels of distribution in the United States to include
distributors and resellers. We expect that we will continue to be dependent upon
a number of OEMs for a significant portion of our net sales in future periods,
although no OEM is presently obligated to purchase a specified amount of
products.
A portion of our sales to distributors and resellers is generally under
terms that provide for certain stock balancing return privileges and price
protection. Sales to this channel have increased and are expected to further
increase significantly. Accordingly, we make a provision for estimated sales
returns and other allowances related to those sales. Returns, which have been
netted in the sales presented herein, were approximately 6.6% of sales for 1999.
The major distributors are allowed to return up to 15.0% of their prior
quarter's purchases under the stock balancing programs, provided that they place
a new order for equal or greater dollar value of the stock balancing return.
Historically, the returns have been primarily mechanical port replicators that
are associated with portable computers that have been replaced in the market. It
is anticipated that the return activity will diminish significantly due to the
nature of the universal docking station and the reduced obsolescence issues.
We derive a significant portion of our sales outside the United States,
principally in France, Germany and the United Kingdom, to OEMs, retailers and a
limited number of independent distributors. On October 1, 1999 we sold Mobility
Electronics, L.L.C., our international sales subsidiary, which owned
subsidiaries in France, Germany and the United Kingdom, for nominal value to
Cameron Wilson, our former president. Mr. Wilson has
29
<PAGE> 32
resigned from Mobility to develop these former subsidiaries into an independent
representative agency that will market our products exclusively in Europe.
International sales accounted for approximately 17.9% of our net sales for the
twelve months ended December 31, 1999. We expect sales outside the United States
to continue to account for a large portion of our net sales. International sales
are generally denominated in the currency of our foreign customers. A decrease
in the value of foreign currencies relative to the U.S. dollar could result in a
significant decrease in U.S. dollar sales received by us for our international
sales. That risk may be increased as a result of the introduction in January
1999 of the new "Euro" currency in European countries that are part of the
European Monetary Union, or EMU. During 2002, all EMU countries are expected to
completely replace their national currencies with the Euro. However, we cannot
determine the impact this may have on our business because a significant amount
of uncertainty exists as to the effect the Euro will have on the marketplace and
because all of the final rules and regulations have not yet been defined and
finalized by the European Commission regarding the Euro currency. We intend to
develop and implement a plan to mitigate this risk once the final rules and
regulations are established. We recognized net foreign exchange gains of
approximately $17,368 in the twelve months ended December 31, 1999. We have not
engaged in hedging transactions with respect to our net foreign currency
exposure. To the extent that we implement hedging activities in the future with
respect to foreign currency transactions, there can be no assurance that we will
be successful in such hedging activities.
Various factors have in the past affected and may continue in the future to
affect our gross profits, including but not limited to, our product mix, lower
volume production and higher fixed costs for newly introduced product platforms
and technologies, market acceptance of newly introduced products and the
position of our products in their respective lifecycles. The initial stages of
our product introductions are generally characterized by lower volume production
which is accompanied by higher costs, especially for specific products which are
initially purchased in small volumes during the development lifecycle.
We were formed as Electronics Accessory Specialists International, L.L.C.
in May 1995 and converted to Electronics Accessory Specialists International,
Inc. by a merger effected in August 1996 in order to convert from a limited
liability company to a C-corporation. The Company purchased all the issued and
outstanding common stock of Mobility Electronics, L.L.C. in May 1996 for $500.
The purchase price approximated the fair value of the net assets acquired, and
thus no goodwill resulted from this acquisition. On July 29, 1997 we acquired
certain assets and assumed certain liabilities approximating $565,000 of Miram
International, Inc. ("Miram"), in exchange for 55,000 (giving effect to the
1-for-2 reverse stock split) shares of common stock valued at $425,000. The
purchase price approximated the fair value of the net assets acquired, and thus
no goodwill resulted from this acquisition. During May 1999 the Company issued
an additional 38,500 shares of common stock valued at $308,000 to settle and
eliminate any contingent future consideration. Each of these acquisitions was
accounted for using the purchase method of accounting. In October 1999 we sold
Mobility Electronics, L.L.C. for $10, resulting in a loss of approximately
$134,000.
We purchased Miram to gain access to and control of its in-process
universal docking technology. The fundamental technology was believed to be a
basis on which we could develop a commercially viable line of universal docking
products. The Miram acquisition was driven by the concern that we would have to
spend twelve to eighteen months in a development program to create a workable
technology. At the time of acquisition, the technology had not reached
technological feasibility and was at a point where software drivers had to be
written to support the numerous peripheral devices and compatibility issues had
to be resolved. Without the software, the basic technology was of little value.
We had engaged a third party appraiser to assess the value of the
technology. The appraisal was done as of the date of acquisition using the
income approach methodology.
30
<PAGE> 33
Based upon the determination that the in-process technology had not yet reached
technological feasibility and had no future alternative uses, we wrote off
$965,000 of in-process research and development in 1997.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data for the
periods indicated expressed as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
----------------------------------------
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
---------------------- ---------------
1997 1998 1999 1999 2000
----- ----- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales.............................. 104.6 111.7 84.2 86.6 72.1
----- ----- ------ ------ ------
Gross profit (loss)...................... (4.6) (11.7) 15.8 13.4 27.9
Operating expenses:
General and administrative............... 15.0 21.1 26.2 25.7 25.1
Research and development................. 23.1 20.7 24.2 33.2 19.0
Marketing and sales...................... 20.6 24.3 37.3 48.1 22.9
----- ----- ------ ------ ------
Total operating expenses......... 58.7 66.1 87.7 107.0 67.0
----- ----- ------ ------ ------
Loss from operations.................. (63.3) (77.8) (71.9) (93.7) (39.0)
Other expense:
Interest expense, net.................... 5.3 7.8 45.1 19.4 18.6
Other, net............................... .2 -- .9 -- --
----- ----- ------ ------ ------
Loss before provision for income
taxes............................... (68.8) (85.6) (118.0) (113.1) (57.6)
Provision for income taxes................. -- -- -- -- --
----- ----- ------ ------ ------
Net loss......................... (68.8)% (85.6)% (118.0)% (113.1)% (57.6)%
===== ===== ====== ====== ======
</TABLE>
Years Ended December 31, 1998 and 1997
Net sales. Net sales consist of sales of product net of returns and
allowances. We recognize sales at the time goods are shipped and the ownership
of the goods is transferred to the customer, and maintain a reserve for stock
rotation transactions with the distribution channel. Net sales increased 65.3%
to $21.1 million for the year ended December 31, 1998 from $12.7 million for the
year ended December 31, 1997. The increase in net sales for the year ended
December 31, 1998 was mainly due to the expansion of our product offering of
mechanical port replicators and docking stations.
Gross profit (loss). Our cost of sales consist primarily of costs
associated with components, outsourced manufacturing and in-house labor
associated with assembly, testing, packaging, shipping, quality assurance,
depreciation of equipment and indirect manufacturing costs. Cost of sales for
the year ended December 31, 1998 increased 76.5% to $23.5 million from $13.3
million for the year ended December 31, 1997. The increase was due to the
overall increase in sales volume and a product mix shift to mechanical port
replicators that had higher component costs and start up issues. An incremental
inventory reserve provision in the amount of $4.5 million was recorded during
the year ended December 31, 1998, reflective of the excess and obsolete
inventory and the write-off associated with our decision to discontinue the
mechanical port replicator product line. The short lifecycles of the mechanical
port replicators generated a significant obsolescence exposure for components
and finished goods which are returned under the stock balancing contract
provision with the major channel distributors. The gross profit (loss) percent
declined to (11.7)% of net sales for the year ended December 31, 1998 from
(4.6)% of net sales for the year ended December 31, 1997.
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<PAGE> 34
General and administrative. General and administrative costs consist of
salaries and other personnel related costs of our finance, human resources, MIS,
corporate development and other administrative personnel, professional fees, bad
debt, depreciation and amortization and related expenses. General and
administrative expenses increased 133.1% to $4.4 million for the year ended
December 31, 1998 from $1.9 million in the year ended December 31, 1997, which
represents 21.1% of net sales in 1998 and 15.0% of net sales in 1997. The cost
increase was attributed to staffing and infrastructure additions to support the
higher sales volume and anticipated launch of the universal connectivity
products.
Research and development. Research and development expenses generally
consist of salaries and other personnel related costs, facilities, outside
consulting, lab costs and travel related costs of our product development group.
Research and development expenses increased 47.8% to $4.4 million for the year
ended December 31, 1998 from $3.0 million in the year ended December 31, 1997,
which included purchased research and development of $965,000 in connection with
the Miram acquisition and which represents 20.7% of net sales in the year ended
1998 and 23.1% of net sales in the year ended 1997. The increased expense was
the result of increased activity on the Split Bridge(TM) technology program.
Marketing and sales. Marketing and sales costs generally consist of
salaries, commissions and other personnel related costs of our sales, marketing
and support personnel, advertising, public relations, promotions, printed media
and travel. Marketing and sales expense increased 95.5% to $5.1 million for the
year ended December 31, 1998 from $2.6 million in the year ended December 31,
1997. In 1998 we canceled our distribution agreements with Extended Systems and
developed the internal infrastructure to distribute our products directly
through the established U.S. distribution channels. We also increased sales and
marketing expenses in anticipation of the launch of the universal connectivity
station products based upon the Split Bridge(TM) technology. The delay in the
ASIC development resulted in a twelve month delay in the launch program.
Interest expense, net. Interest expense consists of interest on our bank
revolving lines of credit and promissory notes as well as our subordinated debt
and convertible debentures, partially offset by interest earned on our cash
balances and short-term investments. Interest expense increased 142.3% to $1.6
million for the year ended December 31, 1998 from $676,000 for the year ended
December 31, 1997. The increase was due to increases in the outstanding debt
balance and the amortization of deferred loan costs related to warrants issued
in conjunction with debt.
Income taxes. We have incurred losses from inception to date; therefore, no
provision for income taxes was required for the years ended December 31, 1998 or
1997.
Years Ended December 31, 1999 and 1998
Net sales. Net sales declined 33.8% to $14.0 million for the year ended
December 31, 1999 from $21.1 million for the year ended December 31, 1998. There
were several factors that contributed to the sales decline. We elected to
migrate out of the mechanical port replicator business. Sales in 1999 were
limited to existing products, as all new mechanical port replicator product
development was terminated in the first quarter of 1999. No new products were
introduced in 1999 into a market that changes approximately every nine months
due to constant change of portable computer models. We also terminated our
exclusive distribution arrangement with Extended Systems in July 1998, which
resulted in a charge to income of approximately $295,000, and initiated
relationships directly with the distribution channel. The volume sold through
the distribution channel increased monthly in the first quarter of 1999, after
relationships were established in the fourth quarter of 1998, but did not reach
the volumes previously sold through Extended Systems until the second quarter of
1999. In
32
<PAGE> 35
addition, we had changed from in-house manufacturing to contracted
manufacturing. Product availability was negatively impacted during the
implementation of this transition.
Gross profit (loss). Cost of sales for the year ended December 31, 1999
decreased 50.1% to $11.8 million from $23.5 million for the year ended December
31, 1998. The decrease in cost of sales was primarily the result of the volume
decrease in net sales. Gross profit (loss) increased to 16.4% of net sales for
the year ended December 31, 1999 from (11.7)% of net sales for the year ended
December 31, 1998. The gross profit for the period ended December 31, 1998 was
adversely affected by the inventory reserve provision of $4.5 million to reflect
obsolescence issues with the mechanical port replicator dock product line.
Additionally, during 1999 $5.3 million of inventory was scrapped and charged to
the inventory reserve. Although improved as a percentage of net sales, the gross
profit for the period ended December 31, 1999 was adversely affected by a
reduction in sales volume and the additional initial costs incurred as the shift
to contract manufacturing was implemented.
General and administrative. General and administrative costs decreased
17.9% to $3.7 million for the year ended December 31, 1999 from $4.4 million for
the year ended December 31, 1998. The cost decrease was attributed to staffing
cuts in the United States implemented due to the decline in sales volume. We
expect general and administrative costs to increase in the future, in particular
as we incur higher legal, accounting and other expenses associated with being a
public reporting company.
Research and development. Research and development expenses decreased to
$3.4 million for the year ended December 31, 1999 from $4.4 million for the year
ended December 31, 1998. Expenses increased significantly in the product
development efforts in connection with our Split Bridge(TM) technology and its
application to the universal docking product line. This increase was more than
offset by reductions in research and development expenses associated with
mechanical port replicator products. We expect engineering costs to increase in
the future as we continue to develop next generation chips in order to keep us
at the leading edge of universal docking and remote PCI bus applications.
Marketing and sales. Marketing and sales expenses increased 1.5% to $5.2
million for the year ended December 31, 1999 from $5.1 million for the year
ended December 31, 1998. The increase in costs was primarily due to the launch
costs and packaging development costs for the universal docking product line. We
also incurred incremental expenses to establish direct relationships with the
U.S. distribution channels. We expect marketing and sales costs to continue to
increase in the future as we continue to launch new product lines and as sales
increase.
Interest expense, net. We also issued convertible bridge loan debt that
included warrants. In connection with the offering of Bridge Promissory Notes in
March and July 1999, we recorded a charge for deferred loan expense of $4.7
million relative to such warrants. Based upon normal amortization or the
conversion of the underlying debt, we expensed $4.1 million related to these and
other warrants for the year ended December 31, 1999. The warrants are amortized
over the life of the loan and are recorded as interest expense upon conversion.
Net interest expense increased by 284.4% to $6.3 million for the year ended
December 31, 1999 from $1.6 million for the year ended December 31, 1998. The
increase was primarily due to the non-cash expense associated with amortization
of the bridge loan warrants which totaled $4.1 million in the year ended
December 31, 1999. We expect to pay down substantially all of our debt with the
proceeds of the offering.
Income taxes. We have incurred losses from inception to date; therefore, no
provision for income taxes was required for the years ended December 31, 1999 or
1998.
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Three Months Ended March 31, 2000 and 1999 (Unaudited)
Net sales. Net sales increased 55.0% to $5.0 million for the three months
ended March 31, 2000 from $3.2 million for the three months ended March 31,
1999. Several factors contributed to the sales growth. Sales of our core product
lines, power products and monitor stands increased 121.8% to $2.9 million for
the three months ended March 31, 2000 from $1.3 million for the three months
ended March 31, 1999. Sales from new products totaled $1.8 million in the three
months ended March 31, 2000. Sales of mechanical port replicators decreased
77.9% to $430,000 for the three months ended March 31, 2000 from $1.9 million
for the three months ended March 31, 1999. This decrease was anticipated based
upon our decision to abandon this product line.
Gross profit. Cost of sales increased 29.1% to $3.6 million for the three
months ended March 31, 2000 from $2.8 million for the three months ended March
31, 1999. The increase in cost of sales was primarily the result of the volume
increase in net sales. Gross profit increased to 27.9% of net sales for the
three months ended March 31, 2000 from 13.4% of net sales for the three months
ended March 31, 1999. The gross profit rate improvement had two primary drivers:
the shift of manufacturing to outsourced contract manufacturers and a different
mix of mechanical port replicators that have low gross margin percentages.
General and administrative. General and administrative costs increased
51.4% to $1.3 million for the three months ended March 31, 2000 from $829,000
for the three months ended March 31, 1999. The cost increase was primarily
attributed to the amortization of deferred compensation costs which totaled
$308,000 in the three month period ended March 31, 2000. We expect general and
administrative costs to increase in the future, in particular as we incur higher
legal, accounting and other expenses associated with being a public company.
Research and development. Research and development expenses decreased 11.4%
to $951,000 for the three months ended March 31, 2000 from $1.1 million for the
three months ended March 31, 1999. Expenses increased significantly in the
product development efforts in connection with our Split Bridge(TM) technology.
This increase was more than offset by reductions in the research and development
expenses associated with mechanical port replicator products which were
abandoned. We expect research and development costs to increase in the future as
we continue to develop next generation ASIC chips in order to keep us at the
leading edge of universal docking and remote PCI bus applications.
Marketing and sales. Marketing and sales expenses decreased 26.4% to $1.1
million for the three months ended March 31, 2000 from $1.6 million for the
three months ended March 31, 1999. The cost reductions were primarily in
salaries and personnel related costs as the marketing support was outsourced
resulting in a headcount reduction. We expect marketing and sales expenses to
increase in the future as we continue to launch new product lines and as sales
increase.
Interest expense, net. We issued convertible bridge loan debt that included
warrants. In connection with the offering of Bridge Promissory Notes in March
and July 1999, we recorded a charge for deferred loan expense of $710,000
relative to such warrants in the three months ended March 31, 2000. Net interest
expense increased 48.0% to $929,000 for the three months ended March 31, 2000
from $628,000 for the three months ended March 31, 1999. The increase was
primarily due to the non-cash expense associated with the amortization of the
bridge loan warrants. We expect to pay down substantially all of our debt with
the proceeds of the offering. See "Use of Proceeds."
Income taxes. We have incurred losses from inception to date; therefore, no
provision for income taxes was required for the three months ended March 31,
2000.
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have funded our operations primarily through debt and
equity financing, as the cost of our operating activities have exceeded our
sales. Our operating activities used cash of $8.9 million, $12.9 million, $11.5
million and $2.4 million for the years ended December 31, 1997, 1998 and 1999
and the three months ended March 31, 2000, respectively. The increased cash used
in operations was primarily due to our increased operating losses.
Our financing activities generated cash of $11.6 million, $14.1 million,
$14.6 million and $4.1 million for the years ended 1997, 1998 and 1999 and the
three months ended March 31, 2000, respectively. In March 1999 we issued an
aggregate of $3.5 million of 13% Bridge Promissory Notes, which were due and
payable in March 2000, and issued warrants for the purchase of 525,000 shares of
common stock. In June 1999 $2.3 million of the Bridge Promissory Notes were
converted to common stock at a price of $8.00 per share. In February 2000 $1.2
million of the outstanding Bridge Promissory Notes, plus accrued interest
thereon of approximately $160,000, were extended to March 31, 2001, and we
issued additional warrants for the purchase of 138,502 shares of common stock in
connection therewith. In June through August 1999 we completed a private
placement of $3.7 million and issued warrants for the purchase of 449,200 shares
of common stock at a price of $0.02 per share. The private placement was
structured as an offering of 13% Bridge Promissory Notes with an option to
immediately convert to common stock at a price of $8.00 per share. Bridge
Promissory Notes totaling $550,000 were issued, along with warrants to purchase
65,000 shares of common stock, and are due and payable in July 2000. We issued
394,063 shares of common stock, along with warrants to purchase 384,200 shares
of common stock, with a total value of approximately $3.2 million. In November
1998 through January 1999 we sold 827,209 shares of Series C preferred stock for
an aggregate of approximately $5 million in a private placement. In October 1999
through January 2000 we sold 1,231,450 shares of Series C preferred stock for an
aggregate of approximately $7.4 million in a private placement and issued
warrants to purchase 1,231,450 shares of common stock at $0.02 per share. In
March 2000 we sold 500,000 shares of Series D preferred stock for $5.0 million.
In April and May 1998 we sold 742,500 shares of common stock for an aggregate of
$8.5 million in a private placement, and in September 1997 we sold 1.25 million
shares of common stock for an aggregate of $10.0 million and issued warrants to
purchase an additional 312,500 shares of common stock in a private placement. In
late 1996 and early 1997 we issued an aggregate of approximately $2.2 million of
12% convertible debentures. In December 1998 approximately $2.1 million of the
convertible debentures were converted to common stock at a price of $7.73 per
share. We also issued an aggregate of $3.4 million of 13.5% Secured Promissory
Notes to Finova in June 1997 and March 1998 (the "Finova Notes"), which are due
and payable on June 23, 2002. In connection with the issuance of the Finova
Notes, we issued warrants to Finova which are currently exercisable for an
aggregate of 209,062 shares of common stock at an exercise price of $0.02 per
share (the "Finova Warrants"). The unconverted portion of the convertible
debentures and the Finova Notes will be repaid with part of the proceeds of this
offering.
Our investing activities used cash of $805,000, $903,000, $724,000 and
$120,000 for the years ended 1997, 1998 and 1999 and the three months ended
March 31, 2000, respectively. From inception through March 31, 2000, cash used
in investing activities was primarily used for capital purchases, including
tooling and capital leases.
Our cash and cash equivalents increased to $6.3 million at March 31, 2000,
compared to $4.8 million at December 31, 1999, $2.4 million at December 31, 1998
and $2.2 million at December 31, 1997. Our net working capital (deficit) at
those same dates was $4.2 million, $5.6 million, $(3.5 million) and $1.9
million, respectively. At March 31, 2000 our primary source of liquidity other
than our cash and cash equivalents were our foreign and domestic
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<PAGE> 38
lines of credit with Bank of America totaling $3.75 million. At March 31, 2000
the $3.0 million domestic line of credit and the $750,000 foreign line of credit
had outstanding balances of approximately $1.4 million and $0.5 million,
respectively, bearing interest at 2.5% plus the bank's corporate base rate
(11.5% at March 31, 2000), per annum, payable monthly. Advances under both lines
are limited to a percentage of eligible accounts receivable and inventory and
are secured by our accounts receivable, inventory and property and equipment.
The foreign line of credit is guaranteed by the U.S. Export-Import Bank, and
both lines of credit are also guaranteed by certain of our stockholders. See
"Certain Transactions." We were in violation of certain restrictive debt
covenants with respect to the lines of credit with Bank of America as of
December 31, 1998 and 1999 which were subsequently waived by the bank. Audited
December 31, 1998 financial statements were required to be provided to the bank
by March 31, 1999 under the domestic loan agreement and by April 30, 1999 under
the foreign loan agreement. The required financial statements were not provided
until February 4, 2000. We were also required to maintain a current ratio of
0.90:1 under the domestic loan agreement and 1.00:1 under the foreign loan
agreement. Our current ratio at December 31, 1998 was 0.72:1. At December 31,
1998 our foreign loan agreement required us to have tangible net worth of
$1,190,000 and a total liabilities to tangible net worth ratio of 3.40:1. Those
amounts, calculated with adjustments as provided by the loan agreement, were
$(319,684) and -40.00:1, respectively. Our 1999 payments of compensation to
officers exceeded those same payments for 1998 by $190,779, which was in
violation of the domestic loan agreement covenant requiring that total
compensation paid to officers for the year 1999 could not exceed the amount of
payments in 1998. Both the domestic and foreign loan agreements prohibited loans
to officers. However, we entered into a loan with Jeffrey Doss in 1999. See
"Certain Transactions." Also in 1999 we sold our European subsidiary without the
consent of the bank, which was in violation of covenants in both the domestic
and foreign loan agreements. The outstanding balances of both lines of credit
will be repaid with part of the proceeds of this offering. See "Use of
Proceeds."
At December 31, 1999 we had $32.0 million of federal net operating loss
carryforwards which expire at various dates. We anticipate that the sale of
common stock in this offering coupled with prior sales of common stock will
cause an annual limitation on the use of our net operating loss carryforwards
pursuant to the change in ownership provisions of Section 382 of the Internal
Revenue Code of 1986, as amended. This limitation is expected to have a material
effect on the timing of our ability to use the net operating loss carryforward
in the future. Additionally, our ability to use the net operating loss
carryforward is dependent upon our level of profitability, which cannot be
determined.
We believe that our existing sources of liquidity and net proceeds to us
from this offering will be sufficient to satisfy our expected working capital,
debt repayment requirements and capital expenditures needs for at least the next
twelve months.
YEAR 2000 READINESS
In preparation for the year 2000, we engaged in efforts to ensure that our
products and business systems properly recognize date-sensitive information in
the year 2000 and beyond. These efforts and their costs are described below. We
have not experienced any significant "year 2000 problems" with our products and
business systems and do not expect that we will do so in the future.
State of Readiness. In 1999 we hired outside consultants to audit and
assess the ability of our hardware and software systems to operate properly in
the year 2000 and beyond. We investigated the year 2000 readiness of our
software, hardware and other significant vendors by requiring them to complete
questionnaires and submit internal year 2000 plans to insure no disruption would
occur in our supply chain. To date we have not encountered any material year
2000 issues or significant disruptions to our operations.
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Cost of Assessment and Remediation. We have incurred direct costs of less
than $100,000 in assessing and remediating year 2000 problems, and we do not
expect to spend more than $100,000 in the aggregate to complete the process.
Risks. We could be exposed to a loss of revenues and our operating expenses
could increase if our products or business systems have year 2000 problems. Our
potential areas of exposure include products purchased from third parties,
information technology, including computers and software, and non-information
technology, including telephone systems and other equipment used internally. The
reasonably likely worst case scenario for year 2000 problems would be if a
significant defect exists in key hardware or software and if a solution for such
a problem were not immediately available.
Contingency Plan. Although we have not experienced any year 2000-related
problems affecting our internal systems, we have developed contingency plans to
be implemented if our efforts to identify and correct year 2000 problems are not
effective. Depending on the systems affected, these plans include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of back-up equipment and software or other
redundant systems; and
- increased work hours for our personnel or the hiring of additional
information technology staff.
The discussion of our efforts and expectations relating to year 2000
compliance are forward-looking statements. Our ability to achieve year 2000
compliance, and the level of incremental costs associated with compliance, could
be adversely affected by, among other things, the availability and cost of
external resources, third party suppliers' ability to modify proprietary
software and unanticipated problems not identified in our ongoing review.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Prototype and beta
site units are also expensed. Production tooling and fixtures are capitalized.
Tooling and fixturing costs are accumulated as a prepaid asset in the financial
statements until the associated products are launched into production. At that
time the accumulated costs are amortized to expense over the estimated useful
life of the tool or fixture or the estimated life of the product, whichever is
shorter.
MARKET RISK
To date we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We invest our cash in money market
funds, which are subject to minimal credit and market risk. We believe that the
market risks associated with these financial instruments are immaterial.
Our revolving lines of credit and certain other debt obligations are
subject to variable rate interest which could be adversely affected by increases
in rates, however, our intent is to pay off our debt from a portion of the
proceeds of this offering, which should minimize this interest rate risk.
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BUSINESS
THE COMPANY
Mobility Electronics designs, develops and markets connectivity and remote
peripheral component interface, or PCI bus, technology and products for the
computer industry and for a broad range of related microprocessor applications.
The PCI bus is the electrical transmission path linking the computer's central
processing unit with its memory and other peripheral devices, such as modems,
disk drives and local area networks, or LANs. Our proprietary Split Bridge(TM)
technology consists of a Split Bridge(TM) link, typically two customized
semiconductors, known as application-specific integrated circuits, or ASIC
chips, two connectors and a high-speed, bi-directional cable. Our technology for
the first time allows the primary PCI bus of any computer to be extended to a
remote location, up to 15 feet, with virtually no software requirements or
performance degradation, thereby enabling architectural designs of computer
systems and applications that previously were not feasible. Unlike traditional
communication protocols such as universal serial bus, or USB, firewire, or IEEE
1394, Ethernet and small computer systems interface, or SCSI, Split Bridge(TM)
technology offers a combination of:
- high performance, bi-directional gigabit speeds;
- plug and play ease of use with no unique software requirements;
- flexible architectural design choices;
- minimal special size, heat and power requirements; and
- cost effective pricing.
Since Split Bridge(TM) technology extends the PCI bus, it can also
accommodate any of the traditional communication protocols in the remote
location as if they are attached to the primary PCI bus.
Split Bridge(TM) technology is suitable for many applications, including
universal docking stations for portable and handheld computers, desktop
expansion modules, servers, keyboard-video-mouse, or KVM, switches, and
potentially routers, business machines, such as copiers and printers, test
equipment, modular computers, computer data storage, in-home remote computer
extension and other applications that could benefit from extending the PCI bus
or from enhanced communication among computers.
Our first major application for Split Bridge(TM) technology is the creation
of a new universal docking product category which provides portable computer
users with the ability to configure a flexible, high performance docking
solution that meets their individual needs, and more importantly, is compatible
with most makes and models of portable computers.
Our second major application is the provision of additional lower cost
expansion and back up capacity, remote access and enhanced communication among
computers in the server, desktop and KVM switch markets in partnership with
Cybex Computer Products Corporation.
Our Split Bridge(TM) technology won PC Week's "Best New Technology" award
at the fall 1999 COMDEX trade show, the world's largest information technology
event in the computer industry. Our Split Bridge(TM) technology and its
universal docking application was also runner-up for the "Technology Achievement
of the Year Award" at the Mobile Insights 2000 Conference which was held in
March 2000. Mobile Insights is a professional services company that focuses on
the mobile computing and data communications market. Additionally, our flagship
EasiDock(R) 3000 universal docking product was a runner-up for the Byte.com
"Best New Peripheral Award" at the fall 1999 COMDEX show.
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In addition to our Split Bridge(TM) technology products, we also design,
develop and market a range of connectivity and power products for portable
computers. Our current major customers include Buy.com, Compaq, CompUSA,
Gateway, Hewlett-Packard, Hitachi, IBM, Ingram Micro, Merisel, Microwarehouse,
Mitsubishi Electronics, NEC, Pinacor, Targus, Tech Data and Toshiba.
INDUSTRY BACKGROUND
PCI Computer Architecture
Today the most prevalent computer architecture, which is incorporated into
virtually all computer systems and in many related embedded processor
applications, uses the PCI bus. However, the PCI bus has a number of key
limitations, most notably a constraint on the number of lines, or circuits, and
loads that can be attached to it. Historically, these limitations have been
mitigated to some extent by attaching a bridge chip to the PCI bus, which in
turn permits a number of additional loads or peripherals to be attached to a
secondary PCI bus, which is also connected to the bridge chip. This procedure
has the major limitation of requiring the secondary PCI bus to be located on the
main PCI bus printed circuit board, or PCB, or attached physically by a
connector which enables extension of the secondary PCI bus to a maximum of
approximately three inches from the PCB. Consequently, the industry today faces
a number of physical and electrical constraints when designing a computer
system, and has been unable to move the secondary PCI bus more than a few inches
from the primary PCI bus. Additionally, traditional communication protocols,
which attempt to address these limitations, have numerous disadvantages since
they generally require a processor, extensive software and other related items.
Universal Docking
The portable computer market, which is a rapidly growing segment of the
personal computer industry, could benefit from solutions that address the
inherent limitations on PCI bus architecture. Demand in this market has been
fueled by advances in computer technology and the demand for computer mobility.
According to IDC, a leading industry source, the market for portable computers,
excluding handheld devices, is expected to grow at a compounded annual growth
rate of 13.8% from 15.5 million units in 1998 to approximately 29.6 million
units in 2003. In addition, IDC forecasts that the handheld market, which can
also benefit from Split Bridge(TM) technology, will grow at a compounded annual
growth rate of over 39.8% from 6.6 million units in 1998 to approximately 35.2
million units by 2003. Along with this unit growth, there is an increasing
dependence on portable computers. IDC reported that 65.3% of all notebook
computers sold in 1998 served as the user's primary computer.
Coupled with this trend toward portability, there has been an increased
demand for computers that are smaller and lighter but have processing
functionality similar to that of the traditional desktop computer. To meet this
demand, there has been an increased use of peripheral and external devices such
as hard drives, CD-ROM drives, networking connections, printers, tape backup
units and USB devices which enable the core laptop to be smaller and lighter. To
make these smaller and lighter computers more convenient to use in the office
and home, port replicators and docking stations have been developed to allow
users to connect to networks, peripheral devices and external power sources,
providing users with all of the features and functionality of a traditional
desktop computer. Port replicators are simple devices that provide users with a
cable management system for peripherals such as full-sized keyboards, power
cords, mice and monitors. Docking stations include basic port replicator
features, as well as more advanced capabilities such as networking, PC card
slots, storage devices and internal power supplies. Attaching and releasing a
portable computer from a port replicator or docking station is typically a
one-step procedure that takes seconds to complete compared to the burdensome
task of attaching or releasing each external device separately.
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When a portable computer is detached from a connectivity product, all external
devices connected to the connectivity product stay in place.
To date, there has not been a provider of a standardized, complete,
cost-effective, quick-to-market connectivity solution. Computer original
equipment manufacturers, or OEMs, have historically designed port replicators
and docking stations internally and subcontracted these products for assembly by
various vendors. Because computer OEMs primarily focus on providing portable
computers with the latest technological capabilities and strong price and
performance characteristics, their development of port replicators and docking
stations is a secondary focus and often lack state-of-the-art technology and
innovation. These OEM-developed port replicators and docking stations are
generally expensive, lack configuration flexibility and are often available only
well after the computer model is launched. Additionally, computer OEMs generally
retool each generation of portable computers and have not created standardized
port replicators and docking stations that are independent of manufacturer or
model.
Servers, Desktop Computers and KVM Switches
The server market, which is a rapidly growing segment of the computer
industry, is driven by the increasing demands of the Internet. According to
Dataquest, the server market is expected to grow at an annual compounded growth
rate of 15.1% from approximately 3.7 million units in 2000 to approximately 5.6
million units in 2003. The desktop PC market is expected to grow at an annual
compounded growth rate of 14.8% from approximately 110.5 million units in 2000
to approximately 167.2 million units in 2003.
Currently this growth is met by adding additional servers and PCs because
the main PCI bus can only support a fixed number of electrical loads.
Additionally, communication among servers, desktop computers and portable
computers is limited due to constraints of the PCI bus. These servers are often
operated with either an individual KVM switch, or with a dedicated local or, in
some cases, remote KVM switch. In all cases, due to current technical
limitations these servers operate independently from the desktop or portable
computer system, and are generally expensive to expand. Additionally, it is
often difficult or expensive to isolate related peripherals for expansion,
backup and security reasons.
THE MOBILITY SOLUTION
Split Bridge(TM) Technology
Our Split Bridge(TM) technology allows the primary PCI bus of any computer
to be extended to a remote location with virtually no software or performance
degradation. This technology enables architectural designs of computer systems
and applications that previously were not feasible. The implementation of such
new solutions can potentially include replacing current bridge chips with Split
Bridge(TM) chips, integrating Split Bridge(TM) technology into other chips and
technologies or using Split Bridge(TM) technology to create new products and
product categories in a variety of potential applications.
More specifically, Split Bridge(TM) technology eliminates many of the
physical and electrical constraints on a primary PCI computer bus and PCB, by
allowing one or more Split Bridge(TM) chips to be attached to the primary
computer PCI bus, with the mating Split Bridge(TM) chips installed at a remote
location along with the secondary PCI bus. As a result, all of the secondary PCI
bus loads and peripherals do not need to be attached to the primary PCI bus,
therefore eliminating their respective constraints on the primary PCI bus PCB.
Additionally, Split Bridge(TM) technology substantially reduces the physical
space requirements on the primary PCB by eliminating the need for multiple
traditional bridge chip connections and allows the connecting cable to be small
and flexible.
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Universal Docking
We believe that our universal Split Bridge(TM) docking station product line
will advance the state-of-the-art in docking capability by enabling the user to
configure a docking system which incorporates standard docking station
functionality with the user's preferred peripheral devices and PCI expansion
capability. Our universal Split Bridge(TM) docking station is capable of being
upgraded due to its modular design, providing the user with enhanced
flexibility. Our universal docking station is designed to work with most
standard notebook computers and PCI-based computing devices, regardless of the
manufacturer or model. Today Split Bridge(TM) technology allows the remote
universal docking station to be located up to 15 feet away from the computer.
These distances may be much greater as we complete the development of our next
generation ASIC chips.
Our universal docking station provides end users with the flexibility to
configure virtually any type of desired docking system, including the ability to
convert almost any PCI-based portable computer into a full desktop system. This
creates a basis for a connectivity standard for the portable computer industry
which would allow the user to replace the desktop computer with a fully
integrated, customizable mobile computing system. These universal docking
products also provide a range of docking options that were not previously
available for many of the existing installed base of portable computers. Our
solution further provides distributors, retailers and value-added resellers with
the ability to carry a limited number of universal and expandable docking
products, as opposed to many individual docking stations that only work with one
computer model. Thus, distributors, retailers and value-added resellers can
offer flexible choices to their customers and have products readily available
when new computer models are launched, while at the same time maintaining a
limited SKU count. Finally, these products offer OEMs the ability to create a
standardized docking solution for portable computer models, and to provide
creative docking solutions.
Servers, Desktop Computers and KVM Switches
Split Bridge(TM) technology enables servers, desktop computers,
input/output devices, peripherals and other technologies to be placed in
multiple remote locations. Thus, our Split Bridge(TM) technology will permit the
configuration of new ways to meet the server, desktop and portable computer
needs of corporate users. For example, by using our Split Bridge(TM) link, each
expansion slot of a server can be expanded to accommodate an additional four
loads. This allows the use of a physically smaller server without expansion
slots to be expanded as necessary with a Split Bridge(TM) connector, and allows
users to avoid adding additional servers until they require more processing
capacity. Alternatively, Split Bridge(TM) technology can be used to connect
servers, KVM switches, desktop PC computers and portable computers in various
locations within the office. This would allow a common connectivity station that
accesses any of the above computing devices with enhanced communication between
servers, desktop computers and portable computers at different times. With Split
Bridge(TM) technology, PCI peripherals can also be easily isolated for
expansion, backup and security reasons. Since servers are a rapidly growing
segment of the computer industry, and because they often already require
multiple bridges, the growth potential for Split Bridge(TM) technology in the
server segment could be quite large.
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TECHNOLOGY
The heart of most computing architecture today and into the foreseeable
future is the PCI bus or a derivative of PCI. A traditional PCI computer
architecture together with our Split Bridge(TM) chip alternative is shown in the
following figure:
[A diagram of a printed circuit board will appear here. This diagram will
illustrate the ability of the Mobility Split Bridge(TM) chip to interface with a
remote secondary PCI bus rather than a traditional secondary PCI bus.]
As shown above, the primary PCI bus is typically connected to a north
bridge chip, which in turn is connected to the central processing unit, or CPU,
memory and advanced graphic processor, or AGP, and various peripherals such as
audio peripherals, a card bus controller, LAN adapters, SCSI adapters, a bridge
chip and other devices. The bridge chip then connects to a secondary PCI bus
that can handle additional functions just like the primary PCI bus.
The key limitations of traditional technology and architecture are:
- the requirement that the primary and secondary PCI bus be on the same
PCB, or be physically attached via a connector which limits the distance
to approximately three inches; and
- the limited number of allowable lines and loads on the PCI bus.
Thus, substantial expansion requires many bridges on the PCB, creating a variety
of physical and loading constraints. These constraints are the reason bridges
were invented in the first place, but their limitation is that they take up a
load on the bus and the secondary bus is on the same PCB as the primary PCI bus.
Split Bridge(TM) chips are like any other bridge chip, except they are divided
into two halves separated by a high speed link. Consequentially, Split
Bridge(TM) technology eliminates the requirement of having the secondary PCI bus
on the
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primary PCI bus PCB. As a result, multiple secondary PCI buses can be created at
a number of remote locations. The first generation Split Bridge(TM) ASIC chips
have been designed for distances of up to 15 feet. We believe future generations
may extend this distance substantially.
The traditional and the Split Bridge(TM) approaches are shown in the figure
above. While a traditional bridge chip has many lines in and out of the chip,
typically over 60, on the same PCB, with Split Bridge(TM) technology, these
lines are reduced to four, sent over a high-speed link at gigabit speed and
returned to the full number of lines at the remote PCI bus location. An
additional benefit of this technology is that it is transparent to software. No
operating system or device drivers are required since we actually move the PCI
bus. Thus, Split Bridge(TM) technology can replace traditional bridge chips in
many applications.
Historically, the above limitations have been addressed by using a range of
communication protocols such as USB, IEEE 1394, Ethernet and SCSI. These
approaches are generally software intensive, require processors and are
applicable for only certain uses since they involve moving data as opposed to
extending the PCI bus. The following table illustrates the advantages of Split
Bridge(TM) architecture:
SPLIT BRIDGE(TM) TECHNOLOGY ADVANTAGES
<TABLE>
<CAPTION>
<S> <C>
- Gigabit speed - No storage requirements
- Bi-directional - Minimal size, heat and power requirement
- PCI superset (transfers bus, not data) - Highly upgradeable technology migration path
- Full PCI bus compatibility - Small, flexible cable
- No processor requirements - Cost effective
- No software requirement
</TABLE>
STRATEGY
Our objective is to be the leading provider of Split Bridge(TM) products
and technology. Key elements of our strategy include:
Leverage Technological Leadership. We intend to continue to accelerate
the development of Split Bridge(TM) technology and invest in research and
development of related advanced technologies.
Maximize Penetration in the Universal Docking Market. We intend to
capitalize on our current strategic position in the universal docking
market by continuing to introduce high-technology Split Bridge(TM) products
that suit the needs of a broad range of users. These products will provide
users with multiple configuration choices and will include a family of
universal docking products designed to provide customers with timely,
easy-to-use connectivity choices and solutions that meet individual
customer needs at optimal price and performance levels. One of our goals is
to eventually have Split Bridge(TM) technology installed on every PCI-based
computer motherboard for the purpose of providing a standard docking
solution. To achieve this goal, we have entered into a joint strategic
development agreement with Molex and Silicon Image to provide an integrated
Split Bridge(TM) and digital video, or DVI, universal, industry-wide
docking solution.
Establish Licensing and Strategic Partnerships. We intend to license
Split Bridge(TM) technology and enter into strategic partnerships in order
to fully realize the market potential of our Split Bridge(TM) technology.
These activities will specifically include exploiting the server, KVM
switch and desktop computer market with our strategic partner, Cybex, as
well as expanding current strategic partnerships and establishing a wide
variety of additional relationships.
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Expand Split Bridge(TM) Applications. We intend to pursue the further
commercialization of Split Bridge(TM) technology so that we are able to
expand our product offerings to include additional applications.
Broaden Distribution Capabilities Worldwide. We currently sell our
products worldwide through distributors, value-added resellers, retailers
and private label partners. We believe that broadening the distribution of
our products through strategic alliances with a variety of companies within
the computer industry is a critical element in establishing our technology
and products as industry standards.
Expand OEM Relationships. We intend to provide a broad range of OEM
products by partnering with OEMs globally in a manner that meets their
current and future connectivity and remote PCI bus requirements. We will
also work with both OEMs and other chip makers, such as DVI partners, card
bus controller partners, processor manufacturers and others, to design and
implement solutions that can meet the integrated requirements of OEMs.
Pursue Strategic Acquisitions. We intend to evaluate opportunities to
acquire complementary businesses, technologies and products that can
benefit from Split Bridge(TM) technology. We also plan to pursue
acquisitions that will enable us to offer products and features to better
serve our customers or to more fully realize the market potential of our
Split Bridge(TM) technology, to more rapidly develop and bring to market
advanced technology, to expand distribution capabilities and to penetrate
other targeted markets or geographic locations.
STRATEGIC RELATIONSHIPS
We have entered into a number of strategic relationships to develop and
enhance our existing and future technology, product lines and market
opportunities. We own all of the Split Bridge(TM) technology and do not pay
royalties to any of our strategic partners with which we have strategic
relationships. These relationships include the following:
Technology
Cybex Computer Products Corporation. Cybex is a leader in providing
KVM switches in the server market. In March 2000 we entered into a
strategic partnership agreement with Cybex to pursue the development of new
server, desktop and KVM switch systems, technology and products. As part of
this strategic partnership: (i) we entered into a private label agreement
with Cybex pursuant to which we have agreed to sell Cybex our universal
docking products; (ii) we have agreed with Cybex to cross-license certain
of our respective technologies for permitted applications; and (iii) Cybex
purchased $5 million of our Series D preferred stock. A major focus of our
strategic partnership with Cybex will be the potential substantial
extension of the distances over which Split Bridge(TM) technology can be
used.
LSI Logic Corporation. LSI is a major supplier of custom,
high-performance semiconductors and is focused on building complete systems
on a single chip. Pursuant to our strategic partnership, LSI has committed
to develop two next generation chips, at its expense, which will enhance
the universal docking solution by eliminating the need for an external
serialization/deserialization, or SerDes, chip. This development will
reduce our costs and provide us with a one-chip motherboard solution for
our OEM customers.
Molex Incorporated. Molex is a major developer and manufacturer of
connectors and cable. Together with Molex, we have developed our
proprietary connector and 1.25 gigabit bi-directional cable for use with
our Split Bridge(TM) and docking technology. Molex is our sole supplier of
certain system connectors for use with our universal docking
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products, has invested a significant amount of capital in this technology
and continues to support the development of our Split Bridge(TM)
technology. Further, Molex has agreed to support the development of a major
new integrated Split Bridge(TM)/DVI universal docking solution in
partnership with Silicon Image and us, as well as support Split Bridge(TM)
connector and cable requirements in other market areas. Molex is also one
of our investors.
Silicon Image, Inc. Silicon Image is a provider of DVI technology.
Silicon Image, Mobility and Molex have entered into a joint strategic
development agreement to develop and promote a new integrated Split
Bridge(TM)/DVI universal docking solution.
Philips Semiconductors. Philips, formerly VLSI Technology, Inc., is a
leading designer, developer and manufacturer of ASIC chips. Together with
Philips, we have developed our proprietary first generation digital ASIC
chip, which incorporates our Split Bridge(TM) technology. Until the next
generation chip is available from LSI, Philips is our sole supplier of
Split Bridge(TM) technology ASIC chips. Philips has invested a significant
amount of capital in developing this technology and is one of our
investors.
Contract Manufacturers
Solectron Corporation. Solectron is a leading, high quality contract
manufacturer for the electronics industry. Solectron currently manufactures
all of our Split Bridge(TM) universal docking stations in its Malaysian
facility.
EFA Corporation. EFA is a leading, high quality Taiwanese contract
manufacturer for the electronics industry. EFA currently manufactures all
of our USB docking stations.
Private Labels and Arrangements With Key OEMs
3Com Corporation. 3Com is a leader in the Ethernet networking market.
Pursuant to our strategic partnership, 3Com provides us with its latest
10/100 base T Ethernet ASIC chip, which we incorporate into a range of our
connectivity products. Additionally, 3Com will promote our products as part
of the 3Com Connected(TM) partner program.
Targus, Inc. Targus is the largest worldwide provider of carrying
cases for portable computers. Targus distributes a range of our products,
on a private label basis, primarily to major retail outlets and certain OEM
fulfillment outlets worldwide. Unlike traditional U.S. distributors, Targus
is responsible for all stock balancing, advertising and other retail
oriented discounts and issues with its customers.
Cybex Computer Products Corporation. Cybex is a leading provider of
KVM switches for the server market. Cybex has entered into a private label
agreement with us to purchase a range of our universal docking products,
potentially including the integration of a Cybex KVM switch. Cybex will be
responsible for the marketing of such products through its distribution
channels at its cost.
PRODUCTS
Standard Split Bridge(TM) Products
We have designed and internally tested the Split Bridge(TM) products
described below. In March 2000 we began shipping commercial quantities of the
EasiDock(R) 1000E and completed the commercialization of the Split Bridge(TM)
link which is now available for sale pursuant to the licensing agreement with
Cybex. We expect to begin shipping commercial production quantities of all of
the remaining products described below in the second or third quarter of 2000.
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Split Bridge(TM) Link. This product allows the extension of the primary PCI
bus. It includes two Split Bridge(TM) ASIC chips, two connectors and a 1.25
gigabit bi-directional, high-speed cable. The choice of connectors and chips
depends on the application. We will offer this Split Bridge(TM) link, which can
be incorporated into a customer's custom product, provided that the purchaser
executes a license or royalty arrangement with us similar to the Cybex
agreement.
Split Bridge(TM) Universal Docking Products. We will offer a variety of
Split Bridge(TM) products which enable the user to connect a portable computer
to a universal docking station in the home or office, thereby expanding the
connectivity and capability of the portable computer. These products will
include the following:
- EasiDock(R) 1000 and 1000E Series. This product series enables the user
to connect most portable computers to a universal docking station at a
speed of 1.25 gigabits, which is 100 times faster than USB. The
EasiDock(R) 1000 provides key port replicator functions consisting of a
mouse, keyboard, serial and full parallel port and a USB hub with four
USB ports. Most notably, each two USB ports will have a full 12 Megabits
per second, or Mbs, bandwidth, as opposed to a total of only 12 Mbs
across all ports for a USB only product. The second product in this
category, the EasiDock(R) 1000E, includes the features listed above plus
10/100 base T Ethernet networking. The suggested retail price for this
product is $249 without Ethernet and $299 with Ethernet.
- EasiDock(R) 2000 Series/Desktop Expansion Products. The 2000 Series
products will allow the user to add two USB ports, three additional PCI
expansion cards and four additional enhanced integrated drive
electronics, or EIDE, drive bays to most portable computers, desktop
computers or servers. Thus, the user will have the capability to provide
almost unlimited expansion capacity in any of these applications. The
suggested retail price for this product line is expected to be $399.
- EasiDock(R) 3000 and 3000E Series. The EasiDock(R) 3000 will offer all
the functionality of the EasiDock(R) 1000 Series, except it will have two
USB ports versus four, and also will offer expansion options including
two EIDE expansion bays, which can be used for applications such as CD
ROMs, storage, drives, two standard PCI expansion slots and two of our
proprietary expansion card slots. The EasiDock(R) 3000E includes 3Com
10/100 base T Ethernet networking. The suggested retail price for this
product is expected to be $499 without Ethernet and $549 with Ethernet.
Custom Split Bridge(TM) Products
We have historically worked closely with OEMs to provide a wide variety of
unique products and programs that use traditional connectivity technology. We
are currently marketing these solutions to a number of OEMs. These products
include or will include:
Standard Card Bus Universal Dock Offering. These products will provide OEMs
with a docking solution for products that have no docking connector or no OEM
dock offering as well as a complementary dock offering for certain of these
products. Such products include all of the previously described Split Bridge(TM)
products, which may be privately labeled at an OEM's request.
Universal Expansion Modules. We will offer OEMs an expansion module option
that interfaces with a standard, low-end port replicator OEM product. This
module will provide OEMs with the opportunity to continue with a low cost,
standard port replicator that provides video, USB and other port replication
functions, while also offering a PCI expansion card and enhanced integrated
drive electronic drive bay capability. This solution will eliminate the need for
OEMs to design and develop an expensive high end docking station with such
expansion capability, while offering the customer such option.
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Universal Desktop Expansion Module. These products will provide an
expansion module for desktop computers, providing PCI and drive bay expansion
capabilities.
Chip On Board Programs. We will offer OEMs the possibility of installing
one of our ASIC chips on the computer motherboard, either independently or in
combination with DVI or other technologies. Also, OEMs or other chip technology
companies will be able to integrate our technology into other main motherboard
chips. These programs will generally take much longer to implement due to
computer design cycles.
USB Products
We currently offer two universal USB docking stations which provide the
portable computer user with basic connectivity in the home or office. These
products use standard industry technology, and thus operate at 12 Mbs, and
provide five USB ports as well as a PS/2 mouse, PS/2 keyboard, serial port and
printer port. The second of these products provides the above mentioned features
plus 10 base T Ethernet networking.
USB is not currently capable of handling higher performance items such as
video, 100 base T networking and PCI and EIDE drive bay expansion capability. It
does, however, provide a lower cost product that is well suited for the consumer
and small business market and other niche applications. The suggested retail
price for this product is currently $149 without Ethernet and $199 with
Ethernet. Our EasiDock(R) USB 200 was selected as one of the nominees in the
peripheral category for the "2000 Mobility Awards" that were given by Mobile
Insights in March 2000.
Other Products
We also offer a range of in-car/in-air chargers and monitor stands. The
in-car/in-air chargers allow the user to power and charge a portable computer in
a car or in an airplane that supports the Empower standard, the airline
industry's on-board computer product power standard.
PRODUCTS UNDER DEVELOPMENT
We are currently in various stages of developing or planning the following
products:
Split Bridge(TM) Products
Next Generation EasiDock(R) 1000 and 1000E Series. We intend to expand
the current EasiDock(R) 1000 and 1000E series with a product series that is
expected to include all the current EasiDock(R) 1000 and 1000E features
plus the addition of video and a mini PCI card slot for user expansion. We
also plan to include additional USB capacity to provide for a full 12 Mbs
on each USB port as opposed to 12 Mbs for each two USB ports. Subsequently,
some of the USB ports will be replaced with USB 2.0 ports when USB 2.0
becomes available.
Next Generation EasiDock(R) 3000 Series. We intend to expand the
current EasiDock(R) 3000 series with the next generation EasiDock(R) 3000
Series when USB 2.0 becomes widely available. We plan to include all the
current EasiDock(R) 3000 features, plus integrated USB 2.0 with two full
bandwidth USB ports and a newly integrated docking chip.
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ASIC Chips. We intend to offer several new ASIC chips. These
developments will help us stay at the leading edge of universal docking and
remote PCI bus applications. We intend to develop and market the following
chips:
- Chip On Board. We are currently working with LSI to combine our Split
Bridge(TM) technology with LSI's SerDes technology to develop a
single chip OEM solution for use on OEM motherboards and for
non-docking applications. This product will be in a small package and
will not have any of the docking functions, thus providing OEMs with
a low-cost, small, single chip solution.
- Integrated Dock Chip. We are also currently working with LSI to
combine our Split Bridge(TM) technology with LSI's SerDes technology
to develop a single docking chip for use in our range of docking
products. We expect that this product will allow us to replace the
need for an external SerDes, reducing cost and circuit board size
requirements.
- Dock on a Chip. We intend to develop a next generation chip which
integrates Split Bridge(TM) and SerDes technology into other docking
functions such as USB 2.0, networking, video, EIDE and other
functions. The specific items that will be included will be
determined based on the best information available at the time the
development program is initiated. We expect that this program will
substantially reduce the cost of all our Split Bridge(TM) docking
products and reduce space requirements for the docking circuit board.
- Other Chips. We are currently evaluating the potential of integrating
Split Bridge(TM) technology into other intellectual property blocks,
such as digital video, and expect to develop several of these
options.
All of the chips described above are intended to be used throughout our docking
product family, as well as in other applications, generally increasing
capability and reducing cost.
Next Generation EasiDock(R) USB Product. This product is planned for
introduction when USB 2.0 becomes available and is intended to replace the
current EasiDock(R) USB series. We plan to include all the EasiDock(R) USB
features, plus the addition of a full parallel port, a 100 base T networking
option, video and other unique features. Based on the acceptance of USB
peripherals by the time this product is released, legacy port replication ports
may or may not be included.
Retractable Cord Power Product. This product is a unique version of our
current in-car/in-air charger product line that can be used across all power
products. The Retractable Cord Power Product is expected to include an
innovative and unique mechanical feature, which will allow the user to store the
input and output cables of the user's adapter via a retractable cord system. It
is intended to be used in both model specific, which is 2 wire output, or
universal, which is 4 wire output, in-car/in-air charger configurations. Through
the use of creative industrial design, we believe this product will offer the
customer the smallest, self-contained in-car/in-air power adapter on the market.
This product would complement our current line of power products.
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CUSTOMERS
Our major customers include:
<TABLE>
<CAPTION>
OEM CUSTOMERS DISTRIBUTION CHANNEL CUSTOMERS
-------------------------- -------------------------------------------------------
<S> <C> <C>
- Acer - Buy.com* - Merisel
- Compaq - CDW* - Microwarehouse*
- Gateway - Comark* - Mobile Planet*
- Hewlett-Packard - CompUSA* - Pinacor
- Hitachi - Computers for Sure* - Propeller Portable
- IBM - Dell Computer*
- Mitsubishi - Ingram Micro - Tech Data
- NEC - Insight* - Value America*
- Toshiba
- Targus
</TABLE>
---------------
* these customers purchase from us through distributors
As a group, the OEMs and distributors listed in the chart above accounted
for 53.0% and 24.0%, respectively, of sales for the year ended December 31,
1999. For the three months ended March 31, 2000 the OEMs accounted for 57.7% of
sales and distributors accounted for 31.2% of sales. Targus accounted for 26.6%
of our total sales for the year ended December 31, 1999, and 29.4% for the three
months ended March 31, 2000. Targus distributes a range of our products, on a
private label basis, primarily to major retail outlets and certain OEM
fulfillment outlets worldwide. Our distributors sell a wide range of our
products to value-added resellers, system integrators, catalog houses, major
retail outlets and certain OEM fulfillment outlets worldwide. Our largest
distributor, Tech Data, accounted for 22.2% of net sales for the three months
ended March 31, 2000. IBM, who buys brand labeled monitor stands and USB docking
stations, accounted for 11.1% of net sales for the three months ended March 31,
2000.
SALES, MARKETING AND DISTRIBUTION
Sales. We have a dedicated, senior level OEM sales person who, along with
top management, focuses on developing and expanding relationships with top tier
computer OEMs on a worldwide basis. We are pursuing the sale of our standard
products, whether Mobility branded or private labeled, and the sale of custom
products and chips on board with all OEMs on a worldwide basis.
In North America, we use an internal sales organization and a sales
representative organization to penetrate the traditional two-tier distribution
channel, including Ingram Micro, Merisel, Pinacor and Tech Data. We leverage
major catalog houses such as CDW and OEM catalog programs such as Dell, top
retailers such as CompUSA and a broad range of value-added resellers and dealers
such as Insight and Propeller Portable Computers. We also work with major
corporations and key accounts as part of our strategic efforts.
We also plan to aggressively pursue markets outside North America by
establishing strategic sales representatives and distribution or private label
arrangements in each significant geographic region. We plan to execute bundling
programs with major OEMs, drive manufacturers, selected related vendors and
synergistic suppliers to our market. We have also established an e-commerce
capability and marketing program, which will include in the future build to
order capability. Additionally, we plan to use website links to help maintain
relationships with related parties and OEMs, and will establish a "preferred
vendor" program for products that integrate into our universal docking products.
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In Europe, we distribute our products through a sales representative
arrangement through a company operated by several of our former employees, which
primarily focuses on the marketing and sales of our products.
We also have entered into an agreement with Targus whereby Targus
distributes a range of our products in its worldwide distribution channels,
primarily to major retail outlets and certain OEM fulfillment outlets. This
agreement provides that we are the exclusive supplier to Targus for some of our
products, and that we will develop certain products for Targus on an exclusive
basis. Targus markets our products to its retail customers, which include Best
Buy Co., Circuit City Stores, CompUSA, Computer City, OfficeMax and Staples.
Marketing. We intend to implement a variety of marketing activities in 2000
to aggressively market our Split Bridge(TM) and our new range of other universal
docking products. Such activities include participation in major user groups and
trade shows, key OEM and distribution catalogs, distribution promotions,
value-added reseller and information technology manager advertising, on-line
advertising and banner ads, direct mail and telemarketing and bundle
advertisements with OEMs and related product partners. In addition, we intend to
implement a strong public relations program to continually educate the market
about us, our Split Bridge(TM) technology and our products, with a major
emphasis on timely product and news releases, speaking opportunities and feature
stories. Attending and speaking at key trade shows, such as PC Expo, Mobile
Insights and COMDEX, will provide a forum to provide additional market education
about us, our Split Bridge(TM) technology and our products. We also intend to
leverage our web site as a major marketing and direct sales mechanism.
MANUFACTURING
The proprietary components of our Split Bridge(TM) technology are
manufactured by our strategic partners. Philips supplies us with our Split
Bridge(TM) technology chips, and Molex supplies us with our high-speed cable and
connectors. In the future LSI will supply us with our next generation chips. Our
USB product line, power products and monitor stands are supplied by contract
manufacturers in Taiwan. We have selected Solectron as our primary contract
manufacturing source for the Split Bridge(TM)universal docking product line.
Solectron has begun commercial production of the EasiDock(R) 1000E and has
sourced components and built prototype units and customer evaluation units on
production lines that have been established for production of the EasiDock(R)
3000 Series, the EasiDock(R) 2000 Series and the EasiDock(R) 1000 Series
products.
In-house manufacturing activity has primarily been reduced to packaging and
fulfillment activity. Some product is shipped in bulk quantities which are not
packaged for delivery to our customers. These products are packaged in the
appropriate box with the corresponding operations manual and other product
documentation. We currently assemble one mechanical port replicator under a
contract with NEC. The volume levels on this product are too small to outsource
economically. We will continue to build this product in-house for the
foreseeable future.
COMPETITION
Competition for our Split Bridge(TM) technology primarily comes from
traditional communication protocols, such as USB, IEEE 1394, Ethernet and SCSI.
These protocols are generally well established, particularly in certain
applications, and thus will provide competition for our Split Bridge(TM)
technology depending upon the application.
The market for our universal docking products is relatively new and
emerging and we presently have few direct competitors. However, we expect that
the markets for our products will become increasingly competitive. The market
for computer products in general is intensely competitive, subject to rapid
change and sensitive to new product introductions or
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enhancements and marketing efforts by industry participants. The principal
competitive factors affecting the markets for our product offerings include
corporate and product reputation, innovation with frequent product enhancement,
breadth of integrated product line, product design, functionality and features,
product quality, performance, ease-of-use, support and price. Although we
believe that our products compete favorably with respect to such factors, there
can be no assurance that we can maintain our competitive position against
current or potential competitors, especially those with greater financial,
marketing, service, support, technical or other competitive resources.
We currently compete primarily with the internal design efforts of OEMs.
These OEMs, as well as a number of our potential non-OEM competitors, have
larger technical staffs, more established and larger marketing and sales
organizations and significantly greater financial resources than we have. We
believe that we have a proprietary position with respect to our Split Bridge(TM)
and universal docking technology, which could pose a competitive barrier for
companies seeking to develop similar products or sell competing products in our
markets.
PROPRIETARY RIGHTS
Our success and ability to compete is dependent in part upon proprietary
technology. We rely primarily on a combination of patent protection, copyright
and trademark laws, trade secrets, nondisclosure agreements and technical
measures to protect our proprietary rights. Mobility has one key Split
Bridge(TM) patent that was issued on May 30, 2000 and another key Split
Bridge(TM) patent pending. The issued patent covers Split Bridge(TM) technology
in general, and the other pending patent covers the application of Split
Bridge(TM) technology in universal docking. Notice of Allowance was mailed
February 25, 2000 by the U.S. Patent and Trademark Office allowing all claims
under the pending U.S. patent application. The issue fee has been duly paid and
the pending patent will issue shortly. Eighty-one claims were allowed in the
issued patent and 64 claims were allowed in the pending patent application.
Two international patent applications were also filed for the Split
Bridge(TM) patents under the Patent Cooperation Treaty designating all member
countries and thereby preserving the right to file patent applications in those
member countries. Multiple additional Split Bridge(TM) patents are planned to be
filed before the U.S. Patent and Trademark Office and cover, or will cover, a
host of other related follow-on items. Additionally, we have two issued patents
and fifteen U.S. patent applications pending covering other related items.
We typically enter into confidentiality agreements with our employees,
distributors, customers and potential customers, and limit access to, and
distribution of, our product design documentation and other proprietary
information. Moreover, we enter into noncompetition agreements with employees,
whereby the employees are prohibited from working for and sharing confidential
information with our competitors for a period of two years after termination of
their employment. Additionally, we believe that, due to the rapid pace of
innovation within the computer industry, the following factors also represent
protection for our technology:
- technological and creative skill of personnel;
- knowledge and experience of management;
- name recognition;
- maintenance and support of products;
- the ability to develop, enhance, market and acquire products and
services; and
- the establishment of strategic relationships in the industry.
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RESEARCH AND DEVELOPMENT
Our future success depends on our ability to enhance existing products and
develop new products that incorporate the latest technological developments. We
work with customers and prospects, as well as partners and industry standards
organizations, to identify and implement new solutions that meet the current and
future needs of our customers. Whenever possible, our products are designed to
meet and drive industry standards to ensure interoperability. We intend to
continue to support industry standards integral to our product strategy as well
as drive new initiatives relating to remote bus technology.
Our research and development efforts will focus on enhancing our current
technology for use in docking as well as other broad applications. These
enhancements will center on issues of speeds, distance, cost and integration. We
intend to develop internal and external resources to more fully integrate chip
design capabilities.
Currently, our Split Bridge(TM) technology group consists of 17 people who
are responsible for architecture, hardware, software and quality. This group is
active in industry committees, special interest groups and other activities that
provide industry knowledge and leadership. Additionally, we have substantial
resources dedicated to development efforts by our strategic partners, most
notably, Molex, LSI, Philips and Silicon Image.
Amounts spent on research and development for the years ended December 31,
1997, 1998 and 1999 and the three months ended March 31, 2000 were $2.0 million,
$4.4 million, $3.4 million and $951,000, respectively.
EMPLOYEES
As of March 31, 2000 we had 48 full-time employees, all of whom are located
in the United States, including 9 employed in operations, 18 in engineering, 7
in sales and marketing and 14 in administration. We engage temporary employees
from time to time to augment our full time employees, generally in operations.
None of our employees are covered by a collective bargaining agreement. We
believe we have good relationships with our employees.
FACILITIES
Our executive offices and operations are located in Scottsdale, Arizona.
This facility consists of approximately 38,712 square feet of leased space
pursuant to a lease for which the current term expires on January 31, 2002.
Additionally, we lease an office in Scottsdale, Arizona, which was our former
executive office. This office has been sublet to a tenant for the balance of the
original lease term at a rate resulting in no net expense. We believe that our
facility is suitable and adequate for our current business activities for the
remainder of the term of our lease.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The names and ages of our executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Charles R. Mollo....................... 49 President, Chief Executive Officer and
Chairman of the Board
Jeffrey S. Doss........................ 38 Executive Vice President and Director
Richard W. Winterich................... 45 Vice President and Chief Financial
Officer
Donald W. Johnson...................... 53 Executive Vice President of Worldwide
Sales, Marketing and Operations
Scott Smith............................ 40 Vice President
Robert P. Dilworth(1).................. 58 Director
William O. Hunt(1)..................... 66 Director
Jeffrey R. Harris(2)................... 51 Director
Kenneth A. Steel, Jr.(2)............... 42 Director
</TABLE>
------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Charles R. Mollo is one of our founders and has been our Chief Executive
Officer and Chairman of our Board of Directors since our formation in May 1995,
and our President since July 1999, having previously served as our President
between March 1997 and June 1998. From September 1992 to May 1995 Mr. Mollo was
the director of the Wireless Telephone Products Division of Andrew Corporation,
a communications equipment services and systems company. From September 1986 to
July 1992 Mr. Mollo was the Vice President of Corporate Development of Alliance
Telecommunications Corporation, a wireless telecommunications company. Between
1980 and 1986 Mr. Mollo was a Vice President of Meadows Resources, Inc., where
he managed a venture capital and investment portfolio of approximately $150
million. In the past he has served on the boards of a number of companies,
including Alliance Telecommunications Corporation and he currently serves on the
board of an internet startup company, SuperGroups.com. Mr. Mollo has a B.S.E.E.
from Manhattan College, an M.S.E.E. from Newark College of Engineering and an
M.B.A. from the University of New Mexico.
Jeffrey S. Doss is one of our founders, served as our President from our
formation until March 1997 and has served as an Executive Vice
President -- Product Strategy & Development since that time. Mr. Doss has served
as a director since May 1995. From May 1994 to December 1999 Mr. Doss was the
owner of Doss Enterprises, which provided consulting services to various
companies in the consumer electronics industry. From March 1994 through May 1995
Mr. Doss served as a consultant for cellular accessories for Andrew Corporation,
a communications equipment company. From January 1991 to April 1994 Mr. Doss
held various positions, including Vice President of Operations, President and
Chief Executive Officer of Unitech Industries, Inc., a manufacturer of cellular
telephone accessories.
Richard W. Winterich has served as Vice President and our Chief Financial
Officer since January 1999. From 1993 to December 1998 Mr. Winterich served in
various capacities for Harbour Group, an industrial conglomerate. These
capacities included serving as Executive Vice President/General Manager from
1995 to December 1998 and as Chief Financial Officer from 1995 to 1997 of AEC,
Inc., a supplier of auxiliary capital equipment, and as Chief Financial Officer
from 1993 to 1995 of Acadia Corporation, a rubber molding company. From 1991 to
1993 Mr. Winterich served in various capacities, including Director of Finance,
with
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<PAGE> 56
Square D Corporation, in its automation and control business sector. From 1984
to 1991 Mr. Winterich served in various capacities with Burr-Brown Corporation,
a manufacturer of electronic components. Prior to his private career, Mr.
Winterich spent five years in public accounting with predecessor firms of Ernst
and Young. Mr. Winterich is a licensed Certified Public Accountant in the State
of Ohio and received a B.A. from Baldwin-Wallace College.
Donald W. Johnson has served as our Executive Vice President of Worldwide
Sales, Marketing and Operations since April 2000. From 1998 until March 2000 Mr.
Johnson served in various capacities for UNISYS Corporation, most recently as
Vice President and General Manager of the enterprise server business. From 1980
to 1998 Mr. Johnson served in various capacities for IBM, including Director of
Servers and Commercial Systems, Product Marketing, Brand Management and Product
Development in IBM's PC business, and worldwide sales manager and product
manager. Mr. Johnson has a B.S. Degree in Business Administration from the
University of California at Berkeley.
Scott Smith has been employed by us since September 1996 and has served in
the capacity of program manager, manager of the power product and monitor stand
business unit and since July 1999 has served as Vice President of Operations.
Prior to that time, he was an owner and partner of an industrial design
consultancy, Design Form, Inc. He has an undergraduate degree in Industrial
Design from Arizona State University.
Robert P. Dilworth has served as a director since May 1999. Prior to the
acquisition of VLSI by Royal Philips Electronics in June 1999, Mr. Dilworth was
a Senior Vice President of the Computer & Consumer Products Group at VLSI
Technologies, Inc. and also a member of VLSI's board of directors. Mr. Dilworth
was responsible for VLSI's businesses in Advanced Computing, ASIC's Consumer
Digital Entertainment and Local/Wide Area Networking. Mr. Dilworth also serves
as a director and is chairman of the board at Metricom. He also served as
Metricom's President and as Chief Executive Officer. Prior to joining Metricom,
Mr. Dilworth was President of Zenith Electronics Corp. He has served as
President of Morrow Designs, a microcomputer manufacturer, and Vice President of
Finance for Varian Data Machines. Mr. Dilworth is also a director of eOn
Communications Corporation and Graphon, Inc.
William O. Hunt has served as director since December 1999. Mr. Hunt is
currently chairman of the board of Intellicall, Inc., a diversified
telecommunications company providing products and services to pay telephone
networks on a worldwide basis. Mr. Hunt is also currently chairman of the board
of Internet America, Inc., an internet service provider. From 1992 to 1998 Mr.
Hunt served as Chief Executive Officer of Intellicall, Inc. From 1990 to 1996
Mr. Hunt served as chairman or vice chairman of the board and director of Hogan
Systems, Inc., a designer of integrated online application software products for
financial institutions. Prior to that time, Mr. Hunt served as chairman of the
board, Chief Executive Officer and President of Alliance Telecommunications
Corporation. He is also a director of American Homestar Corporation, Andrew
Corporation and Digital Convergence.com.
Jeffrey R. Harris has been a director since September 1995. Mr. Harris has
been employed by Public Service Company of New Mexico, a public utility company,
since 1972, and currently serves as Director, International Business
Development. Mr. Harris is President of New Vistas Investment Corporation, a
real estate development and management company, and New Horizons Enterprises,
Inc., a real estate investment and management company, and was a founder of the
Bright Beginnings Child Development Centers, a child care chain in New Mexico.
Kenneth A. Steel, Jr. has served as a director since September 1997. Since
October 1999 Mr. Steel has been President and Chief Operating Officer of
COVALEX.com, a business-to-business, e-commerce web company servicing the
chemical process industry. Mr. Steel has been President of San Francisco Foods,
Inc., a manufacturer of frozen pizza, calzones and
54
<PAGE> 57
foccacia bread, since 1998. Mr. Steel has been the Executive Vice President of
K.A. Steel Chemicals, Inc., a chemical manufacturing and distribution company,
since 1978. Mr. Steel also served as Chief Executive Officer of Monterey Pasta
Company, a manufacturer of refrigerated pastas and sauces, from October 1996 to
August 1997. Since 1995 Mr. Steel has been a director of Organic Food Products,
Inc.
BOARD OF DIRECTORS
Our board of directors has seven authorized directors and currently
consists of six members. Each director holds office until his or her term
expires, he or she resigns, is removed or dies or until his or her successor is
duly elected and qualified. Our bylaws provide for a classified board of
directors. In accordance with the terms of our bylaws, our board is divided into
three classes whose terms expire at different times. The three classes are
comprised of the following directors:
- Class I consists of Mr. Steel, who will serve until the annual meeting of
stockholders to be held in 2001;
- Class II consists of Messrs. Dilworth, Harris and Hunt, who will serve
until the annual meeting of stockholders to be held in 2002; and
- Class III consists of Messrs. Doss and Mollo, who will serve until the
annual meeting of stockholders to be held in 2003.
At each annual meeting of stockholders beginning with the 2001 annual
meeting, the successors to directors whose terms will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election and until their successors have been duly
elected and qualified any additional directorships resulting from an increase in
the number of directors will be distributed among the three classes so that, as
nearly as possible, each class will consist of an equal number of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The compensation committee of the board of directors consists of Messrs.
Dilworth and Hunt. The compensation committee makes recommendations to the board
concerning salaries and incentive compensation for our executive officers,
directors, employees and consultants and administers our 1996 Plan.
The audit committee of the board of directors consists of Messrs. Harris
and Steel. The audit committee aids management in the establishment and
supervision of our financial controls, evaluates the scope of the annual audit,
reviews audit results, makes recommendations to our board of directors regarding
the selection of independent auditors, consults with management and our
independent auditors prior to the presentation of financial statements to
stockholders and, as appropriate, initiates inquiries into aspects of our
financial affairs.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Neither Messrs. Dilworth or Hunt, who are members of our compensation
committee, has at any time been one of our officers or employees. None of our
executive officers serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of our board of directors or compensation committee. For a description of
the transactions between us and any member of the compensation committee and
entities affiliated with any compensation committee member, see "Certain
Transactions."
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<PAGE> 58
DIRECTOR COMPENSATION
Each director who is also our employee does not receive additional
compensation for serving as a director. Each non-employee director, upon initial
election to the board, will receive a non-qualified option to purchase 10,000
shares of common stock, which will be fully exercisable on the one-year
anniversary of the date of grant (if that director is then serving as a
director). In addition, each non-employee director will receive a non-qualified
option to purchase 15,000 shares of common stock at the annual meeting of our
stockholders following the initial year of service as a director, and every
fourth year thereafter, which option will vest 25% annually, commencing on the
date of grant of the option with vesting occurring only on continuous service.
At each annual meeting of our directors, each non-employee director who is
elected to serve on either the audit committee or the compensation committee
will receive an option to purchase 2,500 shares of common stock, which option
shall be fully exercisable at the end of the one-year term of that office (with
vesting occurring only on continuous service). Directors may also be reimbursed
for certain expenses in connection with attendance at board and committee
meetings.
We have entered into consulting agreements with Messrs. Hunt and Dilworth.
The agreement with Mr. Dilworth expires on May 21, 2001. The agreement with Mr.
Hunt expires on December 8, 2001. The agreements may be terminated by either
party to the agreement at any time as long as 30 days written notice is given to
the other party to the agreement. As compensation for entering these agreements,
we granted each of Messrs. Hunt and Dilworth the option to purchase 35,000
shares of our common stock under our 1996 Plan. Mr. Hunt's options were granted
at an exercise price of $4.00 per share. Mr. Dilworth's options were granted at
an exercise price of $8.00 per share. Mr. Dilworth's options expire on the
earlier of the date his consulting agreement is terminated or May 21, 2003. Mr.
Hunt's options expire on the earlier of the date his consulting agreement is
terminated or December 8, 2003. The consulting agreements provide that we will
reimburse Messrs. Hunt and Dilworth for all reasonable and necessary
out-of-pocket travel and other expenses they incur while performing their duties
and state that Messrs. Hunt and Dilworth are independent contractors.
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<PAGE> 59
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or
accrued for services rendered to us in all capacities during the years ended
December 31, 1997, 1998 and 1999 by our Chief Executive Officer and the two
other most highly compensated executive officers whose salary and bonus exceeded
$100,000 in fiscal 1999 (collectively, the "Named Executive Officers") for
services rendered in all capacities to us during the year ended December 31,
1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
-------------------------------------- ---------------------------------
NAME AND PRINCIPAL OTHER ANNUAL STOCK SECURITIES UNDERLYING
POSITION YEAR SALARY($) BONUS($) COMPENSATION($) AWARDS($) OPTIONS(#)
------------------ ---- --------- -------- --------------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Mollo.......................... 1999 $123,750 $1,923 -- $400,000 100,000
President, Chief Executive Officer 1998 116,346 -- -- 171,373 14,902
and Chairman of the Board 1997 116,657 -- -- -- --
Jeffrey S. Doss........................... 1999 120,366 1,731 -- 300,000 75,000
Executive Vice 1998 114,913 -- -- 171,373 14,902
President and Director 1997 100,000 -- -- -- --
Richard W. Winterich...................... 1999 185,711 3,557 -- 200,500 75,000
Vice President and 1998 -- -- 15,000 -- --
Chief Financial Officer 1997 -- -- -- -- --
</TABLE>
------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include medical, group life
insurance or other benefits which are available generally to all of our
salaried employees and certain perquisites and other personal benefits
received which do not exceed the lesser of $50,000 or 10% of any officer's
salary and bonus disclosed in this table.
OPTION GRANTS IN LAST FISCAL YEAR
Stock options were granted to the Named Executive Officers during the year
ended December 31, 1999. The following table summarizes the option grants.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
% OF TOTAL
NUMBER OPTIONS POTENTIAL REALIZABLE VALUE AT
OF GRANTED ASSUMED ANNUAL RATES OF STOCK
SECURITIES TO EXERCISE PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE MARKET TERM($)
OPTIONS IN FISCAL PRICE PRICE EXPIRATION --------------------------------
NAME GRANTED(#) YEAR(%) ($/SHARE) ($/SHARE) DATE 0% 5% 10%
---- ---------- ---------- --------- --------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Charles R. Mollo..... 100,000 16.47% $4.00 $10.50 12/01/04 $650,000 $940,115 $1,291,025
Jeffrey S. Doss...... 75,000 12.35% 4.00 10.50 03/31/03 487,500 626,651 782,813
Richard W.
Winterich.......... 50,000 8.24% 4.00 8.00 4/12/04 200,000 310,520 444,200
25,000 4.12% 0.02 8.00 4/12/09 199,500 325,280 518,240
</TABLE>
Both Messrs. Mollo and Doss have executed personal loan guarantees as
collateral for our revolving line of credit with Bank of America dated November
2, 1999. Each guaranteed a total of approximately $1,800,000. As affirmation and
compensation for the associated financial risk, we issued warrants to purchase
8,412 shares of our common stock to Mr. Mollo at a price of $4.00 per share and
warrants to purchase 7,010 shares of our common stock to Mr. Doss at a price of
$4.00 per share in November 1999.
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<PAGE> 60
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides summary information regarding the stock
options exercised during 1999 and the stock options held as of December 31, 1999
by the Named Executive Officers. No stock options were exercised by the Named
Executive Officers during 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1999 OPTIONS AT DECEMBER 31, 1999
---------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Charles R. Mollo....................... 37,704 106,568 $265,726 $813,136
Jeffrey S. Doss........................ 37,704 81,568 265,726 613,136
Richard W. Winterich................... -- 75,000 -- 699,500
</TABLE>
AMENDED AND RESTATED 1996 LONG TERM INCENTIVE PLAN
Our Amended and Restated 1996 Long Term Incentive Plan, or the 1996 Plan,
authorizes the granting of options intended to qualify as incentive stock
options within the meaning of Section 422 of the Internal Revenue Code of 1986,
as amended, options that do not so qualify ("non-qualified stock options") and
restricted stock awards to our directors, key employees and advisors. The 1996
Plan is administered by the compensation committee, which is, and shall be,
comprised of at least two non-employee directors as may be appointed by the
Board (the "Committee"). The Committee generally has the authority to fix the
terms and number of options and restricted stock awards to be granted and to
determine the employees or other persons who will receive awards; provided that
non-employee directors receive non-qualified stock options under the 1996 Plan
automatically upon election as a director and upon each annual meeting of the
stockholders thereafter while he or she continues to serve as an independent
director. The aggregate number of shares of common stock for which options may
be granted or for which stock grants may be made under the 1996 Plan is
1,250,000. The 1996 Plan will terminate in 2008, unless sooner terminated by the
board.
Each option granted pursuant to the 1996 Plan is exercisable at any time
upon or after vesting and expires on the date determined by the compensation
committee. In no event will any option expire later than ten years from the date
of grant. In no event will any option granted to a person who, on the date of
grant of the option, owns stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of us, expire later than
five years from the date of grant. With respect to a participant who is an
employee or advisor, each option expires within three months after the date the
participant ceases to be an employee or advisor. During that three month period,
those options may only be exercised if they were exercisable immediately prior
to the time the employment was terminated. If the employee's, advisor's or
non-employee director's employment is governed by an employment agreement and is
terminated for "cause," the option will automatically expire. The exercise price
of each option granted will be determined by the Committee, but shall not be
less than 100% of the fair market value of the common stock at the time such
option is granted. In the case of an incentive stock option granted to a person
who, on the date of the grant owns more than 10% of us or our subsidiary, the
exercise price shall not be less than 110% of the fair market value of the
common stock at the time such incentive stock option is granted. Options are not
transferable other than by will or the laws of descent or distribution or to a
beneficiary, as defined in the plan, in the event of the participant's death.
Options may not be pledged, mortgaged, hypothecated or otherwise encumbered, and
shall not be subject to the claims of creditors. Options may be exercised during
the lifetime of the optionee only by the optionee or the optionee's authorized
representative. A vesting schedule for the options is indicated in each option
agreement as determined by the compensation committee.
Shares of common stock awarded under restricted stock grants are subject to
restrictions prohibiting their sale, assignment, transfer or encumbrance for a
period of time specified by
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<PAGE> 61
the Committee and will revert to us if the participant's relationship with us
terminates during such period of restriction, unless the Committee, by rule or
regulation or in any award agreement, provides otherwise.
As of December 31, 1999 we had outstanding options to purchase in the
aggregate 827,728 shares of common stock under the 1996 Plan, 143,284 of which
are vested and exercisable. We expect that options will continue to be granted
to eligible persons as part of our incentive-based compensation program.
FOUNDERS OPTIONS
Several key managers have received non-qualified options to purchase an
aggregate of 132,198 shares of common stock at a price per share of $3.52
outside the 1996 Plan. These options vested from August 23, 1996 to June 1, 1999
and are outstanding as of December 31, 1999.
EMPLOYMENT AGREEMENTS
We have entered into full-time employment agreements with Messrs. Mollo,
Doss, Winterich and Johnson. The agreements with Messrs. Mollo and Doss expire
on December 1, 2001. The agreement with Mr. Winterich expires on December 31,
2001. The agreement with Mr. Johnson expires April 1, 2003. When the agreements
have expired, they will be renewed on a year-to-year basis unless either party
to the agreement gives the other party notice of termination at least 90 days
prior to the end of the then current term, as defined in the agreement. The
employment agreements provide for increases in salary as determined by the board
of directors.
As of December 1, 1999 Mr. Mollo's base salary was $200,000. His salary
will automatically be increased $25,000 per year upon the completion of this
initial public offering. If we have positive net income for fiscal year 2000,
Mr. Mollo's salary must be increased by at least 7%, effective December 1, 2000.
Mr. Mollo is entitled to an annual cash bonus, for each fiscal year that the
agreement is in effect, of up to 50% of his then current base salary. Under the
terms of his employment agreement, we granted Mr. Mollo the option to purchase
100,000 shares of our common stock at $4.00 per share under our 1996 Plan. This
option expires on December 1, 2004 or one year following the termination of Mr.
Mollo's employment agreement.
As of December 1, 1999 Mr. Doss's base salary is $180,000. Mr. Doss is
entitled to an annual increase in salary of at least 7% which will take effect
each year on December 1. Mr. Doss is further entitled to an annual cash bonus
for each fiscal year that the agreement is in effect. Mr. Doss is entitled to
0.4% of actual margin contributions provided by all OEM sales which consist of
unique and chip on board sales (but not standard product programs) for which Mr.
Doss has had primary and direct responsibility. We will also pay to Mr. Doss a
cash bonus of either 15% of his salary, as of the end of the fiscal year, if we
attain at least 90% of our budgeted gross profit margin for that particular
fiscal year, or 25% of his salary, as of the end of the fiscal year, if we
attain 100% of our budgeted margin for that particular fiscal year. Under the
terms of his employment agreement, we granted Mr. Doss the option to purchase
75,000 shares of our common stock at $4.00 per share under our 1996 Plan. This
option expires on the earlier of March 31, 2003 or 180 days following the
termination of Mr. Doss's employment agreement; provided, however the option
cannot expire prior to September 22, 2000. Pursuant to Mr. Doss's employment
agreement, we sold him 50,000 shares of our Series C preferred stock at a
purchase price of $6.00 per share and issued Mr. Doss a warrant to purchase
50,000 shares of our common stock at an exercise price of $0.02 per share. In
return, Mr. Doss provided us with a promissory note and an agreement pledging
his
59
<PAGE> 62
50,000 shares of Series C preferred stock and his warrant to purchase (and the
underlying) 50,000 shares of common stock to us.
If we terminate our employment agreement with Mr. Mollo or Mr. Doss for any
reason other than just cause, as defined in the agreement, within two years of
experiencing a change in control, as defined in the agreement, we will, in the
case of Mr. Mollo, pay a lump-sum payment equal to his then current salary for
the remainder of the then current term of the agreement or, in the case of Mr.
Doss, continue to pay his then current salary for the remainder of the then
current term of his employment agreement plus one year. If Mr. Mollo or Mr. Doss
terminates his employment agreement with us for constructive termination, as
defined in the agreement, within two years of the time that we experience a
change in control, as defined in the agreement, we will, in the case of Mr.
Mollo, also pay him a lump-sum payment equal to his then current salary for the
remainder of the then current term of his employment agreement or, in the case
of Mr. Doss, continue to pay his then current salary for the remainder of the
then current term of his employment agreement plus one year.
We have agreed to consult with Mr. Doss regarding any change of our current
chief executive officer. If Mr. Doss does not approve of the new chief executive
officer, he is entitled to terminate his employment with us within thirty days
of the time the new chief executive officer takes office. Mr. Doss will retain
the compensation he has earned until that point and we will pay to Mr. Doss a
lump-sum equal to three months of his then current salary.
As of January 1, 1999 Mr. Winterich's base salary is $185,000. Mr.
Winterich is entitled to an annual calendar year cash bonus of 25% of his then
current salary. Under the terms of his employment agreement, we granted Mr.
Winterich the option to purchase 50,000 shares of our common stock at $4.00 per
share under our 1996 Plan. This option vests and becomes exercisable over a
period of three years from the date of grant and expires on April 12, 2004,
unless it expires earlier due to Mr. Winterich terminating his employment with
us. Mr. Winterich also has the option to purchase 25,000 additional shares of
our common stock at a price of $0.02 per share which will vest when we
consummate this offering, experience a change-in-control, have a strategic
partner or investor invest $10.0 million in us or on December 31, 2007,
whichever occurs first. This option expires on April 12, 2009, unless it expires
earlier due to Mr. Winterich terminating his employment with us.
As of April 1, 2000 Mr. Johnson's base salary is $220,000. Mr. Johnson is
entitled to an annual calendar year bonus of 40% of his then current salary.
Under the terms of his employment agreement, we granted Mr. Johnson the option
to purchase 110,000 shares of our common stock at $11.00 per share under our
1996 Plan. This option vests and becomes exercisable over a period of three
years beginning April 1, 2000 and expires April 1, 2005, unless it expires
earlier due to Mr. Johnson's termination of employment with us. If we terminate
our employment agreement with Mr. Johnson for any reason other than just cause,
as defined in the agreement, or if Mr. Johnson terminates the agreement with us
for constructive termination, as defined in the agreement, within two years of
experiencing a change in control, as defined in the agreement, we will pay a
lump-sum payment equal to his then current salary for the remainder of the then
current term of the agreement.
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<PAGE> 63
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock and Series C preferred stock as of March 31, 2000,
and as adjusted to reflect the sale of common stock offered hereby, by:
- each person or entity known by us to beneficially own 5% or more of the
outstanding shares of common stock;
- each of our directors and the Named Executive Officers; and
- all of our executive officers and directors as a group.
Unless otherwise noted, the persons named below have sole voting and
investment power with respect to the shares shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
NUMBER OF SHARES OWNED AFTER OFFERING IF
BENEFICIALLY OWNED OVER-ALLOTMENT OPTION
PRIOR TO THE OFFERING(1) EXERCISED IN FULL(2)
------------------------- ------------------------
BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
---------------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Charles R. Mollo(3)(4).......................... 1,171,198 13.15% 1,171,198 8.67%
Jeffrey S. Doss(3)(5)........................... 237,416 2.67% 237,416 1.76%
Jeffrey R. Harris(3)(6)......................... 892,601 10.01% 892,601 6.61%
Richard Winterich(3)(7)......................... 46,667 * 46,667 *
Robert P. Dilworth(3)(8)........................ 52,500 * 52,500 *
William O. Hunt(3)(9)........................... 75,539 * 75,539 *
Kenneth A. Steel, Jr. (3)(10)................... 126,186 1.42% 126,186 *
New Vistas Investment Corporation(11)........... 507,747 5.73% 507,747 3.77%
Janice L. Breeze-Mollo(12)...................... 906,242 10.19% 906,242 6.72%
Seligman Communications and Information
Fund, Inc.(13)................................ 678,307 7.41% 678,307 4.93%
Executive officers and directors as a group
(nine persons)................................ 2,620,285 28.24% 2,620,285 18.88%
</TABLE>
------------
* Less than 1%
(1) "Beneficially" owned shares, as defined by the SEC, are those shares as to
which a person has voting or dispositive power, or both. "Beneficial"
ownership does not necessarily mean that the named person is entitled to
receive the dividends on, or the proceeds from the sale of, the shares.
(2) This calculation is the quotient of (a) the number of shares currently
beneficially owned by the named individual or group, plus the number of
shares, if any, for which options beneficially held by such person or group
are exercisable within 60 days or upon the closing of an initial public
offering, divided by (b) the total number of shares outstanding at March
31, 2000, plus the number of shares, if any, for which options or warrants
held by such person or group are exercisable within 60 days or upon the
closing of an initial public offering.
(3) The address for Messrs. Mollo, Doss, Harris, Winterich, Dilworth, Hunt and
Steel is 7955 East Redfield Road, Scottsdale, Arizona 85260.
(4) Includes 54,913 shares owned directly by Mr. Mollo; 116,047 shares owned by
Mollo Family LLC of which Mr. Mollo owns 10% and is a manager; 371,063
shares owned by New Vistas Investment Corporation of which Mr. Mollo owns
approximately 43%; 233,827 shares owned by New Horizons of which Mr. Mollo
owns 49%; 9,042 shares held at Delaware Trust FBO Charles R. Mollo; 107,986
shares held in the Charles R. Mollo Revocable Trust; 25,000 shares held in
the John R. Harris and Timothy D. Harris Irrevocable Trust of which Mr.
Mollo is trustee; 50,900 shares held in the Deanna L. and Kristen A.
Williams Irrevocable Trust of which Mr. Mollo is trustee; 22,424 shares
that may be received upon the conversion of 32,501 shares of Series C
preferred stock owned directly by Mr. Mollo; 98,175 shares that may be
received upon the conversion of 142,293 shares of Series C preferred stock
owned by New Vistas Investment Corporation; 6,250 shares that may be
purchased upon the exercise of warrants owned directly by Mr. Mollo; 16,823
shares that may be purchased upon the exercise of warrants owned by Mollo
Family LLC; 38,510 shares that may be purchased upon the exercise of
warrants owned by New Vistas Investment Corporation; and 20,238 shares that
may be purchased upon the exercise of options granted under the 1996 Plan.
Mr. Mollo is married to Ms. Breeze-Mollo, however, all shares owned by
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Ms. Breeze-Mollo are held as separate property and Mr. Mollo has no
beneficial ownership rights thereto, and disclaims beneficial ownership of
the shares owned by Ms. Breeze-Mollo.
(5) Includes 135,017 shares owned directly by Mr. Doss; 5,000 owned by Nolton
Doss International, Inc. of which Mr. Doss owns 50% and is a director;
34,498 shares that may be received upon the conversion of 50,000 shares of
Series C preferred stock owned directly by Mr. Doss; 16,269 shares that may
be purchased upon the exercise of warrants owned directly by Mr. Doss; and
46,632 that may be purchased upon the exercise of options granted under the
1996 Plan.
(6) Includes 20,403 shares owned directly by Mr. Harris; 60,579 shares owned by
Harris Family LLC of which Mr. Harris owns 10% and is a manager; 6,742
shares held at Delaware Trust FBO Jeffrey R. Harris; 371,063 shares owned
by New Vistas Investment Corporation of which Mr. Harris owns approximately
20% and is a director; 233,827 shares owned by New Horizons of which Mr.
Harris owns 26% and is a director; 11,499 shares that may be received upon
the conversion of 16,666 shares of Series C preferred stock owned directly
by Mr. Harris; 2,876 shares that may be received upon conversion of 4,168
shares of Series C preferred stock held at Delaware Trust FBO Jeffrey R.
Harris; 98,175 shares that may be received upon the conversion of 142,293
shares of Series C preferred stock owned by New Vistas Investment
Corporation; 4,250 shares that may be purchased upon the exercise of
warrants owned directly by Mr. Harris; 9,677 shares that may be purchased
upon the exercise of warrants owned by Harris Family LLC; 38,510 shares
that may be purchased upon the exercise of warrants owned by New Vistas
Investment Corporation; and 35,000 shares that may be purchased upon the
exercise of options granted under the 1996 Plan.
(7) Includes 5,000 shares owned directly by Mr. Winterich; and 41,667 shares
that may be purchased upon the exercise of options granted under the 1996
Plan.
(8) Includes 52,500 shares that may be purchased upon the exercise of options
granted under the 1996 Plan.
(9) Includes 28,039 shares owned by B&G Partners Limited of which Mr. Hunt has
a 100% interest and 47,500 shares that may be purchased upon the exercise
of options granted under the 1996 Plan.
(10) Includes 13,034 shares owned directly by Mr. Steel; 39,625 shares owned by
K.A. Steel Chemicals, Inc. of which Mr. Steel owns approximately 33% and is
a director; 24,527 shares that may be purchased upon the exercise of
warrants owned directly by Mr. Steel; 1,500 shares that may be purchased
upon the exercise of warrants owned by K.A. Steel Chemicals, Inc.; and
47,500 shares that may be purchased upon the exercise of options granted
under the 1996 Plan.
(11) Includes 371,062 shares owned directly by New Vistas Investment
Corporation; 98,175 shares that may be received upon the conversion of
142,293 shares of Series C preferred stock owned directly by New Vistas
Investment Corporation; and 38,510 shares that may be purchased upon the
exercise of warrants owned directly by New Vistas Investment Corporation.
The address for New Vistas Investment Corporation is 5528 Eubank Boulevard,
N.E., Suite #3, Albuquerque, New Mexico 87111.
(12) Includes 2,620 shares owned directly by Ms. Breeze-Mollo; 30,966 shares
held by Breeze LLC; 6,468 shares held at Alex Brown FBO Janice L. Breeze;
20,160 shares held in the Janice L. Breeze Revocable Trust; 75,000 shares
held in the Christine E. Mollo and Charles R. Mollo III Irrevocable Trust
of which Ms. Breeze-Mollo is Trustee; 371,063 shares owned by New Vistas
Investment Corporation of which Ms. Breeze-Mollo owns approximately 18.5%;
233,828 shares owned by New Horizons of which Ms. Breeze-Mollo owns 25%;
3,450 shares that may be received upon the conversion of 5,000 shares of
Series C preferred stock owned directly by Ms. Breeze-Mollo; 98,175 shares
that may be received upon the conversion of 142,293 shares of Series C
preferred stock owned by New Vistas Investment Corporation; 3,750 shares
that may be purchased upon the exercise of warrants owned directly by Ms.
Breeze-Mollo; 7,557 shares that may be purchased upon the exercise of
warrants owned by Breeze LLC; 38,510 shares that may be purchased upon the
exercise of warrants owned by New Vistas Investment Corporation; and 14,695
shares that may be purchased upon the exercise of options granted under the
1996 Plan. Ms. Breeze-Mollo is married to Mr. Mollo, however, all shares
owned by Mr. Mollo are held as separate property and Ms. Breeze-Mollo has
no beneficial ownership rights thereto, and disclaims beneficial ownership
of the shares owned by Mr. Mollo. The address for Ms. Breeze-Mollo is 5528
Eubank Boulevard, N.E., Suite #3, Albuquerque, New Mexico 87111.
(13) Includes 344,974 shares that may be received upon the conversion of 499,999
shares of Series C preferred stock owned directly by Seligman
Communications and Information Fund, Inc.; and 333,333 that may be
purchased upon the exercise of warrants owned directly by Seligman
Communications and Information Fund, Inc. The address for Seligman
Communications and Information Fund, Inc. is 125 University Avenue, Palo
Alto, California 94301.
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CERTAIN TRANSACTIONS
The following is a description of transactions, for the last three years,
to which we have been a party, in which the amount involved in the transaction
exceeds $60,000 and in which any of our directors, executive officers or holders
of more than five percent of our capital stock had or will have a direct or
indirect material interest, other than compensation arrangements that are
otherwise required to be described under "Management."
From September 1996 through May 1997 we raised approximately $1.9 million
from our management and their affiliates (approximately $1.3 million of which
was in the form of common stock, at a purchase price of $7.73 per share, and
$565,000 of which was in the form of convertible subordinated debt (the
"Convertible Debentures")), and approximately $2.4 million from outside
investors ($846,458 of which was in the form of common stock, at a purchase
price of $7.73 per share, and approximately $1.6 million of which was in
Convertible Debentures). For a description of the Convertible Debentures, see
"Description of Capital Stock -- Convertible Debentures."
In November 1997 we completed a $10.0 million private placement, including
approximately $1.0 million of already outstanding preferred stock which was
converted to common stock at $8.00 per share and the sale of 1,124,500
newly-issued shares of common stock at $8.00 per share and 312,500 warrants to
purchase shares of common stock at $14.00 per share. Of these amounts,
management converted preferred stock of approximately $1.0 million and purchased
$16,000 of common stock, all at $8.00 per share.
In June 1998 we completed a private placement of approximately $8.5 million
and issued an aggregate of 742,500 shares of common stock at $11.50 per share.
Our management and their affiliates purchased an aggregate of 37,000 shares of
common stock ($425,000) in this private placement.
In December 1998 we offered to convert the principal of the Convertible
Debentures and accrued interest thereon to common stock at a price of $7.73 per
share. Of the approximately $2.1 million of principal outstanding, approximately
$2.0 million plus accrued interest of $62,448 was converted into 275,721 shares
of common stock. Our management and their affiliates converted $545,000 of
principal and $16,476 accrued interest into 72,730 shares of common stock.
In January 1999 we completed a private placement of approximately $5.0
million and issued an aggregate of 735,300 shares of Series C preferred stock at
$6.75 per share. Our management and their affiliates purchased an aggregate of
45,000 shares of Series C preferred stock ($303,750) in this private placement.
Pursuant to the terms of the Series C preferred stock, an additional 91,909
shares were issued to the investors in such private placement as a result of a
subsequent round of financing at the lower price of $6.00 per share and 5,625 of
such additional shares were issued to management and their affiliates. See
"Description of Capital Stock -- Series C Preferred Stock."
In March 1999 we raised $3.5 million in the form of 13% Bridge Promissory
Notes, of which $1,075,000 was from our management and their affiliates and the
balance from outside investors. Of the amount held by management and their
affiliates $550,000 was converted to 68,750 shares of common stock at a price of
$8.00 per share in June 1999. The offering also included the issuance of
warrants to purchase 525,000 shares of common stock at a price of $0.02 per
share, of which 146,250 were issued to our management and their affiliates. See
"Description of Capital Stock -- Registration Rights -- Private Placement of 13%
Bridge Promissory Notes and Warrants and Series C Preferred Stock." In February
2000, the outstanding balance of the Bridge Notes of approximately $1.2 million
and the accrued interest thereon of approximately $160,000 were extended to
March 31, 2001. Of the Bridge Notes extended, our management and their
affiliates held $525,000 with accrued interest
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thereon of approximately $69,000. As part of the extension agreement, we issued
warrants to purchase 10,000 shares of common stock for each $100,000 of
principal outstanding, including accrued interest. Our management and their
affiliates received 118,736 of the 277,004 warrants issued.
In January 2000 we completed a private placement of approximately $7.4
million and issued an aggregate of 1,231,450 shares of Series C preferred stock
at $6.00 per share. For each share of Series C preferred stock purchased, an
investor received a warrant to purchase one share of common stock at a price of
$0.02 per share. Our management and their affiliates purchased an aggregate of
159,167 shares of Series C preferred stock ($955,006) in this private placement
and received warrants for the purchase of 159,167 shares of common stock at a
price of $0.02 per share. See "Description of Capital Stock -- Series C
Preferred Stock."
In April 1998 in connection with the Bank of America line of credit,
certain stockholders including Messrs. Mollo and Doss executed personal
guarantees to guarantee a total of approximately $1.8 million each, and certain
of our other stockholders agreed to indemnify such guarantors against amounts
paid under such guarantees up to certain agreed upon levels. As part of such
guarantees and indemnification arrangements, such persons were issued an
aggregate of 112,500 warrants to purchase common stock at a price of $11.50 per
share. Our management of the Company and their affiliates received an aggregate
of 86,621 of such warrants.
When the Bank of America line of credit was amended in November 1999,
certain stockholders including Messrs. Mollo and Doss executed personal
guarantees to guarantee $1.8 million each, and certain other stockholders
continued to indemnify such guarantors against amounts paid under such
guarantees up to certain agreed upon levels. As part of such guarantees and
indemnification arrangements, such persons were issued an aggregate of 56,250
warrants to purchase common stock at a price of $4.00 per share. Of such
warrants, Mr. Mollo was issued warrants to purchase 8,412 shares and Mr. Doss
was issued warrants to purchase 7,010 shares of common stock. Our management and
their affiliates received an aggregate of 51,111 of such warrants.
We have entered into an employment agreement with Messrs. Doss, Mollo,
Winterich and Johnson. See "Management -- Employment Agreements."
As provided for in Mr. Doss's employment agreement, we have entered into a
promissory note in the principal sum of $300,000 in December 1999 with Mr. Doss,
our Executive Vice President, to finance his purchase of 50,000 shares of our
Series C preferred stock at a purchase price of $6.00 per share and a warrant to
purchase 50,000 shares of our common stock at an exercise price of $0.02 per
share (which was included in the January 2000 offering). This note provides for
6.0% per annum interest and is due in full on December 1, 2001, however, Mr.
Doss may prepay at any time without any penalty or premium. The principal amount
outstanding as of December 31, 1999 is $300,000. In connection with the note,
Mr. Doss and the Company have also entered into a pledge agreement granting a
security interest in the preferred stock and the warrant we sold to Mr. Doss.
New Vistas Investment Corporation, an entity owned in part by Mr. Mollo,
Ms. Breeze-Mollo and Mr. Harris, provided administrative services to us, for
which we reimbursed the direct costs of providing such services. The services
provided were in support of Mr. Mollo, primarily in connection with our previous
private financings. No contractual agreement exists between the parties. Amounts
reimbursed for the years ended December 31, 1997, 1998 and 1999 were $32,000,
$52,000 and $42,000, respectively.
We have granted options to certain of our directors and executive officers.
We have also entered into an indemnification agreement with each of our
directors and executive officers. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be
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permitted to our directors, executive officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act, and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by us of
expenses incurred or paid by one of our directors, executive officers or
controlling persons in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with
the securities being registered, we will, unless in the opinion of our counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
We are a Delaware corporation and our affairs are governed by our
certificate of incorporation, as amended, our bylaws, as amended, and the
Delaware General Corporation Law (the "DGCL"). The following description of our
capital stock is qualified in all respects by the certificate of incorporation
and the bylaws, which have been filed as exhibits to the registration statement
to which this prospectus forms a part.
As of April 1, 2000, our authorized capital stock consisted of 90,000,000
shares of common stock, par value $0.01 per share, and 15,000,000 shares of
preferred stock, par value $0.01 per share.
COMMON STOCK
As of March 31, 2000 we had 6,698,119 shares of common stock outstanding
and approximately 495 holders of common stock. All issued and outstanding common
stock is, and all shares of common stock to be outstanding upon completion of
this offering will be, fully paid and nonassessable. Holders of shares of common
stock are entitled to one vote per share on all matters submitted to a vote of
our stockholders. There is no right to cumulative voting for the election of
directors. Holders of shares of common stock are entitled to receive dividends,
if and when declared by the board of directors out of funds legally available
therefor, after payment of dividends required to be paid on any outstanding
shares of preferred stock. Upon our liquidation, holders of shares of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the liquidation preferences of any outstanding shares of
preferred stock. Holders of shares of common stock have no conversion,
redemption or preemptive rights. The rights of the holders of common stock will
be subject to, and may be adversely affected by, the rights of the holders of
preferred stock.
PREFERRED STOCK
The board of directors may, without further action of our common
stockholders, issue shares of preferred stock in one or more series and fix or
alter the rights and preferences thereof, including the voting rights,
redemption provisions (including sinking fund provisions), dividend rights,
dividend rates, liquidation preferences, conversion rights and any other rights,
preferences, privileges and restrictions of any wholly unissued series of
preferred stock. The board of directors may, without further action by our
common stockholders, issue shares of preferred stock which it has designated.
The rights of holders of common stock will be subject to, and may be adversely
affected by, the rights of holders of preferred stock. While the issuance of
preferred stock provides flexibility in connection with additional financing,
possible acquisitions and other corporate purposes, future issuances may have
the effect of delaying, deferring or preventing the change of control in us
without further action by the stockholders and may discourage bids for the
common stock at a premium over the market price. The board of directors may,
without stockholder approval, provide for the issuance of preferred stock that
could have voting, conversion or other rights superior to the rights of holders
of common stock.
We have no present plans to issue any new series of preferred stock.
SERIES C PREFERRED STOCK
As of March 31, 2000 we had 4,500,000 shares of Series C preferred stock
authorized for issuance and 2,447,808 shares of Series C preferred stock
outstanding and 200 holders of Series C preferred stock. All issued and
outstanding Series C preferred stock is, and all shares of Series C preferred
stock to be outstanding upon completion of this offering will be, fully paid and
nonassessable.
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The Series C preferred stock is convertible into shares of common stock.
The rate of conversion is 1-to-0.68995 as of March 31, 2000. The initial
conversion rate was one for one, but was subject to change if certain events
occur. Generally, the conversion rate will be adjusted if we issue any non-cash
dividends on our securities, split our securities or otherwise effect a change
to the number of our outstanding securities. The conversion rate will also be
adjusted if we issue additional securities at a price that is less than the
price that the Series C preferred stockholders paid for their shares. Such
adjustments will be made according to certain formulas that are designed to
prevent dilution of the Series C preferred stock. The Series C preferred stock
can be converted at any time at the option of the holder, and will convert
automatically, immediately prior to the consummation of a firm commitment
underwritten public offering of our common stock pursuant to a registration
statement filed with the SEC having a per share price equal to or greater than
$24.00 per share and a total gross offering amount of not less than $15.0
million. No fractional shares will be issued upon conversion.
If our board of directors declares a cash dividend payable on our
outstanding shares of common stock, the board of directors must also declare a
dividend payable on each share of Series C preferred stock equal to the amount
of the dividend payable on the number of shares of common stock into which each
such share could then be converted. Holders of shares of Series C preferred
stock are entitled to vote on all matters submitted for a vote of the holders of
common stock. Holders will be entitled to one vote for each share of common
stock into which one share of Series C preferred stock could then be converted.
In the event of our liquidation or dissolution, the holders of Series C
preferred stock will be entitled to receive the amount they paid for their
stock, plus accrued and unpaid dividends out of our assets legally available for
such payments prior to the time other holders of our securities junior to the
Series C preferred stock will be entitled to any payments. We are restricted
from undertaking the following corporate actions without the consent of the
Series C preferred stockholders while any shares of Series C preferred stock
remain outstanding: (i) merging, selling all or substantially all of our assets
or liquidating unless the holders of Series C preferred stock receive at least
$15.00 per share; (ii) purchasing any common stock, except for purchases of
shares under contractual arrangements; (iii) authorizing or issuing any equity
securities senior to or on parity with the Series C preferred stock; (iv)
declaring or paying any cash dividends on the common stock; or (v) increasing or
decreasing the number of authorized shares of preferred stock or common stock.
SERIES D PREFERRED STOCK
As of March 31, 2000, we had 500,000 shares of Series D preferred stock
authorized for issuance, all of which shares were outstanding and held by one
investor. All issued and outstanding Series D preferred stock is, and all shares
of common stock underlying the Series D preferred stock to be outstanding upon
completion of this offering will be, fully paid and nonassessable.
The Series D preferred stock is convertible into shares of common stock. On
March 1, 2002, each share of Series D preferred stock will convert automatically
into a number of shares of common stock determined by dividing $10.00 by the
offering price per share used in the last round of equity private placement
financing prior to March 1, 2002; provided, however, immediately prior to the
consummation of this offering, each share of Series D preferred stock will
convert automatically into the number of shares of common stock determined by
dividing $10.00 by 95% of the offering price per share of the common stock used
in this offering.
If our board of directors declares a cash dividend payable on our
outstanding shares of common stock, the board of directors must also declare a
dividend payable on each share of Series D preferred stock equal to the same
dividend per share paid on each share of common stock (as adjusted for any
common stock dividends, splits or the like). Holders of shares of
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Series D preferred stock are entitled to vote on all matters submitted for a
vote of the holders of common stock. Holders will be entitled to one vote for
each share of Series D preferred stock (subject to adjustment for any common
stock dividends, splits or the like). In the event of our liquidation or
dissolution, the holders of Series D preferred stock will be entitled to receive
the amount they paid for their stock, plus accrued and unpaid dividends out of
our assets legally available for such payments after the holders of Series C
preferred stock have received their preferential payments, but prior to the time
other holders of our securities will be entitled to any payments. We are
prohibited from paying any cash dividends on our common stock while any shares
of Series D preferred stock remain outstanding.
WARRANTS AND OPTIONS
Finova Warrants. In connection with a $1.6 million loan made by Finova on
June 24, 1997 to us (the "Finova Loan"), we issued a Stock Purchase Warrant to
Finova (the "First Finova Warrant") to purchase 85,849 shares of common stock,
at $0.02 per share, subject to the following adjustments: if the Finova Loan
remains outstanding on June 24, 1999, Finova would have the right to purchase
115,644 shares of common stock; if the Finova Loan remains outstanding on June
24, 2000, Finova would have the right to purchase 146,088 shares of common
stock; and if the Finova Loan remains outstanding on June 24, 2001, Finova would
have the right to purchase 177,161 shares of common stock. The First Finova
Warrant is exercisable at any time until July 31, 2002. Pursuant to the terms of
the First Finova Warrant and the Second Finova Warrant (defined below)
(collectively with the First Finova Warrant, the "Finova Warrants"), Finova is
entitled to receive notice of and be entitled to attend or to send a
representative to attend all meetings of our board of directors in a non-voting
observation capacity, receive copies of all notices, packages and documents
provided to members of our board of directors for each board meeting and receive
copies of all actions taken by written consent of our board of directors, until
such time as the Finova Loan has been paid in full. Additionally, both Finova
Warrants contain certain provisions that protect the holder against dilution by
adjustment of exercise price and the number of shares of common stock subject to
the Finova Warrants in certain events, such as stock dividends and
distributions, stock splits, recapitalizations, mergers or consolidations. We
also granted to Finova an option to sell (the "Put") to us the Finova Warrants
for a period of 30 days immediately preceding the expiration of the Finova
Warrants at a purchase price equal to fair market value (as defined therein);
however, upon consummation of this offering and full payment of the Finova Loan,
the Put will terminate. Additionally, we have granted certain registration
rights to Finova in connection with the Finova Warrants. See "-- Registration
Rights" below. Effective March 25, 1998 we entered into the First Amendment to
the Loan Agreement and Loan Documents with Finova Capital Corporation whereby
the principal amount of the loan was increased by approximately $1.8 million to
a total of approximately $3.4 million. In connection with the additional loan,
we issued a Stock Purchase Warrant to Finova (the "Second Finova Warrant") which
provides that Finova may purchase 93,418 shares of common stock, subject to the
following adjustment: if the Finova Loan remains outstanding on June 24, 2000,
Finova would have the right to purchase 141,572 shares of common stock; if the
Finova Loan remains outstanding on June 24, 2001, Finova would have the right to
purchase 190,728 shares of common stock; and if the Finova Loan remains
outstanding on June 24, 2002, Finova would have the right to purchase 240,920
shares of common stock. This warrant is exercisable at any time until July 31,
2002 and the exercise price is $0.02 per share of common stock.
Other Warrants. As of March 31, 2000, warrants to purchase a total of
2,083,776 shares of common stock were issued and outstanding at exercise prices
ranging from $0.02 per share to $14.00 per share.
Options. As of March 31, 2000, options to purchase 974,923 shares of common
stock were issued and outstanding. The exercise prices of these options range
from $0.02 to $11.50 per share. See "Management -- Option Grants in Last Fiscal
Year," "-- Amended and
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Restated 1996 Long Term Incentive Plan," "-- Founders Options" and
"-- Employment Agreements" for a description of options granted by us.
CONVERTIBLE DEBENTURES
In late 1996 and early 1997 we issued approximately $2.2 million in
aggregate principal amount of 12% Convertible Debentures to various investors
(the "Convertible Debentures"). In December 1998 approximately $2.1 million was
converted to common stock at a price of $7.73 per share. The remaining
Convertible Debentures ($95,000) require us to pay interest quarterly at a rate
of 12% per annum. Beginning on the second anniversary of the date of issuance of
each Convertible Debenture, we are required to pay 20 equal quarterly
installments of principal and accrued but unpaid interest in an amount necessary
to fully amortize the notes by the twentieth installment, when all remaining
principal and accrued interest will be due. Each of the Convertible Debentures
may be prepaid at our option at any time upon 30 days' notice to the holder.
Unless prepaid by us, each Convertible Debenture also can be redeemed at the
holder's option in whole or in part upon the closing of this offering (the "IPO
Redemption Option"). Such redemption price would be equal to 100% of the
principal amount of the Convertible Debentures to be redeemed, plus accrued
interest, if any, to the date of the closing of this offering; provided,
however, that the IPO Redemption Option will terminate at the close of business
on the date of the closing of this offering and will be lost if not exercised by
that time. The IPO Redemption Option may be exercised separately or in
conjunction with the conversion right described below.
Unless the Convertible Debenture is prepaid by us, 60% of the outstanding
principal balance of each Convertible Debenture is convertible, at the option of
the holder, into common stock on the date of the closing of this offering at the
rate of one share of common stock for each $7.73 of principal of each
Convertible Debenture (but just the 60% convertible portion thereof); provided,
however, that the right to convert each Convertible Debenture will terminate at
the close of business on the date of the closing of this offering and will be
lost if not exercised prior to that time.
BRIDGE PROMISSORY NOTES
In March 1999 we issued an aggregate of $3.5 million principal amount of
13% Bridge Promissory Notes. The Bridge Notes provided for interest of 13% per
annum and were due and payable on March 5, 2000. Holders of an aggregate of $2.3
million principal amount of the Bridge Notes converted such Bridge Notes into
shares of common stock in June 1999. In February 2000, we entered into a loan
extension agreement with each holder of then outstanding Bridge Notes. This loan
extension agreement: (i) increased the interest rate from 13% to 14% per annum;
(ii) extended the maturity date to the earlier of (a) March 31, 2001, (b) thirty
days following the closing of our initial public offering of common stock or (c)
thirty days following the closing of a private offering of our equity securities
with aggregate subscriptions of at least $10 million; (iii) made prepayment
optional and without penalty; and (iv) allowed conversion of the outstanding
principal balance of and interest on the Bridge Notes to be converted into
shares of common stock within fifteen days following the closing of our initial
public offering of common stock, at a price equal to 95% of the offering price
in the initial public offering. Concurrent with the execution of the loan
extension agreement, we issued to each participating Bridge Noteholder a warrant
to purchase 10,000 shares of common stock for each $100,000 of principal
outstanding. These warrants may be exercised at any time on or prior to April
30, 2001 at an exercise price equal to 95% of the offering price in the initial
public offering. In addition, the Company agreed that commencing on October 1,
2000, and for each calendar quarter thereafter, if any Bridge Note is not paid
off, then the holder will receive a warrant to purchase 2,500 shares of common
stock for each $100,000 of principal outstanding, which warrant would have an
exercise period of one year and an exercise price of $0.02 per share.
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In June through August 1999 we issued an aggregate of $550,000 principal
amount of 13% Bridge Promissory Notes. The Bridge Notes provided for interest of
13% per annum and are due and payable on July 31, 2000. We also issued warrants
to purchase 65,000 shares of common stock to the purchasers of the Bridge Notes
based upon the principal amounts of notes subscribed. These warrants may be
exercised on or after September 1, 1999, but must be exercised on or prior to
May 31, 2002, at an exercise price of $0.02 per share.
REGISTRATION RIGHTS
Finova Warrants. The Finova Warrants contain a registration rights
provision that allows Finova to request that we register all or any part of the
shares of common stock issuable upon exercise of the Finova Warrants as
described above (the "Finova Shares") in certain circumstances. Specifically,
Finova can request that we register the Finova Shares if we propose to file a
registration statement on a form suitable for a secondary offering of shares. We
are required to notify Finova of our intention to file such a registration
statement at least thirty days prior to such filing. If Finova requests that we
register some or all of the Finova Shares, we must include the Finova Shares in
such registration statement at our expense; provided, however, that if the
offering being registered is underwritten and the representative of the
underwriters certifies in writing that the inclusion of the Finova Shares would
materially and adversely affect the sale of the securities to be sold by us in
the offering, then we will be required to include in the offering only the
number of Finova Shares that the underwriters determine in their sole discretion
will not jeopardize the success of the offering.
On April 5, 2000 Finova waived its rights to register shares pursuant to
the registration statement that we are filing in connection with this offering
and therefore no Finova Shares will be included in this offering.
Miram International, Inc. On July 29, 1997 we entered into a registration
rights agreement with Miram International, Inc., or Miram. Pursuant to this
agreement, we are obligated to register 93,500 shares of common stock (the
"Miram Shares") held by Miram in certain circumstances.
Miram can request that we register the Miram Shares if we propose to file
certain types of registration statements at any time after we become a reporting
company under the Exchange Act. If such a request is made, we are required to
use our best efforts to cause any managing underwriter of such a proposed
underwritten offering to permit Miram to include the Miram Shares in the
offering. However, no such registration will be required if the managing
underwriter for the proposed offering determines that the inclusion of the Miram
Shares could have an adverse effect on the marketability or the price of the
securities otherwise included in the offer. If the contemplated registration
does not involve an underwritten public offering, such determination shall be
made by us in our reasonable discretion. If requested by the managing
underwriter, Miram has agreed to use its best efforts not to effect any public
sale or distribution of the Miram Shares within 10 days before or 90 days after
the effective date of an underwritten public offering in which any Miram Shares
are included. Expenses incurred in connection with the registration of the Miram
Shares generally will be borne by us. These registration rights will terminate
upon the earlier of the sale of all or substantially all our assets or our
merger with and into another business entity or December 31, 2000.
Cybex Computer Products Corporation. In connection with our strategic
partner agreement with Cybex, we, among other things, granted certain
registration rights to Cybex, and certain permitted assignees of Cybex
(collectively, the "Cybex Holders"). Commencing March 1, 2001, Cybex Holders
holding at least two-thirds of the shares of common stock issued or issuable
upon conversion of Cybex's 500,000 shares of Series D preferred stock, may
require us to file a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the resale of their shares. To
demand such registration, Cybex Holders must request that the registration
statement register the resale of at least
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$5 million of common stock, with such amount being determined based on the
market price of our common stock on the date of the Cybex Holders' request. We
are not required to effect more than one demand registration in total.
Additionally, Cybex Holders will have piggyback registration rights with
respect to the future registration of our shares of common stock under the
Securities Act. If we propose to register any shares of common stock under the
Securities Act (other than on Form S-8 or Form S-4, or a registration in which
the only common stock being registered is common stock issuable upon conversion
of debt securities which are also being registered or in an SEC Rule 145
transaction), the holders of shares having piggyback registration rights are
entitled to receive notice of such registration and are entitled to include
their shares in the registration.
At any time after we become eligible to file a registration statement on
Form S-3 under the Securities Act, Cybex Holders may require us to file one
registration statement per 12-month period on Form S-3 with respect to their
shares of common stock; provided, however, that the aggregate offering price for
any such registration must be at least $3 million.
These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations described above,
except underwriting discounts and commissions. In addition, we have agreed to
indemnify Cybex Holders for losses they incur in connection with registrations
under the strategic partner agreement.
Private Placement of Common Stock and Warrants. In November 1997 we
completed a private placement of 1,250,000 shares of common stock and 312,500
warrants to purchase shares of common stock, to various members of our
management, other individuals and institutional investors. In June 1998 we
completed a private placement of 742,500 shares of common stock to various
members of our management, other individuals and institutional investors.
Pursuant to purchase agreements executed by the holders of these securities, if
we propose to register any of our common stock or other securities in connection
with the public offering of such securities solely for cash, other than an
initial public offering or certain other types of offerings, we shall promptly
give each holder written notice of such proposed filing. Upon the timely request
of each holder, we must, subject to certain exceptions, cause such securities to
be registered. If such offering is underwritten, we will not be required to
include any of these securities in the offering unless the holder accepts the
terms of the underwriting and then only in such quantity as the underwriters
determine in their sole discretion will not materially jeopardize or in any way
reduce the success of the offering. Expenses incurred in connection with the
registration of these securities will be borne by us. Assignment of these
registration rights is permitted in certain instances. Additionally, each holder
has agreed that it will not sell any of these securities until 120 days after
the earlier of the effective registration of these securities or the effective
date of a registration statement in which these securities could have been
included. These registration rights will terminate three years after we become a
public company.
Private Placement of 13% Bridge Promissory Notes and Warrants and Series C
Preferred Stock. In March 1999 we issued in a private placement approximately
$3.5 million of our 13% Bridge Promissory Notes together with warrants to
purchase 525,000 shares of our common stock (the "March Note Placement"). In
June 1999 holders of approximately $2.3 million of the 13% Bridge Promissory
Notes issued in connection with the March Note Placement converted their notes
and accrued interest thereon of approximately $96,000 to 296,342 shares of
common stock. In June through August 1999 we completed a private placement of
$3.7 million and issued warrants for the purchase of 449,200 shares of common
stock at a price of $0.02 per share. The private placement was structured as an
offering of 13% Bridge Promissory Notes with an option to immediately convert to
common stock at a price of $8.00 per share (the "July Note Placement"). Bridge
Promissory Notes totaling $550,000 were
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<PAGE> 74
issued, along with warrants to purchase 65,000 shares of common stock, and are
due and payable in July 2000. We issued 394,063 shares of common stock, along
with warrants to purchase 384,200 shares of common stock, with a total value of
approximately $3.2 million. In January 2000 we completed the private placement
of 1,231,450 shares of our Series C preferred stock and warrants to purchase
1,231,450 shares of our common stock. Pursuant to the note and warrant purchase
agreements executed in connection with the March Note Placement, the Series C
preferred stock purchase agreements and the Series C preferred stock and warrant
purchase agreements, beginning January 1, 2001, the holders of at least 66 2/3%
of the then outstanding shares of common stock issuable under these warrants or
upon the conversion of the Series C preferred stock, as the case may be, may
notify us that they desire to have such shares registered for sale to the
public. Promptly following receipt of such notice and after notifying all other
applicable holders of their right to participate in such offering, we will
prepare and file, and use our best efforts to prosecute to effectiveness, an
appropriate registration statement with the SEC which includes such securities.
We may delay such registration for not longer than 180 days if our board of
directors in good faith reasonably believes that the filing would materially
adversely affect certain pending or proposed offerings or certain other actions.
If less than $5.0 million of the common stock issuable pursuant to the note and
warrant purchase agreements executed in connection with the March Note Placement
or the Series C preferred stock and warrant purchase agreements or less than
$10.0 million of common stock issuable upon conversion of the Series C preferred
stock pursuant to the Series C preferred stock purchase agreements is to be sold
in such offering, we will not be obligated to register such securities. We are
obligated to make such a filing with regard to the common stock issuable
pursuant to the note and warrant purchase agreements executed in connection with
the March Note Placement or the Series C preferred stock and warrant purchase
agreements only once, and are obligated to make such a filing with regard to the
common stock issuable upon conversion of the Series C preferred stock pursuant
to the Series C preferred stock purchase agreements only one time in any twelve
month period and no more than three times in the aggregate, unless such
registration statement is not declared effective.
Even if the holders do not exercise these demand registration rights, once
we are eligible to effect a registration of our common stock on Form S-3, the
holders of the shares of common stock issuable under the warrants sold pursuant
to the March Note Placement and the July Note Placement and the shares of common
stock issuable upon conversion of the Series C preferred stock will have the
right to request us to register such securities on Form S-3 as long as the
aggregate proposed offering price of such securities is not less than $3.0
million. We are obligated to honor such a request only once during a 12 month
period. If such an offering is underwritten, the holders' securities will not be
included unless the holders accept the terms of the underwriting agreement. We
may delay such an S-3 offering for no longer than 180 days if our board of
directors in good faith reasonably believes that the filing would materially
adversely affect certain pending or proposed offerings or other certain actions.
Finally, if we propose to register any of our securities in connection with
the public offering of such securities solely for cash, other than an initial
public offering or certain other types of offerings, we shall promptly give each
holder written notice of such proposed filing. Upon the timely request of each
holder, we must, subject to certain exceptions, cause such securities to be
registered.
Expenses incurred in connection with the registration of these securities
will be borne by us and assignment of these registration rights is permitted in
certain instances. Additionally, each holder has agreed that if requested by us
or the underwriters, it will not sell any of these securities until 180 days
after the effective date of an underwritten public offering of any our shares of
common stock without our prior written approval or the approval of the
underwriters. If the offering is an underwritten initial public offering, such a
request will not
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be required and the holders of the warrants or shares of common stock have
agreed to execute and deliver a lock-up letter to the underwriter if requested
to do so. These registration rights will terminate at the earlier of (a) two
years after we become a public company in the case of common stock issuable
under the warrants pursuant to the note and warrant purchase agreements executed
in connection with the March Note Placement and the July Note Placement and four
years after we become a public company in the case of common stock issuable
under the warrants or upon conversion of the Series C preferred stock pursuant
to the Series C preferred stock purchase agreements and the Series C preferred
stock and warrant purchase agreements, as the case may be, or (b) such time as
the holder is able to sell all of such holder's securities issued pursuant to
the note and warrant purchase agreements executed in connection with the March
Note Placement and the July Note Placement and the Series C preferred stock
purchase agreements in a single three-month period in compliance with Rule 144
of the Securities Act.
In connection with the purchase by each of Philips and Seligman
Communications and Information Fund of 166,666 shares of Series C preferred
stock in May 1999 and the purchase by Seligman of 333,333 shares of Series C
preferred stock and warrants to purchase 333,333 shares of common stock in
October 1999, we granted registration rights to Philips and Seligman that are
substantially similar to the registration rights we granted pursuant to the
March Note Placement.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
We are subject to the provisions of Section 203 of the DGCL. In general,
Section 203 of the DGCL prohibits a publicly-held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. This provision could
delay, discourage or prohibit transactions not approved in advance by the board
of directors, such as takeover attempts that might result in a premium over the
market price of the common stock.
Our certification of incorporation and bylaws provide that any action
required or permitted to be taken by our stockholders may be taken only at a
duly called annual or special meeting of stockholders, and that special meetings
of stockholders may be called only by our Chairman of the Board, the President
or the board of directors. Our certificate of incorporation does not allow for
action of the stockholders to be taken by written consent. These provisions
could have the effect of delaying until the next stockholders' meeting
stockholder actions which are favored by the holders of a majority of our
outstanding voting securities. Our certificate of incorporation also does not
allow for cumulative voting for directors or for any other purpose. Under
cumulative voting, a minority stockholder holding a sufficient percentage of a
class of shares might be able to ensure the election of one or more directors.
These and other provisions contained in our certificate of incorporation and
bylaws could delay or discourage certain types of transactions involving an
actual or potential change in control of us or our management (including
transactions in which stockholders might otherwise receive a premium for their
shares over the then current prices) and may limit the ability of stockholders
to remove then-current management or approve transactions that stockholders may
deem to be in their best interests and, therefore, could adversely affect the
price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, LLC.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock.
Future sales of substantial amounts of common stock in the public market after
this offering could cause the market price of our common stock to decline.
Furthermore, since only a limited number of shares will be available for sale
shortly after this offering because of contractual and legal restrictions on
resale, sales of substantial amounts of our common stock in the public market
after the restrictions lapse could adversely affect the prevailing market price
and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 12,831,400
shares of common stock. Of these shares, the 4,000,000 shares sold in this
offering (and any shares issued upon exercise of the underwriters'
over-allotment option) will be freely tradable without restriction under the
Securities Act, unless purchased by "affiliates" of ours as that term is defined
in Rule 144 under the Securities Act. Affiliates generally include officers,
directors or 10% stockholders. Shares eligible to be sold by affiliates pursuant
to Rule 144 are subject to volume restrictions as described below.
The remaining 8,831,400 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rules 144, 144(k) or 701 under the Securities Act, which
are summarized below. Sales of these shares in the public market, or the
availability of such shares for sale, could cause the market price of our common
stock to decline.
Certain of our stockholders have entered into lock-up agreements generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 180 days after the effective date of the registration statement filed
pursuant to this offering. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
salable until such agreements expire or are waived. Taking into account the
lock-up agreements, the following shares will be eligible for sale in the public
market at the following times:
- Beginning on the effective date of the registration statement filed
pursuant to this offering, only the shares sold in the offering will be
immediately available for sale in the public market;
- Beginning 180 days after the effective date, approximately 6,936,239
shares will be eligible for sale pursuant to Rules 701, 144 and 144(k),
of which all but 5,907,827 shares are held by affiliates;
- An additional 1,895,161 shares will be eligible for sale pursuant to Rule
144 on March 31, 2001.
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RULE 144
Under Rule 144, beginning 90 days after the effective date of the
registration statement of which this prospectus is a part, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year, which includes the holding period of any prior owner other than
an affiliate, would generally be entitled to sell within any three-month period
a number of shares that does not exceed the greater of:
- 1% of the outstanding shares of our common stock then outstanding, which
will equal approximately 128,314 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
Mobility.
RULE 144(k)
Under Rule 144(k), a person who was not an affiliate of Mobility at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, which includes the holding
period of any prior owner except an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees, consultants or advisors,
other than affiliates, who purchases or receives shares from us in connection
with a compensatory stock purchase plan or option plan or other written
agreement will be eligible to resell these shares beginning 90 days after the
effective date of the registration statement of which this prospectus is a part,
subject only to the manner of sale provisions of Rule 144, and by affiliates
under Rule 144 without compliance with its holding period requirements.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of 6,990,672 shares of common
stock or securities convertible into common stock will be entitled to
registration rights with respect to these shares under the Securities Act. When
these shares are registered under the Securities Act they will be freely
tradable unless held by affiliates.
STOCK OPTIONS
In addition, we intend to file a registration statement under the
Securities Act as promptly as possible upon the completion of this offering to
register 1,250,000 shares of common stock issued or to be issued pursuant to our
employee benefit plans or upon exercise of non-plan options. As a result, any
options or rights exercised under the 1996 Plan after the effectiveness of the
registration statement will be available for sale in the public market 180 days
after the effective date of this offering upon the expiration of lock-up
agreements. However, such shares held by affiliates will still be subject to the
volume limitation, manner of sale, notice and public information requirements of
Rule 144 unless otherwise resalable under Rule 701.
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank
Securities Inc. and Banc of America Securities LLC, have severally agreed to
purchase from us the following respective numbers of shares of common stock at a
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus:
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Deutsche Bank Securities Inc. .............................. 1,920,000
Banc of America Securities LLC.............................. 1,280,000
Bear, Stearns & Co. Inc. ................................... 75,000
Chase H&Q................................................... 75,000
CIBC World Markets Corp. ................................... 75,000
FleetBoston Robertson Stephens Inc. ........................ 75,000
Advest, Inc. ............................................... 50,000
George K. Baum & Company.................................... 50,000
Chatsworth Securities LLC................................... 50,000
FAC/Equities................................................ 50,000
First Security Van Kasper................................... 50,000
C.L. King & Associates, Inc. ............................... 50,000
Pennsylvania Merchant Group................................. 50,000
Raymond James & Associates, Inc. ........................... 50,000
SunTrust Equitable Securities Corporation................... 50,000
Wedbush Morgan Securities Inc. ............................. 50,000
---------
Total............................................. 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the
underwriters to purchase the common stock is subject to the terms and conditions
set forth in the underwriting agreement. The underwriting agreement requires the
underwriters to purchase all of the shares of the common stock offered by this
prospectus, if any are purchased. The shares of common stock offered by the
underwriters pursuant to this prospectus are subject to prior sale, when, as and
if delivered to and accepted by the underwriters, and subject to the
underwriters' right to reject any order in whole or in part.
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock to the public at the initial public offering
price of $12.00 per share and to certain dealers at a price that represents a
concession not in excess of $0.50 per share. Any such securities dealers may
resell any shares purchased from the underwriters to certain other brokers or
dealers at a discount of up to $0.10 per share from the public offering price.
The underwriters may change the public offering price after the common stock is
released for sale to the public.
The underwriters may sell more shares than the total number set forth in
the table above. To cover these sales, we have granted the underwriters an
option to purchase up to an aggregate of 600,000 additional shares of common
stock at the initial public offering price, less the underwriting discounts and
commissions. The underwriters may exercise this option at any time within 30
days after the date of this prospectus only to cover these sales. To the extent
the underwriters exercise this option, each of the underwriters will purchase
shares in approximately the same proportion as the number of shares of common
stock to be purchased by it shown in the above table bears to 4,000,000 and we
will be obligated, pursuant to the option, to sell those shares to the
underwriters. If purchased, the underwriters will offer the additional shares on
the same terms as those on which the 4,000,000 shares are
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being offered. If the underwriters exercise their over-allotment option in full,
the total public offering price will be $55,200,000, the total underwriting
discount will be $3,864,000 and the total proceeds to us will be $51,336,000.
The following table shows the per share and total offering expenses and
underwriting discounts and commissions we will pay. This information is
presented assuming either no exercise or full exercise by the underwriters of
the over-allotment option.
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts and
commissions to be paid by us..... $0.84 $0.84 $3,360,000 $3,864,000
Expenses payable by us............. $0.38 $0.33 $1,532,855 $1,532,855
</TABLE>
Bank of America, N.A., an affiliate of Banc of America Securities LLC, is
our primary lender. We intend to use a portion of the proceeds from this
offering to repay certain amounts outstanding under our loans from Bank of
America, N.A.
Because affiliates of Banc of America Securities LLC may receive in excess
of 10% of the proceeds in the offering, the offering is being conducted in
accordance with Rule 2710(c)(8) and 2720 of the NASD Conduct Rules. These rules
require that the initial public offering price may be no higher than that
recommended by a "qualified independent underwriter," as defined by the NASD.
Deutsche Bank Securities Inc. is serving in that capacity and has conducted due
diligence and participated in the preparation of this prospectus and the
registration statement of which this prospectus forms a part. The initial public
offering price is not higher than the price recommended by Deutsche Bank
Securities Inc.
Mr. Christopher Y. Pelgrift, a managing director of Banc of America
Securities LLC, holds 5,000 shares of Series C preferred stock and 5,000 shares
of common stock which are considered to be compensation in connection with this
offering and are subject to a lock-up agreement under which he agrees not to
transfer or otherwise dispose of, directly or indirectly, any shares of common
stock or Series C preferred stock, or any securities convertible into or
exchangeable or exercisable for shares of our common stock for a period of one
year after the effective date of the registration statement filed pursuant to
this offering.
We have agreed to indemnify the underwriters with respect to certain
liabilities, including liabilities under the Securities Act.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the common stock. Specifically, the underwriters may over-allot shares of our
common stock in connection with this offering, thereby creating a short position
in the underwriters' account. A short position results when an underwriter sells
more shares of common stock than such underwriter is committed to purchase.
Additionally, to cover over-allotments or to stabilize the market price of the
common stock, the underwriters may bid for, and purchase, shares of our common
stock at a level above that which might otherwise prevail in the open market.
The underwriters are not required to engage in these activities, and, if they
do, they may discontinue doing so at any time. The underwriters also may reclaim
selling concessions allowed to an underwriter or dealer, if the underwriters
repurchase shares distributed by such underwriter or dealer. These stabilizing
and other transactions may cause the price of our common stock to be higher than
it otherwise would be in the absence of such transactions. These transactions
may be effected on the Nasdaq National Market, in the over-the-counter market or
otherwise.
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We and our executive officers and directors and certain of our
stockholders, including all stockholders beneficially owning, individually, at
least one percent of our common stock prior to the offering, have agreed subject
to limited exceptions, without the prior written consent of Deutsche Bank
Securities Inc. for a period of 180 days after the effective date of the
registration statement filed pursuant to this offering, not to, directly or
indirectly, offer, sell, purchase or otherwise dispose of or transfer any shares
of our common stock or securities convertible into or exchangeable or
exercisable for our common stock, request the filing of any registration
statement or enter into any hedging transaction with respect to any shares of
our common stock or securities convertible into or exchangeable or exercisable
for our common stock or enter into any swap or other agreement that transfers
the economic consequence of ownership of such securities. The foregoing
restrictions generally apply to all shares that a stockholder beneficially owns
or over which a stockholder has the power of disposition at, and subsequent to,
the time such stockholder executes a lock-up agreement with Deutsche Bank
Securities Inc.
The representatives of the underwriters have advised us that the
underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1,532,855.
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 300,000 shares for our employees, relatives of our
employees and directors and vendors and customers. The number of shares of
common stock available for sale to the general public will be reduced to the
extent these reserved shares are purchased. Any reserved shares that are not
purchased will be offered by the underwriters to the general public on the same
basis as the other shares offered by this prospectus. Generally, reserved shares
purchased by persons or entities subject to the 180-day lock-up period referred
to above will also be locked up for 180 days. Reserved shares will not otherwise
be subject to a lock-up period, except as may be required by the Conduct Rules
of the National Association of Securities Dealers. These rules require that some
purchasers of reserved shares be subject to a three-month lock-up period if they
are affiliated with or associated with NASD members or if they or members of
their immediate families hold senior positions at financial institutions.
Our common stock has been approved for listing on the Nasdaq National
Market under the symbol "MOBE."
PRICING OF THIS OFFERING
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price for our common stock was
determined by negotiation among us and the representatives of the underwriters.
Among the factors considered in determining the public offering price were:
- prevailing market conditions;
- our results of operations in recent periods;
- the present stage of our development;
- the market capitalizations and stages of development of other companies
which we and the representatives of the underwriters believe to be
comparable to us; and
- estimates of our business potential.
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INTERESTS OF NAMED EXPERTS AND COUNSEL
The validity of the common stock offered hereby will be passed upon for
Mobility by Jackson Walker L.L.P., Dallas, Texas. Richard F. Dahlson, a partner
of Jackson Walker, is Secretary of Mobility. Willkie Farr & Gallagher, New York,
New York, is acting as counsel for the underwriters in connection with selected
legal maters related to the shares of common stock offered by this prospectus.
As of the date of this prospectus, Mr. Dahlson owns 164,452 shares of common
stock, warrants to purchase an additional 4,139 shares of common stock and
21,666 shares of Series C preferred stock, which will convert into 14,948 shares
of our common stock upon completion of this offering.
EXPERTS
The consolidated financial statements of Mobility Electronics, Inc. and
subsidiaries as of December 31, 1998 and 1999 and for each of the years in the
three-year period ended December 31, 1999, have been included herein and in the
registration statement filed in connection with this offering in reliance upon
the report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein and upon the authority of said firm as experts in accounting
and auditing.
ADDITIONAL INFORMATION AVAILABLE TO YOU
We have filed with the SEC a registration statement on Form S-1 with
respect to the common stock in this offering. This prospectus, which constitutes
a part of the registration statement, does not contain all of the information
set forth in the registration statement or the exhibits and schedules which are
part of the registration statement. For further information with respect to
Mobility and the common stock, reference is made to the registration statement
and the exhibits and schedules thereto. You may read and copy any document we
file at the SEC's public reference room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the
public reference room. Our SEC filings are also available to the public from the
SEC's web site at www.sec.gov.
Upon completion of this offering, Mobility will become subject to the
information and periodic reporting requirements of the Securities Exchange Act
and, in accordance therewith, will file periodic reports, proxy statements and
other information with the SEC. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the SEC's
public reference room and the web site of the SEC referred to above.
79
<PAGE> 82
(This page intentionally left blank)
<PAGE> 83
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Condensed Consolidated Financial Statements:
Condensed Consolidated Balance Sheets as of December 31,
1999 and March 31, 2000 (unaudited).................... F-2
Condensed Consolidated Statements of Operations for the
three months ended March 31, 1999 (unaudited) and 2000
(unaudited)............................................ F-3
Condensed Consolidated Statement of Stockholders' Equity
for the three months ended March 31, 2000
(unaudited)............................................ F-4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 (unaudited) and 2000
(unaudited)............................................ F-5
Notes to Condensed Consolidated Financial Statements...... F-6
Independent Auditors' Report................................ F-10
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998 and
1999................................................... F-11
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999....................... F-12
Consolidated Statements of Stockholders' Equity
(Deficiency) and Comprehensive Income (Loss) for the
years ended December 31, 1997, 1998 and 1999........... F-13
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999....................... F-14
Notes to Consolidated Financial Statements................ F-15
</TABLE>
F-1
<PAGE> 84
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1999 2000 2000
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................ $ 4,792,313 6,317,537 6,317,537
Accounts receivable, net......................... 2,992,014 4,369,572 4,369,572
Inventories...................................... 1,554,016 2,021,360 2,021,360
Prepaid expenses and other current assets........ 682,728 1,034,403 1,034,403
----------- ----------- -----------
Total current assets..................... 10,021,071 13,742,872 13,742,872
----------- ----------- -----------
Property and equipment, net........................ 1,916,891 1,887,159 1,887,159
Other assets, net.................................. 2,961,375 2,449,079 2,449,079
----------- ----------- -----------
$14,899,337 18,079,110 18,079,110
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit.................................. $ -- 1,866,074 1,866,074
Accounts payable................................. 2,298,946 3,523,205 3,523,205
Accrued expenses and other current liabilities... 1,109,771 1,224,135 1,224,135
Notes payable.................................... -- 2,685,042 2,685,042
Current installments of long-term debt........... 993,138 123,981 123,981
Current installments of capital lease
obligations................................... 136,326 90,491 90,491
----------- ----------- -----------
Total current liabilities................ 4,538,181 9,512,928 9,512,928
----------- ----------- -----------
Lines of credit.................................... 2,728,538 -- --
Long-term debt, less current installments.......... 5,285,750 3,406,000 3,406,000
Capital lease obligations, less current
installments....................................... 36,636 23,647 23,647
----------- ----------- -----------
Total liabilities........................ 12,589,105 12,942,575 12,942,575
----------- ----------- -----------
Stockholders' equity:
Convertible preferred stock -- Series C, $.01 par
value; authorized 15,000,000 shares; 2,399,102
and 2,447,808 shares issued and outstanding at
December 31, 1999 and March 31, 2000
(unaudited), respectively..................... 23,991 24,478 24,478
Convertible preferred stock -- Series D, $.01 par
value; authorized 500,000 shares, 500,000
shares issued and outstanding at March 31,
2000 (unaudited).............................. -- 5,000 --
Common stock, $.01 par value; authorized
90,000,000 shares; 5,978,679 and 6,698,119
shares issued and outstanding at December 31,
1999 and March 31, 2000 (unaudited),
respectively; 7,136,714 shares issued and
outstanding pro forma......................... 59,787 66,981 71,367
Additional paid-in capital....................... 51,719,778 57,129,997 57,130,611
Accumulated deficit.............................. (46,659,488) (49,541,832) (49,541,832)
Stock subscription and deferred compensation..... (2,833,836) (2,548,089) (2,548,089)
----------- ----------- -----------
Total stockholders' equity............... 2,310,232 5,136,535 5,136,535
----------- ----------- -----------
$14,899,337 18,079,110 18,079,110
=========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 85
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net sales................................................... $ 3,227,784 5,002,005
Cost of sales............................................... 2,794,875 3,607,286
----------- ----------
Gross profit........................................... 432,909 1,394,719
----------- ----------
Operating expenses:
General and administrative................................ 829,097 1,255,380
Research and development.................................. 1,072,484 950,657
Marketing and sales....................................... 1,554,167 1,144,301
----------- ----------
Total operating expenses.......................... 3,455,748 3,350,338
----------- ----------
Loss from operations.............................. (3,022,839) (1,955,619)
Other income (expense):
Interest expense.......................................... (642,195) (986,734)
Interest income........................................... 14,633 57,799
Other, net................................................ 472 2,210
----------- ----------
Loss before provision for income taxes............ (3,649,929) (2,882,344)
Provision for income taxes.................................. -- --
----------- ----------
Net loss.......................................... (3,649,929) (2,882,344)
Beneficial conversion costs of preferred stock.............. -- (48,663)
----------- ----------
Net loss attributable to common stockholders................ $(3,649,929) (2,931,007)
=========== ==========
Net loss per share:
Basic and diluted......................................... $ (0.80) (0.46)
=========== ==========
Weighted average common shares outstanding:
Basic and diluted......................................... 4,566,892 6,324,220
=========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 86
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
STOCK
SUBSCRIPTIONS
COMMON STOCK ADDITIONAL RECEIVABLE NET
PREFERRED ------------------- PAID-IN ACCUMULATED AND DEFERRED STOCKHOLDERS'
STOCK SHARES AMOUNT CAPITAL DEFICIT COMPENSATION EQUITY
--------- --------- ------- ---------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1999....... $23,991 5,978,679 $59,787 51,719,778 (46,659,488) (2,833,836) 2,310,232
Issuance of common stock for
warrants exercised................ -- 719,440 7,194 202,304 -- -- 209,498
Issuance of Series C preferred stock
for cash.......................... 487 -- -- 268,596 -- -- 269,083
Issuance of Series D preferred stock
for cash.......................... 5,000 -- -- 4,726,276 -- -- 4,731,276
Issuance of warrants................ -- -- -- 213,043 -- -- 213,043
Amortization of deferred
compensation...................... -- -- -- -- -- 285,747 285,747
Net loss............................ -- -- -- -- (2,882,344) -- (2,882,344)
------- --------- ------- ---------- ----------- ---------- ----------
Balances at March 31, 2000.......... $29,478 6,698,119 $66,981 57,129,997 (49,541,832) (2,548,089) 5,136,535
======= ========= ======= ========== =========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 87
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(3,649,929) (2,882,344)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for accounts receivable...................... 30,000 30,000
Provision for obsolete inventory....................... 15,000 5,000
Depreciation and amortization.......................... 163,711 179,354
Amortization on deferred loan costs.................... 354,815 710,081
Amortization of deferred compensation.................. -- 307,927
Changes in operating assets and liabilities:
Accounts receivable.................................. (542,014) (514,929)
Inventories.......................................... 1,182,347 (472,345)
Prepaid expenses and other assets.................... 372,115 (388,328)
Accounts payable..................................... (1,060,766) 331,630
Accrued expenses and other current liabilities....... (62,398) 274,407
----------- -----------
Net cash used in operating activities............. (3,197,119) (2,419,547)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment........................ (411,027) (119,891)
----------- -----------
Net cash used in investing activities............. (411,027) (119,891)
----------- -----------
Cash flows from financing activities:
Cash received from issuance of note payable............... 3,500,000 --
Repayment of lines of credit.............................. (420,000) (862,465)
Repayment of note payable................................. -- (166,667)
Repayment of long-term debt and capital lease
obligations............................................ (55,762) (116,063)
Net proceeds from issuance of preferred stock............. 1,052,518 5,000,359
Proceeds from exercise of warrants........................ 173,878 209,498
----------- -----------
Net cash provided by financing activities......... 4,250,634 4,064,662
----------- -----------
Net increase in cash and cash equivalents......... 642,488 1,525,224
Cash and cash equivalents, beginning of period.............. 2,432,703 4,792,313
----------- -----------
Cash and cash equivalents, end of period.................... $ 3,075,191 6,317,537
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE> 88
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1999 AND 2000
(1) BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Mobility Electronics, Inc. (Mobility or the Company) formerly known as
Electronics Accessory Specialists International, Inc. and its wholly owned
subsidiary, Mobility Electronics, L.L.C., including its three operating
subsidiaries, up to October 1999, being the date of the sale of the subsidiary.
All significant intercompany balances and transactions have been eliminated.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles, pursuant to rules and regulations of
the Securities and Exchange Commission. In the opinion of management, the
accompanying condensed consolidated financial statements include all adjustments
that are necessary for a fair presentation of the results for the interim
periods presented. Certain information and footnote disclosures have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements and notes thereto should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's audited consolidated financial statements as of and
for the year ended December 31, 1999. Results of operations in interim periods
are not necessarily indicative of results to be expected for a full year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Net Loss Per Common Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or contracts to issue common stock were exercised or converted to
common stock or resulted in the issuance of common stock that then shared in the
earnings or loss of the Company.
(b) Unaudited Interim Financial Information
The unaudited interim financial statements as of and for the three months
ended March 31, 1999 and 2000, reflect, in the opinion of management, all
adjustments (which include only normal recurring adjustments) necessary to
fairly present the financial position, results of operations, and cash flows as
of and for the periods presented. The results of the interim periods presented
are not necessarily indicative of results to be expected for the full year.
(3) STOCKHOLDERS' DEFICIENCY
(a) Preferred Stock
On March 6, 2000, the Company signed a Strategic Partner Agreement with
Cybex Computer Products Corporation (Cybex). The Company and Cybex have agreed
to license certain technology to each other and the Company has agreed to sell
certain of its products to Cybex on a private label basis. In conjunction with
this agreement, the Company sold Cybex 500,000 shares of $0.01 par value Series
D preferred stock for $5,000,000, or $10.00 per share. The Series D preferred
stockholders have voting rights consistent with common stockholders and have
liquidation preference over common stockholders but subordinate to Series C
preferred stockholders. The Series D preferred stock is convertible into shares
of common stock. On March 1, 2002, each share of Series D preferred stock will
convert automatically into
F-6
<PAGE> 89
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
a number of shares of common stock determined by dividing $10.00 by the offering
price per share used in the last round of equity private placement financing
prior to March 1, 2002; provided, however, immediately prior to the consummation
of a public offering, each share of Series D preferred stock will convert
automatically into the number of shares of common stock determined by dividing
$10.00 by 95% of the offering price per share of the common stock used in the
offering. In the event of liquidation or dissolution, the holders of Series D
preferred stock will be entitled to receive the amount they paid for their
stock, plus accrued and unpaid dividends out of assets legally available for
such payments after the holders of Series C preferred stock have received their
preferential payments, but prior to the time other holders of our securities
will be entitled to any payments. The Company is prohibited from paying any cash
dividends on common stock while any shares of Series D preferred stock remain
outstanding without the consent of the Series D stockholders.
During January 2000, the Company completed a Private Placement and issued
48,706 shares of Series C preferred stock at $6.00 per share for total gross
proceeds of $292,240. In conjunction with this Private Placement, the Company
issued a warrant for each share of Series C preferred stock to purchase two
shares of common stock. The total warrants issued of 48,706 are exercisable at
$0.02 per common stock share and expire October 1, 2002.
At the date of issuance of the Series C shares, a non-cash beneficial
conversion adjustment of $48,663, which represents a 17% discount to the fair
value of the common stock at the date of issuance, has been recorded in the 2000
consolidated financial statements as an increase and decrease to additional
paid-in capital.
The Series C preferred stock is convertible into shares of common stock.
The rate of conversion is 1-to-0.68995 as of March 31, 2000. The initial
conversion rate was one for one, but was subject to change if certain events
occur. Generally, the conversion rate will be adjusted if the Company issues any
non-cash dividends on outstanding securities, splits its securities or otherwise
effects a change to the number of its outstanding securities. The conversion
rate will also be adjusted if the Company issues additional securities at a
price that is less than the price that the Series C preferred stockholders paid
for their shares. Such adjustments will be made according to certain formulas
that are designed to prevent dilution of the Series C preferred stock. The
Series C preferred stock can be converted at any time at the option of the
holder, and will convert automatically, immediately prior to the consummation of
a firm commitment underwritten public offering of common stock pursuant to a
registration statement filed with the SEC having a per share price equal to or
greater than $24.00 per share and a total gross offering amount of not less than
$15.0 million.
The Company may not pay any cash dividends on its common stock while any
Series C preferred stock remain outstanding without the consent of the Series C
preferred stockholders. Holders of shares of Series C preferred stock are
entitled to vote on all matters submitted for a vote of the holders of common
stock. Holders will be entitled to one vote for each share of common stock into
which one share of Series C preferred stock could then be converted. In the
event of liquidation or dissolution, the holders of Series C preferred stock
will be entitled to receive the amount they paid for their stock, plus accrued
and unpaid dividends out of the Company's assets legally available for such
payments prior to the time other holders of securities junior to the Series C
preferred stock will be entitled to any payments.
F-7
<PAGE> 90
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(b) Common Stock
On March 10, 2000, the Company's Board of Directors authorized and on March
31, 2000 the Company's stockholders approved a 1-for-2 reverse stock split, and
a post-split adjustment of the number of authorized shares of common stock to
90,000,000 shares. All share information included in the accompanying condensed
consolidated financial statements has been retroactively adjusted to reflect
this reverse split and post-split adjustment.
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of the Company's stockholders. There is no right to
cumulative voting for the election of directors. Holders of shares of common
stock are entitled to receive dividends, if and when declared by the board of
directors out of funds legally available therefor, after payment of dividends
required to be paid on any outstanding shares of preferred stock. Upon
liquidation, holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to the liquidation
preferences of any outstanding shares of preferred stock. Holders of shares of
common stock have no conversion, redemption or preemptive rights.
(4) LONG-TERM DEBT
On February 29, 2000, the Company amended the certain Bridge Promissory
Notes to extend the maturity date of $1,225,000 of the Existing Bridge Notes and
related accrued interest of approximately $160,000 from March 31, 2000 to the
earlier of an initial public offering (IPO) or other equity infusion of
$10,000,000 or greater, or March 31, 2001. In addition, the annual interest rate
was increased to 14%. In conjunction with the extension of the maturity date,
the Company issued warrants to purchase 138,502 shares of common stock valued at
$213,043. The value of the warrants is charged to interest expense over the term
of the related debt. The warrants are exercisable at a purchase price equal to
the offering price used in the last round of equity private placement financing
prior to the note maturity date of March 31, 2001, or if the Company has
completed an initial public offering of common stock prior to the note maturity
date, then the purchase price shall be ninety-five percent of the offering price
of the initial public offering. However, if the outstanding principal balance
due under these Bridge Notes are not paid by September 30, 2000, 2,500 warrants
for every $100,000 of extended and outstanding principal due shall be awarded
per quarter until the principal balance is paid. These warrants are exercisable
for common stock at an exercise price of $0.02.
(5) LINES OF CREDIT
On March 13, 2000, the Company entered into agreements to extend the
maturity date of the lines of credit and promissory note agreements due March
31, 2000 to March 31, 2001. As part of the extension agreement, the interest
rate on the $750,000 line of credit was increased from the bank's corporate base
rate plus 2.5% to the bank's corporate base rate plus 3.5%.
(6) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Four customers accounted for 16%, 13%, 12% and 12% (unaudited) of net sales
for the three months ended March 31, 1999. Three customers accounted for 29%,
22% and 11% (unaudited) of net sales for the three months ended March 31, 2000.
F-8
<PAGE> 91
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
(7) CONTINGENCIES AND LITIGATION
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity. Accordingly, the accompanying condensed consolidated
financial statements do not include a provision for losses, if any, that might
result from the ultimate disposition of these matters.
(8) NET LOSS PER SHARE
The computation of basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 2000
----------- ----------
<S> <C> <C>
Net loss.................................................. $(3,649,929) (2,882,344)
Beneficial conversion costs of preferred stock............ -- (48,663)
----------- ----------
Net loss attributable to common stockholders.............. $(3,649,929) (2,931,007)
=========== ==========
Weighted average common shares outstanding -- basic and
diluted................................................. 4,566,892 6,324,220
=========== ==========
Net loss per share -- basic and diluted................... $ (0.80) (0.46)
=========== ==========
</TABLE>
(9) PRO FORMA BALANCE SHEET
The pro forma balance sheet as of March 31, 2000 gives effect to the
conversion of 500,000 shares of Series D preferred stock into 438,595 shares of
common stock. Immediately prior to the consummation of a public offering, each
share of Series D preferred stock will convert automatically into the number of
shares of common stock determined by dividing $10.00 by 95% of the offering
price per share of the common stock used in the offering.
F-9
<PAGE> 92
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Mobility Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Mobility
Electronics, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
related consolidated statements of operations, stockholders' equity (deficiency)
and comprehensive income (loss) and cash flows for each of the years in the
three-year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Mobility
Electronics, Inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
Phoenix, Arizona
March 3, 2000, except for the
first, fourth and fifth paragraphs of Note 20,
which are as of March 6, 2000, March 13, 2000
and March 10, 2000, respectively
F-10
<PAGE> 93
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,432,703 4,792,313
Accounts receivable, net.................................. 2,796,787 2,992,014
Inventories............................................... 3,358,025 1,554,016
Prepaid expenses and other current assets................. 356,426 682,728
----------- -----------
Total current assets.............................. 8,943,941 10,021,071
----------- -----------
Property and equipment, net................................. 1,925,548 1,916,891
Other assets, net........................................... 1,865,230 2,961,375
----------- -----------
$12,734,719 14,899,337
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Lines of credit........................................... $ 5,130,855 --
Accounts payable.......................................... 5,557,303 2,298,946
Accrued expenses and other current liabilities............ 1,547,167 1,109,771
Current installments of long-term debt.................... 15,250 993,138
Current installments of capital lease obligations......... 204,314 136,326
----------- -----------
Total current liabilities......................... 12,454,889 4,538,181
----------- -----------
Lines of credit............................................. -- 2,728,538
Long-term debt, less current installments................... 3,587,221 5,285,750
Capital lease obligations, less current installments........ 188,972 36,636
----------- -----------
Total liabilities................................. 16,231,082 12,589,105
----------- -----------
Commitments, contingencies, and subsequent events (notes 7,
8, 12, 13, 14, 15, 17, 18, 19 and 20)
Stockholders' equity (deficiency):
Convertible preferred stock -- Series C, $.01 par value;
authorized 15,000,000 shares; 558,400 and 2,399,102
issued and outstanding at
December 31, 1998 and 1999, respectively............... 5,584 23,991
Common stock, $.01 par value; authorized 90,000,000
shares; 4,563,806 and 5,978,679 shares issued and
outstanding at December 31, 1998 and 1999,
respectively........................................... 45,638 59,787
Additional paid-in capital................................ 26,664,791 51,719,778
Accumulated deficit....................................... (30,202,415) (46,659,488)
Stock subscription and deferred compensation.............. -- (2,833,836)
Accumulated other comprehensive income (loss) -- foreign
currency translation adjustment........................ (9,961) --
----------- -----------
Total stockholders' equity (deficiency)........... (3,496,363) 2,310,232
----------- -----------
$12,734,719 14,899,337
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-11
<PAGE> 94
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net sales.......................................... $12,743,984 21,072,057 13,952,010
Cost of sales...................................... 13,335,273 23,529,822 11,750,705
----------- ----------- -----------
Gross profit (loss)........................... (591,289) (2,457,765) 2,201,305
----------- ----------- -----------
Operating expenses:
General and administrative....................... 1,907,051 4,445,731 3,651,173
Research and development......................... 1,985,750 4,361,365 3,377,215
Marketing and sales.............................. 2,625,560 5,130,955 5,207,503
Purchased research and development............... 965,081 -- --
----------- ----------- -----------
Total operating expenses................. 7,483,442 13,938,051 12,235,891
----------- ----------- -----------
Loss from operations..................... (8,074,731) (16,395,816) (10,034,586)
Other income (expense):
Interest expense................................. (711,245) (1,756,534) (6,396,567)
Interest income.................................. 34,977 118,439 100,136
Other, net....................................... (24,171) 1,053 (126,056)
----------- ----------- -----------
Loss before provision for income taxes... (8,775,170) (18,032,858) (16,457,073)
Provision for income taxes......................... -- -- --
----------- ----------- -----------
Net loss................................. (8,775,170) (18,032,858) (16,457,073)
Dividends declared on Series B preferred stock..... (317,365) -- --
Beneficial conversion costs of preferred stock..... -- -- (1,449,541)
----------- ----------- -----------
Net loss attributable to common stockholders....... $(9,092,535) (18,032,858) (17,906,614)
=========== =========== ===========
Net loss per share:
Basic and diluted................................ $ (3.45) (4.36) (3.59)
=========== =========== ===========
Weighted average common shares outstanding:
Basic and diluted................................ 2,638,577 4,135,575 4,994,283
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 95
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY) AND COMPREHENSIVE
INCOME (LOSS)
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
STOCK FOREIGN
COMMON STOCK ADDITIONAL SUBSCRIPTIONS CURRENCY
PREFERRED ------------------- PAID-IN ACCUMULATED AND DEFERRED TRANSLATION
STOCK SHARES AMOUNT CAPITAL DEFICIT COMPENSATION ADJUSTMENT
--------- --------- ------- ---------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996...... $ 42 2,293,764 $22,938 4,554,380 (2,928,277) (503,592) (5,145)
Conversion of preferred stock to
common stock as part of private
placement........................ (21) 125,500 1,255 (1,234) -- -- --
Redemption of preferred stock for
cash............................. (21) -- -- (995,479) -- -- --
Receipt of stock subscription
receivable....................... -- -- -- -- -- 503,592 --
Reclassification of par value of
common stock issued.............. -- 69,059 690 (690) -- -- --
Issuance of common stock through
private placement................ -- 1,124,500 11,245 7,849,958 -- -- --
Issuance of common stock for asset
purchase......................... -- 55,000 550 424,450 -- -- --
Issuance of common stock for
cash............................. -- 58,366 584 450,496 -- -- --
Issuance of warrants............... -- -- -- 669,308 -- -- --
Preferred stock dividends
declared......................... -- -- -- -- (317,365) -- --
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- -- -- -- -- -- 1,050
Net loss......................... -- -- -- -- (8,775,170) -- --
Total comprehensive loss...
------- --------- ------- ---------- ----------- ---------- --------
Balances at December 31, 1997...... -- 3,726,189 37,262 12,951,189 (12,020,812) -- (4,095)
Conversion of convertible
debentures to common stock....... -- 275,721 2,757 2,125,813 -- -- --
Issuance of common stock through
private placement................ -- 742,500 7,425 7,456,950 -- -- --
Issuance of preferred stock through
private placement................ 5,584 -- -- 3,348,358 -- -- --
Issuance of warrants............... -- -- -- 1,443,438 -- -- --
Repurchase of common stock......... -- -- -- -- -- -- --
Retirement of treasury stock....... -- (180,604) (1,806) (660,957) (148,745) -- --
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- -- -- -- -- -- (5,866)
Net loss......................... -- -- -- -- (18,032,858) -- --
Total comprehensive loss...
------- --------- ------- ---------- ----------- ---------- --------
Balances at December 31, 1998...... 5,584 4,563,806 45,638 26,664,791 (30,202,415) -- (9,961)
Conversion of convertible
debentures to common stock....... -- 296,342 2,963 2,367,777 -- -- --
Issuance of common stock for
cash............................. -- 394,063 3,941 3,032,772 -- -- --
Warrants exercised................. -- 681,093 6,811 183,056 -- -- --
Issuance of warrants............... -- -- -- 5,633,957 -- -- --
Issuance of preferred stock through
private placements............... 14,573 -- -- 8,070,226 -- -- --
Issuance of preferred stock for
cash............................. 1,667 -- -- 930,833 -- -- --
Issuance of preferred stock to VLSI
(note 10)........................ 1,667 -- -- 998,333 -- -- --
Issuance of common stock in
settlement agreement............. -- 38,500 385 307,615 -- -- --
Stock options granted.............. -- -- -- 3,179,943 -- -- --
Issuance of common stock to
consultant....................... -- 4,875 49 50,975 -- -- --
Preferred stock subscribed......... 500 -- -- 299,500 -- (300,000) --
Deferred compensation.............. -- -- -- -- -- (2,775,000) --
Amortization of deferred
compensation..................... -- -- -- -- -- 241,164 --
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- -- -- -- -- -- 9,961
Net loss......................... -- -- -- -- (16,457,073) -- --
Total comprehensive loss...
------- --------- ------- ---------- ----------- ---------- --------
Balances at December 31, 1999...... $23,991 5,978,679 $59,787 51,719,778 (46,659,488) (2,833,836) --
======= ========= ======= ========== =========== ========== ========
<CAPTION>
NET
STOCKHOLDERS'
TREASURY EQUITY
STOCK (DEFICIENCY)
-------- -------------
<S> <C> <C>
Balances at December 31, 1996...... (533,158) 607,188
Conversion of preferred stock to
common stock as part of private
placement........................ -- --
Redemption of preferred stock for
cash............................. -- (995,500)
Receipt of stock subscription
receivable....................... -- 503,592
Reclassification of par value of
common stock issued.............. -- --
Issuance of common stock through
private placement................ -- 7,861,203
Issuance of common stock for asset
purchase......................... -- 425,000
Issuance of common stock for
cash............................. -- 451,080
Issuance of warrants............... -- 669,308
Preferred stock dividends
declared......................... -- (317,365)
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- 1,050
Net loss......................... -- (8,775,170)
-----------
Total comprehensive loss... (8,774,120)
-------- -----------
Balances at December 31, 1997...... (533,158) 430,386
Conversion of convertible
debentures to common stock....... -- 2,128,570
Issuance of common stock through
private placement................ -- 7,464,375
Issuance of preferred stock through
private placement................ -- 3,353,942
Issuance of warrants............... -- 1,443,438
Repurchase of common stock......... (278,350) (278,350)
Retirement of treasury stock....... 811,508 --
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- (5,866)
Net loss......................... -- (18,032,858)
-----------
Total comprehensive loss... (18,038,724)
-------- -----------
Balances at December 31, 1998...... -- (3,496,363)
Conversion of convertible
debentures to common stock....... -- 2,370,740
Issuance of common stock for
cash............................. -- 3,036,713
Warrants exercised................. -- 189,867
Issuance of warrants............... -- 5,633,957
Issuance of preferred stock through
private placements............... -- 8,084,799
Issuance of preferred stock for
cash............................. -- 932,500
Issuance of preferred stock to VLSI
(note 10)........................ -- 1,000,000
Issuance of common stock in
settlement agreement............. -- 308,000
Stock options granted.............. -- 3,179,943
Issuance of common stock to
consultant....................... -- 51,024
Preferred stock subscribed......... -- --
Deferred compensation.............. -- (2,775,000)
Amortization of deferred
compensation..................... -- 241,164
Comprehensive income (loss):
Foreign currency translation
adjustment..................... -- 9,961
Net loss......................... -- (16,457,073)
-----------
Total comprehensive loss... (16,447,112)
-------- -----------
Balances at December 31, 1999...... -- 2,310,232
======== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 96
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $(8,775,170) (18,032,858) (16,457,073)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provisions for accounts receivable....................... 164,230 997,217 955,370
Provision for obsolete inventory......................... 837,635 4,469,481 1,733,463
Depreciation and amortization............................ 695,952 965,086 982,156
Amortization on deferred loan costs...................... 79,762 633,398 4,839,918
Loss on sale of assets................................... 28,537 -- --
Loss on sale of subsidiary............................... -- -- 133,972
Amortization of deferred compensation.................... 5,000 22,000 333,442
Purchased research and development....................... 965,081 -- --
Expense for stock granted to consultant.................. -- -- 51,024
Changes in operating assets and liabilities, net of
acquisition:
Accounts receivable.................................... (1,960,503) (1,145,534) (1,150,597)
Inventories............................................ (3,846,587) (3,128,926) 70,546
Prepaid expenses and other assets...................... 59,612 (518,463) 202,260
Accounts payable....................................... 2,518,295 1,936,508 (2,851,563)
Accrued expenses and other current liabilities......... 333,970 866,136 (341,656)
----------- ----------- -----------
Net cash used in operating activities................ (8,894,186) (12,935,955) (11,498,738)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment......................... (971,636) (902,951) (724,268)
Proceeds from sale of property and equipment............... 169,597 -- --
Purchase of patent......................................... (3,380) -- --
----------- ----------- -----------
Net cash used in investing activities................ (805,419) (902,951) (724,268)
----------- ----------- -----------
Cash flows from financing activities:
Cash received from lines of credit......................... 2,922,609 2,208,246 --
Repayment of lines of credit............................... (1,200,225) -- (2,402,317)
Borrowings under long-term debt............................ 2,635,000 1,750,000 5,165,787
Repayment of long-term debt and capital lease
obligations.............................................. (86,664) (436,677) (318,907)
Cash paid to acquire long-term debt........................ (128,287) -- --
Expenses related to conversion of debt into common stock... -- -- (115,787)
Net proceeds from issuance of preferred stock.............. -- 3,353,942 9,017,299
Cash paid to redeem preferred stock........................ (995,500) -- --
Proceeds from sale of common stock......................... 8,223,583 7,464,375 3,036,713
Proceeds for exercise of warrants.......................... -- -- 189,867
Cash paid for treasury stock............................... -- (278,350) --
Collection of stock subscription receivable................ 503,592 -- --
Dividends paid............................................. (249,635) -- --
----------- ----------- -----------
Net cash provided by financing activities............ 11,624,473 14,061,536 14,572,655
----------- ----------- -----------
Effects of exchange rates on cash and cash equivalents...... 1,050 (5,866) 9,961
----------- ----------- -----------
Net increase in cash and cash equivalents............ 1,925,918 216,764 2,359,610
Cash and cash equivalents, beginning of year................ 290,021 2,215,939 2,432,703
----------- ----------- -----------
Cash and cash equivalents, end of year...................... $ 2,215,939 2,432,703 4,792,313
=========== =========== ===========
Supplemental disclosure of cash flow information:
Interest paid.............................................. $ 601,054 1,230,890 1,223,722
=========== =========== ===========
Supplemental schedule of noncash investing and financing
activities:
Acquisition of property and equipment and assumption of
capital lease obligations................................ $ 374,461 216,215 --
=========== =========== ===========
Warrants issued in connection with the execution of
long-term debt........................................... $ 664,308 1,421,438 5,633,957
=========== =========== ===========
Conversion of 2,101 shares of Series B preferred stock into
125,500 shares of common stock........................... $ 2,489 -- --
=========== =========== ===========
Conversion of preferred dividends and interest on Series B
preferred stock to 11,088 shares of common stock......... $ 88,700 -- --
=========== =========== ===========
Issuance of stock subscribed for 69,059 shares of common
stock.................................................... $ 1,381 -- --
=========== =========== ===========
Stock issued in conjunction with acquisition............... $ 425,000 -- --
=========== =========== ===========
Conversion of debentures and accrued interest to 275,721
shares of common stock................................... $ -- 2,128,570 --
=========== =========== ===========
Conversion of bridge loans to 296,342 shares of common
stock.................................................... $ -- -- 2,370,740
=========== =========== ===========
Retirement of treasury stock............................... $ -- 811,508 --
=========== =========== ===========
Issuance of 166,666 shares of Series C preferred stock for
settlement of accounts payable and inventory purchases... $ -- -- 1,000,000
=========== =========== ===========
Issuance of 38,500 shares of common stock as settlement for
contingent purchase price................................ $ -- -- 308,000
=========== =========== ===========
Options issued for services................................ $ -- -- 3,179,943
=========== =========== ===========
Stock subscription receivable.............................. $ -- -- 300,000
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 97
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) NATURE OF BUSINESS
Mobility Electronics, Inc. (Mobility or the Company) formerly known as
Electronics Accessory Specialists International, Inc. was formed on May 4, 1995.
Mobility was originally formed as a limited liability corporation, however, in
August 1996 the Company became a C Corporation incorporated in the State of
Delaware.
Mobility designs, develops and markets connectivity and remote PCI bus
technology and products for the computer industry and a broad range of related
embedded processor applications. In addition, Mobility also manufactures and/or
distributes in-car and in/out DC power adapters, portable computer docking
stations, port replicators, and monitor stands. Mobility distributes products in
the U.S., Canada and Europe.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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 amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Material
estimates that are particularly susceptible to significant change include
valuation of accounts receivable and inventories, impairment of intangible
assets and valuation of deferred tax assets. Management believes that such
estimates have been appropriately established in accordance with generally
accepted accounting principles.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of Mobility and
its wholly owned subsidiary, Mobility Electronics L.L.C. including its three
operating subsidiaries, up to October 1999, being the date of the sale of this
subsidiary. All significant intercompany balances and transactions have been
eliminated in consolidation.
(c) Cash and Cash Equivalents
All short-term investments purchased with an original maturity of three
months or less are considered to be cash equivalents. Cash and cash equivalents
include cash on hand and amounts on deposit with financial institutions.
(d) Inventories
Inventories consist of component parts purchased partially and fully
assembled for computer accessory items. The Company has all normal risks and
rewards of its inventory held by contract manufacturers. Inventories are stated
at the lower of cost (first-in, first-out method) or market. Finished goods and
work-in-process inventories include material, labor and overhead costs. Overhead
costs are allocated to inventory manufactured in-house based upon direct labor.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment held under capital
leases is stated at the present value of future minimum lease payments.
Depreciation on furniture, fixtures and equipment is provided using the
straight-line method over the estimated useful lives of
F-15
<PAGE> 98
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the assets ranging from two to seven years. Tooling is capitalized at cost and
is depreciated over a two-year period. Equipment held under capital leases and
leasehold improvements are amortized over the shorter of the lease term or
estimated useful lives of the assets.
(f) Deferred Loan Costs
Deferred loan costs are amortized over the term of the related debt.
(g) Licensing Fees and Noncompete Agreement
The cost of licensing fees and a noncompete agreement are included in other
assets and amortized on a straight-line basis over their estimated economic
lives of two to five years.
(h) Goodwill
Goodwill, which is included in other assets, represents the excess of
purchase price over fair value of net assets acquired, is amortized on a
straight-line basis over five years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of goodwill
balance over its remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(i) Impairment of Long-Lived Assets
The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future undiscounted net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed the
fair value of the assets. Assets to be disposed of are reported at the lower of
the carrying amount or fair value less costs to sell.
(j) Revenue Recognition
Revenue from product sales is recognized upon shipment and transfer of
ownership from the Company or contract manufacturer to the customer. Provisions
for returns and credits are provided for in the same period the related sales
are recorded.
(k) Warranty Reserve
The Company provides limited warranties on certain of its products for
periods generally not exceeding three years. The Company accrues warranty costs
for potential product liability and warranty claims based on the Company's claim
experience. The Company's warranty accrual was $50,000, $174,071 and $294,071 as
of December 31, 1997, 1998 and 1999, respectively.
(l) Income Taxes
The Company utilizes the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying
F-16
<PAGE> 99
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(m) Net Loss Per Common Share
Basic loss per share is computed by dividing loss available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could occur
if securities or contracts to issue common stock were exercised or converted to
common stock or resulted in the issuance of common stock that then shared in the
earnings or loss of the Company.
(n) Employee Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
"disclosure only" alternative treatment under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
(o) Fair Value of Financial Instruments
The fair value of accounts receivable, accounts payable, and accrued
expenses approximates the carrying value due to the short-term nature of these
instruments. Management has estimated that the fair values of the line of credit
and notes payable approximate the current balances outstanding, based on
currently available rates for debt with similar terms.
(p) Research and Development
The cost of research and development is charged to expense as incurred.
(q) Foreign Currency Translation
The financial statements of the Company's foreign subsidiary are measured
using the local currency as the functional currency. Assets and liabilities of
this subsidiary are translated at exchange rates as of the balance sheet date.
Revenues and expenses are translated at average rates of exchange in effect
during the year. The resulting cumulative translation adjustments have been
recorded as comprehensive income (loss), a separate component of stockholders'
equity. Foreign currency transaction gains and losses are included in
consolidated net loss for the years ended December 31, 1997, 1998 and 1999.
These foreign currency transaction gains and losses were not considered material
and thus, are not separately disclosed on the face of the accompanying
consolidated statements of operations.
F-17
<PAGE> 100
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(r) Segment Reporting
The Company has only one operating business segment, the sale of peripheral
computer equipment.
(s) Comprehensive Loss
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No.
130) which became effective for the Company January 1, 1998. SFAS No. 130
established standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
adopted the provisions of SFAS No. 130 in 1998. Financial statements presented
for earlier periods have been reclassified in accordance with the requirements
of SFAS No. 130.
(t) Reclassification
Certain amounts included in the 1997 and 1998 consolidated financial
statements have been reclassified to conform to the 1999 financial statement
presentation.
(3) ACQUISITION AND SALE
(a) Acquisition
On July 29, 1997, the Company acquired certain assets and assumed certain
liabilities approximating $565,000 of Miram International, Inc. (Miram), a
manufacturer of docking stations, in exchange for 55,000 shares of common stock
valued at $425,000, with further consideration payable in future periods,
contingent upon product sales revenue during these periods. The Company
purchased Miram to gain access to and control of their in-process universal
docking technology. Miram had not established technological feasibility of its
docking technology. Based upon the determination that the in-process technology
had not yet reached technological feasibility and had no future alternative
uses, the Company wrote off $965,000 of in-process research and development in
1997. The transaction was accounted for in accordance with the purchase method
of accounting. During May 1999, the Company issued an additional 38,500 shares
of common stock valued at $308,000 to settle and eliminate any contingent future
consideration. The Company had no sales relating to the Miram docking
technology. This amount has been recorded as a component of general and
administrative expense for 1999 and no additional payments to the seller will be
required.
(b) Sale of Mobility Electronics LLC
On October 1, 1999, the Company sold its European subsidiary (Mobility
Electronics LLC, which maintained offices in the United Kingdom and France, and
offices and a warehouse/ distribution center in Germany through its three
operating subsidiaries, Mobility Electronics (U.K.), Mobility Electronics GMBH
and Mobility Electronics SARL). The stated value of net assets of approximately
$134,000 was sold for nominal consideration resulting in a loss on sale of the
subsidiary of approximately $134,000, which is recorded as a component of other
loss for 1999.
F-18
<PAGE> 101
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
<S> <C> <C>
Raw materials............................................... $5,564,935 2,381,921
Work-in-process............................................. 175,185 16,344
Finished goods.............................................. 3,111,530 1,105,750
---------- ---------
8,851,650 3,504,015
Less reserve for obsolete inventories....................... 5,493,625 1,950,000
---------- ---------
$3,358,025 1,554,015
========== =========
</TABLE>
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
<S> <C> <C>
Furniture and fixtures...................................... $ 173,631 135,480
Store, warehouse and related equipment...................... 383,121 364,382
Computer equipment.......................................... 687,418 672,102
Capital lease assets........................................ 590,676 581,641
Tooling..................................................... 1,563,396 2,209,813
Leasehold improvements...................................... 63,239 63,239
---------- ---------
3,461,481 4,026,657
Less accumulated depreciation and amortization.............. 1,535,933 2,109,766
---------- ---------
Property and equipment, net....................... $1,925,548 1,916,891
========== =========
</TABLE>
Capital lease assets consist of computers and furniture and fixtures.
(6) OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
<S> <C> <C>
Deferred loan costs......................................... $2,275,344 5,162,389
Deferred compensation expense............................... -- 404,943
Goodwill.................................................... 200,000 200,000
Patents and trademarks...................................... 68,321 126,871
Restricted cash............................................. -- 225,000
Other....................................................... 103,309 92,238
---------- ---------
2,646,974 6,211,441
Less accumulated amortization............................... 781,744 3,250,066
---------- ---------
Net other assets.................................. $1,865,230 2,961,375
========== =========
</TABLE>
F-19
<PAGE> 102
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(7) LINES OF CREDIT
On May 6, 1998, the Company entered into a $1,500,000 line of credit with a
bank. The line bears interest at the bank's corporate base rate plus 1.5% (9.25%
at December 31, 1998), payable monthly, with final payment of interest and
principal on May 6, 1999. The line of credit is secured by the Company's
accounts receivable, inventory, and property and equipment. At December 31,
1998, $792,801 was outstanding under this line of credit. On May 6, 1999, the
Company extended the maturity date of this line of credit to August 1999. In
August 1999, the maturity date was further extended to October 30, 1999 and the
amount available under the line was reduced from $1,500,000 to $750,000. On
October 31, 1999, the maturity date was extended to March 31, 2000 and the
interest rate payable on the line increased to the bank's corporate base rate
plus 2.5%. On March 13, 2000, the bank agreed to extend the maturity date of
this line of credit to March 31, 2001 and increased the interest rate payable on
the line to the bank's corporate base rate plus 3.5% (12% at December 31, 1999).
At December 31, 1999, $466,082 was outstanding under this line of credit.
On July 21, 1998, the Company entered into a line of credit with the same
bank under which the Company may borrow up to the lesser of $4,500,000 or the
sum of 80% of the aggregate amounts of accounts receivable, 60% of the aggregate
amount of finished goods inventory and 40% of the aggregate amount of raw
materials inventory. The interest rate on amounts borrowed under the line of
credit is the bank's corporate base rate plus 1.5% (9.25% at December 31, 1998)
per annum, payable monthly. The line is secured by the Company's accounts
receivable, inventory, and property and equipment. At December 31, 1998,
$4,338,054 was outstanding under this line of credit. This line of credit is
guaranteed by certain stockholders of the Company. The line matured August 31,
1999.
On November 2, 1999, the Company approved the amended and restated business
loan agreement. Pursuant to the terms of this agreement, the outstanding
principal balance of the previously described $4,500,000 note was reduced to
$2,852,054 and then replaced by a revolving line of credit promissory note in
the face amount of $3,000,000. The interest rate on amounts borrowed under this
promissory note is 2.5% plus the bank's corporate base rate per annum (11% at
December 31, 1999), payable monthly and remaining principal and interest due
March 31, 2000. On March 13, 2000, the Company extended the maturity date of
this line of credit to March 31, 2001. At December 31, 1999, $2,262,456 was
outstanding under this line of credit.
The Company's loan agreements contain restrictive debt covenants some of
which include restrictions on officers' salaries, prohibition on payment of
dividends, purchase of fixed assets and maintenance of financial ratios. The
Company was in violation of certain restrictive debt covenants with respect to
the lines of credit and business loan agreements (note 8) as of December 31,
1998 and through 1999 which have been subsequently waived.
F-20
<PAGE> 103
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
<S> <C> <C>
Notes payable............................................... $3,507,471 4,424,138
Convertible debentures...................................... 95,000 79,750
Bridge notes................................................ -- 1,775,000
---------- ---------
3,602,471 6,278,888
Less current installments................................... 15,250 993,138
---------- ---------
Long-term debt, excluding current installments.............. $3,587,221 5,285,750
========== =========
</TABLE>
During 1996 and 1997, the Company had issued $2,161,122 in aggregate
principal amount of Convertible Debentures (the "Debentures"), of which 60% of
the outstanding balance is convertible at the option of the holder into common
stock on or before the closing date of an Initial Public Offering of the
Company. The conversion price is equal to $7.73 per share. At December 31, 1997,
none of the Debentures had been converted. The annual interest rate on the
debentures is 12%. In December 1998, the Company amended the conversion term of
the debentures to allow the holders of the debentures to convert 100% (versus
60%) of the debentures to common stock. As a result, $2,066,122 of the
Debentures and related accrued interest of $62,448 were converted into 275,721
shares of common stock at a conversion price of approximately $7.73 during 1998.
The December 31, 1998 principal balance totaling $95,000 on the remaining
Debentures are due in quarterly installments of $3,813 plus interest, with any
unpaid principal and interest due at maturity dates ranging from October 2003 to
May 2004. At December 31, 1998 and 1999, $95,000 and $79,750 was outstanding
under these debentures, respectively.
On June 24, 1997, the Company signed a five-year promissory note with a
financial institution for $1,600,000. The interest rate is 13.5% per annum,
payable monthly with final payment due June 23, 2002. The note is secured by the
Company's inventory, property and equipment, and intangible assets. At December
31, 1998 and 1999, $1,600,000 was outstanding under this promissory note.
On March 25, 1998, the Company signed a promissory note with a financial
institution for $1,750,000. The interest rate is 13.5% per annum, payable
monthly, with final payment due June 23, 2002. The note is secured by the
Company's inventory, property and equipment, and intangible assets. At December
31, 1998 and 1999, $1,750,000 was outstanding under this promissory note.
In July 1997, the Company acquired certain assets by executing a $400,000
promissory note payable. The note accrues interest at 8% annually with quarterly
payments of $54,604 including interest that began on October 1, 1997 and
continue through July 1, 1999. The note is secured by a patent application and
other related patents. On May 21, 1999, the Company entered into a Settlement
Agreement, which extended the repayment date with principal and accrued interest
due and payable in equal installments on January 31, April 30 and July 31, 2000.
At December 31, 1998 and 1999, $157,471 was outstanding under this promissory
note.
On November 2, 1999, the Company signed new promissory notes with a bank
with face values of $1,500,000, $150,000 and $75,000 with interest rate on
amounts borrowed under these promissory notes ranging from 2.5% to 3.5% plus the
bank's corporate base rate per annum. The $1,500,000 promissory note is payable
in monthly payments of principal of
F-21
<PAGE> 104
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$83,333 and accrued interest, with $500,000 due at signing and any unpaid
principal and interest due March 31, 2000. On March 13, 2000, the bank agreed to
extend the maturity date of this promissory note to March 31, 2001. At December
31, 1999, $916,667 was outstanding under this promissory note. The $150,000 and
$75,000 promissory notes, which are secured by certificate of deposits, are
payable in monthly interest payments, with unpaid principal and interest due
September 15, 2000. At December 31, 1999, $150,000 and $75,000 were available
under these promissory notes.
During March 1999, the Company issued $3.5 million of 13% Bridge Promissory
Notes (the "Existing Bridge Notes") with interest at a rate of 13% per annum and
due and payable March 5, 2000. For each $100,000 of Existing Bridge Notes
subscribed, each subscriber received a warrant to purchase 15,000 shares of
Common Stock at an exercise price of $0.02 per share. This resulted in the
issuance of warrants to purchase 525,000 shares of common stock valued at
$4,200,000. The warrants are exercisable at any time after July 1, 1999 but on
or prior to March 5, 2002, and have certain registration rights. In May 1999,
the Company provided holders of the Existing Bridge Notes the right to convert
the principal and interest of such notes to common stock at a price of $8.00 per
share, provided such conversion was made by June 30, 1999. As of December 31,
1999, $2,275,000 of the Existing Bridge Notes and $95,740 of related accrued
interest was converted into 296,342 shares of common stock. At December 31,
1999, $1,225,000 was outstanding under these Existing Bridge Notes. On February
29, 2000, the Company extended the maturity date of the Existing Bridge Notes
and related accrued interest of approximately $160,000 to March 31, 2001 and
increased the interest rate to 14% per annum (note 20). In conjunction with the
extension of the maturity date, the Company issued warrants to purchase 138,502
shares of common stock. The warrants are exercisable at a purchase price equal
to the offering price used in the last round of equity private placement
financing prior to the note maturity date or if the Company has completed an
initial public offering of common stock prior to the note maturity date, then
the purchase price shall be ninety-five percent of the offering price of the
initial public offering.
In June through August 1999, the Company completed a Private Placement of
$3.7 million and issued warrants for the purchase of 449,200 shares of common
stock at an exercise price of $0.02 per share in conjunction with this Private
Placement. The warrants may be exercised on or after September 1, 1999, but must
be exercised on or prior to May 31, 2002. The Private Placement was structured
as an offering of 13% Bridge Notes with an option to immediately convert to
common stock at a price of $8.00 per share. Under this Private Placement, Bridge
Notes totaling $550,000 were issued and are due and payable on July 31, 2000.
The Bridge Notes accrue interest at 13% per annum. The Company issued warrants
to purchase 65,000 shares of common stock valued at $520,000 to purchasers of
Bridge Notes based upon the principal amounts of notes subscribed. Under the
Private Placement, the Company issued 394,063 shares of common stock along with
warrants to purchase 384,200 shares of common stock in exchange for $3,036,713,
net of issuance costs of $115,787.
F-22
<PAGE> 105
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
2000........................................................ $ 993,138
2001........................................................ 1,894,000
2002........................................................ 3,369,000
2003........................................................ 19,000
2004........................................................ 3,750
----------
$6,278,888
==========
</TABLE>
(9) CAPITAL LEASE OBLIGATIONS
The Company is obligated under various capital leases primarily for
computer equipment and office furniture that expire at various dates through
2001. These leases meet the various criteria of capital leases and are,
therefore, classified as capital lease obligations. Capital lease obligations
reflect the present value of future rental payments, discounted at the interest
rate implicit in each of the leases. A summary of the future minimum lease
payments required under the capital leases after December 31, 1999 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
2000........................................................ $157,366
2001........................................................ 39,503
--------
Total minimum capital lease payments...................... 196,869
Less amount representing interest (17.7% to 37.3%).......... 23,907
--------
Capital lease obligations................................. 172,962
Less current installments of capital lease obligations...... 136,326
--------
Capital lease obligations, less current installments...... $ 36,636
========
</TABLE>
The leased furniture and equipment has been included in property and
equipment at a total cost of $590,676 and $581,641 at December 31, 1998 and
1999, respectively.
(10) STOCKHOLDERS' EQUITY (DEFICIENCY)
In January 2000, the Board of Directors authorized the Company's
certificate of incorporation to increase the number of authorized shares of
common stock to 100,000,000 and increased the authorized shares of preferred
stock to 15,000,000 shares and in August 1997 the Board of Directors approved a
44-for-1 stock split. Additionally, in March 2000, the Company's Board of
Directors authorized and the Company's stockholders approved a 1-for-2 reverse
stock split and a post split adjustment of the number of authorized shares of
common stock to 90,000,000 shares. All share information included in the
accompanying consolidated financial statements has been retroactively adjusted
to reflect these amendments.
(a) Convertible Preferred Stock
As part of the Company's financing activities in 1997, 8% cumulative Series
B preferred stockholders were offered the opportunity to convert their Series B
shares into common stock or to redeem their Series B shares. The preferred stock
was converted into common stock at $8.00 per common share. During 1997, 2,101
shares of Series B preferred shares were
F-23
<PAGE> 106
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
converted into 125,500 shares of common stock with a face value of $1,004,000.
The remaining 2,085 Series B preferred shares were redeemed for $995,500 in
cash.
In addition, all dividends in arrears plus interest were paid on
outstanding Series B preferred shares prior to conversion or redemption. During
1997, Series B preferred stockholders used $88,700 of the dividends and interest
to purchase 11,088 shares of common stock. The remaining $249,635 (228,665
Series B and 20,970 Series A) was paid to preferred stockholders in cash.
During 1998, the Company issued 558,400 shares of Series C Preferred Stock
for $3,353,942, net of legal and issuance costs of $415,208 through a Private
Placement. During 1999, the remaining 176,900 shares relating to this Private
Placement were issued for $1,057,888, net of issuance costs of $136,241. An
additional 91,909 shares were issued as a result of repricing the Private
Placement from $6.75 per share to $6.00 per share and 5,804 shares were issued
as payment for broker commissions.
During 1999, the Company issued 1,182,744 shares of Series C Preferred
Stock at $6.00 per share for $7,026,911 million, net of legal and Private
Placement fees of $69,553, in conjunction with a Private Placement. In addition,
the Company issued a warrant for each share of Series C preferred stock to
purchase one share of common stock. In addition, the Company issued warrants to
purchase 72,584 shares of common stock as settlement of certain private
placement fees. The total warrants issued of 1,243,888 and 11,440 are
exercisable at $0.02 and $9.60, respectively, per common stock share and expire
December 2004.
At the date of issuance of the Series C shares, a non-cash beneficial
conversion adjustment of $1,449,541, which represents a 17% discount to the fair
value of the common stock at the date of issuance, has been recorded in the 1999
consolidated financial statements as an increase and decrease to additional
paid-in capital.
In April 1999, the Company entered into an agreement with Seligman
Communications and Information Fund, Inc. (Seligman) under which the Company
issued 166,666 shares of Series C preferred stock at $6.00 per share in exchange
for a $1,000,000 investment in the Company for a total of $1,000,000.
In April 1999, the Company entered into an agreement with VLSI Technology,
Inc. (VLSI) under which the Company issued 166,666 shares of Series C preferred
stock at $6.00 per share in exchange for the settlement of liabilities of
$406,000 with the Company and a prepayment for inventory purchases of $594,000,
net of issuance costs of $67,500. The prepayment of inventory is reflected in
other current assets at December 31, 1999.
The Series C preferred stock is convertible into shares of common stock.
The initial conversion rate was one for one, but was subject to change if
certain events occur. Generally, the conversion rate will be adjusted if the
Company issues any non-cash dividends on outstanding securities, splits its
securities or otherwise effects a change to the number of its outstanding
securities. The conversion rate will also be adjusted if the Company issues
additional securities at a price that is less than the price that the Series C
preferred stockholders paid for their shares. Such adjustments will be made
according to certain formulas that are designed to prevent dilution of the
Series C preferred stock. The Series C preferred stock can be converted at any
time at the option of the holder, and will convert automatically, immediately
prior to the consummation of a firm commitment underwritten public offering of
common stock pursuant to a registration statement filed with the SEC
F-24
<PAGE> 107
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
having a per share price equal to or greater than $24.00 per share and a total
gross offering amount of not less than $15.0 million.
The Company may not pay any cash dividends on its common stock while any
Series C preferred stock remain outstanding without the consent of the Series C
preferred stockholders. Holders of shares of Series C preferred stock are
entitled to vote on all matters submitted for a vote of the holders of common
stock. Holders will be entitled to one vote for each share of common stock into
which one share of Series C preferred stock could then be converted. In the
event of liquidation or dissolution, the holders of Series C preferred stock
will be entitled to receive the amount they paid for their stock, plus accrued
and unpaid dividends out of the Company's assets legally available for such
payments prior to the time other holders of securities junior to the Series C
preferred stock will be entitled to any payments.
(b) Common Stock
In July 1997, the Company acquired certain assets from an unrelated party
by issuing 55,000 shares of common stock valued at $7.73 per share for a total
of $425,000. During May 1999, the Company issued an additional 38,500 shares of
common stock valued at $6.00 per share for a total of $231,000 to settle the
purchase price (note 3).
During 1997, the Company issued 58,366 shares of common stock for $451,080
cash ($7.73 per share).
During 1997, the Company held a Private Placement and issued 1,250,000
shares of common stock for $10,000,000. The common shares were recorded as
follows: 1,124,500 shares were issued for $7,861,203 (which included the $88,700
of converted dividends and interest), net of legal and Private Placement fees of
$1,134,797; and 125,500 shares, valued at $1,004,000, were issued for converted
Series B preferred stock.
During 1998, the Company held a Private Placement and issued 742,500 shares
of common stock for $7,464,375, net of legal and Private Placement fees of
$1,074,377.
During 1998, $2,066,122 of the Convertible Debentures and accrued interest
of $62,448 totaling $2,128,570 were converted into 275,721 common shares at a
conversion price of approximately $7.73.
During 1999, the Company issued 4,875 shares of common stock valued at
$51,188 for services performed by a third party consultant which was recorded as
compensation expense in 1999.
During 1999, the Company issued 394,063 shares of common stock for
$3,036,716, net of issuance costs of $115,787 under a Private Placement.
Holders of shares of common stock are entitled to one vote per share on all
matters submitted to a vote of the Company's stockholders. There is no right to
cumulative voting for the election of directors. Holders of shares of common
stock are entitled to receive dividends, if and when declared by the board of
directors out of funds legally available therefor, after payment of dividends
required to be paid on any outstanding shares of preferred stock. Upon
liquidation, holders of shares of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to the liquidation
preferences of any outstanding shares of preferred stock. Holders of shares of
common stock have no conversion, redemption or preemptive rights.
F-25
<PAGE> 108
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Treasury Stock
During 1996, the Company entered into a non-cash transaction and reacquired
154,154 shares of common stock valued at $533,158 in exchange for a
distributor's outstanding trade receivable due to Mobility. During 1998, this
treasury stock was retired.
During 1998, the Company repurchased and retired 26,450 shares of common
stock valued at $278,350 for cash.
(d) Stock Subscription and Deferred Compensation
In December 1999, the Company entered into a promissory note in the
principal sum of $300,000 with an executive of the Company to finance his
purchase of 50,000 shares of Series C preferred stock at a composite purchase
price of $6.00 for one share of preferred stock and one warrant for the purchase
of 50,000 shares of common stock at an exercise price of $0.02.
In April 1999, 75,000 incentive stock options to purchase common stock at a
weighted average exercise price of $2.68 were issued to an officer. The Company
recorded $400,000 of deferred compensation, which represents the intrinsic value
of these stock options, related to the issuance of the options which are charged
to compensation expense over the vesting period through March 2002. The
unamortized portion has been recorded as a deduction from stockholders' equity.
During 1999, 441,250 incentive stock options to purchase common stock at a
weighted average exercise price of $4.00 were issued to employees. The Company
recorded $2,375,000 of deferred compensation expense, which represents the
intrinsic value of these stock options, related to the issuance of the options
which are charged to expense over the vesting period through periods ranging
from December 2000 to December 2004. The unamortized portion has been recorded
as a deduction from stockholders' equity.
(11) INCENTIVE STOCK OPTION PLAN AND WARRANTS
In 1995, the Board granted stock options to employees to purchase 132,198
shares of common stock. Later in 1996, the Company adopted an Incentive Stock
Option Plan (the Plan) pursuant to the Internal Revenue Code. Common stock
reserved for grants to key employees of the Company under the Plan total 132,000
shares. The aggregate number of shares of common stock for which options may be
granted or for which stock grants may be made under the plan is 1,250,000.
Options become exercisable over varying periods up to five years and expire at
the earlier of termination of employment or up to seven years after the date of
grant. The options under both the Plan and pursuant to Board approval were
granted at the fair market value of the Company's stock at the date of grant as
determined by the Company's Board of Directors.
At December 31, 1998 and 1999, there were 903,984 and 422,272 shares,
respectively, available for grant under the Plan and pursuant to Board approval.
The per share weighted average fair value of stock options granted under the
Plan for the years ended December 31, 1997, 1998 and 1999 was $7.76, $8.12 and
$5.22, respectively, based on the date of grant using the minimum value method
with the following weighted average assumptions: expected dividend yield 0%,
risk free interest rate of 5.1% and an expected life of 5 years.
F-26
<PAGE> 109
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of options was $0.02 -- $11.50 and 5 years,
respectively.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICE
NUMBER PER SHARE
-------- ----------------
<S> <C> <C>
Outstanding, December 31, 1997........................... 187,438 $ 4.76
Granted................................................ 324,756 11.50
Canceled............................................... (33,980) 5.78
Exercised.............................................. -- --
-------- ------
Outstanding, December 31, 1998........................... 478,214 9.26
Granted................................................ 735,239 5.26
Canceled............................................... (253,527) 10.94
Exercised.............................................. -- --
-------- ------
Outstanding, December 31, 1999........................... 959,926 $ 5.74
======== ======
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.02 25,000 1.2 $ 0.02 -- $ 0.02
$3.52 132,198 0.6 $ 2.96 132,198 $ 3.52
$4.00 527,202 5.3 $ 4.00 1,400 $ 4.00
$7.72-$8.00 91,438 3.9 $ 7.96 29,518 $ 7.88
$11.50 184,088 4.1 $11.50 112,366 $11.50
------- --- ------ ------- ------
$0.02-$11.50 959,926 4.5 $ 5.74 275,482 $ 7.24
======= === ====== ======= ======
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's net loss would have been increased to the pro forma
amount indicated below:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss applicable to common
stockholders:
As reported............................ $(9,092,535) (18,032,858) (17,906,614)
=========== ============ ============
Pro forma.............................. $(9,276,532) (18,267,627) (18,147,186)
=========== ============ ============
</TABLE>
Pro forma net loss reflects only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss amount presented above because
compensation cost is reflected over the options' vesting period of four to five
years.
F-27
<PAGE> 110
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997 and 1998, the Company granted consultants 4,950 and 15,000,
respectively, incentive stock options for services performed. The options are
exercisable at $7.72 and $11.50 per share and expire May 2004 and 2005,
respectively. The options were valued at $5,000 and $22,000 and were charged to
compensation expense in 1997 and 1998, respectively.
During June 1997, the Company issued 81,268 warrants to purchase shares of
common stock in connection with long-term debt executed with a bank. The Company
issued an additional 4,581 warrants in September 1997 pursuant to the
anti-dilution clause of the loan agreement. The warrants are exercisable at
$0.02 per share and expire July 31, 2002. The warrants valued at $669,308 are
included in other assets. The value of the warrants is charged to interest
expense over the term of the related debt. In June 1999, the Company issued an
additional 34,795 warrants valued at $149,180 exercisable at $0.02 in connection
with the extension of this debt with the bank.
On October 7, 1997, the Company issued to the placement agents warrants to
purchase 111,354 shares of common stock exercisable at $9.60 per share which may
be exercised from November 10, 1998 and prior to the earlier date of (i)
November 10, 2001; or (ii) the sale of substantially all Company assets, merger
or liquidation, dissolution, winding-up or reorganization of the Company. The
Company issued additional warrants to purchase 27,839 shares of common stock.
The warrants are exercisable at $14.00 per share, subject to antidilution
provisions and are exercisable as defined above.
On October 8, 1997, the Company issued 312,500 warrants to purchase shares
of common stock (the "Warrants") in connection with the Private Placement. The
Warrants are exercisable at $14.00 per share, subject to antidilution
provisions. The Warrants may be exercised prior to the earlier of (i) September
30, 2001, (ii) eighteen months after the time that the Company becomes subject
to the reporting requirements of the Exchange Act of 1934, as amended or (iii)
the sale of substantially all Company assets, merger, or the liquidation,
dissolution, winding-up or reorganization of the Company.
During 1998, the Company issued 112,500 warrants to purchase shares of
common stock in connection with long-term debt executed with a bank. The
warrants were issued to certain stockholders as consideration of their personal
guarantees and indemnification arrangements for the long-term debt. The warrants
are exercisable at $11.50 per share and expire at April 20, 2003. The warrants
valued at $350,249 are included in other assets. The value of the warrants is
charged to interest expense over the term of the related debt.
During 1998, the Company issued 68,200 warrants to purchase common stock in
connection with the Private Placement of common stock. The warrants are
exercisable at $13.80 per share and expire after five years.
On March 25, 1998, the Company issued 93,418 warrants to purchase shares of
common stock in connection with long-term debt executed with a bank. The
warrants are exercisable at $0.02 per share and expire July 31, 2002. The
warrants valued at $1,071,189 are included in other assets. The value of the
warrants is charged to interest expense over the term of the related debt.
In January 1999, the Company issued 32,500 warrants to purchase common
stock in connection with the Private Placement of Series C Preferred Stock. The
warrants are exercisable at $12.00 per share and expire January 2004.
F-28
<PAGE> 111
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In March 1999, 525,000 warrants were issued to purchase common stock for an
exercise price of $0.02. The warrants valued at $4,200,000 are included in other
assets. The value of the warrants is amortized to interest expense over the term
of the related debt.
In May 1999, the Company granted a consultant 35,000 incentive stock
options for services performed. The options are exercisable at $8.00 per share
and expire in May 2003. The Company recorded $37,443 of deferred compensation
related to the issuance of the options. The unearned portion is amortized as
compensation expense over the term of the agreement through May 2001.
Compensation expense totaled $9,361 during 1999.
In May 1999, in conjunction with the issuance of Bridge Notes in a Private
Placement described in Note 8, 65,000 warrants were issued to purchase common
stock for an exercise price of $0.02. The warrants valued at $520,000 are
included in other assets. The value of the warrants is charged to interest
expense over the term of the related debt.
In June through August 1999, the Company issued warrants to purchase
384,200 shares of common stock at an exercise price of $0.02 per share in
conjunction with the sale of common stock under a Private Placement. In
addition, the Company issued warrants to purchase 53,000 shares of common stock
at an exercise price of $0.02 per share that expire after five years as payment
of broker fees associated with the sale of common stock under the Private
Placement.
In December 1999, the Company granted a consultant 35,000 incentive stock
options for services performed. The options are exercisable at $4.00 per share
and expire in December 2003. The Company recorded $367,500 of deferred
compensation related to the issuance of the options. The unearned portion is
amortized as compensation expense over the term of the agreement through
December 2001. Compensation expense totaled $2,917 during 1999.
In December 1999, the Company issued 1,255,327 warrants to purchase common
stock in connection with the Private Placement of Series C preferred stock
described in Note 10(a). 1,243,888 and 11,439 warrants are exercisable at $0.02
and $9.60, respectively, and expire October 1, 2002.
In November 1999, the Company issued 56,250 warrants to purchase common
stock in connection with the extension of its $4,500,000 line of credit. The
warrants were issued to certain stockholders as part of their personal
guarantees and indemnification arrangements for this line of credit. The
warrants valued at $450,000 are exercisable at $4.00, expire November 1, 2004,
are included in other assets and are being amortized over the term of the line
of credit.
In December 1999, the Company granted a consultant 50,000 warrants to
purchase common stock for services performed in connection with the purchase of
Series C preferred stock described in Note 10(d). The warrants are exercisable
at $0.02 and expire December 2004.
During 1999, 655,843 and 25,250 warrants were exercised at $0.02 and $7.00
per share, respectively, for a total of $189,867.
(12) OPERATING LEASE COMMITMENTS
The Company has entered into various non-cancelable operating lease
agreements for its facilities in Scottsdale, Arizona, automobile, and office
equipment. Existing facility leases require monthly rents plus payment of
property taxes, normal maintenance and insurance on facilities. Rental expense
for the operating leases was $394,950, $365,782 and $478,037 during the years
ended 1997, 1998, and 1999, respectively.
F-29
<PAGE> 112
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the minimum future lease payments for the years ending
December 31 follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
2000........................................................ $ 483,037
2001........................................................ 505,113
2002........................................................ 479,937
----------
$1,468,087
==========
</TABLE>
(13) INCOME TAXES
The Company has generated net operating losses for both financial and
income tax reporting purposes since inception. At December 31, 1998 and 1999,
the Company had net operating loss carryforwards for federal income tax purposes
of approximately $11,842,000 and $32,000,000, respectively, which, subject to
annual limitations, are available to offset future taxable income, if any,
through 2019 and net operating loss carryforwards for state income tax purposes
of approximately $11,842,000 and $32,000,000, which are available to offset
future taxable income through 2004.
The temporary differences that give rise to deferred tax assets and
liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward for federal income
taxes.................................................. $ 6,092,700 12,941,231
Net operating loss carryforward for state income taxes.... 1,119,019 2,289,030
Depreciation and amortization............................. 57,224 90,395
Section 263A inventory.................................... 63,132 63,132
Accrued liabilities....................................... 272,295 201,563
Reserves.................................................. 215,465 218,836
Bad debts................................................. 263,117 255,749
Investment tax credits.................................... 161,022 180,557
Inventory obsolescence.................................... 2,366,033 791,603
------------ ------------
Total gross deferred tax assets................... 10,610,007 17,032,096
Deferred tax liabilities.................................... -- --
------------ ------------
Net deferred tax assets........................... 10,610,007 17,032,096
Less valuation allowance.................................... (10,610,007) (17,032,096)
------------ ------------
Net deferred tax assets........................... $ -- --
============ ============
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1998 and
1999 was $10,610,007 and $17,032,096, respectively. The net change in the total
valuation allowance for the years ended December 31, 1998 and 1999 was an
increase of $6,769,007 and $6,422,089, respectively. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon
generation of future taxable income during the periods in which those temporary
differences become deductible. In addition, due to the frequency of equity
transactions within the Company, it is
F-30
<PAGE> 113
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
possible the use of the net operating loss carryforward may be limited in
accordance with Section 382 of the Internal Revenue Code. A determination as to
this limitation will be made at a future date as the net operating losses are
utilized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more likely than not that the
Company will not realize the benefits of these deductible differences.
(14) CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial
institutions and generally limits the amount of credit exposure to the amount of
FDIC coverage. However, periodically during the year, the Company maintains cash
in financial institutions in excess of the FDIC insurance coverage limit of
$100,000. The Company performs ongoing credit evaluations of its customers'
financial condition but does not typically require collateral to support
customer receivables. The Company establishes an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical
trends and other information.
Two customers accounted for 29% and 18% of net sales for the year ended
December 31, 1997. Three customers accounted for 18%, 17% and 16% of net sales
for the year ended December 31, 1998. One customer accounted for 26% of net
sales for the year ended December 31, 1999.
(15) RELATED PARTY TRANSACTIONS
The Company has an agreement with a related entity under which this entity
provides management services. The Company paid the consultant approximately
$32,000, $52,000 and $42,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
Certain officers/stockholders of the Company have personally guaranteed the
bank debt of the Company.
(16) EXPORT SALES
Export sales were approximately 31%, 34% and 18% of the Company's net sales
for the years ended December 31, 1997, 1998 and 1999, respectively. The
principal international market served by the Company was Europe.
(17) COMMITMENTS AND CONTINGENCIES
The Company has a defined contribution 401(K) plan for all employees. Under
the 401(K) plan, employees are permitted to make contributions to the plan in
accordance with IRS regulations. The Company may make discretionary
contributions as approved by the Board of Directors. There were no contributions
during 1997, 1998 and 1999.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, based on consultation
with legal counsel, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results of
operations or liquidity. Accordingly, the accompany-
F-31
<PAGE> 114
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ing consolidated financial statements do not include a provision for losses, if
any, that might result from the ultimate disposition of these matters.
(18) SUPPLEMENTAL FINANCIAL INFORMATION
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended December 31, 1997, 1998
and 1999 follows:
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997... $ 10,000 $ 165,184 $ 954 $ 174,230
========== ========== ========== ==========
Year ended December 31, 1998... $ 174,230 $ 762,217 $ 288,295 $ 648,152
========== ========== ========== ==========
Year ended December 31, 1999... $ 648,152 $ 219,013 $ 237,165 $ 630,000
========== ========== ========== ==========
Allowance for sales returns:
Year ended December 31, 1997... $ 9,942 $ 223,242 $ 111,487 $ 121,697
========== ========== ========== ==========
Year ended December 31, 1998... $ 121,697 $ 235,000 $ -- $ 356,697
========== ========== ========== ==========
Year ended December 31, 1999... $ 356,697 $ 766,357 $ 778,054 $ 345,000
========== ========== ========== ==========
Reserve for obsolescence of
inventories:
Year ended December 31, 1997... $ 244,823 $ 921,409 $ 83,774 $1,082,458
========== ========== ========== ==========
Year ended December 31, 1998... $1,082,458 $4,469,481 $ 58,314 $5,493,625
========== ========== ========== ==========
Year ended December 31, 1999... $5,493,625 $1,733,463 $5,277,088 $1,950,000
========== ========== ========== ==========
</TABLE>
(19) NET LOSS PER SHARE
The computation of basic and diluted net loss per share follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net loss......................................... $(8,775,170) $(18,032,858) $(16,457,073)
Less dividend declared on Series B preferred
stock.......................................... (317,365) -- --
Beneficial conversion costs of preferred stock... -- -- (1,449,541)
----------- ------------ ------------
Net loss attributable to common stockholders..... $(9,092,535) $(18,032,858) $(17,906,614)
=========== ============ ============
Weighted average common shares outstanding --
basic and diluted.............................. 2,638,577 4,135,575 4,994,283
=========== ============ ============
Net loss per share -- basic and diluted.......... $ (3.45) $ (4.36) $ (3.59)
=========== ============ ============
Stock options and warrants not included in
diluted EPS since antidilutive................. 724,980 1,289,874 3,546,315
=========== ============ ============
Convertible preferred stock not included in
diluted EPS since antidilutive................. -- 558,400 2,399,102
=========== ============ ============
</TABLE>
F-32
<PAGE> 115
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) SUBSEQUENT EVENTS
On March 6, 2000, the Company signed a Strategic Partner Agreement with
Cybex Computer Products Corporation (Cybex). The Company and Cybex have agreed
to license certain technology to each other and the Company has agreed to sell
certain of its products to Cybex on a private label basis. In conjunction with
this agreement, the Company sold Cybex 500,000 shares of $0.01 par value Series
D preferred stock for $5,000,000, or $10.00 per share. The Series D preferred
stockholders have voting rights consistent with common stockholders and have
liquidation preference over common stockholders but subordinate to Series C
preferred stockholders. The Company may not pay any cash dividends on its common
stock while any shares of Series D preferred stock remain outstanding without
the consent of the Series D stockholders. The Series D preferred stock is
convertible into shares of common stock. On March 1, 2002, each share of Series
D preferred stock will convert automatically into a number of shares of common
stock determined by dividing $10.00 by the offering price per share used in the
last round of equity private placement financing prior to March 1, 2002;
provided, however, immediately prior to the consummation of a public offering,
each share of Series D preferred stock will convert automatically into the
number of shares of common stock determined by dividing $10.00 by 95% of the
offering price per share of the common stock used in the offering. In the event
of liquidation or dissolution, the holders of Series D preferred stock will be
entitled to receive the amount they paid for their stock, plus accrued and
unpaid dividends out of assets legally available for such payments after the
holders of Series C preferred stock have received their preferential payments,
but prior to the time other holders of our securities will be entitled to any
payments.
On February 29, 2000, the Company amended the certain Bridge Promissory
Notes to extend the maturity date of $1,225,000 of the Existing Bridge Notes and
related accrued interest of approximately $160,000 from March 31, 2000 to the
earlier of an initial public offering (IPO) or other equity infusion of
$10,000,000 or greater, or March 31, 2001. In addition, the annual interest rate
was increased to 14%. In conjunction with the extension of the maturity date,
the Company issued warrants to purchase 138,502 shares of common stock. The
warrants are exercisable at a purchase price equal to the offering price used in
the last round of equity private placement financing prior to the note maturity
date of March 31, 2001, or if the Company has completed an initial public
offering of common stock prior to the note maturity date, then the purchase
price shall be ninety-five percent of the offering price of the initial public
offering. However, if the outstanding principal balance due under these Bridge
Notes are not paid by September 30, 2000, 2,500 warrants for every $100,000 of
extended and outstanding principal due shall be awarded per quarter until the
principal balance is paid. These warrants are exercisable for common stock at an
exercise price of $0.02.
During January 2000, the Company completed a Private Placement and issued
48,706 shares of Series C preferred stock at $6.00 per share for $292,240. In
conjunction with this Private Placement, the Company issued a warrant for each
share of Series C preferred stock to purchase two shares of common stock. The
total warrants issued of 48,706 are exercisable at $0.02 per common stock share
and expire October 1, 2002.
On March 13, 2000, the Company entered into agreements to extend the
maturity date of the lines of credit and promissory note agreements due March
31, 2000 to March 31, 2001. As part of the extension agreement, the interest
rate on the $750,000 line of credit was increased from the bank's corporate base
rate plus 2.5% to the bank's corporate base rate plus 3.5%.
On March 10, 2000, the Company's Board of Directors authorized and on March
31, 2000 the Company's stockholders will approve a 1-for-2 reverse stock split,
and a post-split
F-33
<PAGE> 116
MOBILITY ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adjustment of the number of authorized shares of common stock to 90,000,000
shares. All share information included in the accompanying consolidated
financial statements has been retroactively adjusted to reflect this reverse
split and post-split adjustment.
(21) QUARTERLY FINANCIAL DATA (UNAUDITED)
A summary of the quarterly data for the years ended December 31, 1998 and
1999 follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Net sales........................... $ 5,568,430 $ 6,815,773 $ 5,723,055 $ 2,964,799
=========== =========== =========== ===========
Gross profit (loss)................. $ 851,359 $ 1,535,198 $(3,548,635) $(1,295,687)
=========== =========== =========== ===========
Operating expenses.................. $(2,459,162) $(2,581,094) $(3,420,381) $(5,477,414)
=========== =========== =========== ===========
Operating loss...................... $(1,607,803) $(1,045,896) $(6,969,016) $(6,773,101)
=========== =========== =========== ===========
Net loss attributable to common
stockholders..................... $(1,838,670) $(1,480,253) $(7,453,497) $(7,260,438)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted................ $ (0.49) $ (0.35) $ (1.73) $ (1.67)
=========== =========== =========== ===========
Year ended December 31, 1999:
Net sales........................... $ 3,227,784 $ 3,560,417 $ 3,374,233 $ 3,789,576
=========== =========== =========== ===========
Gross profit........................ $ 432,909 $ 96,298 $ 823,676 $ 848,422
=========== =========== =========== ===========
Operating expenses.................. $(3,455,748) $(3,374,847) $(2,422,088) $(2,983,208)
=========== =========== =========== ===========
Operating loss...................... $(3,022,839) $(3,278,549) $(1,598,412) $(2,134,786)
=========== =========== =========== ===========
Net loss attributable to common
stockholders..................... $(3,649,929) $(6,186,662) $(3,068,240) $(5,001,783)
=========== =========== =========== ===========
Net loss per share:
Basic and diluted................ $ (0.80) $ (1.33) $ (0.64) $ (0.84)
=========== =========== =========== ===========
</TABLE>
F-34
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<PAGE> 118
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<PAGE> 119
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under the
circumstances and in jurisdictions where it is lawful to do so. The information
contained in the prospectus is correct only as of its date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 8
FORWARD-LOOKING STATEMENTS............ 20
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 21
CAPITALIZATION........................ 22
DILUTION.............................. 24
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 26
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 28
BUSINESS.............................. 38
MANAGEMENT............................ 53
PRINCIPAL STOCKHOLDERS................ 61
CERTAIN TRANSACTIONS.................. 63
DESCRIPTION OF CAPITAL STOCK.......... 66
SHARES ELIGIBLE FOR FUTURE SALE....... 74
UNDERWRITING.......................... 76
INTERESTS OF NAMED EXPERTS AND
COUNSEL............................. 79
EXPERTS............................... 79
ADDITIONAL INFORMATION AVAILABLE TO
YOU................................. 79
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</TABLE>
UNTIL JULY 25, 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT BUY, SELL OR TRADE IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. DEALERS
ARE ALSO OBLIGATED TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
[MOBILITY ELECTRONICS LOGO]
Mobility Electronics, Inc.
4,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Banc of America Securities LLC
PROSPECTUS
JUNE 30, 2000
