UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1997
Commission File Number:
0-29194
NEXAR TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3268334
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
182 TURNPIKE ROAD
WESTBOROUGH, MASSACHUSETTS 01581
(Address of principal executive offices)
(508) 836-8700
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [x] No [_]
The number of shares of the registrant's Common Stock, $.01 par value,
outstanding as of August 13, 1997 was 9,200,000.
1
INDEX
Item Number
Part I: Financial Information Page
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1996 and June 30, 1997 (Unaudited) 3
Condensed Consolidated Statements of Operations
for the three months and six months ended June 30,
1996 and June 30, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1996 and June 30,
1997 (Unaudited) 5
Notes to Condensed Consolidated Financial
Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-10
Part II: Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Exhibit 10.1 - Office Lease between the Company and
Deerfoot LLC
Exhibit 11.1 - Statement Re: Per Share Earnings
Exhibit 27 - Financial Data Schedule
Signatures 12
2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
JUNE 30,
DECEMBER 31, 1997
1996 (Unaudited)
------------ -----------
ASSETS
Current Assets:
Cash ........................................................... $ 2,739 $ 6,969
Accounts receivable, net ....................................... 7,747 13,508
Inventories .................................................... 6,113 5,061
Prepaid expenses and other current assets ...................... 368 848
------- -------
Total current assets ........................................ 16,967 26,386
Property and equipment, net ...................................... 255 451
Purchased technology, net ........................................ 1,375 1,146
Other assets ..................................................... 992 286
------- -------
$19,589 $28,269
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable ............................................... $ 4,537 $ 5,456
Accrued expenses ............................................... 2,005 1,152
Deferred revenue ............................................... -- 1,908
------- -------
Total current liabilities .................................... 6,542 8,516
Due to related parties ........................................... 22,818 --
------- -------
Stockholders' Equity (Deficit):
Preferred stock, $.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding at
December 31, 1996; 45,684 shares issued and
outstanding at June 30, 1997.................................. -- 1
Common stock, $.01 par value, 30,000,000 shares
authorized; 4,800,000 shares issued and outstanding
at December 31,1996; 9,200,000 shares issued and
outstanding at June 30, 1997................................. 48 92
Additional paid-in capital ..................................... (48) 34,164
Accumulated deficit ............................................ (9,771) (14,504)
------- -------
Total Stockholders' Equity (Deficit) ......................... (9,771) 19,753
------- -------
$19,589 $ 28,269
======= ========
See accompanying notes to condensed consolidated financial statements.
3
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Share And Per Share Data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- -------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1996 1997 1996 1997
-------- -------- ------- -------
Net revenues ........................................... $ 2,034 $ 9,172 $ 2,151 $17,997
Cost of revenues ....................................... 1,798 8,515 1,914 16,651
------- ------- ------- -------
Gross profit ...................................... 236 657 237 1,346
Operating expenses:
Research and development ........................... 103 419 170 720
Selling and marketing .............................. 1,679 2,226 2,006 3,919
General and administrative ......................... 634 740 1,076 1,525
------- ------- ------- -------
Total operating expenses ........................... 2,416 3,385 3,252 6,164
------- ------- ------- -------
Interest income -- 87 -- 87
------- ------- ------- -------
Net loss $(2,180) $(2,641) $(3,015) $(4,731)
======== ======= ======= =======
Net loss per common and common
equivalent share $ (0.26) $ (0.32) $ (0.36) $ (0.56)
======= ======= ======= =======
Weighted average number of common
and common equivalent shares outstanding 8,421,838 8,355,886 8,421,838 8,413,391
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
-----------------
JUNE 30, JUNE 30,
1996 1997
--------- ---------
Cash flows from operating activities:
Net loss .......................................... $(3,015) $(4,731)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization ............ 28 293
Changes in current assets and liabilities:
Accounts receivable ....................... (1,745) (5,761)
Inventories ............................... (1,833) 1,052
Prepaid expenses and other current assets (5) (480)
Accounts payable .......................... 2,237 919
Accrued expenses .......................... 110 (853)
Due to related parties .................... -- (550)
Deferred revenue .......................... -- 1,908
------ ------
Net cash used in operating activities (4,223) (8,203)
Cash flows from investing activities:
Purchases of property and equipment ............... (86) (240)
Decrease in other assets .......................... (105) 686
------ ------
Net cash (used in) provided by investing activities (191) 446
Cash flows from financing activities:
Borrowings (payments) of amounts to related parties 5,475 (7,700)
Net proceeds from issuance of common stock -- 19,687
------ -------
Net cash provided by financing activities 5,475 11,987
Net increase in cash .................................. 1,061 4,230
Cash, beginning of period ............................. 981 2,739
------ -------
Cash, end of period ................................... $2,042 $ 6,969
====== =======
Supplemental disclosure of non cash investing
and financing activities:
Conversion of amounts due to related parties to
preferred stock ..................................... -- 4,568
======= =======
Conversion of amounts due to related parties to
common stock ........................................ -- 10,000
======= =======
See accompanying notes to condensed consolidated financial statements.
5
NEXAR TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared by Nexar Technologies, Inc. (the "Company") pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1996 included in
the Company's Registration Statement on Form S-1 (File No. 333-18489), as
amended (the "Registration Statement"). The accompanying condensed consolidated
financial statements reflect all adjustments (consisting of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the six month period ended June 30, 1997 may not be indicative of
the results to be expected for the full year.
2.) Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of the Company and its wholly owned subsidiary. All significant
intercompany balances and transactions have been eliminated in consolidation.
3.) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following (in thousands):
December 31, June 30,
1996 1997
------------ --------
Raw materials ................................... $4,214 $2,535
Work-in-process ................................. 769 369
Finished goods .................................. 1,130 2,157
------ ------
$6,113 $5,061
====== ======
Work-in-process and finished goods inventories consist of material, labor and
manufacturing overhead.
4.) Concentration of Credit Risk
Statement of Financial Accounting Standards (SFAS) No. 105, Disclosure of
Information About Financial Instruments with Off-Balance-Sheet Risk and
Financial Instruments with Concentrations of
6
4.) Concentration of Credit Risk (Continued)
Credit Risk, requires disclosures of any significant off-balance-sheet and
credit risk concentrations. The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign currency exchange contracts,
options contracts or other foreign hedging arrangements. Financial instruments
that subject the Company to credit risk consist primarily of cash and trade
accounts receivable. The Company places its cash in highly rated financial
institutions. The Company's accounts receivable credit risk is limited to one
customer who represented approximately $4,561,000 of accounts receivable at June
30, 1997. To reduce risk, the Company routinely assesses the financial strength
of its customers and, as a result, believes that its accounts receivable credit
risk exposure is limited. The Company maintains an allowance for potential
credit losses. The Company has not experienced any significant losses related to
individual customers or groups of customers in any particular industry or
geographic area.
5.) Net Loss per Common and Common Equivalent Share
Net loss per common and common equivalent share is computed by dividing the net
loss by the weighted average number of common and common equivalent shares
outstanding. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, and the Accounting Principles Board (APB) Opinion No. 15, the
weighted average number of common and common equivalent shares outstanding
assumes the conversion of $10,000,000 due to related parties into 700,000 shares
of the Company's common stock (excluding 1,200,000 shares of common stock
subject to a contingent repurchase right of the Company, at a nominal price per
share, and will only be released upon the attainment of certain revenue, net
income and stock price milestones, as defined in an agreement between the
Company's majority stockholder and the Company), and assumes that all common
stock and common stock equivalents issued within twelve months prior to the
initial filing of the Company's initial public offering (See Note 7) have been
included in the calculation, using the treasury stock method, as if they were
outstanding for all periods immediately preceding the initial public offering.
Options issued more than twelve months prior to the initial filing of the
Company's initial public offering have not been included as their effect would
be anti-dilutive.
6.) New Accounting Standard
On March 31, 1997, the Financial Accounting Standards Board issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 is effective for fiscal years
ending after December 15, 1997 and early adoption is not permitted. When adopted
by the Company, SFAS No. 128 will require restatement of prior years' earnings
per share. The Company will adopt SFAS No. 128 for its fiscal year ended
December 31, 1997. The Company believes that the adoption of SFAS No. 128 will
not have a material effect on its financial statements.
7.) Initial Public Offering
The Company completed its initial public offering of 2,500,000 shares at
$9.00 per share on April 14, 1997. Net proceeds to the Company amounted to $19.7
million.
7
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Nexar Technologies, Inc. (the "Company") was organized and commenced
operations in March of 1995. The Company has focused on developing its products
and its marketing and distribution strategies and did not generate material
revenues until April 1996 when it began shipping its proprietary personal
computers (PCs). The Company develops, manufactures and markets high-
performance, competitively-priced desktop PCs based upon patent pending
technologies.
The table below presents the statement of operations items for the three
months and six months ended June 30, 1996 and June 30, 1997 as a percentage of
net revenues and provides the percentage increase in absolute dollars of such
items comparing the interim periods ended June 30, 1997 to the corresponding
period from the prior fiscal period.
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- ---------------------
% Change % Change
June 30, June 30, of Dollar June 30, June 30, of Dollar
1996 1997 Increase 1996 1997 Increase
------- ------- ------- ------- ------- -------
Net revenues ..................... 100.0% 100.0% 350.9% 100.0% 100.0% 736.7%
Cost of revenues ................. 88.4 92.8 373.6 89.0 92.5 769.9
------- ------ ----- ------- ------ -----
Gross profit ..................... 11.6 7.2 178.4 11.0 7.5 467.9
Operating expenses:
Research and development ........ 5.1 4.6 306.8 7.9 4.0 323.5
Selling and marketing ........... 82.5 24.3 32.6 93.3 21.8 95.4
General and administrative ...... 31.2 8.1 16.7 50.0 8.5 41.7
------- ------ ----- ------- ------ -----
Total operating expenses ........ 118.8 37.0 40.1 151.2 34.3 89.5
Interest income .................. -- 1.0 100.0 -- 0.5 100.0
------- ------ ----- ------- ------ -----
Net loss ......................... (107.2)% (28.8)% 21.1% (140.2)% (26.3)% 5 6.9%
======= ======= ======= ======= ======= =======
Net Revenues
Net revenues increased 351% in the second quarter of 1997 to $9.2 million
from $2.0 million in the second quarter of 1996. For the six months ended June
30, 1997, net revenues increased 737% to $18.0 million from $2.2 million in the
comparable period of 1996. The increase in net revenues for the second quarter
and the first six months of 1997 over comparable periods of 1996 was attributed
to increased units sold as a direct result of increased demand for the Company's
PCs.
8
Unit shipments in the quarter increased 419% to approximately 13,500 from
2,600 in the second quarter of 1996. For the six months ended June 30, 1997,
unit shipments increased 754% to approximately 22,200 from approximately 2,600
in the first six months of 1996. Unit shipments for the second quarter increased
55% over shipments in the first quarter of 1997. This growth reflects the
Company's aggressive sales efforts, including pricing actions aimed at winning
new customer accounts and increasing the penetration of existing customer
accounts.
Gross Profit
Gross profit in the second quarter and first six months of 1997 increased
179% and 468% , respectively over comparable periods of 1996. As a percentage of
net revenues, gross profit for the second quarter and first six months of 1997
decreased to 7% from approximately 11% for the comparable periods of 1996. This
was the result of continual competitive market pressure on PC prices, including
significant decreases in key component costs which were passed on to customers
through system price decreases. The Company also provided customers with sales
incentives in order to facilitate transition of production from the Company's
Nexar II product, to its new XPA product. The Company anticipates better margins
with its shipment of XPA.
Operating Expenses
The Company strives to manage total operating expenses in line with sales
growth and gross profit levels. The Company's selling and marketing and general
and administrative expenses increased in absolute dollars amount while declining
as a percentage of net revenues in the second quarter of 1997 as compared with
the same period of 1996. The increase in expenses resulted from selling expenses
associated with higher unit volumes, as well as expenses incurred in connection
with the entry into new markets and the expansion of the Company's distribution
channels. The Company anticipates that in the remainder of 1997 selling and
marketing and general and administrative expenses will increase in amount as it
supports new product introductions, steps up its advertising and promotion
programs, expands into new markets, and increases its investment in the area of
service and support, especially in support of our new XPA product.
Research and development costs increased in absolute dollars and decreased
as a percentage of net revenues for both the second quarter of 1997 and the six
month period ended June 30, 1997 as compared to the corresponding period(s) of
1996. This decrease as a percentage of net revenues was due primarily to higher
unit shipments during the current period(s) ended June 30, 1997. The Company is
committed to continuing a significant research and development program and
development costs are likely to increase for the remainder of the year.
Liquidity and Capital Resources
The Company's working capital increased to $17.9 million at June 30, 1997,
compared to $10.4 million at December 31, 1996.
The Company's cash and cash equivalents increased to $7.0 million at June
30, 1997 from $2.7 million at December 31, 1996, primarily because of the net
proceeds received from the initial public offering. Accounts Receivable
increased to $13.5 million at June 30, 1997 from $7.7 million primarily
9
as a result of higher shipments in the second quarter versus the fourth quarter
of 1996. Inventory decreased to $5.0 million at June 30, 1997, from $6.1 million
at December 31, 1996 as a result of better management of inventory levels.
The Company is currently debt free and expects to fund expenditures for
capital requirements, as well as liquidity needs created by changes in working
capital from a combination of available cash balances, Company generated funds
and possible future financing arrangements, if the need arises.
Subsequent Events
In July 1997, one of the Company's two outside turn-key manufacturers
notified the Company of its inability to timely manufacture on a going forward
basis the Company's proprietary motherboards. The Company has made arrangements
with two new manufacturers to assume timely production of the motherboards. The
Company does not believe that the transition to the new manufacturers will have
a long-term material adverse effect on the Company, but the several weeks it may
take to resume full production of these key components could have a short-term
negative impact on the Company's results of operations in the third quarter due
to the possibility of limited delays in the initial shipments of the Company's
new XPA product.
Cautionary Statement
Statements in this report expressing the expectations and beliefs of the
Company regarding its future results or performance are forward-looking
statements that involve a number of risks and uncertainties. In particular,
certain statements contained in the Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning anticipated availability
of capital for working capital and for capital expenditures) constitute
"forward-looking statements". The Company's actual future results may differ
significantly from those stated in any forward-looking statements. Factors that
may cause or contribute such differences include, but are not limited to, risks
discussed in the Company's Prospectus dated April 8, 1997 included in its
Registration Statement on Form S-1 (Reg. No. 333-18489) and from time to time in
the Company's other filings with the Securities and Exchange Commission,
including, without limitation, the following,(a) the risks and uncertainties
associated with the possibility of product shipment delays as described in
Subsequent Events above and reliance in general on suppliers, (b) intense
competition in the personal computer business, (c) the Company's dependence on a
substantial customer, (d) the risks associated with rapid substantial growth,
(e) the uncertainty of market acceptance of the Company's products, (f) the
risks associated with international expansion, (g) the dependence of the Company
on outside engineering for the development of its products, (h) the risks
associated with the protection and possible infringement of the Company's
intellectual property, (i) dependence upon a third party to provide service and
support to the Company's customers, and (j) dependence on third party
distributors and resellers.
As a result of the foregoing and other factors, the Company may experience
material fluctuations in future operating results on a quarterly or annual basis
which could materially and adversely affect its business, financial condition,
operating results and stock price. The Company specifically declines any
obligation to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect anticipated or unanticipated events or
circumstances occurring after the date of such statement.
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit 10.1 - Office Lease between the Company and Deerfoot LLC
Exhibit 11.1 - Statement Re: Per Share Earnings
Exhibit 27 - Financial Data Schedule
No reports have been filed on Form 8-K during the quarter ended June 30, 1997.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NEXAR TECHNOLOGIES, INC.
Date: August 13, 1997 BY /s/ Albert J. Agbay
----------------------------------
Albert J. Agbay
Chairman, Chief Executive Officer
and President
(as authorized officer)
BY /s/ Gerald Y. Hattori
----------------------------------
Gerald Y. Hattori
Vice President, Finance, Chief Financial
Officer and Treasurer
(as authorized officer and as principal
financial officer)
12