<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 16, 1997
REGISTRATION NO. 333-____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_______________
NEWCOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 3699 95-4485355
- -------------------------------- -------------------------- -----------------------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization Classification Code Number)
</TABLE>
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:
Thomas J. Poletti, Esq.
Jorge A. del Calvo, Esq. Katherine J. Blair, Esq.
L. William Caraccio, Esq. Darren O. Bigby, Esq.
Pillsbury Madison & Sutro LLP Freshman, Marantz, Orlanski, Cooper & Klein
2700 Sand Hill Road 9100 Wilshire Boulevard
Menlo Park, California 94025 Beverly Hills, California 90212
Tel. (415) 233-4500 Tel. (310) 273-1870
Fax. (415) 233-4545 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. [_]
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. [_]
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CALCULATION OF REGISTRATION FEE
=========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each Unit consists of one
share of Common Stock, par value 1, 955,000 $10.00 $19,550,000 $5,925
$.001 per share, and one Common
Stock Purchase Warrant(3).............
Common Stock, par value $.001 per
share(4).............................. 1,955,000 _____ ______ _____
====================================================================================================================
</TABLE>
(Continued on following page)
__________
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.
================================================================================
<PAGE>
(Continued from previous page)
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========================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock Purchase Warrants(5)..... 1,955,000 _____ _________ _____
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per 1,955,000 $ 15.00 $29,325,000 $ 8,887
share, underlying Warrants(6)........
- ------------------------------------------------------------------------------------------------------------------------
Representative's Option(7)............ 1 $170.00 $ 170.00 $ 0
- ------------------------------------------------------------------------------------------------------------------------
Units underlying Representative's
Option, each Unit consists of one
share of Common Stock, par value 170,000 $ 11.00 $ 1,870,000 $ 567
$.001 per share, and one Common
Stock Purchase Warrant...............
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share, underlying Representative's 170,000 _____ _________ _____
Option...............................
- ------------------------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants
underlying Representative's 170,000 _____ _________ _____
Option...............................
- ------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share, underlying Common Stock 170,000 $ 15.00 $ 2,550,000 $ 773
Purchase Warrants underlying
Representative's Option..............
- ------------------------------------------------------------------------------------------------------------------------
Total Fee $16,152
========================================================================================================================
</TABLE>
(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 255,000 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 255,000 shares of Common Stock subject to the Underwriters' Over-
allotment Option.
(5) Includes 255,000 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 170,000
Units at $11.00 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.
<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 JULY 16, 1997
PROSPECTUS
1,700,000 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 77% of the outstanding Common Stock of the Company (approximately
75% 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.
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=======================================================================
Underwriting
Discounts and Proceeds to the
Price to Public Commissions(1) Company(2)
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit.... $ $ $
Total(3).... $ $ $
=======================================================================
</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 $170 of an option (the "Representative's Option")
to purchase 170,000 Units at a price of 110% 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 $900,000,
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 60 days from the
date of this Prospectus, to purchase up to 255,000 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."
<PAGE>
[INSIDE FRONT COVER OF PROSPECTUS]
[ARTWORK]
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 expec tations 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).
<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 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 (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), and (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 66.
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.
Demand for PC communication and multimedia products has grown significantly
in 1996 and 1997. The Company believes this growth has been and will continue
to be 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 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 50% of the
Company's gross revenues during Fiscal 1997, include Dinorall Corporation (dba
Dinexim Corp.), MicroInformatica Corporation and Southern Electronic
Distributors, Inc. The Company's retail and mass merchant customers, which
accounted for 45%
-3-
<PAGE>
of gross 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
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<CAPTION>
<S> <C>
Securities Offered(1)............................ 1,700,000 Units
Common Stock Outstanding prior to the Offering... 8,000,000 Shares
Common Stock to be Outstanding after the Offering 9,700,000 Shares(2)
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 symbols.......... Common Shares--"NWCM"
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) 1,700,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 255,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Underwriters' Over-allotment Option
if exercised in full, (iii) 170,000 shares of Common Stock issuable upon
exercise of the Representative's Option, (iv) 170,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Representative's
Option, and (v) 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 Year Ended May 31,
February 28, February 29, February 28, ---------------------------
1995 1996 1997 1996 1997
------------- ------------------ ------------ ---------- --------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
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 operations..... (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
</TABLE>
<TABLE>
<CAPTION>
May 31, 1997
February 28, 1997 ---------------------------------------------------
----------------- Pro Forma
Actual Actual Pro Forma(2) As Adjusted(3)
----------------- ------------ ----------- -------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
Total current assets........................ $44,329,127 $52,476,020 $52,476,020 $67,776,020
Working capital............................. 21,916,553 31,565,837 31,565,837 50,365,837
Total assets................................ 47,435,171 55,272,094 55,272,094 70,572,094
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 21,522,705 21,522,706
Stockholders' equity........................ 7,772,723 8,839,205 12,839,205 28,139,205
- ----------
</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 1,700,000 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
Compaay'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, 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" component purchasing 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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FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING
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 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 $3.5 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. There can be no assurance that, following the
Offering, the Company will be able to obtain any additional loans from Aura.
The Company's failure to obtain additional loans from Aura could have a material
adverse effect on the Company's future growth plans.
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 twelve-month period following the date of this Prospectus. 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. 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 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.
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
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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 mother boards 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 its fiscal year ended February 29, 1996 ("Fiscal 1996"), the
Company experienced substantial constraints in the availability of modem
chipsets from its primary supplier, 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. 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. The
Company has no guaranteed supply arrangements with any of its sole or limited
source suppliers, 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. Moreover,
the Company's suppliers may, from 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
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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 com ponent 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 success ful 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 lesser extent, to OEMs/VARs.
The Company's success is 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 50% of the Company's gross 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 42% of gross 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 58% of the Company's gross revenues
(increasing from 45% of gross 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
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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 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, returns of
defective products or product components, and the Company's practice of
assisting some customers in balancing inventories. 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. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 5.9% of gross revenues) in the prior
fiscal year. 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. 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. There can be no assurance
that factors such as those that occurred in Fiscal 1997, 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."
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MANAGEMENT OF GROWTH
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 has
resulted in a need for significant investment in infrastructure and systems.
The Company's future operating results will therefore depend on its ability to
successfully implement operating, manu facturing and financial procedures and
controls, to improve coordination among different operating functions, to
strengthen management information systems and telecommunications systems, and to
continue to hire additional per sonnel, particularly in its customer service,
engineering and technical support organizations. Although management has taken
actions intended to improve these areas, there can be no assurance that the
Company will be able to manage these activities and implement these additional
systems and controls successfully, and any failure to do so could have a
material adverse effect upon the Company's operating results. There can be no
assurance that the Company's man agement 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.
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 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.
PROPRIETARY RIGHTS
The Company does not employ an internal research and development staff and
acquires virtually all of the soft ware 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 9,700,000 shares of Common Stock which will be outstanding
upon completion of the Offering, Aura will beneficially own and control 77% of
the Company's outstanding Common Stock (or approximately 75% 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
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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 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 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
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 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
(the "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
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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.
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 registra tion
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 regis-
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tration 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.
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
-15-
<PAGE>
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."
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, (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
170,000 Units at an exercise price of 110% 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 9,700,000 shares of Common Stock out of a total of 50,000,000 shares
of Common Stock authorized, not including up to (i) 1,700,000
-16-
<PAGE>
shares of Common Stock issuable upon exercise of the Warrants, (ii) 170,000
shares of Common Stock issuable upon exercise of the Representative's Option,
(iii) 170,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Representative's Option, (iv) 255,000 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 12,995,000
shares of Common Stock will be issued and outstanding. The remaining 37,005,000
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 $1.07, or 12%, 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 1,700,000 Common Shares offered hereby, and based upon shares
outstanding after giving effect to the Recapitalization, there will be
approximately 9,700,000 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. 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."
-17-
<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.
-18-
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,700,000 Units offered
hereby are estimated to be approximately $13.1 million ($13.3 million if the
Underwriters' Over-allotment Option is exercised in full), assuming an Offering
Price of $9.00 per Unit and after deducting underwriting discounts and
commissions of $1.3 million and other expenses of the Offering estimated to be
$900,000 (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>
Product/Components Acquisition...... $ 4.2 million 32%
Repayment of Commercial Line of
Credit and Other Debt(1).......... 3.5 million 27
Marketing and Sales................. 2.1 million 16
Working Capital and Other General
Corporate Purposes................ 3.3 million 25
-------------- ---
$ 13.1 million 100%
============== ===
</TABLE>
- ------------------------------
(1) 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 $3.1 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 Agree
ment, 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.
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
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<PAGE>
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.
-20-
<PAGE>
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; 9,700,000
shares outstanding, pro forma as adjusted(6)........... 7,556 8,000 9,700
Additional paid-in capital..................................... 9,993,444 13,993,000 29,291,300
Accumulated deficit............................................ (1,161,795) (1,161,795) (1,161,795)
Total stockholders' equity............................. 8,839,205 12,839,205 28,139,205
Total capitalization......................................... 34,361,911 34,361,911 49,661,911
========== ========== ==========
</TABLE>
- ---------------
(1) Gives effect to the Conversion.
(2) Adjusted to reflect the sale by the Company of 1,700,000 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) 1,700,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 255,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Underwriters' Over-allotment Option
if exercised in full, (iii) 170,000 shares of Common Stock issuable upon
exercise of the Representative's Option, (iv) 170,000 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."
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<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 1,700,000 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 $26.0 million or $2.67 per share. This
represents an immediate increase in such pro forma net tangible book value of
$1.07 per share to existing stockholders and an immediate dilution of $6.33 per
share to new investors purchasing Units in the Offering, which dilution amounts
to approximately 70% of the initial public offering price per share of Common
Stock. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
<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........... 1.07
-----
Pro forma net tangible book value after the offering......... 2.67
-----
Dilution per share to new investors (2)..................... $6.33
=====
- ------------------
</TABLE>
(1) Assumes no allocation of the Offering Price to the Warrants. Before
deduction of underwriting discounts and commissions.
(2) This dilution per share expressed as a percentage of the assumed initial
public offering price is 67%. Does not reflect the issuance of up to (i)
1,700,000 shares of Common Stock reserved for issuance upon exercise of the
Warrants, (ii) 255,000 shares of Common Stock issuable if the Warrants
included in the Underwriters' Over-allotment Option are exercised in full,
(iii) 340,000 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):
-22-
<PAGE>
<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 82.0% $14,001,000(1) 47.8% $ 1.75
New investors........... 1,700,000 18.0 15,300,000 52.2 $ 9.00(2)
--------- ------- ----------- -------
Total................. 9,700,000(1) 100.0% $29,301,000 100.0%
========== ======= =========== =======
- ----------
</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) 1,700,000 shares of Common Stock
reserved for issuance upon exercise of the Warrants, (ii) 255,000 shares of
Common Stock issuable if the Warrants included in the Underwriters' Over-
allotment Option are exercised in full, (iii) 340,000 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 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 (Unaudited)
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.......... 423,619 4,972,064 11,840,951 1,631,698 2,728,857
administrative............... ---------- ----------- ----------- ---------- -----------
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,........... (3,710) 1,279,451 1,393,676 232,761 518,585
net..............................
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>
February 28 [29],
--------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE SHEET DATA (YEAR-END):
Total current assets............. $1,631,696 $24,471,238 $44,329,127
Working capital........... 988,840 14,744,627 21,916,553
Total assets..................... 2,501,993 25,348,346 47,435,171
Total current liabilities........ 642,856 9,726,611 22,412,574
Due to Aura(3)................... 1,238,354 20,186,283 17,249,874
Stockholders' equity (deficit)... 620,783 (4,564,548) 7,772,723
</TABLE>
-24-
<PAGE>
<TABLE>
<CAPTION>
May 31, 1997
--------------------------
Pro
Actual Forma(2)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA (QUARTER-END):
Accounts receivable.............. $32,844,092 $32,844,092
Total current assets............. 52,476,020 52,476,020
Working capital.................. 31,565,837 31,565,837
Total assets..................... 55,272,094 55,272,094
Total current liabilities........ 20,910,183 20,910,183
Due to Aura(3)................... 25,522,706 21,522,706
Stockholders equity (deficit).... 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. Aura has agreed with the Company
that, prior to the Closing Date, the aggregate amount of the Company's
indebtedness to Aura in excess of $4.0 million will be converted into long-
term debt represented by a promissory note due and payable in September
1998.
-25-
<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 that the Company's management believes are reasonable
under the circumstances.
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.
-26-
<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
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>
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 three month period ended May 31, 1997 ("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. The increase is primarily a
result of the Company's 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.
Discounts given for the first quarter of Fiscal 1998 were approximately
$31,000 on $16.1 million of gross revenue or .2% as compared to approximately
$24,000 on $7.5 million or .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. These figures may
vary substantially from quarter to quarter depending on the customer base and
general market conditions.
Net revenues 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%.
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%
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<PAGE>
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.
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.
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. The increase resulted from an increase in product
sales during the second half of the year to major mass merchandisers such as
Best Buy Company, Inc. and Circuit City Stores, Inc.
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.
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 5.9% 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. 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.
Net revenues for Fiscal 1997 were $50.6 million as compared to $31.2 million
in Fiscal 1996, an increase of 62.2%.
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. Also, the Company's implementation of "Just in Time"
inventory acquisition improved the Company's ability to obtain more favorable
pricing for products purchased just prior to delivery dates.
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.
-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 the nine months ended February 28, 1995 ("Fiscal 1995"). The
increase is 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.
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.
Returns and allowances for Fiscal 1996 were approximately $2.0 million as
compared to none in Fiscal 1995. The returns were due to rotation of stock by
customers and products returned for exchange by consumers.
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.
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.
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth results of operations for each of the
Company's last ten quarters and the percentage of the Company's net revenues
represented by each line item reflected in the table. 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.
-29-
<PAGE>
<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 development............ -- 4,201 -- -- -- --
Selling, general and administrative. 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 operations............... (171,454) (212,473) 77,834 (974,841) 2,623,454 (5,632,327)
Interest (income) expenses, net............ -- -- 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 income 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)
Fiscal 1997
---------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
---------- ----------- ----------- -----------
Net revenues.................................. $7,441,383 $11,041,216 $17,920,915 $14,228,176
Cost of goods sold........................... 4,854,512 7,401,456 14,192,913 7,170,203
Gross profit.................................. 2,586,871 3,639,760 3,728,002 7,057,973
Expenses:
Research and development.................... -- -- -- 7,708
Selling, general and administrative......... 1,631,698 2,769,972 2,327,698 5,111,583
Total expenses........................... 1,631,698 2,769,972 2,327,698 5,119,291
Income (loss) from operations................. 955,173 869,788 1,400,304 1,938,682
Interest (income) expenses, net............... 240,171 436,572 382,625 456,998
Other (income) expense........................ (7,410) (7,230) (4,321) (103,729)
Income (loss) before income taxes............. 722,412 440,446 1,022,000 1,585,413
Provision for income taxes.................... 108,000 -- -- 325,000
Net income (loss)............................. 614,412 440,446 1,022,000 1,260,413
- ----------
</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 cancelations 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.
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 February 28, 1997. 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, inventories and other assets in the current
year quarter, 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.
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 were $1.2 million, $20.2 million and $17.2 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.
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 a promissory note due and
payable in September 1998.
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 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.
-31-
<PAGE>
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. In May 1997, the
Company replaced this line with another line of credit with another lending
institution that permits borrowings of up to $7.0 million, or 60% of eligible
accounts receivable, plus up to $2.0 million of inventory flooring. This line of
credit has an interest rate equal to the institution's prime rate plus 1.25%. At
May 31, 1997 the outstanding balance under this line of credit was approximately
$5.7 million.
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 to additional paid-in capital, which was 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. 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. 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 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.
-32-
<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
Demand for PC communication and multimedia products grew significantly in
1996 and 1997. The Company believes this growth has been and will continue to
be 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 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
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<PAGE>
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. 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
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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.
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 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
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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 August 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.42bis/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.42bis/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 Speakerphone System. The NewTalk 33,600 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, Windows3.x or
Windows95 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 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.42bis/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 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, Windows3.x or Windows95 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 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.42bis/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 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 Windows 95PCs and
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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.42bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, and tone or pulse dialing.
33,600 Internal DOS/Windows Data/Fax Modem. This internal data/fax modem
is a card that fits inside a DOS, Windows3.x or Windows95 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.42bis/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, efx & efx-m 14,400bps data and 14,400bps send/receive fax modem. Nov 94
Product line includes internal Windows/DOS PC, external
Windows/DOS PC, and external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------------------------------
NewCom 33,600 ifx, efx & efx-m 33,600bps data and 14,400bps send/receive fax modem. May 96
Product line includes internal Windows/DOS PC, external
Windows/DOS PC, and external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------------------------------
New Talk 33,600 ifx, Vifx & 33,600bps data and 14,400bps send/receive fax modem. This Jun 97
SPifx 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 DSVD ifx Digital simultaneous voice data modem, speakerphone, Jun 96
answering machine, 33,600bps data, 14,400bps send/receive
fax modem. This product is a Windows/DOS PC internal card.
- ---------------------------------------------------------------------------------------------------------------
NewCom 56,000 ifx 56,000bps data and 14,400bps send/receive fax modem X2- May 97
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 memory, Jun 97
including 33,600 bps data modem, 14,400 send/receive fax
modem, web browser and E-mail service.
- ---------------------------------------------------------------------------------------------------------------
NewCom WebPal Deluxe Internet box with 8 meg of RAM and 2 meg of Flash memory, Jul 97
including 56,000 bps data modem, 14,400 send/receive fax
modem, web browser and E-mail service.
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
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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 sound enhancing wood based enclosures. The Audiophile
Multimedia kit incorporates Aura's Neo-radial speaker technology 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 33,600bps 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/6XRead 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.
Multimedia Products with Date of Initial Shipment
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION DATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NewCom Hi-Fi 16i sound board Windows/DOS PC Internal 16 bit stereo sound board with built in Apr 95
CD ROM IDE connector. Compatible with SoundBlaster, SoundBlaster
Pro.
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION DATE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NewCom 6X Drive Kit, Multi- Windows/DOS PC Internal six speed CD-ROM drive with audio Jan 96
media Kit and Multimedia cable and IDE cable. Multimedia Kit also has Hi-Fi 16i sound
Internet Kit board, Titles, cables and speakers. Multimedia Internet Kit also has
28,800ifx modem and microphone.
- ------------------------------------------------------------------------------------------------------------------
NewCom 8X Drive Kit, Multi- Windows/DOS PC Internal eight speed CD-ROM drive with audio Apr 96
media Kit and Multimedia cable and IDE cable. Multimedia Kit also has Hi-Fi 16i sound
Internet Kit board, Titles, cables and speakers. Multimedia Internet Kit also has
28,800ifx or 33,600ifx modem and microphone.
- ------------------------------------------------------------------------------------------------------------------
NewCom 10X Drive Kit, Multi- Windows/DOS PC Internal ten speed CD-ROM drive with audio Aug 96
media Kit and Multimedia cable and IDE cable. Multimedia Kit also has Hi-Fi 16i sound
Internet Kit board, Titles, cables and speakers. Multimedia Internet Kit also has
33,600ifx modem and microphone.
- ------------------------------------------------------------------------------------------------------------------
NewCom 12X Drive Kit and Windows/DOS PC Internal twelve speed CD-ROM drive with audio Aug 96
Multimedia Kit 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 drive, Hi-Fi 16i Nov 96
Internet Kit sound board, 33,600ifxmodem, Titles, cables, microphone and
speakers.
- ------------------------------------------------------------------------------------------------------------------
NewCom 16X Drive Kit and Windows/DOS PC Internal sixteen speed CD-ROM drive with Feb 97
Multimedia Kit 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 drive, 32PnP Apr 97
Multimedia Kit 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 desktop May 97
Upgrade Kit 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 CDR Multimedia Kit Two speed Write/six speed Read Drive, bundled with a May 97
Windows/DOS PC SCSI board with high quality audio capture and
playback, and a full feature Windows/DOS PC sound card.
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
PRODUCTS UNDER DEVELOPMENT
The Company has developed the following new products and product
enhancements that it intends to introduce to market and ship within the next
twelve (12) 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
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<PAGE>
(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 16,000bps channel. By incorporating ISDN technology, the
NewCom ISDN modem would allow for a potential data transmission rate of
128,000bps, as compared to the 33,600bps 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 33,600bps 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
33,600bps data transmission and 14,400 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 640x480 to 1600x1200 will be supported, with full 32 bit (16.8
million) colors being supported up to 1024x768 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.
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.
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 54Kbps to 500Kbps and a downstream
speed of l0Mbps and will have the advantage of a
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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 64OKbps and a
downstream speed of 2Mbps to 6Mbps. 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:
. Distributors - Approximately 50% of gross revenues in Fiscal 1997 and
42% in the first quarter of Fiscal 1998. Current national and regional
customers include D & H, Southern Electronic Distributors, Inc., Tech
Data, Dinorall Corporation (dba DinExim) and MicroInformatica
Corporation.
. Retailers/Mass Merchants - Approximately 45% of gross revenues in
Fiscal 1997 and 58% 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.
. OEM/VARs - Approximately 5% of gross revenues in Fiscal 1997 as
compared to zero in the first quarter of Fiscal 1998. Customers
include Powercomm, Techmedia, and Data Storage Marketing.
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.
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
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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. 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.
MANUFACTURING
NewCom currently utilizes four primary 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. 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.
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
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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.
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.
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.
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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, subleased by the Company from Aura pursuant to a
lease expiring in May 2000. 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. In
addition, management believes that such additional facilities will be available
in the future as needed on commercially reasonable terms.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
Name Age Position
---- --- --------
Sultan W. Khan 52 Chief Executive Officer, President and Director
Asif M. Khan 52 Executive Vice President and Director
Steven C. Veen 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 40 Director
James M. Curran(2) 47 Director
Gerald S. Papazian(2) 41 Director
Alexander Remington(2) 40 Director
_____________________
(1) Not an executive officer position.
(2) Members of the Audit Committee and 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,
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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,
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, Soft ware 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).
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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.
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 $100,000 in each of these periods.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Awards
------------
Annual Compensation Securities
Name and Fiscal ------------------- Underlying All Other
Principal Position Year Salary($)(1) Options(#) Compensation($)(2)
- --------------------------- ------ ------------------- ------------ --------------
<S> <C> <C> <C> <C>
Sultan W. Khan, 1997 $136,528 -- $1,976
Chief Executive Officer 1996 127,783 -- --
and President(3)......... 1995 84,527 -- --
Asif M. Khan, 1997 136,528 -- 1,431
Executive Vice 1996 127,783 -- --
President(3)............. 1995 84,527 -- --
Steven C. Veen, 1997 144,749 -- 1,889
Vice President of 1996 121,501 25,000A(5) 1,701
Finance, Chief 1995 84,035 -- 1,179
Financial Officer(4).....
</TABLE>
_______________
(1) 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.
(2) Such compensation consists of total matching contributions made by Aura to
the plan account of each individual pursuant to Aura's 401(k) Plan.
(3) All compensation amounts were paid by the Company except $29,076 paid by
Aura through August 26, 1994.
(4) All compensation amounts were paid by Aura.
(5) 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.
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
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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. 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 unlawful payment of divi
dend or unlawful stock repurchase or redemption, as provided Section 174 of the
Delaware Law, or (iv) for any trans action 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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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 77% of the outstanding Common Stock (approximately 75% 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 provided for therein, taken
as a whole, are fair to both parties, while continuing certain mutually
beneficial arrangements. However, there can be
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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 bene 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.
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, during the period in which the Company is
included in Aura's consolidated group, the Company could be liable in the event
that any federal tax liability is incurred, but not discharged, by any other
member of Aura's consolidated group. Following the date Aura will own less than
80% of the outstanding Common Stock (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") which will require the Company to pay Aura, up to and
including the Deconsolidation Date, an amount in respect of federal income taxes
equal to the amount of the federal income taxes that the Company would be
required to pay if the Company were to file its own federal income tax return
and was never part of Aura's consolidated group. Pursuant to the Tax Agreement,
Aura has agreed to indemnify and hold harmless the Company for any penalties and
interest in respect of any tax liability attributable to the consolidated group
incurred on or before 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
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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.
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, the Company's Chief
Executive Officer and President, 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
In Fiscal 1997, the Company purchased speaker components from Aura for use
in NewCom's multimedia kit products, for which Aura received $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 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.
Alexander Remington, a director of the Company, founded and currently
serves as Chief Executive Officer of Micro Equipment Corporation ("M.E.C.").
M.E.C. (and an affiliated company) purchased certain product from the Company in
the amount of $6.1 million in Fiscal 1997. In addition, M.E.C. served as a
supplier to the Company in the amount of $12.5 million in Fiscal 1997.
The Company believes that the foregoing transactions were in its best
interests. It is the Company's current policy 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.
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
Percentage Beneficially Owned(1)
--------------------------------------
Name and Address of Owner Shares Beneficially Owned(1) Before Offering After Offering(2)
------------------------- ------------------------------- ---------------- ------------------
<S> <C> <C> <C>
Aura Systems, Inc.(3)(4) 7,511,533(5) 94% 77%A(5)
Sultan W. Khan(3)(6) 220,622 3% 2%
Asif M. Khan(3)(6) 220,622 3% 2%
Steven C. Veen(3) 0 -- --
Michael I. Froch(3) 0 -- --
Zane R. Alsabery(3)(7) 26,984 * *
Gerald S. Papazian(3) 0 -- --
Alexander Remington(3) 0 -- --
James M. Curran(3) 0 -- --
All executive officers and
directors as a group (8 persons) 468,228 5.9% 4.8%
</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 1,700,000 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.
(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 7,256,533 shares and 75%, 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 and Approximate Percentage Beneficially
Owned would be 5,888,033 shares and 51%, 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.
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(7) Includes 26,984 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.
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
77% of the outstanding Common Stock of the Company (approximately 75% 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, 58,199 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.
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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 1,700,000 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 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 77% 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
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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, 1,700,000 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 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."
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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 substan tially 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 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 $170, a warrant (the
"Representative's Option") to purchase up to 170,000 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 110% of the Public Offering Price and will contain customary
antidilution provisions.
REGISTRATION RIGHTS
Representative's Option. The Representative's Option to acquire up to
170,000 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 Representa tive's Option provides
for two such requests, one of which will be 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."
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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. 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.
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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 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 com parable 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
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<PAGE>
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
(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.
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<PAGE>
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.
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.]
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
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<PAGE>
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
9,700,000 shares of Common Stock, out of a total of 50,000,000 shares of Common
Stock authorized, not including up to (i) 1,700,000 shares of Common Stock
issuable upon exercise of the Warrants, (ii) 170,000 shares of the Company
issuable upon exercise of the Representative's Option, (iii) 170,000 shares of
the Company issuable upon exercise of the Warrants included in the
Representative's Option, (iv) 255,000 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.
Of the 9,700,000 shares of Common Stock outstanding, the 1,700,000 Common Shares
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 97,000 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"). 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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<PAGE>
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>
Underwriters Number of Units
- ------------ ---------------
<S> <C>
Joseph Charles & Associates, Inc...................
Total 1,700,000
=========
</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 has granted the Representative an option, exercisable during
the 60-day period following the date of this Prospectus, to purchase up to
255,000 additional Units at the Offering Price less the underwriting discounts
and commissions. 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 $382,500
(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 four (4) years 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 for
election to its Board of Directors. 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.
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
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<PAGE>
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 holders otherwise agreeing to lock up their
shares to sell any or all of their shares.
At the closing of the Offering, the Company will sell and deliver to the
Representative for an aggregate purchase price of $170, the Representative's
Option to purchase 170,000 Units at a price that is equal to 110% 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 nontransferable for a period of one
year following the date of this Prospectus except to officers of the
Representative. 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. The Representative's
Option will be exercisable during the four-year period commencing one year after
the date of this Prospectus.
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.
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 other wise
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
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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.
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<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.
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.
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 telephony Using computers to perform telephone functions.
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 speakerphone Allows both parties to talk at the same time and be
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
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.
POTS Plain Old Telephone Service; standard home or
office analog telephone service.
RJ11 Standard single line or two line telephone modular
jack.
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.
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<PAGE>
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.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 conferencing Telephone conferencing in which each party see a video
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.
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NEWCOM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<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,
February 28, February 29, February 28, ---------------------------
1995 1996 1997 1997 Pro Forma
------------- ------------- ------------- ------------ ------------
ASSETS: (note 2)
<S> <C> <C> <C> <C> <C>
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
Other current assets.............. 200 55,617 45,069 4,151,124 4,151,124
---------- ----------- ----------- ----------- -----------
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
Other debt........................ -- 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)
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>
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 provided (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)
Other current assets............................... (200) (55,417) 10,548 (2,000) (4,106,055)
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 -- -- -- --
Net cash transactions with Aura................ 1,238,354 18,947,929 6,063,591 2,157,322 8,272,832
----------- ------------ ------------ ----------- -----------
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.
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)
- ---------------------------------------------------
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).
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:
Machinery and equipment 3-10 years
Furniture and fixtures 5-10 years
Leasehold improvements Life of lease
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. Manage ment 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.
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)
- ---------------------------------------------------
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 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
defec tive products or product components, and the Company's practice of
assisting some customers in balancing inventories. 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.
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 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. No interest was charged to the Company on intercompany
indebtedness during Fiscal 1995.
In Fiscal 1997, the Company purchased speaker components from Aura, for use in
multimedia kit products in the amount of $543,719.
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)
- -----------------------------------
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 reasonable and 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>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
Trade debtors $1,053,029 $19,791,671 $31,824,924
Less allowance for doubtful accounts (30,000) (1,057,000) (1,850,000)
---------- ----------- -----------
$1,023,029 $18,734,671 $29,974,924
---------- ----------- -----------
</TABLE>
Bad debt expense was approximately $30,000, $1,057,000 and $812,000 in Fiscal
1995, 1996 and 1997, respectively.
Note 6 - Inventories
- --------------------
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Raw materials $ 187,761 $ 2,053,152 $ 5,882,390
Finished goods 85,000 1,525,615 5,613,113
---------- ----------- -----------
$ 272,761 $ 3,578,767 $11,495,503
---------- ----------- -----------
</TABLE>
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 7 - Property and equipment
- -------------------------------
Property and equipment, at cost is comprised as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment $ 125,118 $ 311,010 $ 2,382,646
Furniture and fixtures 61,144 62,296 112,037
Leasehold improvements -- 37,595 37,595
---------- ----------- -----------
$ 186,262 $ 410,901 $ 2,532,278
---------- ----------- -----------
</TABLE>
Note 8 - Accrued expenses
- -------------------------
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- -----------
<S> <C> <C> <C>
Accrued payroll and related expenses $ 38,956 $ 114,808 $ 166,650
Other -- 11,504 8,090
---------- ----------- -----------
$ 38,956 $ 126,312 $ 174,740
---------- ----------- -----------
</TABLE>
Note 9 - Other debt
- -------------------
The Company has entered into a financing arrangement with a lender who is
providing a line of credit collateralized by accounts receivable. At February
29, 1996 and February 28, 1997 the outstanding balance was $2,397,657 and
$8,883,656, respectively, with a maximum of $2,500,000 and $9,000,000,
respectively. The interest rate was 9.5% at February 28, 1997. Subsequent to
Fiscal 1997, the financing agreement was terminated and a new financing
arrangement was entered into with a different lender on comparable terms.
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.
At February 28, 1997, the Company had no net operating loss carryforwards for
federal and state income tax purposes.
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
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 10 - Income taxes (continued)
- ----------------------
accounts.
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.
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 11 - Leases (continued)
- ----------------
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>
Note 12 - Significant Customers
- -------------------------------
The Company sold computer related products to three significant customers during
Fiscal 1997. Sales of communications and multimedia products to major mass
merchandisers Best Buy Company, Inc., Circuit City Stores, Inc., and Fry's
Electronics accounted for $20.0 million or 27% of gross revenues. During the
three months ended May 31, 1997, sales to these same customers accounted for
$6.7 million or 41.6% of gross revenues.
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.
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 manufactuers and suppliers. Certain of these components,
particularly modem chipsets and application specific integrated circuit chipsets
which provide multimedia fuctionality, 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.
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.
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 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).
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 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, (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
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)
Note 17 - Subsequent events (continued)
- ---------------------------
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>
================================================================================
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 Representatives.
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 unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
infor mation 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.............................................................. 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of
Financial Condition and Results of Operations........................... 26
Business................................................................. 33
Management............................................................... 45
Relationship with Aura and Certain Transactions.......................... 50
Principal Stockholders................................................... 53
Description of Securities................................................ 55
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
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
participating 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.
================================================================================
================================================================================
1,700,000 Units
NewCom, Inc.
___________________
PROSPECTUS
__________, 1997
___________________
JOSEPH CHARLES &
ASSOCIATES, INC.
================================================================================
<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 connec tion 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.......................................... $16,152
National Association of Securities Dealers, Inc. filing fee... 5,830
Nasdaq filing fee............................................. *
Printing and engraving expenses............................... *
Registrar and Transfer Agent fees............................. *
Accounting fees and expenses.................................. *
Legal fees and expenses....................................... *
Blue Sky fees and expenses.................................... *
Representative's Nonaccountable Expense Allowance............. *
Miscellaneous................................................. *
-------
TOTAL........................................................ $ *
=======
</TABLE>
________________
* To be filed by amendment. 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 3.1 hereto) and the Registrant's Bylaws
(Exhibit 3.2 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.
II-1
<PAGE>
(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.
(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
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------ -----------------------
1.1* Form of Underwriting Agreement
3(i).1* Amended and Restated Certificate of Incorporation.
3(i).2* Form of 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 Warrant.
4.3* Form of Representative's Option.
5.1* Opinion of Pillsbury Madison & Sutro LLP.
10.1* Sublease 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* Common Stock Redemption Option Agreement between NewCom, Inc.
and Aura Systems, Inc.
10.6* 1997 Stock Plan and Forms of Agreements thereunder.
II-2
<PAGE>
10.8* Form of Sales Representative 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 (see page II-3).
27.1 Financial Data Schedule.
____________
* To be filed by amendment.
(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.
II-3
<PAGE>
(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.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Westlake Village, State
of California, on the 16th day of July, 1997.
NEWCOM, INC.
By /s/ SULTAN W. KHAN
---------------------------------------
Sultan W. Khan
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sultan Khan and Asif Khan, and each of them, his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments, including post-effective
amendments, to this Registration Statement, and any registra tion statement
relating to the offering covered by this Registration Statement and filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that each of said attorneys-in-fact and agents or their substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
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 Executive Officer July 16,
- -------------------------- (Principal Executive Officer) and 1997
Sultan W. Khan Director
/s/ ASIF M. KHAN Executive Vice President and Director July 16,
- -------------------------- 1997
Asif M. Khan
/s/ STEVEN C. VEEN Vice President, Finance and Chief July 16,
- -------------------------- Financial Officer (Principal Financial 1997
Steven C. Veen and Accounting Officer)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ MICHAEL I. FROCH Secretary and Director July 16,
- -------------------------- 1997
Michael I. Froch
/s/ ZANE R. ALSABERY Director July 16,
- -------------------------- 1997
Zane R. Alsabery
/s/ JAMES M. CURRAN Director July 16,
- -------------------------- 1997
James M. Curran
/s/ GERALD S. PAPAZIAN Director July 16,
- -------------------------- 1997
Gerald S. Papazian
/s/ ALEXANDER REMINGTON Director July 16,
- -------------------------- 1997
Alexander Remington
</TABLE>
II-6
<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............... 30,000 935,000 -- (30,000) 935,000
Reserve for returns.................. -- 122,000 -- -- 122,000
---------- ---------- ---------- -------- ----------
$ 30,000 $1,127,000 $ -- $(30,000) $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 7,000 -- (19,000) 923,000
Reserve for returns.................. 122,000 805,000 -- -- 927,000
---------- ---------- ---------- -------- ----------
$1,127,000 $1,097,000 $ -- $(19,000) $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................. 927,000 -- -- (5,000) 922,000
---------- ---------- ---------- -------- ----------
$2,205,000 $ 61,000 $ -- $(71,000) $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
Certificate Public Accountants
A Professional Corporation
Los Angeles, California
June 11, 1997
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in 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
Certificate Public Accountants
A Professional Corporation
Los Angeles, California
July 16, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S FINANCIAL STATEMENTS AT AND FOR THE FISCAL YEAR ENDED FEBRUARY 20,
1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> FEB-28-1997 FEB-28-1997
<PERIOD-START> MAR-01-1996 MAR-01-1997
<PERIOD-END> FEB-28-1997 MAR-31-1997
<CASH> 2,813,631 0
<SECURITIES> 0 0
<RECEIVABLES> 29,974,924 32,844,092
<ALLOWANCES> 0 0
<INVENTORY> 11,495,503 15,480,804
<CURRENT-ASSETS> 44,329,127 52,476,020
<PP&E> 2,271,370 2,308,899
<DEPRECIATION> (260,908) (281,758)
<TOTAL-ASSETS> 47,435,171 55,272,094
<CURRENT-LIABILITIES> 22,412,574 20,910,183
<BONDS> 0 0
0 0
0 0
<COMMON> 7,556 7,556
<OTHER-SE> 9,993,444 9,953,444
<TOTAL-LIABILITY-AND-EQUITY> 47,435,171 55,272,094
<SALES> 0 0
<TOTAL-REVENUES> 73,120,781 16,081,392
<CGS> 33,619,084 10,397,883
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 11,848,659 2,735,727
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,516,366 535,735
<INCOME-PRETAX> 3,770,271 1,777,482
<INCOME-TAX> 433,000 711,000
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,337,271 1,066,482
<EPS-PRIMARY> 0.44 .14
<EPS-DILUTED> 0 0
</TABLE>
