<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997
REGISTRATION NO. 333-31431
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEWCOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3699 95-4485355
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION NUMBER)
31166 VIA COLINAS
WESTLAKE VILLAGE, CALIFORNIA 91362
(818) 597-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SULTAN W. KHAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEWCOM, INC.
31166 VIA COLINAS
WESTLAKE VILLAGE, CALIFORNIA 91362
(818) 597-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JORGE A. DEL CALVO, ESQ. THOMAS J. POLETTI, ESQ.
L. WILLIAM CARACCIO, ESQ. KATHERINE J. BLAIR, ESQ.
PILLSBURY MADISON & SUTRO LLP DARREN O. BIGBY, ESQ.
2700 SAND HILL ROAD FRESHMAN, MARANTZ, ORLANSKI, COOPER
MENLO PARK, CALIFORNIA 94025 & KLEIN
TEL. (415) 233-4500 9100 WILSHIRE BOULEVARD
FAX. (415) 233-4545 BEVERLY HILLS, CALIFORNIA 90212
TEL. (310) 273-1870
FAX. (310) 274-8357
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
(Continued on following page)
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<PAGE>
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(Continued from previous page)
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED(1) SECURITY(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Units, each Unit consists
of one share of Common
Stock, par value $.001
per share, and one
Common Stock Purchase
Warrant(3) ............. 2,300,000 $ 10.00 $23,000,000 $ 6,970
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share(4)...... 2,300,000
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Common Stock Purchase
Warrants(5)............. 2,300,000
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Common Stock, par value
$.001 per share,
underlying Warrants(6).. 2,300,000 $ 15.00 $34,500,000 $10,455
- --------------------------------------------------------------------------------
Representative's
Option(7)............... 1 $200.00 $ 200.00 $ 0
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Units underlying
Representative's Option,
each Unit consists of
one share of Common
Stock, par value $.001
per share, and one
Common Stock Purchase
Warrant................. 200,000 $ 12.00 $ 2,400,000 $ 667
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying
Representative's
Option.................. 200,000
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Common Stock Purchase
Warrants underlying
Representative's
Option.................. 200,000
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying Common Stock
Purchase Warrants
underlying
Representative's
Option.................. 200,000 $ 15.00 $ 3,000,000 $ 909
- --------------------------------------------------------------------------------
Total Fee................ $19,061*
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</TABLE>
* $19,001 previously paid.
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of
shares of Common Stock and Warrants as may be issued by reason of
adjustments in the number of shares of Common Stock and Warrants pursuant
to anti-dilution provisions contained in the Warrants and Representative's
Option. Because such additional shares of Common Stock and Warrants will,
if issued, be issued for no additional consideration, no registration fee
is required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 300,000 Units subject to the Underwriters' overallotment option
(the "Underwriters' Over-allotment Option"). The Common Shares included in
these Units will be offered by Aura Systems, Inc. and the Warrants
included in these Units will be offered by the Registrant.
(4) Includes 300,000 shares of Common Stock subject to the Underwriters' Over-
allotment Option.
(5) Includes 300,000 Warrants subject to the Underwriters' Over-allotment
Option. The Warrants are exercisable over a five year period commencing on
the Closing Date of the Offering at $14.85 per share.
(6) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Warrants at the maximum exercise price
thereof.
(7) The Representative's Option entitles the Representative to purchase
200,000 Units at $12.00 per Unit. The Common Stock and Warrants included
in the Units underlying the Representative's Option may only be purchased
together. The Representative's Option is exercisable over a four year
period commencing on the Closing Date of the Offering.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 8, 1997
PROSPECTUS
2,000,000 UNITS
NEWCOM, INC.
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE
WARRANT
-----------
Each Unit ("Unit") of NewCom, Inc., a Delaware corporation (the "Company"),
consists of one share of Common Stock, $0.001 par value per share ("Common
Share"), and one Common Stock Purchase Warrant ("Warrant"). All of the Units
offered hereby (the "Offering") are being sold by the Company. The anticipated
initial public offering price of the Units is between $8.00 and $10.00 per Unit
("Offering Price"), of which $.10 is the public offering price allocated to the
Warrants. Upon completion of the Offering, the Common Shares and the Warrants
will immediately trade separately. Each Warrant entitles the holder to purchase
one share of Common Stock at a price of 150% of the Offering Price until that
date which is five years from the date of this Prospectus. The Warrants are
redeemable at the option of the Company, at $.05 per Warrant, at any time on or
after that date which is one year from the date of this Prospectus, or such
earlier date as may be determined by Joseph Charles & Associates, Inc., the
representative (the "Representative") of the Underwriters, upon at least 30
days' notice if the closing price of the Common Stock equals or exceeds 200% of
the Offering Price for 20 consecutive trading days ending within 30 days prior
to the date notice of redemption is given, and at such time as there is a
current effective registration statement covering the Common Shares underlying
the Warrants. Upon 30 days written notice to all holders of the affected class
of Warrants, the Company shall have the right to reduce the exercise price
and/or extend the term of the Warrants. The Units, Common Shares and Warrants
offered hereby are sometimes hereinafter collectively referred to as the
"Securities."
The Company is a majority-owned subsidiary of Aura Systems, Inc., a Delaware
corporation ("Aura"). Upon completion of the Offering, Aura will own
approximately 75% of the outstanding Common Stock of the Company (approximately
72% if the Underwriters' Over-allotment Option is exercised in full) and will
continue to control the Company. See "Principal Stockholders" and "Relationship
with Aura and Certain Transactions."
Prior to the Offering, there has been no public market for the Common Shares
or Warrants of the Company and there can be no assurance that such a market
will develop or be sustained after the Offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price of the Units and the terms of the Warrants. The Company has
applied to have the Common Shares and Warrants approved for quotation on the
Nasdaq National Market under the symbols NWCM and NWCMW, respectively, and the
Common Shares and the Warrants will trade separately immediately after the
Offering.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit............................ $ $ $
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Total(3)............................ $ $ $
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</TABLE>
(see Notes, next page)
-----------
The Securities are offered by the several Underwriters, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to approval of certain legal matters by counsel and to certain other
conditions. The Underwriters reserve the right to withdraw, cancel or modify
the Offering and to reject any offer to purchase in whole or in part. It is
expected that delivery of the certificates representing the Securities will be
made against payment therefor at the offices of Joseph Charles & Associates,
Inc., 9701 Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, or
through the facilities of Depository Trust Company, on or about , 1997.
JOSEPH CHARLES & ASSOCIATES, INC.
The date of this Prospectus is , 1997
<PAGE>
NOTES
(1) Does not include additional compensation to be received by the
Representative in the form of (i) a 2.5% non-accountable expense
allowance, of which $40,000 has previously been paid by the Company, and
(ii) the sale to the Representative for $200 of an option (the
"Representative's Option") to purchase 200,000 Units at a price of 120% of
the Offering Price, exercisable over a period of four years commencing one
year from the date of this Prospectus. The Company and Aura have also
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $1.1
million, including the Representative's non-accountable expense allowance.
(3) Aura and the Company have granted the Underwriters an option (the
"Underwriters' Over-allotment Option"), exercisable within 45 days from
the date of this Prospectus, to purchase up to 300,000 additional Units on
the same terms as set forth above, solely for the purpose of covering
over-allotments, if any. The Common Shares included in such additional
Units will be offered by Aura and the Warrants included in such additional
Units will be offered by the Company. If the Underwriters' Over-allotment
Option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $ , $
and $ , respectively, and Aura will receive gross proceeds of $ after
payment of $ of Underwriting Discounts and Commissions. See
"Underwriting."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
WARRANTS, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
CONVERTING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
----------------
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The Company
intends to furnish its stockholders and the holders of Securities with annual
reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law. The
Company's fiscal year ends February 28 (February 29 during leap years).
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) assumes no exercise of the Warrants, the Underwriters' Over-allotment
Option or the Representative's Option, (ii) does not include a total of
1,000,000 shares of Common Stock (giving effect to the Stock Split described
below) reserved for issuance upon exercise of options either outstanding or
available for grant under the Company's 1997 Stock Incentive Plan (the "Stock
Plan"), and (iii) has been adjusted to reflect a recapitalization of the
Company (the "Recapitalization") to take effect immediately prior to the
closing date of the Offering (the "Closing Date") pursuant to which (x) a stock
split of the outstanding shares of Common Stock and shares subject to the Stock
Plan (the "Stock Split") will be effected as a result of which the outstanding
shares of Common Stock of the Company immediately prior to the Closing Date
will be 8,000,000 (for purposes of this Prospectus, assuming an Offering Price
of $9.00 per Unit, such Stock Split is 7,555.556-for-1.0), (y) the Certificate
of Incorporation of the Company will be amended (the "Certificate Amendment")
to increase the number of authorized shares of Common Stock to 50,000,000 and
to create and authorize 5,000,000 shares of Preferred Stock, and (z) Aura will
convert (the "Conversion") $4.0 million in intercompany debt from NewCom into
that number of shares of Common Stock equal to $4.0 million divided by the
Offering Price (for purposes of this Prospectus, assuming an Offering Price of
$9.00 per Unit, Aura will receive 444,444 shares of Common Stock in the
Conversion). See "Description of Securities" and "Underwriting." A glossary of
certain capitalized terms used in this Prospectus begins on page 63.
THE COMPANY
NewCom, Inc. ("NewCom" or the "Company") designs, manufactures and markets
high performance computer communication and multimedia products for the
personal computer ("PC") market. NewCom's communication products include a line
of high speed external and internal data/fax and voice modems, which link PCs
through the worldwide web and through direct connections over telephone lines,
and NewCom's WebPal, an Internet appliance enabling users to access the
worldwide web and perform Internet-specific tasks through their existing
television screens. NewCom's multimedia product line includes a broad range of
add-in subsystems, upgrade kits and Internet access kits that incorporate CD-
ROM drives, speakers, sound cards, modems, microphones and other telephony and
sound solutions. The Company's multimedia products are targeted both to users
that desire to convert their PCs into multimedia systems and to users desiring
to upgrade their current multimedia systems with faster CD-ROM drives, higher
quality sound and increased functionality.
The Company believes that demand for PC communication and multimedia products
is driven by a variety of factors including (i) the growing installed base of
PCs, particularly those sold into the consumer and small office/home office
("SOHO") markets, (ii) continuing advances in technology leading to faster
modems and CD-ROM drives and expanded multimedia functionality and (iii) the
rapid growth of Internet content, bandwidth-intensive interactive software, on-
line services and emerging PC applications such as digital video capture and
playback, video conferencing, telephony, paperless faxing, advanced desktop
publishing, voicemail, high resolution three-dimensional ("3D") games, and
interactive movies and other entertainment media, which increasingly
demonstrates to consumers the need for PC communications and multimedia
products.
NewCom had gross revenues of $73.1 million and $16.1 million, and net
revenues of $50.6 million and $15.4 million, during its fiscal year ended
February 28, 1997 ("Fiscal 1997") and the three months ended May 31, 1997 (the
"first quarter of Fiscal 1998"), respectively. The Company's sales channels
include a broad network of national and regional independent distributors and
leading retail and mass merchant chains and catalogues and, to a lesser extent,
original equipment manufacturers and value added resellers ("OEMs/VARs").
NewCom's distributor customers, which accounted for 49% of the Company's gross
revenues and 72% of net revenues during Fiscal 1997, include Dinorall
Corporation (dba Dinexim Corp.), MicroInformatica Corporation
3
<PAGE>
and Southern Electronic Distributors, Inc. The Company's retail and mass
merchant customers, which accounted for 45% of gross revenues and 65% of net
revenues during the same period, include Circuit City Stores, Inc., Best Buy
Company, Inc. and Fry's Electronics.
NewCom does not employ an internal research and development staff. Rather,
the Company strives to identify key emerging technologies in the PC
communication and multimedia industries and to innovatively combine these
technologies into its products using manufacturing techniques that enable the
Company to rapidly bring to market high-quality products at competitive prices.
New products currently being designed by NewCom and anticipated to be
introduced within the next year include a line of Integrated Services Digital
Network ("ISDN") modems, a 33,600 bps modem with video conferencing capability,
and multimedia kits featuring Digital Video Disc-Read Only Memory ("DVD-ROM"),
Compact Disk Recordable ("CDR"), and CDR MPEG (video encoding and decoding)
drives, as well as a 3D graphics card and a deluxe version of the WebPal
Internet appliance. Using integral compression, NewCom's ISDN modems are being
designed to support data rates of up to 512 Kbps. Moreover, unlike most ISDN
modems available today, NewCom's ISDN modems are being designed to function as
both ISDN and standard POTS modems, making it possible for users who have
upgraded their PCs to remain compatible with those who have not. In addition,
the Company is exploring opportunities to design new families of communications
and multimedia products utilizing emerging technologies in the industry such as
cable modem and Asymmetric Digital Subscriber Line ("ADSL") modem technology.
The Company was incorporated under the laws of Delaware in June 1994. The
Company's executive offices are located at 31166 Via Colinas, Westlake Village,
California 91362 and its telephone number is (818) 597-3200.
The NewCom logo is a trademark of the Company. NEWCOM(R) is a registered
trademark of the Company. NavPal, NetTalk, NetFax, NewPal, NewTalk and WebPal
are trademarks of the Company for which trademark applications are pending.
This Prospectus includes product names, trade names and marks of companies
other than the Company. All other company or product names are trademarks,
registered trademarks, trade names or marks of their respective owners and are
not the property of the Company.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,000,000 Units(1)
Common Stock Outstanding prior to 8,000,000 Shares
the Offering.....................
Common Stock to be Outstanding 10,000,000 Shares(2)
after the Offering...............
Use of Proceeds................... Proceeds from sale of the Units will be
used for the acquisition of products and
product components, repayment of existing
commercial indebtedness, marketing and
sales and working capital and other general
corporate purposes. The Company will not
receive the proceeds (if any) from the sale
of Common Shares underlying any Units sold
upon exercise of the Underwriters' Over-
allotment Option. See "Use of Proceeds."
Risk Factors...................... The Securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
Proposed Nasdaq National Market Common Shares--"NWCM"
symbols.......................... Warrants--"NWCMW"
</TABLE>
- --------
(1) Until completion of the Offering, the Units may only be purchased on the
basis of one Common Share and one Warrant per Unit. Upon completion of the
Offering, the Common Shares and the Warrants will be immediately detachable
and separately transferable. Each Warrant entitles the holder to purchase
one Common Share at a price per share equal to 150% of the Offering Price
until that date which is five years from the date of this Prospectus. The
Warrants are redeemable at the option of the Company, at $.05 per Warrant,
at any time after the first anniversary of the date of this Prospectus, or
such earlier date as may be consented to in writing by the Representative,
upon 30 days prior written notice, if the closing price of the Common
Shares, as reported by the principal exchange on which the Common Shares
are quoted, equals or exceeds 200% of the Offering Price for 20 consecutive
trading days within the 30 day period preceding the date of the notice of
redemption and at such time as there is a current effective registration
statement covering the Common Shares underlying the Warrants. Upon 30 days
written notice to all holders of the Warrants, the Company shall have the
right to reduce the exercise price and/or extend the term of the Warrants.
See "Description of Securities."
(2) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 300,000 shares of Common Stock included in
the Underwriters' Over-allotment Option, (iii) 300,000 shares of Common
Stock issuable upon exercise of the Warrants included in the Underwriters'
Over-allotment Option, (iv) 200,000 shares of Common Stock issuable upon
exercise of the Representative's Option, (v) 200,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Representative's
Option, and (vi) 546,690 shares of Common Stock issuable upon the exercise
of options outstanding as of June 30, 1997. See "Description of
Securities," "Underwriting" and "Management--Stock Incentive Plan."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MAY 31,
FEBRUARY 28, YEAR ENDED FEBRUARY 28, ---------------------------
1995 FEBRUARY 29, 1996 1997 1996 1997
------------ ----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $7,465,720 $16,081,392
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
Income (loss) from oper-
ations................. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Net income (loss)....... (380,217) (5,185,331) 3,337,271 614,412 1,066,482
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts(1)............. 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
Pro forma net income per
share(2)............... $.42 $.13
Number of shares used in
computing pro forma net
income per share(2).... 8,000,000 8,000,000
<CAPTION>
MAY 31, 1997
----------------------------------------
PRO FORMA
FEBRUARY 28, 1997 ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets................. $44,329,127 $52,476,020 $52,476,020 $64,626,020
Working capital...................... 21,916,553 31,565,837 31,565,837 47,215,837
Total assets......................... 47,435,171 55,272,094 55,272,094 67,422,094
Total current liabilities............ 22,412,574 20,910,183 20,910,183 17,410,183
Due to Aura(4)....................... 17,249,874 25,522,706 21,522,706 21,522,706
Stockholders' equity................. 7,772,723 8,839,205 12,839,205 28,489,205
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for information regarding
calculation of net income (loss) per share.
(2) Gives effect to the Conversion. Assuming the Conversion was effected June
1, 1996, pro forma net income would be approximately $3,981,000 or $.50 per
share, for the twelve months ended May 31, 1997.
(3) Adjusted to reflect the sale by the Company of 2,000,000 Units offered
hereby at an assumed Offering Price of $9.00 per Unit and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(4) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the Company
to Aura was approximately $17.0 million.
6
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following risk
factors in addition to the other information presented in this Prospectus,
before purchasing the Securities offered hereby. This Prospectus contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this Prospectus.
RISK FACTORS RELATING TO THE COMPANY
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future operating results may vary significantly from period to
period as a result of a number of factors, many of which are beyond the
Company's control. These factors include the timing and volume of orders
received during the period, the impact of price competition on the Company's
average selling prices, the availability and pricing of components for the
Company's products, market acceptance of new product introductions by the
Company and its competitors, the ability of the Company to timely collect
outstanding accounts receivable, changes in product or distribution channel
mix, the timing of expenditures in anticipation of future sales, product
returns or price protection charges from customers, the inventory levels and
financial health of the Company's customers, the overall state of the PC
industry and economic conditions generally. The volume and timing of orders
received during a quarter are difficult to forecast. Customers generally order
on an as-needed basis and, accordingly, the Company has historically operated
with a relatively small backlog. Moreover, as often occurs in the PC industry,
a disproportionate percentage of the Company's net sales in any quarter may be
generated in the last month of the quarter. As a result, a shortfall in sales
in any quarter as compared to expectations may not be identifiable until the
end of the quarter. Notwithstanding its relatively small backlog and the
difficulty in forecasting future sales, the Company generally must plan
production, order components and undertake its development, sales and
marketing activities and other commitments months in advance. Accordingly, any
shortfall in revenues in a given quarter may impact the Company's operating
results due to an inability to adjust expenses or inventory during the quarter
to match the level of revenues for the quarter. Although the Company, through
its use of "Just-in-Time" purchasing, whereby components and supplies are
purchased just before they are needed in the manufacturing cycle, and other
manufacturing strategies, has generally been able to avoid problems associated
with excess inventory, there can be no assurance that the market factors
described above will not cause the Company to possess excess inventory in one
or more future quarters, which could result in cash flow difficulties as well
as expenses associated with inventory writeoffs.
The Company's gross margins have been and will continue to be subject to
quarterly fluctuations, due to the market factors described above and changes
in the Company's mix of products sold and in the mix of its distribution
channels. The Company's multimedia products typically have higher gross
margins than its communications products. The Company's efforts to increase
its sales of communication products as a percentage of total revenues in
future periods will result in a reduction in its overall gross margins.
Currently the Company is attempting to increase sales to OEMs/VARs, which
traditionally have had lower gross margins, and to significantly increase its
sales to the retail/mass merchant channel, which typically provides higher
gross margins than OEM/VAR sales but requires higher sales and marketing
expenses. In addition, the Company's anticipated new product introductions,
which typically have higher initial development, production and marketing
expenses, may further negatively impact the Company's future operating
results. Moreover, the Company's industry is characterized by intense
competition and declining average selling prices. As a result of the foregoing
trends and competitive pricing pressures, the Company's margins and results of
operations may decline in the future from the levels experienced to date.
The Company believes that, due to industry seasonality, demand for the
Company's products is strongest during the fourth calendar quarter of the
year, as a result of year-end business purchases and holiday sales. This
seasonality may become more pronounced in the future to the extent that a
greater proportion of the Company's sales consist of sales into the
retail/mass merchant channel.
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LIMITED HISTORY OF INDEPENDENT OPERATIONS
While the Company has experienced substantial growth in total revenues since
its inception in 1994, the Company incurred net losses of approximately
$380,000 and $5.2 million, respectively, for the nine months ended February
28, 1995 ("Fiscal 1995") and the fiscal year ended February 29, 1996 ("Fiscal
1996"). The Company commenced operations in September 1994 and, at all times
prior to the Offering, has operated as a majority owned subsidiary of Aura. As
such, prior to the Offering, the Company benefitted from the financial,
administrative and other resources of Aura. In addition, prior to the
Offering, Aura exerted significant influence over the Company's Board of
Directors and thus the Company's business. Aura and NewCom have entered into
several intercompany agreements designed to permit the Company to operate,
following the Offering, to a greater extent as an independent business.
Accordingly, the Company's future prospects must be evaluated in light of the
risks, expenses and difficulties it encounters as an independent business.
There can be no assurance the Company will succeed in its efforts to operate
profitably at a greater level of independence from Aura. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MANAGEMENT OF EXPANSION
Since March 1, 1996, the Company has experienced a significant expansion in
its overall level of business and operations, including product design,
marketing, technical support and sales and distribution. The Company's full-
time employee base has grown from 35 at March 1, 1996, to 73 at June 30, 1997.
This expansion in the scope of the Company's business and operations resulted
in a need for significant investment in infrastructure and systems. While
growth of the Company's business has generated significant accounts
receivable, much of the Company's available cash has been required to finance
the Company's capital expenditures and operations, particularly in the first
quarter of Fiscal 1998. Due to the increases in the Company's overhead and
operating expenses resulting from this expansion, the Company's operating
results, and opportunities for future growth, may be adversely affected if its
revenues remain flat or do not increase to the extent anticipated by the
Company. The Company's accounts receivable have recently increased
significantly due to greater revenues and also due to its receivables being
outstanding for a longer period. This longer collection period resulted, in
part, from the Company's revenue growth increasing beyond the capacity of its
credit and collections personnel. Of the Company's accounts receivable net at
May 31, 1997 of $32.8 million, $20.9 million was over 90 days old (including
$3.7 million which was due from C'More, Inc., a company controlled by
Alexander Remington, a director of the Company) and $9.8 million remained
outstanding as of September 5, 1997 (none of which was due from C'More, Inc.
or any other affiliated entities). In response, the Company has increased the
size of its credit and collections staff and intends to add additional staff
in the future. The inability of the Company to collect significant portions of
its accounts receivable on a timely basis or to obtain adequate financing, in
addition to the proceeds of this Offering, to meet its cash requirements could
limit the Company's future growth. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In addition, the Company's growth has placed significant demands on the
Company's management and on its financial and internal infrastructure. The
Company's future operating results depend on its ability to successfully
implement operating, manufacturing and financial procedures and
infrastructure, to improve coordination among different operating functions,
to strengthen management information systems and telecommunications systems,
and to continue to hire additional personnel, particularly in its customer
service, accounts receivable, engineering and technical support organizations.
Although management has taken actions intended to improve these areas and will
execute the Services Agreement with Aura on the closing of this Offering,
there can be no assurance that the Company will be able to manage these
activities and implement these additional procedures, systems and
infrastructure successfully, and any failure to do so would have a material
adverse effect upon the Company's operating results. There can be no assurance
that the Company's management team and other new personnel can successfully
manage the Company's rapidly evolving business, and failure to do so would
have a material adverse effect upon the Company's operating results.
FUTURE CAPITAL REQUIREMENTS; FUNDING BY AURA; UNCERTAINTY OF ADDITIONAL
FUNDING
The Company incurred a net loss of $5.1 million in Fiscal 1996. Although the
Company achieved profitability on an annual basis in Fiscal 1997 and the first
quarter of Fiscal 1998, there can be no assurance that revenue growth or
profitability will continue on a quarterly or annual basis in the future. The
Company operates
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in a capital-intensive industry. Since its formation, the Company has financed
it operations and capital requirements primarily with revenues generated from
sales, inter-company loans received from Aura and a secured commercial line of
credit. At June 30, 1997, the Company's outstanding indebtedness to Aura and
under the credit line was approximately $17.0 million and $3.6 million,
respectively. Immediately prior to the Closing Date, the Company intends to
discharge $4.0 million of the amount due to Aura by effecting the Conversion.
While the Company's current cash projections do not contemplate the need to
borrow additional funds from Aura following the completion of this Offering,
there can be no assurance that future events will not cause the Company to
look to Aura for funding. While Aura has indicated that it will not provide
working capital to the Company on a basis consistent with past practices, the
Company has not received any indication from Aura that it would not provide
term funding to the Company in the case of unforeseen circumstances. While the
Company intends to partially repay the amount owing under its commercial line
of credit with a portion of the net proceeds of this Offering, management's
internal cash projections estimate future borrowings under such facility or
any replacement thereof to finance operations in an amount equal to or in
excess of such repaid amount within the 12-month period following the
completion of this Offering. As a result, the Company will not significantly
benefit from any reduction in interest expense as a result of such debt
repayment.
The Company believes that current and future available capital resources,
including the net proceeds from the Offering, cash flow from operations, and
other existing sources of liquidity, will be adequate to fund its operations
for the 12-month period following the date of this Prospectus including, but
not limited to, funding of the Company's $8.25 million firm commitment to
purchase WebPal units manufactured for the Company (see Note 13 of Notes to
Financial Statements). However, there can be no assurance that sufficient
funds will be available following the completion of the Offering or that
future events will not cause the Company to seek additional capital sooner
including, but not limited to, the failure by the Company to timely collect
outstanding accounts receivable. To the extent the Company is in need of any
additional financing, there can be no assurance that it will be available to
the Company from Aura or any other source on terms acceptable to the Company,
or at all. If additional funds are raised by issuing equity securities,
further dilution to the existing stockholders may result. If adequate funds
are not available, the Company may be required to delay, scale back or
eliminate its product design, manufacturing and marketing programs or to
obtain funds through arrangements with partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain adequate
financing could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions, evolving industry
requirements and short product life cycles. The Company believes that these
trends will continue into the foreseeable future. The Company believes that
its future success will depend in large part upon its ability to enhance its
existing products and to successfully bring to market new products that meet
customer requirements and gain market acceptance. There can be no assurance
that the Company will be successful in designing product enhancements or new
products on a timely basis, if at all, or that the Company will be able to
successfully market these enhancements and new products once designed. Since
the Company does not develop internally the software or hardware technology
used in its products, the Company is dependent on its ability to acquire on
commercially reasonable terms the proprietary technology of others. The
Company must monitor industry trends and make choices in selecting new
technologies and features to incorporate into its products. Each new product
cycle presents new opportunities for current or prospective competitors of the
Company to gain market share. If the Company does not successfully introduce
new products within a given product cycle, the Company's sales will be
adversely affected for that cycle and possibly subsequent cycles. Any such
failure could also impair the Company's brand name and ability to command
retail shelf space in future periods. Moreover, because of the short product
life cycles coupled with long lead times for many components used in the
Company's products, the Company may not be able to quickly reduce its
production or inventory levels in response to unexpected shortfalls in sales
or, conversely, to increase production in response to unexpected demand.
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Sales of individual products and product lines are typically characterized
by substantial declines in sales, pricing and margins toward the end of the
respective product's life cycle, the precise timing of which may be difficult
to predict. As new products are planned and introduced, the Company attempts
to monitor the inventory of older products and to phase out their manufacture
in a controlled manner. Nevertheless, the Company could experience unexpected
reductions in sales of older generation products as customers anticipate new
products. These reductions could give rise to additional charges for obsolete
or excess inventory, returns of older generation products by distributors and
mass merchant customers, or substantial price protection charges. See "--
Product Return Risks." To the extent that the Company is unsuccessful in
managing product transitions, its business and operating results could be
materially adversely affected.
The Company's multimedia products are individual add-in subsystems which
function with PCs to provide additional multimedia functionality.
Historically, as a given functionality becomes technologically stable and
widely accepted by PC users, the cost of providing the functionality is
typically reduced by means of large scale integration into semiconductor chips
which are then incorporated onto PC motherboards. The Company expects that
such migration will, in fact, occur with respect to the functionality provided
by the Company's current products. The Company's success is largely dependent
on its ability to continue to design products which incorporate new and
rapidly evolving technologies that system manufacturers have not yet fully
incorporated into PC motherboards. In addition, many OEMs/VARs are
increasingly incorporating sound cards, CD-ROM drives, speakers and other
components of multimedia upgrade kits in their PCs on a pre-installed basis.
The Company anticipates that this trend will result in a reduction in demand
for multimedia upgrade kits based upon such components in the future. While
the Company believes that a market will continue to exist for add-in
subsystems that provide advanced functionalities and offer flexibility in
systems configuration, there can be no assurance that incorporation of new
functionalities onto PC motherboards will not adversely affect the market for
the Company's products or that the Company will continue to design and
successfully introduce new types of multimedia upgrade kits.
COMPONENT SHORTAGES; RELIANCE ON LIMITED SOURCE SUPPLIERS AND THIRD-PARTY
ASSEMBLERS
The Company produces its products using components or subassemblies
purchased from third-party manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit ("ASIC") chipsets which provide multimedia functionality, are
available only from a single source or limited sources. These components are
generally in short supply and frequently subject to allocation by
semiconductor manufacturers. In particular, in Fiscal 1996 the Company
experienced substantial constraints in the availability of modem chipsets from
Rockwell International, its primary supplier at the time, which sharply
impacted the Company's production and sale of its communication products.
Although the Company has since increased its efforts to obtain required
supplies of components, including working closely with component manufacturers
and vendors and qualifying alternative components for inclusion in the
Company's products, component shortages may again become acute and there can
be no assurances that the Company can continue to obtain adequate supplies or
obtain such supplies at their historical cost levels. Currently, the Company
depends to a substantial degree upon Cirrus Logic as the Company's primary
supplier of chips. In addition, since the Company does not develop internally
the software or hardware technology used in its products, the Company depends
on acquiring rights to use the proprietary technology of others. In February
1997 the Company entered into an $8.25 million fixed-price firm commitment to
purchase WebPal units and during the first quarter of Fiscal 1998 made a $3.6
million deposit against initial purchases. Although the Company believes that
other sources of supply are available for delivery of WebPal units, the
Company is and will continue to be dependent upon the ability of the seller to
deliver the WebPal units in a timely manner and in accordance with Company
specifications. Additionally, there can be no assurance that the Company could
recover all or any portion of its deposit in the event of a dispute with or a
deterioration in the financial condition of the seller. Other than the
aforementioned fixed-price commitment, the Company has no guaranteed supply
arrangements with any of its sole or limited source suppliers, including its
chip suppliers. Moreover, the Company does not maintain an extensive inventory
of components and customarily purchases sole or limited source components
pursuant to purchase orders placed from time to time in the ordinary course of
business. The Company's suppliers may, from
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time to time, experience production shortfalls or interruptions which impair
the supply of components to the Company. Component shortages are likely to
continue, and there can be no assurance that such shortages will not adversely
affect future operating results.
The Company uses contract assemblers, primarily located in the Peoples
Republic of China, Taiwan and Mexico, to assemble its products. The Company's
relationships with its Chinese, Taiwanese and Mexican contract assemblers are
subject to greater political, legal, economic and other uncertainties than
with its contract assemblers located in the United States. In addition, the
Company typically uses only one contract assembler for a given design.
Products approved for sale in certain foreign countries require the use of a
manufacturing facility that has been approved by the applicable foreign
regulatory authority, which limits the number of facilities available to
assemble products for those countries. The failure of a contract assembler to
provide acceptable quality and timely service, or an interruption of supplies
from an assembler as a result of a fire, natural calamity, strike, political
unrest, increased import/export restrictions or other significant events,
could materially and adversely affect the Company's results of operations. See
"Business--Manufacturing."
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes directly against a large number of suppliers of communication
products and multimedia add-in subsystems, and indirectly against OEMs to the
extent they manufacture their own products and add-in subsystems. Such
competitors may develop superior products or products of similar quality for
sale at the same or lower prices. Other competitors may have better access
than the Company to emerging technologies for use in their products, either
through their use of in-house research and development personnel or through
their relationships with third-party semiconductor manufacturers. In addition,
the multimedia market is expected to become increasingly competitive as
functionalities continue to converge and companies that previously supplied
products providing functionalities not currently addressed by the Company
emerge as competitors. Many of the Company's current and potential competitors
have significantly greater market presence, name recognition and financial and
technical resources than the Company, and many have longstanding market
positions and established brand names in their respective markets. While the
Company believes that its semiconductor vendor flexibility enables it to
select from among the most advanced components available, the captive
semiconductor supplies of certain of the Company's current and potential
competitors can provide to them greater control over component design,
availability and cost. The Company believes that certain of the Company's
current and potential competitors compete in their markets largely on the
basis of price, which may result in significant price competition, lower
margins for the Company's products or otherwise affect the market for the
Company's products. There can be no assurance that the Company will be able to
continue to compete successfully in its markets, or to compete successful
against current and new competitors, as the Company's markets continue to
evolve. See "Business--Competition."
Substantially all of the Company's sales to date have consisted of sales of
PC communications and multimedia products. Sales of communications products
and multimedia products accounted for approximately 20% and 80%, respectively,
of the Company's revenues in Fiscal 1996 and 30% and 70%, respectively, in
Fiscal 1997 and are expected to continue to account for substantially all of
the Company's sales in the near term. A decline in demand or average selling
prices for these products, whether as a result of new product introductions or
price competition from competitors, technological change, incorporation of the
products' functionality onto PC motherboards or otherwise, would have a
material adverse effect on the Company's sales and operating results. In
addition, the PC communications and multimedia industries have been marked by
consolidations in recent periods, with a number of firms suffering significant
operating losses and, in certain cases, cessation of business. Given the
Company's concentration in these markets, there can be no assurance that the
volatility and competition pressure of the market will not have a material
adverse effect on the Company's operations in the future.
DISTRIBUTION RISKS; DIVERSIFICATION OF SALES CHANNELS
The Company sells its products primarily to independent regional and
national distributors and retailers/mass merchants and, to a significantly
lesser extent, to OEMs/VARs. The Company's success is
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dependent on the continued viability and financial stability of its customer
base. The PC distribution and retail/mass merchant industries have been
historically characterized by rapid change, including periods of widespread
consolidations and the emergence of alternative distribution channels. Such
change has periodically subjected the PC distribution and retail/mass merchant
industries to financial difficulties. The loss of, or reduction in sales to,
the Company's key customers could have a material adverse effect on the
Company's operating results.
In Fiscal 1997, sales to independent regional and national distributors
accounted for approximately 49% of the Company's gross revenues and 72% of net
revenues, constituting the largest percentage of the Company's sales during
that period. In the first quarter of Fiscal 1998, sales to distributors
decreased to approximatley 42% of gross revenues and 44% of net revenues.
These independent distributors are not contractually committed to future
purchases of the Company's products, are subject to only limited control by
the Company, and often carry competitors' products. As a result, the Company's
distributors could discontinue carrying the Company's products at any time.
The Company has recently undertaken significant efforts to expand its sales
channels, particularly through the expansion of its presence in the U.S.
retail/mass merchant market. During the first quarter of Fiscal 1998, sales to
retailers/mass merchants accounted for approximately 58% of the Company's
gross revenues (increasing from approximately 45% of gross revenues during
Fiscal 1997) and 60% of the Company's net revenues (increasing from 65% of net
revenues during Fiscal 1997). The retail/mass merchant channel is
substantially different from the distributor and OEM/VAR channels. Due to
competition for limited shelf space, retailers are in a strong position to
negotiate favorable terms of sale, including price discounts and product
return policies. See "--Product Return Risks." There can be no assurance that
the Company will be able to maintain or increase its sales to retailers/mass
merchants on favorable terms, if at all.
The Company's sales to OEMs/VARs accounted for approximately 6.4% of gross
revenues and 9.3% of net revenues during Fiscal 1997, as compared to 0.3% of
gross revenues and 0.3% of net revenues during the first quarter of Fiscal
1998. The decrease in sales to OEMs/VARs for the first quarter of Fiscal 1998
was primarily due to the Company's focus of its limited sales and marketing
resources on its other more substantial distribution channels. The Company
currently is expanding its sales and marketing efforts in an attempt to
increase the volume of its sales to OEMs. OEMs generally have significantly
different requirements from retailers/mass merchants and distributors, and
often have more stringent quality standards. OEMs generally also require
special distribution arrangements and product pricing. There can be no
assurance the Company will be successful in its efforts to increase sales to
OEMs. The inability of the Company to successfully penetrate the OEM channel
could have a material adverse effect on its future operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Distribution" and "--Technical Support
and Customer Service."
PRODUCT RETURN RISKS
The Company is exposed to the risk of product returns from its retailer/mass
merchant and distributor customers as a result of several factors, including
returns from their customers, contractual stock rotation privileges and
returns of defective products or product components. In addition, the Company
generally accepts returns of unsold product from customers with whom the
Company has severed its customer relationship. Overstocking by the Company's
customers could lead to higher than normal returns, which could have a
material adverse effect on the Company's results of operations. Returned
unused products generally are tested by the Company and, if undamaged, are
repackaged and put back into inventory to be resold. Returned used products
are tested, repaired and used as warranty replacements. Products returned to
the Company due to faulty work by Company subcontractors are returned to the
subcontractors for credit against future purchase orders. The Company also has
a policy of offering price protection to its customers for some or all of
their inventory, whereby when the Company reduces its prices for a product,
the customer receives a credit for the difference between the original
purchase price of the product and the Company's reduced price for the product.
As a result
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of this policy, significant reductions in prices have had, and may in the
future have, a material adverse effect on the Company's results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Returns and allowances for the first quarter of Fiscal 1998 were $621,000
(or 3.9% of gross revenues), and were $22.4 million (or 30.6% of gross
revenues) in Fiscal 1997 and $2.0 million (or 6.0% of gross revenues) in
Fiscal 1996. Of these returns in Fiscal 1997, approximately $18.0 million were
attributed to sales made by regional and national distributors and $4.0
million were attributed to sales made by retailers/mass merchants. The
disproportionately large increase in returns in Fiscal 1997 was partially due
to a problem encountered in the middle of the year with a chip used in the
Company's DSVD modems that was manufactured for the Company by Phylon
Communications, Inc. ("Phylon"). Due to a defect in the chip's software
design, which the Company believes was caused by Phylon, the chip vendor was
unable to satisfy the Company's specifications for DSVD performance. As a
result, the Company agreed to accept its customers' return of the modems,
which it thereafter repackaged and resold as a non-DSVD modem product. Since
the modem was so repackaged and sold at a profit, the Company did not seek
further satisfaction from Phylon. The Company has discontinued using Phylon as
a chip vendor. To reduce the likelihood of a similar problem occurring in the
future, the Company has instituted a program of additional beta testing of its
products and product components, sometimes in conjunction with its larger mass
merchant customers. Aggregate returns relating to the defective chips were
approximately $10.1 million, or 44.9% of total returns in Fiscal 1997. In
addition, in Fiscal 1997 the Company's efforts to upgrade the quality and
average size of its customer base and its resulting cessation of business with
several smaller customers resulted in a higher than normal incidence of
product returns from such customers. Aggregate returns in Fiscal 1997 from
customers with which the Company discontinued business (which may have
included returns due to the aforementioned defective chips) were approximately
$10.2 million, or 45.5% of total returns in Fiscal 1997. While the Company
believes that returns associated with the aforementioned chip defect should
not be material in future periods, it is expected that returns will continue
from smaller customers disenfranchised as a result of the Company's upgrading
of its customer base, possibly at significant levels. There can be no
assurance this factor, as well as the other factors described above, will not
continue to result in significant levels of product returns and allowances in
future periods, which may have a material adverse effect on the Company's
operations.
DEPENDENCE ON FUTURE GROWTH OF INTERNET AND INTERNET INFRASTRUCTURE
The growth of the markets for PC communication and multimedia products has
been driven in part by the rapid technological change in those markets and
increased use of the Internet. There can be no assurance that such rapid
technological change will continue or that the telecommunications
infrastructure will be developed to support the high-volume adoption of these
technologies. Moreover, the Company's future success is in significant
respects dependent upon continued growth in the use of and interest in the
Internet. Such growth is a recent phenomenon and there can be no assurance
that the current rate of growth will be sustained in future periods. To the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it
by such growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity or due to increased
governmental regulation. Any of these factors could materially adversely
affect the market for PC communication and multimedia products and the
Company's results of operations. See "Business--Industry Overview."
RELIANCE ON KEY EMPLOYEES
The Company's success will depend in large part on the continued services of
its President, Chief Executive Officer and Director, Sultan W. Khan, its
Executive Vice President and Director, Asif M. Khan, and other key management
employees. The Company does not maintain "key person" insurance on the lives
of any of these individuals. The loss of one or more key management employees
or the failure to attract and retain additional personnel could have a
material adverse effect on the Company.
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PROPRIETARY RIGHTS
The Company does not employ an internal research and development staff and
acquires virtually all of the software and hardware technology used in its PC
communication and multimedia products by licensing such technology from third-
party manufacturers and suppliers. The Company establishes and protects its
proprietary rights in and to its product design, manufacturing, testing,
marketing and customer support methods primarily through a combination of
trade secret and copyright protections. There can be no assurance that the
Company's measures to protect its proprietary rights will deter or prevent
unauthorized use of the Company's trade secrets, proprietary information or
technology. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the
United States. As is typical in its industry, the Company from time to time
may be subject to legal claims asserting that the Company has violated
intellectual property rights of third parties. In the event a third party were
to sustain a valid claim against the Company and in the event any required
license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. See "Business--Commitment to Emerging Technologies."
RISK FACTORS RELATING TO THE OFFERING
CONTROL OF COMPANY BY AURA
Based upon the 10,000,000 shares of Common Stock which will be outstanding
upon completion of the Offering, Aura will beneficially own and control 75% of
the Company's outstanding Common Stock (or approximately 72% if the
Underwriters' Over-allotment Option is exercised in full). In addition,
cumulative voting (which provides that a stockholder can cast votes in the
election of directors equal to the number of shares owned by such stockholder
multiplied by the number of directors to be elected to a single candidate or
among the candidates as the stockholder wishes) is not permitted with respect
to the Company's Common Stock. Accordingly, Aura will have sufficient voting
power to control the outcome of all corporate matters submitted to the vote of
stockholders. Such matters could include the election of directors, changes in
the size and composition of the Board of Directors, proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. In addition, the concentration of ownership in
Aura could have the effect of delaying or preventing a change in control of
the Company and may affect the market price of the Securities. See
"Management," "Relationship with Aura and Certain Transactions," "Principal
Stockholders" and "Description of Securities."
POTENTIAL CONFLICTS OF INTEREST; CERTAIN CHARTER PROVISIONS LIMITING LIABILITY
Various conflicts of interest between the Company and Aura could arise
following the completion of the Offering, and persons serving as directors,
officers and employees of both the Company and Aura may have conflicting
duties to each. Currently, Steven C. Veen, the Company's acting Chief
Financial Officer, also serves as Chief Financial Officer of Aura, Michael I.
Froch, the Company's Secretary and a Director, also serves as an employee of
Aura, and Gerald S. Papazian, a Director of the Company, also serves as
President and Chief Operating Officer of Aura. Although the Company currently
is searching for a new Chief Financial Officer to replace Mr. Veen, there can
be no assurance the Company will be successful in hiring such replacement
position in the foreseeable future or at all. Ownership interests of NewCom's
Directors or officers in the common stock of Aura could also create or appear
to create potential conflicts of interest when such directors and officers are
faced with decisions that could have different implications for the Company
and for Aura. See "Principal Stockholders--Ownership of Aura Stock."
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") includes provisions relating to competition by Aura
with the Company, allocations of corporate opportunities, transaction
14
<PAGE>
with interested parties and intercompany agreements and provisions limiting
the liability of certain persons. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions." The enforceability under
Delaware corporate law of such provisions which eliminate certain rights that
might have been available to stockholders under Delaware law had such
provisions not been included has not been established and thus counsel to the
Company is not able to render an opinion regarding the enforceability of such
provisions. The Company's Restated Certificate provides that any person
purchasing or acquiring an interest in shares of capital stock of the Company,
including the Underwriters, shall be deemed to have consented to the
provisions in the Restated Certificate relating to competition by Aura with
the Company, conflicts of interest, corporate opportunities and intercompany
agreements, and such consent may restrict such person's ability to challenge
transactions carried out in compliance with such provisions. The existence of
these terms and restrictions described above do not limit, impair or waive any
rights conferred by or under the federal securities laws. The Company intends
to disclose the existence of such provisions in its Annual Reports on Form 10-
K as well as in certain other filings with the Commission. The corporate
charter of Aura does not include compatible provisions and, as a result,
persons who are directors and/or officers of the Company and who are also
directors and/or officers of Aura may choose to take action in reliance on
such provisions rather than act in a manner that might be favorable to the
Company but adverse to Aura. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions."
Under the Restated Certificate, the personal monetary liability of the
directors of the Company for breach of their fiduciary duty of care, including
actions involving gross negligence, are eliminated to the fullest extent
permitted under Delaware law. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions--Limitations on Directors'
Liability."
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS
On or before the Closing Date, Aura and the Company will have entered into
certain intercompany agreements, including (i) a tax sharing agreement
pursuant to which, for the period prior to the date of deconsolidation of the
Company and Aura for tax purposes, Aura will have sole authority to respond to
and conduct all tax proceedings (including tax audits) relating to the
Company, to file federal, state and local returns on behalf of the Company and
to calculate the amount of the Company's tax liability, however, any tax
liability owed by the Company to Aura for the period from June 1, 1997 through
the Deconsolidation Date will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date. See
"Relationship with Aura and Certain Transactions--Arrangements and
Transactions with Aura Systems, Inc.--Tax Sharing Agreement", (ii) a
noncompetition agreement with terms described below (the "Noncompetition
Agreement"), (iii) an agreement pursuant to which Aura will continue to
provide various corporate services, as more fully described below, to the
Company on an interim basis following the Closing Date that may be material to
the conduct of the Company's business (the "Corporate Services Agreement"),
(iv) a redemption agreement pursuant to which Aura will have the option to
require the Company to apply up to 70% of the net proceeds the Company
receives from the exercise of the Warrants to redeem shares of Common Stock
held by Aura at the Warrant exercise price (the "Redemption Option
Agreement"), and (v) a registration rights agreement, pursuant to which Aura
can require the Company to register, at the Company's expense, all of the
Common Stock held by Aura, with 3.0 million shares subject to such rights
commencing one year from the date of this Prospectus and the balance of such
shares registrable one year thereafter (the "Aura Rights Agreement"). Because
the Company is currently a majority-owned subsidiary of Aura, none of the
intercompany agreements resulted from arm's-length negotiations. These
agreements may include terms and conditions that may be more or less favorable
to the Company than terms contained in similar agreements negotiated with
third parties.
Pursuant to the Underwriting Agreement to be executed by and between the
Representative, as representative of the several Underwriters, Aura and the
Company, the Company and Aura have granted the Underwriters the Underwriters'
Over-allotment Option to purchase up to 300,000 additional Units on the same
terms set forth herein, solely for the purpose of covering over-allotments, if
any. The Common Shares included in such additional Units will be offered by
Aura and the Warrants included in such additional Units will be offered by the
Company.
15
<PAGE>
With respect to matters covered by the Corporate Services Agreement, the
relationship between Aura and the Company is intended to continue on an
interim basis for six months following completion of the Offering, in a manner
generally consistent with past practices. The Corporate Services Agreement is
terminable by either party upon 60 days prior written notice. In the event
that Aura elects to terminate the agreement, there can be no assurance that
the Company would be able to secure alternative sources for such services
within 60 days or that such services could be obtained for costs comparable to
costs charged by Aura within such period. Pursuant to the Noncompetition
Agreement, Aura has covenanted, for a period of three years from the Closing
Date, not to compete with the Company in the design, manufacture, sale or
marketing of PC modem and certain multimedia products and to provide the
Company with an exclusive, fully paid, royalty free, worldwide license,
irrevocable during such three-year period, to make, use and sell any such
competitive products developed or offered by Aura. Except as set forth in the
Noncompetition Agreement, Aura is not restricted from competing with the
Company and there can be no assurance that Aura, following the expiration or
prior termination of the Noncompetition Agreement, will not expand, through
development of new lines of products or businesses, acquisitions or otherwise,
its operations in a way that might compete with the Company's business. See
"Relationship with Aura and Certain Transactions."
WARRANTS SUBJECT TO REDEMPTION
Each Warrant will entitle the holder to purchase one share of Common Stock
at an exercise price equal to 150% of the Offering Price until that date which
is five years from the date of this Prospectus. The Warrants are redeemable by
the Company for $.05 per Warrant at any time one year after the date of this
Prospectus (which period may be reduced or waived by the Representative in its
sole discretion) upon at least 30 days' prior written notice provided the
closing price of the Common Stock for 20 consecutive trading days within the
30 day period preceding the date of the notice of redemption equals or exceeds
200% of the Offering Price. A Warrant holder's right to exercise the Warrants
will terminate upon the redemption date, thereby depriving the Warrants of any
value except the right to receive the redemption price. In the event the
Company exercises the right to redeem the Warrants, a holder would be required
either to exercise the Warrants within the period of the notice of redemption
(which could occur at a time when it may be disadvantageous to do so), to sell
the Warrants at the then current market price when the holder might otherwise
wish to hold them, or to accept the redemption. The Company presently expects
to call all of the Warrants for redemption as soon as permitted provided that
a current prospectus relating to the Common Stock underlying such Warrants is
then in effect. See "Description of Securities--Warrants." There can be no
assurance that a Warrant holder would be able to sell the shares of Common
Stock received by it upon exercise of the Warrants at the then-current market
price or at a price which is in excess of the exercise price of such Warrants.
Further, as described in detail below, the Company may not be able to issue
shares of Common Stock to Warrant holders wishing to exercise their Warrants
in response to the Company's notice of redemption. See "--Current Prospectus
and State Blue Sky Registration Requirements to Exercise Warrants" and
"Description of Securities."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIREMENTS TO EXERCISE
WARRANTS
The Company will be able to issue shares of Common Stock upon the exercise
of the Warrants and the Representative's Option only if (i) there is a current
prospectus relating to such Common Stock under an effective registration
statement (including audited financial statements for any companies acquired)
filed with the Commission, and (ii) such Common Stock is then qualified for
sale or exempt therefrom under the applicable state securities laws of the
jurisdictions in which the various holders of Warrants reside. The Company has
agreed with the Representative in the Underwriting Agreement to use its best
efforts to have a registration statement effective at any time that the
exercise price of the Warrants is less than the market price of the Common
Stock (i.e., when the Warrants are "in the money"). After a registration
statement becomes effective, it may require updating by the filing of a post-
effective amendment. There can be no assurance, however, that the Company will
be successful in maintaining a current registration statement. Also, it is
possible that the Company may be unable, for unforeseen reasons, to cause a
registration statement covering the shares underlying the Warrants to be in
effect when the Warrants are exercisable. In that event, the Warrants may
expire unless extended by the Company as permitted by the Warrant.
16
<PAGE>
Because the Warrants and Common Shares included in the Units being offered
hereby will be immediately detachable and separately transferable, it is
possible that the Warrants may be acquired by persons residing in states where
the Company has not registered, or is not exempt from registration, such that
the shares of Common Stock underlying the Warrants may not be sold or
transferred upon exercise of the Warrants. Warrant holders residing in those
states would have no choice but to attempt to sell their Warrants or to let
them expire unexercised. Holders of Warrants should, therefore, contact their
own legal advisor or broker at such time as they may wish to exercise any
Warrants held by them to ascertain whether or not the Company is then
qualified to issue Common Stock under the state securities laws in the state
in which such holder resides. Accordingly, the market for the Warrants may be
limited because of the Company's obligation to fulfill the foregoing
requirements. See "Description of Securities--Warrants."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights of such shares, without any further vote or action by
the Company's stockholders. Such charter provisions could have the effect of
delaying, deferring or preventing a change of control of the Company. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Restated Certificate and of
Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. See "Description of Securities--Preferred
Stock" and "--Delaware Anti-takeover Law and Certain Charter Provisions." The
Company is subject to the anti-takeover provisions of section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person first
becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of section 203 could have the
effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Restated Certificate or Bylaws may have the
effect of delaying or preventing changes of control or management of the
Company, which could adversely affect the market price of the Company's Common
Stock. See "Description of Securities."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF SECURITIES' PRICE
Prior to the Offering, there has been no public market for the Company's
Common Shares or Warrants and there can be no assurance that an active trading
market will develop or be sustained after the Offering. The Offering Price
will be determined through negotiations among the Company and the
Representative based on several factors and may not be indicative of the
market price of the Common Shares or Warrants after the Offering. See "--
Arbitrary Determination of Offering Price." The market price of the Securities
is likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's results of
operations, announcements of technological innovations, introduction of new
products by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the
computer and other technology industries or the market for add-in subsystems,
changes in or failure by the Company to meet securities analysts'
expectations, general market conditions and other factors. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Securities. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Underwriting."
17
<PAGE>
NO DIVIDENDS ON COMMON STOCK
The Company has not previously paid any cash or other dividends on its
Common Stock and does not anticipate payment of any dividends for the
foreseeable future, it being anticipated that any earnings would be retained
by the Company to finance its operations and future growth and expansion. See
"Dividend Policy."
ARBITRARY DETERMINATION OF OFFERING PRICE
The Offering Price for the Securities will be determined by negotiations
between the Company and the Representative and will not necessarily bear any
relationship to the assets, performance, book value or net worth of the
Company or any other recognized criteria of value. Among the factors to be
considered in determining such price are the business experience of the
Company's management, the prospects for the industry in which the Company
operates, growth prospects of the Company and prevailing market conditions
generally. The Offering Price should not be considered to be an indication of
the actual value of the Company. See "Dilution" and "Underwriting."
CONTRACTUAL OBLIGATIONS TO REPRESENTATIVE
The Underwriting Agreement with the Representative provides for the
Company's continuing involvement with the Representative after the Offering,
including (i) the Company's agreement to retain the Representative as a
consultant for two years from the date of this Prospectus for a fee of $3,000
per month, (ii) the Company's agreement to allow the Representative to
nominate two directors or to designate a consultant to the Board of Directors
for a period of four years from the date of this Prospectus and Aura's
agreement to vote all shares of the Company's Common Stock owned by Aura for
said nominees, (iii) the Company's agreement to appoint the Representative as
Warrant solicitation agent and to pay a fee for such services equal to 3% of
the exercise price of Warrant exercises solicited by the Representative, (iv)
the grant to the Representative of an option to purchase 200,000 Units at an
exercise price of 120% of the Offering Price, and (v) the right of the
Representative to allow the Company to redeem the Warrants at a date earlier
than 12 months after the date of this Prospectus provided the other conditions
for redemption have been satisfied. The ongoing fees to be paid to the
Representative will reduce the amount of working capital available for other
purposes. See "Underwriting." In addition, pursuant to a registration rights
agreement between the Company and the Representative, the holders of the
Representative's Option have the right to require the registration under the
Securities Act, at the Company's expense, of the Common Shares, and Warrants
issuable upon exercise of the Representative's Option and of the shares of
Common Stock issuable upon exercise of the Warrants included therein, as well
as certain "piggyback" registration rights. The cost to the Company of
effecting a demand registration may be substantial. See "Description of
Securities--Registration Rights."
To the extent the Representative elects to effect transactions in the
Company's Common Shares and Warrants, the Representative may exert a
dominating influence on the market for such Common Shares and Warrants. Such
market making activity may be discontinued at any time. In the event the
Representative elects or is forced to discontinue such activity following the
completion of the Offering, the price and liquidity of the Common Shares and
Warrants may be materially adversely affected. Further, as a result of the
Representative's role as Warrant solicitation agent, unless granted an
exemption by the Commission from Rule 10b-6, the Representative may be
prohibited from engaging in any market making activities with regard to the
Company's Securities for the period from two to nine business days prior to
any solicitation by the Representative of the exercise of the Warrants until
the later of (i) the termination of such solicitation activity, or (ii) the
termination, by waiver or otherwise, of any right that the Representative may
have to receive a fee for the exercise of the Warrants following the
solicitation. As a result, the Representative may be unable to continue to
provide a market for the Company's Securities under certain periods while the
Warrants are exercisable. See "Underwriting."
FUTURE ISSUANCES OF STOCK BY THE COMPANY WITHOUT STOCKHOLDER APPROVAL
Following the sale of the Securities offered hereby, the Company will have
outstanding 10,000,000 shares of Common Stock out of a total of 50,000,000
shares of Common Stock authorized, not including up to
18
<PAGE>
(i) 2,000,000 shares of Common Stock issuable upon exercise of the Warrants,
(ii) 200,000 shares of Common Stock issuable upon exercise of the
Representative's Option, (iii) 200,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Representative's Option,
(iv) 300,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Underwriters' Over-allotment Option, and (v) 1,000,000 shares
reserved for issuance under the Company's Stock Plan. If the maximum number of
shares of Common Stock are issued as a result of the exercise of each of the
foregoing, a total of 13,700,000 shares of Common Stock will be issued and
outstanding. The remaining 36,300,000 shares of Common Stock and 5,000,000
shares of Preferred stock authorized but not issued may be issued without any
action or approval of the Company's stockholders. Although there are no
present plans, agreements or undertakings involving the issuance of such
shares, except as disclosed in this Prospectus, any such issuance could be
used as a method of discouraging, delaying or preventing a change in control
of the Company or could significantly dilute the public ownership of the
Company, which could adversely affect the market. There can be no assurance
that the Company will not undertake to issue such shares if it deems it
appropriate to do so.
The holders of the Warrants, Representative's Option and any other options,
warrants and other securities convertible into shares of Common Stock have the
opportunity to profit from a rise in the market price of the Common Stock, if
any, without assuming the risk of ownership, with a resulting dilution in the
interest of other stockholders. The existence of the aforementioned options
and warrants and any other options or warrants that may be granted in the
further may prove to be a hinderance to future equity financing by the
Company. Further, the holders of such warrants and options may exercise them
at a time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. See "Dilution," "Description
of Securities," and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in the Offering will experience immediate and substantial
dilution of $6.15, or 68%, per share between the adjusted pro forma net
tangible book value per share after the Offering and the Offering Price of
$9.00 per Unit. To the extent that any Warrants, options or other securities
convertible into shares of Common Stock currently outstanding or subsequently
granted to purchase the Common Stock are exercisable at a price less than the
net tangible book value per share following the Offering, there will be
further dilution upon the exercise of such securities. See "Dilution" and
"Description of Securities."
POSSIBLE ADVERSE EFFECTS DUE TO SHARES ELIGIBLE FOR FUTURE SALE
Sales in the public market after the Offering of substantial amounts of
previously issued and currently outstanding shares of Common Stock could
adversely affect the prevailing market price of the Company's Common Stock. In
addition to the 2,000,000 Common Shares offered hereby, and based upon shares
outstanding after giving effect to the Recapitalization, there will be
approximately 10,000,000 shares of Common Stock outstanding as of the Closing
Date, all of which existing shares are "restricted" shares (the "Restricted
Shares") under the Securities Act of 1933, as amended (the "Securities Act").
As a result of the expiration of certain lock-up agreements between certain
stockholders and the Representative, 8,000,000 shares will become available
for sale to the public market beginning one year after the date of this
Prospectus, pursuant to Rule 144 promulgated under the Securities Act, all of
which will be subject to the volume and other restrictions of Rule 144. The
Representative may in its discretion and without notice to the public waive
these lock-up agreements and permit Aura and other holders otherwise agreeing
to lock-up their shares to sell any or all of their shares, the effect of
which could be a substantial decline in the trading price of the Company's
Common Stock or Warrants. In addition, an aggregate of 109,338 shares issuable
upon the exercise of stock options will first become eligible for sale in the
public market one year following the date of this Prospectus and the
expiration of such lock-up agreements, all of which will be subject to the
volume and other restrictions of Rule 144. See "Shares Eligible for Future
Sale." In addition, shares of Common Stock held by Aura are subject to the
Redemption Option Agreement and the Aura Rights Agreement. See "Relationship
With Aura and Certain Transactions."
19
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in June 1994. The Company's
executive offices are located at 31166 Via Colinas, Westlake Village,
California 91362 and its telephone number is (818) 597-3200.
ACQUISITION OF NUVO ASSETS FROM AURA
Prior to September 1994, the Company had no material assets and no
operations. As part of the Company's initial capitalization, in September 1994
Aura contributed to the Company certain assets that Aura had previously
purchased out of the Chapter 7 bankruptcy proceedings of Nuvo Corporation of
America ("Nuvo"). Prior to its bankruptcy, Nuvo had been in the business of
developing, manufacturing and supporting data communication for fax, modem and
memory products and laser printer accessories. The assets acquired from Nuvo
by Aura consisted of inventory, certain furniture, fixtures and equipment and
production drives and tooling equipment relating to Nuvo's modem business.
Aura acquired the Nuvo assets in consideration for issuing 133,333 shares of
Aura common stock valued at $1.0 million. Immediately after the acquisition,
the Nuvo assets were transferred to the Company. Upon the assets being
contributed to the Company, the Company evaluated the assets acquired and made
an allocation of purchase price under APB 16. The Company determined that the
inventory and fixed assets had an aggregate fair value of approximately
$277,000. The remaining purchase price of approximately $723,000 was allocated
to intangible assets consisting of the engineering designs and drawings
(including tooling) that were estimated to have a fair value during purchase
negotiations in excess of that amount. These intangible assets were assigned a
five year amortization period, and currently (approximately 33 months later)
are still utilized by the Company. In addition to purchasing the Nuvo assets,
Aura in late May 1994 hired four former employees of Nuvo including Sultan W.
Khan, Nuvo's former president, and Asif M. Khan, Nuvo's former vice president.
The hiring of the Nuvo employees was not part of the Nuvo asset purchase
transaction or the bankruptcy proceedings, but was negotiated separately
between Aura and each employee. In September 1994, Sultan W. Khan and Asif M.
Khan became the Company's President and Executive Vice President,
respectively.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Units offered
hereby are estimated to be approximately $15.7 million, assuming an Offering
Price of $9.00 per Unit and after deducting underwriting discounts and
commissions of approximately $1.3 million and other expenses of the Offering
estimated to be approximately $1.1 million (which includes the
Representative's non-accountable expense allowance). The Company expects to
use the proceeds substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
----------------------- ------------- -------------
<S> <C> <C>
Products/Components Acquisition(1)............. $ 4.2 million 27%
Repayment of Commercial Line of Credit and
Other Debt(2)................................. 3.5 million 22
Marketing and Sales............................ 2.1 million 13
Working Capital and Other General Corporate
Purposes...................................... 5.9 million 38
------------- ---
$15.7 million 100%
============= ===
</TABLE>
- --------
(1) The products and components to be purchased are expected to include those
contained in the computer communication and multimedia products currently
offered and under development by the Company; the Company is unable to
specifically identify the products or components or the quantities thereof
that will be so purchased. Purchases may include products and components
from Micro Equipment Corporation, a company which Alexander Remington, a
director of the Company, founded and of which he currently acts as Chief
Executive Officer, and from Aura. Such purchases will only be made if they
are approved by a majority of the Company's disinterested independent
directors, are on terms no less favorable to the Company than could be
obtained from unaffiliated parties and are reasonably expected to benefit
the Company. See "Certain Transactions."
(2) The Company's existing commercial line of credit bears interest at the
lending bank's prime rate plus 1.25% (the interest rate was 9.75% at June
30, 1997); at June 30, 1997 the outstanding principal balance of the
credit line was $3.6 million.
The Board of Directors has broad discretion in determining how the net
proceeds of the Offering (other than with respect to the debt repayment
obligations described above) will be applied. Pursuant to the Receivables
Agreement, in the event Aura exercises its right to return to the Company
accounts receivable NewCom is unable to collect, the Company shall be required
to reimburse Aura for the full amount of such receivables. Such reimbursement
amount may be paid with the proceeds of the Offering. Proceeds may also be
used to acquire businesses, technology or products that complement the
business of the Company. No such transactions are being negotiated as of the
date of this Prospectus. Pending use of the proceeds from the Offering as set
forth above, the Company intends to invest all or a portion of such proceeds
in short-term bank certificates of deposit, U.S. Government obligations, money
market investments and short-term investment grade securities.
The Common Shares comprising any and all Units purchased pursuant to
exercise of the Underwriters' Over-allotment Option will be sold by Aura and
the Company will not receive any of the proceeds from the sale of such Common
Shares. The Company will receive the proceeds from the Warrants comprising all
Units purchased pursuant to exercise of the Underwriters' Over-allotment
Option, or $.10 per Unit thus purchased. In addition, pursuant to the
Redemption Option Agreement between the Company and Aura, Aura has the right,
exercisable at its option, to require the Company to apply up to 70% of the
net proceeds received by the Company from the sale of shares of Common Stock
pursuant to exercise of the Warrants (including any Warrants sold pursuant to
the Underwriters' Over-allotment Option and the Representative's Option),
subject to certain limitations, to redeem outstanding shares of Common Stock
currently held by Aura at the Warrant exercise price. Accordingly, the Company
will not retain or use for its benefit any of the proceeds from the sale of
Common Stock as to which Aura exercises its option under the Redemption
Agreement.
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<PAGE>
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company intends to retain earnings, if any, to finance the development and
expansion of its business. Accordingly, the Company does not intend to pay
cash dividends in the foreseeable future on its Common Stock. Holders of the
Company's Common Stock are entitled to dividends when, as and if declared by
the Board of Directors out of funds legally available therefor. The payment of
dividends, therefore, is within the discretion of the Company's Board of
Directors. Cash dividends, if any, that may be paid in the future to holders
of Common Stock will be payable when, as and if declared by the Board of
Directors of the Company, based upon the Board's assessment of the financial
condition of the Company, its earnings, need for funds, capital requirements
and other factors, including any applicable laws. In addition, any financing
which the Company may obtain in the future may contain provisions restricting
the Company's ability to pay dividends. The Company is not currently a party
to any agreement restricting the payment of dividends.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of May 31, 1997:
<TABLE>
<CAPTION>
MAY 31, 1997
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
----------- ------------ --------------
<S> <C> <C> <C>
Short-term debt(3).................... $ 5,740,236 $ 5,740,236 $ 2,240,236
=========== =========== ===========
Due to Aura(4)........................ $25,522,706 $21,522,706 $21,522,706
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized(5); no
outstanding shares actual, pro forma
or pro forma as adjusted............ -- -- --
Common Stock, $.001 par value,
50,000,000 shares authorized(5);
7,555,556 shares outstanding,
actual; 8,000,000 shares
outstanding, pro forma; 10,000,000
shares outstanding, pro forma as
adjusted(6)......................... 7,556 8,000 10,000
Additional paid-in capital........... 9,993,444 13,993,000 29,641,000
Accumulated deficit.................. (1,161,795) (1,161,795) (1,161,795)
----------- ----------- -----------
Total stockholders' equity.......... 8,839,205 12,839,205 28,489,205
----------- ----------- -----------
Total capitalization.............. $34,361,911 $34,361,911 $50,011,911
=========== =========== ===========
</TABLE>
- --------
(1) Gives effect to the Conversion.
(2) Adjusted to reflect the sale by the Company of 2,000,000 Units offered
hereby at an assumed Offering Price of $9.00 per Unit and the application
of the estimated net proceeds therefrom. Of the $9.00 Offering Price,
$8.90 is attributed to one Common Share and $.10 is attributed to one
Warrant. See "Use of Proceeds."
(3) See Note 9 of Notes to Financial Statements.
(4) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the
Company to Aura was approximately $17.0 million.
(5) Gives effect to the Certificate Amendment.
(6) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 300,000 shares of Common Stock issuable
upon exercise of the Warrants included in the Underwriters' Over-allotment
Option if exercised in full, (iii) 200,000 shares of Common Stock issuable
upon exercise of the Representative's Option, (iv) 200,000 shares of
Common Stock issuable upon exercise of the Warrants included in the
Representative's Option, and (v) 1,000,000 shares of Common Stock issuable
upon the exercise of options outstanding as of June 30, 1997. See
"Description of Securities," "Underwriting" and "Management--Stock
Incentive Plan."
22
<PAGE>
DILUTION
As of May 31, 1997, after giving effect to the Conversion, the Company had a
pro forma net tangible book value of approximately $12.8 million or $1.60 per
share. Pro forma net tangible book value per share represents the amount of
total tangible assets less total liabilities of the Company, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
of the 2,000,000 Units offered by the Company hereby at an assumed Offering
Price of $9.00 per Unit (and assuming no part of the Offering Price is
allocated to the Warrants), and after deduction of estimated underwriting
discounts and commissions and Offering expenses, the pro forma net tangible
book value of the Company at May 31, 1997 would have been approximately
$28.49 million or $2.85 per share. This represents an immediate increase in
such pro forma net tangible book value of $1.25 per share to existing
stockholders and an immediate dilution of $6.15 per share to new investors
purchasing Units in the Offering, which dilution amounts to approximately 68%
of the initial public offering price per share of Common Stock. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price of the Common Shares offered
hereby(1)..................................................... $9.00
Pro forma Net tangible book value before the offering........ $1.60
Increase per share attributable to new investors............. 1.25
-----
Pro forma net tangible book value after the offering........... 2.85
-----
Dilution per share to new investors (2)........................ $6.15
=====
</TABLE>
- --------
(1) Assumes no allocation of the Offering Price to the Warrants. Before
deduction of underwriting discounts and commissions.
(2) Does not reflect the issuance of up to (i) 2,000,000 shares of Common
Stock reserved for issuance upon exercise of the Warrants, (ii) 300,000
shares of Common Stock issuable if the Warrants included in the
Underwriters' Over-allotment Option are exercised in full, (iii) 400,000
shares of Common Stock issuable if the Representative's Option and the
Warrants included in the Representative's Option are exercised in full,
and (iv) 1,000,000 shares of Common Stock issuable upon the exercise of
options issued or issuable under the Company's Stock Plan, the exercise or
issuance of any of which could have a substantial dilutive effect to new
investors. See "Description of Securities," "Underwriting" and
"Management--Stock Incentive Plan."
The following table summarizes, on an unaudited pro forma basis as of May
31, 1997, after giving effect to the Recapitalization, the differences between
existing stockholders and purchasers of Securities in the Offering with
respect to the number of Common Shares purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per Unit
(based upon an assumed Offering Price of $9.00 per Unit and before deduction
of estimated underwriting discounts and commissions and offering expenses
payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,000,000 80.0% $14,001,000(1) 43.8% $1.75
New investors.......... 2,000,000 20.0 18,000,000 56.2 $9.00(2)
---------- ----- ----------- -----
Total................ 10,000,000(3) 100.0% $32,001,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes (i) $1,000 contributed to acquire capital stock of the Company
effective June 1994, (ii) $1.0 million in assets contributed by Aura as
additional paid-in capital effective September 1994, (iii) $9.0 million
contributed by Aura as additional paid-in capital effective March 1996,
and (iv) $4.0 million contributed by Aura to acquire capital stock
pursuant to the Conversion, in each case as adjusted to reflect the Stock
Split and Certificate Amendment.
(2) Of the $9.00 Offering Price, $8.90 is attributed to one Common Share and
$.10 is attributed to one Warrant.
(3) Does not reflect the issuance of up to (i) 2,000,000 shares of Common
Stock reserved for issuance upon exercise of the Warrants,
(ii) 300,000 shares of Common Stock issuable if the Warrants included in
the Underwriters' Over-allotment Option are exercised in full,
(iii) 400,000 shares of Common Stock issuable if the Representative's
Option and the Warrants included in the Representative's Option are
exercised in full, and (iv) 1,000,000 shares of Common Stock issuable upon
the exercise of options issued or issuable under the Company's Stock Plan,
the exercise or issuance of any of which could have a substantial dilutive
effect to new investors. See "Description of Securities," "Underwriting"
and "Management--Stock Incentive Plan."
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data of the
Company for the periods indicated and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and the Notes related thereto included
elsewhere in this Prospectus. The Company was incorporated in June 1994 and
commenced operations in September 1994. Accordingly, prior to September 1994,
the Company had no operations and had no assets other than $1,000 in cash
representing Aura's initial purchase of Common Stock. The selected financial
data at February 28, 1995, February 29, 1996 and February 28, 1997 and for the
nine months ended February 28, 1995 and each of the two years in the period
ended February 28, 1997, respectively, have been derived from the financial
statements of the Company that have been audited by Pannell Kerr Forster,
Certified Public Accountants, A Professional Corporation, Los Angeles,
California, included herein. The statement of operations data for the three
months ended May 31, 1996 and 1997, and the balance sheet data at May 31, 1997
are derived from the Company's unaudited financial statements included
elsewhere in this Prospectus and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at that date and results
of operations for those periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $ 7,465,720 $ 16,081,392
Less discounts given... 24,923 128,400 89,117 24,337 30,678
Less returns and
allowances............ -- 1,986,758 22,399,974 -- 621,037
---------- ----------- ----------- ------------ -------------
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Cost of goods sold..... 2,059,545 30,131,245 33,619,084 4,854,512 10,397,883
---------- ----------- ----------- ------------ -------------
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
---------- ----------- ----------- ------------ -------------
Expenses:
Research and
development........... 4,201 -- 7,708 -- 6,870
Selling, general and
administrative........ 423,619 4,972,064 11,840,951 1,631,698 2,728,857
---------- ----------- ----------- ------------ -------------
Total expenses....... 427,820 4,972,064 11,848,659 1,631,698 2,735,727
---------- ----------- ----------- ------------ -------------
Income (loss) from
operations............. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Other (income) expense,
net.................... (3,710) 1,279,451 1,393,676 232,761 518,585
Provision for income
taxes.................. -- -- 433,000 108,000 711,000
---------- ----------- ----------- ------------ -------------
Net income (loss)....... $ (380,217) $(5,185,331) $ 3,337,271 $ 614,412 $ 1,066,482
========== =========== =========== ============ =============
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts................ 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
<CAPTION>
MAY 31, 1997
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 ACTUAL PRO FORMA(2)
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA;
Total current assets.... 1,631,696 24,471,238 44,329,127 52,476,020 52,476,020
Working capital......... 988,840 14,744,627 21,916,553 31,565,837 31,565,837
Total assets............ 2,501,993 25,348,346 47,435,171 55,272,094 55,272,094
Total current
liabilities............ 642,856 9,726,611 22,412,574 20,910,183 20,910,183
Due to Aura(3).......... 1,238,354 20,186,283 17,249,874 25,522,706 21,522,706
Stockholders' equity
(deficit).............. 620,783 (4,564,548) 7,772,723 8,839,205 12,839,205
</TABLE>
- -------
(1) See Note 1 of Notes to Financial Statements for information regarding
calculation of net income (loss) per share.
(2) Gives effect to the Conversion.
(3) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the
Company to Aura was approximately $17.0 million.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. See "Forward-Looking Statements." The Company's actual
results may differ materially from the results discussed in the forward-
looking statements as a result of certain factors, including, but not limited
to, those discussed in "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company's Statement of Operations includes revenue and costs directly
attributable to the Company, as well as certain allocations from Aura of
indirect costs. Such allocations generally are based upon the proportionate
labor costs of the Company and the rest of Aura. The results of operations
also include allocations of (i) costs for administrative functions and
services performed on behalf of the Company by centralized staff groups within
Aura; (ii) Aura's general corporate expenses; (iii) pension and other
retirement benefit costs; and (iv) cost of capital. Current and deferred
income taxes and related tax expense have been allocated to the Company as if
it were a separate taxpayer. The allocations and estimates in the financial
statements are based on assumptions which the Company's management believes
are, under the circumstances, a reasonable approximation of the Company's
results of operations on a "stand-alone" basis.
The Company does not employ an internal research and development staff, but
instead focuses on identifying and innovatively incorporating into its
products software and hardware technologies acquired from third-party
manufacturers and suppliers. Accordingly, the Company's research and
development expenses during the periods discussed have been insignificant.
Substantially all of the Company's current products are, and have been
throughout the Company's operating history, IBM compatible. For each of Fiscal
1995, Fiscal 1996, Fiscal 1997 and the first quarter of Fiscal 1998 over 99%
of the Company's gross revenues and net revenues were derived from the sale of
IBM compatible products.
In order to provide its distributors with a measure of price protection, the
Company has adopted a price protection policy which requires it to credit its
distributors with an amount equal to the full amount of any price decrease for
any products purchased during the 30-day period preceding the Company's notice
of change in its prices, or products remaining in the distributors' inventory
at the effective date of the price change. In the event of product "close-
outs" or "price-outs," the price protection policy extends only to inventory
on hand at the time the close-out or price-out was announced.
The Company's product return policy permits its distributors to return for
credit, less any prior credits or price adjustments, all products purchased
within the previous 60 days that the Company discontinues or removes from its
published price list. Returns of multimedia kits, however, are treated by the
Company as warranties or exchanges and no credit is issued.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial
data as a percentage of net revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-----------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, --------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 97.9 96.6 66.4 65.2 67.4
Gross profit............ 2.1 3.4 33.6 34.8 32.6
Expenses
Research and
development.......... 0.2 0.0 0.0 0.0 0.0
Selling, general and
administrative....... 20.1 15.9 23.4 21.9 17.7
Total expenses...... 20.3 15.9 23.4 21.9 17.7
Income (loss) from
operations............. (18.3) (12.5) 10.2 12.9 14.9
Other (income) and
expenses
Miscellaneous income.. (0.2) (0.1) (0.2) (0.0) (0.1)
Interest expense...... 0.0 4.2 3.0 3.2 3.5
Provision for income
taxes.................. 0.0 0.0 0.8 0.0 4.6
Net income (loss)....... (18.1) (16.6) 6.6 9.7 6.9
</TABLE>
THREE MONTHS ENDED MAY 31, 1997 AS COMPARED TO THREE MONTHS ENDED MAY 31, 1996
Revenues. Gross revenues in the first quarter of Fiscal 1998 increased by
$8.6 million to $16.1 million from $7.5 million in the first quarter of Fiscal
1997. Net revenues, representing gross revenues net of discounts and returns
and allowances, for the first quarter of Fiscal 1998 were $15.4 million as
compared to $7.4 million for the corresponding prior fiscal period, an
increase of 107.3%. The increase in revenues was primarily a result of the
Company's increased volume of sales to major mass merchandisers such as
Circuit City Stores, Inc. and Best Buy Company, Inc., which began in the
second half of Fiscal 1997. Revenues for the first quarter of Fiscal 1998 were
positively affected by improved volume of sales of multimedia products which
represented approximately 59.2% of net revenues, which in turn were driven by
the increased volume of sales of the NewCom 12X drive kit and multimedia kits,
NewCom 16X drive kit and multimedia kits and NewCom 16X Audiophile multimedia
kit, and offset by decreased volume of sales of the NewCom 8X drive kit and
multimedia kits. Sales of communication products for the first quarter of
Fiscal 1998 which represented approximately 40.8% of net revenues, were
positively affected by the increased volume of sales of the NewCom 33,600 ifx,
efx and efx-m fax modems, NewTalk 33,600 ifx, vifx and spifx modems and NewCom
56,000 ifx and fax modems, and offset by decreased sales of the NewTalk 2000
DSVD ifx modem. Revenues from sales of multimedia products for the first
quarter of Fiscal 1997 which represented approximately 57.7% of net revenues,
were positively affected by the increased volume of sales of the newly
introduced NewCom 6X drive kit and multimedia kits and NewCom 8X drive kit and
multimedia kits. Revenues from sales of communication products in the first
quarter of Fiscal 1997 which represented approximately 42.3% of net revenues
were driven by the increased volume of sales of the NewCom 14,400 ifx, efx and
efx-m fax modems and NewCom 28,800 ifx, efx and efx-m modems.
Discounts given for the first quarter of Fiscal 1998 were approximately
$31,000 on $16.1 million of gross revenue or 0.2%. Such discounts were
comparable to approximately $24,000 on $7.5 million or 0.3% in the
corresponding prior fiscal period.
Returns and allowances in the first quarter of Fiscal 1998 were $621,037,
compared to none in the corresponding prior fiscal period. In the first
quarter of Fiscal 1998, the returns and allowances were primarily due to
rotation of stock by customers and products returned for exchange by
consumers. Returns and allowances in the first quarter of Fiscal 1998 related
primarily to returns associated with the NewCom 33,600 ifx, efx and ifx-m fax
modems, NewCom 8X drive kit and multimedia kits and NewCom 12X drive kit and
multimedia kits. Such returns and allowances may vary substantially from
quarter to quarter depending on the customer base and general market
conditions.
26
<PAGE>
Cost of Goods Sold. Cost of goods sold increased to $10.4 million or 67.4%
of net revenues from $4.9 million or 65.2% in the first quarter of Fiscal 1998
of net revenues in the corresponding prior fiscal period. The increase in the
percentage cost of goods sold resulted from a shifting in the mix of products
sold, with a larger portion of the product being modems, which carry a lower
margin than the multimedia kits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.7 million or 17.7% of net revenues in the
first quarter of Fiscal 1998 as compared to $1.6 million or 21.9% of net
revenues in the corresponding prior fiscal period. The decrease as a
percentage of net revenues was due to the fact that expenses required to
establish the infrastructure necessary to achieve higher sales had been
incurred in prior periods.
Interest Expense. Interest expense in the first quarter of Fiscal 1998 has
increased to $535,735 from $240,171 in the corresponding prior fiscal period.
The increase is a result of higher levels of borrowing from commercial sources
during the current year quarter along with higher levels of advances from
Aura. While the Company intends to partially repay the amount owing under its
commercial line of credit with a portion of the net proceeds of this Offering,
management's internal cash projections estimate future borrowings under such
facility or any replacement thereof to finance operations in an amount equal
to or in excess of such repaid amount within the 12 month period following the
completion of this Offering. As a result, the Company will not significantly
benefit from any reduction in interest expense as a result of such debt
repayment.
Income Taxes. The Company incurred a $711,000 provision for income taxes in
the first quarter of Fiscal 1998 compared to $108,000 in the corresponding
prior fiscal period. The Company and Aura have agreed, pursuant to the Tax
Sharing Agreement (as that term is defined herein), that any tax liability
owed by the Company to Aura for the period from June 1, 1997 through that date
on which Aura owns less than 80% of the Company's outstanding Common Stock
(the "Deconsolidation Date") will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date. See
"Relationship with Aura and Certain Transactions--Arrangements and
Transactions with Aura Systems, Inc.--Tax Sharing Agreement."
Net Income. Net income for the first quarter of Fiscal 1998 was $1.1 million
as compared to net income of $614,000 for the corresponding prior fiscal
period. Net income for the three months ended May 31, 1996 was positively
affected by the utilization of the Company's net operating loss carry forward.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Revenues. Gross revenues in Fiscal 1997 increased to $73.1 million from
$33.3 million in Fiscal 1996. Net revenues for Fiscal 1997 were $50.6 million
as compared to $31.2 million in Fiscal 1996, an increase of 62.2%. The
increase resulted from an increase in the volume of product sales during the
second half of the year to major mass merchandisers such as Best Buy Company,
Inc. and Circuit City Stores, Inc. Revenues for Fiscal 1997 were positively
affected by the improved volume of sales of multimedia products, which
represented approximately 64.1% of net revenues, which in turn was driven by
the increased volume of sales of the NewCom 8X drive kit and multimedia kits
and the NewCom 12X drive kit and multimedia kits introduced in April and
August 1996, respectively, and offset by the decreased volume of sales of
NewCom 4X drive kit and multimedia kits no longer offered by the Company.
Revenues from communication products, which represented approximately 35.9% of
net revenues, were positively affected by the increased volume of sales of the
NewCom 33,600 ifx, efx and efx-m fax modems and the NewTalk 2,000 DSVD ifx
modem, introduced in May and June 1996, respectively, and were offset by the
decreased volume of sales of the Company's 28,800 ifx, efx and efx-m fax
modems no longer offered by the Company. Revenues for Fiscal 1996 increased
primarily due to the increased volume of sales of multimedia products, which
represented approximately 80.5% of net revenues, primarily the NewCom 4X drive
kit and multimedia kits and the NewCom HiFi 16i sound board introduced in the
first quarter of Fiscal 1996. Revenues from communication products, which
represented approximately 19.5% of net revenues, were driven by the increased
volume of sales of the NewCom 14,400 ifx, efx and efx-m fax modems and the
28,800 ifx, efx and efx-m fax modems (no longer offered by the Company),
offset by the decreased volume of sales of the Company's discontinued 96424
ifx, efx and efx-m fax modems.
27
<PAGE>
Discounts given during Fiscal 1997 were approximately $89,000 on $73.1
million of gross revenues or 0.1%, as compared to approximately $128,000 on
$33.3 million or 0.4% in Fiscal 1996. The Company was required to give higher
discounts in Fiscal 1996 due to a heightened level of price competition for
CD-ROM drives included in the Company's multimedia kits.
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 6.0% of gross revenues) in Fiscal
1996. The disproportionately large increase in returns in Fiscal 1997 was
partially due to a problem encountered in the middle of the year with a chip
used in the Company's DSVD modems that was manufactured for the Company by
Phylon. Due to a defect in the chip's software design which the Company
believes was caused by Phylon, the chip vendor was unable to satisfy the
Company's specifications for DSVD performance. As a result, the Company agreed
to accept its customers' return of the modems, which it thereafter repackaged
and resold as a non-DSVD modem product. Since the modem was so repackaged and
sold at a profit, the Company did not seek further satisfaction from Phylon.
The Company has discontinued using Phylon as a chip vendor. To reduce the
likelihood of a similar problem occurring in the future, the Company has
instituted a program of additional beta testing, sometimes in conjunction with
its larger mass merchant customers. Aggregate returns relating to the
defective chips were approximately $10.1 million, or 44.9% of total returns in
Fiscal 1997. Also, in Fiscal 1997 the Company's efforts to upgrade the quality
and average size of its customer base and its resulting cessation of business
with several smaller customers resulted in a higher than normal incidence of
product returns from such customers. Aggregate returns in Fiscal 1997 from
customers with which the Company discontinued business (which may have
included returns due to the aforementioned defective chips) were approximately
$10.2 million, or 45.5% of total returns in Fiscal 1997. While the Company
believes that returns associated with the aforementioned chip defect should
not be material in future periods, it is expected that returns will continue
from smaller customers disenfranchised as a result of the Company's upgrading
of its customer base, possibly at significant levels. Returns and allowances
for Fiscal 1997 related primarily to returns associated with the NewCom 33,600
ifx, efx and ifx-m fax modems, NewCom 8X drive kit and multimedia kits and
NewCom 4X drive kit and multimedia kits. Returns and allowances for Fiscal
1996 related primarily to returns associated with NewCom 2X drive kit and
multimedia kits introduced and discontinued in Fiscal 1996, NewCom 4X drive
kit and multimedia kits, NewCom 14,400 ifx, efx and efx-m fax modems and the
Company's discontinued 28,800 ifx, efx and efx-m fax modems.
Cost of Goods Sold. Cost of goods sold increased from approximately $30.1
million in Fiscal 1996 to $33.6 million in Fiscal 1997 but, as a percentage of
net revenues, decreased to 66.4% from 96.6%. The decrease as a percentage of
net revenues was due to the fact the Company was able to buy components used
in its products at more favorable prices during Fiscal 1997 because of the
larger volume of its purchases and a decrease in the cost of such components.
The Company was able to take advantage of such cost decreases because of its
use of "Just in Time" inventory acquisition whereby the Company delays its
purchases until just before the components are needed in the manufacturing
cycle rather than pre-purchasing and warehousing inventory.
Gross Profit. Gross profit for Fiscal 1997 was 33.6% compared to 3.4% for
Fiscal 1996. The increase in gross profit resulted from a decrease in the cost
of goods sold as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $11.8 million in Fiscal
1997 from $5.0 million in Fiscal 1996. The increase was a result of the rapid
expansion in infrastructure needed to sustain the growth in sales as well as
an increase in advertising from approximately $4.0 million in Fiscal 1997 as
compared to $1.5 million in Fiscal 1996.
Interest Expense. Interest expense for Fiscal 1997 was $1.5 million as
compared to $1.3 million for Fiscal 1996. The increase was due primarily to
the increase in borrowings against lines of credit and from Aura.
Income Taxes. The Company incurred $433,000 in income taxes for Fiscal 1997
compared to none in Fiscal 1996; no income taxes were due in Fiscal 1996
because of the Company's net loss.
28
<PAGE>
Net Income. Net income for Fiscal 1997 was $3.3 million as compared to a net
loss of $5.2 million for Fiscal 1996. Net income for Fiscal 1997 was
positively affected by the utilization of the Company's net operating loss
carry forward.
FISCAL 1996 AS COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1995
Revenues. Gross revenues for Fiscal 1996 increased to $33.3 million from
$2.1 million for Fiscal 1995. Net revenues for Fiscal 1996 were $31.2 million
as compared to $2.1 million in Fiscal 1995. The increase in revenues was due
to the establishment of the channels of distribution that the Company began
setting up in September 1994, when the Company first began shipping product.
Revenues for Fiscal 1996 increased primarily due to the increased volume of
sales of multimedia products, which represented approximately 80.5% of net
revenues, primarily the NewCom 4X drive kit and multimedia kits and the NewCom
Hi-Fi 16i sound board introduced in the first quarter of Fiscal 1996. Revenues
from communication products which represented approximately 19.5% of net
revenues, were driven by the increased volume of sales of the NewCom 14,400
ifx, efx and efx-m fax modems and the NewCom 28,800 ifx, efx and efx-m fax
modems (no longer offered by the Company), offset by the decreased volume of
sales of the Company's discontinued 96424 ifx, efx and efx-m fax modems.
Revenues for Fiscal 1995 consisted primarily of sales of communication
products, which represented 100% of net revenues, which sales were primarily
driven by the increased volume of sales of the 14,400 ifx, efx and efx-m fax
modems no longer offered by the Company.
Discounts given during Fiscal 1996 were approximately $128,000 on $33.3
million of gross revenues or 0.4% as compared to approximately $25,000 on $2.1
million of gross revenues or 1.2% in Fiscal 1995. The Company was required to
give higher discounts in Fiscal 1996 due to a heightened level of price
competition for CD-ROM drives included in the Company's multimedia kits.
Returns and allowances for Fiscal 1996 were approximately $2.0 million as
compared to none in Fiscal 1995. The returns and allowances in Fiscal 1996
were primarily due to rotation of stock by customers and products returned for
exchange by consumers. Such returns and allowances were associated primarily
with the Company's 2X drive kit and multimedia kits introduced and
discontinued in Fiscal 1996, NewCom 4X drive kit and multimedia kits, NewCom
14,400 ifx, efx and efx-m fax modems and the discontinued 28,800 ifx, efx and
efx-m fax modems.
Cost of Goods Sold. Cost of goods sold increased to $30.1 million from $2.1
million in Fiscal 1995 in conjunction with the increase in sales. As a
percentage of net revenues, cost of goods sold decreased to 96.6% from 97.9%
in Fiscal 1995.
Gross Profit. Gross profit for Fiscal 1996 was 3.4% as compared to 2.1% in
Fiscal 1995. The improvement in Fiscal 1996 was largely due to the improvement
in cost of goods sold as a percentage of net revenues.
Selling, General and Administrative Expenses. General and administrative
expenses for Fiscal 1996 increased to $5.0 million from $0.4 million in Fiscal
1995 as the Company set up its internal infrastructure.
Interest Expense. Interest expense for Fiscal 1996 was $1.3 million compared
to none in the prior year. The interest expense resulted from the
establishment of a line of credit with a lending institution for the financing
of the Company's accounts receivable, and to an interest charge by Aura on the
loan balances due.
29
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth results of operations for each of the
Company's last 11 quarters. In the opinion of management, this information has
been presented on the same basis as the audited financial statements appearing
elsewhere in this Prospectus, and includes all adjustments, consisting only of
normal recurring adjustments and accruals, that the Company considers
necessary for a fair presentation. The unaudited quarterly information should
be read in conjunction with the audited financial statements of the Company
and the notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------------------- --------------------------------------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 839,910 $ 1,263,528 $ 2,271,047 $ 8,250,841 $11,073,123 $ 9,602,418
Cost of goods sold...... 755,910 1,303,635 1,941,060 8,798,229 7,806,438 11,585,518
Gross profit............ 84,000 (40,107) 329,987 (547,388) 3,266,685 (1,983,100)
Expenses:
Research and develop-
ment................... -- 4,201 -- -- -- --
Selling, general and ad-
ministrative........... 255,454 168,165 252,153 427,453 643,231 3,649,227
Total expenses.......... 255,454 172,366 252,153 427,453 643,231 3,649,227
Income (loss) from oper-
ations................. (171,454) (212,473) 77,834 (974,841) 2,623,454 (5,632,327)
Interest expense........ -- -- 13,322 76,300 111,063 1,102,055
Other (income) expense.. -- (3,710) 25,120 49,740 (76,759) (21,390)
Income (loss) before in-
come taxes............. (171,454) (208,763) 39,392 (1,100,881) 2,589,150 (6,712,992)
Provision for income
taxes.................. -- -- -- -- -- --
Net income (loss)....... (171,454) (208,763) 39,392 (1,100,881) 2,589,150 (6,712,992)
Net income (loss) per
share.................. (.02) (.03) .01 (.15) .34 (.89)
<CAPTION>
FISCAL 1997 FISCAL 1998
------------------------------------------------- -----------
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $7,441,383 $11,041,216 $17,920,915 $14,228,176 $15,429,677
Cost of goods sold...... 4,854,512 7,401,456 14,192,913 7,170,203 10,397,883
Gross profit............ 2,586,871 3,639,760 3,728,002 7,057,973 5,031,794
Expenses:
Research and develop-
ment................... -- -- -- 7,708 6,870
Selling, general and ad-
ministrative........... 1,631,698 2,769,972 2,327,698 5,111,583 2,728,857
Total expenses.......... 1,631,698 2,769,972 2,327,698 5,119,291 2,735,727
Income from operations.. 955,173 869,788 1,400,304 1,938,682 2,296,067
Interest expense........ 240,171 436,572 382,625 456,998 535,735
Other income............ (7,410) (7,230) (4,321) (103,729) (17,150)
Income before income
taxes.................. 722,412 440,446 1,022,000 1,585,413 1,777,482
Provision for income
taxes.................. 108,000 -- -- 325,000 711,000
Net income.............. 614,412 440,446 1,022,000 1,260,413 1,066,482
Net income per share.... .08 .06 .14 .17 .14
</TABLE>
- -------
(1) During the second quarter of 1995, the Company had no operations other
than charges payable to Aura for certain corporate services in the
aggregate amount of $20,000.
30
<PAGE>
The Company's past operating results have been, and its future operating
results will be, subject to quarterly and other fluctuations due to a variety
of factors, including changes in pricing policies by the Company, its
competitors or its suppliers, including anticipated and unanticipated
decreases in unit average selling prices of the Company's products,
availability and cost of products from the Company's suppliers, changes in the
mix of products sold and in the mix of sales by distribution channels, the
gain or loss of significant customers, new product introductions by the
Company or its competitors, market acceptance of new or enhanced versions of
the Company's products, seasonal customer demand, and the timing of
significant orders. Operating results could also be adversely affected by
general economic and other conditions affecting the timing of customer orders
and capital spending, a downturn in the market for PCs, and order
cancellations or rescheduling. The Company's customers may change delivery
schedules or cancel orders without significant penalty. The Company
anticipates that operating results will fluctuate on a quarterly basis as a
result of a number of factors, including the factors discussed above. See
"Risk Factors--Potential Fluctuations in Future Operating Results."
The Company believes that, due to industry seasonality, demand for the
Company's products is strongest during the third quarter of its fiscal year
(the fourth calendar quarter of the year), as a result of year-end business
purchases and holiday sales. This seasonality may become more pronounced in
the future to the extent that a greater proportion of the Company's sales
consist of sales into the retail/mass merchant channel.
Selling, general and administrative expenses are typically higher in the
fourth quarter of the Company's fiscal year primarily as a result of higher
advertising costs for the holiday season. In the fourth quarter of Fiscal
1996, the Company incurred approximately $1.8 million for the production and
airing of a television commercial during the Super Bowl. In the fourth quarter
of Fiscal 1997, advertising expense incurred during the holiday season
totalled approximately $2.2 million.
Through the first quarter of Fiscal 1996, the Company experienced no
merchandise returns on revenues of $4.4 million. During the quarter ended
August 31, 1995, the Company had returns of approximately $400,000 on gross
revenues of $8.6 million, and no returns during the quarter ended November 30,
1995 on revenues of $11.1 million. Due to the limited amount of returns from
inception through November 30, 1995, the Company at the time concluded that no
reserve for future returns was necessary in order to make a fair presentation
of its operating results. Commencing with the fourth quarter of Fiscal 1996,
the Company experienced returns of $1.6 million on sales of $11.2 million and,
at that time, determined that a reserve for future returns was required.
Accordingly, a reserve of $122,000 was recorded as of February 28, 1996. Such
reserve amount was reviewed at the end of the first three quarters of Fiscal
1997, and was determined to be adequate at each respective quarter end. Gross
revenues for the first three quarters of Fiscal 1997 were $7.5 million, $14.8
million and $19.3 million, respectively. Actual returns were $0, $3.8 million
and $1.3 million, respectively. Returns were larger in the second quarter of
Fiscal 1997 due primarily to returns from a single customer with which the
Company ceased doing business. For the fourth quarter of Fiscal 1997, gross
revenues were $31.5 million, and actual returns were $17.3 million. The larger
volume of returns in the fourth quarter of Fiscal 1997 was due primarily to
the DVSD chip problem and the upgrading of the Company's customer base which
resulted in the disenfranchisement of several smaller customers. At February
28, 1997, the reserve for returns was increased to $922,000 as a result of
increased revenues in that quarter.
For the first quarter of Fiscal 1998, gross revenues were $16.1 million and
actual returns were approximately $600,000. The Company concluded that the
reserve for returns of $922,000 at the end of Fiscal 1997 was adequate as of
May 31, 1997, and therefore did not adjust the reserve for returns as of that
date.
Management is of the opinion that its historical return experience is in
line with industry averages.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997 the Company had a cash overdraft of $23,507, which has been
reclassified to accounts payable, compared to the February 28, 1997 cash
balance of $2.8 million, due primarily to the reduction in debt owing to
commercial lenders. Accounts receivable were $32.8 million at May 31, 1997 as
compared to $30.0 million at February 28, 1997. Inventories were $15.5 million
at May 31, 1997 as compared to $11.5 at
31
<PAGE>
February 28, 1997 and $3.6 million at February 29, 1996. These increases were
due to the Company's increased sales volume. While the Company attempts to
purchase higher cost inventory items on a Just-in-Time basis, a large amount
of lower cost, longer lead-time items are required to be held in stock to
support the increasing sales volume. The inventory at February 28, 1997
represents approximately 110% of the cost of sales for the first quarter of
Fiscal 1998. Other current assets increased by $4.1 million at May 31, 1997
compared to February 28, 1997, primarily as a result of prepayments to vendors
to initiate manufacturing of the Company's WebPal product. Net cash used by
operating activities increased to $7.9 million at May 31, 1997 from
$3.4 million at February 28, 1997 due to the larger increases in accounts
receivable, the increased level of inventories necessary to support
anticipated future sales and a $3.6 million deposit made in connection with
the Company's $8.25 million firm commitment to purchase WebPal units
manufactured for the Company, offset partially by an increase in accounts
payable in the current year quarter as compared to a decrease in accounts
payable in the prior year quarter. See Note 13 of Notes to Financial
Statements.
Since inception, the Company has financed its operations through loans from
Aura. The outstanding balances payable to Aura at Fiscal 1995, 1996 and 1997
year-end and at May 31, 1997 were $1.2 million, $20.2 million, $17.2 million
and $25.5 million, respectively. Intercompany interest expense, included in
the outstanding balance at Fiscal 1996 and Fiscal 1997 year-end was $1.2
million and $1.1 million, respectively, and was charged at the rate of 9% and
8%, respectively, per annum. No interest was charged to the Company on
intercompany indebtedness during Fiscal 1995. Effective March 1, 1996, Aura
contributed $9.0 million of the Company's indebtedness to Aura as additional
paid-in capital, thereby reducing the amount reflected in "Due to Aura." In
addition, subsequent to Fiscal 1997, the Company notified its commercial
lender that it was replacing the facility with a different lender. As a
result, the commercial lender discontinued advancing funds under the line and
Aura agreed to finance the Company's working capital requirements until the
replacement commercial line was put in place. Between March 1, 1997 and May
31, 1997, Aura advanced $8.3 million to the Company; this amount was repaid in
June 1997 when the new commercial line of credit was put into effect with
borrowings under the new line and cash on hand. Immediately prior to the
Closing Date, Aura will effectuate the Conversion whereby $4.0 million in
intercompany indebtedness will be converted into 444,444 Shares of Common
Stock (assuming an Offering Price of $9.00 per Unit). All remaining
intercompany debt will be evidenced by an unsecured promissory note from the
Company to Aura due and payable in full in September 1998. The promissory note
will bear interest at the rate of 9% per annum and will have no prepayment
penalty.
Since March 1, 1996, the Company has experienced a significant expansion in
its overall level of business and operations, including product design,
marketing, technical support and sales and distribution. The Company's full-
time employee base has grown from 35 at March 1, 1996, to 73 at June 30, 1997.
This expansion in the scope of the Company's business and operations resulted
in a need for significant investment in infrastructure and systems. Growth of
the Company's business has generated significant accounts receivable; $32.8
million of accounts receivable net were outstanding at May 31, 1997. The
stated payment terms of the Company's sales are typically 30 days from the
date of shipment. The Company's accounts receivable have also recently
increased significantly due to its receivables being outstanding for a longer
period. While the aging of the Company's accounts receivable generally is
affected by the fact that a substantial portion of the Company's sales occur
in the final three weeks of the fiscal quarter, of the $32.8 million of
accounts receivable net outstanding at May 31, 1997, $20.9 million was over 90
days old ($3.7 million of which was due from C'More, Inc. a company controlled
by Alexander Remington, a director of the Company). Total receivables as of
September 5, 1997 were $33.8 million, of which approximately $9.8 million
consisted of amounts remaining from the May 31, 1997 balance (none of which
was due from C'More, Inc. or any other affiliated entities). Of this $9.8
million, the Company expects that approximately $2.4 million will be offset
against amounts owed to two major customers (Brysis, Inc. and Korea Data
Systems); approximately $3.8 million is due from large national retail and
mass merchant customers that typically pay slowly; approximately $550,000 is
subject either to pending collection litigation or litigation to be filed by
the Company within 60 days; and approximately $300,000 is payable pending
proof of delivery. The remaining amount (approximately $2.8 million)
represents amounts due from small customers that are making periodic payments
and have agreed to pay the remaining balances. Management believes that any
potential uncollectible amounts in this $9.8 million remaining from the May
31, 1997 balance is provided for by the Company's allowance for doubtful
accounts.
32
<PAGE>
This longer collection period resulted, in part, from the Company's revenue
growth increasing beyond the capacity of its credit and collections personnel.
In response, the Company has increased the size of its credit and collections
staff and intends to add additional staff in the future. The inability of the
Company to collect significant portions of its accounts receivable on a timely
basis or to obtain adequate financing, in addition to the proceeds of this
Offering, to meet its cash requirements could limit the Company's future
growth.
Aura also provided certain support services to the Company during these
periods including financial, legal, tax, audit, benefits administration and
personal property insurance. The costs for providing these support services
were allocated by Aura to the Company based upon formulas that in management's
opinion reasonably approximated the actual costs incurred by Aura in providing
these services. The expenses recorded by the Company for these allocations
were $80,000, $120,000 and $120,000 for Fiscal 1995, 1996 and 1997 year-end,
respectively. The amounts allocated by Aura are not necessarily indicative of
the actual costs which may have been incurred had the Company operated as an
unaffiliated entity. The Company intends to continue using the support
services of Aura on an interim basis with rates negotiated in accordance with
a Service Agreement for up to six months from the Offering.
In Fiscal 1996 and 1997, the Company had available a line of credit with a
commercial lending institution that permitted borrowings of up to the lesser
of $9.0 million or 80% of eligible accounts receivable, as defined in the
financing agreement with the lender. The line of credit had an interest rate
equal to the institution's prime rate plus 1/2%. The interest rate was 9.5% at
each of February 29, 1996 and February 28, 1997. The line of credit was
collateralized by accounts receivable and required the Company to maintain
certain financial ratios. The Company used this facility for funding its
operations during Fiscal 1996 and 1997. At February 29, 1996 and February 28,
1997, the outstanding balance under this line of credit was $2.4 million and
$8.8 million, respectively, with a maximum permitted balance of $2.5 million
and $9.0 million, respectively. In May 1997, the Company replaced this line
with another line of credit with another lending institution that permits
borrowings of up to the lesser of $7.0 million or 60% of eligible accounts
receivable, plus up to $2.0 million of inventory flooring. Eligible accounts
receivable consist of all receivables except those greater than 90 days past
due; receivables where more than 50% of the account balance is greater than 90
days past due; accounts originated under non-standard terms and/or which allow
for payment to be made more than 30 days from date of sale; receivables from
customers who are also vendors; receivables from non-domestic customers;
accounts for which the obligor is an officer, director, shareholder, parent,
employee, subsidiary or affiliate of the Company; accounts for which payment
is or may be conditional; accounts for which the obligor is not a commercial
or institutional entity or not a resident of the United States or Canada;
accounts evidenced by judgments or promissory notes; accounts which represent
goods purchased for personal purposes; accounts which represent goods used for
demonstration purposes; accounts which are progress payment, barter or contra
accounts, and any other account which the lender deems to be ineligible. This
new line of credit has an interest rate equal to the institution's prime rate
plus 1.25%. The interest rate was 9.75% at June 30, 1997. The new line of
credit is secured by substantially all of the operating assets of the Company.
In addition, the Company agreed to issue in favor of the lender irrevocable
letters of credit equal to $750,000. The stated interest rate on the new
financing agreement is higher by 0.75% than the former arrangement. However,
the former arrangement provided for additional lender's fees which in the
aggregate resulted in a substantially higher cost of funds overall.
Pursuant to the terms of the new line of credit, the Company must adhere to
the following financial covenants: (i) combined tangible net worth and
subordinated debt of not less than $10.0 million; (ii) a ratio of debt (not
including subordinated debt) to tangible net worth and subordinated debt of
not more than three to one; (iii) a ratio of current tangible assets to
current liabilities of not less than one and one-half to one; and (iv) net
income (before taxes and after extraordinary items and adjustments) of
$100,000 for each fiscal quarter beginning September 1, 1996 or, in the event
the Company fails to achieve net income of $100,000 in any fiscal quarter, a
net income of $100,000 for that portion of the Company's fiscal year that runs
through the end of such fiscal quarter. The Company believes it is currently
in compliance with the aforementioned financial covenants. At June 30, 1997,
the outstanding balance under the new line of credit was approximately $3.6
million.
33
<PAGE>
Net cash used by operating activities for Fiscal 1995, 1996 and 1997 was
$778,530, $19.3 million and $9.7 million, respectively. The Company's net cash
flow used by investing activities for Fiscal 1995, 1996 and 1997 was $125,118,
$224,639 and $2.1 million, respectively. Cash flows from financing activities
for Fiscal 1995, 1996 and 1997 were $1.2 million, $21.3 million and $12.5
million, respectively. During September 1994, Aura contributed assets to the
Company in the amount of $1.0 million. The contributed assets consisted of
inventory valued at $216,297 and property and equipment valued at $61,144 and
engineering designs and drawings valued at $722,559. Effective March 1, 1996,
Aura contributed $9.0 million of the Company's indebtedness to Aura as
additional paid-in capital, thereby reducing the amount reflected in "Due to
Aura."
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1.7 million, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead.
To date, inflation has not had a material effect on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.
The Company believes that current and future available capital resources,
including the net proceeds from the Offering, cash flow from operations, and
other existing sources of liquidity, will be adequate to fund its operations
for the 12-month period following the date of this Prospectus, including but
not limited to funding of the Company's $8.25 million firm commitment to
purchase WebPal units manufactured for the Company (see Note 13 of Notes to
Financial Statements). As of August 19, 1997, the Company had a cash balance
of $810,000, available borrowings under its commercial credit line of
approximately $3.0 million and current receivables of approximately $19.3
million. However, there can be no assurance that sufficient funds will be
available following the completion of this Offering or that future events will
not cause the Company to seek additional capital sooner including, but not
limited to, the failure by the Company to timely collect outstanding accounts
receivable. While the Company's current cash projections do not contemplate
the need to borrow additional funds from Aura following the completion of this
Offering, there can be no assurance that future events will not cause the
Company to look to Aura for funding. While Aura has indicated that it will not
provide working capital to the Company on a basis consistent with past
practices, the Company has not received any indication from Aura that it would
not provide term funding to the Company in the case of unforeseen
circumstances. To the extent the Company is in need of any additional
financing, there can be no assurance that it will be available to the Company
from Aura or any other source on terms acceptable to the Company, or at all.
If additional funds are raised by issuing equity securities, further dilution
to the existing stockholders may result. If adequate funds are not available,
the Company may be required to delay, scale back or eliminate its product
development, manufacturing and marketing programs or to obtain funds through
arrangements with partners or others that may require the Company to
relinquish rights to certain of its technologies or potential products or
other assets. Accordingly, the inability to obtain adequate financing could
have a material adverse affect on the Company's business, financial condition
and results of operations. See "Risk Factors--Future Capital Requirements;
Uncertainty of Additional Funding."
Although there are no present understandings, commitments or agreements with
respect to any acquisitions of other businesses, products or technologies, the
Company from time to time evaluates potential acquisitions of other
businesses, products and technologies and may in the future require additional
equity or debt financings to consummate such potential acquisitions.
34
<PAGE>
BUSINESS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward-looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."
COMPANY
NewCom, Inc. ("NewCom" or the "Company") designs, manufactures and markets
high performance computer communication and multimedia products for the
personal computer ("PC") market. NewCom's line of communication products
includes a line of high speed external and internal data/fax and voice modems,
which link PCs through the worldwide web and through direct connections over
telephone lines, and NewCom's WebPal, an Internet appliance enabling users to
access the worldwide web and perform Internet specific tasks through their
existing television screens. NewCom's multimedia product line includes a broad
range of add-in subsystems, upgrade kits and Internet access kits that
incorporate CD-ROM drives, speakers, sound cards, modems, microphones and
other telephony and sound solutions. The Company's multimedia products are
targeted both to users that desire to convert their PCs into multimedia
systems and to users desiring to upgrade their current multimedia systems with
faster CD-ROM drives, higher quality sound and increased functionality.
INDUSTRY OVERVIEW
The Company believes that demand for PC communication and multimedia
products is driven by a variety of factors including (i) the growing installed
base of PCs, particularly those sold into the consumer and small office/home
office ("SOHO") markets, (ii) continuing advances in technology, leading to
faster modems and CD drives and expanded multimedia functionality and (iii)
the rapid growth of Internet content, bandwidth-intense interactive software,
on-line services and emerging PC applications such as digital video capture
and playback, video conferencing, telephony, paperless faxing, advanced
desktop publishing, voicemail, high resolution 3D games, and interactive
movies and other entertainment media, which increasingly demonstrates to
consumers the need for PC communications and multimedia products.
Growth in PC Use. Many of NewCom's multimedia and communication products are
purchased for use in home PCs. According to data published by International
Data Corporation ("IDC"), the United States leads the world in the percentage
of households with PCs at 35%. According to a December 1996 IDC survey, as the
rate of growth in the number of U.S. homes with PCs tapers, growth will
continue to be fueled by increases in the number of households acquiring
multiple PCs. IDC projects that by the end of this decade, one in three PC
households will have more than one PC, compared to one in five households in
1996. IDC also reported that in 1996 64.6% of PC households used the PC at
least once per day, up from 55.2% in 1993. Increased usage of modems was also
reported in the survey; 39% of PC households with modems subscribed to an
online service in 1996, up from 26% in 1994. In 1996, 24% of those accessing
the Internet did so on a daily basis, with another 60% surfing on the Internet
at least once a week. IDC has projected that in 1997 PC spending worldwide
will grow by 15.5% to $182.5 billion.
The December 1996 IDC survey also showed that PCs have not achieved
significant penetration into lower and middle income U.S. households, in part
due to the relatively high purchase price of a complete PC system. Industry
sources indicate that Internet access, cost and ease of use are among the main
factors in families' choosing to purchase home systems. NewCom's WebPal has
been designed to address these factors by providing the consumer with an easy
to use, relatively inexpensive means to access the Internet.
Advances in Technology. PC users have consistently demonstrated a desire to
upgrade to higher speed modems, faster CD-ROM drives and higher quality
soundcards. Consumers have in the past replaced first 9,600
35
<PAGE>
bps modems, then 14,400 bps, and now 28,800 bps modems with faster modems as
they have became available at an affordable price. A May 1996 industry study
found that the number of PC power users accessing the Internet at 28,800 bps
had increased to 39% from 27% six months earlier. The Company believes the
speed advantage offered by today's emerging new 56,000 bps standard and future
standards (utilizing emerging ADSL and cable modem technologies) of more than
100 Kbps, will once again push many PC users tired of slow content download
and Internet response times to upgrade to the newer, faster standards.
Multimedia products, as well, have benefited from significant and continuing
improvements in speed, sound quality and functionality. New 16 speed and
higher CD-ROM drives, which can transfer data 16 times or more faster than the
once-standard single speed drives, now enable users to play many more high
speed video files directly off of the CD-ROM drive (without requiring any off
load to a fixed hard disk drive), thus saving the user valuable time and hard
disk space.
Expansion of Internet and Other PC Applications. In addition to improvements
in technology, the rapid growth and increased quality of Internet content, on-
line services and other PC applications have contributed to the increasing
number of new uses for PC communications products such as those offered by
NewCom. While recent estimates of the number of Internet users in the United
States range from 15 million to 35 million (depending on how Internet use is
identified), industry sources indicate that the Internet and the use of modems
to access the Internet continue to grow rapidly. IDC has estimated that the
number of Internet users worldwide will be approximately 200 million by the
end of 1999, an increase from approximately 56 million at the end of 1995. A
recent study by Hambrecht & Quist estimates that an industry providing
Internet-related technologies (including equipment, network services,
software, enabling services and Internet expertise) could become a $13 billion
industry by the year 2000.
Adding to the variety of uses for the Internet is the growing number of
software makers that offer new or upgraded software on-line. Hardware vendors,
as well, now almost routinely allow users to download the latest driver
updates off of the vendors' Internet sites. Downloads of large files are time
consuming and inconvenient with slower older modems, making newer faster
modems increasingly more attractive. Fax modem technology, which allows users
to send and receive faxes electronically via their computers without the need
for paper output, is gaining widespread acceptance among PC users. Computer
telephony also promises to increase the usefulness of PC communications
products. Internet phone technology allows users to make long distance phone
calls for the much lower cost of calling the local Internet provider. IDC
estimated that the number of Internet telephony users had grown to 500,000
active users by the end of 1995, and forecasts that such number will grow to
16 million by the end of 1999.
Using computer multimedia and communications technology, desktop
videoconferencing (DVC), audio/visual collaboration via the PC will allow
users to see as well as hear people in other locations while conferencing. IDC
projects that worldwide Desktop Videoconferencing will grow from $604 million
in 1996 to $1.29 billion in 2001.
The widening array of PC applications has also increased the market for
other multimedia products. The multimedia market has been fueled by the
increased volume of software that requires CD-ROM drives, soundcards and high
bandwidth delivery systems. Microsoft, Novell and other large vendors now ship
much of their software on compact discs. Popular games such as Lucas Art's
Rebel Assault and Dark Forces can only be played with a CD-ROM drive. Most
multimedia encyclopedias, as well as learning and game software, now
incorporate quality sound as an integral part of their software programs.
STRATEGY
NewCom's objective is to become a leading supplier of innovative, high
performance communications and multimedia products for the PC market. To
achieve this objective, the Company is pursuing the following strategies:
. Capitalize on Engineering Expertise: The Company strives to identify and
innovatively incorporate into its products key emerging technologies in
the PC communications and multimedia industries.
36
<PAGE>
NewCom's engineers maintain a close working relationship with their
counterparts at the major chip manufacturers to ensure the Company is
kept apprised of the latest in chip technology and design.
. Promote Manufacturing Advantages: Management believes NewCom's success
in reaching a particular product niche and gaining market share stems
from its ability to produce products rapidly, cost effectively and with
a high level of reliability. NewCom's manufacturing strategy is
supported by its use of Just-in-Time manufacturing, whereby supplies and
components are purchased just before they are needed during the
manufacturing cycle, its design focus on utilizing interchangeable
circuit boards and other product components, and its relationships with
its primary manufacturing partners in China, Taiwan, Mexico and the
United States.
. Pursue Proven Markets: NewCom will continue to introduce to its existing
markets products with improved performance, additional features and
better pricing. NewCom's use of DSP technology allows software upgrades
to meet evolving standards and add enhancements, while "value
engineering" enables the Company to design and manufacture new
generations of existing products at reduced costs.
. Target Newly Forming Markets: NewCom seeks to identify newly forming
markets and emerging technologies and to capitalize on its ability to
deliver superior products with a favorable price/performance ratio.
Newly forming markets for 56,000 bps modems, CDR and CDR/MPEG drives and
Internet appliances such as WebPal offer the Company significant
opportunities for growth, allowing NewCom to gain access to valuable
shelf space, achieve higher margins and establish a larger presence in
strategic market segments.
. Maintain High Attention to Customer Satisfaction: The Company seeks to
differentiate itself through the quality and level of its technical
support and customer service. The Company performs extensive testing and
preshipping inspection of its products, ships products with installation
discs and user-friendly manuals, and maintains a skilled, full-time
technical support team to respond to customer inquiries.
CURRENT PRODUCTS
NewCom strives to design products that are technologically advanced,
multifunctional, reliable, easy to use and affordable. Below is a description
of NewCom's most current products, substantially all of which are IBM
compatible.
COMMUNICATIONS PRODUCTS
NewCom WebPal. Introduced in June 1997, WebPal is a communication appliance
designed specifically for the non-computer user. Similar in size and cost to a
VCR, WebPal allows users to access the Internet and the World Wide Web through
their existing television screens. WebPal incorporates a World Wide Web
browser and an E-mail service, and uses the television screen to display
information. WebPal connects to the Internet through a telephone line and a
modem included in the box, and requires a standard NTSC or PAL television set
or VGA monitor. A remote control unit is included with WebPal and an optional
remote keyboard is available. WebPal allows any consumer with a television set
and a standard wall telephone jack to surf the Internet and gain access to the
large number of interactive Internet text, graphic and audio pages and web
sites. WebPal is equipped with parallel port, which allows the user to print
output to a printer and to complete future parallel port upgrades such as
adding a hard disk drive. Both the browser/E-mail and the operating system are
stored in flash memory and are upgradable via Internet access. Also, WebPal
does not require the user to use a specific Internet Service Provider (ISP).
This allows many users with existing ISP accounts to continue using these same
accounts with the WebPal appliance, thus avoiding additional ISP monthly
access charges and the inconvenience of changing e-mail addresses. WebPal's
operating environment allows for easy user setup, provides seamless ISP
configuration and access, and supports a variety of add-on peripherals.
Additional specifications and features: 32-bit RISC Multimedia Processor,
standard 16-bit ISA bus for modem, ISDN adaptor or network card, built-in
ports for S-video and composite video for NTSC and PAL, VGA
37
<PAGE>
output, standard PS/2 style keyboard and mouse ports, infrared receiver for
remote control unit and remote keyboard, parallel printer port, stereo audio
output, and Smartcard socket.
NewCom 56,000 bps Data/Fax Modem. This high speed internal modem, introduced
by NewCom in May 1997, is a send/receive fax and data modem all in one
computer card. The modem uses X2(R)-compatible technology, currently the most
widely supported 56,000 bps system. The internal version permits installation
using either Plug and Play or ISA Bus Direct. Enhanced models of these modems
include voicemail features or speakerphone and answering machine features.
Since these products are able to be used over standard analog POTS phone
lines, management expects that consumer demand will increase once the 56,000
bps standard for analog modems is fully established in the industry. Although
this product currently has an optimal data download rate of 56,000 bps, noise
and other analog phone line limitations will limit the actual speed of this
modem to lower rates. Management plans to introduce the external versions of
this product in Fall 1997.
Additional specifications and features: built-in enhanced 16550 compatible
UART (with larger buffer), CCITT V.42/MNP 2-4 error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 2000 DSVD Data/Fax Voice Modem. This product consists of an internal
DSVD send/receive fax and data modem card, full duplex speakerphone and
voicemail system all in one computer card. The Company's DSVD technology
allows PC users to have both a voice phone connection and a computer data
connection sharing a single standard POTS phone line. The data modem operates
at 33,600 bps transmission rate with a throughput of up to 134,400 bps using
data compression. In fax mode, it operates as a 14,400 class 1 group 3
send/receive facsimile. The product is shipped complete with a microphone,
headset, 3-inch desktop multimedia speakers, a modular null phone cable, a
user manual and DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), error correction for reliable communications, V.42
bis/MNP 5 data compression, auto dial and auto answer capability, auto redial
of busy numbers, tone or pulse dialing, call waiting support, remote message
retrieval, password protected mailboxes, and fax on demand.
NewTalk 33,600 bps Speakerphone System. The NewTalk 33,600 bps Speakerphone
System is a full duplex speakerphone, voicemail system, send/receive fax and
data modem all in one computer card. The computer card fits inside a DOS,
Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. As a data modem, the system operates at
33,600 bps transmission rate, with a throughput of up to 134,400 bps using
data compression. In fax mode it operates as a 14,400 bps class 1 group 3
send/receive facsimile. The user can install this product using either Plug
and Play or ISA Bus Direct. This modem product line possesses the same data
modem and fax transmission rates as found in the NewTalk Data/Fax Voice Modem
described above. It is shipped complete with a microphone, headset, 3-inch
desktop multimedia speakers, a modular null phone cable, a user manual, and
DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 33,600 bps Data/Fax Voice Modem. This internal data/fax voice modem
is a voicemail system, send/receive fax and data modem all in one computer
card. The card goes inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. This product
operates using the fastest established analog modem industry standards
currently on the market. As a data modem, it operates at a 33,600 bps
transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. The user can install
38
<PAGE>
this product using either Plug and Play or ISA Bus Director. It is shipped
complete with a modular RJ11 phone cable and a user manual as well as DOS and
Windows fax software and communications software.
Additional specifications features: built in enhanced 16550 compatible UART
(with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
33,600 bps External Data/Fax Modem. This external data/fax modem hooks up to
the PC from the outside via a cable to the PC's serial port. One model is
designed to work with DOS, Windows 3.1x, or Windows95 PCs and another model is
designed to work with the Apple Macintosh. As a data modem, it operates at a
33,600 bps transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. It is shipped with fax software and communications software, a
power supply, a modular RJ11 phone cable and a user manual.
Additional specifications and features: CCITT, V.34, V.34+ error correction,
V.42 bis/MNP 5 data compression, auto dial and auto answer capability, auto
redial of busy numbers, and tone or pulse dialing.
33,600 bps Internal DOS/Windows Data/Fax Modem. This internal data/fax modem
is a card that fits inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. As a data modem,
it operates at a 33,600 bps transmission rate with a throughput of up to
134,400 bps using data compression. In fax mode, it operates as a 14,400 class
1 group 3 send/receive facsimile. The user can install this product using
either Plug and Play or ISA Bus Direct. It is also shipped with DOS and
Windows fax software and communications software, a modular RJ11 phone cable
and a user manual.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction, V.42 bis/MNP 5
data compression, auto dial and auto answer capability, auto redial of busy
numbers, and tone or pulse dialing.
COMMUNICATION PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom 14,400 ifx, 14,400 bps data and 14,400 bps send/receive fax November 1994
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
NewCom 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax May 1996
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
New Talk 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax June 1997
Vifx & SPifx modem. This product is a Windows/DOS PC internal
card. DSP allows for future software upgrades.
Vifx model includes Voicemail feature. SPifx
model includes speakerphone and answering
machine.
- ---------------------------------------------------------------------------------------
NewTalk 2000 Digital simultaneous voice data modem, June 1996
DSVD ifx speakerphone, answering machine, 33,600 bps
data, 14,400 bps send/receive fax modem. This
product is a Windows/DOS PC internal card.
- ---------------------------------------------------------------------------------------
NewCom 56,000 ifx 56,000 bps data and 14,400 bps send/receive fax May 1997
modem X2-compatible technology. Product line
currently limited to internal Windows/DOS PC
versions.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 4 meg of RAM and 1 meg of Flash June 1997
memory, including 33,600 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 8 meg of RAM and 2 meg of Flash July 1997
Deluxe memory, including 56,000 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
MULTIMEDIA PRODUCTS
As used in this Prospectus, "multimedia" refers to the transformation of the
PC from a task oriented device used for such things as word processing to a
user friendly multi-purpose device used for research, education, games,
entertainment and communication, in addition to traditional PC tasks.
Currently, in its basic form, a PC multimedia system is defined as any PC
equipped with a CD-ROM drive and high quality sound capability.
NewCom Multimedia Upgrade Kits. The Company's DOS, Windows 3.x or Windows 95
PC multimedia upgrade kit consists of a high-speed CD-ROM drive bundled with
desktop speakers and a sound card. The CD-ROM drives are compatible with audio
CDs, karaoke CDs and photo CDs, as well as game and reference CDs. NewCom's
multimedia upgrade kits are sold with a large number of included multimedia
CD-ROM software titles that allow the user to immediately utilize the product.
Drive kits without speakers and sound cards are also offered by the Company.
Another NewCom multimedia upgrade kit now being offered is the Audiophile
Multimedia Kit which features a high speed CD-ROM drive, a NewCom 32PnP
Wavetable Sound Card and NC100 speakers in sound enhancing wood based
enclosures. The Audiophile Multimedia Kit incorporates Aura's Neo-radial
speaker technology ("NRT") to provide cutting edge sound quality.
NewCom Multimedia Internet Kits. The Company's multimedia Internet kits
typically contain each of the components and features of its multimedia
upgrade kits, and also come equipped with a 33,600 bps modem and microphone to
provide full interactive connectivity to the Internet.
NewTalk High Fidelity 16i Sound Card. NewCom's internal 16 bit stereo
record/playback sound card is a core component of each of the Company's
multimedia upgrade and multimedia Internet kits. The sound card fits inside a
DOS, Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. Once the sound card is installed, a PC can
play sounds from games, computer encyclopedias, Windows 3.x, Windows 95, and
many other software products. Additionally, the sound card can play standard
audio CDs using the PC's CD-ROM drive. The card has a built-in ATAPI/IDE
internal interface that supports compliant CD-ROM drives and multiple audio
internal interfaces that allow most popular brands of current CD-ROM drives to
hook up directly to it. External interfaces are provided for speakers, line
out, line in, microphone and game port. The sound card has been designed to be
compatible with SoundBlaster(TM), SoundBlaster Pro(TM), Adlib(TM), and Windows
Sound System(TM). The Company offers different enhanced versions of its
NewTalk sound card. One version includes a Wave Table. Another includes both a
Wave Table and SRS 3D(TM), a "surround sound" technology which attempts to
duplicate three-dimensional sound using only two speakers.
NewCom CDR Drive and CDR Multimedia Kits. Whereas conventional CD-ROM
technology only allows the user to retrieve, or "read," information from a
factory-prerecorded compact disc, the CDR drive allows the user to record
information directly onto the compact disc. This drive will utilize "read many
times/write once" technology, that is, once information is recorded onto the
CD it cannot be erased or recorded over again. However, data can be appended
onto the compact disc multiple times until all of the storage space is
utilized. The CDR multimedia kit includes a 2X Write/6X Read Drive, a
Windows/DOS PC SCSI board with high quality audio capture and playback, and a
Windows/DOS PC sound card. The Company also has developed and intends to
market an upgrade kit containing only the NewCom CDR Drive.
NewCom NC Speaker Series. These Audiophile-quality multimedia speakers
incorporate NRT within specially shaped wood enclosures. Many multimedia
speakers offered in the market today are enclosed in plastic. The wood
cabinets used in the NewCom NC speakers minimize resonance and produce sounds
that are cleaner and crisper than what would be produced if plastic were used.
In addition to yielding high quality sound, these NRT speakers emit low
amounts of magnetic leakage so that they can be placed near computer monitors
without adverse effect. A variety of different NC speaker systems are
currently being shipped. The NC100, with 20 W total amplifier power (10
W/channel) and 5 W/(rms) per channel with sound equalization, has one 3-inch
driver in each speaker. The NC 200 has similar specifications to the NC 100
but has the added feature of Polymide tweeters. The NC300, with 30 W total
amplifier power (15 W/channel) and 7.5 W/(rms) per channel with sound
equalization, has two 3-inch drivers and one tweeter in each speaker. The
NC400 subwoofer, with 30 W total amplifier power (15 W/channel) and 7.5
W/(rms) per channel with sound equalization, has one 5.25-inch driver in each
speaker.
40
<PAGE>
MULTIMEDIA PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NewCom Hi-Fi 16i Windows/DOS PC Internal 16 bit stereo sound board April 1995
sound board with built in CD ROM IDE connector. Compatible
with SoundBlaster, SoundBlaster Pro.
- -------------------------------------------------------------------------------------------
NewCom 6X Drive Kit, Windows/DOS PC Internal six speed CD-ROM drive January 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 8X Drive Kit, Windows/DOS PC Internal eight speed CD-ROM drive April 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx or 33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 10X Drive Kit, Windows/DOS PC Internal ten speed CD-ROM drive August 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 12X Drive Kit and Windows/DOS PC Internal twelve speed CD-ROM drive August 1996
Multimedia Kit with audio cable and IDE cable. Multimedia Kit
also has Windows/DOS PC Internal twelve speed
CD-ROM drive, Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 12X Multimedia Windows/DOS PC Internal twelve speed CD-ROM November 1996
Internet Kit drive, Hi-Fi 16i sound board, 33,600 ifx modem,
Titles, cables, microphone and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Drive Kit and Windows/DOS PC Internal sixteen speed CD-ROM February 1997
Multimedia Kit drive with audio cable and IDE cable. Multimedia
Kit also has Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Audiophile Windows/DOS PC Internal sixteen speed CD-ROM April 1997
Multimedia Kit drive, 32 PnP Wavetable Sound Card, speakers
using Aura Neo-radial speaker technology, sound
enhancing wood enclosures, Titles, cables and
microphone.
- -------------------------------------------------------------------------------------------
NewCom 20X Multimedia Twenty speed IDE CD ROM drive bundled with 3-inch May 1997
Upgrade Kit desktop speakers and a sound card. CD-ROM drive
is compatible with audio, karaoke and photo CDs,
and game and reference CDs. Includes large
number of multimedia CD-ROM software titles that
allow the user to immediately use the product.
Drive kits without speakers and sound cards will
also be offered by the Company.
- -------------------------------------------------------------------------------------------
NewCom 24X Multimedia Twenty-four speed IDE CD ROM drive bundled with July 1997
Upgrade Kit 3-inch desktop speakers and a sound card. CD-ROM
drive is compatible with audio, karaoke and
photo CDs, and game and reference CDs. Includes
large number of multimedia CD-ROM software
titles that allow the user to immediately use
the product. Drive kits without speakers and
sound cards will also be offered by the Company.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom CDR Two speed Write/six speed Read Drive, bundled May 1997
Multimedia Kit with a Windows/DOS PC SCSI board with high
quality audio capture and playback, and a full
feature Windows/DOS PC sound card.
- ---------------------------------------------------------------------------------------
NewCom NC Speaker Series Speakers incorporating Aura neo-radial speaker June 1997
technology housed in sound-enhancing wood
enclosures. Speakers offer between 10 to 15 W
total amplifier power, 5 to 7.5 W/(rms) per
channel with sound equalization and a
3-inch to 5.25-inch driver in each speaker.
</TABLE>
PRODUCTS UNDER DEVELOPMENT
The Company is in the process of designing the following new products and
product enhancements that it intends to introduce to market and ship within
the next twelve months:
NewCom CDR MPEG Multimedia Kit. This multimedia kit will include a CDR drive
with the features and functionality described above. In addition, the kit will
optimize storing video to the CDR drive by including MPEG video encoding and
decoding. The multimedia kit will include a 2X Write/4X Read Drive, MPEG 1
encoder/decoder (capture/playback), and a Windows/DOS PC SCSI controller card.
Management plans to ship this product in Fall 1997.
NewCom ISDN Modem. Basic ISDN service typically provides two 64,000bps
channels and one 16,000 bps channel. By incorporating ISDN technology, the
NewCom ISDN modem would allow for a potential data transmission rate of
128,000 bps, as compared to the 33,600 bps rate currently available with
standard analog modems. ISDN service currently can be made available to the
majority of U.S. homes by converting their current standard analog POTS phone
lines to ISDN lines. To allow users of an ISDN modem to communicate with
modems relying on non-ISDN services, the NewCom ISDN modem will be able to
operate as a standard analog 33,600 bps modem. This product also supports
throughput of speeds up to 921,000 bps using proprietary compression
techniques. As ISDN technology gains acceptance, the Company intends to
develop and market enhanced, faster versions of its ISDN modems. Management
plans to ship its first ISDN modems in Fall 1997.
NewTalk 2000 Modem with Video Conferencing. The Company anticipates that
users of this product, utilizing the same standard phone line connection used
to talk with the other party, will also be able to see a small video image of
the person with whom they are talking if that person is also using the NewCom
product. Management believes this product will offer a low cost solution for
video conferencing based on a flexible, software-defined DSP architecture. The
product will work with a color digital parallel camera and Audio Vision
application software on a single line. It will have modem capability of 33,600
bps data transmission and 14,400 bps send/receive fax transmission, a
speakerphone and voicemail. Management plans to ship this product in Fall
1997.
NewCom 3D SVGA Graphics Accelerator Card. This 64-bit video card, which is
still in early development stages, will have 2 megabytes of EDO RAM and will
use the new Cirrus Logic video chip to produce high performance 3D graphics;
this product will support Intel AGP (accelerated graphics port) and Microsoft
Direct3D, enabling arcade level 3D game play on desktop computers. Resolutions
ranging from 640 x 480 to 1600 x 1200 will be supported, with full 32 bit
(16.8 million) colors being supported up to 1024 x 768 in Microsoft Windows
3.1x, Windows 95, and Windows NT. This video card will have a connector that
will allow for future TV tuner or MPEG upgrades. Management plans to ship this
product in Summer 1998.
NewCom NetPro TV Tuner. The NetPro, which is still in early development
stages, will consist of a cable-ready, 125 channel TV tuner that displays
video in a scaleable window on top of any VGA or SVGA display. Management
believes the NetPro TV tuner, which will contain a Windows/DOS PC internal
board, will bring a state of the art TV solution to the VGA world with superb
video and audio quality. Management plans to ship this product in Summer 1998.
42
<PAGE>
NewCom DVD Drive Kit & NewCom DVD Multimedia Kits. These kits, which are
still in early development stages, will be similar to NewCom's other
multimedia kits except that the CD ROM drive will be replaced by a higher
capacity DVD drive. These DVD drives, while remaining backward compatible with
current 680 megabyte CD ROM disc media, will also be able to read the new 4.7
gigabyte DVD disc media. The upcoming dual layer DVD disc media will hold even
more data with a storage capacity of 8.5 gigabytes. Future DVD-Write Once and
DVD-Rewritable drives may also be offered at a later date. Management plans to
ship this product in Summer 1998.
NewCom CD-RW Multimedia Kit. This multimedia kit will be similar to the CDR
Multimedia Kit but will include a CD-RW (Compact Disc ReWriteable) drive
instead of a CDR drive. CD-RW technology allows users to record and rerecord
information onto a compact disc. The CD is sometimes referred to as having
read-many write-many capabilities. Management plans to ship this product in
Fall 1997.
COMMITMENT TO EMERGING TECHNOLOGIES
The Company continues to review opportunities for the development and
introduction of new products and product families that incorporate emerging
technologies to meet changing end-user needs. Although the Company believes
that to date it has been able to respond on a timely basis to technological
innovations and market changes drawing upon its engineering expertise, there
can be no assurance that the Company will be able to anticipate future market
developments or develop products to meet those needs on a timely basis with
price and performance characteristics which would permit those products to
compete successfully. See "Risk Factors--Rapid Technological Change; Short
Product Life Cycles" and "--Competition."
Cable Modem and ADSL Modem Technology. Modems utilizing cable technology are
projected to have an upstream speed of 54 Kbps to 500 Kbps and a downstream
speed of 10 Mbps and will have the advantage of a continuous connection. The
Yankee Group estimates that by the year 2000, there will be 7 million cable
modem customers. Modems utilizing Asymmetric Digital Subscriber Lines are
projected to have an upstream speed of 640 Kbps and a downstream speed of 2
Mbps to 6 Mbps. ADSL service can be made available to U.S. homes by converting
usage of current standard analog POTS phone lines. According to industry
forecasters such as Dataquest, ADSL modem technology is expected to strongly
challenge cable modem technology for control of the high end high speed modem
market. NewCom believes that both technologies currently have significant
potential for growth in the modem market.
Other Technology. NewCom is developing plans to incorporate into its future
modem product lines emerging communications technologies in which the Company
has proprietary rights. First, NewCom has licensed from Aura, on an exclusive
basis with respect to PC applications, rights to two patents with respect to
noise cancellation techniques and two patent applications in blind adaptive
filtering (BAF). The Company believes that these technologies may enhance
modem transmission speeds. Second, the Company has licensed from Aura, on an
exclusive basis with respect to PC applications, rights to two patent
applications with respect to a wavelet approach to spectral speech
compression. The Company believes this approach may facilitate the sending and
storage of speech using less bandwidth and drive space.
SALES AND DISTRIBUTION
As a result of management's broad prior experience in sales and marketing,
the Company has established a comprehensive sales, marketing and distribution
network. The Company's sales and marketing strategy consists of a highly
consumer-oriented approach to regional distributors and retailers/mass
merchants, supplemented by a targeted entry into the OEM/VAR channels. Current
sales of NewCom PC communications and multimedia products are summarized as
follows:
43
<PAGE>
. Distributors--Approximately 49% of gross revenues and 72% of net
revenues in Fiscal 1997 and 42% and 44%, respectively, in the first
quarter of Fiscal 1998. Current national and regional customers include
D & H, Southern Electronic Distributors, Inc. ("S.E.D."), Tech Data,
Dinorall Corporation (dba DinExim) and MicroInformatica Corporation.
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
--------------------------------- --------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MicroInformatica........ $ 3,697,853 5.1% 7.3% $ 679,628 4.2% 4.4%
DinExim................. 3,449,550 4.7 6.8 15,684 .1 .1
S.E.D................... 3,280,193 4.5 6.5 354,978 2.2 2.3
----------- ---- ---- ---------- --- ---
$10,427,596 14.3% 20.6% $1,050,290 6.5% 6.8%
=========== ==== ==== ========== === ===
</TABLE>
. Retailers/Mass Merchants--Approximately 45% of gross revenues and 65% of
net revenues in Fiscal 1997 and 58% and 60%, respectively, in the first
quarter of Fiscal 1998. Current customers include Fry's Electronics,
Circuit City Stores, Inc., CompUSA, Staples, Computer City, Sun TV,
Electronic Boutique and Best Buy Company, Inc.
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
--------------------------------- --------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Circuit City............ $ 8,913,474 12.2% 17.6% $2,295,505 14.3% 14.9%
Best Buy................ 7,393,515 10.1 14.6 3,748,524 23.3 24.3
Fry's Electronics....... 3,685,009 5.0 7.3 650,001 4.0 4.2
----------- ---- ---- ---------- ---- ----
$19,991,998 27.3% 39.5% $6,694,030 41.6% 43.4%
=========== ==== ==== ========== ==== ====
</TABLE>
. OEM/VARs--Approximately 6.4% of gross revenues and 9.2% of net revenues
in Fiscal 1997 as compared to 0.3% and 0.3%, respectively, in the first
quarter of Fiscal 1998. Customers include Powercom, Techmedia, and Data
Storage Marketing ("D.S.M.").
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
-------------------------------- -----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Techmedia.... $2,195,104 3.0% 4.3% $ 0 0% 0%
PowerCom..... 1,614,618 2.2 3.2 0 0 0
D.S.M........ 872,300 1.2 1.7 42,068 .3 .3
---------- --- --- ------- --- ---
$4,682,022 6.4% 9.2% $42,068 .3% .3%
========== === === ======= === ===
</TABLE>
The loss of major customers may have a material adverse effect on the
Company.
Other customers include Micromatix, Misco, Global Computers, Tiger Direct,
Insight and Music Land. The majority of NewCom's domestic sales are made and
supported on a national basis by sales representatives.
The Company reaches its various market segments by a concentrated
telemarketing campaign and a direct marketing approach, utilizing the
industry's top manufacturer's representatives. The Company believes the
strength of its relationships with vendors lies in its personal relationships
with key engineers and salespeople that have been cultivated through senior
management's many years of experience in the industry, which serves to provide
the Company with timely access to new technology and competitive pricing. In
addition, management believes NewCom's reputation for offering high quality
customer service and technical support has significantly enhanced its sales
efforts.
The Company's promotional strategy in both the distributor and mass merchant
channels focuses on utilizing a variety of methods, including improved product
packaging, national co-op advertising with distributors, national co-op
advertising with mass merchants, controlled direct national advertising,
incentive promotions, mass mailings, periodic press releases, and
participation in trade shows.
44
<PAGE>
Management is taking steps to attempt to increase the Company's sales to
OEM/VAR customers. The Company intends to use its new products and its
heightened name recognition to pursue the OEM/VAR channel and make it a larger
segment of NewCom's overall sales. There can be no assurance, however, that
the Company will be successful in increasing its penetration of the OEM/VAR
channel. See "Risk Factors--Distribution Risks; Diversification of Sales
Channels."
After first focusing on building name recognition in the United States,
NewCom has begun to implement plans to market its products overseas. To date,
distribution of the Company's products into foreign markets has been by sales
to domestic distributors who thereupon resell such products to foreign
customers. Accordingly, all of the Company's direct sales, including those
subject to resale to foreign customers, are denominated in U.S. dollars. The
Company has acquired modest market shares in South America and the Indian
subcontinent, and it is now turning its attention toward other foreign
markets.
PRODUCT DESIGN
In order to maintain the interest of its customer base and a competitive
advantage in its distribution channels, NewCom must regularly introduce new PC
communication and multimedia products. NewCom must also constantly update the
software drivers it incorporates into its products so that they stay current
with the changing needs of the market. The Company does not employ an internal
research and development staff and acquires virtually all the software and
hardware technology used in its PC communication and multimedia products by
licensing such technology from third-party manufacturers and suppliers. The
Company's product design efforts focus on achieving three goals: First, NewCom
performs "value engineering," which the Company defines as developing the
means to manufacture new generations of its existing products more efficiently
and with reduced costs. Second, the Company identifies and/or designs new
features and better performing models within its existing product lines by
acquiring and utilizing successively more innovative technologies. Third, the
Company designs new products and product families based on emerging
technologies in the industry. See "Risk Factors--Rapid Technological Change;
Short Product Life Cycles," "--Component Shortages; Reliance on Limited Source
Suppliers and Third Party Assemblers" and "--Proprietary Rights."
The Company believes that keeping current with changes in semiconductor chip
designs is essential to increase the performance and reduce the overall size
of each product. The Company presently maintains an in-house engineering staff
that is knowledgeable in the design of communication and multimedia hardware
and software drivers and utilities. In addition to its in-house engineers,
NewCom relies on outside engineers and utilizes strategic alliances with
industry standard telecommunication and multimedia chip vendors such as
Rockwell International Corporation, Texas Instruments, Cirrus Logic, Opti
Corporation, Yamaha Corporation and Analog Devices Incorporated. Working with
these major chip manufacturers, the Company designs its hardware based upon
the most current available technology. NewCom's engineering goal is to
integrate the latest technology onto the smallest board footprint possible
while maintaining a modular design that is easy for the PC user to upgrade and
maintain. In addition, in order to keep NewCom's products competitively
priced, the Company's engineering team has an ongoing mandate to continually
examine methods to reduce product costs by using newer, lower priced methods
and parts, without sacrificing quality or reliability.
The Company attempts to utilize common chips in its different products in
order to achieve cost effective procurement, improved compatibility, lower
production costs and faster future product design and manufacturing cycles.
NewCom's products are designed to be modular and the basic circuit board and
other components used by the Company are common to various of its products.
Product specific chips can then be purchased and installed as needed during
the completion phase of production. The Company continually evaluates and
licenses communication and multimedia software from established software
developers. This software is bundled with the Company's hardware and improves
the overall value of the product.
45
<PAGE>
MANUFACTURING
NewCom currently utilizes four primary independent contract manufacturers,
located in each of the Peoples Republic of China, Taiwan, Mexico and the
United States. In February 1997, these contract manufacturers account for 30%,
30%, 15% and 25%, respectively, of the Company's manufacturing output. The
Company does not directly conduct any operations outside of the United States.
In house at its California facility, NewCom integrates the chip sets on to the
circuit boards, runs tests on 100% of the boards as part of its quality
control program, installs value added software to the products and performs
all of its own packaging, inspection and shipping. Products manufactured for
the Company in foreign countries are invoiced and paid in U.S. dollars.
For the Company to grow and achieve its business objectives, it is important
to receive from its manufacturing partners a large part of its product
requirements as finished goods in almost ready to ship condition. The Company
must do this while also securing favorable open account terms. These
manufacturing arrangements allow NewCom to reduce the time it takes to
introduce new products to market. Management believes NewCom's ability to
reach a particular niche and gain market share just as the market is gaining
momentum is dependent upon the Company's ability to produce products quickly,
cost effectively and with a high level of reliability. In forging these
manufacturing relationships NewCom takes great care to insure that its
manufacturing partners produce quality products.
NewCom employs a Just-in-Time ("JIT") manufacturing strategy whereby
supplies and components are purchased just before they are needed during the
manufacturing cycle, rather than purchased at the beginning of the cycle and
held in inventory. Management believes such a strategy has been successful in
limiting the risk of inventory obsolescence and in containing the Company's
investment in product inventory. To facilitate its JIT manufacturing strategy,
the Company designs products with a focus on a commonality of parts. As a
result, a growing number of NewCom's communications and multimedia products
have interchangeable circuit boards.
To reduce costs, NewCom has negotiated agreements with key component
suppliers that allow its manufacturing partners to competitively buy material
under blanket discount agreements.
The Company has no backlog as initial orders are typically 90 days from the
date of shipment.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
NewCom offers its end users multiple avenues to receive technical support
and customer service.
. Phone Support: Support staff can be called by end users with questions
via NewCom's toll free 800 number. Currently a full time support staff
in the California office handles calls by end users weekdays from 6:00
a.m. to 10:00 p.m. P.S.T. and weekends from 8:00 a.m. to 5:00 p.m.
P.S.T. Each member of the support staff is equipped with a PC loaded
with software enabling the member to better help the end user find a
solution.
. E-mail Support: For users with Internet access, NewCom's staff maintains
a dedicated support e-mail address. E-mail is used to send end users the
latest drivers and text help files.
. On-line Support: NewCom offers 24 hour a day access to its on-line
support solutions. For those with access to the Internet, NewCom's web
page offers answers to frequently asked questions ("FAQ") and downloads
of the most up to date software drivers and files. NewCom's web page can
be found at "www.newcominc.com." For those with modems but who do not
have Internet access, NewCom maintains a bulletin board site with an up-
to-date list of FAQs and downloads similar to what is found on its
Internet web page.
. Fax Support: NewCom offers end users the ability to fax requests for
support. Whenever possible, solutions will be faxed back to the end user
which eliminates the need for further action by the end user and the
support staff.
The Company includes an installation disk with many NewCom products that
detects and reports back to the user which interrupts, DMA channels and COM
ports are available to the user when installing the product. Management
believes this software reduces the number of potential installation problems
and makes the Company's products more user friendly.
46
<PAGE>
COMPETITION
The Company has experienced a tremendous amount of competition in the PC
communication and multimedia products industry. In the communication products
market, the Company's direct U.S. competitors include Zoom Telephonic,
Cardinal Technology, Boca Research, Best Data, Hayes Microcomputers, U.S
Robotics and MicroCom. Potential overseas competitors in this market, such as
Aski, GVC and WiseCom, are primarily from the Far East and generally do not
compete in NewCom's retail market but instead focus on supplying large OEM's.
In the multimedia products market, the Company's direct competitors include
Creative Laboratory Ltd., Aztec Systems Ltd., Diamond Technology, Inc. and
Pinnacle Micro.
Many of the Company's current and potential competitors have a significantly
greater market presence, name recognition and financial and technical
resources than the Company, and many have long standing market positions and
established brand names in their respective markets. While the Company
believes that its semiconductor vendor flexibility enables it to select from
among the most advanced components available, the captive semiconductor
supplies of certain of the Company's current and potential competitors can
provide them with greater control over component design, availability and
cost. NewCom believes that certain of its current and potential competitors
compete in their markets largely on the basis of price, which may result in
significant price competition and lower margins for the Company's products or
otherwise affect the market for the Company's products. In addition, the PC
communication and multimedia industries have been marked by consolidations in
recent periods, with a number of firms suffering significant operating losses
and, in certain cases, cessation of business. Given the Company's
concentration in these markets, there can be no assurance that the volatility
and intense competitive pressure of the market will not adversely affect the
Company's operations in the future. See "Risk Factors--Competition."
The Company seeks to differentiate itself through the quality of its
products and the level of its support and service. The Company designs its
products for high reliability, good price value, compatibility with existing
and emerging industry standards, and up to date product features and
performance. NewCom has attempted to establish brand name recognition through
periodic advertising on prime time television and through print advertising in
major trade magazines and periodicals. To assure compatibility with multiple
PC's, the Company performs extensive testing on its products.
The market for the Company's products is characterized by rapidly changing
technology, short product life cycles, and evolving industry standards. The
Company believes that its future success will depend upon its ability to
continually enhance its existing products and to introduce new products on a
timely basis. Accordingly, the Company intends to continue to make investments
in product and technological development.
PERSONNEL
As of June 30, 1997, NewCom employed 73 full-time employees. From time to
time, the Company also hires temporary employees. The Company's employees are
not represented by any collective bargaining agreements and the Company has
never experienced a work stoppage. The Company believes that its relations
with its employees are good.
FACILITIES
The Company's headquarters are located in a 33,000 square foot facility in
Westlake Village, California, currently leased by Aura pursuant to a lease
expiring in May 2000. On or before the Closing Date, Aura will assign the
lease for this facility to the Company. The Company believes that its current
facilities, together with certain additional warehouse and assembly facilities
the Company intends to lease in Fall 1997, will be adequate for the next 12
months. Although management believes that such additional facilities will be
available in the future as needed on commercially reasonable terms, the
Company has not entered into any written or otherwise binding lease agreement
regarding such additional facilities and there can be no assurance the Company
will enter into any such agreements to lease additional facilities in the fall
of 1997. The Company has not at this time definitely determined any specific
properties it intends to lease as additional facilities. Except for its
Westlake Village facility, the Company does not intend to lease or sublease
any of its current or future facilities from an affiliate of the Company.
47
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sultan W. Khan............. 52 Chief Executive Officer, President and Director
Asif M. Khan(3)............ 52 Executive Vice President and Director
Steven C. Veen(2).......... 41 Chief Financial Officer and Director
Michael I. Froch........... 35 Secretary and Director
David W. Harralson(1)...... 56 Director of Engineering
Sonia Kiarashi(1).......... 38 Director of Marketing and Sales
Zane R. Alsabery(2)........ 40 Director
James M. Curran(2)(3)...... 47 Director
Gerald S. Papazian(3)...... 42 Director
Alexander Remington(3)..... 40 Director
</TABLE>
- --------
(1) Not an executive officer position.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Sultan W. Khan has been President and Chief Executive Officer of NewCom
since September 1994. From June to September 1994, Mr. Khan was employed by
Aura to perform special projects. Prior to joining Aura, Mr. Khan was a
founder and President of Nuvo Corporation of America, Inc ("Nuvo"), a
developer, manufacturer and marketer of PC peripheral products. In addition,
he founded Computer Peripherals, Inc. which under his leadership grew into a
multi-million dollar sales company and an industry leader in modem
communication products. Prior to Computer Peripherals, Mr. Khan was employed
by Texas Instruments and, prior thereto, by Data Products, where he was
responsible for developing a high speed band printer family of products. Mr.
Khan received his B.S. in electrical engineering at Cal Polytechnic Institute,
San Luis Obispo, and a M.B.A. at Cal Lutheran College.
Asif M. Khan has been Executive Vice President of NewCom since September
1994. From June to September 1994, Mr. Khan was employed by Aura to perform
special projects. Prior to joining Aura from April 1990 through May 1994, Mr.
Khan served as Executive Vice President of Nuvo. Mr. Khan received his B.S. in
electrical engineering at West Coast University, Los Angeles, his B.S. in
physics and mathematics at Karachi University, Pakistan, and an M.B.A. at the
University of California at Los Angeles.
Steven C. Veen, a Certified Public Accountant, has been Chief Financial
Officer since June 1997. He joined Aura as its Controller in December 1992 and
became its Chief Financial Officer in March 1994, which position he currently
holds. Prior to that, Mr. Veen practiced for over twelve (12) years in varying
capacities in the public accounting profession. In particular, Mr. Veen served
from 1983 to December 1992 with Muller, King, Black, Mathys & Acker, Certified
Public Accountants. He received a B.A. in accounting from Michigan State
University in 1981.
Michael I. Froch has been Secretary and a Director of NewCom, Inc. since
June 1997. From July 1994 through February 1997, Mr. Froch served as Corporate
Attorney at Aura, following which he was appointed as Aura's General Corporate
Counsel and Secretary. From 1991 through 1994, Mr. Froch was engaged in
private law practice in California. Mr. Froch is admitted to the California
and District of Columbia bars. He received his Juris Doctor degree from Santa
Clara University School of Law in 1989 and his A.B. Degree from the University
of California, Berkeley in 1984.
David W. Harralson has been the Director of Engineering for NewCom since
January 1996. For the fifteen year period prior to his employment at NewCom,
Mr. Harralson owned his own software design company, Mephistopheles Systems
Design. Mr. Harralson has enjoyed a career of more than 30 years in military,
48
<PAGE>
aerospace, space, commercial and consulting activities. Mr. Harralson received
his B.A. in mathematics from California State University at Northridge.
Sonia Kiarashi has been the Director of Marketing and Sales for NewCom since
August 1995 and, prior thereto, served as NewCom's National Sales, Marketing
and Business Manager since September 1994. From June to September 1994, Ms.
Kiarashi was employed by Aura to perform special projects. Prior to joining
Aura, she was employed by Nuvo for several years in the capacity of Sales and
Marketing Manager for North and South America. Prior to that, she held various
management positions at I.C.C., C.P.I. and other companies. Ms. Kiarashi
graduated from the California State University at Fullerton with a B.A. in
business administration with an emphasis in international marketing.
Zane R. Alsabery has been a Director of NewCom since June 1997. From
September 1994 to June 1997, Mr. Alsabery served as the Company's Vice
President of Special Projects. Prior to joining the Company, from June to
September 1994, he was employed by Aura. From April 1984 to June 1994, Mr.
Alsabery served in several full time positions at Interstate Recruiters
Corporation, most recently as Vice President of Corporate Accounts, where he
managed Interstate's management consulting efforts in the high technology and
computer-related industries. Prior to Interstate, Mr. Alsabery served as the
Manager of multi-user system sales at Marcey, Inc. and as a sales
representative at Compal Computer Systems. He received his B.A. in economics
from the University of California, Los Angeles in 1979.
James M. Curran has been a Director of NewCom since June 1997. From August
1996 until the present, Mr. Curran has served as an independent business
consultant. From May 1995 to August 1996 he served as Executive Vice
President, Information Products and Systems, of Visa International. Prior
thereto, Mr. Curran was employed by International Business Machine Corporation
for 22 years, where he most recently served as a Division Director, Software
Solutions Division. He received his B.A. in philosophy from Cathedral College
Seminary in New York in 1972.
Gerald S. Papazian has been a Director of the Company since June 1997. He
joined Aura in August 1988 and currently serves as Aura's President and Chief
Operating Officer. Previously, Mr. Papazian worked at Bear Stearns & Co., an
investment banking firm, where he served from 1986 as Vice President,
Corporate Finance in the Investment Banking Division. Prior to joining Bear
Stearns, Mr. Papazian was an associate attorney in the law firm of Stroock &
Stroock & Lavan. Mr. Papazian received his B.A. in economics from the
University of Southern California in 1977 and a J.D./M.B.A. from the
University of California, Los Angeles, 1981.
Alexander Remington has been a director of NewCom since June 1997. Mr.
Remington is Chief Executive Officer of Micro Equipment Corporation
("M.E.C."), which he founded in 1983. M.E.C. is a distributor and manufacturer
of computer and peripherals products in the U.S. and worldwide. Prior to 1983,
Mr. Remington worked for First Financial Management Corporation for one half
year, during which time he started and managed the Micro Computer division.
Mr. Remington holds a Master of Science degree in Information Computer Science
(ICS).
The bylaws of the Company provide that the authorized number of directors
shall be nine until changed by amendment of the Bylaws duly adopted by the
shareholders amending the Bylaws' Section 1. The directors hold office until
the next annual meeting of shareholders and until their successors have been
elected and qualified. The Company has agreed, if requested by the
Representative at any time within four years after the date of the Prospectus,
to nominate and use its best efforts to elect two designees of the
Representative as directors of the Company or, at the Representative's option,
as non-voting advisors to the Company's Board of Directors. Each such designee
may be a director of the Representative. The persons to be designated by the
Representative have not been identified to date. See "Underwriting."
Directors do not receive any fees for service on the Board of Directors or
any Committee thereof. Directors are reimbursed for their expenses for each
meeting attended. Directors are eligible to participate in the Company's Stock
Plan described below, although as of the date of this Prospectus, no options
have been granted to non-employee directors.
49
<PAGE>
Each officer of the Company serves at the discretion of the Board of
Directors. There is no family relationship between Sultan W. Khan and Asif M.
Khan or among any other directors, officers or key employees of the Company.
In April 1994 a petition under the federal bankruptcy laws was filed against
Nuvo which ultimately resulted in the Chapter 7 dissolution and winding-up of
Nuvo and the liquidation of its business assets in September 1994. At the time
these bankruptcy proceedings commenced, Sultan W. Khan, the Company's Chief
Executive Officer, President and a Director, was president of Nuvo, and Asif
M. Khan, the Company's Executive Vice President and a Director, was vice
president of Nuvo.
In October 1996, the Commission issued an order (Securities Act Release No.
7352) instituting an administrative proceeding against Aura and two individual
parties. The proceeding was settled on consent of all the parties, without
admitting or denying any of the Commission's findings. In its order, the
Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and
1994 in connection with its reporting on two transactions in reports
previously filed with the Commission. The Commission's order directs that each
party cease and desist from committing or causing any future violation of
these provisions.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's two other most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers"), for services rendered in all capacities to the Company and Aura
during Fiscal 1997, 1996 and 1995. No other executive officer of the Company
earned compensation in excess of $100,000 in each of these periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND FISCAL ------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY($)(2) OPTIONS(#) COMPENSATION($)(3)
--------------------- ------ ------------------- ------------ ------------------
<S> <C> <C> <C> <C>
Sultan W. Khan.......... 1997 136,528 -- 1,976
Chief Executive Officer 1996 127,783 -- --
and President(4) 1995 84,527 -- --
Asif M. Khan............ 1997 136,528 -- 1,431
Executive Vice
President(4) 1996 127,783 -- --
1995 84,527 -- --
Steven C. Veen.......... 1997 144,749 -- 1,889
Vice President of
Finance, 1996 121,501 25,000(6) 1,701
Chief Financial
Officer(5) 1995 84,035 -- 1,179
</TABLE>
- --------
(1) The Company has not entered into, and does not currently contemplate
entering into, any employment contracts or compensation agreements with
any of its executive officers.
(2) Includes amounts deferred by each individual under the 401(k) Plan of the
Company or Aura, as applicable. No bonuses were paid to any such
individuals during the periods identified.
(3) Such compensation consists of total matching contributions made by Aura to
the plan account of each individual pursuant to Aura's 401(k) Plan.
(4) All compensation amounts were paid by the Company except $29,076 paid by
Aura through August 26, 1994.
(5) All compensation amounts were paid by Aura.
(6) Reflects options to acquire shares of Aura common stock, granted in
January 1996, having a term of 10 years, with an exercise price of $5.06
per share, vesting at a rate of 20% on each anniversary of the date of
grant.
50
<PAGE>
No options to acquire shares of Common Stock of the Company were granted or
exercised during the Company's fiscal year ended February 28, 1997.
STOCK INCENTIVE PLAN
In June 1997 the Company's Board of Directors adopted the Company's 1997
Stock Incentive Plan (the "Stock Plan"). A total of 1,000,000 shares of Common
Stock are currently reserved for issuance under the Stock Plan pursuant to the
direct award or sale of shares or the exercise of options granted under the
Stock Plan. If any option granted under the Stock Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to that option will once again be available for additional
option grants.
Under the Stock Plan, all employees (including officers) and directors of
the Company or any subsidiary and any independent contractor or advisor who
performs services for the Company or a subsidiary are eligible to purchase
shares of Common Stock and to receive awards of shares or grants of
nonstatutory options. Employees are also eligible to receive grants of
incentive stock options ("ISOs") intended to qualify under Section 422A of the
Internal Revenue Code of 1986, as amended ("Code"). The Stock Plan is
administered by a committee of the Board of Directors of the Company, which
selects the persons to whom shares will be sold or awarded or options will be
granted, determines the number of shares to be made subject to each sale,
award or grant, and prescribes other terms and conditions, including the type
of consideration to be paid to the Company upon sale or exercise and vesting
schedules, in connection with each sale, award or grant.
The exercise price under the nonstatutory options generally must be at least
85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value
of the Common Stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of the Company, not less than
110% of such fair market value. The term of an option cannot exceed ten years,
and the term of an ISO granted to a holder of more than 10% of the voting
power of the Company cannot exceed five years. Options generally expire not
later than ninety days following a termination of employment or six months
following the optionee's death or permanent disability. The purchase price of
shares sold under the Stock Plan generally must be at least 85% of the fair
market value of the Common Stock and, in the case of a holder of more than 10%
of the voting power of the Company, not less than 110% of such fair market
value. Under the Stock Plan, options granted pursuant to the Stock Plan will
generally vest over a period of five years, at a rate of 20% on each
anniversary of the date of grant. Options granted to the Named Executive
Officers vest over a period of four years, at a rate of 25% on each
anniversary of the date of grant.
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share
(giving effect to the Recapitalization). Options granted to the Company's
directors, the Named Executive Officers, and all directors and executive
officers as a group included the following: Sultan W. Khan, CEO, President and
Director, 192,720 shares; Asif M. Khan, Executive Vice President and Director,
192,720 shares; Zane R. Alsabery, Director, 35,000 shares; and all directors
and executive officers as a group, 420,440 shares. A total of 453,310 shares
of Common Stock are available for future issuance under the Stock Plan.
Pursuant to the Underwriting Agreement, the Company has agreed that, for a
period of one year following the date of this Prospectus, the Company will not
grant any additional options under the Stock Plan at an exercise price less
than the initial public offering price of the Common Shares, without the
Representative's prior consent which may be withheld in its sole discretion.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Delaware General Corporation Law ("Delaware Law"). The Delaware Law
provides that directors of a company will not be personally liable for
monetary damages for breach of their fiduciary duty as directors, except for
liability (i) for any breach of their duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for
51
<PAGE>
unlawful payment of dividend or unlawful stock repurchase or redemption, as
provided Section 174 of the Delaware Law, or (iv) for any transaction from
which the director derived an improper personal benefit. Any amendment or
repeal of these provisions requires the approval of the holders of shares
representing at least 66 2/3% of the shares of the Company entitled to vote in
the election of directors, voting as one class.
The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law. The Company has entered into separate
indemnification agreements with its directors that could require the Company,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. The Company believes that the limitation of liability
provision in its Certificate of Incorporation and the indemnification
agreements will facilitate the Company's ability to continue to attract and
retain qualified individuals to serve as directors and officers of the
Company.
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<PAGE>
RELATIONSHIP WITH AURA AND CERTAIN TRANSACTIONS
PRINCIPAL STOCKHOLDER; CONTROL OF THE COMPANY
Prior to the Offering, Aura owned approximately 94% of the then-outstanding
shares of Common Stock of the Company. Upon completion of the Offering, Aura
will own approximately 75% of the outstanding Common Stock (approximately 72%
if the Underwriters' Over-allotment Option is exercised in full). For as long
as Aura continues to own shares of Common Stock representing more than 50% of
the combined voting power of the Common Stock of the Company, Aura will be
able, among other things, to determine any corporate action requiring approval
of holders of Common Stock representing a majority of the combined voting
power of the Common Stock, including the election of the entire Board of
Directors of the Company, without the consent of the other stockholders of the
Company. In addition, through its control of the Board of Directors and
beneficial ownership of Common Stock, Aura will be able to control certain
decisions including decisions with respect to the Company's dividend policy,
the Company's access to capital (including borrowing from third-party lenders
and the issuance of additional equity securities), mergers or other business
combinations involving the Company, the acquisition or disposition of assets
by the Company and any change in control of the Company.
Except for the limited activities described below under "Arrangements and
Transactions with Aura Systems, Inc.," the Company will be operated as a
company independent of Aura. The Company believes that, in the event of an
insolvency, bankruptcy or receivership proceeding involving Aura, a court,
exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with Aura.
Other than pursuant to (i) the Underwriting Agreement, in which Aura has
agreed, subject to certain exceptions, not to sell or otherwise dispose of any
shares of Common Stock (or any security convertible into or exchangeable or
exercisable for Common Stock) owned by it for a period of one year following
the date of this Prospectus without the prior written consent of the
Representative, (ii) the Redemption Option Agreement (described below), and
(iii) the Aura Rights Agreement (described below), Aura has no agreement with
the Company not to sell or distribute the outstanding shares of Common Stock
it holds. There can be no assurance concerning the period of time during which
time Aura will maintain its ownership of the Common Stock.
The Company's Restated Certificate contains provisions relating to
competition by Aura with the Company, potential conflicts of interest that may
arise between the Company and Aura, the allocation of business opportunities
that may be suitable for either Aura or the Company and the approval of
transactions between the Company and Aura. The Company's Restated Certificate
also limits the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors, except to the extent otherwise
required by the Delaware General Corporations Law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions that may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
ARRANGEMENTS AND TRANSACTIONS WITH AURA SYSTEMS, INC.
The Company and Aura have entered into agreements for the purpose of
defining their ongoing relationships, the material terms of which are
summarized below. These agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's-
length negotiations between independent parties. It is the intention of the
Company and Aura that such agreements and the transactions
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provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements. However, there can be no
assurance that each of such agreements, or the transactions provided for
therein, have been effected on terms at least as favorable to the Company as
could have been obtained from unaffiliated third parties.
Additional or modified arrangements and transactions may be entered into by
the Company, Aura and its subsidiaries after completion of the Offering. Any
such future arrangements and transactions will be determined through
negotiation between the Company and Aura, and it is possible that conflicts of
interest will be involved. The Audit Committee of the Board of Directors of
the Company, consisting of directors independent of both management and Aura
must independently approve all transactions by and between the Company and
Aura.
The following is a summary of certain arrangements and transactions between
the Company and Aura. The descriptions of agreements set forth below are
intended to be summaries and, while material terms of the agreements are set
forth herein, the descriptions are qualified in their entirety by reference to
the relevant agreements filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
Underwriting Agreement. Pursuant to the Underwriting Agreement to be
executed by and between the Representative, as representative of the several
Underwriters, Aura and the Company, the Company and Aura have granted the
Underwriters the Underwriters' Over-allotment Option to purchase up to 300,000
additional Units on the same terms set forth herein, solely for the purpose of
covering over-allotments, if any. The Common Shares included in such
additional Units will be offered by Aura and the Warrants included in such
additional Units will be offered by the Company.
Aura Rights Agreement. Prior to the completion of this Offering, the Company
and Aura will enter into the Aura Rights Agreement, pursuant to which Aura can
require the Company to register, at the Company's expense, all of the Common
Stock held by Aura, with 3.0 million shares subject to such rights commencing
one year from the date of this Prospectus and the balance of such shares
registrable one year thereafter.
Noncompetition Agreement. Pursuant to the Noncompetition Agreement, Aura has
covenanted, for a period of three years from the Closing Date, not to compete
with the Company in the design, manufacture, sale or marketing of PC modem and
certain multimedia products and to provide the Company with an exclusive,
fully paid, royalty free, worldwide license, irrevocable during such three-
year period, to make, use and sell any such competitive products developed or
offered by Aura within such period. Except as set forth in the Noncompetition
Agreement, Aura is not restricted from competing with the Company.
Redemption Option Agreement. Prior to the completion of the Offering, the
Company and Aura will enter into a Redemption Option Agreement, pursuant to
which Aura can require the Company, solely at Aura's option, to apply up to
70% of the net proceeds the Company receives from the exercise of the Warrants
to redeem shares of Common Stock held by Aura at the Warrant exercise price.
Tax Sharing Agreement. In general, the Company will be included in Aura's
consolidated group for federal income tax purposes for so long as Aura
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, the Company could be liable for any
federal tax incurred during a taxable period for which the Company is included
in Aura's consolidated group, if such tax liability is not discharged.
However, pursuant to the Tax Sharing Agreement (defined below), Aura has
agreed to indemnify and hold harmless the Company for any penalties and
interest in respect of any tax liability attributable to the Aura consolidated
group incurred on or before the date upon which Aura will own less than 80% of
the outstanding Common Stock (the "Deconsolidation Date"). After the
Deconsolidation Date, the Company will not file a federal consolidated return
with Aura. It is expected that the Company will continue to file California
combined reports with Aura for periods ending after the Deconsolidation Date.
Prior to the completion of the Offering, the Company and Aura plan to enter
into a tax sharing agreement (the "Tax Sharing Agreement") pursuant to which,
during the period from June 1, 1997 up
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to and including the Deconsolidation Date, the Company will not be required to
reimburse Aura for any amounts of federal income taxes that the Company would
have been required to pay if the Company were to file its own federal income
tax return and was not part of Aura's consolidated group. Any amount not
required to reimbursed will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date.
Corporate Services Agreement. The Company historically has been allocated
expenses of various administrative services provided by Aura. The costs of
such services were not directly attributable to a specific division or
subsidiary and primarily included general corporate overhead such as
accounting and cash management services, human resources, internal audit and
other administrative functions. These expenses were calculated as a pro rata
share of certain administrative costs based on relative assets and liabilities
of each division or subsidiary, which management believes was a reasonable
method of allocation. The allocations of expense for Fiscal 1995, 1996 and
1997 were $80,000, $120,000 and $120,000, respectively.
Prior to the completion of the Offering, the Company and Aura will enter
into a corporate services agreement (the "Corporate Services Agreement")
pursuant to which Aura will continue to provide to the Company on an interim
basis for certain routine and ordinary corporate services, including
financial, insurance accounting, employee benefits, payroll, tax and legal
services. The cash assets of the Company will not be commingled with those of
Aura. For these services, the Company will be assessed a fee of $50,000 per
month, payable on a monthly basis. With respect to matters covered by the
Corporate Services Agreement, the relationship between Aura and the Company is
intended to continue in a manner generally consistent with past practices. The
Company believes that the charges under the Corporate Services Agreement are
reasonable. The initial term of this agreement will be six months. Thereafter,
the agreement will expire unless extended by mutual agreement of the parties.
The agreement may be terminated by either party upon 60 days' prior written
notice.
Sublease Agreement. The Company currently subleases from Aura its principal
operating facilities in Westlake Village, California. In Fiscal 1997, the
Company made lease payments of $191,013 under the sublease, which payments
were made, with Aura's consent, directly to the landlord, and property tax
payments of $7,956.
Each of the Noncompetition Agreement, Redemption Option Agreement, Tax
Sharing Agreement, Corporate Services Agreement, Sublease Agreement and Aura
Rights Agreement are hereinafter collectively referred to as the "Intercompany
Agreements."
RECENT SALES OF SECURITIES TO AFFILIATES
In connection with the formation of the Company, in June 1994 the Company
sold 935.35 shares of Common Stock to Aura and in September 1994 the Company
issued 64.65 shares to other individuals. Assuming an Offering Price of $9.00
per Unit, upon giving effect to the Stock Split these 1,000 shares will be
converted into 7,555,556 shares. See "Description of Securities--Registration
Rights."
In June 1997, incentive stock options to purchase Common Stock of the
Company were granted to certain of the directors, executive officers and key
employees of the Company as follows: Sultan W. Khan, Chief Executive Officer
and President of the Company, 192,720 shares; Asif M. Khan, Executive Vice
President of the Company, 192,720 shares; Zane R. Alsabery, a Director of the
Company, 35,000 shares; and Sonia Kiarashi, Director of Marketing and Sales of
the Company, 50,000 shares. The exercise price of such options was $8.00 per
share, the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. The options are subject to vesting over
a four-year period at a rate of 25% on each anniversary of the date of grant.
RELATED PARTY TRANSACTIONS
Since inception, the Company has financed its operations through loans from
Aura. The outstanding balances payable to Aura at Fiscal 1995, 1996 and 1997
year-end and at May 31, 1997 were $1.2 million, $20.2 million, $17.2 million
and $25.5 million, respectively. Intercompany interest expense, included in
the
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outstanding balance at Fiscal 1996 and Fiscal 1997 year-end and at May 31,
1997, was $1.2 million, $1.1 million, and approximately $0.4 million,
respectively, and was charged at the rate of 9%, 8% and 8%, respectively, per
annum. No interest was charged to the Company on intercompany indebtedness
during Fiscal 1995. Effective March 1, 1996, Aura contributed $9.0 million of
the Company's indebtedness to Aura as additional paid-in capital, thereby
reducing the amount reflected in "Due to Aura." Subsequent to Fiscal 1997, the
Company notified its commercial lender that it was replacing the facility with
a different lender. As a result, the commercial lender discontinued advancing
funds under the line and Aura agreed to finance the Company's working capital
requirements until the replacement commercial line was put in place. Between
March 1, 1997 and May 31, 1997, Aura advanced $8.3 million to the Company;
this amount was repaid in June 1997 when the new commercial line of credit was
put into effect with borrowings under the new line and cash on hand.
Immediately prior to the Closing Date, Aura will effectuate the Conversion
whereby $4.0 million in intercompany indebtedness will be converted into
444,444 Shares of Common Stock (assuming an Offering Price of $9.00 per Unit).
All remaining intercompany debt will be evidenced by an unsecured promissory
note from the Company to Aura due and payable in full in September 1998. The
promissory note will bear interest at the rate of 9% per annum and will have
no prepayment penalty.
In Fiscal 1997, the Company purchased speaker components from Aura for use
in NewCom's multimedia kit products, for which Aura received $543,719.
Alexander Remington, a director of the Company, founded and currently serves
as Chief Executive Officer of Micro Equipment Corporation ("M.E.C.") and is
the controlling shareholder of C'More, Inc. M.E.C. and C'More, Inc. purchased
certain product from the Company in the aggregate amount of zero and $6.1
million in the first quarter of Fiscal 1998 and in Fiscal 1997, respectively.
The stated terms were payment 30 days from the date of shipment. At May 31,
1997, $3.7 million of the amount due to the Company from C'More, Inc. was over
90 days old; all of such amount had been paid by September 5, 1997.
In addition, M.E.C. served as a supplier of products and components to the
Company in the amount of $3.3 million and $12.5 million in the first quarter
of Fiscal 1998 and in Fiscal 1997, respectively. The Company may continue to
purchase products and components from M.E.C. in the future, generally
consisting of those products and components included in the Company's
communication and multimedia products currently offered and under development,
although the Company is unable to specifically identify the products or
components or amounts thereof that may be so purchased. Purchases from M.E.C.
will only be made if they are approved by a majority of the Company's
disinterested directors, are on terms no less favorable to the Company than
could be obtained from unaffiliated parties and are reasonably expected to
benefit the Company.
The Company currently subleases from Aura its facilities in Westlake
Village, California. In Fiscal 1997, the Company made lease payments of
$191,013 under the sublease, which payments were made, with Aura's consent,
directly to the landlord, and property tax payments of $7,956.
James M. Curran, a director of the Company, has served as a business sales
consultant to Aura since March 1997. For his services, Mr. Curran has received
$67,700 from Aura through June 30, 1997.
The Company believes that the foregoing transactions were in its best
interests. It is the Company's current policy, adopted in June 1997, that all
transactions by the Company with officers, directors, 5% stockholders and
their affiliates will be entered into only if such transactions are approved
by a majority of the disinterested independent directors, are on terms no less
favorable to the Company than could be obtained from unaffiliated parties and
are reasonably expected to benefit the Company. Each of the Intercompany
Agreements has been approved by a majority of the Company's disinterested
directors in accordance with the foregoing policy.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
OWNERSHIP OF NEWCOM STOCK
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock on a pro forma basis as of June 30,
1997, (i) by each person or entity known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) by each of the Company's
directors, (iii) by each executive officer of the Company named in the Summary
Compensation Table and (iv) by all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENTAGE BENEFICIALLY OWNED(1)
BENEFICIALLY ---------------------------------
NAME AND ADDRESS OF OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------- ------------ --------------- -----------------
<S> <C> <C> <C>
Aura Systems, Inc.(3)(4)..... 7,511,533(5) 94% 75%(5)
Sultan W. Khan(3)(6)......... 220,622 3% 2%
Asif M. Khan(3)(6)........... 220,622 3% 2%
Steven C. Veen(3)............ -- -- --
Michael I. Froch(3).......... -- -- --
Zane R. Alsabery(3)(7)....... 26,974 * *
Gerald S. Papazian(3)........ -- -- --
Alexander Remington(3)....... -- -- --
James M. Curran(3)........... -- -- --
All executive officers and
directors as a group (8
persons).................... 468,218 5.9% 4.7%
</TABLE>
- --------
* Denotes less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options
currently exercisable or exercisable within sixty days of the date of this
Prospectus are deemed outstanding for computing the beneficial ownership
percentage of the person holding such options but are not deemed
outstanding for computing the beneficial ownership percentage of any other
person. See "Management--Stock Incentive Plan." Except as indicated by
footnote, to the knowledge of the Company, the persons named in the table
above have the sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(2) Adjusted to give effect to the sale of 2,000,000 Units offered hereby.
Assumes no exercise of the Warrants, Underwriters' Over-allotment Option,
Representative's Option or any options under the Company's Stock Plan.
(3) c/o NewCom, Inc.; 31166 Via Colinas; Westlake Village, CA 91362
(4) May be deemed to be a parent or promoter of the Company, as those terms
are defined in the Securities Act. Aura has agreed to vote all shares held
by it for a period of forty eight (48) months following the completion of
this Offering for the election to the Company's Board of Directors of two
designees of the Representative reasonably acceptable to the Company. See
"Underwriting."
(5) In the event the Underwriters' Over-allotment Option was exercised in full
by the Representative in the Offering, Aura's resulting Shares
Beneficially Owned and Approximate Percentage Beneficially Owned/After
Offering would be 7,211,533 shares and 72%, respectively. In the event all
of the Warrants issued in the Offering (including those included in the
Underwriters' Over-allotment Option) were exercised and Aura elected to
exercise in full its Redemption Option with respect thereto, Aura's
resulting Shares Beneficially Owned/After Offering and Approximate
Percentage Beneficially Owned would be 5,601,533 shares and 46%,
respectively.
(6) Includes 220,622 shares of Common Stock issued and outstanding and held by
Mr. Khan. Excludes 192,720 shares of Common Stock issuable pursuant to
options, none of which are exercisable within sixty days of June 30, 1997.
(7) Includes 26,974 shares of Common Stock issued and outstanding and held by
Mr. Alsabery. Excludes 35,000 shares of Common Stock issuable pursuant to
options, none of which are exercisable within sixty days of June 30, 1997.
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OWNERSHIP OF AURA STOCK
The principal stockholder of the Company is Aura. The address of Aura is
2335 Alaska Avenue, El Segundo, California 90245. Prior to the completion of
the Offering, Aura will own 7,511,533 shares of Common Stock, representing 94%
of the shares of Common Stock then outstanding. Under Delaware law, Aura is
able, acting alone, to cause to be elected the entire Board of Directors of
the Company and to control the vote on all matters submitted to a vote of the
Company's stockholders, including extraordinary corporate transactions.
Currently, the Company's Board of Directors is comprised entirely of designees
of Aura and three of the Company's eight directors are also directors and/or
officers of Aura. Upon completion of the Offering, Aura will own approximately
75% of the outstanding Common Stock of the Company (approximately 72% if the
Underwriters' Over-allotment Option is exercised in full), and the Company
will expand its Board of Directors to include two additional director
positions.
At June 30, 1997, the beneficial ownership of Aura common stock by the
Company's directors, the Named Executive Officers, and all directors and
executive officers as a group included the following: Sultan W. Khan, Chief
Executive Officer, President and Director, 973 shares; Asif M. Khan, Executive
Vice President and Director, 755 shares; Zane R. Alsabery, Director, 8 shares;
Gerald S. Papazian, Director, 123,282 shares; Steven C. Veen, Chief Financial
Officer and Director, 73,199 shares; Michael I. Froch, Secretary and Director,
15,362 shares; James M. Curran, Director, 0 shares; Alexander Remington,
Director, 34,000 shares; and all directors and executive officers as a group
(8 persons), 232,579 shares. To the Company's knowledge, the persons named in
above have sole voting and investment power with respect to all shares of Aura
common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the footnotes
to this table. None of the individual directors or the Named Executive
Officers beneficially own 1.0% or more of outstanding shares of Aura capital
stock. All of the Company's directors and the Named Executive Officers,
collectively as a group, beneficially own less than 1.0% of such capital
stock.
DESCRIPTION OF SECURITIES
Upon the closing of the Offering, the authorized capital stock of the
Company, after giving effect to the Recapitalization, will consist of
50,000,000 shares of Common Stock, $.001 par value per share and 5,000,000
shares of Preferred Stock, $.001 par value per share.
UNITS
Each of the 2,000,000 Units offered hereby consists of one share of the
Company's Common Stock, $.001 par value per share, and one Common Stock
Purchase Warrant. Upon completion of the Offering, the Common Shares and
Warrants comprising the Units will be immediately detachable and separately
transferable. The assumed Offering Price of $9.00 per Unit is allocated $8.90
to the Common Share and $.10 to the Warrant.
COMMON STOCK
Upon giving effect to the Recapitalization and conversion, there will be
8,000,000 issued and outstanding shares of Common Stock. Immediately prior to
the date of this Prospectus, Aura was the stockholder of record of 7,511,533
shares, or 94% of the Company. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally
available therefor when, as and if declared by the Board of Directors and,
upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to stockholders. All outstanding shares of Common Stock are
validly authorized and issued, fully paid and nonassessable, and all shares to
be sold and issued as contemplated hereby, will be validly authorized and
issued, fully paid and nonassessable. The Board of Directors is authorized to
issue additional shares of Common Stock, not to exceed the amount authorized
by the Company's Certificate of Incorporation, and to issue options and
warrants for the purchase of such shares, on
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such terms and conditions and for such consideration as the Board may deem
appropriate without further stockholder action. The above description
concerning the Common Stock of the Company does not purport to be complete.
Reference is made to the Company's Certificate of Incorporation and bylaws
which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of
stockholders.
Prior to the Offering, there has been no market for the Common Stock of the
Company, and no predictions can be made of the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock of the Company in the public market may adversely affect
prevailing market prices, and may impair the Company's ability to raise
capital at that time through the sale of its equity securities.
Each holder of Common Stock is entitled to one vote per share on all matters
on which such stockholders are entitled to vote. Since the shares of Common
Stock do not have cumulative voting rights, the holders of more than 50% of
the shares voting for the election of directors can elect all the directors if
they choose to do so and, in such event, the holders of the remaining shares
will not be able to elect any person to the Board of Directors. Immediately
following completion of the Offering (assuming no exercise of the
Underwriters' Over-allotment Option), Aura will hold 75% of the outstanding
shares of Common Stock.
PREFERRED STOCK
There are currently no shares of Preferred Stock outstanding. Upon giving
effect to the Certificate Amendment, the Board of Directors has the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock could adversely affect the voting power of the
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation, and could have the effect of
delaying, deferring or preventing a change in the control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
There are currently no warrants issued by the Company outstanding. Upon
consummation of the sale of Units offered hereby, assuming no exercise of the
Underwriters' Over-allotment Option, 2,000,000 Warrants will be issued and
outstanding. The initial offering price of the Warrants is $0.10 per Warrant.
Upon completion of the Offering, the Common Shares and Warrants comprising the
Units will be immediately detachable and separately transferable. See "Risk
Factors."
Each Warrant entitles the holder to purchase one share of Common Stock at
150% of the Offering Price until that date which is five years from the date
of this Prospectus. The Common Stock underlying the Warrants will, upon
exercise of the Warrants, be validly issued, fully paid and nonassessable. The
Warrants are redeemable at the option of the Company for $.05 per Warrant, at
any time after the first anniversary of the date of this Prospectus, or at
such earlier date as may be determined by the Representative, upon 30 days
prior written notice, if the closing price of the Common Stock, as reported by
the principal exchange on which the Common Stock is traded, equals or exceeds
200% of the Offering Price per share, for 20 consecutive trading days during
the 30-day period preceding the date of the notice of redemption and at such
time as there is a current effective registration statement covering the
Common Stock underlying the Warrants. Upon 30 days prior written notice to all
holders of the Warrants, the Company shall have the right to reduce the
exercise price and/or extend the term of the Warrants.
The Company will deliver Warrant certificates to the purchasers of Units
representing one Warrant for each Unit purchased. Thereafter, Warrant
certificates may be exchanged for new certificates of different
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<PAGE>
denominations, and may be exercised or transferred by presenting them at the
offices of the Transfer Agent. Holders of the Warrants may sell the Warrants
if a market exists rather than exercise them, subject to the requirement that
each Warrant may not trade separately from the Common Share to which it is
attached without the consent of the Representative or the Company, as
applicable. However, there can be no assurance that a market will develop or
continue as to the Warrants or the Units. If the Company is unable to qualify
its Common Stock underlying such Warrants for sale in certain states, holders
of the Company's Warrants in those states will have no choice but to either
sell such Warrants (or the Units of which they are a part) or allow such
Warrants to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The Warrants may be exercised in whole or
from time to time in part. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new Warrant certificate will be issued
for the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as
to terminate the Warrants, the Warrants may be exercised immediately prior to
such action. In the event of liquidation, dissolution or winding up of the
Company, holders of the Warrants are not entitled to participate in the
Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity
to profit from a rise in the market price of the Common Stock of the Company.
The exercise of the Warrants will result in the dilution of the then book
value of the Common Stock of the Company held by the public investors and
would result in a dilution of their percentage ownership of the Company. The
terms upon which the Company may obtain additional capital may be adversely
affected through the period that the Warrants remain exercisable. The holders
of these Warrants may be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain equity capital on terms more
favorable than those provided for by the Warrants. See "Risk Factors--Future
Issuances of Stock by the Company Without Stockholder Approval."
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement, the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
Common Stock underlying the Warrants are not registered or qualified for sale
in the state in which a Warrant holder resides, such holder might not be
permitted to exercise the Warrants. See "Risk Factors--Current Prospectus and
State Blue Sky Registration Requirements to Exercise Warrants."
In the event that the Warrants are called for redemption, the Warrant
holders may not be able to exercise their Warrants in the event that the
Company has not updated this Prospectus in accordance with the requirements of
the Act or these securities have not been qualified for sale under the laws of
the state where the Warrant holder resides. See "Risk Factors--Current
Prospectus and State Blue Sky Registration Requirements to Exercise Warrants."
In addition, in the event that the Warrants have been called for redemption,
such call for redemption could require the Warrant holder to either (i)
assuming the necessary updating to the Prospectus and state blue sky
qualifications have been effected, exercise the Warrants and pay the exercise
price at a time when, in the event of a decrease in market price from the
period preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price,
which, in the event of an increase in the price of the stock, could be
substantially less than the market value thereof at the time of redemption.
See "Risk Factors--Warrants Subject to Redemption."
OPTIONS
As of the date hereof, options to purchase an aggregate of 546,690 shares of
Common Stock have been granted and are outstanding. Options to purchase an
aggregate of 453,310 shares of the Company are reserved
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for future issuance under the Stock Plan. See "Management--Stock Incentive
Plan." Shares of Common Stock received upon the exercise of such options are
subject to the provisions of Commission Rule 144.
REPRESENTATIVE'S OPTION
At the closing of this offering, the Company has agreed to sell to the
Representative, for an aggregate purchase price of $200, a warrant (the
"Representative's Option") to purchase up to 200,000 Units (each Unit
consisting of one share of Common Stock and one Warrant, each identical to the
Common Shares and Warrants offered hereby). The Representative's Option will
be exercisable for a period of four years commencing one year after the
Closing Date at 120% of the Offering Price and will contain customary
antidilution provisions. The Representative's Option will be restricted from
sale, assignment, transfer or hypothecation prior to its exercise date except
to officers of the Representative and members of the selling group and
officers and partners thereof.
REGISTRATION RIGHTS
Representative's Option. The Representative's Option to acquire up to
200,000 Units contains certain registration rights under the Securities Act
relating to the shares of Common Stock and Warrants included in the Units
underlying the Representative's Option and the shares of Common Stock issuable
upon exercise of the Warrants included in such Units (collectively, the
"Representative Shares"). Under the terms of the Representative's Option, the
Company is obligated to register all or part of the Representative Shares if
it receives a request to do so by the holders owning or entitled to purchase a
majority of the Representative Shares, provided that the request is made 12
months after the date of this Prospectus. The Representative's Option provides
for one such request, at the Company's expense. The demand registration right
contained in the Representative's Option will expire five years from the date
of this Prospectus. In addition, if the Company proposes to register any of
its securities under the Securities Act for its own account, holders of the
Representative's Option or Representative Shares are entitled to notice of
such registration and the Company is obligated to use all reasonable efforts
to cause the Representative Shares to be included, provided that the
underwriter of any such offering shall have the right to limit the number of
shares included in the registration. The Company is responsible for all
expenses incurred in connection with any such piggyback registration of the
Representative Shares. The piggyback registration rights contained in the
Representative's Option will expire no later than five years from the date of
this Prospectus. The exercise of such registration rights by the
Representative may result in dilution in the interests in the Company of then-
present stockholders, hinder efforts by the Company to arrange future
financings of the Company and/or have an adverse effect on the market price of
the Company's Common Stock and Warrants. See "Underwriting."
Aura Rights Agreement. Pursuant to the Aura Rights Agreement, Aura, or its
permitted transferee, is entitled to certain demand and incidental
registration rights with respect to the shares of Common Stock Aura will hold
upon completion of the Offering (the "Registrable Securities"), subject to
certain customary limitations. One year after the date of this Prospectus,
Aura will be entitled to request that the Company file a registration
statement under the Securities Act covering the resale of some or all of its
Registrable Securities, provided that during the first year following the
commencement of such rights Aura will not be permitted to cause more than
3,000,000 Registrable Securities to be so registered. The Company is required
to bear all costs associated with such registration. In addition, commencing
one year following the date of this Prospectus, whenever the Company proposes
to register any of its securities under the Securities Act, for its own
account or that of any other stockholder, holders of Registrable Securities
are entitled, subject to certain restrictions (including the 3,000,000 shares
limitation during the first year such rights are in effect and customary
underwriters' "cutback" limitations), to include their Registrable Securities
in such registration. Subject to certain limitations, the holders of
Registrable Securities may also require the Company to register such shares on
Form S-3 no more than once every 12 months (commencing on the first
anniversary of the date of this Prospectus), provided that the anticipated
aggregate proceeds would exceed $1.0 million. The Company is required to bear
all registration and selling expenses (other than underwriters' discounts and
commissions and the fees of more than a single special counsel to the selling
Stockholders) in connection with the registration of Registrable Securities in
one demand registration, two piggy-back registrations and all Form S-3
registrations. Registration rights under the Aura Rights Agreement may be
transferred to an assignee or transferee provided that such assignee or
transferee acquires at least 500,000 Registrable Securities held by the
transferring holder.
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These registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding. The
registration rights granted under the Aura Rights Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation and Bylaws. The Company's Amended and Restated
Certificate of Incorporation ("Restated Certificate") and Bylaws require the
Company to indemnify the current and former directors and officers of the
Company, and permit the Company to indemnify any current or former employee or
agent of the Company, to the fullest extent permitted by law. The Restated
Certificate eliminates a director's liability for monetary damages for conduct
as a director, unless the elimination of liability is prohibited by the
Delaware General Corporation Law, such as the breach of a director's duty of
loyalty or acts or omissions which involve intentional misconduct or knowing
violation of law. These provisions do not eliminate a director's duty of care.
Moreover, the provisions do not eliminate or limit a director's liability for
violation of certain laws, including federal securities laws. The Company
believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as directors and officers.
Under the Restated Certificate, the Board of Directors has the power to
authorize the issuance of up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of the Common Stock.
These provisions of the Restated Certificate could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. Such provisions, however, could have
the effect of discouraging others from making tender offers for the Company's
shares and, as a consequence, they also may inhibit fluctuations in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in the management of the Company.
The Restated Certificate provides that the Company's Bylaws may be repealed
or amended only by a two-thirds vote of the Board of Directors or a two-thirds
stockholder vote. Further, the Restated Certificate requires that all
stockholder action be taken at a stockholders' meeting. In addition, those
provisions of the Restated Certificate may only be amended or repealed by the
holders of at least two-thirds of the voting power of all the then-outstanding
shares of stock entitled to vote generally for the election of directors
voting together as a single class. The provisions described above, together
with the ability of the Board of Directors to issue Preferred Stock as
described under "--Preferred Stock," may have the effect of deterring a
hostile takeover or delaying a change in control or management of the Company.
See "Risk Factors--Effect of Anti-takeover Provisions."
Delaware Takeover Statute. The Company is subject to section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation
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outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Restated Certificate provides that any person purchasing or acquiring an
interest in shares of capital stock of the Company is deemed to have consented
to the following provisions relating to intercompany agreements and to
transactions with interested parties and corporate opportunities. The
corporate charter of Aura does not include comparable provisions relating to
intercompany agreements, transactions with interested parties or corporate
opportunities.
Transactions With Interested Parties. The Restated Certificate provides that
no contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) between the Company and Aura or any
Related Entity (as such terms are defined below) or between the Company and
any director or officer of the Company, Aura or any Related Entity shall be
void or voidable solely for the reason that Aura, a Related Entity or any one
or more of the officers or directors of the Company, Aura or any Related
Entity are parties thereto, or solely because of any such directors or
officers are present at, participate in or vote with respect to the
authorization of such contract, agreement, arrangement or transaction (or any
amendment, modification or termination thereof). Further, the Restated
Certificate provides that neither Aura nor any officer or director thereof or
of any Related Entity shall be liable to the Company or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in (or not
opposed to) the best interests of the Company or the derivation of any
improper personal benefit by reason of the fact that Aura or an officer or
director thereof or of such Related Entity in good faith takes any action or
exercises any rights or gives or withholds any consent in connection with any
agreement or contract between Aura or such Related Entity and the Company. No
vote cast or other action taken by any person who is an officer, director or
other representative of Aura or such Related Entity, which vote is cast or
action is taken by such person in his capacity as a director of the Company,
shall constitute an action of or the exercise of a right by or a consent of
Aura, such subsidiary or Related Entity for the purpose of any such agreement
or contract. For purposes of the foregoing, the "Company" and "Aura" include
all corporations and other entities in which the Company or Aura, as the case
may be, owns 50% or more of the outstanding voting stock, and "Related Entity"
means one or more corporations or other entities in which one or more of the
directors of the Company have a direct or indirect financial interest.
Competition by Aura with the Company; Corporate Opportunities. The Restated
Certificate provides that except as Aura may otherwise agree in writing:
(i) neither Aura nor any subsidiary of Aura (other than the Company)
shall have a duty to refrain from engaging directly or indirectly in the
same or similar business activities or lines of business as the Company;
and
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(ii) neither Aura nor any subsidiary (other than the Company), officer or
director thereof will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities or of such
person's participation therein.
The Restated Certificate also provides that if Aura or any subsidiary of
Aura (other than the Company) acquires knowledge of a potential transaction or
matter which may be a corporate opportunity both for Aura or such subsidiary
and for the Company, except as Aura may otherwise agree in writing, neither
Aura nor such subsidiary (nor the officers and directors of either thereof)
shall have a duty to communicate or offer such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach
of fiduciary duty as a stockholder of the Company or controlling person of a
stockholder by reason of the fact that Aura or such subsidiary pursues or
acquires such opportunity for itself, directs such corporate opportunity to
another person, or does not communicate information regarding such corporate
opportunity to the Company.
Further, the Restated Certificate provides that, except as Aura may
otherwise agree in writing, in the event that a director, officer or employee
of the Company who is also a director, officer or employee of Aura acquires
knowledge of a potential transaction or mater that may be a corporate
opportunity both for the Company and Aura (whether such potential transaction
or mater is proposed by a third party or is conceived by such director,
officer or employee of the Company), such director, officer or employee shall
be entitled to offer such corporate opportunity to the Company or Aura as such
director, officer or employee deems appropriate under the circumstances in his
or her sole discretion, and no such director, officer or employee shall be
liable to the Company or its stockholders for breach of any fiduciary duty or
duty of loyalty or failure to act in (or not opposed to) the best interests of
the Company or the derivation of any improper personal benefit by reason of
the fact that (i) such director, officer or employee offered such corporate
opportunity to Aura (rather than the Company) or did not communicate
information regarding such corporate opportunity to the Company or (ii) Aura
pursues or acquires such corporate opportunity for itself or directs such
corporate opportunity to another person or does not communicate information
regarding such corporate opportunity to the Company.
The enforceability of the provisions discussed above under Delaware
corporate law has not been established and, due to the absence of relevant
judicial authority, counsel to the Company is not able to deliver an opinion
as to the enforceability of such provisions. These provisions of the Restated
Certificate eliminate certain rights that might have been available to
stockholders under Delaware law had such provisions not been included in the
Restated Certificate, although the enforceability of such provisions has not
been established.
At the time of the consummation of the Offering, certain of the directors of
the Company will also be employees and/or directors of Aura.
The foregoing provisions of the Restated Certificate shall expire on the
date that Aura ceases to own beneficially Common Stock representing at least
20% of the number of outstanding shares of Common Stock and no person who is a
director or officer of the Company is also a director or officer of Aura or
its subsidiaries.
Actions Under Intercompany Agreements. The Company's Restated Certificate
will also limit the liability of Aura and its subsidiaries for certain
breaches of their fiduciary duties in connection with action that may be taken
or not taken in good faith under the intercompany agreements. See
"Relationship with Aura and Certain Transactions."
Advance Notice Provision. The Company's Amended and Restated Bylaws provide
for an advance notice procedure for the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors
as well as for other stockholder proposals to be considered at annual meetings
of stockholders. In general, notice of intent to nominate a director or raise
matters at such meetings will have to be received by the Company not less than
120 or more than 150 days prior to the first anniversary of the Company's
proxy statement in connection with the previous year's annual meeting, and
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
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Limitations on Directors' Liability. The Restated Certificate and the
applicable provisions of the DGCL provide that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions will be to eliminate the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
The existence of these terms and restrictions described above do not limit,
impair or waive any rights conferred by or under the federal securities laws.
NASDAQ NATIONAL MARKET LISTING
The Company has applied for inclusion of its Common Stock and Warrants for
quotation on the Nasdaq National Market under the symbols "NWCM" and "NWCMW,"
respectively. This offering is the initial public offering of the Company's
Securities and, accordingly, there is currently no public trading market for
any such Securities. Even if the Company's Common Stock and Warrants are
accepted for quotation on Nasdaq National Market, there can be no assurance
that a public trading market will ever develop or, if one develops, that it
will be maintained. Although it has no legal obligation to do so, the
Representative from time to time may act as a market maker and otherwise
effect transactions for its own account, or for the account of others, in the
Company's Securities. The Representative, if it so participates, may be a
dominating influence in any market that may develop for any of the Company's
Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Warrant Agent
for the Warrants is Interwest Transfer Company, Inc., Salt Lake City, Utah.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Common Stock and Warrants annual
reports containing audited financial statements. The Company may issue other
unaudited interim reports to its securityholders as it deems appropriate.
Contemporaneously with the Offering, the Company shall register its Common
Stock with the Commission, under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, the Company will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no public market for the Common Stock
or Warrants of the Company, and no predictions can be made regarding the
effect, if any, that market sales of the Securities or the availability of
Securities for sale will have on the market price prevailing from time to
time. As described below, only a limited number of shares of Common Stock will
be available for sale shortly after the Offering due to certain contractual
and legal restrictions on resale. Nevertheless, sales of substantial amounts
of Common Stock of the Company in the public market after the restrictions
lapse could adversely affect the prevailing market price.
Upon completion of the Offering, the Company will have outstanding
10,000,000 shares of Common Stock, out of a total of 50,000,000 shares of
Common Stock authorized, not including up to (i) 2,000,000 shares of Common
Stock issuable upon exercise of the Warrants, (ii) 200,000 shares of Common
Stock issuable upon exercise of the Representative's Option,
(iii) 200,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Representative's Option, (iv) 300,000 shares of Common Stock
issuable upon exercise
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of the Warrants included in the Underwriters' Over-allotment Option, and (v)
1,000,000 shares of Common Stock reserved for issuance under the Company's
Stock Plan. Of the 10,000,000 shares of Common Stock outstanding, the
2,000,000 shares of Common Stock being sold hereby will be freely tradable
without restriction or registration under the Securities Act, except for any
shares purchased by an affiliate of the Company (in general, a person who has
a control relationship with the Company), which shares will be subject to the
resale limitations of Rule 144 under the Securities Act. All remaining shares
were issued and sold by the Company in private transactions ("Restricted
Shares") and, upon the expiration of the Lock-up Period described below, will
be eligible for public sale if registered under the Securities Act or sold in
accordance with Rule 144 or Rule 701 thereunder.
In general, under Rule 144 as in effect commencing April 29, 1997, beginning
ninety days after the date of this Prospectus, an affiliate of the Company, or
a holder of Restricted Shares who owns beneficially shares that were not
acquired from the Company or an affiliate of the Company within the previous
one year, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 100,000 shares immediately after the Offering,
assuming no exercise of the Underwriters' Over-allotment Option) or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the ninety days immediately
preceding the sale and who owns beneficially Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above, provided that at least two years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company. The foregoing is a summary of Rule 144 and is not intended to be a
complete description of it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the closing
of the Offering, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before the Offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning ninety days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold
by persons other than affiliates subject only to the manner of sale provisions
of Rule 144 and by affiliates under Rule 144 without compliance with its two
year minimum holding period requirements.
Aura, which upon completion of the Offering will hold an aggregate of
7,511,533 shares of Common Stock, and the Company's directors and executive
officers have agreed pursuant to certain agreements that they will not sell
any Common Stock owned by them or issuable upon the exercise of options
previously granted or reserved for grant, without the prior written consent of
the Representative for a period of one year from the date of this Prospectus
(the "Lockup Period"). The Representative may in its discretion and without
notice to the public waive these lock-up agreements and permit Aura and other
holders otherwise agreeing to lock-up their shares to sell any or all of their
shares, the effect of which could be a substantial decline in the trading
price of the Company's Common Stock or Warrants. Following the expiration of
the Lockup Period, approximately 8,109,338 shares of Common Stock, including
109,338 shares issuable upon the exercise of certain options that are
exercisable on or before such expiration, will be available for sale in the
public market subject to compliance with Rule 144 or Rule 701. See
"Underwriting."
In addition, shares of Common Stock held by Aura are subject to the
Redemption Option Agreement and the Aura Rights Agreement.
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UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Joseph Charles & Associates, Inc. is
acting as representative (the "Representative"), have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters named below, the aggregate number of Units set forth opposite
there respective names in the table below at the price to the public less
underwriting discounts set forth on the cover page of this Prospectus. The
Units are being sold on a firm commitment basis. The Underwriting Agreement
provides, however, that the obligations of the Underwriters to pay for and
accept delivery of the Units are subject to certain conditions precedent, and
that the Underwriters are committed to purchase and pay for all Units if any
Units are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
------------ ---------
<S> <C>
Joseph Charles & Associates, Inc..................................
---------
Total........................................................... 2,000,000
=========
</TABLE>
The Representative has informed the Company that the Underwriters do not
expect to sell any Units to any account over which they have discretionary
authority.
The Representative has advised the Company that the Underwriters propose to
offer the Units directly to the public at the initial public offering prices
set forth on the cover page of this Prospectus, and to selected dealers at
that price, less a concession of not more than $0. per Unit. The
Underwriters may allow a discount of not more than $0. per Unit on sales to
certain other dealers. After the initial public offering, the price to the
public of the Units, Common Shares and Warrants and the other terms may be
changed.
The Company and Aura have granted the Representative an option, exercisable
during the 45-day period following the date of this Prospectus, to purchase up
to 300,000 additional Units at the Offering Price less the underwriting
discounts and commissions. The Common Shares included in such additional Units
will be offered by Aura and the Warrants included in such additional Units
will be offered by the Company. The Representative may exercise such option
only for the purpose of covering any overallotments in the sale of the Units
offered hereby.
The Company has agreed to pay the Representative a nonaccountable expense
allowance of 2.5% of the gross proceeds from the sale of Units, or $450,000
(based upon an assumed Offering Price of $9.00 per Unit), against which
$40,000 has heretofore been paid. In addition to the Underwriter's discount
and the non-accountable expense allowance, the Company is required to pay the
costs of qualifying the Securities under federal and state securities laws,
together with legal and accounting fees, printing, road show and other costs
in connection with the Offering.
The Company has agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospects for a fee
of $3,000 per month payable on a monthly basis. The financial consulting
services to be provided by the Representative include assisting in the
development of a long-term financial strategy and working with financial
analysts.
The Company has agreed for forty-eight (48) months following the completion
of the Offering to nominate and use its best efforts to cause the election of
two designees of the Representative reasonably acceptable to the Company to
its Board of Directors and Aura has agreed to vote all shares of the Company's
Common Stock owned by it for said nominees. To date, the Representative has
not designated such nominees but has advised the Company that it plans to do
so shortly following completion of the Offering.
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The Company has agreed with the Representative not to solicit Warrant
exercises other than through the Representative. Upon exercise of any
Warrants, the Company will pay the Representative a fee of 3% of the aggregate
exercise price, if (i) the market price of the Company Common Shares on the
date the Warrant is exercised is greater than the then exercise price of the
Warrant; (ii) the exercise of the Warrant was solicited by a member of the
National Association of Securities Dealers, Inc. who is so designated in
writing by the holder exercising the Warrant; (iii) the Warrant is not held in
a discretionary account except where prior specific written approval for the
exercise has been received; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrant; (v) the solicitation of the exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Exchange Act; and (vi) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the date of this Prospectus or on
Warrants voluntarily exercised at any time without solicitation. In addition,
unless granted an exemption by the Commission from Rule 10b-6 under the
Exchange Act, the Representative will be prohibited from engaging in any
market making activities or solicited brokerage activities until the later of
the termination of such solicitations activity or the termination by waiver or
otherwise of any right the Representative may have to receive a fee for the
exercise of the Warrants following such solicitation. Such a prohibition,
while in effect, could impair the liquidity and market price of the
Securities.
Except in connection with acquisitions or the exercise of the Warrants, the
Representative's Option or options to purchase up to 1,000,000 Common Shares
that may be reserved or granted under the Company's Stock Plan, the Company
has agreed, for a period of one year from the closing of the Offering, that it
will not issue, sell or purchase any Common Shares, warrants or options or
other equity securities of the Company without the prior written consent of
the Representative. In addition, the officers, directors and principal
stockholders of the Company have agreed that they will not offer, sell or
otherwise dispose of any Common Shares, Warrants or other equity securities of
the Company owned by them to the public for a period of at least one year from
the effective date of the Offering, without the prior written consent of the
Representative. The Representative may in its discretion and without notice to
the public waive these lock-up agreements and permit Aura and other holders
otherwise agreeing to lock-up their shares to sell any or all of their shares,
the effect of which could be a substantial decline in the trading price of the
Company's Common Stock or Warrants.
At the closing of the Offering, the Company will sell and deliver to the
Representative, for an aggregate purchase price of $200, the Representative's
Option to purchase 200,000 Units at a price that is equal to 120% of the
Offering Price. The Warrants underlying the Representative's Option will have
an exercise price and other terms identical to the Warrants being offered to
the public pursuant to this Prospectus. The Representative's Option will be
exercisable during the four-year period commencing one year after the date of
this Prospectus. The Representative's Option will be restricted from sale,
assignment, transfer or hypothecation prior to its exercise date except to
officers of the Representative and members of the selling group and officers
and partners thereof. The Representative's Option will also contain
antidilution provisions for stock splits, stock dividends, recombinations and
reorganizations, a one-time demand registration provision (at the Company's
expense) and piggyback registration rights (which registration rights will
expire five years from the date of this Prospectus) and will otherwise be in
form and substance satisfactory to the Representative.
Prior to the Offering, there has been no public market for the Common Shares
or Warrants and there can be no assurance that a market will develop or be
sustained following the Offering. The Offering Price and the exercise price of
the Warrants will be determined by negotiations between the Representative and
the Company. Among the factors considered in determining the Offering Price
and the exercise price of the Warrants will be the prospects for the Company,
an assessment of the industries in which the Company operates, the assessment
of management, the number of Units offered, the price that purchasers of Units
might be expected to pay given the nature of the Company and the general
condition of the securities markets at the time of the offering. Accordingly,
the Offering Price set forth on the cover page of this Prospectus should not
necessarily be considered an indication of the actual value of the Company or
the Units, Common Shares or Warrants.
68
<PAGE>
Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Shares and Warrants at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchases, for the purpose of
pegging, fixing or maintaining the price of the Common Shares or Warrants. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Representatives to reclaim a selling concession
from a syndicate member in connection with the offering when Common Shares or
Warrants sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq Stock Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Securities offered
hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP,
Menlo Park, California. Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California, has acted as counsel to the
Underwriters with respect to certain legal matters in connection with the
Offering.
EXPERTS
The financial statements of NewCom, Inc. at February 28, 1995, February 29,
1996 and February 28, 1997, for the nine-month period ended February 28, 1995,
and for each of the two years in the period ended February 28, 1997, included
in this Prospectus have been audited by Pannell Kerr Forster, Certified Public
Accountants, a Professional Corporation, Los Angeles, California, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus regarding the contents of
any contract or other document are not necessarily complete; with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. A copy of the Registration Statement, including
the exhibits and schedules thereto, may be inspected without charge at the
principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material may be obtained from such office upon
payment of the fees prescribed by the Commission.
69
<PAGE>
GLOSSARY OF TERMS
16550 UART Universal Asynchronous Receiver Transmitter. Buffer
memory that allows for high fax and modem speeds by
holding data until the computer has time to process it.
ADSL Asymmetric Digital Subscriber Line; a fast new modem
technology.
bps Bits per second--the speed at which data and fax are
transmitted. One Kbps is equal to 1,000 bits per second
and one Mbps is equal to 1,000,000 bits per second.
Bus Direct The direct link to a computer's motherboard.
cable modems Modems that hook up to cable systems once used
exclusively for TV.
CCITT Comite Consultatif International Telegraphique et
Telephonique, the international standards body now known
as ITU.
CD Compact Disc.
CD-ROM Compact Disk-Read Only Memory; CD drive technology that
allows data to be read but not written.
CD-RW Compact Disc ReWriteable; CD drive technology that allows
users to record and rerecord information onto a compact
disc. Sometimes referred to as having read-many write-
many capabilities.
CDR Compact Disc Recordable; CD drive technology that allows
data to be read and written; current technology usually
permits data to be read many times but written only once.
computer Using computers to perform telephone functions.
telephony
data fax modem Computer product used for transmission of computer data
and fax data over telephone lines.
DOS Disc operating system, generally refers to Microsoft DOS
or to other Microsoft compliant systems.
DSP Digital Signal Processing; a hardware device whose
functions can change with software modifications
DSVD Digital Simultaneous Voice and Data; allows both voice
and computer data to be simultaneously transmitted over a
single standard phone line.
DVC Desktop Videoconferencing
DVD-ROM Digital Video Disk-Read Only Memory; new standard in CD
technology that is faster and holds many times more data
than CD-ROM; allows data to be read but not written.
error correction Technology which allows for error free transmission over
less than error free phone lines.
full duplex Allows both parties to talk at the same time and be
speakerphone heard.
IDE Integrated Drive Electronics; standard computer interface
for CD-ROM and other drives.
Internet A global open network of thousands of interconnected
computer networks and millions of commuter connections
that allow individuals, businesses and other
organizations to communicate worldwide.
Internet content A phrase that encompasses all of the written, audio and
video information available on the Internet.
Internet page A location of information on the World Wide Web.
Internet phone Uses the Internet modem connection to exchange voice
packets of data, i.e., voice conversations.
ISA
Industry Standard Architecture; standard Windows/DOS PC
bus interface slot.
ISDN
Integrated Services Digital Network; phone line
connection that is digital rather then the standard
analog; allows for much higher data transmission speeds.
ITU
International Telecommunication Union
70
<PAGE>
Just-in-Time NewCom's purchasing strategy, whereby components and
supplies are purchased just before they are needed in the
manufacturing process.
MNP 5 Microcom Networking Protocol level 5--A data compression
method sometimes used in modems. Produces a compression
ratio of approximately 2 to 1 and is often used as a
fallback to the higher compression V.42bis.
Modem Modulator/Demodulator--An electronic device that converts
binary data to analog tones and voltages that are
suitable for transmissions over standard telephone lines.
MPEG One of the more popular video compression standards that
permits a large amount of video data to be stored or
transmitted in a compressed amount of space.
multimedia Currently in its basic form, a PC multimedia system is
defined as any system with a CD-ROM drive and high
quality sound capability.
NTSC National Television System Committee--The method used to
transmit television signals in North America and Japan.
PAL Phase-Alternational Line--The broadcast color television
standard used in Western Europe and Australia.
POTS Plain Old Telephone Service; standard home or office
analog telephone service.
RISC Reduced Instruction-Set Computer--A central processing
unit technology that is designed to provide faster and
lower-cost processing than the CISC (Complex Instruction-
Set Computing) technology used in most personal
computers.
RJ11 Standard single line or two line telephone modular jack.
S-Video Super-Video--A higher resolution VHS (Video Home System)
video cassette recorder format.
SCSI Small Computer System Interface; A standard computer
system interface that is used on the Apple Macintosh and
has growing usage on Windows/DOS PCs.
sound card A hardware card that hooks up to the bus of a PC and
which outputs sound signals to speakers.
UART Universal Asynchronous Receiver Transmitter.
SVGA Super Video Graphics Array; a video adapter standard.
V.34, V.34+ Error correction standards which allow for high speed
transmission.
V.42 A standard for error detection and error correction
(through retransmission) often implemented in modems.
V.42bis A data compression method sometimes used in modems.
Produces a compression ratio of approximately 4 to 1.
V.42bis/MNP 5 Data compression standard which can increase the
throughput of data transmission by compressing the amount
of data that must be sent.
VAR Value Added Reseller.
VGA Video Graphics Array; a video adapter standard.
video Telephone conferencing in which each party see a video
conferencing transmission of the other party.
Web browsing A phrase used to describe the process of looking for
information on the Internet World Wide Web.
Windows/DOS PC A PC that uses Microsoft's operating system. Also known
as IBM PC clones.
WWW World Wide Web; linked computer around the world.
71
<PAGE>
NEWCOM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholder's Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NewCom, Inc.
Westlake Village, California
We have audited the accompanying balance sheets of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the related
statements of operations, statements of stockholder's equity (deficit) and
cash flows for each of the two years in the period ended February 28, 1997,
and for the nine months ended February 28, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the results of
its operations and its cash flows for each of the two years in the period
ended February 28, 1997, and for the nine months ended February 28, 1995, in
conformity with generally accepted accounting principles.
Los Angeles, California
June 11, 1997
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
F-2
<PAGE>
NEWCOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MAY 31, 1997
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, ------------------------
1995 1996 1997 ACTUAL PRO FORMA
------------ ------------ ------------ ----------- -----------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash
equivalents.......... $ 335,706 $ 2,102,183 $ 2,813,631 $ -- $ --
Accounts receivable,
net.................. 1,023,029 18,734,671 29,974,924 32,844,092 32,844,092
Inventories........... 272,761 3,578,767 11,495,503 15,480,804 15,480,804
Deposits on inventory
purchase............. -- -- -- 3,580,000 3,580,000
Other current assets.. 200 55,617 45,069 571,124 571,124
---------- ----------- ----------- ----------- -----------
Total current
assets.............. 1,631,696 24,471,238 44,329,127 52,476,020 52,476,020
---------- ----------- ----------- ----------- -----------
Property and equipment,
at cost................ 186,262 410,901 2,532,278 2,590,657 2,590,657
Less accumulated
depreciation........... (21,553) (56,989) (260,908) (281,758) (281,758)
---------- ----------- ----------- ----------- -----------
Net property and
equipment........... 164,709 353,912 2,271,370 2,308,899 2,308,899
---------- ----------- ----------- ----------- -----------
Engineering designs and
drawings, net of
accumulated
amortization of $72,256
(1995), $216,768 (1996)
and $361,280 (1997).... 650,303 505,791 361,279 325,151 325,151
Other assets............ 55,285 17,405 473,395 162,024 162,024
---------- ----------- ----------- ----------- -----------
Total assets............ $2,501,993 $25,348,346 $47,435,171 $55,272,094 $55,272,094
---------- ----------- ----------- ----------- -----------
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT):
Current liabilities
Accounts payable...... $ 603,900 $ 7,202,642 $13,354,178 15,066,921 15,066,921
Accrued expenses...... 38,956 126,312 174,740 103,026 103,026
Line of credit........ -- 2,397,657 8,883,656 5,740,236 5,740,236
---------- ----------- ----------- ----------- -----------
Total current
liabilities......... 642,856 9,726,611 22,412,574 20,910,183 20,910,183
---------- ----------- ----------- ----------- -----------
Due to Aura............. 1,238,354 20,186,283 17,249,874 25,522,706 21,522,706
---------- ----------- ----------- ----------- -----------
Commitments and
contingencies
Stockholder's equity
(deficit)
Common Stock, par
value $.001 per
share, authorized
50,000,000 shares,
issued and
outstanding 7,555,556
shares (note 17); pro
forma shares issued
and outstanding
8,000,000 (note 2)... 7,556 7,556 7,556 7,556 8,000
Additional paid-in
capital.............. 993,444 993,444 9,993,444 9,993,444 13,993,000
Accumulated deficit... (380,217) (5,565,548) (2,228,277) (1,161,795) (1,161,795)
---------- ----------- ----------- ----------- -----------
620,783 (4,564,548) 7,772,723 8,839,205 12,839,205
---------- ----------- ----------- ----------- -----------
Total liabilities and
stockholder's equity
(deficit).............. $2,501,993 $25,348,346 $47,435,171 $55,272,094 $55,272,094
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
NEWCOM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
NINE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED YEAR ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $7,465,720 $16,081,392
Less discounts given.... 24,923 128,400 89,117 24,337 30,678
Less returns and
allowances............. -- 1,986,758 22,399,974 -- 621,037
---------- ----------- ----------- ---------- -----------
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Cost of goods sold...... 2,059,545 30,131,245 33,619,084 4,854,512 10,397,883
---------- ----------- ----------- ---------- -----------
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
---------- ----------- ----------- ---------- -----------
Expenses
Research and
development.......... 4,201 -- 7,708 -- 6,870
Selling, general and
administrative
expenses............. 423,619 4,972,064 11,840,951 1,631,698 2,728,857
---------- ----------- ----------- ---------- -----------
Total expenses...... 427,820 4,972,064 11,848,659 1,631,698 2,735,727
---------- ----------- ----------- ---------- -----------
Income (loss) from
operations............. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Other (income) and
expenses
Miscellaneous income.. (3,710) (23,289) (122,690) (7,410) (17,150)
Interest expense...... -- 1,302,740 1,516,366 240,171 535,735
---------- ----------- ----------- ---------- -----------
Income (loss) before
taxes.................. (380,217) (5,185,331) 3,770,271 722,412 1,777,482
Provision for income
taxes.................. -- -- 433,000 108,000 711,000
---------- ----------- ----------- ---------- -----------
Net income (loss)....... $ (380,217) $(5,185,331) $ 3,337,271 $ 614,412 $ 1,066,482
---------- ----------- ----------- ---------- -----------
Net income (loss) per
common share........... $ (.05) $ (.69) $ .44 $ .08 $ .14
---------- ----------- ----------- ---------- -----------
Weighted average number
of common shares (note
2)..................... 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
NEWCOM, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
NINE MONTHS ENDED FEBRUARY 28, 1995 AND THE
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997
AND THE UNAUDITED THREE-MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNTS CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Stock issued for cash,
July 1, 1994........... 1,000 $ 5 $ 995 $ -- $ 1,000
Assets contributed by
stockholder
(note 1)............... -- -- 1,000,000 -- 1,000,000
Effect of 7,555.556 for
1 stock split (note
17).................... 7,554,556 7,551 (7,551) -- --
Net loss................ -- -- -- (380,217) (380,217)
--------- ------ ---------- ----------- ----------
Balance at February 28,
1995................... 7,555,556 7,556 993,444 (380,217) 620,783
Net loss................ -- -- -- (5,185,331) (5,185,331)
--------- ------ ---------- ----------- ----------
Balance at February 29,
1996................... 7,555,556 7,556 993,444 (5,565,548) (4,564,548)
Capital contribution by
stockholder (note 4)... -- -- 9,000,000 -- 9,000,000
Net income.............. -- -- -- 3,337,271 3,337,271
--------- ------ ---------- ----------- ----------
Balance at February 28,
1997................... 7,555,556 7,556 9,993,444 (2,228,277) 7,772,723
Net income (unaudited).. -- -- -- 1,066,482 1,066,482
--------- ------ ---------- ----------- ----------
Balance at May 31, 1997
(unaudited)............ 7,555,556 $7,556 $9,993,444 $(1,161,795) $8,839,205
========= ====== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
NEWCOM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss)...... $ (380,217) $ (5,185,331) $ 3,337,271 $ 722,412 $ 1,066,482
----------- ------------ ------------ ----------- -----------
Adjustments to
reconcile net income
(loss) to net cash
used by operating
activities
Depreciation and
amortization......... 93,809 195,020 348,420 56,978 56,978
Changes in operating
assets and
liabilities
Accounts receivable... (1,023,029) (17,711,642) (11,240,253) (579,711) (2,869,168)
Inventories........... (56,464) (3,306,006) (7,916,736) 361,063 (4,045,301)
Deposits on inventory
purchase............. -- -- -- -- (3,580,000)
Other current assets.. (200) (55,417) 10,548 (2,000) (526,055)
Other assets.......... (55,285) 22,808 (455,990) 8,572 371,371
Accounts payable...... 603,900 6,598,742 6,151,536 (4,061,923) 1,712,743
Accrued expenses...... 38,956 87,356 48,428 82,716 (71,714)
----------- ------------ ------------ ----------- -----------
Total adjustments.... (398,313) (14,169,139) (13,054,047) (4,134,305) (8,951,146)
----------- ------------ ------------ ----------- -----------
Net cash used by
operating
activities.......... (778,530) (19,354,470) (9,716,776) (3,411,893) (7,884,664)
----------- ------------ ------------ ----------- -----------
Cash flows used by
investing activities...
Additions to property
and equipment......... (125,118) (224,639) (2,121,366) (28,505) (58,379)
----------- ------------ ------------ ----------- -----------
Cash flows from
financing activities...
Net proceeds (payments)
from borrowings....... -- 2,397,657 6,485,999 1,016,758 (3,143,420)
Proceeds from issuance
of common stock....... 1,000 -- -- -- --
Cash advances from
Aura.................. 1,581,034 22,237,586 14,832,091 4,057,322 16,200,832
Cash repayments to
Aura.................. (342,680) (3,289,657) (8,768,500) (1,900,000) (7,928,000)
----------- ------------ ------------ ----------- -----------
Net cash provided by
financing
activities.......... 1,239,354 21,345,586 12,549,590 3,174,080 5,129,412
----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 335,706 1,766,477 711,448 (266,318) (2,813,631)
Cash and cash
equivalents at
beginning of period.... -- 335,706 2,102,183 2,102,183 2,813,631
----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ 335,706 $ 2,102,183 $ 2,813,631 $ 1,835,865 $ --
=========== ============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1--BUSINESS AND ORGANIZATION OF COMPANY
NewCom, Inc. (the "Company") specializes in the manufacturing and selling of
high performance computer communication and multimedia products for the IBM
compatible and Apple Macintosh personal computer markets. The Company offers a
line of products including, among others, internal and external data fax
modems, speaker phones, sound cards, and multimedia kits.
The Company was incorporated in June 1994 and commenced operations in early
September 1994. Prior to commencing its operations, the Company had no assets
other than cash of $1,000 from the sale of its stock to Aura Systems, Inc.
("Aura") and other founders.
Concurrent with the commencement of the Company's operations, Aura
contributed to the Company certain assets, valued at $1,000,000, purchased
from the bankruptcy proceeding of Nuvo Corporation of America ("Nuvo"). The
contributed assets consisted of inventory valued at $216,297 and property and
equipment valued at $61,144. The remaining purchase price paid by Aura was
attributed to engineering designs and drawings in the amount of $722,559.
Aura acquired the assets in September 1994 in exchange for 133,333 shares of
its common stock valued at $1,000,000. Previous to Aura's acquisition, Nuvo
had filed for bankruptcy in April 1994, and had ceased operations shortly
thereafter.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company recognizes revenue for product sales upon shipment. The Company
provides for estimated returns and allowances based upon experience (see note
3).
The Company also earns a portion of its revenues from license fees, and
generally records these fees as income when the Company has fulfilled its
obligations under the particular agreement.
Cash equivalents
The Company considers all highly liquid assets, having an original maturity
of less than three months, to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Stock options
The Company intends to account for stock-based compensation under the
provisions of APB Opinion No. 25. Additional pro forma disclosures as to net
income and earnings per share, as if the fair value-based method of accounting
defined by SFAS No. 123 was applied, will be disclosed in the reporting period
of grant.
Per share information
The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the year (see note 17).
F-7
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Research and development
Research and development costs are expensed as incurred.
Advertising costs
Advertising costs are expensed as incurred. Advertising charged to expense
in Fiscal 1995, 1996 and 1997 approximated $19,000, $1,523,000 and $3,990,000,
respectively.
Property and equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Machinery and equipment........ 3-10 years
Furniture and fixtures......... 5-10 years
Leasehold improvements......... Life of lease
</TABLE>
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1,712,184, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead. The Company
expects recovery of these costs from orders.
Depreciation expense of machinery and equipment, furniture and fixtures and
leasehold improvements was $21,553, $50,508 and $203,919, for Fiscal 1995,
1996 and 1997, respectively.
Engineering designs and drawings
Engineering designs and drawings represents the fair value of intangible
assets contributed by Aura in September 1994 (see note 1), and is being
amortized over 5 years on a straight-line basis.
The carrying value of these intangible assets is based on management's
current assessment of recoverability. Management evaluates recoverability
using both objective and subjective factors. Objective factors include
management's best estimates of projected future earnings and cash flows and
analysis of recent sales and earnings trends. Subjective factors include
competitive analysis and the Company's strategic focus.
Unaudited pro forma balance sheet
The unaudited pro forma balance sheet at May 31, 1997 gives effect to the
conversion of advances from Aura of $4,000,000 into 444,444 shares of the
Company's common stock upon the closing of the Company's initial public
offering, assuming an offering price per Unit of $9.00. The unaudited pro
forma balance sheet does not give effect to the offering itself.
Unaudited Note to Financial Statements
Management Opinion
In the opinion of Company management, the accompanying unaudited financial
statements as of May 31, 1997 and for the three months ended May 31, 1996 and
1997, reflect all adjustments (which include only normal
F-8
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
recurring adjustments) and reclassification for comparability necessary to
present fairly the financial position and results of operations.
NOTE 3--PRODUCT RETURN RISKS
The Company is exposed to the risk of product returns from its retailer mass
merchant and distributor customers as a result of several factors, including
returns from their customers, contractual stock rotation privileges, returns
of defective products or product components. In addition, the Company
generally accepts returns of unsold product from customers with whom the
Company has severed its customer relationship. Overstocking by the Company's
customers could lead to higher than normal returns, which could have a
material adverse effect on the Company's results of operations. The Company
also has a policy of offering price protection to its customers for some or
all of their inventory, whereby when the Company reduces its prices for a
product, the customer receives a credit for the difference between the
original purchase price of the product and the Company's reduced price for the
product. As a result of this policy, significant reductions in prices have
had, and may in the future have, a material adverse effect on the Company's
results of operations. The financial statements include adequate provisions to
reserve for future product returns.
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 6.0% of gross revenues) in Fiscal
1996. The disproportionately large increase in returns in Fiscal 1997 was
partially due to a problem encountered in the middle of the year with a chip
used in the Company's DSVD modems that was manufactured for the Company by
Phylon Communications, Inc. ("Phylon"). Due to a defect in the chip's software
design which the Company believes was caused by Phylon, the chip vendor was
unable to satisfy the Company's specifications for DSVD performance. As a
result, the Company agreed to accept its customers' return of the modems,
which it thereafter repackaged and resold as a non-DSVD modem product. Since
the modem was so repackaged and sold at a profit, the Company did not seek
further satisfaction from Phylon. The Company has discontinued using Phylon as
a chip vendor. To reduce the likelihood of a similar problem occurring in the
future, the Company has instituted a program of additional beta testing,
sometimes in conjunction with its larger mass merchant customers. Aggregate
returns relating to the defective chips were approximately $10.1 million, or
44.9% of total returns in Fiscal 1997. Also, in Fiscal 1997 the Company's
efforts to upgrade the quality and average size of its customer base and its
resulting cessation of business with several smaller customers resulted in a
higher than normal incidence of product returns from such customers. Aggregate
returns in Fiscal 1997 from customers with which the Company discontinued
business (which may have included returns due to the aforementioned defective
chips) were approximately $10.2 million, or 45.5% of total returns in Fiscal
1997. While the Company believes that returns associated with the
aforementioned chip defect should not be material in future periods, it is
expected that returns will continue from smaller customers disenfranchised as
a result of the Company's upgrading of its customer base, possibly at
significant levels. Returns and allowances for Fiscal 1997 related primarily
to returns associated with the NewCom 33,600 ifx, efx and ifx-m fax modems,
NewCom 8X drive kit and multimedia kits and NewCom 4X drive kit and multimedia
kits. Returns and allowances for Fiscal 1996 related primarily to returns
associated with NewCom 2X drive kit and multimedia kits introduced and
discontinued in Fiscal 1996, NewCom 4X drive kit and multimedia kits, NewCom
14,400 ifx, efx and efx-m fax modems and the Company's discontinued 28,800
ifx, efx and efx-m fax modems.
NOTE 4--RELATED PARTY TRANSACTIONS
During Fiscal years 1995, 1996 and 1997, Aura loaned funds to the Company as
needed. The balances outstanding were $1,238,354, $20,186,283 and $17,249,874
at February 28, 1995, February 29, 1996 and
F-9
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 4--RELATED PARTY TRANSACTIONS--(CONTINUED)
February 28, 1997, respectively. The balance outstanding at the end of each
period was considered long-term debt. Effective March 1, 1996, Aura
contributed $9,000,000 of the balance outstanding at February 29, 1996 to the
Company as additional paid-in capital. Intercompany interest expense, included
in the outstanding balance at Fiscal 1996 and 1997, was $1,202,236 and
$1,147,621, respectively, and was computed at approximately 9% and 8%,
respectively. The interest rates used were determined by Aura with reference
to its estimated cost of borrowed funds. No interest was charged to the
Company on intercompany indebtedness during Fiscal 1995. Fiscal 1995
transactions with Aura that resulted in the balance due to Aura at February
28, 1995 consisted of cash advances of $1,501,034 and an $80,000 charge for
certain support services described below. Repayments during the period totaled
$342,680. The average outstanding balance due Aura during Fiscal 1995 was
approxixmately $625,000.
In Fiscal 1997, the Company purchased speaker components from Aura, for use
in multimedia kit products in the amount of $543,719.
The Company currently subleases from Aura its facilities in Westlake
Village, California. In Fiscal 1997, the Company made lease payments of
$191,013 under the sublease, which payments were made, with Aura's consent,
directly to the landlord, and property taxes payments of $7,956.
Aura provided certain support services to the Company including financial,
legal, tax, audit, benefits administration and personal property insurance.
These charges are allocated by Aura to the Company based on various formulas
that, in management's opinion, reasonably approximate the actual costs
incurred. The expenses recorded by the Company for these allocations were
$80,000, $120,000 and $120,000 for Fiscal 1995, 1996 and 1997, respectively,
and are included in selling, general and administrative expenses in the
accompanying statements of operations. The amounts allocated by Aura are not
necessarily indicative of the actual costs which may have been incurred had
the Company operated as an unaffiliated entity. However, the Company believes
that the allocation is a reasonable approximation of the Company's operations
on a "stand-alone" basis and is in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 55.
The Company intends to continue using the support services of Aura on an
interim basis at rates negotiated in accordance with a service agreement to be
entered into between the Company and Aura.
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Trade debtors........... $1,053,029 $19,791,671 $31,824,924 $34,684,092
Less allowance for
doubtful accounts...... (30,000) (1,057,000) (1,850,000) (1,840,000)
---------- ----------- ----------- -----------
$1,023,029 $18,734,671 $29,974,924 $32,844,092
========== =========== =========== ===========
</TABLE>
Bad debt expense was approximately $30,000, $1,057,000 and $812,000 in
Fiscal 1995, 1996 and 1997, respectively.
F-10
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5--ACCOUNTS RECEIVABLE--(CONTINUED)
Accounts receivable due from major customers were as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1997
----------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ------- ----------- -------
<S> <C> <C> <C>
$ 5,115,804 27.3% $ 4,444,058 14.8%
1,464,300 7.8 3,653,000 12.2
1,406,981 7.5 3,041,096 10.1
1,332,020 7.1 2,742,085 9.2
1,317,333 7.0 1,646,762 5.5
---------------- ---- ----------- ----
$10,636,438 56.7% $15,527,001 51.8%
================ ==== =========== ====
</TABLE>
The above accounts receivable are due from well established mass-market
retailers and distributors. Accordingly, management believes that
recoverability of these receivables does not represent a substantial credit
risk.
NOTE 6--INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Raw materials............. $187,761 $2,053,152 $ 5,882,390 $ 7,172,005
Finished goods............ 85,000 1,525,615 5,613,113 8,308,799
-------- ---------- ----------- -----------
$272,761 $3,578,767 $11,495,503 $15,480,804
======== ========== =========== ===========
</TABLE>
At February 29, 1996, February 28, 1997 and May 31, 1997, raw material
inventory is presented net of a $70,000, $355,000 and $355,000, respectively,
reserve for potential product obsolescence.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment, at cost is comprised as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Machinery and
equipment............. $125,118 $311,010 $2,382,646 $2,438,435
Furniture and
fixtures.............. 61,144 62,296 112,037 114,627
Leasehold
improvements.......... -- 37,595 37,595 37,595
-------- -------- ---------- ----------
$186,262 $410,901 $2,532,278 $2,590,657
======== ======== ========== ==========
</TABLE>
NOTE 8--ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Accrued payroll and
related expenses......... $38,956 $114,808 $166,650 $90,776
Other..................... -- 11,504 8,090 12,250
------- -------- -------- --------
$38,956 $126,312 $174,740 $103,026
======= ======== ======== ========
</TABLE>
F-11
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 9--LINE OF CREDIT
In Fiscal 1996 and 1997, the Company had available a line of credit with a
commercial lending institution that permitted borrowings of up to the lesser
of $9.0 million or 80% of eligible accounts receivable, as defined in the
financing agreement with the lender. The line of credit had an interest rate
equal to the institution's prime rate plus 1/2%. The interest rate was 9.5% at
each of February 29, 1996 and February 28, 1997. The line of credit was
collateralized by accounts receivable and required the Company to maintain
certain financial ratios. The Company used this facility for funding its
operations during Fiscal 1996 and 1997. At February 29, 1996 and February 28,
1997, the outstanding balance under this line of credit was $2.4 million and
$8.8 million, respectively with a maximum of $2.5 million and $9.0 million,
respectively. In May 1997, the Company replaced this line with another line of
credit with another lending institution that permits borrowings of up to the
lesser of $7.0 million or 60% of eligible accounts receivable, plus up to $2.0
million of inventory flooring. Eligible accounts receivable consist of all
receivables except those greater than 90 days past due; receivables where more
than 50% of the account balance is greater than 90 days past due; accounts
originated under non-standard terms and/or which allow for payment to be made
more than 30 days from date of sale; receivables from customers who are also
vendors; receivables from non-domestic customers; accounts for which the
obligor is an officer, director, shareholder, parent, employee, subsidiary or
affiliate of the Company; accounts for which payment is or may be conditional;
accounts for which the obligor is not a commercial or institutional entity or
not a resident of the United States or Canada; accounts evidenced by judgments
or promissory notes; accounts which represent goods purchased for personal
purposes; accounts which represent goods used for demonstration purposes;
accounts which are progress payment, barter or contra accounts; or any other
account which the lender deems to be ineligible.
This new line of credit has an interest rate equal to the institution's
prime rate plus 1.25%. The interest rate was 9.75% at June 30, 1997. The new
line of credit is secured by substantially all of the operating assets of the
Company. In addition, the Company agreed to issue in favor of the lender
irrevocable letters of credit equal to $750,000. The stated interest rate on
the new financing agreement is higher by 0.75% than the former arrangement.
However, the former arrangement provided for additional lender's fees which in
the aggregate resulted in a substantially higher cost of funds overall.
Pursuant to the terms of the new line of credit, the Company must adhere to
the following financial covenants: (i) combined tangible net worth and
subordinated debt of not less than $10 million; (ii) a ratio of debt (not
including subordinated debt), to tangible net worth and subordinated debt of
not more than three to one; (iii) a ratio of current tangible assets to
current liabilities of not less than one and one-half to one; and (iv) net
income (before taxes and after extraordinary items and adjustments) of
$100,000 for each fiscal quarter beginning September 1, 1996 or, in the event
the Company fails to achieve net income of $100,000 in any fiscal quarter, a
net income of $100,000 for that portion of the Company's fiscal year that runs
through the end of such fiscal quarter. The Company believes it is currently
in compliance with the aforementioned financial covenants. At June 30, 1997,
the outstanding balance under the new line of credit was approximately $3.6
million.
NOTE 10--INCOME TAXES
Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the
liability method of accounting for income taxes. The objective of accounting
for income taxes is to recognize the amount of current and deferred taxes
payable (or refundable) at the date of financial statements (a) as a result of
all events that have been recognized in the financial statements and (b) as
measured by the provisions of enacted tax laws. Income taxes currently payable
are based on the taxable income for the year. A deferred tax liability or
asset is calculated for tax consequences estimated to occur in future years.
F-12
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 10--INCOME TAXES--(CONTINUED)
The Company's taxable income is included in the consolidated federal income
tax return filed by Aura. For financial reporting purposes the Company's
income tax expense or benefit is computed on a separate entity basis, with the
resulting current income taxes payable or receivable and related deferred
income taxes settled through the intercompany accounts. During Fiscal 1997,
the Company utilized its net operating losses carryforwards of $4,281,000
(Federal) and $3,154,000 (state) to reduce its tax liability to Aura. At
February 28, 1997, the Company had no remaining net operating loss
carryforwards for Federal and state income tax purposes.
The provision differs from the expense that would result from applying
federal statutory rates to income before taxes because of the inclusion of a
provision for state income taxes.
Temporary differences arise primarily from differences in timing in the
deduction of bad debts, inventory reserves, state income taxes, capitalization
of certain costs in inventory for tax purposes and the use of the straight-
line method of depreciation for financial reporting purposes and accelerated
methods of depreciation for tax purposes.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- --------
<S> <C> <C> <C>
Federal................................................ $ -- $ -- $270,000
State.................................................. -- -- 163,000
----- ----- --------
$ -- $ -- $433,000
===== ===== ========
</TABLE>
The following is a summary of the company's deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- ---------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities
resulting from taxable
temporary differences.. $ -- $ -- $ -- $ -- $ -- $(30,000)
Deferred tax assets
resulting from
deductible temporary
differences and loss
carryforwards.......... 12,000 121,000 451,000 1,771,000 882,000 96,000
Valuation allowance..... (12,000) (121,000) (451,000) (1,771,000) (882,000) (66,000)
-------- --------- --------- ----------- --------- --------
$ -- $ -- $ -- $ -- $ -- $ --
======== ========= ========= =========== ========= ========
</TABLE>
NOTE 11--LEASES
The Company subleases office facilities and equipment under operating leases
that expire through Fiscal 2000. Other costs, such as property taxes,
insurance and maintenance, are also paid by the Company. Rental expense
charged to operations was $22,568, $147,635 and $191,013 in Fiscal 1995, 1996
and 1997, respectively.
At February 28, 1997, minimum rentals under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1998................................ $193,228
1999................................ 199,025
2000................................ 204,996
--------
$597,249
========
</TABLE>
F-13
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 12--SIGNIFICANT CUSTOMERS
Sales to significant customers were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1997 MAY 31, 1997
---------------- ---------------
<S> <C> <C> <C> <C>
Circuit City.............................. $ 8,913,474 12.2% $2,295,505 14.3%
Best Buy.................................. 7,393,515 10.1 3,748,524 23.3
Fry's Electronics......................... 3,685,009 5.0 650,001 4.0
----------- ---- ---------- ----
$19,991,998 27.3% $6,694,030 41.6%
=========== ==== ========== ====
</TABLE>
NOTE 13--COMMITMENTS
The Company has a firm fixed price commitment to purchase a certain number
of units of the "WebPal set-top-box" at a total cost of $8,250,000. The price
is fixed and not subject to change. After reaching a threshold purchase of a
certain number of units, the Company and seller have agreed to reevaluate and
renegotiate the pricing and scheduling of an additional number of units
specified in this purchase agreement. The stated purchase price for all units
included in the agreement total $16,500,000. During the first quarter of
Fiscal 1998, deposits of $3,580,000 were paid to the seller to be applied
against the initial purchases under the agreement.
NOTE 14--CONCENTRATIONS OF RISK
The Company's financial instruments potentially subject to concentrations of
credit risk consist primarily of cash, cash equivalents, accounts receivable,
accounts payable and other debt. The carrying value of these financial
instruments approximate their fair value at February 28, 1997.
The Company maintains cash balances at a local financial institution.
Accounts at the institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At February 28, 1997, the Company's uninsured cash
balances total $2,850,000.
The Company produces its products using components or subassemblies
purchased from third-party manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit chipsets which provide multimedia functionality, are available only
from a single source or limited sources. These components are generally in
short supply and frequently subject to allocation by semiconductor
manufacturers.
The Company performs credit checks and evaluates the credit worthiness of
any potential new customers prior to granting credit. UCC financing statements
are filed, when deemed necessary.
NOTE 15--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
NOTE 16--SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Noncash investing and financing activities:
During September 1994, Aura contributed assets to the Company in the amount
of $1,000,000 (see note 1).
F-14
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
Effective March 1, 1996, Aura contributed $9,000,000 to additional paid-in
capital, which was reflected in "Due to Aura" at February 29, 1996 (see note
4).
Cash paid for income taxes was $800, $800 and $800 for Fiscal 1995, 1996 and
1997, respectively. Cash paid for interest was $0, $100,504 and $310,204 for
Fiscal 1995, 1996 and 1997, respectively.
NOTE 17--SUBSEQUENT EVENTS
The Company is currently in the process of an initial public offering (the
"Offering") of its common stock.
In connection with the Offering, the Company intends to effect a 7,555.556-
for-1 Common stock split, change the Common Stock par value from $.005 to
$.001 per share, and change the authorized shares of Common Stock from 100,000
to 50,000,000. In addition, 5,000,000 shares of Preferred Stock, par value
$.001 per share, will be authorized prior to the Offering. The accompanying
financial statements give retroactive effect to the stock split and the par
value change as though effected at the beginning of the initial period
presented.
Upon the closing of the Offering, advances from Aura, totaling $4,000,000,
will be converted into 444,444 shares of the Company's common stock, assuming
an offering price of $9.00 per Unit.
Aura and the Company have entered into certain intercompany agreements,
including (i) a tax sharing agreement pursuant to which, for the period prior
to the date on which Aura owns less than 80% of the Company's outstanding
Common Stock (the Deconsolidation Date), Aura will have sole authority to
respond to and conduct all tax proceedings (including tax audits) relating to
the Company, to file federal, state and local returns on behalf of the Company
and to calculate the amount of the Company's tax liability, any tax liability
owed by the Company to Aura for the period from June 1, 1997 through the
Deconsolidation Date will be recorded by the Company as an additional capital
contribution by Aura effective as of the Deconsolidation Date, (ii) a
noncompetition agreement, (iii) an agreement pursuant to which Aura will
continue to provide various corporate services to the Company on an interim
basis following the effective date of the initial public offering ("IPO") that
may be material to the conduct of the Company's business, (iv) a redemption
agreement pursuant to which Aura will have the option to require the Company
to apply up to 70% of the net proceeds the Company receives from the exercise
of the Warrants to redeem shares of Common Stock held by Aura at the Warrant
exercise price, and (v) a registration rights agreement, pursuant to which
Aura can require the Company to register, at the Company's expense, all of the
Common Stock held by Aura, with 3.0 million shares subject to such rights
commencing one year from the date of the IPO and the balance of such shares
registrable one year thereafter. Because the Company is currently a majority-
owned subsidiary of Aura, none of the intercompany agreements resulted from
arm's-length negotiations. These agreements may include terms and conditions
that may be more or less favorable to the Company than terms contained in
similar agreements negotiated with third parties.
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share.
Options granted to the Company's directors, the Named Executive Officers, and
all directors and executive officers as a group included the following: Sultan
W. Khan, CEO, President and Director, 192,720 shares; Asif M. Khan, Executive
Vice President and Director, 192,720 shares; Zane Alsabery, Director, 35,000
shares; and all directors and executive officers as a group, 420,440 shares. A
total of 453,310 shares of Common Stock are available for future issuance
under the Company's stock plan. Pursuant to an underwriting agreement, the
Company has agreed that, for a period of one year following the date of the
Prospectus, the Company will not grant any additional options under the
Company's stock plan at an exercise price less than the initial public
offering price of the Common Shares, without the Underwriters' prior consent
which may be withheld in its sole discretion.
F-15
<PAGE>
[PHOTO OF PRODUCT] 33,600 BPS
EXTERNAL DATA/FAX MODEM
[PHOTO OF PRODUCT] WEBPAL INTERNET APPLIANCE
[PHOTO OF PRODUCT] 24X
MULTIMEDIA UPGRADE KIT
[PHOTO OF PRODUCT] NC100
SPEAKERS
[PHOTO OF PRODUCT] 56,000 BPS INTERNAL
DATA/FAX MODEM
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 22
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
Management............................................................... 48
Relationship with Aura and Certain Transactions.......................... 53
Principal Stockholders................................................... 57
Description of Securities................................................ 58
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 69
Experts.................................................................. 69
Additional Information................................................... 69
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK
PURCHASE WARRANT
NEWCOM, INC.
---------------
PROSPECTUS
---------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee.......................................... $ 19,001
National Association of Securities Dealers, Inc. filing fee... 6,770
Nasdaq filing fee............................................. 28,000
Printing and engraving expenses............................... 200,000
Registrar and Transfer Agent fees............................. 10,000
Accounting fees and expenses.................................. 100,000
Legal fees and expenses....................................... 165,000
Blue Sky fees and expenses.................................... 30,000
Representative's Nonaccountable Expense Allowance............. 517,500
Miscellaneous................................................. 13,729
----------
Total....................................................... $1,090,000
==========
</TABLE>
- --------
* All expenses listed above are estimates except the SEC registration fee and
the National Association of Securities Dealers, Inc. filing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation (Exhibit 3(i)(2) hereto) and the Registrant's
Bylaws (Exhibit 3(ii) hereto) provide for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors that will
require the Registrant, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors
to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Representatives of the Registrant, its directors and officers, and by the
Registrant of the Representatives, for certain liabilities, including
liabilities arising under the Act, and affords certain rights of contribution
with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The share and per share numbers presented below have been adjusted to
reflect the 7,555.556-for-1.0 split of the Registrant's Common Stock that will
occur prior to the consummation of the offering being made hereby.
(a) In June 1994, the Registrant issued 7,067,089 shares of its Common Stock
to Aura Systems, Inc., for an aggregate consideration of $935.35. The
Registrant relied on the exemption provided by Section 4(2) of the Act.
(b) In September 1994, the Registrant issued 488,467 shares of its Common
Stock to four of its employees for an aggregate consideration of $64.65. The
Registrant relied on the exemption provided by Section 4(2) of the Act.
II-1
<PAGE>
(c) On June 1, 1997, the Registrant granted options to acquire 520,440
shares of its Common Stock to five employees under its Stock Plan. The
exercise price per share was $8.00, for an aggregate consideration of $4.2
million. The Registrant relied on the exemption provided by Rule 701 under the
Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates and warrants issued in such transactions. All recipients had
adequate access, through employment or other relationships, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3(i).1* Certificate of Incorporation.
3(i).2* Form of Amended and Restated Certificate of Incorporation to be filed prior
to the effective date of this Registration Statement.
3(ii)* Bylaws of the Registrant, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Form of Redeemable Common Stock Purchase Warrant.
4.3* Form of Representative's Warrant.
5.1** Opinion of Pillsbury Madison & Sutro LLP.
10.1 Lease Assignment Agreement Between NewCom, Inc. and Aura Systems, Inc.
10.2* Corporate Services Agreement Between NewCom, Inc. and Aura Systems, Inc.
10.3* Tax Sharing Agreement between NewCom, Inc. and Aura Systems, Inc.
10.4* Noncompetition Agreement between NewCom, Inc. and Aura Systems, Inc.
10.5* Form of Redemption Option Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.6* 1997 Stock Incentive Plan and Forms of Agreements thereunder.
10.7 Registration Rights Agreement between NewCom, Inc. and Aura Systems, Inc.
10.8 Form of Indemnification Agreement.
10.9* Form of Promissory Note of NewCom, Inc. issuable to Aura Systems, Inc.
10.10* Form of Warrant Agreement between NewCom, Inc. and Interwest Transfer
Company, Inc.
10.11* Common Stock Purchase Agreement dated September 1, 1994 between NewCom, Inc.
and Aura Systems, Inc.
10.12* Form of Employee Stock Purchase Agreement between NewCom, Inc. and each of
Sultan Khan, Asif Khan, Zane Alsabery, and Geoffrey Farrer.
10.13(a)* Business Financing Agreement dated as of December 23, 1996 between Deutsche
Financial Services Corporation ("Deutsche") and NewCom, Inc.
10.13(b) Agreement for Wholesale Financing dated as of April 16, 1997 between
Deutsche and NewCom, Inc.
10.14* Form of Financial Consulting Agreement.
10.15 Form of Distributor Purchase Agreement.
10.16 Form of Authorized Independently Contracted Sales Agent Agreement.
11.1 Statement of computation of earnings per share.
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A
Professional Corporation
23.2** Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts (and accompanying Independent
Auditors' Report)
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(4) The Registrant will remove from registration by means of a post-
effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Westlake Village, State of California, on this 8th day of September,
1997.
Newcom, Inc.
/s/ Sultan W. Khan
By __________________________________
Sultan W. Khan
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Sultan W. Khan President and Chief September 8, 1997
- ------------------------------------- Executive Officer
SULTAN W. KHAN (Principal
Executive Officer)
and Director
* Asif M. Khan Executive Vice September 8, 1997
- ------------------------------------- President and
ASIF M. KHAN Director
* Steven C. Veen Vice President, September 8, 1997
- ------------------------------------- Finance and Chief
STEVEN C. VEEN Financial Officer
(Principal
Financial and
Accounting Officer)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Michael I. Froch Secretary and September 8, 1997
- ------------------------------------- Director
MICHAEL I. FROCH
* Zane R. Alsabery Director September 8, 1997
- -------------------------------------
ZANE R. ALSABERY
* James M. Curran Director September 8, 1997
- -------------------------------------
JAMES M. CURRAN
* Gerald S. Papazian Director September 8, 1997
- -------------------------------------
GERALD S. PAPAZIAN
* Alexander Remington Director September 8, 1997
- -------------------------------------
ALEXANDER REMINGTON
/s/ Sultan W. Khan
*By:
- -------------------------------------
Sultan W. Khan,
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE II
NEWCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTHS ENDED FEBRUARY 28, 1995, AND YEARS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997, AND THREE MONTHS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ----------- ---------- ------------ ----------
<S> <C> <C> <C> <C> <C>
Allowances are deducted
from the assets to
which they apply
Nine months ended
February 28, 1995:
Allowance for:
Uncollectible
Accounts............. $ -- $ 30,000 $-- $ -- $ 30,000
========== =========== ==== ============ ==========
Year ended February 29,
1996:
Allowance for:
Reserve for potential
product
obsolescence......... $ -- $ 70,000 $-- $ -- $ 70,000
Uncollectible
accounts............. 30,000 1,057,000 -- (152,000) 935,000
Reserve for returns
and discounts........ -- 2,115,000 -- (1,993,000) 122,000
---------- ----------- ---- ------------ ----------
$ 30,000 $ 3,242,000 $-- $ (2,145,000) $1,127,000
========== =========== ==== ============ ==========
Year ended February 28,
1997:
Allowance for:
Reserve for potential
product
obsolescence......... $ 70,000 $ 285,000 $-- $ -- $ 355,000
Uncollectible
accounts............. 935,000 812,000 -- (824,000) 923,000
Reserve for returns
and discounts........ 122,000 22,489,000 -- (21,684,000) 927,000
---------- ----------- ---- ------------ ----------
$1,127,000 $23,586,000 $-- $(22,508,000) $2,205,000
========== =========== ==== ============ ==========
Three months ended May
31, 1997:
Allowance for:
Reserve for potential
product
obsolescence......... $ 355,000 -- -- -- 355,000
Uncollectible
accounts............. 923,000 61,000 -- (66,000) 918,000
Reserve for returns
and discounts........ 927,000 652,000 -- (657,000) 922,000
---------- ----------- ---- ------------ ----------
$2,205,000 $ 713,000 $-- $ (723,000) $2,195,000
========== =========== ==== ============ ==========
</TABLE>
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Our audits were made for the purpose of forming an opinion on the basic
financial statements as of February 28, 1997, February 29, 1996 and February
28, 1995 and for the two years ended February 28, 1997 and the nine months
ended February 28, 1995 taken as a whole. The schedule listed in the
accompanying Index at Item 16 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California
June 11, 1997
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Form of Underwriting Agreement
3(i).1* Certificate of Incorporation.
3(i).2* Form of Amended and Restated Certificate of Incorporation to be filed prior
to the effective date of this Registration Statement.
3(ii)* Bylaws of the Registrant, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Form of Redeemable Common Stock Purchase Warrant.
4.3* Form of Representative's Warrant.
5.1** Opinion of Pillsbury Madison & Sutro LLP.
10.1 Lease Assignment Agreement Between NewCom, Inc. and Aura Systems, Inc.
10.2* Corporate Services Agreement Between NewCom, Inc. and Aura Systems, Inc.
10.3* Tax Sharing Agreement between NewCom, Inc. and Aura Systems, Inc.
10.4* Noncompetition Agreement between NewCom, Inc. and Aura Systems, Inc.
10.5* Form of Redemption Option Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.6* 1997 Stock Incentive Plan and Forms of Agreements thereunder.
10.7 Registration Rights Agreement between NewCom, Inc. and Aura Systems, Inc.
10.8 Form of Indemnification Agreement.
10.9* Form of Promissory Note of NewCom, Inc. issuable to Aura Systems, Inc.
10.10* Form of Warrant Agreement between NewCom, Inc. and Interwest Transfer
Company, Inc.
10.11* Common Stock Purchase Agreement dated September 1, 1994 between NewCom, Inc.
and Aura Systems, Inc.
10.12* Form of Employee Stock Purchase Agreement between NewCom, Inc. and each of
Sultan Khan, Asif Khan, Zane Alsabery, and Geoffrey Farrer.
10.13(a)* Business Financing Agreement dated as of December 23, 1996 between Deutsche
Financial Services Corporation ("Deutsche") and NewCom, Inc.
10.13(b) Agreement for Wholesale Financing dated as of April 16, 1997 between
Deutsche and NewCom, Inc.
10.14* Form of Financial Consulting Agreement.
10.15 Form of Distributor Purchase Agreement.
10.16 Form of Authorized Independently Contracted Sales Agent Agreement.
11.1 Statement of computation of earnings per share.
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A
Professional Corporation
23.2** Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
**To be filed by amendment.
<PAGE>
EXHIBIT 1.1
NEWCOM, INC.
31166 Via Colinas
Westlake Village, CA 91362
UNDERWRITING AGREEMENT
----------------------
____________, 1997
Joseph Charles & Associates, Inc.
As Representative of the Several Underwriters
Named in Schedule I hereto
9701 Wilshire Boulevard, Ninth Floor
Beverly Hills, CA 90212
Ladies and Gentlemen:
NEWCOM, INC., a Delaware corporation (the "Company"), proposes to issue and
sell to the Underwriters named in Schedule I hereto (the "Underwriters")
pursuant to this Underwriting Agreement (the "Agreement"), an aggregate of
2,000,000 Units, each Unit consisting of one (1) share of Common Stock, $.001
par value per share (the "Shares"), and one (1) Redeemable Common Stock Purchase
Warrant (the "Warrants"), each exercisable to purchase one (1) share of Common
Stock at any time commencing on the effective date of the Registration Statement
(the "Effective Date") and ending on the fifth anniversary of the Effective
Date. The Warrant exercise price, subject to adjustment described below, will be
$_______ (150% of the initial public offering price of the Units). The Warrants
are subject to redemption at $.05 per Warrant on thirty (30) days' prior written
notice (i) if the closing bid price of the Common Stock as reported on NASDAQ
exceeds 200% of the initial public offering price of the Units for a period of
twenty (20) consecutive trading days ending within thirty (30) days of the
notice of redemption, or (ii) with your prior written consent. The Shares and
the Warrants will be separately transferable immediately upon issuance. In
addition, the Company and Aura Systems, Inc. ("Aura") propose to grant to the
Underwriters the option referred to in Section 2(b) to purchase all or any part
of an aggregate of 300,000 additional Units. The shares of Common Stock
included in such additional Units will be offered by Aura and the Warrants
included in such additional Units will be offered by the Company. Unless the
context otherwise indicates, the term "Units" shall include the additional Units
referred to above.
The aggregate of 2,000,000 Units, together with all or any part of the
300,000 Units which the Underwriters have the option to purchase, and the Shares
and the Warrants comprising such Units, are herein called the "Units". The
Common Stock of the Company to be outstanding after giving effect to the sale of
the Shares is herein called the "Common Stock." The Units, and the Shares and
Warrants included in the Units (including the 300,000
1
<PAGE>
Units which the Underwriters have the option to purchase) are herein
collectively called the "Securities."
You have advised the Company and Aura that you desire to purchase the
Units, and that you have been authorized to execute this Agreement as
representative of the Underwriters (the "Representative"). The Company and Aura
confirm the agreements made by it with respect to the purchase of the Units by
you, as follows:
1. Representations and Warranties.
------------------------------
A. Representations and Warranties of the Company and Aura.
------------------------------------------------------
Each of the Company and Aura represents and warrants to, and agrees
with, each Underwriter that:
(a) A registration statement (File No. 333-31431) on Form S-1 relating
to the public offering of the Units, including a preliminary form of prospectus,
copies of which have heretofore been delivered to you, has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act") and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission under the Act. "Preliminary Prospectus" shall
mean each prospectus filed pursuant to Rule 430 of the Rules and Regulations.
The registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective and the final prospectus included
therein are respectively referred to as the "Registration Statement" and the
"Prospectus", except that (i) if the prospectus first filed by the Company
pursuant to Rule 424(b) or Rule 430A of the Rules and Regulations or otherwise
utilized and not required to be so filed shall differ from said prospectus as
then amended, the term "Prospectus" shall mean the prospectus first filed
pursuant to Rule 424(b) or Rule 430A or so utilized from and after the date on
which it shall have been filed or utilized, and (ii) if such registration
statement or prospectus is amended or such prospectus is supplemented, after the
effective date of such registration statement and prior to the Option Closing
Date (as defined in Section 2(b)), the term "Registration Statement" shall
include such registration statement as so amended, and the term "Prospectus"
shall include the prospectus as so amended or supplemented, or both, as the case
may be.
(b) At the time the Registration Statement becomes effective and at
all times subsequent thereto up to the Option Closing Date (hereinafter
defined), (i) the Registration Statement and Prospectus will in all material
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the
2
<PAGE>
circumstances under which they were made; provided, however, that neither the
Company nor Aura make representations, warranties or agreements as to
information contained in or omitted from the Registration Statement or
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by you or on behalf of any Underwriter through you
specifically for use in the preparation thereof. It is understood that the
statements set forth in the Prospectus with respect to stabilization, the
material set forth under the heading "Underwriting" and the identity of counsel
to the Underwriters under the heading "Legal Matters" constitute the only
information furnished in writing by you, or by any Underwriter through you, for
inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify is not reasonably likely to materially adversely affect the Company's
business, properties or financial condition.
(d) The authorized capital stock of the Company as of the Effective
Date was as set forth under "Capitalization" in the Prospectus. The shares of
issued and outstanding capital stock of the Company set forth thereunder have
been duly authorized, validly issued and are fully paid and non-assessable;
except as set forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or agreements or other
rights to convert any obligation into, any shares of capital stock of the
Company have been granted or entered into by the Company. The Units, Shares,
Warrants and Representative's Warrant (as that term is defined in Section 12
herein, the "Representative's Warrant") conform in all material respects to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and Shares are duly authorized and, when issued,
delivered and paid for pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The certificates evidencing the Shares are
in valid and proper legal form. The Warrants and the Representative's Warrant
will be exercisable for shares of Common Stock of the Company in accordance with
the terms of the Warrants and the Representative's Warrant and at the prices
therein provided for. The shares of Common Stock have been duly authorized and
reserved for issuance upon such exercise, and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and the Representative's
Warrant and when the price is paid,
3
<PAGE>
shall be fully paid and non-assessable. Neither the filing of the Registration
Statement nor the offering or sale of the Units or any of the Securities as
contemplated in this Agreement gives rise to any rights, other than those which
have been waived or satisfied, for or relating to the registration of any
securities of the Company, except as described in the Registration Statement.
(f) This Agreement, the Warrant Agreement and the Representative's
Warrant have been duly and validly authorized, executed and delivered by the
Company and Aura, as applicable, and assuming due execution by the other party
or parties hereto and thereto, constitute valid and binding obligations of the
Company enforceable against the Company and Aura, as applicable, in accordance
with their respective terms, except as rights to indemnity and contribution
hereunder may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally or by general equitable principles. Each of the Company and
Aura has full power and lawful authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities or the Representative's Warrant, except such as may be required under
the Act or state securities laws.
(g) Except as described in the Prospectus, neither the Company nor
Aura is in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement, the Warrant Agreement and the Representative's Warrant will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which either the
Company or Aura is a party or by which either the Company or Aura may be bound
or to which any of the property or assets of the Company or Aura are subject,
which would have a material adverse effect on the business, properties or
financial condition of the Company or Aura, nor will such action result in any
violation of the provisions of any statute or any order, rule or regulation
applicable to the Company or Aura of any court or of any regulatory authority or
other governmental body having jurisdiction over the Company or Aura, which
would have a material adverse effect on the business, properties or financial
condition of the Company or Aura or of the certificate of incorporation or the
by-laws of the Company or Aura, as amended.
(h) The Company owns no real property and, subject to the
qualifications stated in the Prospectus, the Company has good and marketable
title to all properties and assets described in
4
<PAGE>
the Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are not materially significant or
important in relation to its business; all of the leases and subleases under
which the Company is the lessor or sublessor of properties or assets or under
which the Company holds properties or assets as lessee or sublessee as described
in the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any respect with respect to any of
the terms or provisions of any of such leases or subleases which would have a
material adverse effect on the business, properties or financial condition of
the Company, and no claim has been asserted by anyone adverse to rights of the
Company as lessor, sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the Company
to continued possession of the leased or subleased premises or assets under any
such lease or sublease except as described or referred to in the Prospectus,
which would have a material adverse effect on the business properties or
financial condition of the Company; and the Company owns or leases all such
properties described in the Prospectus as are necessary to its operations as now
conducted and, except as otherwise stated in the Prospectus, as proposed to be
conducted as set forth in the Prospectus.
(i) Pannell Kerr Forster, who have given their report on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are with respect
to the Company independent public accountants as required by the Act and the
Rules and Regulations.
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in financial
position of the Company on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, the Company has not incurred
any liabilities or obligations, direct or contingent, not in the ordinary course
of business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of long-term debt by,
the Company or any issuance of options, warrants or other rights to purchase the
capital stock of the Company or any adverse change or any development involving,
so far as the Company can now reasonably foresee, a prospective adverse change
in the condition (financial
5
<PAGE>
or other), net worth, results of operations, business, key personnel or
properties of it which would be material to the business or financial condition
of the Company, and the Company has not become party to, and neither the
business nor the property of the Company has become the subject of, any material
litigation whether or not in the ordinary course of business.
(l) Except as set forth in the Prospectus, there is not now pending
nor, to the knowledge of the Company, threatened, any action, suit or proceeding
(including those related to environmental matters or discrimination on the basis
of age, sex, religion or race) to which the Company is a party before or by any
court or governmental agency or body, which, if adversely determined, would
result in any material adverse change in the condition (financial or other),
business prospects, net worth or properties of the Company; and, except as set
forth in the Prospectus, no labor disputes involving the employees of the
Company exist which, if adversely determined, would result in any material
adverse change in the condition (financial or otherwise), business prospects,
net worth or property of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company
which has not been adequately reserved for on the Company's balance sheet.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its business
or the ownership of its property as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, mark registrations,
copyrights and licenses necessary for the conduct of such business and has not
received any notice of conflict with the asserted rights of others in respect
thereof. None of the activities or business of the Company is in violation of,
or causes the Company to violate, any law, rule, regulation or order of the
United States, any state, county or locality, or of any agency or locality, the
violation of which would have a material adverse effect upon the condition
(financial or otherwise), business prospects, net worth or properties of the
Company.
(o) The Company has not, directly or indirectly, at any time (i) made
any contributions to any candidate for foreign political office, or if made,
failed to disclose fully any such contribution made in violation of law, or (ii)
made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments or contributions required or allowed by applicable law. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to
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comply in all material respects with the Foreign Corrupt Practices Act of 1977,
as amended.
(p) On the Closing Dates (as defined in Section 2(c)), all transfer or
other taxes (including franchise, capital stock or other tax, other than income
taxes imposed by any jurisdiction), if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriters hereunder
will have been fully paid or provided for by the Company or Aura, as applicable,
and all laws imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which are, under
the Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) Neither the Company nor Aura has taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Units, Shares or Warrants or
to facilitate the sale or resale of the Securities.
(s) The Company has no subsidiaries.
(t) Except for this Agreement and other agreements with the
Representative, neither the Company nor Aura has entered into any agreement
pursuant to which any person is entitled either directly or indirectly to
compensation from the Company for services as a finder in connection with the
proposed public offering.
(u) The Shares of Common Stock and Warrants have been approved by
listing on the Nasdaq National Market.
(v) Except for such rights which have been waived or satisfied, no
holder of securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration Statement or
otherwise in connection with the sale of the Units contemplated hereby.
(w) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(x) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its respective business and (iii) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such
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<PAGE>
noncompliance, failure to receive required permits, licenses or other approvals
or failure to comply with the terms and conditions of such permits, licenses or
approvals will not in the aggregate have a material adverse effect on the
Company.
(y) Each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), that
is maintained, administered or contributed to by the Company for employees or
former employees of the Company has been maintained in compliance with its
respective terms and the requirements of any applicable statutes, orders, rules
and regulations, including but not limited to ERISA and the Internal Revenue
Code of 1986, as amended (the "Code"). No prohibited transaction, within the
meaning of Section 406 of ERISA or Section 4975 of the Code, has occurred with
respect to any such plan, excluding transactions effected pursuant to a
statutory or administrative exemption. For each such plan that is subject to
the funding rules of Section 412 of the Code or Section 302 of ERISA, no
"accumulated funding deficiency", as defined in Section 412 of the Code, has
been incurred, whether or not waived, and the fair market value of the assets of
each such plan (excluding for these purposes accrued but unpaid contributions)
exceeded the present value of all benefits accrued under such plan determined
using reasonable actuarial assumptions.
(z) The Company maintains a system of internal accounting controls
that, taken as a whole, are sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company maintains its own cash management
system and none of the proceeds of this Offering payable to the Company shall in
any way be controlled or subject to direction by Aura or co-mingled with any
account or monies directly or indirectly controlled by Aura.
(aa) The Company maintains insurance of the types and in the amounts
generally deemed adequate for its respective business, including, without
limitation, insurance covering real and personal property owned or leased by it
against theft, damage, destruction, acts of vandalism and all other material
risks customarily insured against, all of which insurance is in full force and
effect. The Company has no reason to believe that it will not be able to renew
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
respective business.
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<PAGE>
(bb) The Company's by-laws have been amended so that for a period of
forty-eight (48) months from the First Closing Date there shall be two (2)
vacancies on the Company's Board of Directors reserved for those two nominees of
the Representative referenced in Section 3(t) herein.
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<PAGE>
B. Representations and Warranties of Aura.
--------------------------------------
(a) Aura is the lawful owner of the shares of Common Stock to be sold
by it pursuant to this Agreement and has, and on the Option Closing Date will
have, good and clear title to such Shares, free of all restrictions on transfer,
liens, encumbrances, security interests and claims whatsoever.
(b) Upon delivery of and payment for such shares of Common Stock
pursuant to this Agreement, good and clear title to such shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(c) Aura has, and on the Option Closing Date will have, full legal
right, power and authority to enter into this Agreement and the Custody
Agreement between Aura and Interwest Transfer Company, Inc., Custodian (the
"Custody Agreement") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the Custody
Agreement have been duly authorized, executed and delivered by or on behalf of
Aura and each of this Agreement and the Custody Agreement is a valid and binding
agreement of Aura enforceable against Aura in accordance with its terms, except
as rights to indemnity and contribution hereunder may be limited by applicable
law and except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
(d) All information furnished by or on behalf of Aura relating to Aura
and Aura's shares of Common Stock that is set forth in the Registration
Statement and the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) was or will be,
true, correct and complete, and does not, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(e) Neither Aura nor any of Aura's affiliates directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, or had any other association with (within the meaning of
Article I of the Bylaws of the National Association of Securities Dealers, Inc.
(the "NASD")), any member firm of the NASD.
(f) Aura shall in no event control or direct any of the proceeds of
this Offering payable to the Company or co-mingle any of said funds with any
account or monies directly or indirectly controlled by Aura.
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<PAGE>
2. Purchase, Delivery and Sale of the Units.
----------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties and agreements herein contained,
the Company agrees to issue and sell to the Underwriters, and the Underwriters
agree, severally and not jointly, to buy from the Company at $_____ per Unit at
the place and time hereinafter specified, the number of Units set forth opposite
each Underwriter's name in Schedule I hereto (the "Firm Units").
Delivery of the Firm Units against payment therefor shall take place
at the offices of Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard,
Ninth Floor, Beverly Hills, California 90212 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m. New York time
on __________________, 1997, or at such other time and date, not later than 5
business days thereafter, as you may designate, such time and date of payment
and delivery for the Firm Units being herein called the "First Closing Date."
Time shall be of the essence and delivery at the time and place specified in
this subsection (a) is a further condition to the obligations of the
Underwriters hereunder.
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company and Aura hereby grant the Underwriters an option
to purchase all or any part of an aggregate of 300,000 additional Units at the
same price per Unit as the Underwriters pay for the Firm Units being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Units being referred to herein as the "Option Units"). The shares of Common
Stock included in such Option Units will be offered by Aura and the Warrants
included in such Option Units will be offered by the Company. The purchase
price for each Warrant will be $.10. This option may be exercised on one
occasion within 60 days after the Effective Date upon notice by you to the
Company and Aura advising each of them as to the amount of Option Units as to
which the option is being exercised, the names and denominations in which the
certificates for such Option Units are to be registered and the time and date
when such certificates are to be delivered. Such time and date shall be
determined by you but shall not be earlier than three and not later than five
full business days after the exercise of said option, nor in any event prior to
the First Closing Date, and such time and date is referred to herein as the
"Option Closing Date." Delivery of the Option Units against payment therefor
shall take place at the offices of Joseph Charles & Associates, Inc., 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212. Time shall be
of the essence and delivery at the time and place specified in this subsection
(b) is a further condition to the obligations of the Underwriters hereunder.
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<PAGE>
The Option granted hereunder may be exercised only to cover over-
allotments in the sale by the Underwriters of Firm Units referred to in
subsection (a) above.
(c) The Company and Aura, as applicable, will make the certificates
for the Securities comprising the Units to be purchased by the Underwriters
hereunder available to you for checking at least two full business days prior to
the First Closing Date or the Option Closing Date (which are collectively
referred to herein as the "Closing Dates" and individually as a "Closing Date"),
as the case may be. The certificates shall be in such names and denominations
as you may request, at least two full business days prior to the relevant
Closing Dates. Time shall be of the essence and the availability of the
certificates at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company and
Aura, as applicable, to you for the several accounts of the Underwriters against
payment of the purchase price by you, at your option, by certified or bank
cashier's checks in New York Clearing House funds or by wire transfer, payable
to the order of the Company.
In addition, in the event the Underwriters exercise the option to
purchase from the Company and Aura all or any portion of the Option Units
pursuant to the provisions of subsection (b) above, payment for such Option
Units shall be made to or upon the order of the Company and Aura by you, for the
several accounts of the Underwriters at your option, by certified or bank
cashier's checks payable in New York Clearing House funds or by wire transfer,
at the offices of Joseph Charles & Associates, Inc. at the time and date of
delivery of such Option Units as required by the provisions of subsection (b)
above, against receipt of the certificates for such Option Units by you, for the
several accounts of the Underwriters registered in such names and in such
denominations as you may request. The shares of Common Stock included in such
Option Units will be offered by Aura and the Warrants included in such Option
Units will be offered by the Company. The purchase price for each Warrant will
be $.10.
It is understood that the Underwriters propose to offer the Units to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company.
------------------------
The Company covenants and agrees with the Underwriters that:
(a) Company will use its best efforts to cause the Registration Statement
to become effective and, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether
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<PAGE>
before or after the Effective Date, file any amendment to the Registration
Statement or supplement to the Prospectus of which you shall not previously have
been advised and furnished with a copy or to which you or your counsel shall
have reasonably objected in writing or which is not in compliance with the Act
and the Rules and Regulations. At any time prior to the later of (A) the
completion by you of the distribution of the Units contemplated hereby (but in
no event more than nine months after the Effective Date) and (B) 25 days after
the Effective Date, the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or Prospectus which, in your reasonable opinion, may be necessary or
advisable in connection with the distribution of the Units.
Promptly after you or the Company is advised thereof, you will advise the
Company or the Company will advise you, as the case may be, and confirm the
advice in writing, of the receipt of any comments of the Commission, of the
effectiveness of any post-effective amendment to the Registration Statement, of
the filing of any supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop orders or other order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of the suspension of the qualification of the
Units for offering in any jurisdiction, or the institution of any proceedings
for any of such purposes, and will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain as soon as possible the lifting
thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriters and selected dealers to use the Prospectus in connection with the
sale of the Units for such period not to exceed nine months from the Effective
Date as in the reasonable opinion of counsel for you the use thereof is required
to comply with the applicable provisions of the Act and the Rules and
Regulations. In case of the happening, at any time within such period as a
Prospectus is required under the Act to be delivered in connection with sales by
an underwriter or dealer, of any event of which the Company or Aura has
knowledge and which materially affects the Company or the Securities, or which
in the opinion of counsel for the Company or counsel for the Underwriters should
be set forth in an amendment to the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Units, or in case it shall be necessary to amend
or supplement the Prospectus to comply with the Act or with the Rules and
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<PAGE>
Regulations, the Company or Aura will notify you promptly and forthwith prepare
and furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of any such amendment or supplement to the Registration Statement or
amended Prospectus or supplement to be attached to the Prospectus shall be
without expense to the Underwriters, except that in case the Underwriters are
required, in connection with the sale of the Units, to deliver a Prospectus nine
months or more after the Effective Date, the Company will upon request of and at
your expense, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriters with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
(b) The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations thereunder in connection with the offering and issuance of
the Units.
The Company will use its best efforts to qualify or register the Securities
for sale under the securities or "blue sky" laws of such jurisdictions as you
may have designated in writing prior to the execution hereof and will make such
applications and furnish such information to counsel for the Underwriters as may
be required for that purpose and to comply with such laws, provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service process in any
jurisdiction. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as you may reasonably request. Legal fees for
such qualifications shall be itemized based on the time expended and costs
incurred, shall be reasonable and shall not in any event exceed $30,000.00,
exclusive of filing fees.
(c) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the First Closing Date and on a monthly basis
thereafter for six additional months.
(d) The Company will use its best efforts to cause a Registration
Statement under the Exchange Act to be declared effective on the Effective Date.
(e) For so long as the Company is a reporting company under either
Section 12(g), 13 or 15(d) of the Exchange Act, the
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<PAGE>
Company, at its expense, will furnish to its stockholders an annual report
(including financial statements audited by independent public accountants), in
reasonable detail and at its expense, will furnish to you during the period
ending five years from the date hereof, (i) as soon as practicable after the end
of each fiscal year, a balance sheet of the Company and any subsidiaries as at
the end of such fiscal year, together with statements of income, stockholders'
equity and cash flows of the Company and any subsidiaries as at the end of such
fiscal year, all in reasonable detail and accompanied by a copy of the
certificate or report thereon of independent accountants; (ii) as soon as they
are available, a copy of all reports (financial or other) mailed to security
holders; (iii) as soon as they are available, a copy of all non-confidential
reports and financial statements furnished to or filed with the Commission; and
(iv) such other information of a public nature as you may from time to time
reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing
Date one signed copy of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon your order, from time to time until the
Effective Date as many copies of any Preliminary Prospectus filed with the
Commission prior to the Effective Date as the Underwriters may reasonably
request. The Company will deliver to you on the Effective Date and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so, but in no event later
than 90 days after the end of 12 months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the Effective Date which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units
substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
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<PAGE>
(j) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration Statement,
preliminary Prospectus or Prospectus and take any other action, which in the
opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you may be
reasonably necessary or advisable in connection with the distribution of the
Units and will use its best efforts to cause the same to become effective as
promptly as possible.
(k) Prior to the Effective Date, the Company will cause Aura and all
of the Company's directors and executive officers to enter into a written
agreement with the Representative, which, among other things, shall provide that
for a period of 12 months following the closing date of the Offering, Aura and
such persons will not sell, assign, hypothecate or pledge any of the shares of
Common Stock of the Company owned by them on the Effective Date, or subsequently
acquired by the exercise of any options or warrants or conversion of any
convertible security of the Company held by them on the Effective Date directly
or indirectly, except with your prior written consent, which consent may be
unreasonably withheld, and such stockholders will permit all certificates
evidencing those shares to be stamped with an appropriate restrictive legend,
and will cause the transfer agent for the Company to note such restrictions on
the transfer books and records of the Company.
(l) The Company shall, upon the initial filing of the Registration
Statement, make all filings required to obtain approval for the quotation of the
Shares and Warrants on the National Association of Securities Dealers, Inc.
("NASDAQ") National Market and will use its best efforts to effect and maintain
the aforesaid approval for at least five (5) years from the date of this
Agreement. Within ten (10) days after the Effective Date, the Company shall
cause the Company to be listed in the Moody's OTC Industrial Manual and cause
such listing to be maintained for five years from the date of this Agreement.
(m) The Company represents that it has not taken, and agrees that it
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or Warrants or
to facilitate the sale or resale of the Securities.
(n) During the period of the offering, and for a period of twelve (12)
months from the Effective Date, the Company will not sell or otherwise dispose
of any securities of the Company (except for up to 1,000,000 shares under the
Company's Stock Option Plan) without your prior written consent, which consent
may be withheld in your sole discretion.
(o) The Company shall retain a public relations firm acceptable to
you, and shall continue to retain such firm, or any alternate firm acceptable to
you, for a minimum period of one (1) year.
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<PAGE>
(p) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Warrants and the Representative's Warrant outstanding from time to time.
(q) So long as any Warrants are outstanding, the amendments to the
Registration Statement which may be on Form SB-2, S-1, S-2 or S-3 to become
effective in compliance with the Act and without any lapse of time between the
effectiveness of any such post-effective amendments, and cause a copy of each
Prospectus, as then amended, to be delivered to each holder of record of a
Warrant and to furnish to each Underwriter and each dealer as many copies of
each such Prospectus as such Underwriters or dealers may reasonably request. In
addition, for so long as any Warrant is outstanding, the Company will provide
you with copies of all filings made by the Company pursuant to the provisions of
the Act and the Securities Exchange Act of 1934, as amended.
(r) The Company shall deliver to you, at the Company's expense, three
(3) bound volumes in form and content acceptable to you, containing the
Registration Statement and all exhibits filed therewith, and all amendments
thereto, and all other material correspondence, filings, certificates and other
documents filed and/or delivered in connection with this offering. The Company
shall use its best efforts to deliver such volumes with one hundred eighty (180)
days of the First Closing Date.
(s) The Company shall deliver to you an executed financial consulting
agreement in form and substance acceptable to you whereby you agree to act as a
financial consultant for a period of two years from the First Closing Date for a
fee of $3,000 per month payable on a monthly basis.
(t) For a period of forty-eight (48) months from the First Closing
Date, the Underwriter shall have the right to designate two members of the Board
of Directors provided that the designees are acceptable to the Company. Such
members shall be entitled to the same compensation, reimbursements and
indemnification as other members of the Company's Board of Directors. In the
event that the Company is unable to obtain the Directors' and Officers'
Liability Insurance described in sub-paragraph (v) below, the Representative
shall have the right for such forty-eight (48) month period to designate a
consultant to the Board of Directors of the Company, which consultant shall have
the right to attend all Board and Board committee meetings and shall be
compensated on the same basis as outside members of the Board.
(u) Current Company management, as disclosed in the Prospectus, will
continue in place after the First Closing Date.
(v) The Company shall have acquired a reasonable amount of Directors'
and Officers' Liability Insurance (provided
17
<PAGE>
that such insurance can be obtained at a reasonable cost as determined by the
Company and the Representative) from a responsible insurer, all satisfactory to
the Representative.
(w) The Company will not solicit Warrant exercises other than through
the Representative. Upon exercise of any Warrants, the Company will pay the
Representative a fee of 3% of the aggregate exercise price, if (i) the market
price of the Company Common Shares on the date the Warrant is exercised is
greater than the then exercise price of the Warrant; (ii) the exercise of the
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. is so designated in writing by the holder exercising the Warrant;
(iii) the Warrant is not held in a discretionary account except where prior
specific written approval for the exercise has been received; (iv) disclosure of
compensation arrangements was made both at the time of the offering and at the
time of exercise of the Warrant; (v) the solicitation of the exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Exchange Act;
and (vi) the Representative provides bona fide services in connection with the
solicitation of the Warrant. No solicitation fee will be paid to the
Representative on Warrants exercised within one year of the First Closing Date
or on Warrants voluntarily exercised at any time without solicitation.
4. Conditions of Obligations of Joseph Charles & Associates, Inc.
--------------------------------------------------------------
The obligations of the Underwriters to purchase and pay for the Units which
they have agreed to purchase hereunder are subject to the accuracy (as of the
date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 5:00 p.m., New York time, on
the date of this Agreement, or at such later time or on such later date as to
which you may agree in writing; on the Closing Dates, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that or any similar purpose shall have been instituted or shall
be pending or, to the knowledge of any Underwriter or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper & Klein, counsel
to you; and no stop order shall be in effect denying or suspending effectiveness
of the Registration Statement nor shall any stop order proceedings with respect
thereto be instituted or pending or threatened under the Act.
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(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Pillsbury Madison & Sutro, counsel for
the Company and Aura, in form and substance reasonably satisfactory to counsel
for you, to the effect that:
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware and
is duly qualified or licensed to do business as a foreign corporation in
good standing in each other jurisdiction in which the ownership or leasing
of its properties or the conduct of its business requires such
qualification, except where (other than the State of California) failure to
so qualify will not have a material adverse effect in the business,
properties or financial condition of the Company. The Company has the
corporate power to own, lease and operate its properties and to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under this Agreement, the Warrant Agreement and the
Representative Warrant;
(ii) the authorized capitalization of the Company as of the date of
the Prospectus was as set forth in the Prospectus; all of the shares of the
Company's outstanding stock requiring authorization for issuance by the
Company's Board of Directors have been duly authorized and validly issued,
are fully paid and non-assessable and conform to the description thereof
contained in the Prospectus; the outstanding shares of Common Stock of the
Company have not been issued in violation of the preemptive rights of any
stockholder and the stockholders of the Company do not have any preemptive
rights or other rights to subscribe for or to purchase; there are no
restrictions upon the voting or transfer of, any of the Shares; the Common
Stock, the Warrants, the Underwriter's Warrant and the Warrant Agreement
dated as of _______________, 1997 between and among the Company and
Interwest Transfer Company, Inc. (the "Warrant Agreement") conform in all
material respects to the respective descriptions thereof contained in the
Prospectus; the Shares and Warrants to be issued as contemplated in the
Registration Statement and this Agreement have been duly authorized and,
when paid, will be validly issued, fully paid and non-assessable and free
of preemptive rights contained in the Company's certificate of
incorporation or By-laws, or any other document, instrument or agreement
known to counsel; a sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Warrants and the
Representative's Warrant; neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this
Agreement gives rise to any registration rights or other rights, other than
those contemplated by the Representative's Warrant or which have been
waived or satisfied, for or relating to the
19
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registration of the Securities. The Company has no subsidiaries;
(iii) this Agreement, the Warrant Agreement and the Representative's
Warrant (sometimes hereinafter collectively referred to as the
"Representative Agreements") have been duly and validly authorized,
executed and delivered by the Company, and assuming due execution and
delivery of this Agreement by you, and of the Warrant Agreement by you and
the Warrant Agent, all of such agreements are, or when duly executed will
be, the valid and legally binding obligations of the Company except as
enforceability may be limited by bankruptcy, insolvency, moratorium or
other laws affecting the rights of creditors, or by general equitable
principles; provided that no opinion need be expressed as to the
enforceability of the indemnity provisions contained in Section 6 or the
contribution provisions contained in Section 7 of this Agreement;
(iv) the certificates evidencing the Shares and Warrants are in valid
and proper legal form; the Warrants and the Representative's Warrant will
be exercisable for shares of Common Stock of the Company in accordance with
the terms of the Warrants and the Representative's Warrant and at the
prices therein provided for; the shares of Common Stock of the Company
issuable upon exercise of the Warrants and the Underwriter's Warrants have
been duly authorized and reserved for issuance upon such exercise, and such
shares, when issued upon such exercise in accordance with the terms of the
Warrants and the Representative's Warrant and when the price is paid shall
be fully paid and non-assessable;
(v) Such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which are required
to be described or referred to in the Registration Statement which are not
so described or referred to;
(vi) The execution and delivery of this Agreement, the Warrant
Agreement and the Representative's Warrant and the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated will not result in a violation
of, or constitute a default under, the certificate or articles of
incorporation or by-laws of the Company, or in a violation of or default
under any obligation, agreement, covenant or condition contained in any
bond, debenture, note or other evidence of indebtedness or in any of the
contracts, indentures, mortgages, loan agreements, leases, joint ventures
or other agreements or instruments to which the Company is a party that are
filed as Exhibits to the Registration Statement or otherwise known to
counsel;
(vii) The Registration Statement has become effective under the Act,
and to such counsel's knowledge, no stop
20
<PAGE>
order suspending the effectiveness of the Registration Statement is in
effect, no proceedings for that purpose have been instituted or are pending
before, or threatened by, the Commission and the Registration Statement and
the Prospectus (except, in the case of both the Registration Statement and
any Amendment thereto, and the Prospectus and any supplement thereto for
the financial statements and notes and schedules thereto, and other
financial information or statistical data contained therein, or omitted
therefrom, as to which such counsel need express no opinion) comply as to
form in all material respects with the applicable requirements of the Act
and the Rules and Regulations;
(viii) All descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts, plans,
options and other documents are accurate and fairly present the information
required to be shown, and such counsel is familiar with all contracts and
other documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement, or filed as exhibits to
the Registration Statement, and such counsel does not know of any contracts
or documents of a character required to be summarized or described therein
or to be filed as exhibits thereto which are not so summarized, described
or filed;
(ix) No authorization, approval, consent or license of any
governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the
Securities by the Company, in connection with the execution, delivery and
performance of this Agreement, the Warrant Agreement or the Underwriter's
Warrant by the Company or in connection with the taking of any action
contemplated herein or therein, or the issuance of the Underwriter's
Warrant or the Securities underlying the Warrants and Underwriter's
Warrant, other than registration or qualification of the Securities under
applicable state or foreign securities or blue sky laws (as to which such
counsel need express no opinion) and registration under the Act;
(x) The statements in the Registration Statement under the caption
"Description of Securities," to the extent that such statements constitute
a matter of law or legal conclusion have been reviewed by such counsel and
are correct in all material respects;
(xi) The Common Stock and Warrants have been approved for listing on
the Nasdaq National Market;
(xii) The Company is not, and after receipt of payment for the
Common Stock and Warrants will not be, an "investment company" within the
meaning of Investment Company Act;
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(xiii) Except as disclosed in the Prospectus, to the best knowledge
of such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by this
Agreement;
(xiv) Neither the Company nor Aura is in violation of its charter or
by-laws or any law, administrative regulation or administrative or court
decree applicable to the Company or is in default in the performance and
observance of any obligation, agreement, covenant or condition contained in
any material existing instrument, except in each such case for such
violations or defaults as would not, individually or in the aggregate,
result in a material adverse change in the financial condition or results
of operations of either the Company or Aura;
(xv) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and is a valid and binding agreement of
Aura, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(xvi) The execution and delivery by Aura of, and the performance by
Aura of its obligations under, the Underwriting Agreement and its Custody
Agreement will not contravene or conflict with, result in a breach of, or
constitute a default under, the charter or by-laws, partnership agreement,
trust agreement or other organizational documents, as the case may be, of
Aura, or to the best of such counsel's knowledge, violate or contravene any
provision of applicable law or regulation, or violate, result in a breach
of or constitute a default under the terms of any other agreement or
instrument to which Aura is a party or by which it is bound or any
judgment, order or decree applicable to any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over Aura;
(xvii) Aura has good and valid title to all of the Common Stock which
may be sold by Aura under the Underwriting Agreement and has the legal
right and power, and all authorizations and approvals required under its
charter and bylaws or other organizational documents, as the case may be,
to enter into this Agreement and its Custody Agreement, to sell, transfer
and deliver all of the Common Stock which may be sold by Aura under the
Underwriting Agreement and to comply with its other obligations under the
Underwriting Agreement and the Custody Agreement of Aura has been duly
authorized, executed and delivered by Aura and is
22
<PAGE>
a valid and binding agreement of Aura, enforceable in accordance with its
terms, except as rights to indemnification thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles;
(xviii) Assuming that the Underwriters purchase the Common Stock
which is sold by Aura pursuant to the Underwriting Agreement for value, in
good faith and without notice of any adverse claim, the delivery of such
Common Stock pursuant to the Underwriting Agreement will pass good and
valid title to such Common Stock, free and clear of any security interest,
mortgage, pledge, lieu encumbrance or other claim; and
(xix) No consent, approval, authorization or other order of, or
registration or filing with, any court or governmental authority or agency,
is required for the consummation by Aura of the transactions contemplated
in the Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
Such counsel has participated in the preparation of the Registration
Statement and the Prospectus and although such counsel has not reviewed the
accuracy or completeness of the statements contained in the Registration
Statement or Prospectus nothing has come to the attention of such counsel
that caused such counsel to believe that the Registration Statement or any
amendment thereto at the time it became effective contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make statements therein in light of the circumstances
under which they were made not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes and schedules
thereto and other financial information and statistical data contained
therein, as to which such counsel need express no opinion);
In rendering such opinion, such counsel may rely upon certificates of
any officer of the Company or public officials as to matters of fact; and
in rendering such opinion may rely as to all matters of law other than the
law of the United States or of the State of California upon opinions of
counsel satisfactory to you, in which case the opinion shall state that
they have no reason to believe that you and they are not entitled to so
rely.
23
<PAGE>
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus, and other related matters
shall be reasonably satisfactory to or approved by Freshman, Marantz, Orlanski,
Cooper & Klein, counsel to the Underwriters, and you shall have received from
such counsel a signed opinion, dated as of the First Closing Date, with respect
to the validity of the issuance of the Units, the form of the Registration
Statement and Prospectus (other than the financial statements and other
financial data contained therein), the execution of this Agreement and other
related matters as you may reasonably require. The Company shall have furnished
to counsel for the Underwriters such documents as they may reasonably request
for the purpose of enabling them to render such opinion.
(d) You shall have received a letter on and as of the Effective Date
and again on and as of the First Closing Date, in each instance describing
procedures carried out to a date within five (5) days of the date of the letter,
from Deloitte & Touche, LLP, independent public accountants for the Company,
substantially in the form approved by you.
(e) At each of the Closing Dates, (i) the representations and
warranties of the Company and Aura contained in this Agreement shall be true and
correct with the same effect as if made on and as of such Closing Date, and each
of the Company and Aura shall have performed all of its obligations hereunder
and satisfied all the conditions on its part to be satisfied at or prior to such
Closing Date; (ii) the Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement nor the Prospectus nor any
amendment or supplement thereto shall contain any untrue statements of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances under which they were made; (iii) there shall have been, since the
respective dates as of which information is given, no material adverse change in
the business, properties, condition (financial or otherwise), results of
operations, capital stock, long-term or short-term debt or general affairs of
the Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the Effective Date and the Company shall not have
incurred any material liabilities nor entered into any agreement not in the
ordinary course of business other than as referred to in the Registration
Statement and Prospectus; and (iv) except as set forth in the Prospectus, no
action, suit or proceeding at law shall be pending or threatened against the
Company which would be required to be disclosed in the Registration Statement,
and no proceedings shall be pending or threatened against the Company before or
by any commission, board or administrative agency in the United States or
elsewhere,
24
<PAGE>
wherein an unfavorable decision, ruling or finding would materially and
adversely affect the business, property, condition (financial or otherwise),
results of operations or general affairs of the Company. In addition, you shall
have received, at the First Closing Date, a certificate signed by the President
and the principal financial or accounting officer of each of the Company and
Aura, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the several Underwriters to purchase and pay for the Option
Units referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the Option
Closing Date, no stop order suspending the effectiveness thereof shall have
been issued, and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any reasonable request on the
part of the Commission for additional information shall have been complied
with to the reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper
& Klein, counsel to the Underwriters.
(ii) At the Option Closing Date there shall have been delivered to
you the signed opinion of Pillsbury Madison & Sutro, counsel for the
Company and Aura, dated as of the Option Closing Date, in form and
substance reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper &
Klein, counsel to the Underwriters, which opinion shall be substantially
the same in scope and substance as the opinion furnished to you at the
First Closing Date pursuant to Section 4(b) hereof, except that such
opinion, where appropriate, shall cover the Option Units rather than the
Firm Units. If the First Closing Date is the same as the Option Closing
Date, such opinions may be combined.
(iii) At the Option Closing Date, there shall have been delivered to
you a certificate of the President and the Chairman of the Board of each of
the Company and Aura dated the Option Closing Date, in form and substance
reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein,
counsel to the Underwriters, substantially the same in scope and substance
as the certificates furnished to you at the First Closing Date pursuant to
Section 4(e) hereof.
(iv) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from Pannell Kerr
Foster, dated the Option Closing Date and addressed to you, confirming the
information in their letter referred to in Section 4(d) hereof as of the
date thereof and stating that, without any additional investigation
required, nothing has come to their attention
25
<PAGE>
during the period from the ending date of their review referred to in said
letter to a date not more than five (5) days prior to the Option Closing
Date which would require any change in said letter if it were required to
be dated the Option Closing Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Units shall be
reasonably satisfactory in form and substance to you, and you and Freshman,
Marantz, Orlanski, Cooper & Klein, counsel to the Underwriters, shall have
been furnished with all such documents and certificates as you may request
in connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of
each of the Company and Aura or either of their compliance with any of the
covenants or conditions contained therein.
(g) If any of the conditions herein provided for in this Section shall
not have been completely fulfilled as of the date indicated, this Agreement and
all obligations of the Underwriters under this Agreement may be cancelled at, or
at any time prior to, each Closing Date by your notifying the Company and Aura
of such cancellation in writing or by telegram at or prior to the applicable
Closing Date. Any such cancellation shall be without liability of any
Underwriter to the Company and Aura, as applicable, except as otherwise provided
herein.
5. Conditions of the Obligations of the Company and Aura.
-----------------------------------------------------
The obligation of the Company and Aura, as applicable, to sell and deliver
the Units is subject to the following conditions:
(a) The Registration Statement shall have become effective not later
than 5:00 p.m. New York time, on the date of this Agreement, or on such later
date or time as you and the Company may agree in writing.
(b) On the Closing Dates, no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company and Aura, provided for
in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company and Aura to sell and deliver the Option
Units on exercise of the option provided for in Section 2(b) hereof shall be
affected.
6. Indemnification.
---------------
26
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(a) Indemnification of the Underwriters. The Company and Aura,
jointly and severally, agree to indemnify and hold harmless each Underwriter,
its officers and employees, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company or Aura), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based (i)
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under
the Securities Act, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading; or (ii) upon any untrue statements or alleged untrue statement
of a material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading; or
(iii) in whole or in part upon any inaccuracy in the representations and
warranties of the Company or Aura contained herein, or (iv) in whole or in part
upon any failure of the Company, or Aura to perform their respective obligations
hereunder or under law, or (v) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or relating in any manner
to, the Common Stock or Warrants or the offering contemplated hereby, and which
is included as part of or referred to in any loss, claim, damage, liability or
action arising out of or based upon any matter covered by clause (i) or (ii)
above, provided that the Company and Aura shall not be liable under this clause
(v) to the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action resulted
directly from any such acts or failures to act undertaken or omitted to be taken
by such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by Joseph
Charles & Associates, Inc.) As such expenses are reasonably incurred by such
Underwriter or such controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action; provided, however, that the foregoing indemnity
agreement shall not apply to any loss, claim, damage, liability or expense to
the extent, but only to the extent, arising out of or based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
reliance upon and in conformity with written information furnished to the
Company or Aura by the
27
<PAGE>
Representative expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased units, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to the provision
hereunder and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Units to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense, and provided, further, that the Company, and Aura
may agree, as among themselves and without limiting the rights of the
Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible. The indemnity agreement set
forth in this Section 6(a) shall be in addition to any liabilities that the
Company may otherwise have.
(b) Indemnification of the Company, Aura and each of their Directors
and Officers. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, Aura and each of its officers and directors
and each person, if any, who controls the Company or Aura within the meaning of
the Securities Act or the Exchange Act, against any loss, claim, damage,
liability or expense, as incurred to which the Company, Aura or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or otherwise (including in settlement of any litigation, if such
settlement is effected with the written consent of such Underwriter), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto, or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated thereon or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company and
Aura by the Representative expressly for use therein; and to reimburse the
Company, Aura, or any such director, officer or controlling person for any legal
and other expense reasonably incurred by the
28
<PAGE>
Company, Aura, or any such director, officer or controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action. Each of the Company and Aura hereby
acknowledges that the only information that the Underwriters have furnished to
the Company and Aura expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) as the paragraph on the inside front
cover page of the Prospectus concerning stabilization by the Underwriters and
(B) information under the caption "Underwriting" in the Prospectus; and the
Underwriters confirm that such statements are correct. The indemnity agreement
set forth in this Section 6(b) shall be in addition to any liabilities that each
Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 6 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 6, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 6 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the
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provisions to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (Joseph Charles & Associates, Inc. In the case of Section 6(b) and Section
7), representing the indemnified parties who are parties to such action) or (ii)
the indemnifying party shall not have employed counsel satisfactory to the
indemnified party to represent the indemnified party within a reasonable time
after notice of commencement of the action, in each of which cases the fees and
expenses of counsel shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 6 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
6(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional release
of such indemnified party from all liability on claims that are the subject
matter of such action, suit or proceeding.
7. Contribution.
------------
If the indemnification provided for in Section 6 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified
party of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and Aura, on the one hand, and the Underwriters, on the other hand, from
the offering of the Units pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law,
30
<PAGE>
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, and
Aura, on the one hand, and the Underwriters, on the other hand, in connection
with the statements or omissions or inaccuracies in the representations and
warranties herein which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company, and Aura, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the Units
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Units pursuant to
this Agreement (before deducting expenses) received by the Company, and Aura,
and the total underwriting discount received by the Underwriters, in each case
as set forth on the front cover page of the Prospectus bear to the aggregate
initial public offering price of the Units as set forth on such cover. The
relative fault of the Company, and Aura, on the one hand, and the Underwriters,
on the other hand, shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact or any such inaccurate or
alleged inaccurate representation or warranty relates to information supplied by
the Company, or Aura, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 6(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 6(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 7; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 6(c) for purposes of indemnification.
The Company, Aura and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person
31
<PAGE>
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute pursuant to this Section 7 are several, and not joint,
in proportion to their respective underwriting commitments as set forth opposite
their names in Schedule I. For purposes of this Section 7, each officer and
----------
employee of an Underwriter and each person, if any, who controls an Underwriter
within the meaning of the Securities Act and the Exchange Act shall have the
same rights to contribution as such Underwriter, and each director of the
Company, each officer of the Company who signed the Registration Statement, and
each person, if any, who controls the Company with the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as the
Company.
8. Costs and Expenses.
------------------
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriters is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company, including
but not limited to the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Units contemplated hereby; all expenses, including reasonable
fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to the Underwriters, in connection with the
qualification of the Units under the State Securities or Blue Sky Laws which you
shall designate; the cost of printing and furnishing to you copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Warrant Agreement and the Blue Sky Memorandum; the cost of
printing the certificates representing the Securities, the expenses of Company
due diligence meetings and presentations, (but not of any Underwriter or
Underwriter's counsel in connection therewith) and the expense (which shall not
exceed $7,500) of placing one or more "tombstone" advertisements as directed by
you. The Company shall pay any and all taxes (including any transfer,
franchise, capital stock or other tax imposed by any jurisdiction) on sales to
the Underwriters hereunder. The Company will also pay all costs and expenses
incident to the furnishing of any amended Prospectus or of any supplement to be
attached to the Prospectus as called for in Section 3(a) of this Agreement
except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to you the balance of a non-accountable expense allowance
2.5% of the gross proceeds of the offering, of which a portion has been paid.
In the event the
32
<PAGE>
over-allotment option is exercised in part or in full, the Company shall pay to
you at the Option Closing Date an additional amount equal to 2.5% of the gross
proceeds received upon exercise of the overallotment option. In the event the
transactions contemplated hereby are not consummated for any reason, the Company
shall be liable for your actual accountable out-of-pocket expenses (with credit
given to the amount heretofore paid), including legal fees, provided however,
that any portion of the $40,000 paid by the Company that has not been utilized
by you in connection with the offering on an accountable basis shall be refunded
by you to the Company; and further provided that if the contemplated
transactions are not consummated by reason of breach by the Company of this
Agreement or of any representation, warranty, covenant or condition contained
herein, the Company shall be liable for your accountable out-of-pocket expenses.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless each Underwriter, and the Underwriters
agree to indemnify and hold harmless, severally and not jointly, the Company
from and against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which the indemnified party may become subject insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. Default of One or More of the Several Underwriters.
--------------------------------------------------
If, on the First Closing Date or the Option Closing Date, as the case may
be, any one or more of the several Underwriters fail or refuse to purchase Units
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Units which such defaulting Underwriters agreed but failed
or refused to purchase does not exceed 10% of the aggregate number of the Units
to be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Units set forth opposite
their respective names on Schedule I bears to the aggregate number of Firm Units
----------
set forth opposite the names of all such non-defaulting Underwriters, or in such
other proportions as may be specified by the Representatives with the consent of
the non-defaulting Underwriters, to purchase the Units which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date. If, on the First Closing Date or the Option Closing Date, as the case may
be, any one or more of the Underwriters shall fail or refuse to purchase Units
and the aggregate number of Units with respect
33
<PAGE>
to which such default occurs exceeds 10% of the aggregate number of Units to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Units are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 6, Section 7 and Section 8
shall at all times be effective and shall survive such termination. In any such
case either the Representative or the Company shall have the right to postpone
the First Closing Date or the Option Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other document or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
9. Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. Effective Date.
--------------
The Agreement shall become effective upon its execution, except that you
may, at your option, delay its effectiveness until the earlier to occur of 10:00
A.M., New York time on the first full business day following the Effective Date
as you in your discretion shall first commence the initial public offering by
you of any of the Units. The time of the initial public offering shall mean the
time of release by you of the first newspaper advertisement with respect to the
Units, or the time when the Units are first generally offered by you to dealers
by letter or telecopier, whichever shall first occur. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 6, 7, 8, 13, 14, 15 and 16 shall remain in effect
notwithstanding such termination.
11. Termination.
-----------
(a) This Agreement, except for Sections 6, 7, 8, 13, 14, 15 and 16,
may be terminated at any time prior to the First Closing Date, and the option
referred to in Section 2(b), if exercised, may be cancelled, at any time prior
to the Option Closing Date, by you if in your judgment it is impracticable to
offer for sale or to enforce contracts made by you for the resale of the Units
agreed to be purchased hereunder, by reason of (i) the Company having sustained
a material loss, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government
action, order or decree, (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in securities
generally which are
34
<PAGE>
not in force and effect on the date hereof, (iv) a banking moratorium having
been declared by federal of New York State authorities, (v) an outbreak of major
international hostilities or other national or international calamity having
occurred, (vi) the passage by the Congress of the United States or by any state
legislative body of similar impact, of any act or measure, or the adoption of
any orders, rules or regulations by any governmental body or any authoritative
accounting institute or board, or any governmental executive, which is
reasonably believed likely by you to have a material adverse impact on the
business, financial condition or financial statements of the Company, (vii) any
material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement, or (viii) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or facsimile
transmission, confirmed by letter.
12. Representative's Warrant.
------------------------
On the First Closing Date, the Company will issue to you, for a
consideration of $200.00 and upon the terms and conditions set forth in the form
of Representative's Warrant annexed as an exhibit to the Registration Statement,
the Representative's Warrant to purchase $200,000 Units. In the event of
conflict in the terms of this Agreement and the Representative's Warrant, the
language of the Representative's Warrant shall control.
13. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Existing Shareholders, where appropriate,
and you, set forth in or made pursuant to this Agreement will remain in full
force and effect regardless of any investigation made by or on behalf of the
Underwriters, the Company or any of its officers or directors or any controlling
persons and will survive delivery of and payment for the Units and the
termination of this Agreement.
14. Notice.
------
All communications hereunder will be in writing and, except as otherwise
expressly provided herein, if sent to any Underwriter, will be mailed, delivered
or telecopied and confirmed to it at Joseph Charles & Associates, Inc., 9701
35
<PAGE>
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, with a copy
sent to Thomas J. Poletti, Esq. at Freshman, Marantz, Orlanski, Cooper & Klein,
9100 Wilshire Boulevard, 8th Floor East, Beverly Hills, California 90212-3480,
of if sent to the Company, will be mailed, delivered, or facsimiled and
confirmed to NewCom, Inc., 31166 Via Colinas, Westlake Village, California
91362, with a copy sent to Jorge A. del Calvo, Esq. at Pillsbury Madison &
Sutro, 2700 Sand Hill Road, Menlo Park, California 94025-7020.
15. Parties in Interest.
-------------------
The Agreement herein set forth is made solely for the benefit of the
Underwriters, the Company and, to the extent expressed, Aura, any person
controlling the Company, Aura or any Underwriter, and directors of the Company,
nominees for directors of the Company (if any) named in the Prospectus, the
officers of the Company who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and no other
person shall acquire for have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include any purchaser, as such
purchaser, from any Underwriter of the Units.
16. Applicable Law.
---------------
This Agreement will be governed by, and construed in accordance with, the
laws of the State of California applicable to agreements made and to be entirely
performed within California.
36
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this Underwriting Agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
NewCom, Inc.
Dated: ___________, 1997 By:___________________________
Sultan W. Khan
Chief Executive Officer
and President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
Joseph Charles & Associates, Inc.
Date: ___________, 1997 By:___________________________
Authorized Officer
37
<PAGE>
SCHEDULE I
----------
Underwriting Agreement dated ____________, 1997
<TABLE>
<CAPTION>
Number of Firm Units
Underwriter to be Purchased
- ----------- --------------------
<S> <C>
Joseph Charles & Associates, Inc. 2,000,000
=========
Total. . . . . . . . . . . . . . . . .
---------
</TABLE>
38
<PAGE>
EXHIBIT 10.1
ASSIGNMENT OF LEASE
-------------------
This ASSIGNMENT OF LEASE ("Assignment") is made and entered into as of
June 15, 1997 ("Assignment Date"), between AURA SYSTEMS, INC., a Delaware
corporation ("Assignor"), and NEWCOM, INC., a Delaware corporation ("Assignee"),
in connection with that certain Standard Industrial/Commercial Multi-Tenant
Lease - Modified Net, dated March 31, 1995 ("Lease"), between L/B VIA COLINAS
LLC ("Lessor") and Assignor, for the premises located at 31166 Via Colinas,
Westlake Village, California 91362 ("Property"), and more particularly described
in the Lease. A copy of the Lease is attached as Exhibit "A" and incorporated
herein by reference. Unless otherwise indicated in this Assignment, defined
terms used in this Assignment have the same meanings as in the Lease.
1. Assignment of Lease. Assignor hereby grants, conveys and assigns to
-------------------
Assignee, effective as of the Assignment Date, all of Assignor's right, title
and interest in and to the Lease.
2. Assumption of Obligations. Assignor hereby assigns to Assignee, and
-------------------------
Assignee hereby assumes, all obligations and liabilities of Assignor under the
Lease that accrue on or after the Assignment Date. Assignee hereby agrees to
defend, indemnify and hold Assignor harmless from all claims, demands, causes of
action, liabilities, losses, costs and expenses (including, without limitation,
attorneys' fees) arising from or in connection with the obligations and
liabilities assumed by Assignee under this Assignment. Accordingly, Assignee
shall pay and perform directly to Lessor, for Lessor's benefit, all monetary and
non-monetary obligations accruing under the Lease on or after the Assignment
Date. Assignor hereby agrees to defend, indemnify and hold Assignee harmless
from all claims, demands, causes of action, liabilities, losses, costs and
expenses (including, without limitation, attorneys' fees) arising from or in
connection with any obligations or liabilities of Assignor under the Lease that
accrue and are due and payable prior to the Assignment Date.
3. Consent to Assignment. Notwithstanding anything to the contrary contained
---------------------
herein, no assignment by Assignor to Assignee described herein shall be
effective unless and until Assignor and Assignee shall have obtained the consent
of Lessor to this Assignment.
4. Pro-Rations. All Base Rent, Common Area Operating Expenses, Real Property
-----------
Taxes and other charges payable under the Lease or in connection with the
Property shall be pro-rated between Assignor and Assignee as of the Assignment
Date. All utilities and insurance payable under the Lease or in connection with
the Property shall be pro-rated between Assignor and Assignee as of the
Assignment Date.
5. Further Assurances. Each party to this Assignment shall execute and
------------------
deliver to each other party all documents, and shall take all actions,
reasonably required by such other party from time to time to confirm or effect
the matters set forth in this Assignment, or otherwise to carry out the purposes
of this Assignment.
<PAGE>
6. Miscellaneous. This Assignment shall bind, and shall inure to the benefit
-------------
of, the successors and assigns of the parties hereto. This Assignment may be
executed in counterparts with the same effect as if the parties had executed one
instrument, and each such counterpart shall constitute an original of this
Assignment. No provision of this Assignment that is held to be inoperative,
unenforceable or invalid shall affect the remaining provisions, and to this end
all provisions of this Assignment shall be severable. Time is of the essence of
this Assignment. This Assignment shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first written above.
ASSIGNOR:
--------
AURA SYSTEMS, INC., a Delaware corporation
By:
-----------------------------------------------
Gerald S. Papazian, President
By:
-----------------------------------------------
Michael I. Froch, General Counsel and Secretary
ASSIGNEE:
--------
NEWCOM, INC., a Delaware corporation
By:
-----------------------------------------------
Sultan W. Khan, President
By:
-----------------------------------------------
Asif M. Khan, Executive Vice President
-2-
<PAGE>
LESSOR'S CONSENT
----------------
The undersigned is the owner of the Property and the Lessor under the Lease
described in the foregoing Assignment and hereby consents to the Assignment of
the Lease described in the Assignment.
LESSOR:
------
L/B VIA COLINAS LLC
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT "A"
-----------
LEASE
[to be attached]
<PAGE>
EXHIBIT 10.7
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of this ____ day of September, 1997 by and between AURA SYSTEMS, INC., a
------------------
Delaware corporation ("Aura" or the "Holder") and NEWCOM, INC., a Delaware
------------
corporation (the "Company").
RECITALS
A. The Holder. Aura is an existing corporation duly organized and in
----------
good standing under the laws of the State of Delaware with its principal
executive offices located in El Segundo, California.
B. The Company. The Company is an existing corporation, formed under the
-----------
laws of the State of Delaware, with its principal executive offices located in
Westlake Village, Virginia. Approximately 94% of the outstanding Common Stock
of the Company is currently owned by Aura.
C. Corporate Approvals. Each of the parties to this Agreement has
-------------------
obtained all necessary corporate approvals for the execution and delivery of
this Agreement.
D. Arm's Length Relationship. The parties to this Agreement intend to
-------------------------
conduct their relationships hereunder on an arm's length basis.
E. The Offering. The Company is contemplating the issuance of up to
------------
2,000,000 Units, each Unit consisting of one share of the Company's Common
Stock, $.001 par value per share (the "Common Stock"), and one Common Stock
Purchase Warrant (the "Warrant") in an initial public offering pursuant to a
Registration Statement on Form S-1 (Registration No. 333-31431) (the "Offering")
and following the Offering, Aura will be the beneficial and record owner of
approximately 7,500,000 shares of the Company's Common Stock.
F. Registration Rights. In conjunction with the Offering, the Holder and
-------------------
the Company desire to enter into this Agreement to provide the Holder with
certain registration rights as provided herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, and for other good and valuable consideration had and
received, the receipt and sufficiency of which is hereby acknowledged, the
parties hereto agree as follows:
1. Definitions. As used herein, the following terms shall have the
-----------
following respective meanings:
"Affiliate" shall mean any Person that directly or indirectly
controls, is controlled by, or is under common control with such Person. A
Person shall be deemed to control another Person if such Person owns 50% or
more of any
1
<PAGE>
equity interest in the "controlled" Person or possesses, directly or
indirectly, the power to direct or cause the direction of the management or
policies of the controlled Person, whether through ownership of stock or
partnership interests, by contract, agreement or understanding (whether
oral or written), or otherwise.
"Common Stock" shall have the meaning set forth in Recital E of this
Agreement.
"Designated Transferee" shall have the meaning set forth in Section 10
hereof.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Holders" shall mean Aura, any Affiliate of Aura (other than the
Company) and any Designated Transferees who are holders of record of any
Registrable Shares, and any combination of one or more such Holders.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"Other Holders" shall mean Persons who are holders of record of equity
securities of the Company who subsequent to the date hereof acquire more
than 5% of the outstanding shares of Common Stock pursuant to a transaction
with the Company and to whom the Company grants registration rights
pursuant to a written agreement in connection with such transaction.
"Person" shall mean any individual, corporation, association,
partnership, group (as defined in Section 13(d)(3) of the Exchange Act),
limited liability company, joint venture, business trust or unincorporated
organization, or a government or any agency or political subdivision
thereof.
"Registrable Shares" shall mean (i) all shares of Common Stock owned
by the Holder on the date of this Agreement, and (ii) any shares of Common
Stock acquired by a Holder directly or upon exercise of conversion of any
equity securities of the Company issued or distributed after the date of
this Agreement to a Holder in respect of Registrable Shares by way of any
stock dividend, stock split or other distribution or any recapitalization
or reclassification. As to any particular Registrable Share, such
Registrable Share shall cease to be a Registrable Share when (w) it shall
have been sold, transferred or otherwise disposed of or exchanged pursuant
to a registration statement under the Securities Act; (x) it shall have
been distributed to the public pursuant to Rule 144 (or any successor
provision) under the Securities Act; (y) it shall have been sold or
transferred to a Person other than a Designated Transferee in a private
transaction effected other than pursuant to a registration statement; or
(z) it shall have been sold, transferred or otherwise disposed of in
violation of this Agreement.
2
<PAGE>
"Registration Expenses" shall have the meaning set forth in Section
7(a) hereof.
"SEC" shall mean the Securities and Exchange Commission or any
successor agency thereto.
"Securities Act" shall mean the Securities Act of 1933, as amended.
2. Incidental Registrations
------------------------
(a) Right to Include Registrable Shares. Each time the Company shall
-----------------------------------
determine to file a registration statement under the Securities Act in
connection with a proposed offer and sale for cash of any equity securities
(other than an offering of debt securities which are convertible into equity
securities or an offering of equity securities in an amount not in excess of 5%
of the number of shares of Common Stock outstanding at such time) either by it
or by any holders of its outstanding equity securities, the Company will give
prompt written notice of its determination to each Holder and of such Holder's
rights under this Section 2, at least 60 days prior to the anticipated filing
date of such registration statement. Upon the written request of each Holder
made within 30 days after the receipt of any such notice from the Company,
(which request shall specify the Registrable Shares intended to be disposed of
by such Holder), the Company will use its best efforts to effect the
registration under the Securities Act of all Registrable Shares which the
Company has been so requested to register by the Holders thereof, to the extent
required to permit the disposition of the Registrable Shares so to be
registered; provided, however, that (i) if, at any time after giving written
-------- -------
notice of its intention to register any securities and prior to the effective
date of the registration statement filed in connection with such registration,
the Company shall determine for any reason not to proceed with the proposed
registration of the securities to be sold by it, the Company may, at its
election, give written notice of such determination to each Holder of
Registrable Shares and thereupon shall be relieved of its obligation to register
any Registrable Shares in connection with such registration (but not from its
obligation to pay the Registration Expenses in connection therewith), and (ii)
if such registration involves an underwritten offering, all Holders of
Registrable Shares requesting to be included in the Company's registration must
sell their Registrable Shares to the underwriters on the same terms and
conditions as apply to the Company, with such differences, including any with
respect to indemnification and liability insurance, as may be customary or
appropriate in combined primary and secondary offerings. If a registration
requested pursuant to this Section 2(a) involves an underwritten public
offering, any Holder of Registrable Shares requesting to be included in such
registration may elect, in writing prior to the effective date of the
registration statement filed in connection with such registration, not to
register such securities in connection with such registration. No registration
effected under this Section 2 shall relieve the Company of its obligations to
effect registrations upon request under Section 4 hereof.
(b) Priority in Incidental Registration. If a registration pursuant to
-----------------------------------
this Section 2 involves an underwritten offering and the managing underwriter(s)
in good faith advise(s) the Company in writing that, in its opinion, the number
of securities which the Company, the Holders and any other Persons intend to
include in such registration exceeds the largest number of securities which can
be sold in such offering without having an adverse effect on such
3
<PAGE>
offering (including the price at which such securities can be sold), then the
Company will include in such registration (i) first, if the registration
pursuant to this Section 2 was initiated by Other Holders exercising demand
registration rights, 100% of the securities such Other Holders propose to sell
(except to the extent the terms of such Other Holders' registration rights
provide otherwise); (ii) second, 100% of the securities the Company proposes to
sell for its own account; (iii) third, to the extent that the number of
securities which such Other Holders exercising demand registration rights and
the Company propose to sell is less than the number of securities which the
Company has been advised can be sold in such offering without having the adverse
effect referred to above, such number of Registrable Shares which the Holders
have requested to be included in such registration pursuant to Section 2(a)
hereof and which, in the opinion of such managing underwriter(s), can be sold
without having the adverse effect referred to above; and (iv) fourth, to the
extent that the number of securities which are to be included in such
registration pursuant to clauses (i), (ii) and (iii) is, in the aggregate, less
than the number of securities which the Company has been advised can be sold in
such offering without having the adverse effect referred to above, such number
of other securities requested to be included in the offering for the account of
any Other Holders which, in the opinion of such managing underwriter(s), can be
sold without having the adverse effect referred to above.
3. Holdback Agreements.
-------------------
(a) If any registration of Registrable Shares shall be in connection with
an underwritten public offering, the Holders shall not effect any public sale or
distribution (except in connection with such public offering), of any equity
securities of the Company, or of any security convertible into or exchangeable
or exercisable for any equity security of the Company (in each case, other than
as part of such underwritten public offering), during the 180-day period (or
such lesser period as the managing underwriter(s) beginning on the effective
date of such registration, if, and to the extent, the managing underwriter(s) of
any such offering determine(s) such action is necessary or desirable to effect
such offering; provided, however, that each Holder has received the written
-------- -------
notice required by Section 2(a) hereof; provided, however, that each Holder
-------- -------
shall not be obligated to comply with such restrictions arising as a result of
an underwritten public offering subject to Section 2 hereof more than once in
any 12-month period.
(b) If any registration of Registrable Shares shall be in connection with
any underwritten public offering, the Company shall not effect any public sale
or distribution (except in connection with such public offering) of any of its
equity securities or of any security convertible into or exchangeable or
exercisable for any of its equity securities (in each case other than as part of
such underwritten public offering) during the 180-day period (or such lesser
period as the managing underwriter(s) may permit) beginning on the effective
date of such registration, and the Company shall use its best efforts to cause
each member of the management of the Company who holds any equity security and
each other holder of 5% or more of the outstanding shares of any equity
security, or of any security convertible into or exchangeable or exercisable for
any equity security, of the Company purchased from the Company (at any time
other than in a public offering) to so agree.
4
<PAGE>
4. Registration on Request.
-----------------------
(a) Request by Holders. Upon the written request of the Holders of at
------------------
least 10% of the Registrable Shares (calculated on the based on the number in
clause (i) of its definition) that the Company effect the registration under the
Securities Act of all or part of such Holders' Registrable Shares, and
specifying the amount (which shall not be less than 10% of the Registrable
Shares (calculated on the based on the number in clause (i) of its definition)
in the aggregate) and the intended method of disposition thereof, the Company
will promptly give notice of such requested registration to all other Holders of
Registrable Shares and, as expeditiously as possible, use its best efforts to
effect the registration under the Securities Act of: (i) the Registrable Shares
which the Company has been so requested to register by Holders of at least 10%
of the Registrable Shares; and (ii) all other Registrable Shares which the
Company has been requested to register by any other Holder thereof by written
request received by the Company within 30 days after the giving of such written
notice by the Company (which request shall specify the intended method of
disposition of such Registrable Shares); provided, however, that the Company
-------- -------
shall not be required to effect more than two registrations pursuant to this
Section 4; provided, further, that the Company shall not be obligated to file a
-------- -------
registration statement relating to a registration request under this Section 4
(x) if the registration request is delivered after delivery of a notice by the
Company of an intended registration and prior to the effective date of the
registration statement referred to in such notice, or (y) within a period of 90
days after the effective date of any other registration statement of the Company
requested by a Holder pursuant to this Section 4 or pursuant to which the
Holders included Registrable Shares. The Holders initially requesting a
registration pursuant to this Section 4 may, at any time prior to the effective
date of the registration statement relating to such registration, revoke such
request by providing a written notice to the Company revoking such request;
provided, however, that, in the event the Holders shall have made a written
- -------- -------
request for a demand registration (I) which is subsequently withdrawn by the
Holders after the Company has filed a registration statement with the SEC in
connection therewith but prior to such demand registration being declared
effective by the SEC or (II) which is not declared effective solely as a result
of the failure of Holders to take all actions reasonably required in order to
have the registration and the related registration statement declared effective
by the SEC, then, in any such event, such demand registration shall be counted
as a demand registration for purposes of this Section 4(a). Promptly after the
expiration of the 30-day period referred to in clause (ii) above, the Company
will notify all the Holders to be included in the registration of the other
Holders and the number of shares of Registrable Shares requested to be included
therein.
(b) Registration Statement Form. If any registration requested pursuant to
---------------------------
this Section 4 which is proposed by the Company to be effected by the filing of
a registration statement on Form S-3 (or any successor or similar short-form
registration statement) shall be in connection with an underwritten public
offering, and if the managing underwriter(s) shall advise the Company in writing
that, in its opinion, the use of another form of registration statement is of
material importance to the success of such proposed offering, then such
registration shall be effected on such other form.
(c) Effective Registration Statement. A registration requested pursuant to
--------------------------------
this Section 4 will not be deemed to have been effected unless it has become
effective under the Securities Act and has remained effective for 270 days or
such shorter period as all the
5
<PAGE>
Registrable Shares included in such registration have actually been sold
thereunder. In addition, if within 180 days after it has become effective, the
offering of Registrable Shares pursuant to such registration is interfered with
by any stop order, injunction or other order or requirement of the SEC or other
governmental agency or court, such registration will be deemed not to have been
effected for purposes of this Section 4.
(d) Priority in Requested Registrations. If a requested registration
-----------------------------------
pursuant to this Section 4 involves an underwritten offering and the managing
underwriter(s) in good faith advise(s) the Company in writing that, in its
opinion, the number of securities requested to be included in such registration
(including securities of the Company which are not Registrable Shares) exceeds
the largest number of securities which can be sold in such offering without
having an adverse effect on such offering (including the price at which such
securities can be sold), then the Company will include in such registration (i)
first, 100% of the Registrable Shares requested to be registered pursuant to
Section 4(a) hereof (provided that if the number of Registrable Shares requested
to be registered pursuant to Section 4(a) hereof exceeds the number which the
Company has been advised can be sold in such offering without having the adverse
effect referred to above, the number of such Registrable Shares to be included
in such registration by the Holders shall be allocated pro rata among such
Holders on the basis of the relative number of Registrable Shares each such
Holder has requested to be included in such registration); (ii) second, to the
extent that the number of Registrable Shares requested to be registered pursuant
to Section 4(a) hereof is less than the number of securities which the Company
has been advised can be sold in such offering without having the adverse effect
referred to above, such number of shares of equity securities the Company
requests to be included in such registration, and (iii) third, to the extent
that the number of Registrable Shares requested to be included in such
registration pursuant to Section 4(a) hereof and the securities which the
Company proposes to sell for its own account are, in the aggregate, less than
the number of equity securities which the Company has been advised can be sold
in such offering without having the adverse effect referred to above, such
number of other securities proposed to be sold by any Other Holder which, in the
opinion of such managing underwriter(s), can be sold without having the adverse
effect referred to above (provided that if the number of such securities of such
Other Holder requested to be registered exceeds the number which the Company has
been advised can be sold in such offering without having the adverse effect
referred to above, the number of such securities to be included in such
registration pursuant to this Section 4(d) shall be allocated pro rata among all
such Other Holders on the basis of the relative number of securities each such
Other Holder has requested to be included in such registration).
(e) Additional Rights. If the Company at any time grants to any other
-----------------
holders of equity securities of the Company any rights to request the Company to
effect the registration of any such shares of equity securities on terms more
favorable to such holders than the terms set forth in this Section 4 and in
Section 5 hereof, the terms of this Section 4 and of Section 5 hereof shall be
deemed amended or supplemented to the extent necessary to provide the Holders
such more favorable rights and benefits. In no event shall the Company grant to
any person any rights to request the Company to effect the registration of any
shares of equity securities of the Company on terms which are adverse to rights
of the Holders set forth in Section 2 and this Section 4.
6
<PAGE>
5. Registration Procedures.
-----------------------
(a) If and whenever the Company is required by the provisions of Section 2
or 4 hereof to use its best efforts to effect or cause the registration of
Registrable Shares, the Company shall as expeditiously as possible:
(i) prepare and, in any event within 60 days after the end of the 30-
day period within which a request for registration may be given to the
Company as specified in Sections 2(a) and 4(a) hereof, file with the SEC a
registration statement with respect to such Registrable Shares and use its
best efforts to cause such registration statement to become effective;
(ii) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith
as may be necessary to keep such registration statement effective for a
period not in excess of 270 days and to comply with the provisions of the
Securities Act, the Exchange Act, and the rules and regulations promulgated
thereunder with respect to the disposition of all the securities covered by
such registration statement during such period in accordance with the
intended methods of disposition by the Holders thereof set forth in such
registration statement; provided, however, that (A) before filing a
-------- -------
registration statement (including an initial filing) or prospectus, or any
amendments or supplements thereto, the Company will furnish to one counsel
selected by the Holders of a majority of the Registrable Shares covered by
such registration statement copies of all documents proposed to be filed,
which documents will be subject to the review and comment of such counsel,
and (B) the Company will notify each Holder of Registrable Shares covered
by such registration statement of any stop order issued or threatened by
the SEC, any other order suspending the use of any preliminary prospectus
or of the suspension of the qualification of the registration statement for
offering or sale in any jurisdiction, and take all reasonable actions
required to prevent the entry of such stop order, other order or suspension
or to remove it if entered;
(iii) furnish to each Holder and each underwriter, if applicable, of
Registrable Shares covered by such registration statement such number of
copies of the registration statement and of each amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus included in such registration statement (including each
preliminary prospectus and summary prospectus), in conformity with the
requirements of the Securities Act, and such other documents as each Holder
of Registrable Shares covered by such registration statement may reasonably
request in order to facilitate the disposition of the Registrable Shares by
such Holder;
(iv) use its best efforts to register or qualify such Registrable
Shares covered by such registration statement under the state securities or
blue sky laws of such jurisdictions as each Holder of Registrable Shares
covered by such registration statement and, if applicable, each
underwriter, may reasonably
7
<PAGE>
request, and do any and all other acts and things which may be reasonably
necessary to consummate the disposition in such jurisdictions of the
Registrable Shares owned by such Holder, except that the Company shall not
for any purpose be required to qualify generally to do business as a
foreign corporation in any jurisdiction where, but for the requirements of
this clause (iv), it would not be obligated to be so qualified;
(v) use its best efforts to cause such Registrable Shares covered by
such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
Holders thereof to consummate the disposition of such Registrable Shares;
(vi) if at any time when a prospectus relating to the Registrable
Shares is required to be delivered under the Securities Act, any event
shall have occurred as the result of which any such prospectus as then in
effect would include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, immediately give written notice
thereof to each Holder and the managing underwriter or underwriters, if
any, of such Registrable Shares and prepare and furnish to each such Holder
a reasonable number of copies of an amended or supplemental prospectus as
may be necessary so that, as thereafter delivered to the purchasers of such
Registrable Shares, such prospectus shall not include an untrue statement
of material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
(vii) use its best efforts to list any portion of such Registrable
Shares not already listed on any securities exchange on which similar
securities of the Company are then listed, and enter into customary
agreements including a listing application and indemnification agreement in
customary form, provided that the applicable listing requirements are
satisfied, and provide a transfer agent and registrar for such Registrable
Shares covered by such registration statement not later than the effective
date of such registration statement;
(viii) enter into such customary agreements (including an
underwriting agreement in customary form) and take such other actions as
each Holder of Registrable Shares being sold or the underwriter or
underwriters, if any, reasonably request in order to expedite or facilitate
the disposition of such Registrable Shares, including customary
indemnification and opinions;
(ix) use its best efforts to obtain a "cold comfort" letter or
letters from the Company's independent public accountants in customary form
and covering matters of the type customarily covered by "cold comfort"
letters as the Holders of the Registrable Shares being sold or the
underwriters retained by such Holders shall reasonably request;
(x) make available for inspection by representatives of any Holder of
Registrable Shares covered by such registration statement, by any
underwriter
8
<PAGE>
participating in any disposition to be effected pursuant to such
registration statement and by any attorney, accountant or other agent
retained by such Holders or any such underwriter, all financial and other
records pertinent corporate documents and properties of the Company and its
subsidiaries' officers, directors and employees to supply all information
and respond to all inquiries reasonably requested by such Holders or any
such representative, underwriter, attorney, accountant or agent in
connection with such registration statement;
(xi) promptly prior to the filing of any document which is to be
incorporated by reference into the registration statement or the prospectus
(after initial filing of the registration statement), provide copies of
such document to counsel to the Holders of Registrable Shares covered by
such registration statement and to the managing underwriter(s), if any,
make the Company's representatives available for discussion of such
document and make such changes in such document prior to the filing thereof
as counsel for such Holders or underwriter(s) may reasonably request;
(xii) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security
holders, as soon as reasonably practicable after the effective date of the
registration statement, an earning statement which shall satisfy the
provisions of Section 11(a) of the Securities Act and the rules and
regulations promulgated thereunder;
(xiii) not later than the effective date of the applicable
registration statement, use its best efforts to provide a CUSIP number for
any portion of such Registrable Shares not already included in a CUSIP
number for similar securities of the Company, and provide the applicable
transfer agents with printed certificates for the Registrable Shares which
are in a form eligible for deposit with the Depository Trust Company;
(xiv) notify counsel for the Holders of Registrable Shares included
in such registration statement and the managing underwriter or
underwriters, if any, immediately and confirm the notice in writing, (A)
when the registration statement, or any post-effective amendment to the
registration statement, shall have become effective, or any supplement or
amendment to the prospectus shall have been filed, (B) of the receipt of
any comments from the SEC and (C) of any request of the SEC to amend the
registration statement or amend or supplement the prospectus or for
additional information; and
(xv) cooperate with each seller of Registrable Shares and each
underwriter, if any, participating in the disposition of such Registrable
Shares and their respective counsel in connection with any filings required
to be made with the NASD.
(b) Each Holder of Registrable Shares hereby agrees that, upon receipt of
any notice from the Company of the happening of any event of the type described
in Section
9
<PAGE>
5(a)(vi) hereof, such Holder shall forthwith discontinue disposition of such
Registrable Shares covered by such registration statement or related prospectus
until such Holder's receipt of the copies of the supplemental or amended
prospectus contemplated by Section 5(a)(vi) hereof, and, if so directed by the
Company, such Holder will deliver to the Company (at the Company's expense) all
copies, other than permanent file copies then in such Holder's possession, of
the prospectus covering such Registrable Shares at the time of receipt of such
notice. In the event the Company shall give any such notice, the period
mentioned in Section 5(a)(ii) hereof shall be extended by the number of days
during the period from and including the date of the giving of such notice
pursuant to Section 5(a)(vi) hereof and including the date when such Holder
shall have received the copies of the supplemental or amended prospectus
contemplated by Section 5(a)(vi) hereof. If for any other reason the
effectiveness of any registration statement filed pursuant to Section 4 hereof
is suspended or interrupted prior to the expiration of the time period regarding
the maintenance of the effectiveness of such Registration Statement required by
Section 5(a)(ii) hereof so that Registrable Shares may not be sold pursuant
thereto, the applicable time period shall be extended by the number of days
equal to the number of days during the period beginning with the date of such
suspension or interruption to and ending with the date when the sale of
Registrable Shares pursuant to such registration statement may be recommenced.
(c) Each Holder hereby agrees to provide the Company, upon receipt of its
request, with such information about such Holder to enable the Company to comply
with the requirements of the Securities Act and to execute such certificates as
the Company may reasonably request in connection with such information and
otherwise to satisfy any requirements of law.
6. Underwritten Registrations. Subject to the provisions of Sections 2,
--------------------------
3 and 4 hereof, any of the Registrable Shares covered by a registration
statement may be sold in an underwritten offering at the discretion of the
Holder thereof. In the case of an underwritten offering pursuant to Section 2
hereof, the managing underwriter(s) that will administer the offering shall be
selected by the Company; provided, however, that such managing underwriter(s)
-------- -------
shall be reasonably satisfactory to the Holders of a majority of the Registrable
Shares to be registered. In the case of any underwritten offering pursuant to
Section 4 hereof, the managing underwriter(s) that will administer the offering
shall be selected by the Holders of a majority of the Registrable Shares to be
registered; provided, however, that such underwriter(s) shall be reasonably
-------- -------
satisfactory to the Company.
7. Expenses.
--------
(a) Subject to Section 7(b), the Company shall pay all fees, costs and
expenses of all registrations pursuant to Section 2 hereof and the first
registration pursuant to Section 4 hereof, including all SEC and stock exchange
or NASD registration and filing fees and expenses, reasonable fees and expenses
of any "qualified independent underwriter" and its counsel as may be required by
the rules of the NASD, fees and expenses of compliance with securities or blue
sky laws (including reasonable fees and disbursements of counsel for the
underwriters, if any, in connection with blue sky qualifications of the
Registrable Shares), rating agency fees, printing expenses (including expenses
of printing certificates for Registrable Shares and prospectuses), messenger,
telephone and delivery expenses, the fees and expenses incurred in
10
<PAGE>
connection with the listing of the securities to be registered on each
securities exchange or national market system on which similar securities issued
by the Company are then listed, fees and disbursements of counsel for the
Company and all independent certified public accountants (including the expenses
of any annual audit, special audit and "cold comfort" letters required by or
incident to such performance and compliance), the fees and disbursements of the
underwriters customarily paid by issuers or sellers of securities (including
expenses relating to "road shows" and other marketing activities), the
reasonable fees and expenses of special experts required to be retained by the
Company in connection with such registration, and the reasonable fees and
expenses of other Persons required to be retained by the Company (collectively,
"Registration Expenses"); provided, however, that Registration Expenses shall
-------- -------
not include (i) any allocation of the overhead of the Company, including any
allocation of the compensation or benefits of employees of the Company that
assist in a registration, (ii) any other expense to the extent it would have
been incurred by the Company in the absence of any sale of securities in
connection with a registration pursuant to this Agreement (including the cost of
the Company's annual audit), or (iii) any expenses for any registration
proceeding begun pursuant to Section 4 hereof and subsequently withdrawn by the
Holder requesting such registration.
(b) The Holders shall pay the following: (i) all fees, costs and expenses
of all registrations except the first registration effected pursuant to Section
4 hereof including all Registration Expenses, (ii) any underwriting discounts or
commissions or transfer taxes, if any, attributable to the sale of Registrable
Shares by the Holders pursuant to this Agreement, (iii) all fees, costs and
expenses of counsel to the Holders pursuant to this Agreement in connection with
any registration pursuant to this Agreement, and (iv) all fees, costs and
expenses for any registration proceeding begun pursuant to Section 4 hereto and
subsequently withdrawn by the Holders requesting such registration.
8. Indemnification.
---------------
(a) Indemnification by the Company. In the event of any registration of
------------------------------
any securities of the Company under the Securities Act pursuant to Section 2 or
4 hereof, the Company will, and it hereby does, indemnify and hold harmless, to
the extent permitted by law, each of the Holders of any Registrable Shares
covered by such registration statement, each Affiliate of such Holder (other
than the Company) and their respective directors and officers, each other Person
who participates as an underwriter in the offering or sale of such securities
and each other Person, if any, who controls such Holder or any such underwriter
within the meaning of the Securities Act (collectively, the "Indemnified
Parties"), against any and all losses, claims, damages or liabilities, joint or
several, and expenses (including any amounts paid in any settlement effected
with the Company's consent, which consent shall not be unreasonably withheld) to
which any Indemnified Party may become subject under the Securities Act, state
securities or blue sky laws, common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof,
whether or not such Indemnified Party is a party thereto) or expenses arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which such
securities were registered under the Securities Act, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement thereof,
(ii) any omission or alleged omission to state therein a material fact required
to be
11
<PAGE>
stated therein or necessary to make the statements therein not misleading or
(iii) any violation by the Company of any federal, state or common law rule or
regulation applicable to the Company and relating to action required of or
inaction by the Company in connection with any such registration, and the
Company will reimburse such Indemnified Party for any legal or any other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, liability, action or proceeding; provided, however, that
-------- -------
the Company shall not be liable to any Indemnified Party in any such case to the
extent that any such loss, claim, damage, liability (or action or proceeding in
respect thereof) or expense arises out of or is based upon any untrue statement
or alleged untrue statement or omission or alleged omission made in such
registration statement or amendment or supplement thereof or in any such
preliminary, final or summary prospectus in reliance upon and in conformity with
written information with respect to such Holder furnished to the Company by such
Holder specifically for use in the preparation thereof. Such indemnity shall
remain in full force and effect regardless of any investigation made by or on
behalf of such Holder or any Indemnified Party and shall survive the transfer of
such securities by such Holder.
(b) Indemnification by the Holders and the Underwriters. The Company may
---------------------------------------------------
require, as a condition to including any Registrable Shares in any registration
statement filed in accordance with Section 2 or 4 hereof, that the Company shall
have received an undertaking reasonably satisfactory to it from the Holders of
such Registrable Shares or any underwriter to indemnify and hold harmless (in
the same manner and to the same extent as set forth in Section 8(a) hereof) the
Company with respect to any statement or alleged statement in or omission or
alleged omission from such registration statement, any preliminary, final or
summary prospectus contained therein, or any amendment or supplement, if such
statement or alleged statement or omission or alleged omission was made in
reliance upon and in conformity with written information with respect to the
Holders of the Registrable Shares being registered or such underwriter furnished
to the Company by such Holders or such underwriter specifically for use in the
preparation of such registration statement, preliminary, final or summary
prospectus or amendment or supplement, or a document incorporated by reference
into any of the foregoing; provided, however, that no such Holder shall be
-------- -------
liable for any indemnity claims in excess of the amount of the net proceeds
received by such Holder from the sale of Registrable Shares. Such indemnity
shall remain in full force and effect regardless of any investigation made by or
on behalf of the Company or any of the Holders, or any of their respective
Affiliates (other than the Company), directors, officers or controlling Persons,
and shall survive the transfer of such securities by such Holder.
(c) Notices of Claims, Etc. Promptly after receipt by an indemnified party
----------------------
hereunder of written notice of the commencement of any action or proceeding with
respect to which a claim for indemnification may be made pursuant to this
Section 8, such indemnified party will, if a claim in respect thereof is to be
made against an indemnifying party, give written notice to the latter of the
commencement of such action; provided, however, that the failure of the
-------- -------
indemnified party to give notice as provided herein shall not relieve the
indemnifying party of its obligations under this Section 8, except to the extent
that the indemnifying party is actually materially prejudiced by such failure to
give notice. In case any such action is brought against an indemnified party,
the indemnifying party will be entitled to participate in and to assume the
defense
12
<PAGE>
thereof, with counsel satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to such
indemnified party for any legal or other expenses subsequently incurred by the
latter in connection with the defense thereof other than reasonable costs of
investigation; provided, however, that the indemnified party shall have the
-------- -------
right, at the sole cost and expense of the indemnifying party, to employ counsel
to represent the indemnified party and its respective controlling persons,
directors, officers, employees or agents who may be subject to liability arising
out of any claim in respect of which indemnity may be sought by the indemnified
party against such indemnifying party under this Section 8 if (i) the employment
of such counsel shall have been authorized in writing by such indemnifying party
in connection with the defense of such action, (ii) the indemnifying party shall
not have promptly employed counsel reasonably satisfactory to the indemnified
party to assume the defense of such action or counsel, or (iii) any indemnified
party shall have reasonably concluded that there may be defenses available to
such indemnified party or its respective controlling persons, directors,
officers, employees or agents which are in conflict with or in addition to those
available to an indemnifying party; provided, further, that the indemnifying
-------- -------
party shall not be obligated to pay for more than the expenses of one firm of
separate counsel for the indemnified party (in addition to the reasonable fees
and expenses of one firm serving as local counsel). No indemnifying party will
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such indemnified party of a release from all liability in respect to such
claim or litigation.
(d) If the indemnification provided for in this Section 8 shall for any
reason be unavailable to any indemnified party under Section 8(a) or 8(b) hereof
or is insufficient to hold it harmless in respect of any loss, claim, damage or
liability, or any action in respect of any loss, claim, damage or liability, or
any action in respect thereof referred to therein, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of such loss, claim, damage or liability, or action in respect thereof,
(i) in such proportion as shall be appropriate to reflect the relative benefits
received by the indemnified party and indemnifying party or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) but also the relative fault of the indemnified party
and indemnifying party with respect to the statements or omissions which
resulted in such loss, claim, damage or liability, or action in respect thereof,
as well as any other relevant equitable considerations. Notwithstanding any
other provision of this Section 8(d), no Holder of Registrable Shares shall be
required to contribute an amount greater than the dollar amount of the proceeds
received by such Holder with respect to the sale of any such Registrable Shares.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
(e) Other Indemnification. Indemnification similar to that specified in
---------------------
the preceding subdivisions of this Section 8 (with appropriate modifications)
shall be given by the Company and each Holder of Registrable Shares with respect
of any required registration or other qualification of securities under any
federal or state law or regulation other than the Securities Act.
(f) Non-Exclusivity. The obligations of the parties under this Section 8
---------------
shall be in
13
<PAGE>
addition to any liability which any party may otherwise have to any other party.
9. Rule 144. The Company covenants that it will file in a timely manner
--------
the reports required to be filed by it under the Securities Act and the Exchange
Act and the rules and regulations promulgated thereunder (or, if the Company is
not required to file such reports, it will, upon the request of any Holder of
Registrable Shares, make publicly available such information), and it will take
such further action as any Holder of Registrable Shares may reasonably request,
all to the extent required from time to time to enable such Holder to sell
Registrable Shares without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the SEC. Upon the request of any Holder of
Registrable Shares, the Company will deliver to such Holder a written statement
as to whether it has complied with such requirements.
10. Assignability. This Agreement shall be binding upon and shall inure
-------------
to the benefit of the parties hereto and their respective successors and
permitted assigns. Except as provided herein, no party may assign any of its
rights or delegate any of its duties under this Agreement without the express
consent of the other parties hereto. In addition, and whether or not any
express assignment shall have been made, the provisions of this Agreement which
are for the benefit of the parties hereto other than the Company shall also be
for the benefit of and enforceable by any subsequent Holder of any Registrable
Shares, subject to the provisions contained herein. Any Holder may assign any
of its rights or delegate any of its duties under this Agreement, in whole or in
part, without any prior consent of the Company only to a Person (a "Designated
Transferee") (a) who is an Affiliate of Aura or (b) who is a transferee of
Registrable Shares (whether through purchase, share exchange, bequest or
otherwise) and who agrees to be bound by the terms of this Agreement. Any
purported assignment in violation of this Section 10 shall be void.
11. Limitation on Subsequent Registration Rights. From and after the date
--------------------------------------------
hereof, the Company shall not, without the prior written consent of the Holders
owning not less than 50% of the Registrable Shares, enter into any agreement
with any holder or prospective holder of any securities of the Company which
would allow such holder or prospective holder to include such securities in any
registration of the Company.
12. Notices. Any and all notices, designations, consents, offers,
-------
acceptances or any other communications shall be given in writing by either (a)
personal delivery to and receipted for by the addressee or by (b) telecopy or
registered or certified mail which shall be addressed, in the case of the
Company, to: Network Solutions, Inc., 505 Huntmar Park Drive, Herndon, Virginia
20170, attention: Chief Financial Officer; in the case of Holders, to the
address or addresses thereof appearing on the books of the Company or of the
transfer agent and registrar for its Common Stock. All such notices and
communications shall be deemed to have been duly given and effective: when
delivered by hand, if personally delivered; two business days after being
deposited in the mail, postage prepaid, if mailed; and when receipt is
acknowledged, if telecopied.
13. No Inconsistent Agreements. The Company will not hereafter enter into
--------------------------
any agreement with respect to its securities which is inconsistent with the
rights granted to the
14
<PAGE>
Holders in this Agreement.
14. Specific Performance. The Company acknowledges that the rights
--------------------
granted to the Holders in this Agreement are of a special, unique and
extraordinary character, and that any breach of this Agreement by the Company
could not be compensated for by damages. Accordingly, if the Company breaches
its obligations under this Agreement, the Holders shall be entitled, in addition
to any other remedies that they may have, to enforcement of this Agreement by a
decree of specific performance requiring the Company to fulfill its obligations
under this Agreement.
15. Severability. If any provision of this Agreement or any portion
------------
thereof is finally determined by a court of competent jurisdiction to be
unlawful or unenforceable, such provision or portion thereof shall in no way
affect any other provision of this Agreement, the application of any such
provision and any other circumstances, and any portion of such invalidated
provision that is not invalidated by such a determination shall remain in full
force and effect.
16. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original and all of which,
together, shall constitute one and the same instrument.
17. Defaults. A default by any party to this Agreement in such party's
--------
compliance with any of the conditions or covenants hereof or performance of any
of the obligations of such party hereunder shall not constitute a default by any
other party.
18. Amendments, Waivers. This Agreement may not be amended, modified or
-------------------
supplemented and no waivers of or consents to or departures from the provisions
hereof may be given unless consented to in writing by the Company and the
holders of a majority of the Registrable Shares; provided, however, that no such
-------- -------
amendment, supplement, modification or waiver shall deprive any Holder of any
rights under Section 2 or 4 hereof without the consent of such Holder.
19. Construction. The captions contained in this Agreement are for
------------
reference purposes only and shall not constitute a part of this Agreement.
Unless the context requires otherwise, the use of the masculine shall include
the feminine, and the use of the singular shall include the plural. The word
"including" shall mean "including, without limitation."
20. Attorneys' Fees. In any action or proceeding brought to enforce any
---------------
provision of this Agreement, or where any provision hereof is validly asserted
as a defense, the successful party shall be entitled to recover reasonable
attorneys' fees in addition to any other available remedy.
21. Third Party Beneficiaries. Except as expressly provided in this
-------------------------
Agreement, the parties hereto intend that this Agreement shall not benefit or
create any right or cause of action in or on behalf of any person other than the
parties hereto.
22. Entire Agreement. This Agreement contains the entire agreement among
----------------
the parties hereto with respect to the transactions contemplated herein and
understandings among
15
<PAGE>
the parties relating to the subject matter hereof. Any and all previous
agreements and understandings between or among the parties hereto regarding the
subject matter hereof are, whether written or oral, superseded by this
Agreement.
23. Governing Law. This Agreement is made pursuant to and shall be
-------------
construed in accordance with the laws of the State of Delaware without regard to
that state's conflicts of laws principles. The parties hereto submit to the
non-exclusive jurisdiction of the Courts of the State of Delaware in any action
or proceeding arising out of or relating to this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective authorized officers as of the date first written
above.
NEWCOM, INC.
By_______________________________________________
Name_____________________________________________
Title____________________________________________
AURA SYSTEMS, INC.
By_______________________________________________
Name_____________________________________________
Title____________________________________________
16
<PAGE>
EXHIBIT 10.8
INDEMNIFICATION AGREEMENT
-------------------------
THIS INDEMNIFICATION AGREEMENT ("Agreement") is entered into as of the 15th
day of June, 1997, by and between NEWCOM, INC., a Delaware corporation (the
-------------
"Company"), and ("Indemnitee").
------------
RECITALS:
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial increase in
corporate litigation in general, subjecting directors, officers, employees,
agents and fiduciaries to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induct Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitee to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows;
1. Indemnification.
---------------
(a) Indemnification of Expenses. The Company shall indemnify Indemnitee to
---------------------------
the fullest extent permitted by law if Indemnitee was or is or becomes a party
to or witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any threatened, pending or completed action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee in good faith believes might lead to
the institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "Claim") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was a director of the
Company, or any subsidiary of
-1-
<PAGE>
the Company, or is or was serving at the request of the Company as a director,
officer, employee, agent or fiduciary or another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action or inaction on
the part of Indemnitee while serving in such capacity (hereinafter an
"Indemnifiable Event") against any and all expenses (including attorneys' fees
and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, be a witness in or participate in, any such
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement (if such settlement is approved in advance by the
Company, which approval shall not be unreasonably withheld) of such Claim and
any federal, state, local or foreign taxes imposed on Indemnitee as a result of
the actual or deemed receipt of any payments under this Agreement (collectively,
hereafter "Expenses"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than five days after written demand by Indemnitee therefor is presented
to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of
---------------
the Company under Section 1(a) shall be subject to the condition that the
Reviewing Party (as described in Section 10(e) hereof) shall not have determined
(in a written opinion, in any case in which the Independent Legal Counsel
referred to in Section 1(c) hereof is involved) that Indemnitee would not be
permitted to be indemnified under applicable law, and (ii) the obligation of the
Company to make an advance payment of Expenses to Indemnitee pursuant to Section
2(a) (an "Expense Advance") shall be subject to the condition that, if, when and
to the extent that the Reviewing Party determines that Indemnitee would not be
permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commences legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not required to reimburse the Company
for any Expense Advance until a final judicial determination is made with
respect thereto (as to which all rights of appeal therefrom have been exhausted
or lapsed). Indemnitee's obligation to reimburse the Company for any Expense
Advance shall be unsecured and no interest shall be charged thereon. If there
has not been a Change in Control (as defined in Section 10(c) hereof), the
Reviewing Party shall be selected by the Board of Directors, and if there has
been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
-2-
<PAGE>
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
(c) Change in Control. The Company agrees that if there is a Change in
-----------------
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then, with respect to all matters thereafter
arising concerning the rights of Indemnitee to payments of Expenses and Expense
Advances under this Agreement or any other agreement or under the Company's
Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected
by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and fully
indemnify such counsel against any and all expenses (including attorney's fees),
claims, liabilities and damages arising out of relating to this Agreement or its
engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other provision of
-----------------------------
this Agreement other than Section 9 hereof, to the extent that Indemnitee has
been successful on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, in defense of any action, suit,
proceeding, inquiry or investigation referred to in Section 1(a) hereof or in
the defense of any claim, issue or matter therein, Indemnitee shall be
indemnified against all Expenses incurred by Indemnitee in connection therewith.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all Expenses
-----------------------
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than five
days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
--------------------------------
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any Claim made against
Indemnitee for which indemnification will or could by sought under this
Agreement. Notice to the Company shall be directed to the Chief Executive
Officer of the Company at the address shown on the signature page of this
Agreement (or such other address as the Company shall designate in writing to
Indemnitee). In addition, Indemnitee shall give the Company such information and
cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this Agreement, the
--------------------------------
termination of any Claim by judgement, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or
---------------
its equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any
-3-
<PAGE>
particular belief or that a court has determined that indemnification is not
permitted by applicable law. In addition, neither the failure of the Reviewing
Party to have made a determination as to whether Indemnitee has met any
particular standard of conduct or had any particular belief, nor an actual
determination by the Reviewing Party that Indemnitee has not met such standard
of conduct or did not have such belief, prior to the commencement of legal
proceedings by Indemnitee to secure a judicial determination that Indemnitee
should be indemnified under applicable law, shall be a defense to Indemnitee's
claim or create a presumption that Indemnitee has not met any particular
standard of conduct or did not have any particular belief. In connection with
any determination by the Reviewing Party or otherwise as to whether Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at any time of the receipt by the Company of a
------------------
notice of a Claim pursuant to Section 2(b) hereof, the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of Indemnitee, all amounts payable as a result of such action, suit, proceeding,
inquiry or investigation in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
hereunder to pay the Expenses of any Claim, the Company, if appropriate, shall
be entitled to assume the defense of such Claim with counsel approved by
Indemnitee, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall
have the right to employ Indemnitee's counsel in any such Claim at Indemnitee's
expense and (ii) if (A) the employment of counsel by Indemnitee has been
previously authorized by the Company, (B) Indemnitee shall have reasonably
concluded that there may be a conflict of interest between the Company and
Indemnitee in the conduct of any such defense, or (C) the Company shall not
continue to retain such counsel to defend such Claim, then the fees and expenses
of Indemnitee's counsel shall be at the expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the fullest
-----
extent permitted by law, notwithstanding that such indemnification is not
specifically authorized by the other provisions of this Agreement, the Company's
Certificate of Incorporation, the Company's Bylaws or by statute. In the event
of any change after the date of this Agreement in any applicable law, statute or
rule which expands the right of a Delaware corporation to indemnify a member of
its Board of Directors or an officer, employee, agent or fiduciary, it is the
intent of the parties hereto that Indemnitee shall enjoy by this Agreement the
greater benefits afforded by such change. In the event of any change
-4-
<PAGE>
in any applicable law, statute or rule which narrows the right of a Delaware
corporation to indemnify a member of its Board of Directors or an officer,
employee, agent or fiduciary, such change, to the extent not otherwise required
by such law, statute or rule to be applied to this Agreement, shall have not
effect on this Agreement or the parties' rights and obligations hereunder except
as set forth in Section 8(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement shall
--------------
be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee of any action taken or not taken while
serving in an indemnified capacity even though Indemnitee may have ceased to
serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under
--------------------------
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any provision
-----------------------
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, federal law or applicable public policy may prohibit
the Company form indemnifying its directors, officers, employees, agents or
fiduciaries, under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. To the extent the Company maintains liability
-------------------
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policy in such a manner as to provide
Indemnitee the same rights and benefits as are accorded to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
-5-
<PAGE>
(a) Excluded Action or Omissions. To indemnify Indemnitee for acts,
----------------------------
omissions or transactions from which Indemnitee may not relieved of liability
under applicable law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses to
------------------------------
Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee
and not by way of defense, expect (i) with respect to actions or proceedings
brought to establish or enforce a right to indemnification under this Agreement
or any other agreement or insurance policy or under the Company's Certificate of
Incorporation or Bylaws now or hereafter in effect relating to Claims for
Indemnifiable Events, (ii) in specific cases if the Board of Directors has
approved the initiation or bringing of such Claim, or (iii) as otherwise
required under section 145 of the Delaware General Corporation law, regardless
of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To Indemnify Indemnitee for any expenses incurred
------------------
by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce
or interpret this Agreement, if a court of competent jurisdiction determines
that each of the material assertions made by Indemnitee in such proceeding was
not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
--------------------------
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two (2) years from the date of accrual
of such cause of action, and any claim or cause of action of the Company shall
be extinguished and deemed released unless asserted by the timely filing of a
legal action within such two (2) year period; provided, however, that if any
shorter period of limitations is otherwise applicable to any such cause of
action, such shorter period shall govern.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, so that if Indemnitee is or was a director
of such constituent corporation, or is or was serving at the request of such
constituent corporation as a director of another corporation, partnership, joint
venture, employee benefit plan, trust or other enterprise, Indemnitee shall
stand in the same position under the provisions of this Agreement with respect
to the resulting or surviving corporation as Indemnitee would have respect to
such constituent corporation if its separate existence had continued.
-6-
<PAGE>
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be deemed
to have occurred if (i) any "person" (as such term is used in sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of stock of the
Company, (A) who is or becomes the beneficial owner, directly or indirectly, of
securities of the Company representing ten percent (10%) or more of the combined
voting power of the Company's then outstanding voting Securities, increases his
beneficial ownership of such securities by five percent (5%) or more over the
percentage so owned by such person, or (B) becomes the "beneficial owner" (as
defined in Rule 13d-3 under said Act), directly or indirectly, of securities of
the Company representing more than twenty percent (20%) of the total voting
power represented by the Company's then outstanding Voting Securities, (ii)
during any period of two (2) consecutive years, individuals who at the beginning
of such period constitute the Board of Directors of the Company and any new
director whose election by the Board of Directors or nomination for election by
the Company's stockholders was approved by a vote of at least two-thirds of the
directors then still in office who either were directors at the beginning of the
period or whose election or nomination for election was previously so approved,
cease for any reason to constitute a majority thereof, or (iii) the stockholders
of the Company approve a merger or consolidation of the Company with any other
corporation other than a merger or consolidation which would result in the
Voting Securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into Voting Securities of the surviving entity) at least eighty percent (80%) of
the total voting power represented by the Voting Securities of the Company or
such surviving entity outstanding immediately after such merger or
consolidation, or the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of (in one transaction or a series of transactions) all or substantially
all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel" shall mean
an attorney or firm of attorneys, selected in accordance with the provisions of
Section 1(c) hereof, who shall not have otherwise performed services for the
Company or Indemnitee within the last three (3) years (other than with respect
to matters concerning the rights of Indemnitee under this Agreement, or of other
indemnitees under similar indemnity agreements).
-7-
<PAGE>
(e) For purposes of this Agreement, a "Reviewing Party" shall mean any
appropriate person or body consisting of a member or members of the Company's
Board of Directors or any other person or body appointed by the Board of
Directors who is not a party to the particular Claim for which Indemnitee is
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "voting Securities" shall mean any
securities of the Company that vote generally in the election of the directors.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
--------------------------------------
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any director or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect regardless of whether Indemnitee continues to serve as a
director, officer, employee, agent or fiduciary of the Company or of any other
enterprise at the Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereto or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless, as a part of such action, a
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement of Expenses with respect
to such action, unless, as a part of such action, a court having jurisdiction
over such action determines that each of Indemnitee's material defenses to such
action was made in bad faith or was frivolous.
14. Notice. All notices and other communications required or permitted
------
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed given (a) five (5) days after deposit with the U.S. Postal
Service or other applicable postal service,
-8-
<PAGE>
if delivered by first class mail, postage prepaid, (b) upon delivery, if
delivered by hand, (c) one (1) business day after the business day of deposit
with Federal Express or similar overnight courier, freight prepaid, or (d) one
(1) day after the business day of delivery by facsimile transmission, if
delivered by facsimile transmission with copy by first class mail, postage
prepaid, and shall be addressed if to the Indemnitee, at the Indemnitee's
address as set forth beneath his signature to this Agreement and if to the
Company at the address of its principal corporate offices (attention: Secretary)
or at such other address as such party may designate by ten (10) days advance
written notice to the other party hereto.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
------------
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed as to give effect to
the intent manifested by the provision held invalid, illegal or unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and mergers all
previous written and
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oral negotiations, commitments, understandings and agreements relating to the
subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
---------------------------------------
Agreement shall be construed as giving Indemnitee any right to be engaged or
retained in the employ of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NEWCOM, INC., a Delaware corporation
By /s/ Sultan W. Khan
------------------------------------
Sultan W. Khan, President
Address 31166 Via Colinas
Westlake Village, CA 91362
AGREED TO AND ACCEPTED BY:
INDEMNITEE
- ----------
/s/ [Indemnitee]
- ----------------------------------------
Address
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EXHIBIT 10.13(b)
AGREEMENT FOR WHOLESALE FINANCING
This Agreement for Wholesale Financing ("Agreement") is made as of 4-16 1997
between DEUTSCHE FINANCIAL SERVICES CORPORATION ("DFS") and NEWCOM, INC., a [_]
SOLE PROPRIETORSHIP, [_] PARTNERSHIP, [X] CORPORATION, [_] LIMITED LIABILITY
COMPANY (check applicable term) ("Dealer"), having a principal place of business
located at 31166 VIA COLINAS, WESTLAKE VILLAGE, CA. 91362.
1. EXTENSION OF CREDIT. Subject to the terms of this Agreement, DFS may extend
credit to Dealer from time to time to purchase inventory from DFS approved
Vendors ("Vendors") and for other purposes. If DFS advances Funds to Dealer
following Dealer's execution of this Agreement, DFS will be deemed to have
entered into this Agreement with Dealer, whether or not executed by DFS.
DFS' decision to advance funds will not be binding until the funds are
actually advanced. DFS may combine all of DFS' advances to Dealer or on
Dealer's behalf, whether under this Agreement or any other agreement,
and whether provided by one or more of DFS' branch offices, together with
all finance charges, fees and expenses related thereto, to make one debt
owed by Dealer. DFS may, at any time and without notice to Dealer, elect
not to finance any inventory sold by particular Vendors who are in default
of their obligations to DFS, or with respect to which DFS reasonably feels
insecured. This is an agreement regarding the extension of credit, not the
provision of goods or services.
2. FINANCING TERMS AND STATEMENTS OF TRANSACTION. Dealer and DFS agree that
certain financial terms of any advance made by DFS under this Agreement,
whether regarding finance charges, other fees, maturities, curtailments or
other financial terms, are not set forth herein because such terms depend,
in part, upon the availability of Vendor discounts, payment terms or other
incentives, prevailing economic conditions, DFS' floorplanning volume with
Dealer and with Dealer's Venders, and other economic factors which may vary
over time. Dealer and DFS further agree that it is therefore in their
mutual best interest to set forth in this Agreement only the general terms
of Dealer's financing arrangement with DFS. Upon agreeing to finance a
particular item of inventory for Dealer, DFS will send Dealer a Statement
of Transaction identifying such inventory and the applicable financial
terms. Unless Dealer notifies DFS in writing of any objection within
fifteen (15) days after a Statement of Transaction is mailed to Dealer:
(a) the amount shown on such Statement of Transaction will be an account
stated; (b) Dealer will have agreed to all rates, charges and other terms
shown on such Statement of Transaction; (c) Dealer will have agreed that
DFS is financing the items of inventory referenced in such Statement of
Transaction at Dealer's request; and (d) such Statement of Transaction
will be incorporated herein by reference, will be made a part hereof as if
originally set forth herein, and will constitute an addendum hereto. If
Dealer objects to the terms of any Statement of Transaction, Dealer agrees
to pay DFS for such inventory in accordance with the most recent terms for
similar inventory to which Dealer has not objected (or, if there are no
prior terms, at the lesser of 16% per annum or at the maximum lawful
contract rate of interest permitted under applicable law), but Dealer
acknowledges that DFS may then elect to terminate Dealer's financing
program pursuant to Section 17, and cease making additional advances to
----------
Dealer. However, such termination will not accelerate the maturities of
advances previously made, unless Dealer shall otherwise be in default of
this Agreement.
3. GRANT OF SECURITY INTEREST. To secure payment of all of Dealer's current
and future debts to DFS, whether under this Agreement or any current or
future guaranty or other agreement, Dealer grants DFS a security interest
in all of Dealer's inventory, equipment, fixtures, accounts, contract
rights, chattel paper, security agreements, instruments, deposit accounts,
reserves, documents, and general
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made to Dealer thereon; all whether now owned or hereafter acquired, all
attachments, accessories, accessions, returns, repossessions, exchanges,
substitutions and replacements thereto, and all proceeds thereof. All such
assets are collectively referred to herein as the "Collateral." All of such
terms for which meanings are provided in the Uniform Commercial Code of the
applicable state are used herein with such meanings. All Collateral
financed by DFS, and all proceeds thereof, will be held in trust by Dealer
for DFS, with such proceeds being payable in accordance with Section 9.
---------
4. AFFIRMATIVE WARRANTIES AND REPRESENTATIONS. Dealer warrants and represents
to DFS that: (a) Dealer has good title to all Collateral; (b) DFS' security
interest in the Collateral financed by DFS is not now and will not become
subordinate to the security interest, lien, encumbrance or claim of any
person; (c) Dealer will execute all documents DFS requests to perfect and
maintain DFS' security interest in the Collateral; (d) Dealer will deliver
to DFS immediately upon each request, and DFS may retain, each Certificate
of Title or Statement of Origin issued for Collateral financed by DFS; (e)
Dealer will at all times be duly organized, existing, in good standing,
qualified and licensed to do business in each state, county, or parish, in
which the nature of its business or property so requires; (f) Dealer has
the right and is duly authorized to enter into this Agreement; (g) Dealer's
execution of this Agreement does not constitute a breach of any agreement
to which Dealer is now or hereafter becomes bound; (h) there are and will
be no actions or proceedings pending or threatened against Dealer which
might result in any material adverse change in Dealer's financial or
business condition or which might in any way adversely affect any of
Dealer's assets; (i) Dealer will maintain the Collateral in good condition
and repair; (j) Dealer has duly filed and will duly file all tax returns
required by law; (k) Dealer has paid and will pay when due all taxes,
levies, assessments and governmental charges of any nature; (l) Dealer will
keep and maintain all of its books and records pertaining to the Collateral
at its principal place of business designated in this Agreement; (m) Dealer
will promptly supply DFS with such information concerning it or any
guarantor as DFS hereafter may reasonably request; (n) all Collateral will
be kept at Dealer's principal place of business listed above, and such
other locations, if any, of which Dealer has notified DFS in writing or as
listed on any current or future Exhibit "A" attached hereto which written
notice(s) to DFS and Exhibit A(s) are incorporated herein by reference; (o)
Dealer will give DFS thirty (30) days prior written notice of any change in
Dealer's identity, name, form of business organization, ownership,
management, principal place of business, Collateral locations or other
business locations, and before moving any books and records to any other
location; (p) Dealer will observe and perform all matters required by any
lease, license, concession or franchise forming part of the Collateral in
order to maintain all the rights of DFS thereunder; (q) Dealer will advise
DFS of the commencement of material legal proceedings against Dealer or any
guarantor; and (r) Dealer will comply with all applicable laws and will
conduct its business in a manner which preserves and protects the
Collateral and the earnings and incomes thereof.
5. NEGATIVE COVENANTS. Dealer will not at any time (without DFS' prior written
consent): (a) other than in the ordinary course of its business, sell,
lease or otherwise dispose of or transfer any of its assets; (b) rent,
lease, demonstrate, consign, or use any Collateral financed by DFS; or (c)
merger or consolidate with another entity.
6. INSURANCE. Dealer will immediately notify DFS of any loss, theft or damage
to any Collateral. Dealer will keep the Collateral insured for its full
insurable value under an "all risk" property insurance policy with a
company acceptable to DFS, naming DFS as a lender loss-payee or mortgagee
and containing standard lender's loss payable and termination provisions.
Dealer will provide DFS with written
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7. FINANCIAL STATEMENTS. Dealer will deliver to DFS: (a) within ninety (90)
days after the end of each of Dealer's fiscal years, a reasonably detailed
balance sheet as of the last day of such fiscal year and a reasonably
detailed income statement covering Dealer's operations for such fiscal
year, in a form satisfactory to DFS; (b) within forty-five (45) days after
the end of each of Dealer's fiscal quarters, a reasonably detailed balance
sheet as of the last day of such quarter and an income statement covering
Dealer's operations for such quarter, in a form satisfactory to DFS; and
(c) within ten (10) days after request therefor by DFS, any other report
requested by DFS relating to the Collateral or the financial condition of
Dealer. Dealer warrants and represents to DFS that all financial statements
and information relating to Dealer or any guarantor which have been or may
hereafter be delivered by Dealer or any guarantor are true and correct and
have been and will be prepared in accordance with generally accepted
accounting principles consistently applied and, with respect to such
previously delivered statements or information, there has been no material
adverse change in the financial or business condition of Dealer or any
guarantor since the submission to DFS, either as of the date of delivery,
or, if different, the date specified therein, and Dealer acknowledges DFS'
reliance thereon.
8. REVIEWS. Dealer grants DFS an irrevocable license to enter Dealer's
business locations during normal business hours without notice to Dealer
to: (a) account for and inspect all Collateral; (b) verify Dealer's
compliance with this Agreement; and (c) examine and copy Dealer's books and
records related to the Collateral.
9. PAYMENT TERMS. Dealer will immediately pay DFS the principal indebtedness
owed DFS on each item of Collateral financed by DFS (as shown on the
Statement of Transaction identifying such Collateral) on the earliest
occurrence of any of the following events: (a) when such Collateral is
lost, stolen or damaged; (b) for Collateral financed under Pay-As-Sold
("PAS") terms (as shown on the Statement of Transaction identifying such
Collateral), when such Collateral is sold, transferred, rented, leased,
otherwise disposed of or matured; (c) in strict accordance with any
curtailment schedule for such Collateral (as shown on the Statement of
Transaction identifying such Collateral); (d) for Collateral financed under
Scheduled Payment Program ("SPP") terms (as shown on the Statement of
Transaction identifying such Collateral), in strict accordance with the
installment payment schedule; and (e) when otherwise required under the
terms of any financing program agreed to in writing by the parties.
Regardless of the SPP terms pertaining to any Collateral financed by DFS,
if DFS determines that the current outstanding debt which Dealer owes to
DFS exceeds the aggregate wholesale invoice price of such Collateral in
Dealer's possession, Dealer will immediately upon demand pay DFS the
difference between such outstanding debt and the aggregate wholesale
invoice price of such Collateral. If Dealer from time to time is require to
make immediate payment to DFS of any past due obligation discovered during
any Collateral audit, or at any other time, Dealer agrees that acceptance
of such payment by DFS shall not be construed to have waived or amended the
terms of its financing program. The proceeds of any Collateral received by
Dealer will be held by Dealer in trust for DFS' benefit, for application as
provided in this Agreement. Dealer will send all payments to DFS' branch
office(s) responsible for Dealer's account. DFS may apply: (i) payments to
reduce finance charges first and then principal, regardless of Dealer's
instructions; and (ii) principal payments to the oldest (earliest) invoice
for Collateral financed by DFS, but, in any event, all principal payments
will first be applied to such Collateral which is sold, lost, stolen,
damaged, rented, leased, or otherwise disposed of or unaccounted for. Any
third party discount, rebate, bonus or credit granted to Dealer for any
Collateral will not reduce the debt Dealer owes DFS until DFS has received
payment therefor in cash. Dealer will: (1) pay DFS even if any Collateral
is defective or fails to conform to any warranties extended by any third
party; (2) not assert
3
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indemnify and hold DFS harmless against all claims and defenses asserted by
any buyer of the Collateral relating to the condition of, or any
representations regarding, any of the Collateral. Dealer waives all rights
of offset and counterclaims Dealer may have against DFS.
10. CALCULATION OF CHARGES. Dealer will pay finance charges to DFS on the
outstanding principal debt which Dealer owes DFS for each item of
Collateral financed by DFS at the rate(s) shown on the Statement of
Transaction identifying such Collateral, unless Dealer objects thereto as
provided in Section 2. The finance charges attributable to the rate shown
---------
on the Statement of Transaction will: (a) be computed based on a 360 day
year; (b) be calculated by multiplying the Daily Charge (as defined below)
by the actual number of days in the applicable billing period; and (c)
accrue from the invoice date of the Collateral identified on such Statement
of Transaction until DFS receives full payment in good funds of the
principal debt Dealer owes DFS for each item of such Collateral in
accordance with DFS' payment recognition policy and DFS applies such
payment to Dealer's principal debt in accordance with the terms of this
Agreement. The "Daily Charge" is the product of the Daily Rate (as defined
below) multiplied by the Average Daily Balance (as defined below). The
"Daily Rate" is the quotient of the annual rate shown on the Statement of
Transaction divided by 360, or the monthly rate shown on the Statement of
Transaction divided by 30. The "Average Daily Balance" is the quotient of
(i) the sum of the outstanding principal debt owed DFS on each day of a
billing period for each item of Collateral identified on a Statement of
Transaction, divided by (ii) the actual number of days in such billing
period. Dealer will also pay DFS $100 for each check returned unpaid for
insufficient funds (an "NSF check") (such $100 payment repays DFS'
estimated administrative costs; it does not waive the default caused by the
NSF check). The annual percentage rate of the finance charges relating to
any item of Collateral financed by DFS will be calculated from the invoice
date of such Collateral, regardless of any period during which any finance
charge subsidy shall be paid or payable by any third party. Dealer
acknowledges that DFS intends to strictly conform to the applicable usury
laws governing this Agreement. Regardless of any provision contained herein
or in any other document executed or delivered in connection herewith or
therewith, DFS shall never be deemed to have contracted for, charged or be
entitled to receive, collect or apply as interest on this Agreement
(whether termed interest herein or deemed to be interest by judicial
determination or operation of law), any amount in excess of the maximum
amount allowed by applicable law, and, if DFS ever receives, collects or
applies as interest any such excess, such amount which would be excessive
interest will be applied first to the reduction of the unpaid principal
balances of advances under this Agreement, and, second, any remaining
excess will be paid to Dealer. In determining whether or not the interest
paid or payable under any specific contingency exceeds the highest lawful
rate, Dealer and DFS shall, to the maximum extent permitted under
applicable law: (A) characterize any non-principal payment (other than
payments which are expressly designated as interest payments hereunder) as
an expense or fee rather than as interest; (B) exclude voluntary pre-
payments and the effect thereof; and (C) spread the total amount of
interest throughout the entire term of this Agreement so that the interest
rate is uniform throughout such term.
11. BILLING STATEMENT. DFS will send Dealer a monthly billing statement
identifying all charges due on Dealer's account with DFS. The charges
specified on each billing statement will be: (a) due and payable in full
immediately on receipt; and (b) an account stated, unless DFS receives
Dealer's written objection thereto within 15 days after it is mailed to
Dealer. If DFS does not receive, by the 25th day of any given month,
payment of all charges accrued to Dealer's account with DFS during the
immediately preceding month, Dealer will (to the extent allowed by law) pay
DFS a late fee ("Late Fee") equal to the greater of $5 or 5% of the amount
of such finance charges (payment of the Late Fee does not waive the default
caused by
4
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applicable Law and this Agreement.
12. DEFAULT. Dealer will be in default under this Agreement if: (a) Dealer
breaches any terms, warranties or representations contained herein, in any
Statement of Transaction to which Dealer has not objected as provided in
Section 2, or in any other agreement between DFS and Dealer; (b) any
guarantor of Dealer's debts to DFS breaches any terms, warranties or
representations contained in any guaranty or other agreement between the
guarantor and DFS; (c) any representation, statement, report or certificate
made or delivered by Dealer or any guarantor to DFS is not accurate when
made; (d) Dealer fails to pay any portion of Dealer's debts to DFS when due
and payable hereunder or under any other agreement between DFS and Dealer;
(e) Dealer abandons any Collateral; (f) Dealer or any guarantor is or
becomes in default in the payment of any debt owed to any third party; (g)
a money judgment issues against Dealer or any guarantor; (h) an attachment,
sale or seizure issues or is executed against any assets of Dealer or of
any guarantor; (i) the undersigned dies while Dealer's business is operated
as a sole proprietorship, any general partner dies while Dealer's business
is operated as a general or limited partnership, or any member dies while
Dealer's business is operated as a limited liability company, as
applicable; (j) any guarantor dies; (k) Dealer or any guarantor shall cease
existence as a corporation, partnership, limited liability company or
trust, as applicable; (l) Dealer or any guarantor ceases or suspends
business; (m) Dealer, any guarantor or any member while Dealer's business
is operated as a limited liability company, as applicable, makes a general
assignment for the benefit of creditors; (n) Dealer, any guarantor or any
member while Dealer's business is operated as a limited liability company,
as applicable, becomes insolvent or voluntarily or involuntarily becomes
subject to the Federal Bankruptcy Code, any state insolvency law or any
similar law; (o) any receiver is appointed for any assets of Dealer, any
guarantor or any member while Dealer's business is operated as a limited
liability company, as applicable; (p) any guaranty of Dealer's debts to DFS
is terminated; (q) Dealer loses any franchise, permission, license or right
to sell or deal in any Collateral which DFS finances; (r) Dealer or any
guarantor misrepresents Dealer's or such guarantor's financial condition or
organizational structure; or (s) DFS determines in good faith that it is
insecure with respect to any of the Collateral or the payment of any part
of Dealer's obligation to DFS.
13. RIGHTS OF DFS UPON DEFAULT. In the event of a default:
(a) DFS may at any time at DFS' election, without notice or demand to
Dealer, do any one or more of the following: declare all or any part
of the debt Dealer owes DFS immediately due and payable, together with
all costs and expenses of DFS' collection activity, including, without
limitation, all reasonable attorneys' fees; exercise any or all rights
under applicable law (including, without limitation, the right to
possess, transfer and dispose of the Collateral); and/or cease
extending any additional credit to Dealer (DFS' right to cease
extending credit shall not be construed to limit the discretionary
nature of this credit facility).
(b) Dealer will segregate and keep the Collateral in trust for DFS, and in
good order and repair, and will not sell, rent, lease, consign,
otherwise dispose of or use any Collateral, not further encumber any
Collateral.
(c) Upon DFS' oral or written demand, Dealer will immediately deliver the
Collateral to DFS, in good order and repair, at a place specified by
DFS, together with all related documents; or DFS may, in DFS' sole
discretion and without notice or demand to Dealer, take immediate
possession of the Collateral together with all related documents.
(d) DFS may, without notice, apply a default finance charge to Dealer's
outstanding principal indebtedness equal to the default rate specified
in Dealer's financing program with DFS, if any, or if there is none so
specified, at the lesser of 3% per annum above the rate in effect
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interest permitted under applicable law.
All of DFS' rights and remedies are cumulative. DFS' failure to
exercise any of DFS' rights or remedies hereunder will not waive any
of DFS' rights or remedies as to any past, current or future default.
14. SALE OF COLLATERAL. Dealer agrees that if DFS conducts a private sale of
any Collateral by requesting bids from 10 or more dealers or distributors
in that type of Collateral, any sale by DFS of such Collateral in bulk or
in parcels within 120 days of: (a) DFS' taking possession and control of
such Collateral; or (b) when DFS is otherwise authorized to sell such
Collateral; whichever occurs last, to the bidder submitting the highest
cash bid therefor, is a commercially reasonable sale of such Collateral
under the Uniform Commercial Code. Dealer agrees that the purchase of any
Collateral by a Vendor, as provided in any agreement between DFS and the
Vendor, is a commercially reasonable disposition and private sale of such
Collateral under the Uniform Commercial Code, and no request for bids shall
be required. Dealer further agrees that 7 or more days prior written notice
will be commercially reasonable notice of any public or private sale
(including any sale to a Vendor). Dealer irrevocably waives any requirement
that DFS retain possession and not dispose of any Collateral until after an
arbitration hearing, arbitration award, confirmation, trial or final
judgment. If DFS disposes of any such Collateral other than as herein
contemplated, the commercial reasonableness of such disposition will be
determined in accordance with the laws of the state governing this
Agreement.
15. POWER OF ATTORNEY. Dealer grants DFS an irrevocable power of attorney to:
execute or endorse on Dealer's behalf any checks, financing statements,
instruments, Certificates of Title and Statements of Origin pertaining to
the Collateral; supply any omitted information and correct errors in any
documents between DFS and Dealer; initiate and settle any insurance claim
pertaining to the Collateral; and do anything to preserve and protect the
Collateral and DFS' rights and interest therein.
16. INFORMATION. DFS may provide to any third party any credit, financial or
other information on Dealer that DFS may from time to time possess. DFS may
obtain from any Vendor any credit, financial or other information regarding
Dealer that such Vendor may from time to time possess.
17. TERMINATION. Either party may terminate this Agreement at any time by
written notice received by the other party. If DFS terminates this
Agreement, Dealer agrees that if Dealer: (a) is not in default hereunder,
30 days prior notice of termination is reasonable and sufficient (although
this provision shall not be construed to mean that shorter periods may not,
in particular circumstances, also be reasonable and sufficient); or (b) is
in default hereunder, no prior notice of termination is required. Dealer
will not be relieved from any obligation to DFS arising out of DFS'
advances or commitments made before the effective termination date of this
Agreement. DFS will retain all of its rights, interests and remedies
hereunder until Dealer has paid all of Dealer's debts to DFS. All waivers
set forth within this Agreement will survive any termination of this
Agreement.
18. BINDING EFFECT. Dealer cannot assign its interest in this Agreement without
DFS' prior written consent, although DFS may assign or participate DFS'
interest, in whole or in part, without Dealer's consent. This Agreement
will protect and bind DFS' and Dealer's respective heirs, representatives,
successors and assigns.
19. NOTICES. Except as otherwise stated herein, all notices, arbitration
claims, responses, requests and documents will be sufficiently given or
served if mailed or delivered: (a) to Dealer at Dealer's principal place of
business specified above; and (b) to DFS at 655 Maryville Centre Drive, St.
Louis, Missouri 63141-5832,
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specify in writing.
20. NO ORAL AGREEMENT. ORAL AGREEMENTS OR COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT INCLUDING PROMISES
TO EXTEND OR RENEW SUCH DEBTS ARE NOT ENFORCEABLE. TO PROTECT DEALER AND
DFS FROM MISUNDERSTANDING OR DISAPPOINTMENT, ALL AGREEMENTS COVERING SUCH
MATTERS ARE CONTAINED IN THIS WRITING, WHICH IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, EXCEPT AS SPECIFICALLY
PROVIDED HEREIN OR AS THE PARTIES MAY LATER AGREE IN WRITING TO MODIFY IT.
THERE ARE NO UNWRITTEN AGREEMENTS BETWEEN THE PARTIES.
21. OTHER WAIVERS. Dealer irrevocably waives notice of: DFS' acceptance of
this Agreement, presentment, demand, protest, nonpayment, nonperformance,
and dishonor. Dealer and DFS irrevocably waive all rights to claim any
punitive and/or exemplary damages.
22. SEVERABILITY. If any provision of this Agreement or its application is
invalid or unenforceable, the remainder of this Agreement will not be
impaired or affected and will remain binding and enforceable.
23. SUPPLEMENT. If Dealer and DFS have heretofore executed other agreements in
connection with all or any part of the Collateral, this Agreement shall
supplement each and every other agreement previously executed by and
between Dealer and DFS, and in that event this Agreement shall neither be
deemed a novation nor a termination of such previously executed agreement
nor shall execution of this Agreement be deemed a satisfaction of any
obligation secured by such previously executed agreement.
24. RECEIPT OF AGREEMENT. Dealer acknowledges that it has received a true and
complete copy of this Agreement. Dealer acknowledges that it has read and
understood this Agreement. Notwithstanding anything herein to the contrary:
(a) DFS may rely on any facsimile copy, electronic data transmission or
electronic data storage of this Agreement, any Statement of Transaction,
billing statement, invoice from a Vendor, financial statements or other
reports, and (b) such facsimile copy, electronic data transmission or
electronic data storage will be deemed an original, and the best evidence
thereof for all purposes, including, without limitation, under this
Agreement or any other agreement between DFS and Dealer, and for all
evidentiary purposes before any arbitrator, court or other adjudicatory
authority.
25. MISCELLANEOUS. Time is of the essence regarding Dealer's performance of
its obligations to DFS notwithstanding any course of dealing or custom on
DFS' part to grant extensions of time. Dealer's liability under this
Agreement is direct and unconditional and will not be affected by the
release or nonperfection of any security interest granted hereunder. DFS
will have the right to refrain from or postpone enforcement of this
Agreement or any other agreements between DFS and Dealer without prejudice
and the failure to strictly enforce these agreements will not be construed
as having created a course of dealing between DFS and Dealer contrary to
the specific terms of the agreements or as having modified, released or
waived the same. The express terms of this Agreement will not be modified
by any course of dealing, usage of trade, or custom of trade which may
deviate from the terms hereof. If Dealer fails to pay any taxes, fees or
other obligations which may impair DFS' interest in the Collateral, or
fails to keep the Collateral insured, DFS may, but shall not be required
to, pay such taxes, fees or obligations and pay the cost to insure the
Collateral, and the amounts paid will be: (a) an additional debt owed be
Dealer to DFS, which shall be subject to finance charges as provided
herein; and (b) due and payable immediately in full. Dealer agrees to pay
all of DFS' reasonable attorneys' fees and expenses incurred by DFS in
enforcing
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convenience only and do not define or limit the contents of any Section.
26. BINDING ARBITRATION.
26.1 ARBITRABLE CLAIMS. Except as otherwise specified below, all actions,
disputes, claims and controversies under common law, statutory law or
in equity of any type or nature whatsoever (including, without
limitation, all torts, whether regarding negligence, breach of
fiduciary duty, restraint of trade, fraud, conversion, duress,
interference, wrongful replevin, wrongful sequestration, fraud in the
inducement, usury or any other tort, all contract actions, whether
regarding express or implied terms, such as implied covenants of good
faith, fair dealing, and the commercial reasonableness of any
Collateral disposition, or any other contract claim, all claims of
deceptive trade practices or lender liability, and all claims
questioning the reasonableness or lawfulness of any act), whether
arising before or after the date of this Agreement, and whether
directly or indirectly relating to: (a) this Agreement and/or any
amendments and addenda hereto, or the breach, invalidity or
termination hereof; (b) any previous or subsequent agreement between
DFS and Dealer; (c) any act committed by DFS or by any parent
company, subsidiary or affiliated company of DFS (the "DFS
Companies"), or by any employee, agent, officer or director of a DFS
Company whether or not arising within the scope and course of
employment or other contractual representation of the DFS Companies
provided that such act arises under a relationship, transaction or
dealing between DFS and Dealer; and/or (d) any other relationship,
transaction or dealing between DFS and Dealer (collectively the
"Disputes"), will be subject to and resolved by binding arbitration.
26.2 ADMINISTRATIVE BODY. All arbitration hereunder will be conducted in
accordance with the Commercial Arbitration Rules of The American
Arbitration Association ("AAA"). If the AAA is dissolved, disbanded
or becomes subject to any state of federal bankruptcy or insolvency
proceeding, the parties will remain subject to binding arbitration
which will be conducted by a mutually agreeable arbitral forum. The
parties agree that all arbitrator(s) selected will be attorneys with
at least five (5) years secured transactions experience. The
arbitrator(s) will decide if any inconsistency exists between the
rules of any applicable arbitral forum and the arbitration provisions
contained herein. If such inconsistency exists, the arbitration
provisions contained herein will control and supersede such rules.
The site of all arbitration proceedings will be in the Division of
the Federal Judicial District in which AAA maintains a regional
office that is closest to Dealer.
26.3 DISCOVERY. Discovery permitted in any arbitration proceeding
commenced hereunder is limited as follows. No later than thirty (30)
days after the filing of a claim for arbitration, the parties will
exchange detailed statements setting forth the facts supporting the
claim(s) and all defenses to be raised during the arbitration, and a
list of all exhibits and witnesses. No later than twenty-one (21)
days prior to the arbitration hearing, the parties will exchange a
final list of all exhibits and all witnesses, including any
designation of any expert witness(es) together with a summary of
their testimony; a copy of all documents and a detailed description
of any property to be introduced at the hearing. Under no
circumstances will the use of interrogatories, requests for
admission, requests for the production of documents or the taking of
depositions be permitted. However, in the event of the designation of
any expert witness(es), the following will occur: (a) all information
and documents relied upon by the expert witness(es) will be delivered
to the opposing party, (b) the opposing party will be permitted to
depose the expert witness(es), (c) the opposing party will be
permitted to designate rebuttal expert witness(es), and (d) the
arbitration hearing will be continued to the
8
<PAGE>
accomplished.
26.4 EXEMPLARY OR PUNITIVE DAMAGES. The Arbitrator(s) will not have
the authority to award exemplary or punitive damages.
26.5 CONFIDENTIALITY OF AWARDS. All arbitration proceedings, including
testimony or evidence at hearings, will be kept confidential,
although any award or order rendered by the arbitrator(s)
pursuant to the terms of this Agreement may be entered as a
judgment or order in any state or federal court and may be
confirmed within the federal judicial district which includes the
residence of the party against whom such award or order was
entered. This Agreement concerns transactions involving commerce
among the several states. The Federal Arbitration Act, Title 9
U.S.C. Sections 1 et seq., as amended ("FAA") will govern all
arbitration(s) and confirmation proceedings hereunder.
26.6 PREJUDGMENT AND PROVISIONAL REMEDIES. Nothing herein will be
construed to prevent DFS' or Dealer's use of bankruptcy,
receivership, injunction, repossession, replevin, claim and
delivery, sequestration, seizure, attachment, foreclosure, dation
and/or any other prejudgement or provisional action or remedy
relating to any Collateral for any current or future debt owed by
either party to the other. Any such action or remedy will not
waive DFS' or Dealer's right to compel arbitration of any
Dispute.
26.7 ATTORNEYS' FEES. If either Dealer or DFS brings any other action
for judicial relief with respect to any Dispute (other than those
set forth in Section 26.6), the party bringing such action will
------------
be liable for and immediately pay all of the other party's costs
and expenses (including attorneys' fees) incurred to stay or
dismiss such action and remove or refer such Dispute to
arbitration. If either Dealer or DFS brings or appeals an action
to vacate or modify an arbitration award and such party does not
prevail, such party will pay all costs and expenses, including
attorneys' fees, incurred by the other party in defending such
action. Additionally, if Dealer sues DFS or institutes any
arbitration claim or counterclaim against DFS in which DFS is the
prevailing party, Dealer will pay all costs and expenses
(including attorneys' fees) incurred by DFS in the course of
defending such action or proceeding.
26.8 LIMITATIONS. Any arbitration proceeding must be instituted: (a)
with respect to any Dispute for the collection of any debt owed
by either party to the other, within two (2) years after the date
the last payment was received by the instituting party; and (b)
with respect to any other Dispute, within two (2) years after the
date the incident giving rise thereto occurred, whether or not
any damage was sustained or capable of ascertainment or either
party knew of such incident. Failure to institute an arbitration
proceeding within such period will constitute an absolute bar and
waiver to the institution of any proceeding, whether arbitration
or a court proceeding, with respect to such Dispute.
26.9 SURVIVAL AFTER TERMINATION. The agreement to arbitrate will
survive the termination of this Agreement.
27. INVALIDITY/UNENFORCEABILITY OF BINDING ARBITRATION. IF THIS AGREEMENT IS
FOUND TO BE NOT SUBJECT TO ARBITRATION, ANY LEGAL PROCEEDING WITH RESPECT
TO ANY DISPUTE WILL BE TRIED IN A COURT OF COMPETENT JURISDICTION BY A
JUDGE WITHOUT A JURY. DEALER AND DFS WAIVE ANY RIGHT TO A JURY TRIAL IN ANY
SUCH PROCEEDING.
28. GOVERNING LAW. Dealer acknowledges and agrees that this and all other
agreements between Dealer and DFS have been substantially negotiated, and
will be substantially performed, in the state of CALIFORNIA. Accordingly,
----------
Dealer agrees that all Disputes will be governed by, and construed in
accordance with, the laws of such state, except to the extent inconsistent
with the provisions of the FAA which shall control and govern all
arbitration proceedings hereunder.
9
<PAGE>
IN WITNESS WHEREOF, Dealer and DFS have executed this Agreement as of the
date first set forth hereinabove.
THIS CONTRACT CONTAINS BINDING ARBITRATION, JURY WAIVER AND PUNITIVE DAMAGE
WAIVER PROVISIONS.
DEUTSCHE FINANCIAL SERVICES CORPORATION NEWCON, INC.
------------------------------------
Dealer's Name
By: /s/ Mark V. Rulmacs By: /s/ Sultan W. Khan
----------------------------------- ---------------------------------
Print Name: Mark V. Rulmacs Print Name: Sultan W. Khan
--------------------------- -------------------------
Title: RVP Title: CEO
-------------------------------- -----------------------------
By:________________________________
Print Name:________________________
Title:_____________________________
ATTEST:
/s/ Michael I. Froch
-----------------------------------
(Acting) Secretary
Print Name: Michael I. Froch
------------------------
10
<PAGE>
SECRETARY'S CERTIFICATE OF RESOLUTION
I certify that I am the Secretary or Assistant Secretary of the corporation
named below, and that the following completely and accurately sets forth certain
resolutions of the Board of Directors of the corporation adopted at a special
meeting thereof held on due notice (and with shareholder approval, if required
by law), at which meeting there was present a quorum authorized to transact the
business described below, and that the proceedings of the meeting were in
accordance with the certificate of incorporation, charter and by-laws of the
corporation, and that they have not been revoked, annulled or amended in any
manner whatsoever.
Upon motion duly made and seconded, the following resolution was
unanimously adopted after full discussion:
"RESOLVED, That the several officers, directors, and agents of this
corporation, or any one or more of them, are hereby authorized and empowered on
behalf of this corporation: to obtain financing from Deutsche Financial Services
Corporation ("DFS") in such amounts and on such terms as such officers,
directors or agents deem proper; to enter into financial, security, pledge and
other agreements with DFS relating to the terms upon which such financing may be
obtained and security and/or other credit support is to be furnished by this
corporation therefor; from time to time to supplement or amend any such
agreements; and from time to time to pledge, assign, mortgage, grant security
interests, and otherwise transfer, to DFS as collateral security for any
obligations of this corporation to DFS, whenever and however arising, any assets
of this corporation, whether now owned or hereafter acquired; the Board of
Directors hereby ratifying, approving and confirming all that any of said
officers, directors or agents have done or may do with respect to the
foregoing."
IN WITNESS WHEREOF, I have executed and affixed the seal of the corporation
on the date stated below.
Dated: 4-16, 1997 /s/ Michael Froch
----------- ----------------------------------------------
(Assistant) Secretary
NEWCOM, INC.
----------------------------------------------
Corporate Name
(SEAL)
11
<PAGE>
ADDENDUM TO BUSINESS FINANCING AGREEMENT AND
AGREEMENT FOR WHOLESALE FINANCING
This Addendum is made to (i) that certain Business Financing Agreement
executed on the 23rd day of December, 1996, between NEWCOM, INC. ("Dealer") and
Deutsche Financial Services Corporation ("DFS"), as amended ("BFA") and (ii)
that certain Agreement for Wholesale Financing between Dealer and DFS dated
April 16, 1997, as amended ("AWF").
FOR VALUE RECEIVED, DFS and Dealer agree as follows:
1. Section 3.2 of the BFA is hereby amended to read as follows, and, to
the extent applicable, the following provision shall also amend the AWF
(capitalized terms shall have the same meaning as defined in the BFA unless
otherwise indicated):
"3.2 AVAILABLE CREDIT; PAYDOWN. On receipt of each Schedule, DFS will
credit Dealer with such amount as DFS may deem advisable up to
the remainder of (a) seventy percent (70%) of the net amount of
eligible Accounts listed in such Schedule, minus (b) an amount
equal to one hundred percent (100%) of Dealer's outstanding
indebtedness (including open approvals and pending orders) under
Dealer's Agreement for Wholesale Financing (the 'AWF') with DFS
as in effect from time to time (the 'Reserve Amount') (the
remainder of (a) minus (b) is referred to herein as the
'Available Credit').
In addition, in the event Dealer's outstanding loans under
Dealer's accounts receivable credit facility as set forth in
Section 2.1 of this Agreement at any time exceed Dealer's
-----------
Available Credit, Dealer will immediately pay to DFS an amount
not less than the difference between (i) Dealer's outstanding
loans under Dealer's accounts receivable credit facility as set
forth in Section 2.1 of this Agreement, and (ii) Dealer's
-----------
Available Credit.
Furthermore, as an amendment to the AWF, in the event Dealer's
Reserve Amount exceeds at any time (a) seventy percent (70%) of
the net amount of Dealer's eligible Accounts, minus (b) Dealer's
outstanding loans under Dealer's accounts receivable credit
facility as set forth in Section 2.1 of this Agreement, Dealer
-----------
will immediately pay to DFS, as a reduction of Dealer's total
current outstanding indebtedness to DFS under the AWF, the
difference between (i) Dealer's Reserve Amount, and (ii) (a)
seventy percent (70%) of the net amount of Dealer's eligible
Accounts minus (b) Dealer's outstanding loans under Dealer's
accounts receivable credit facility as set forth in Section 2.1
-----------
of this Agreement. DFS will loan Dealer, on request, such amount
so credited or a part thereof as requested provided that at no
time will such outstanding loans exceed Dealer's maximum accounts
receivable credit facility as set forth in Section 2.1 of this
-----------
Agreement. No loans need be made by DFS if the Dealer is in
Default."
2. The following provision is hereby incorporated into the AWF as if
fully and originally set forth therein to provide as follows:
<PAGE>
"Dealer will (I) at all times maintain: (a) a Tangible Net Worth and
Subordinated Debt in the combined amount of not less than Ten Million
Dollars ($10,000,000.00); (b) a ratio of Debt minus Subordinated Debt to
Tangible Net Worth and Subordinated Debt of not more than three to one
(3.0:1); and (c) a ratio of Current Tangible Assets to current liabilities
of not less than one and one-half to one (1.5:1); and (II) for each of
Dealer's fiscal quarters, commencing with the fiscal quarter beginning on
September 1, 1996, either (a) achieve a Net Income of not less than One
Hundred Thousand Dollars ($100,000.00) for each such fiscal quarter or (b)
in the event that for any such fiscal quarter Dealer fails to achieve a Net
Income of not less than One Hundred Thousand Dollars ($100,000.00),
achieve, for that portion of Dealer's fiscal year which runs through the
end of such fiscal quarter, an Average Quarterly Net Income of at least One
Hundred Thousand Dollars ($100,000.00). As of the end of any fiscal quarter
(the 'Determination Date'), Dealer's 'Average Quarterly Net Income' shall
be determined by dividing Dealer's aggregate fiscal year to Determination
Date Net Income by the number of completed fiscal quarters in the fiscal
year through the Determination Date. For purposes of this paragraph: (i)
'Tangible Net Worth' means the book value of Dealer's assets less
liabilities, excluding from such assets all Intangibles; (ii) 'Intangibles'
-----------
means and includes general intangibles (as that term is defined in the
Uniform Commercial Code); accounts receivable and advances due from
-------------------
officers, directors, employees, stockholders and affiliates; leasehold
improvements net of depreciation; licenses; good will; prepaid expenses;
--------
escrow deposits; covenants not to compete; the excess of cost over book
----------------------------
value of acquired assets; franchise fees; organizational costs; finance
------------------------ -------
reserves held for recourse obligations; capitalized research and
--------------------------------------
development costs; and such other similar items as DFS may from time to
time determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's
liabilities and indebtedness for borrowed money of any kind and nature
whatsoever, whether direct or indirect, absolute or contingent, and
including obligations under capitalized leases, guaranties, or with respect
to which Dealer has pledged assets to secure performance, whether or not
direct recourse liability has been assumed by Dealer; (iv) 'Subordinated
Debt' means all of Dealer's Debt which is subordinated to the payment of
Dealer's liabilities to DFS by an agreement in form and substance
satisfactory to DFS; and (v) 'Net Income' means the net income of Dealer
before provision for taxes and after provision for extraordinary items and
adjustments. The foregoing terms will be determined in accordance with
generally accepted accounting principles consistently applied, and, if
applicable, on a consolidated basis."
3. The following provision is hereby incorporated into the AWF as if fully
and originally set forth therein:
"Dealer hereby agrees to cause an institution acceptable to DFS to issue in
favor of DFS one or more Irrevocable Letters of Credit, in form, substance
and with expiration dates satisfactory to DFS, in the amount of Five
Hundred Thousand Dollars ($500,000.00); provided, however, that if and when
the Average Contract Balance (as defined in Dealer's Business Financing
Agreement with DFS) under Dealer's Business Financing Agreement with DFS
for a calendar month exceeds Five Million Dollars ($5,000,000.00), Dealer
will, within twenty (20) days following the end of such calendar month,
provide DFS with an additional Irrevocable Letter of Credit in an amount
equal to Two Hundred Fifty Thousand Dollars ($250,000.00), so that DFS will
be holding in the aggregate, Irrevocable Letters of Credit in an amount
equal to Seven Hundred Fifty Thousand Dollars ($750,000.00). Any reduction
in the Average Contract Balance under Dealer's Business Financing Agreement
will not result in a reduction in the Irrevocable Letters of Credit.
<PAGE>
Dealer hereby agrees that if at least sixty (60) days prior to the
expiration of the above referenced Irrevocable Letter(s) of Credit or
any subsequent Letter(s) of Credit issued for the account of Dealer in
favor of DFS, such Irrevocable Letter of Credit is not extended for a
term of twelve (12) months or longer, or a new Irrevocable Letter of
Credit in an amount, form and from an institution acceptable to DFS
and for a term of twelve (12) months or longer is not provided to DFS,
an event of default shall have occurred under this Agreement, and DFS
may declare all sums owed by Dealer under this Agreement to be
immediately due and payable. Upon such default, DFS may: (i) exercise
any and all of its rights under this Agreement including, but not
limited to, the right to repossess the Collateral from Dealer; and
(ii) exercise any and all of its rights to draw upon any Irrevocable
Letter of Credit issued for the account of Dealer in favor of DFS."
All other terms and provision of the BFA and AWF, to the extent consistent
with the foregoing, are hereby ratified and will remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, Dealer and DFS have both read this Addendum to the
Business Financing Agreement and Agreement for Wholesale Financing, understand
all the terms and provisions hereof and agree to be bound thereby and subject
thereto as of this 16th day of April, 1997.
NEWCOM, INC.
Attest:
By: /s/ Sultan Khan
-----------------------------
/s/ Michael Froch Title: CEO
- -------------------------------- --------------------------
(Assistant) Secretary
DEUTSCHE FINANCIAL SERVICES CORPORATION
By: [Signature illegible]
--------------------------------
Title: RVP
---------------------------
<PAGE>
ADDENDUM TO BUSINESS FINANCING AGREEMENT
This Addendum is made to that certain Business Financing Agreement entered
into by and between Newcom, Inc. ("Dealer") and Deutsche Financial Services
Corporation ("DFS") on December 23, 1996, as amended ("Agreement").
FOR VALUE RECEIVED, DFS and Dealer agree as follows:
1. New Section 2.4 is incorporated into the Agreement as if fully and
originally set forth therein:
"2.4 NON-USE OF CREDIT FACILITY FEE. If the Average Contract Balance
for any calendar month is less than Five Million Dollars
($5,000,000.00), Dealer agrees to pay to DFS a non-use of credit
facility fee equal to ten one-hundredths of one percent (.10%) of the
difference between Five Million Dollars ($5,000,000.00) and the
Average Contract Balance for such month. Such non-use fee shall be
payable in arrears and due pursuant to DFS' monthly billing
statement."
2. New Section 2.5 is incorporated into the Agreement as if fully and
originally set forth therein:
"2.5 ACTIVATION FEE. Dealer agrees to pay DFS an activation fee in
connection with its Accounts Receivable Facility, payable in advance,
upon the execution of this Agreement, equal to one-quarter of one
percent (.25%) of the Accounts Receivable Facility. Once received by
DFS, the activation fee shall not be refundable by DFS for any
reason."
3. Section 3.3 of the Agreement is hereby amended in its entirety to read
as follows:
"3.3 INELIGIBLE ACCOUNTS. DFS will have the sole right to determine
eligibility of Accounts and, without limiting DFS' discretion in that
regard, the following Accounts will be deemed ineligible: (a) Accounts
created from the sale of goods and services on non-standard terms
and/or that allow for payment to be made more than thirty (30) days
from the date of sale; (b) Accounts unpaid more than ninety (90) days
from date of invoice; (c) all Accounts of any obligor with fifty
percent (50%) or more of the outstanding balance unpaid for more than
ninety (90) days from the date of invoice; (d) Accounts for which the
obligor is an officer, director, shareholder, partner, member, owner,
employee, agent, parent, subsidiary, affiliate of, or is related to
Dealer or has common shareholders, officers, directors, owners,
partners or members; (e) consignment sales; (f) Accounts for which the
payment is or may be conditional; (g) Accounts for which the obligor
is not a commercial or institutional entity or is not a resident of
the United States or Canada; (h) Accounts with respect to which any
warranty or representation provided in Subsection 3.4 is not true and
--------------
correct; (i) Accounts which represent goods or services purchased for
a personal, family or household purpose; (j) Accounts which represent
goods used for demonstration purposes or loaned by the Dealer to
another party; (k) Accounts which are progress payment, barter, or
contra accounts; (m) that portion of any obligor's Accounts which is
in excess of One Million Dollars ($1,000,000.00); and (n) any and all
other Accounts which DFS deems to be ineligible. If DFS determines
that any Account is or becomes an ineligible Account, immediately upon
notice thereof from DFS, Dealer will pay to DFS an amount equal to the
monies loaned by DFS for such ineligible Account."
1
<PAGE>
4. Section 3.8 of the Agreement is hereby amended in its entirety to read
as follows:
"3.8 COLLECTION DAYS. All payments and all amounts received on any
Account will be credited by DFS to Dealer's account (subject to final
collection thereof) after allowing one (1) business day for collection
of checks or other instruments."
5. Section 7.1.1 of the Agreement is hereby amended in its entirety to
read as follows:
"7.1.1 TERMINATION PRIVILEDGE. Despite anything to the contrary in
Section 7.1 of this Agreement, this Agreement may be terminated by
-----------
Dealer at any time upon ninety (90) days prior written notice and
payment to DFS of the following sum (in addition to payment of all
Obligations, whether or not by their terms then due) which sum
represents liquidated damages for the loss of the bargain and not as a
penalty, and the sum is hereby acknowledged by Dealer: (a) Fifty
Thousand Dollars ($50,000.00) if Dealer terminates this Agreement
during the initial twelve (12) month period of this Agreement; and
(b) Twenty-Five Thousand Dollars ($25,000.00) if Dealer terminates
this Agreement during the second twelve (12) month period of this
Agreement. This sum will also be paid by Dealer if the Agreement is
terminated on account of Dealer's Default."
6. The following paragraph is incorporated into the Agreement as if
fully and originally set forth therein:
"Dealer will (I) at all times maintain: (a) a Tangible Net Worth and
Subordinated Debt in the combined amount of not less than Ten Million
Dollars ($10,000,000.00); (b) a ratio of Debt minus Subordinated Debt
to Tangible Net Worth and Subordinated Debt of not more than three to
one (3.0:1); and (c) a ratio of Current Tangible Assets to current
liabilities of not less than one and one-half to one (1.5:1); and (II)
for each of Dealer's fiscal quarters, commencing with the fiscal
quarter beginning on September 1, 1996, either (a) achieve a Net
Income of not less than One Hundred Thousand Dollars ($100,000.00) for
each such fiscal quarter or (b) in the event that for any such fiscal
quarter Dealer fails to achieve a Net Income of not less than One
Hundred Thousand Dollars ($100,000.00), achieve, for that portion of
Dealer's fiscal year which runs through the end of such fiscal
quarter, an Average Quarterly Net Income of at least One Hundred
Thousand Dollars ($100,00.00). As of the end of any fiscal quarter
(the 'Determination Date'), Dealer's 'Average Quarterly Net Income'
shall be determined by dividing Dealer's aggregate fiscal year to
Determination Date Net Income by the number of completed fiscal
quarters in the fiscal year through the Determination Date. For
purposes of this paragraph: (i) 'Tangible Net Worth' means the book
value of Dealer's assets less liabilities, excluding from such assets
all Intangibles; (ii) 'Intangibles' means and includes general
intangibles (as that term is defined in the Uniform Commercial Code);
accounts receivable and advances due from officers, directors,
employees, stockholders and affiliates; leasehold improvements net of
depreciation; licenses; good will; prepaid expenses; escrow deposits;
covenants not to compete; the excess of cost over book value of
acquired assets; franchise fees; organizational cost; finance reserves
held for recourse obligations; capitalized research and development
costs; and such other similar items as DFS may from time to time
determine in DFS' sole discretion; (iii) 'Debt' means all of Dealer's
liabilities and indebtedness for borrowed money of any kind and nature
whatsoever, whether direct or indirect, absolute or contingent, and
including obligations under capitalized leases, guaranties, or with
respect to which Dealer has pledged assets to secure performance,
whether or not direct recourse liability has been assumed by Dealer;
(iv) 'Subordinated Debt' means all of Dealer's Debt which is
subordinated to the payment of Dealer's liabilities to DFS by an
agreement in form and substance satisfactory to DFS; and (v) 'Net
Income' means the net income of Dealer before provision for taxes and
after provision for extraordinary items and adjustments. The foregoing
terms will be determined in accordance with generally accepted
accounting principles consistently applied, and, if applicable, on a
consolidated basis."
2
<PAGE>
7. The following paragraphs are hereby incorporated into the Agreement
as if fully set forth therein (all capitalized terms shall have the same meaning
used in the Agreement unless otherwise defined herein):
"Dealer hereby agrees to cause an institution acceptable to DFS to
issue in favor of DFS one or more Irrevocable Letters of Credit, in
form, substance and with expiration dates satisfactory to DFS, in the
amount of Five Hundred Thousand Dollars ($500,000.00); provided,
however, that if and when the Average Contract Balance for a calendar
month exceeds Five Million Dollars ($5,000,000.00), Dealer will,
within twenty (20) days following the end of such calendar month,
provide DFS with an additional Irrevocable Letter of Credit in an
amount equal to Two Hundred Fifty Thousand Dollars ($250,000.00). so
that DFS will be holding in the aggregate, Irrevocable Letters of
Credit in an amount equal to Seven Hundred Fifty Thousand Dollars
($750,000.00). Any reduction in the Average Contract Balance will not
result in a reduction in the Irrevocable Letters of Credit.
Dealer hereby agrees that if at least sixty (60) days prior to the
expiration of the above referenced Irrevocable Letter(s) of Credit or
any subsequent Letter(s) of Credit issued for the account of Dealer in
favor of DFS, such Irrevocable Letter of Credit is not extended for a
term of twelve (12) months or longer, or a new Irrevocable Letter of
Credit in an amount, form and from an institution acceptable to DFS
and for a term of twelve (12) months or longer is not provided to DFS,
an event of default shall have occurred under this Agreement, and DFS
may declare all sums owed by Dealer under this Agreement to be
immediately due and payable. Upon such default, DFS may: (i) exercise
any and all of its rights under this Agreement including, but not
limited to, the right to repossess the Collateral from Dealer; and
(ii) exercise any and all of its rights to draw upon any Irrevocable
Letter of Credit issued for the account of Dealer in favor of DFS."
Dealer waives notice of DFS' acceptance of this Addendum.
All other terms and provisions of the Agreement, to the extent not
inconsistent with the foregoing, are ratified and remain unchanged and in full
force and effect.
IN WITNESS WHEREOF, Dealer and DFS have executed this Addendum on this 23rd
day of December, 1996.
NEWCOM, INC.
ATTEST:
By: /s/ Steven Veen
-----------------------------------
/s/ Michael I. Froch Title: CFO
- ---------------------------------- --------------------------------
(Acting Secretary)
DEUTCHE FINANCIAL SERVICES CORPORATION
By: [SIGNATURE ILLEGIBLE]
-----------------------------------
Title: [ILLEGIBLE]
--------------------------------
3
<PAGE>
EXHIBIT 10.15
[LOGO OF NEWCOM INC.]
DISTRIBUTOR PURCHASE AGREEMENT
This agreement is entered into as of ______________ (the "Effective Date"),
between NEWCOM, INC., a Delaware corporation ("Seller"), and _______,
a _________ corporation ("Distributor").
Seller and Distributor agree as follows:
1. Definitions. Whenever used in the Agreement, the following terms will
-----------
have the meanings set forth below:
(a) "Products" means any and all items purchased or to be purchased by
Distributor from Seller.
(b) "Purchase Order" means a written purchase order provided to Seller
setting forth the information described in Section 3(a).
2. Appointment as Distributor.
--------------------------
(a) Seller hereby appoints Distributor as its non-exclusive, national
distributor of the Products to market, promote, distribute and resell
the Products to customers of the Distributor, either directly or
indirectly. Seller will notify Distributor at least thirty (30) days
prior to the date on which a new Product will be introduced and will
make such new Product available to Distributor for distribution no
later than the date it is first introduced in the market place.
(b) Distributor reserves the right to set its resale pricing for the
Products at its own discretion. Seller reserves the right to appoint
other authorized distributors to resell the Products. Except as set
forth in a Purchase Order submitted under this agreement which is not
canceled as provided herein, Distributor shall not be obligated to
purchase any of the Products from Seller and Distributor may purchase
any Product, or a product similar to any Product, from any third
party.
(c) Distributor is hereby authorized to use trademarks and trade names of
Seller and third parties used in connection with the Products,
advertising, promoting or distributing of the Products. Distributor
recognizes Seller or other third parties may have rights or ownership
of certain trademarks, trade names, copyrights and patents associated
with the Products. Distributor will act consistently with such rights
and Distributor shall comply with any reasonable written guidelines
provided by Seller of third parties relating to such trademarks, or
trade name usage. Distributor will notify Seller of any infringement
of which Distributor has actual knowledge. Distributor will
discontinue use of Seller's trademarks upon termination of this
Agreement, except as may be needed to sell or liquidate any final
inventories of Products.
3. Purchase Orders.
---------------
(a) During the terms of this Agreement, Distributor shall from time to
time place Purchase Orders for each type of Product ordered hereunder.
Each Purchase Order shall set forth the following: (i) part number,
revision level, quantity and price of the Products and co-op fund
rate; (ii) delivery dates, delivery destinations and requirements
regarding complete or partial shipments; (iii) delivery method and
carrier; and (iv) billing information. Seller shall accept any
Purchase Order that is in conformance with the terms and conditions of
this Agreement and shall deliver to Distributor the Products ordered
thereunder in accordance with Distributor's purchase orders. All
purchases of Products shall be made solely pursuant to this Agreement
and the items
1
<PAGE>
to be printed on the Purchase Orders as noted above, notwithstanding
any additional, conflicting or different terms printed on either
party's purchase orders, acknowledgments, invoices or other
documentation.
(b) Distributor may cancel or reschedule any Purchase Order for Products
or any line item of any Purchase Order with seven (7) days written
notice prior to delivery of the Products by Seller. Distributor may
cancel any Purchase Order for Products if such Products are not
delivered by or before the ship date specified in the Purchase Order.
Any Products delivered to Distributor pursuant to such canceled
Purchase Order may be received, held and returned to Seller at
Seller's risk and expense, and Seller shall issue to Distributor shall
have the right to direct Seller to make shipment to the delivery
destination by the most expeditious means available and the total cost
of such expedited shipment will be borne by Seller and prepaid.
(c) Distributor may issue Purchase Orders in order to evaluate Products or
for use as Product demonstration units at no charge for thirty (30)
days. After completion of such evaluation or demonstration use,
Distributor may either purchase such Products or return such products
to Seller at Distributor's expense.
4. Delivery: Title and Risk of Loss. The Products shall be delivered to
--------------------------------
Distributor at the delivery destination set forth in the Purchase Order on or
before the delivery date specified therefore. Distributor shall notify Seller in
writing of any shortage in any shipment within seven (7) days after
Distributor's receipt of such shipment. Seller shall bear the expense of
transporting the Products to Distributor, including any and all shipping,
freight, insurance and any other expense of transportation. Title to and risk of
loss of the Products shall pass to Distributor upon actual delivery of the
Products to the correct carrier at the delivery point.
5. Inspection and Acceptance. Distributor may inspect the Products prior to
-------------------------
Distributor's acceptance thereof during the fifteen (15) day period after
delivery to Distributor. Distributor's acceptance of each type of Product shall
be based on the Products' complying with all manufacturer's published
specifications and warranties applicable to such Product. Failure of Distributor
to inspect the Products within such inspection period and to notify Seller of
Distributor's rejection thereof and the specific grounds for such rejection
within a reasonable time after the expiration of the inspection period shall
constitute a waiver of Distributor's rights of inspection and shall be
equivalent to acceptance of the Products, except with respect to latent defects,
fraud and Seller's warranty obligations.
6. Invoicing and Payments. Seller shall deliver an invoice for the Products
----------------------
ordered by Distributor under this Agreement on or after the date that
Distributor accepts the Products. Each invoice shall contain the following
information: Distributor's purchase order number, Distributor's part number, a
description of the Products delivered, the revision level of the Products,
quantities, and the unit prices. All payments for Products sold to Distributor
under this Agreement will be made within thirty (30) days after the date of
Distributor's receipt of invoice, unless other credit terms have been mutually
agreed upon. Seller shall notify Distributor in writing of the scheduled
shipment date for each shipment under a Purchase Order.
7. Pricing.
-------
(a) Distributor shall pay to Seller the price set forth on Seller's
published price list current as of the date of the Purchase Order for
each type of Product purchased from Seller hereunder. Seller may
increase or decrease pricing to Distributor with thirty (30) days
prior written notice of price changes. Distributor may make a last
Purchase Order for Product units before the purchase price therefore
increases.
(b) Seller will provide Distributor with updated Product price lists as
soon as Seller makes a Product price adjustment, but in no event less
than monthly. Seller will grant Distributor a retroactive price credit
for the full amount of any Seller price decrease for any Products
purchased before the effective date of the price decrease that are
2
<PAGE>
remaining in Distributor's inventory. Upon written request by Seller,
Distributor will supply Seller with a list of all Products for which
it claims such a credit. Seller will have reasonable audit rights to
verify the accuracy of the claim.
(c) Price Protection applies only to the reduction in the Retail Price
listed in the NewCom Price Schedule, unless otherwise specified.
Price Protection applies only to those units remaining in the
Reseller's physical inventory as of the effective date of the price
reduction. All claims must be submitted within forty five (45) days of
the effective date of the published Price Reduction.
Price Protection will not be applicable if the price change is a
"Close-Out or "Phase-out" special, or whenever "No Price Protection"
is indicated in a notification from NewCom. On hand inventory at
notice of "close-out" or "Phase-out" will be price protected to close-
out price.
The credit will be the difference between the Net Amount invoiced
(including Special Promotional Allowances, Discounts, Special Pricing,
etc.) and the new reduced price. Claim procedures: The "Price
Protection Claim Form" must be completed and validated by the
authorized NewCom management for approval.
NewCom reserves the right to verify the inventory for which credit is
being requested.
(d) Seller, at it's option, will offer the co-op program and advertising
credit to Distributor. Distributor will provide Seller with backup
documentation regarding Distributor's advertising and marketing
activities with respect to co-op and advertising credits applied
against amounts invoiced.
8. Co-Op.
-----
(a) Seller, at it's option will offer the co-op program and advertising
credit to Distributor based on performance and subject to pre-approval
based on 2% of gross sales. MDF might be available on a case by case
basis.
(b) All co-op claims submitted to NewCom must have proper backup
documentation (ie: tear sheets, invoices, etc.) in order to receive
credit. If improper documentation is received by NewCom, the co-op
request will be rejected and the specific claim will be disallowed for
accrual funding.
(c) Co-op claims must be submitted within 60 days of the promotional event
and must be applied against advertising expenses (ie: catalog, flyers,
print, etc.) unless authorized by NewCom.
(d) Co-op claims must be submitted to:
NewCom, Inc.
31166 Via Colinas
Westlake Village, CA 91362
ATTN: Marketing Coordinator
9. Taxes. In addition to the purchase price, Distributor shall pay the amount
-----
of any federal, state or local sales, use, excise, or similar taxes applicable
to the sale or to the Products sold, not measured by the income of Seller, or in
lieu thereof, Distributor shall furnish Seller a properly executed tax exemption
certificate. Any such taxes shall be separately itemized on Seller's invoice.
10. Warranty. Seller warrants as follows:
--------
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<PAGE>
(a) Each Product furnished under the Agreement will be in conformity with
and perform in accordance with the manufacturer's published
specifications for such Product and shall be free from defects in
design, material and workmanship for a period of one (1) year from the
date of delivery of such Product. Beyond one (1) year, Product will be
repaired or replaced.
(b) The title hereunder conveyed shall be good and its transfer rightful,
and the Products shall be transferred and delivered free from any and
all security interests and other liens, claims and encumbrances.
(c) None of the Products do or will infringe any patent, trademark,
copyright, mask work right, license or other proprietary right of any
third party. There are presently no claims or suits threatened or
pending against the manufacturer of any Products alleging that any of
the Products violate any patent, trademark, copyright, mask work
right, license or other proprietary right of any third party to the
knowledge of the Seller. Seller shall promptly notify Distributor in
the event that such claims or suits arise after the Effective Date.
Distributor's remedies for a breach of the non-infringement warranty
set forth in this Section 10(c) shall be limited solely and
exclusively to (1) the indemnification and other rights offered to
Distributor under Section 12. The rights and remedies for breach of
the non-infringement warranty described in this Section 10(c) are,
with respect to one another, non-exclusive and the exercise of any one
or more of such rights and remedies shall not preclude the exercise of
other such rights and remedies, concurrently or otherwise.
(d) THE WARRANTIES SET FORTH IN THIS SECTION 10 ARE IN LIEU OF ALL OTHER
WARRANTIES AND CONDITIONS, EXPRESSED, STATUTORY, OR IMPLIED, INCLUDING
THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
11. Return of Products. Seller agrees to accept the return of products under
------------------
the following conditions. Distributor is required to obtain a pre-approved
Return Material Authorization (RMA) number.
(a) Distributor may return for credit, less any credits or price
adjustments, all Products purchased within the previous sixty (60)
days, that NewCom discontinues or removes from its published price
listing. NewCom will provide Distributor with thirty (30) days advance
notice of Product discontinuations.
(b) The one (1) year warranty period described in Section 10(a) hereof on
any repaired or replacement Product returned to Distributor under
Section 10 shall be extended for a period of twelve (12) months from
the date that Distributor receives the repaired or replacement
Products form Seller.
(c) Stock Rotation will be allowed for inventory up to 20% of the previous
quarterly purchases amount of net invoices or material shipped by
NewCom in the previous one hundred twenty (120) day period. All
product returns must follow the RMA policy
(d) If DOA product received within sixty (60) days of Distributor Sales
Date exceeds 2% of quarterly sales, then NewCom shall pay freight
charges for the return of product to NewCom. NewCom reserves the right
to verify DOA products to verify the nature of the product being
returned.
(e) Multimedia Kits components (i.e. sound cards, speakers, CD-Rom etc.)
which are returned will be treated as warranty or exchange of the
product. No credit will issued.
4
<PAGE>
12. Proprietary Right Indemnity. Seller shall, at it own expense, defend,
---------------------------
indemnify and save Distributor, its agents and customers, harmless from all
costs, losses, damages and liability, including, without limitation, attorneys'
fees and any indirect, incidental, special and consequential damages, which may
be incurred on account of any claims, suits or actions of infringement of any
patent, copyright, mask work right, trade secret or other proprietary right of
any third party arising out of the sale, use or other disposition of the
Products, or any part of any Product, procured under the Agreement by
Distributor, provided Seller is promptly notified of such claims, suits or
actions and is given reasonable assistance in the defense thereof and all
negotiations for its settlement or compromise. In the event of such a charge of
infringement, Seller also shall either defend or settle, or both, all claims and
pay all damages with respect to products of distributor previously sold or
manufactured using infringing (or allegedly infringing) Products purchased from
Seller and (a) obtain a license for Distributor, its agents and customers to
continue the use of or to sell the infringing Product purchased form Seller; or
(b) replace or modify the infringing Product so as to perform in accordance with
the specifications applicable to the infringing Product but be non-infringing;
provided, however, that Seller shall promptly notify Distributor of the terms of
any settlement offer and that Distributor shall approve any such settlement
offer prior to its acceptance by Seller, which approval shall not be
unreasonably withheld.
13. Insurance. Without in any way limiting Seller's indemnification
---------
obligations as set forth in this Agreement, Seller shall maintain Comprehensive
General Liability (Bodily Injury and Property Damage) Insurance in such amounts
as is satisfactory to Distributor, including the following supplementary
coverage: Personal Injury Liability with "employee" and "contractual"
exclusions deleted; and Product and Completed Operations Liability. Seller
shall provide certificates of all coverage to Distributor naming Distributor as
additional insured and requiring thirty (30) days prior notice to Distributor
before termination of any such insurance.
14. Compliance with Applicable Laws. The parties hereto have been, and shall
-------------------------------
continue to be, in material compliance with the provisions of all applicable
federal, state and local laws, regulations, rules and ordinances applicable to
the transactions governed by the Agreements, including, without limitation, The
Equal Opportunity and Affirmative Action Clauses of 41 CFR 60-1.4(a), 60-250.4
and 60-741.4 which are hereby incorporated by reference and, upon request, any
party hereto shall furnish the other party hereto a certificate to that effect.
The parties agree to take the following actions as appropriate: (a) file SF.100
(60-1.7(a)); (b) certify absence of segregated facilities (60-1.8(b)); (c)
prepare facilities (60-1.8(b)); and (d) prepare written affirmative action
program (60-1.40(a), 60-250.5(a) and 60-741.5(a)). The applicable party shall
prepare, maintain and file with all appropriate authorities such records and
reports as pertain to the sale, use and characteristics of the Products as may
be required by any federal, state or local law or regulation concerning the
sale, use of characteristics of the Products or the end products of which the
Products may be a part or component and shall provide the other party hereto
with copies of and access to such records upon request.
15. Effect of Termination. Upon the termination date of this Agreement all
---------------------
rights and obligations granted under or imposed by the Agreement shall
immediately cease and terminate, except as set forth in this Section 15, and
except for the rights, duties and obligations set forth in Sections 7(b), 10,
11a, 12 and 14 of this Agreement. At its option, Distributor may elect to sell
the remaining inventory of Seller's Products. If Distributor elects to return
its remaining Product Inventory, in whole or in part, upon request Seller shall
issue Distributor a credit or refund for the price paid for such Products by
Distributor, less any credits and adjustments. Nothing contained in this
section 15 shall be construed as granting Distributor the right to: (a) place a
new Purchase Order for Products under the Agreement after the exercise of such
termination right, or (b) extend delivery of the Products remaining to be
delivered beyond the end of the delivery date therefore.
16. Miscellaneous.
-------------
(a) Notices. All notices shall be in writing and shall be mailed by
-------
certified or registered mail, return receipt requested, facsimile or
hand delivered to the other party at the
5
<PAGE>
address set forth below. Each notice to Seller or Distributor shall be
addressed, until notice of change thereof, as follows:
If intended for Seller, to:
________________________________
________________________________
________________________________
Attn:___________________________
Facsimile Number:_______________
If intended for Distributor, to:
NewCom, Inc.
31166 Via Colinas
Westlake Village, CA 91362
Attn: Director of Sales and Marketing
Facsimile Number: 818/597-3210
(b) Severability. If one or more of the provisions of the Agreement shall
------------
for any reason be held to be invalid, illegal or unenforceable by a
court of competent jurisdiction, the same shall not affect any other
provision of the Agreement, but the Agreement shall be construed as if
such invalid, illegal or unenforceable provision, or part thereof, had
never been contained therein.
(c) Entire Agreement; Modification. The Agreement constitutes the entire
------------------------------
agreement of the parties with respect to the subject matter thereof,
notwithstanding any additional conflicting or different terms that may
be contained in any quotation, acknowledgment, confirmation, purchase
order, invoice or other form of either party. All prior and
contemporaneous oral or written proposals, negotiations,
representations and agreements are merged in the Agreement. The terms
of the Agreement may not be amended or modified except by a further
written agreement signed by the parties hereto specifically
referencing the Agreement.
(d) Assignment. The Agreement and the rights and obligations of the
----------
thereunder may be assigned only upon the prior written approval of
the parties thereto. The rights and obligations of the parties thereto
will inure to the benefit of, will be binding upon, and will be
enforceable by the parties thereto and their lawful successors,
representatives and assigns.
(e) Waiver. No failure or delay on the part of either party hereto in
------
exercising any right or remedy under this Agreement shall operate as a
waiver thereof; nor shall any single or partial exercise of any such
right or remedy preclude any other or further exercise thereof or of
any other right or remedy. No provision of this Agreement may be
waived except in a writing signed by the party granting such waiver
(f) Force Majeure. If the performance of any part of the Agreement by
-------------
Seller or Distributor is prevented or delayed by an act of civil or
military authority (including governmental priorities), flood, fire,
epidemic, war or riot, which cannot be averted or overcome by
diligence ("Force Majeure Event"), the party affected shall be excused
from such performance to the extent that party is prevented or delayed
thereby, only during the continuance of any such Force Majeure Event;
provided, however, that if such delay in performance extends for
thirty (30) or more days, the other party, at it s discretion, may
terminate without liability its obligations under the Agreement to the
extent that the affected party's performance has been prevented or
delayed.
6
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(g) Governing Law; Jurisdiction. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the state of California. The
parties hereby agree that if Seller institutes a legal action
regarding a claim arising out or relating to this Agreement such legal
proceeding may be submitted to the state and federal courts sitting in
Los Angeles, California. In addition, the parties hereby agree that if
Distributor institutes a legal action regarding a claim arising out or
relating to this Agreement such legal proceeding may be submitted to
the state and federal courts sitting in Los Angeles, California.
(h) Time of Essence. TIME IS OF THE ESSENCE UNDER THE AGREEMENT.
---------------
IN WITNESS WHEREOF, the parties hereto have caused Agreement to be executed and
delivered by their duly authorized officers.
Seller:
- -----------------------------------
By:
--------------------------------
Title:
-----------------------------
Distributor:
NEWCOM, INC.
By:
--------------------------------
Title:
-----------------------------
Date:
------------------------------
7
<PAGE>
EXHIBIT 10.16
[LOGO OF NEWCOM INC.]
AUTHORIZED INDEPENDENTLY CONTRACTED SALES AGENT AGREEMENT
NewCom, Inc. ("NC"), a Delaware corporation, hereby appoints ___________________
_________________________ ("Agent"), having a principal place of business ______
_____________________________, as its non-exclusive, independently contracted
Authorized Sales Agent under the terms and conditions stated herein
("Agreement"), Agent hereby accepts the appointment and agrees to abide by the
terms and conditions of this Agreement set forth below:
1. SCOPE OF AGENCY
---------------
1.1 Products: Agent's appointment is listed to the NewCom produces specified in
--------
Exhibit 1 (hereinafter "NewCom Products"). NewCom may add or delete NewCom
Products at its discretion with thirty (30) days prior written notice to Agent.
1.2 Territory: Agent is authorized to represent NewCom in the geographic area
---------
described in Exhibit 2 (hereinafter "Territory") for the sole purpose of
soliciting orders of the NewCom Products, on NewCom's behalf, from either
unaffiliated, commercial, retail companies that are in the business or reselling
computer supplies products to end-user customers (sometimes hereinafter
referred to as "Retailers") or from unaffilliated, commercial distributors that
are in the business of reselling computer supplies products to retailers that
are in the business of reselling computer supplies products to end-users
customers (sometimes hereinafter referred to as "Distributors"). Agent is not
authorized to represent NewCom outside of the Territory, to solicit sales from
Retailers or Distributors within the Territory who have their corporate billing
addresses outside of the Territory, or to solicit sales from end user customers.
1.2.1 NewCom, either directly, or indirectly through other resellers,
reserves the right to distribute, solicit sales for, market, resell, rent, lease
or license NewCom Products and other NewCom products and services within the
Territory.
1.3 Reserved Accounts: Agent shall not solicit orders from those Retailers and
-----------------
Distributors of NewCom specified in Exhibit 3 ("Reserved Accounts"). NewCom may
add or delete Reserved Accounts at its discretion with thirty (30) days prior
written notice to Agent.
1.4 NewCom expressly reserves the right to redefine Agent's Territory, amend
the list of Reserved Accounts and to terminate this Agreement without cause
pursuant to Section 9.3 herein, provided that it first gives Agent thirty (30)
days prior written notice of its intent to do so. In such event, Agent shall
continue to receive its commission on orders it submits during the thirty (30)
day notice period from those Retailers and Distributors Agent will be losing as
a result of such change in Territory or Reserved Accounts or termination,
provided that the orders are accepted by NewCom and have a requested delivery
date that is within ninety (90) days of the date of the notice. Telemarketers
from NewCom shall not directly solicit sales of NewCom Products from any
Retailer or Distributor developed by Agent pursuant to the terms hereof until
the expiration of such thirty (30) day notice.
1.5 Use of NewCom Name: Agent must refer to and advertise itself as a NewCom
------------------
Authorized Sales Agent when representing NewCom. Advertising and use of the
NewCom name and trademark shall conform to guidelines published by NewCom.
Agent shall not refer to itself as a NewCom dealer, partner, joint venture,
reseller, employee or use any other term that is inconsistent with Agent's true
status or which may be misleading to the public.
1.6 Agent has sole discretion over which of the NewCom Products it wishes to
solicit sales of in any particular instance. Agent also has sole control over
the establishment of its work hours and work schedules.
1
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2. RELATIONSHIP OF THE PARTIES
---------------------------
2.1 This Agreement does not constitute a hiring by either party nor does it
constitute a contract of employment. The parties' intention is that Agent be an
independent contractor and not the employee of NewCom and that Agent retain sole
and absolute discretion and judgment in the manner and means of carrying out its
Agent activities specified herein. This Agreement shall not be construed as a
partnership and neither party hereof shall be liable for any obligations
incurred by the other party except as expressly provided herein. Unless
otherwise required by applicable law, NewCom shall not withhold from Agent's
compensation any amounts for social security or federal or state income taxes.
Agent recognizes that it is its legal responsibility to pay all applicable
federal and state income taxes (including estimated taxes), social security and
all applicable federal and state self-employment taxes for itself and its
employees.
2.2 Agent shall not incur any obligations on behalf of NewCom.
2.3 Upon NewCom's request, Agent shall provide, and shall arrange for each of
its employees to provide, written certification to NewCom that Agent and each of
its employees have paid all state and federal taxes and self-employment tax
required to be paid.
3. TERM OF AGENCY
--------------
3.1 Unless otherwise terminated in accordance with the terms hereof, the term
of this Agreement is for a period of one (1) year ("Term"), commencing on the
date it is signed by NewCom's executive officer or on the date specified below
if such a date is specified. The commencement date is _________________.
3.2 This Agreement may be renewed for an additional one (1) year Term only upon
the mutual written consent of the parties by no later than (15) days prior to
the expiration date of the initial Term.
4. OBLIGATIONS OF AGENT
--------------------
4.1 Orders: Agent shall solicit orders on NewCom's behalf only pursuant to
------
those terms and conditions that are set forth in the attached Distributor
Purchase Agreement and at NewCom's then-current appropriate Retailer/Distributor
Product discounted pricing. Immediately prior to placing such orders, it shall
be Agent's responsibility to contact NewCom's Sales Manager to determine
NewCom's then-current Retailer/Distributor Product pricing and make sure that
the prices in the Retailer/Distributor orders are correct.
4.1.1 Before submitting a Retailer's/Distributor's first order to NewCom, Agent
must obtain the Retailer's/Distributor's signature on NewCom's then-current
standard Distributor Purchase Agreement, a copy of the most recent form of which
is attached as Exhibit 4, and submit that signed contract to NewCom's executive
officer, for his consideration and approval, if appropriate. If the contract is
accepted and executed by NewCom, thereafter, Agent shall submit all
Retailer/Distributor orders on a Retailer/Distributor purchase order that has
been signed by an authorized representative of Retailer/Distributor. Agent shall
submit such orders to the designated NewCom Sales Manager.
4.1.2 Agent may neither accept a NewCom Distributor Purchase Agreement that has
been modified by the Retailer/Distributor nor quote prices that are below
NewCom's then-current Retailer/Distributor Product discounted prices without, in
each instance, first obtaining the express written approval of NewCom's
executive officer. In the event Agent is authorized to offer nonstandard pricing
to a Retailer/Distributor, Agent agrees to help NewCom complete NewCom's Pricing
and Contract Terms Authorization Request Form and obtain whatever competitive
activity information and documentation are required per NewCom's then-current
Order Administration Authorization Matrix Policy to justify the nonstandard
pricing.
2
<PAGE>
4.1.3 Prices to Retailer/Distributor shall not reflect any hidden discounts or
rebates in connection with the sale of the NewCom Products. NewCom will not
accept any orders that include non-NewCom provided products or services.
4.1.4 All orders are subject to acceptance by NewCom. Agent may not execute
agreements with the Retailer/Distributor on NewCom's behalf. NewCom may decline
to accept, or revoke its acceptance of, any order in accordance with its
standard business policies and procedures without being obligated to pay Agent a
commission thereon. If NewCom decides not to accept an order, Agent will
promptly notify the Retailer/Distributor in writing that its order has been
rejected.
4.1.5 Delivery dates provided by NewCom to the Retailer/Distributor are
estimates only. Agent is not authorized to commit to any firm delivery dates on
NewCom's behalf.
4.2 Non-NewCom Products: Unless in each instance expressly authorized in
-------------------
writing by an executive officer of NewCom, Agent shall not represent, either as
an agent, reseller, or manufacturer's representative, any product or service,
including NewCom Products purchased from another source, that is competitive
with the NewCom Products specified in Exhibit 1. However, Agent may represent
and market Non-NewCom Products that are complementary with, but do not compete
against, the NewCom Products authorized herein.
4.3 Standard of Conduct: Agent and its employees shall not misrepresent the
-------------------
functionality or specifications of the NewCom Products or make any contractual
commitments other than those contained in the standard NewCom Distributor
Purchase Agreement provided by NewCom. Agent is not authorized to bind NewCom in
any respect or to legally accept orders or execute the NewCom Distributor
Purchase Agreement on NewCom's behalf.
4.3.1 Agent is solely responsible for all matters and obligations concerning
its employees.
4.3.2 Indemnity: Agent shall indemnify and hold NewCom harmless from and
---------
against any and all claims, losses, expenses, including reasonable attorney's
fees and court costs, and liabilities resulting from the acts or omissions of
Agent and its employees.
5. PERFORMANCE OF NEWCOM
---------------------
5.1 Order Processing: Upon receipt of orders from Agent, NewCom shall perform
----------------
all acceptable order processing, shipping and billing functions and use its best
efforts to perform collection functions in accordance with its standard policies
and procedures.
5.2 Literature: If requested, NewCom shall provide to Agent, at no charge,
----------
reasonable quantities of any promotional and technical literature that may be
generally available for the NewCom Products. Agent may be charged NewCom's
actual cost for unusual quantities requested by Agent to support particular
marketing efforts (e.g. mass mailings) developed by Agent.
5.2.1 Technical and promotional materials shall not be copied by Agent and
shall be returned to NewCom upon request or before any final commission payments
are made hereunder, whichever occurs sooner.
5.3 Compensation: Agent shall be paid the commission percentage set forth in
------------
Exhibit 5 of the net invoice price value of acceptable NewCom Product orders
from Retailers and Distributors that (a) result directly from Agent's efforts
hereunder and (b) are submitted directly by Agent in accordance with the terms
hereof. Commissions shall be the only compensation payable to Agent for its
services to NewCom. Agent, as an independent contractor, acknowledges that it
shall not be eligible to participate in NewCom's pension, profit sharing or
medical/dental and disability health plans or to receive any other type of
benefit that NewCom generally offers to its employees. Agent is responsible for
its and its employees' own
3
<PAGE>
business and traveling expenses. The commission percentage and terms of payment
set forth in Exhibit 5 may be revised by NewCom upon ninety (90) days' prior
written notice to Agent.
5.4 Indemnity: NewCom shall indemnify and hold Agent harmless from and against
---------
claims by the Retailer/Distributor and associated losses, expenses, or
liabilities incurred by Agent as a result thereof, that result directly and
solely from NewCom's breach of the NewCom Distributor Purchase Agreement or
NewCom's intentional misrepresentation of the specifications or capabilities of
the NewCom Products. Such indemnity is conditioned upon NewCom being given (1)
immediate written notice of the third party claim by the Agent, (2) the right to
appoint and retain counsel to defend such a claim, (3) the right to settle the
claim and (4) Agent's full cooperation in defending the claim.
6. RESTRICTED USE OF LOCAL NEWCOM FACILITY
---------------------------------------
Agent may not use NewCom facilities except to demonstrate NewCom Products
to prospective Retailers/Distributors. Such use in each instance must be pre-
approved by NewCom's local Sales Manager.
7. CONFIDENTIAL INFORMATION
------------------------
Any information concerning NewCom or NewCom Products is the confidential
property of NewCom or of others. Agent agrees to keep in confidence any such
proprietary information imparted by NewCom to Agent. Such information shall be
used by Agent only for the intended purpose and, except as provided herein,
Agent shall not use it for its own benefit or disclose it, or otherwise make it
available to third parties without the prior written consent of NewCom. Agent
shall limit the disclosure of such information to only those of its employees
who need such information for the purposes of this Agreement. Agents obligation
under this paragraph shall survive the termination of this Agreement for a
period of five years and shall be binding on its heirs, legal representatives,
successors and assigns. NewCom shall have identical obligations with respect to
any Proprietary information disclosed to it by Agent.
8. TRADEMARK/TRADE NAME
--------------------
8.1 Agent's advertising and use of the NewCom name and trademarks shall conform
to NewCom's policies in effect from time to time. Nothing herein will give
Agent any interest in such trademark, logo, or trade name except as herein
provided.
8.2 Agent is permitted to use the corporate logo "NEWCOM" in an oval device on
its letterhead, business cards, promotional literature, and the like in
conjunction with the marketing of the NewCom Products, provided that the NewCom
name and/or logo are less prominent than Agent's own name and identifying
information. Agent must refer to and advertise itself as an "Authorized NewCom
Sales Agent" when representing NewCom.
8.3 Agent agrees not to apply for registration of any NewCom trademark or any
other trademark on NewCom software or on associated material as NewCom expressly
reserves this right. Agent agrees that it will immediately cease to use all
NewCom trademarks and trade names upon the expiration or termination of this
Agreement.
9. TERMINATION
-----------
9.1 If NewCom finds Agent to be deficient in meeting it responsibilities or
obligations hereunder, NewCom reserves the right to notify Agent in writing of
such deficiencies and give Agent a reasonable period of time (but in no instance
more than thirty (30) days) in which to remedy such deficiencies. If Agent
fails to permanently correct the specified deficiency within the specified time
period, NewCom may terminate this Agreement immediately without recourse to
Agent. No waiver by NewCom of any deficiency in one or more instances shall
constitute a waiver of NewCom's right to terminate this Agreement in a
subsequent instance.
4
<PAGE>
9.2 Notwithstanding the above, the parties agree that a good faith cause exists
for NewCom to immediately terminate this Agreement in the event that:
9.2.1 Agent engages in a course of conduct that has injured, or in the opinion
of NewCom is likely to injure, the reputation of NewCom or the NewCom Products
and Agent does not discontinue said conduct within five (5) days of notice by
NewCom, or
9.2.2 receivership, bankruptcy, insolvency proceedings, an assignment for the
benefit of creditors, or the voluntary winding up or liquidation of the Agent's
business are commenced by or against Agent, or
9.2.3 Agent attempts to assign this Agreement or any of its rights or
obligations hereunder without NewCom's express written consent, transfers a
significant asset or in excess of twenty percent ownership in the business
without the prior written consent of NewCom, or delegates or relinquishes a
significant portion of the current management of the Agent's operations without
NewCom's prior written consent, or
9.2.4 either party ceases to function as a going concern or to conduct its
operations in the normal course of business, or
9.2.5 NewCom ceases to market the NewCom Products, or
9.2.6 NewCom decides to terminate its Sales Agent Program, in which case NewCom
will give Agent ninety (90) days prior written notice, or
9.2.7 Agent solicits NewCom Product orders outside of its assigned Territory or
to a Reserved Account or, without NewCom's express written permission,
represents a supplier that manufactures and/or sells products which are
competitive with NewCom Products, or
9.2.8 Agent misrepresents the capabilities of the NewCom Products, or
9.2.9 A Retailer/Distributor complains to NewCom in writing about the manner in
which Agent has solicited sales of the NewCom Products, or
9.2.10 Agent fails to pay NewCom any moneys that are due hereunder after being
given notice of a default and an additional thirty (30) days within which to
pay, or
9.3 Either party may terminate this Agreement, with or without cause, by giving
the other party thirty (30) days prior written notice.
10. LIMITATIONS OF LIABILITY
------------------------
10.1 NEWCOM MAKES NO WARRANTY OF ANY KIND OR NATURE TO AGENT WITH RESPECT TO
THE NEWCOM PRODUCTS, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE. ALL OBLIGATIONS OF NEWCOM WITH RESPECT TO THE
PERFORMANCE OR DELIVERY OF THE NEWCOM PRODUCTS SHALL BE SET FORTH IN THE
STANDARD NEWCOM AUTHORIZED RETAILER/DISTRIBUTOR SALES AGREEMENT BETWEEN NEWCOM
AND THE RETAILER/DISTRIBUTOR, TO WHICH AGENT SHALL NOT BE A PARTY.
10.2 NEWCOM SHALL NOT BE LIABLE TO AGENT, IN EITHER CONTRACT OR IN TORT, FOR
ANY SPECIAL, INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR FOR THE LOSS OF
PROFIT, REVENUE, DATA, EMPLOYEE TIME, APPLICATION SOFTWARE, OR START-UP
EXPENSES, EVEN IF NEWCOM HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH POTENTIAL
LOSS OR DAMAGE.
11. MISCELLANEOUS
-------------
5
<PAGE>
11.1 This Agreement may not be assigned by Agent without the prior written
consent of NewCom. Any attempt by Agent to assign or delegate any of the
rights, duties, or obligations of the Agreement without such consent is void.
11.2 Neither Agent nor NewCom will hire, employ, or engage the services of, nor
offer to pay commissions, compensation, or any other form of incentive to, the
employees of the other, for any purpose whatsoever, without the express written
consent of a vice president or president of such other party. This provision
will expire six (6) months after the expiration of this Agreement.
11.3 Except as set forth herein, Agent acknowledges that NewCom has extended no
promises or assurances of any nature whatsoever, express or implied, regarding
(a) Agent's success or potential success in the arrangements provided for in
this Agreement, (b) the marketing or advertising of the NewCom Products (c) the
promotion of the NewCom Products by NewCom or (d) NewCom's success or potential
success in selling the NewCom Products. NewCom reserves the right to
discontinue the marketing and sale of the NewCom Products at any time and for
any reason. Agent acknowledges that its expenditure of time, and any capital
investment it may make, in or relating to the subject matter of this Agreement,
shall be at its sole risk.
11.4 This Agreement can only be modified by a writing that specifically
references this Agreement and is duly signed by both Agent and by the
undersigned or a vice president of NewCom. Agent acknowledges that except for
the undersigned, no NewCom employee below the position of vice president is
authorized to bind NewCom.
11.5 If any part of this Agreement is adjudged by any court of competent
jurisdiction to be invalid, such judgment will not affect or nullify the
remainder of this Agreement but the effect thereof will be confined to the part
immediately involved in the controversy adjudged.
11.6 NewCom's policies, procedures and programs are subject to change without
recourse to Agent.
11.7 NewCom reserves the right to change, modify or discontinue any model or
type of NewCom Product or to withdraw any Product from this program.
11.8 Any and all claims by Agent arising under any prior agreement with NewCom
that relates to the subject matter of this Agreement are waived upon acceptance
of this Agreement by Agent unless such claims are made in writing to NewCom
within thirty (30) days of the commencement date hereof.
11.9 All matters, including, without limitation, matters of construction,
procedure, remedies, interpretation, validity, and the rights and duties of the
parties shall be governed by the laws of the State of California, and all
disputes between Agent and NewCom, whether under this Agreement or otherwise,
shall be adjudicated only in a court having jurisdiction and venue at NewCom's
corporate headquarters in El Segundo, California.
11.10 AGENT ACKNOWLEDGES THAT IT HAS READ THIS AGREEMENT AND UNDERSTANDS AND
AGREES TO BE BOUND BY ITS TERMS AND CONDITIONS. AGENT FURTHER AGREES THAT THIS
AGREEMENT, TOGETHER WITH ANY EXHIBITS THERETO, IS THE COMPLETE AND EXCLUSIVE
STATEMENT OF THE MUTUAL UNDERSTANDING OF THE PARTIES AND THAT THIS AGREEMENT
SUPERSEDES AND CANCELS ALL PREVIOUS AND CONTEMPORANEOUS WRITTEN AND ORAL
AGREEMENTS AND COMMUNICATIONS RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT.
Signed this_____day of _________, 199__. Signed this_____day of _______, 199__.
Authorized NewCom Sales Agent NewCom, Inc.
6
<PAGE>
By:__________________________________ By:___________________________________
(authorized signatory) Sultan W. Khan
Title: Title: President
------------------------------- --------------------------------
7
<PAGE>
EXHIBIT 1 TO
- ------------
SALES AGENT AGREEMENT
- ---------------------
AUTHORIZED PRODUCTS AND ASSOCIATED WARRANTY PERIODS
---------------------------------------------------
(see attached list)
Note: Currently, Retailers/Distributors that are categorized by NewCom as
National Distributors, Regional Distributors, Mass Merchant, or master Resellers
qualify for discounts off of NewCom's then-current NewCom Product U.S. list
price, respectively. Such list prices, and discounts are subject to change
without notice. Therefore, it is Agent's responsibility to determine NewCom's
then current applicable list prices, discounts, and other prices and to advise
the Retailer/Distributor accordingly immediately prior to accepting an order.
8
<PAGE>
EXHIBIT 2 TO
- ------------
SALES AGENT AGREEMENT
- ---------------------
AUTHORIZED GEOGRAPHIC TERRITORY
-------------------------------
GEOGRAPHIC TERRITORY (Specify by County, State, and Country)
------------------------------------------------------------
9
<PAGE>
EXHIBIT 3 TO
- ------------
SALES AGENT AGREEMENT
- ---------------------
RESERVED ACCOUNTS (Attach additional pages if necessary.)
-----------------
10
<PAGE>
EXHIBIT 4 TO
- ------------
SALES AGENT AGREEMENT
- ---------------------
DISTRIBUTOR PURCHASE AGREEMENT
------------------------------
By signing this exhibit, Agent acknowledges that it must use the attached NewCom
Distributor Purchase Agreement as specified in Section 4.1.1 of the NewCom Sales
Agent Agreement.
ACCEPTED:
Authorized NewCom Sales Agent
By:______________________________
(authorized signatory)
Title:___________________________
Attachment: Distributor Purchase Agreement
11
<PAGE>
EXHIBIT 5 TO
- ------------
SALES AGENT AGREEMENT
- ---------------------
AUTHORIZED SALES AGENT COMPENSATION
- -----------------------------------
COMPENSATION:
- ------------
Authorized Sales Agent compensation for services performed shall be based on __%
of net unit pricing of all communication products as indicated below.
COMPUTATION AND PAYMENT OF COMMISSION:
- -------------------------------------
Commissions are due and payable by NewCom on or before the 20th day of the month
following in which the NewCom Authorized Retailer/Distributor paid the invoice.
NewCom will send Agent a copy of invoices sold in his territory, together with
any approved returns from NewCom Authorized Retailer/Distributor.
At the time of payment of commissions to Agent, NewCom will send a Statement
showing all invoices paid; less any returns, discounts, or credits fro the
NewCom Authorized Retailer/Distributor in their territory.
12
<PAGE>
EXHIBIT 11.1
NEWCOM, INC.
STATEMENT RE COMPUTATION OF PRO FORMA PER SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended Three Months
February Ended
28, 1997 May 31, 1997
---------- ------------
<S> <C> <C>
Weighted Average Common Shares Outstanding..... 7,555,556 7,555,556
Conversion of Advances from Aura............... 444,444 444,444
---------- ----------
Pro Forma Weighted Average Shares.............. 8,000,000 8,000,000
========== ==========
Pro Forma Net Income........................... $3,327,271 $1,066,482
========== ==========
Pro Forma Net Income Per Share................. $ .42 $ .13
========== ==========
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in Amendment No. 3 to the Registration
Statement on Form S-1 of NewCom, Inc. of our reports, dated June 11, 1997, on
our audits of the balance sheets of NewCom, Inc. as of February 28, 1997,
February 29, 1996 and February 28, 1995, and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the two
years in the period ended February 28, 1997, and for the nine months ended
February 28, 1995. We also hereby consent to the reference to our firm under
the captions "Selected Financial Data" and "Experts" in the Registration
Statement.
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California
September 8, 1997
