<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 25, 1997
REGISTRATION NO. 333-31431
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NEWCOM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 3699 95-4485355
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION NUMBER)
31166 VIA COLINAS
WESTLAKE VILLAGE, CALIFORNIA 91362
(818) 597-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SULTAN W. KHAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEWCOM, INC.
31166 VIA COLINAS
WESTLAKE VILLAGE, CALIFORNIA 91362
(818) 597-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
JORGE A. DEL CALVO, ESQ. THOMAS J. POLETTI, ESQ.
L. WILLIAM CARACCIO, ESQ. KATHERINE J. BLAIR, ESQ.
PILLSBURY MADISON & SUTRO LLP DARREN O. BIGBY, ESQ.
2700 SAND HILL ROAD FRESHMAN, MARANTZ, ORLANSKI, COOPER
MENLO PARK, CALIFORNIA 94025 & KLEIN
TEL. (415) 233-4500 9100 WILSHIRE BOULEVARD
FAX. (415) 233-4545 BEVERLY HILLS, CALIFORNIA 90212
TEL. (310) 273-1870
FAX. (310) 274-8357
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
(Continued on following page)
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<PAGE>
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(Continued from previous page)
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE PER OFFERING REGISTRATION
REGISTERED REGISTERED(1) SECURITY(2) PRICE(2) FEE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units, each Unit consists
of one share of Common
Stock, par value $.001
per share, and one
Common Stock Purchase
Warrant(3) ............. 1, 955,000 $ 10.00 $19,550,000 $ 5,925
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share(4)...... 1,955,000
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Common Stock Purchase
Warrants(5)............. 1,955,000
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Common Stock, par value
$.001 per share,
underlying Warrants(6).. 1,955,000 $ 15.00 $29,325,000 $ 8,887
- --------------------------------------------------------------------------------
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 $.001
per share, and one
Common Stock Purchase
Warrant................. 170,000 $ 11.00 $ 1,870,000 $ 567
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying
Representative's
Option.................. 170,000
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Common Stock Purchase
Warrants underlying
Representative's
Option.................. 170,000
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying Common Stock
Purchase Warrants
underlying
Representative's
Option.................. 170,000 $ 15.00 $ 2,550,000 $ 773
- --------------------------------------------------------------------------------
Total Fee................ $16,152*
</TABLE>
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- -------------------------------------------------------------------------------
* Previously Paid.
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of
shares of Common Stock and Warrants as may be issued by reason of
adjustments in the number of shares of Common Stock and Warrants pursuant
to anti-dilution provisions contained in the Warrants and Representative's
Option. Because such additional shares of Common Stock and Warrants will,
if issued, be issued for no additional consideration, no registration fee
is required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 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.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 25, 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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<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit............................ $ $ $
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Total(3)............................ $ $ $
</TABLE>
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(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."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
WARRANTS, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
CONVERTING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The Company
intends to furnish its stockholders and the holders of Securities with annual
reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law. The
Company's fiscal year ends February 28 (February 29 during leap years).
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) assumes no exercise of the Warrants, the Underwriters' Over-allotment
Option or the Representative's Option, (ii) does not include a total of
1,000,000 shares of Common Stock 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 63.
THE COMPANY
NewCom, Inc. ("NewCom" or the "Company") designs, manufactures and markets
high performance computer communication and multimedia products for the
personal computer ("PC") market. NewCom's communication products include a line
of high speed external and internal data/fax and voice modems, which link PCs
through the worldwide web and through direct connections over telephone lines,
and NewCom's WebPal, an Internet appliance enabling users to access the
worldwide web and perform Internet-specific tasks through their existing
television screens. NewCom's multimedia product line includes a broad range of
add-in subsystems, upgrade kits and Internet access kits that incorporate CD-
ROM drives, speakers, sound cards, modems, microphones and other telephony and
sound solutions. The Company's multimedia products are targeted both to users
that desire to convert their PCs into multimedia systems and to users desiring
to upgrade their current multimedia systems with faster CD-ROM drives, higher
quality sound and increased functionality.
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
3
<PAGE>
and mass merchant customers, which accounted for 45% 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
<TABLE>
<S> <C>
Securities Offered................ 1,700,000 Units(1)
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"
</TABLE> Warrants--"NWCMW"
- --------
(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 included in
the Underwriters' Over-allotment Option, (iii) 255,000 shares of Common
Stock issuable upon exercise of the Warrants included in the Underwriters'
Over-allotment Option, (iv) 170,000 shares of Common Stock issuable upon
exercise of the Representative's Option, (v) 170,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Representative's
Option, and (vi) 546,690 shares of Common Stock issuable upon the exercise
of options outstanding as of June 30, 1997. See "Description of
Securities," "Underwriting" and "Management--Stock Incentive Plan."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MAY 31,
FEBRUARY 28, YEAR ENDED FEBRUARY 28, ---------------------------
1995 FEBRUARY 29, 1996 1997 1996 1997
------------ ----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $7,465,720 $16,081,392
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
Income (loss) from oper-
ations................. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Net income (loss)....... (380,217) (5,185,331) 3,337,271 614,412 1,066,482
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts(1)............. 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
Pro forma net income per
share(2)............... $.42 $.13
Number of shares used in
computing pro forma net
income per share(2).... 8,000,000 8,000,000
<CAPTION>
MAY 31, 1997
----------------------------------------
PRO FORMA
FEBRUARY 28, 1997 ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets................. $44,329,127 $52,476,020 $52,476,020 $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
Company's control. These factors include the timing and volume of orders
received during the period, the impact of price competition on the Company's
average selling prices, the availability and pricing of components for the
Company's products, market acceptance of new product introductions by the
Company and its competitors, 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 $3.6 million, respectively. Immediately prior
to the Closing Date, the Company intends to discharge $4.0 million of the
amount due to Aura by effecting the Conversion. 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
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of older products and to phase out their manufacture in a controlled manner.
Nevertheless, the Company could experience unexpected reductions in sales of
older generation products as customers anticipate new products. These
reductions could give rise to additional charges for obsolete or excess
inventory, returns of older generation products by distributors and mass
merchant customers, or substantial price protection charges. See "--Product
Return Risks." To the extent that the Company is unsuccessful in managing
product transitions, its business and operating results could be materially
adversely affected.
The Company's multimedia products are individual add-in subsystems which
function with PCs to provide additional multimedia functionality.
Historically, as a given functionality becomes technologically stable and
widely accepted by PC users, the cost of providing the functionality is
typically reduced by means of large scale integration into semiconductor chips
which are then incorporated onto PC motherboards. The Company expects that
such migration will, in fact, occur with respect to the functionality provided
by the Company's current products. The Company's success is largely dependent
on its ability to continue to design products which incorporate new and
rapidly evolving technologies that system manufacturers have not yet fully
incorporated into PC motherboards. In addition, many OEMs/VARs are
increasingly incorporating sound cards, CD-ROM drives, speakers and other
components of multimedia upgrade kits in their PCs on a pre-installed basis.
The Company anticipates that this trend will result in a reduction in demand
for multimedia upgrade kits based upon such components in the future. While
the Company believes that a market will continue to exist for add-in
subsystems that provide advanced functionalities and offer flexibility in
systems configuration, there can be no assurance that incorporation of new
functionalities onto PC motherboards will not adversely affect the market for
the Company's products or that the Company will continue to design and
successfully introduce new types of multimedia upgrade kits.
COMPONENT SHORTAGES; RELIANCE ON LIMITED SOURCE SUPPLIERS AND THIRD-PARTY
ASSEMBLERS
The Company produces its products using components or subassemblies
purchased from third-party manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit ("ASIC") chipsets which provide multimedia functionality, are
available only from a single source or limited sources. These components are
generally in short supply and frequently subject to allocation by
semiconductor manufacturers. In particular, in 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,
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strike, political unrest, increased import/export restrictions or other
significant events, could materially and adversely affect the Company's
results of operations. See "Business--Manufacturing."
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes directly against a large number of suppliers of communication
products and multimedia add-in subsystems, and indirectly against OEMs to the
extent they manufacture their own products and add-in subsystems. Such
competitors may develop superior products or products of similar quality for
sale at the same or lower prices. Other competitors may have better access
than the Company to emerging technologies for use in their products, either
through their use of in-house research and development personnel or through
their relationships with third-party semiconductor manufacturers. In addition,
the multimedia market is expected to become increasingly competitive as
functionalities continue to converge and companies that previously supplied
products providing functionalities not currently addressed by the Company
emerge as competitors. Many of the Company's current and potential competitors
have significantly greater market presence, name recognition and financial and
technical resources than the Company, and many have longstanding market
positions and established brand names in their respective markets. While the
Company believes that its semiconductor vendor flexibility enables it to
select from among the most advanced components available, the captive
semiconductor supplies of certain of the Company's current and potential
competitors can provide to them greater control over component design,
availability and cost. The Company believes that certain of the Company's
current and potential competitors compete in their markets largely on the
basis of price, which may result in significant price competition, lower
margins for the Company's products or otherwise affect the market for the
Company's products. There can be no assurance that the Company will be able to
continue to compete successfully in its markets, or to compete successful
against current and new competitors, as the Company's markets continue to
evolve. See "Business--Competition."
Substantially all of the Company's sales to date have consisted of sales of
PC communications and multimedia products. Sales of communications products
and multimedia products accounted for approximately 20% and 80%, respectively,
of the Company's revenues in Fiscal 1996 and 30% and 70%, respectively, in
Fiscal 1997 and are expected to continue to account for substantially all of
the Company's sales in the near term. A decline in demand or average selling
prices for these products, whether as a result of new product introductions or
price competition from competitors, technological change, incorporation of the
products' functionality onto PC motherboards or otherwise, would have a
material adverse effect on the Company's sales and operating results. In
addition, the PC communications and multimedia industries have been marked by
consolidations in recent periods, with a number of firms suffering significant
operating losses and, in certain cases, cessation of business. Given the
Company's concentration in these markets, there can be no assurance that the
volatility and competition pressure of the market will not have a material
adverse effect on the Company's operations in the future.
DISTRIBUTION RISKS; DIVERSIFICATION OF SALES CHANNELS
The Company sells its products primarily to independent regional and
national distributors and retailers/mass merchants and, to a 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
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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 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
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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."
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, manufacturing 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 personnel, 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 management team and other new personnel can
successfully manage the Company's rapidly evolving business, and failure to do
so would have a material adverse effect upon the Company's operating results.
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 software and hardware technology used in its PC
communication and multimedia products by licensing such technology from third-
party manufacturers and suppliers. The Company establishes and protects its
proprietary rights in and to its product design, manufacturing, testing,
marketing and customer support methods primarily through a combination of
trade secret and copyright protections. There can be no assurance that the
Company's measures to protect its proprietary rights will deter or prevent
unauthorized use of the Company's trade secrets, proprietary information or
technology. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the
United States. As is typical in its industry, the Company from time to time
may be subject to legal claims asserting that the Company has violated
intellectual property rights of third parties. In the event a third party were
to sustain a valid claim against the Company and in the event any required
license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. See "Business--Commitment to Emerging Technologies."
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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 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
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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 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
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Company presently expects to call all of the Warrants for redemption as soon
as permitted provided that a current prospectus relating to the Common Stock
underlying such Warrants is then in effect. See "Description of Securities--
Warrants." There can be no assurance that a Warrant holder would be able to
sell the shares of Common Stock received by it upon exercise of the Warrants
at the then-current market price or at a price which is in excess of the
exercise price of such Warrants. Further, as described in detail below, the
Company may not be able to issue shares of Common Stock to Warrant holders
wishing to exercise their Warrants in response to the Company's notice of
redemption. See "--Current Prospectus and State Blue Sky Registration
Requirements to Exercise Warrants" and "Description of Securities."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIREMENTS TO EXERCISE
WARRANTS
The Company will be able to issue shares of Common Stock upon the exercise
of the Warrants and the Representative's Option only if (i) there is a current
prospectus relating to such Common Stock under an effective registration
statement (including audited financial statements for any companies acquired)
filed with the Commission, and (ii) such Common Stock is then qualified for
sale or exempt therefrom under the applicable state securities laws of the
jurisdictions in which the various holders of Warrants reside. The Company has
agreed with the Representative in the Underwriting Agreement to use its best
efforts to have a registration statement effective at any time that the
exercise price of the Warrants is less than the market price of the Common
Stock (i.e., when the Warrants are "in the money"). After a registration
statement becomes effective, it may require updating by the filing of a post-
effective amendment. There can be no assurance, however, that the Company will
be successful in maintaining a current registration statement. Also, it is
possible that the Company may be unable, for unforeseen reasons, to cause a
registration statement covering the shares underlying the Warrants to be in
effect when the Warrants are exercisable. In that event, the Warrants may
expire unless extended by the Company as permitted by the Warrant.
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
15
<PAGE>
combination is approved in a prescribed manner. The application of section 203
could have the effect of delaying or preventing a change of control of the
Company. Certain other provisions of the Company's Restated Certificate or
Bylaws may have the effect of delaying or preventing changes of control or
management of the Company, which could adversely affect the market price of
the Company's Common Stock. See "Description of Securities."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF SECURITIES' PRICE
Prior to the Offering, there has been no public market for the Company's
Common Shares or Warrants and there can be no assurance that an active trading
market will develop or be sustained after the Offering. The Offering Price
will be determined through negotiations among the Company and the
Representative based on several factors and may not be indicative of the
market price of the Common Shares or Warrants after the Offering. See "--
Arbitrary Determination of Offering Price." The market price of the Securities
is likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's results of
operations, announcements of technological innovations, introduction of new
products by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the
computer and other technology industries or the market for add-in subsystems,
changes in or failure by the Company to meet securities analysts'
expectations, general market conditions and other factors. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Securities. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Underwriting."
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
16
<PAGE>
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 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 $6.33, or 70%, per share between the adjusted pro forma net
tangible book value per share after the Offering and the Offering Price of
17
<PAGE>
$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."
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 $3.6 million.
The Board of Directors has broad discretion in determining how the net
proceeds of the Offering (other than with respect to the debt repayment
obligations described above) will be applied. Pursuant to the Receivables
Agreement, in the event Aura exercises its right to return to the Company
accounts receivable NewCom is unable to collect, the Company shall be required
to reimburse Aura for the full amount of such receivables. Such reimbursement
amount may be paid with the proceeds of the Offering. Proceeds may also be
used to acquire businesses, technology or products that complement the
business of the Company. No such transactions are being negotiated as of the
date of this Prospectus. Pending use of the proceeds from the Offering as set
forth above, the Company intends to invest all or a portion of such proceeds
in short-term bank certificates of deposit, U.S. Government obligations, money
market investments and short-term investment grade securities.
The Common Shares comprising any and all Units purchased pursuant to
exercise of the Underwriters' Over-allotment Option will be sold by Aura and
the Company will not receive any of the proceeds from the sale of such Common
Shares. The Company will receive the proceeds from the Warrants comprising all
Units purchased pursuant to exercise of the Underwriters' Over-allotment
Option, or $.10 per Unit thus purchased. In addition, pursuant to the
Redemption Option Agreement between the Company and Aura, Aura has the right,
exercisable at its option, to require the Company to apply up to 70% of the
net proceeds received by the Company from the sale of shares of Common Stock
pursuant to exercise of the Warrants (including any Warrants sold pursuant to
the Underwriters' Over-allotment Option and the Representative's Option),
subject to certain limitations, to redeem outstanding shares of Common Stock
currently held by Aura at the Warrant exercise price. Accordingly, the Company
will not retain or use for its benefit any of the proceeds from the sale of
Common Stock as to which Aura exercises its option under the Redemption
Agreement.
19
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company intends to retain earnings, if any, to finance the development and
expansion of its business. Accordingly, the Company does not intend to pay
cash dividends in the foreseeable future on its Common Stock. Holders of the
Company's Common Stock are entitled to dividends when, as and if declared by
the Board of Directors out of funds legally available therefor. The payment of
dividends, therefore, is within the discretion of the Company's Board of
Directors. Cash dividends, if any, that may be paid in the future to holders
of Common Stock will be payable when, as and if declared by the Board of
Directors of the Company, based upon the Board's assessment of the financial
condition of the Company, its earnings, need for funds, capital requirements
and other factors, including any applicable laws. In addition, any financing
which the Company may obtain in the future may contain provisions restricting
the Company's ability to pay dividends. The Company is not currently a party
to any agreement restricting the payment of dividends.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of May 31, 1997:
<TABLE>
<CAPTION>
MAY 31, 1997
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
----------- ------------ --------------
<S> <C> <C> <C>
Short-term debt(3).................... $ 5,740,236 $ 5,740,236 $ 2,240,236
=========== =========== ===========
Due to Aura(4)........................ $25,522,706 $21,522,706 $21,522,706
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized(5); no
outstanding shares actual, pro forma
or pro forma as adjusted............ -- -- --
Common Stock, $.001 par value,
50,000,000 shares authorized(5);
7,555,556 shares outstanding,
actual; 8,000,000 shares
outstanding, pro forma; 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."
20
<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>
<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) 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):
<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(3) 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.
21
<PAGE>
(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."
22
<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
ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $ 7,465,720 $ 16,081,392
Less discounts given... 24,923 128,400 89,117 24,337 30,678
Less returns and
allowances............ -- 1,986,758 22,399,974 -- 621,037
---------- ----------- ----------- ------------ -------------
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Cost of goods sold..... 2,059,545 30,131,245 33,619,084 4,854,512 10,397,883
---------- ----------- ----------- ------------ -------------
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
---------- ----------- ----------- ------------ -------------
Expenses:
Research and
development........... 4,201 -- 7,708 -- 6,870
Selling, general and
administrative........ 423,619 4,972,064 11,840,951 1,631,698 2,728,857
---------- ----------- ----------- ------------ -------------
Total expenses....... 427,820 4,972,064 11,848,659 1,631,698 2,735,727
---------- ----------- ----------- ------------ -------------
Income (loss) from
operations............. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Other (income) expense,
net.................... (3,710) 1,279,451 1,393,676 232,761 518,585
Provision for income
taxes.................. -- -- 433,000 108,000 711,000
---------- ----------- ----------- ------------ -------------
Net income (loss)....... $ (380,217) $(5,185,331) $ 3,337,271 $ 614,412 $ 1,066,482
========== =========== =========== ============ =============
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts................ 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
<CAPTION>
MAY 31, 1997
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 ACTUAL PRO FORMA(2)
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA;
Total current assets.... 1,631,696 24,471,238 44,329,127 52,476,020 52,476,020
Working capital......... 988,840 14,744,627 21,916,553 31,565,837 31,565,837
Total assets............ 2,501,993 25,348,346 47,435,171 55,272,094 55,272,094
Total current
liabilities............ 642,856 9,726,611 22,412,574 20,910,183 20,910,183
Due to Aura(3).......... 1,238,354 20,186,283 17,249,874 25,522,706 21,522,706
Stockholders' equity
(deficit).............. 620,783 (4,564,548) 7,772,723 8,839,205 12,839,205
</TABLE>
- -------
(1) See Note 1 of Notes to Financial Statements for information regarding
calculation of net income (loss) per share.
(2) Gives effect to the Conversion.
(3) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the
Company to Aura was approximately $17.0 million. 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.
23
<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.
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial
data as a percentage of net revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-----------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, --------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0
Cost of goods sold...... 97.9 96.6 66.4 65.2 67.4
Gross profit............ 2.1 3.4 33.6 34.8 32.6
Expenses
Research and
development.......... 0.2 0.0 0.0 0.0 0.0
Selling, general and
administrative....... 20.1 15.9 23.4 21.9 17.7
Total expenses...... 20.3 15.9 23.4 21.9 17.7
Income (loss) from
operations............. (18.3) (12.5) 10.2 12.9 14.9
Other (income) and
expenses
Miscellaneous income.. (0.2) (0.1) (0.2) (0.0) (0.1)
Interest expense...... 0.0 4.2 3.0 3.2 3.5
Provision for income
taxes.................. 0.0 0.0 0.8 0.0 4.6
Net income (loss)....... (18.1) (16.6) 6.6 9.7 6.9
</TABLE>
24
<PAGE>
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% 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. The Company and Aura have agreed, pursuant to the Tax
Sharing Agreement (as that term is defined herein), that any tax liability
owed by the Company to Aura for the period from June 1, 1997 through that date
on which Aura owns less than 80% of the Company's outstanding Common Stock
(the "Deconsolidation Date") will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date. See
"Relationship with Aura and Certain Transactions--Arrangements and
Transactions with Aura Systems, Inc.--Tax Sharing Agreement."
Net Income. Net income for the first quarter of Fiscal 1998 was $1.1 million
as compared to net income of $614,000 for the corresponding prior fiscal
period. Net income for the three months ended May 31, 1996 was positively
affected by the utilization of the Company's net operating loss carry forward.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Revenues. Gross revenues in Fiscal 1997 increased to $73.1 million from
$33.3 million in Fiscal 1996. 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.
25
<PAGE>
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.
Gross Profit. Gross profit for Fiscal 1997 was 33.6% compared to 3.4% for
Fiscal 1996. The increase in gross profit resulted from a decrease in the cost
of goods sold as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $11.8 million in Fiscal
1997 from $5.0 million in Fiscal 1996. The increase was a result of the rapid
expansion in infrastructure needed to sustain the growth in sales as well as
an increase in advertising from approximately $4.0 million in Fiscal 1997 as
compared to $1.5 million in Fiscal 1996.
Interest Expense. Interest expense for Fiscal 1997 was $1.5 million as
compared to $1.3 million for Fiscal 1996. The increase was due primarily to
the increase in borrowings against lines of credit and from Aura.
Income Taxes. The Company incurred $433,000 in income taxes for Fiscal 1997
compared to none in Fiscal 1996.
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.
Gross Profit. Gross profit for Fiscal 1996 was 3.4% as compared to 2.1% 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.
26
<PAGE>
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.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------------------- --------------------------------------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 839,910 $ 1,263,528 $ 2,271,047 $ 8,250,841 $11,073,123 $ 9,602,418
Cost of goods sold...... 755,910 1,303,635 1,941,060 8,798,229 7,806,438 11,585,518
Gross profit............ 84,000 (40,107) 329,987 (547,388) 3,266,685 (1,983,100)
Expenses:
Research and develop-
ment................. -- 4,201 -- -- -- --
Selling, general and
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 oper-
ations................. (171,454) (212,473) 77,834 (974,841) 2,623,454 (5,632,327)
Interest (income) ex-
penses, 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)
<CAPTION>
FISCAL 1997
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
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 develop-
ment................. -- -- -- 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 oper-
ations................. 955,173 869,788 1,400,304 1,938,682
Interest (income) ex-
penses, 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.
27
<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
28
<PAGE>
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. 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 the lesser of $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 of the Company's indebtedness to Aura as
additional paid-in capital, thereby reducing the amount reflected in "Due to
Aura."
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1.7 million, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead.
To date, inflation has not had a material effect on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.
The Company believes that current and future available capital resources,
including the net proceeds from the Offering, cash flow from operations, and
other existing sources of liquidity, will be adequate to fund its operations
for the 12-month period following the date of this Prospectus. 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.
29
<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
30
<PAGE>
bps modems, then 14,400 bps, and now 28,800 bps modems with faster modems as
they have became available at an affordable price. A May 1996 industry study
found that the number of PC power users accessing the Internet at 28,800 bps
had increased to 39% from 27% six months earlier. The Company believes the
speed advantage offered by today's emerging new 56,000 bps standard and future
standards (utilizing emerging ADSL and cable modem technologies) of more than
100 Kbps, will once again push many PC users tired of slow content download
and Internet response times to upgrade to the newer, faster standards.
Multimedia products, as well, have benefited from significant and continuing
improvements in speed, sound quality and functionality. New 16 speed and
higher CD-ROM drives, which can transfer data 16 times or more faster than the
once-standard single speed drives, now enable users to play many more high
speed video files directly off of the CD-ROM drive (without requiring any off
load to a fixed hard disk drive), thus saving the user valuable time and hard
disk space.
Expansion of Internet and Other PC Applications. In addition to improvements
in technology, the rapid growth and increased quality of Internet content, on-
line services and other PC applications have contributed to the increasing
number of new uses for PC communications products such as those offered by
NewCom. While recent estimates of the number of Internet users in the United
States range from 15 million to 35 million (depending on how Internet use is
identified), industry sources indicate that the Internet and the use of modems
to access the Internet continue to grow rapidly. IDC has estimated that the
number of Internet users worldwide will be approximately 200 million by the
end of 1999, an increase from approximately 56 million at the end of 1995. A
recent study by Hambrecht & Quist estimates that an industry providing
Internet-related technologies (including equipment, network services,
software, enabling services and Internet expertise) could become a $13 billion
industry by the year 2000.
Adding to the variety of uses for the Internet is the growing number of
software makers that offer new or upgraded software on-line. Hardware vendors,
as well, now almost routinely allow users to download the latest driver
updates off of the vendors' Internet sites. Downloads of large files are time
consuming and inconvenient with slower older modems, making newer faster
modems increasingly more attractive. Fax modem technology, which allows users
to send and receive faxes electronically via their computers without the need
for paper output, is gaining widespread acceptance among PC users. Computer
telephony also promises to increase the usefulness of PC communications
products. Internet phone technology allows users to make long distance phone
calls for the much lower cost of calling the local Internet provider. IDC
estimated that the number of Internet telephony users had grown to 500,000
active users by the end of 1995, and forecasts that such number will grow to
16 million by the end of 1999.
Using computer multimedia and communications technology, desktop
videoconferencing (DVC), audio/visual collaboration via the PC will allow
users to see as well as hear people in other locations while conferencing. IDC
projects that worldwide Desktop Videoconferencing will grow from $604 million
in 1996 to $1.29 billion in 2001.
The widening array of PC applications has also increased the market for
other multimedia products. The multimedia market has been fueled by the
increased volume of software that requires CD-ROM drives, soundcards and high
bandwidth delivery systems. Microsoft, Novell and other large vendors now ship
much of their software on compact discs. Popular games such as Lucas Art's
Rebel Assault and Dark Forces can only be played with a CD-ROM drive. Most
multimedia encyclopedias, as well as learning and game software, now
incorporate quality sound as an integral part of their software programs.
STRATEGY
NewCom's objective is to become a leading supplier of innovative, high
performance communications and multimedia products for the PC market. To
achieve this objective, the Company is pursuing the following strategies:
^ Capitalize on Engineering Expertise: The Company strives to identify and
innovatively incorporate into its products key emerging technologies in
the PC communications and multimedia industries.
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NewCom's engineers maintain a close working relationship with their
counterparts at the major chip manufacturers to ensure the Company is
kept apprised of the latest in chip technology and design.
^ Promote Manufacturing Advantages: Management believes NewCom's success
in reaching a particular product niche and gaining market share stems
from its ability to produce products rapidly, cost effectively and with
a high level of reliability. NewCom's manufacturing strategy is
supported by its use of Just-in-Time manufacturing, whereby supplies and
components are purchased just before they are needed during the
manufacturing cycle, its design focus on utilizing interchangeable
circuit boards and other product components, and its relationships with
its primary manufacturing partners in China, Taiwan, Mexico and the
United States.
^ Pursue Proven Markets: NewCom will continue to introduce to its existing
markets products with improved performance, additional features and
better pricing. NewCom's use of DSP technology allows software upgrades
to meet evolving standards and add enhancements, while "value
engineering" enables the Company to design and manufacture new
generations of existing products at reduced costs.
^ Target Newly Forming Markets: NewCom seeks to identify newly forming
markets and emerging technologies and to capitalize on its ability to
deliver superior products with a favorable price/performance ratio.
Newly forming markets for 56,000 bps modems, CDR and CDR/MPEG drives and
Internet appliances such as WebPal offer the Company significant
opportunities for growth, allowing NewCom to gain access to valuable
shelf space, achieve higher margins and establish a larger presence in
strategic market segments.
^ Maintain High Attention to Customer Satisfaction: The Company seeks to
differentiate itself through the quality and level of its technical
support and customer service. The Company performs extensive testing and
preshipping inspection of its products, ships products with installation
discs and user-friendly manuals, and maintains a skilled, full-time
technical support team to respond to customer inquiries.
CURRENT PRODUCTS
NewCom strives to design products that are technologically advanced,
multifunctional, reliable, easy to use and affordable. Below is a description
of NewCom's most current products.
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
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output, standard PS/2 style keyboard and mouse ports, infrared receiver for
remote control unit and remote keyboard, parallel printer port, stereo audio
output, and Smartcard socket.
NewCom 56,000 bps Data/Fax Modem. This high speed internal modem, introduced
by NewCom in May 1997, is a send/receive fax and data modem all in one
computer card. The modem uses X2(R)-compatible technology, currently the most
widely supported 56,000 bps system. The internal version permits installation
using either Plug and Play or ISA Bus Direct. Enhanced models of these modems
include voicemail features or speakerphone and answering machine features.
Since these products are able to be used over standard analog POTS phone
lines, management expects that consumer demand will increase once the 56,000
bps standard for analog modems is fully established in the industry. Although
this product currently has an optimal data download rate of 56,000 bps, noise
and other analog phone line limitations will limit the actual speed of this
modem to lower rates. Management plans to introduce the external versions of
this product in 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.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 2000 DSVD Data/Fax Voice Modem. This product consists of an internal
DSVD send/receive fax and data modem card, full duplex speakerphone and
voicemail system all in one computer card. The Company's DSVD technology
allows PC users to have both a voice phone connection and a computer data
connection sharing a single standard POTS phone line. The data modem operates
at 33,600 bps transmission rate with a throughput of up to 134,400 bps using
data compression. In fax mode, it operates as a 14,400 class 1 group 3
send/receive facsimile. The product is shipped complete with a microphone,
headset, 3-inch desktop multimedia speakers, a modular null phone cable, a
user manual and DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), error correction for reliable communications, V.42
bis/MNP 5 data compression, auto dial and auto answer capability, auto redial
of busy numbers, tone or pulse dialing, call waiting support, remote message
retrieval, password protected mailboxes, and fax on demand.
NewTalk 33,600 bps Speakerphone System. The NewTalk 33,600 bps Speakerphone
System is a full duplex speakerphone, voicemail system, send/receive fax and
data modem all in one computer card. The computer card fits inside a DOS,
Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. As a data modem, the system operates at
33,600 bps transmission rate, with a throughput of up to 134,400 bps using
data compression. In fax mode it operates as a 14,400 bps class 1 group 3
send/receive facsimile. The user can install this product using either Plug
and Play or ISA Bus Direct. This modem product line possesses the same data
modem and fax transmission rates as found in the NewTalk Data/Fax Voice Modem
described above. It is shipped complete with a microphone, headset, 3-inch
desktop multimedia speakers, a modular null phone cable, a user manual, and
DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 33,600 bps Data/Fax Voice Modem. This internal data/fax voice modem
is a voicemail system, send/receive fax and data modem all in one computer
card. The card goes inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. This product
operates using the fastest established analog modem industry standards
currently on the market. As a data modem, it operates at a 33,600 bps
transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. The user can install
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this product using either Plug and Play or ISA Bus Director. It is shipped
complete with a modular RJ11 phone cable and a user manual as well as DOS and
Windows fax software and communications software.
Additional specifications features: built in enhanced 16550 compatible UART
(with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
33,600 bps External Data/Fax Modem. This external data/fax modem hooks up to
the PC from the outside via a cable to the PC's serial port. One model is
designed to work with DOS, Windows 3.1x, or Windows95 PCs and another model is
designed to work with the Apple Macintosh. As a data modem, it operates at a
33,600 bps transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. It is shipped with fax software and communications software, a
power supply, a modular RJ11 phone cable and a user manual.
Additional specifications and features: CCITT, V.34, V.34+ error correction,
V.42 bis/MNP 5 data compression, auto dial and auto answer capability, auto
redial of busy numbers, and tone or pulse dialing.
33,600 bps Internal DOS/Windows Data/Fax Modem. This internal data/fax modem
is a card that fits inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. As a data modem,
it operates at a 33,600 bps transmission rate with a throughput of up to
134,400 bps using data compression. In fax mode, it operates as a 14,400 class
1 group 3 send/receive facsimile. The user can install this product using
either Plug and Play or ISA Bus Direct. It is also shipped with DOS and
Windows fax software and communications software, a modular RJ11 phone cable
and a user manual.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction, V.42 bis/MNP 5
data compression, auto dial and auto answer capability, auto redial of busy
numbers, and tone or pulse dialing.
COMMUNICATION PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom 14,400 ifx, 14,400 bps data and 14,400 bps send/receive fax November 1994
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
NewCom 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax May 1996
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
New Talk 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax June 1997
Vifx & SPifx modem. This product is a Windows/DOS PC internal
card. DSP allows for future software upgrades.
Vifx model includes Voicemail feature. SPifx
model includes speakerphone and answering
machine.
- ---------------------------------------------------------------------------------------
NewTalk 2000 Digital simultaneous voice data modem, June 1996
DSVD ifx speakerphone, answering machine, 33,600 bps
data, 14,400 bps send/receive fax modem. This
product is a Windows/DOS PC internal card.
- ---------------------------------------------------------------------------------------
NewCom 56,000 ifx 56,000 bps data and 14,400 bps send/receive fax May 1997
modem X2-compatible technology. Product line
currently limited to internal Windows/DOS PC
versions.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 4 meg of RAM and 1 meg of Flash June 1997
memory, including 33,600 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 8 meg of RAM and 2 meg of Flash July 1997
Deluxe memory, including 56,000 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
</TABLE>
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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 NC100 speakers in sound enhancing wood based
enclosures. The Audiophile Multimedia Kit incorporates Aura's Neo-radial
speaker technology ("NRT") to provide cutting edge sound quality.
NewCom Multimedia Internet Kits. The Company's multimedia Internet kits
typically contain each of the components and features of its multimedia
upgrade kits, and also come equipped with a 33,600 bps modem and microphone to
provide full interactive connectivity to the Internet.
NewTalk High Fidelity 16i Sound Card. NewCom's internal 16 bit stereo
record/playback sound card is a core component of each of the Company's
multimedia upgrade and multimedia Internet kits. The sound card fits inside a
DOS, Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. Once the sound card is installed, a PC can
play sounds from games, computer encyclopedias, Windows 3.x, Windows 95, and
many other software products. Additionally, the sound card can play standard
audio CDs using the PC's CD-ROM drive. The card has a built-in ATAPI/IDE
internal interface that supports compliant CD-ROM drives and multiple audio
internal interfaces that allow most popular brands of current CD-ROM drives to
hook up directly to it. External interfaces are provided for speakers, line
out, line in, microphone and game port. The sound card has been designed to be
compatible with SoundBlaster(TM), SoundBlaster Pro(TM), Adlib(TM), and Windows
Sound System(TM). The Company offers different enhanced versions of its
NewTalk sound card. One version includes a Wave Table. Another includes both a
Wave Table and SRS 3D(TM), a "surround sound" technology which attempts to
duplicate three-dimensional sound using only two speakers.
NewCom CDR Drive and CDR Multimedia Kits. Whereas conventional CD-ROM
technology only allows the user to retrieve, or "read," information from a
factory-prerecorded compact disc, the CDR drive allows the user to record
information directly onto the compact disc. This drive will utilize "read many
times/write once" technology, that is, once information is recorded onto the
CD it cannot be erased or recorded over again. However, data can be appended
onto the compact disc multiple times until all of the storage space is
utilized. The CDR multimedia kit includes a 2X Write/6X Read Drive, a
Windows/DOS PC SCSI board with high quality audio capture and playback, and a
Windows/DOS PC sound card. The Company also has developed and intends to
market an upgrade kit containing only the NewCom CDR Drive.
NewCom NC Speaker Series. These Audiophile-quality multimedia speakers
incorporate NRT within specially shaped wood enclosures. Many multimedia
speakers offered in the market today are enclosed in plastic. The wood
cabinets used in the NewCom NC speakers minimize resonance and produce sounds
that are cleaner and crisper than what would be produced if plastic were used.
In addition to yielding high quality sound, these NRT speakers emit low
amounts of magnetic leakage so that they can be placed near computer monitors
without adverse effect. A variety of different NC speaker systems are
currently being shipped. The NC100, with 20 W total amplifier power (10
W/channel) and 5 W/(rms) per channel with sound equalization, has one 3-inch
driver in each speaker. The NC 200 has similar specifications to the NC 100
but has the added feature of Polymide tweeters. The NC300, with 30 W total
amplifier power (15 W/channel) and 7.5 W/(rms) per channel with sound
equalization, has two 3-inch drivers and one tweeter in each speaker. The
NC400 subwoofer, with 30 W total amplifier power (15 W/channel) and 7.5
W/(rms) per channel with sound equalization, has one 5.25-inch driver in each
speaker.
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MULTIMEDIA PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NewCom Hi-Fi 16i Windows/DOS PC Internal 16 bit stereo sound board April 1995
sound board with built in CD ROM IDE connector. Compatible
with SoundBlaster, SoundBlaster Pro.
- -------------------------------------------------------------------------------------------
NewCom 6X Drive Kit, Windows/DOS PC Internal six speed CD-ROM drive January 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 8X Drive Kit, Windows/DOS PC Internal eight speed CD-ROM drive April 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx or 33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 10X Drive Kit, Windows/DOS PC Internal ten speed CD-ROM drive August 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 12X Drive Kit and Windows/DOS PC Internal twelve speed CD-ROM drive August 1996
Multimedia Kit with audio cable and IDE cable. Multimedia Kit
also has Windows/DOS PC Internal twelve speed
CD-ROM drive, Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 12X Multimedia Windows/DOS PC Internal twelve speed CD-ROM November 1996
Internet Kit drive, Hi-Fi 16i sound board, 33,600 ifx modem,
Titles, cables, microphone and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Drive Kit and Windows/DOS PC Internal sixteen speed CD-ROM February 1997
Multimedia Kit drive with audio cable and IDE cable. Multimedia
Kit also has Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Audiophile Windows/DOS PC Internal sixteen speed CD-ROM April 1997
Multimedia Kit drive, 32 PnP Wavetable Sound Card, speakers
using Aura Neo-radial speaker technology, sound
enhancing wood enclosures, Titles, cables and
microphone.
- -------------------------------------------------------------------------------------------
NewCom 20X Multimedia Twenty speed IDE CD ROM drive bundled with 3-inch May 1997
Upgrade Kit desktop speakers and a sound card. CD-ROM drive
is compatible with audio, karaoke and photo CDs,
and game and reference CDs. Includes large
number of multimedia CD-ROM software titles that
allow the user to immediately use the product.
Drive kits without speakers and sound cards will
also be offered by the Company.
- -------------------------------------------------------------------------------------------
NewCom 24X Multimedia Twenty-four speed IDE CD ROM drive bundled with July 1997
Upgrade Kit 3-inch desktop speakers and a sound card. CD-ROM
drive is compatible with audio, karaoke and
photo CDs, and game and reference CDs. Includes
large number of multimedia CD-ROM software
titles that allow the user to immediately use
the product. Drive kits without speakers and
sound cards will also be offered by the Company.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom CDR Two speed Write/six speed Read Drive, bundled May 1997
Multimedia Kit with a Windows/DOS PC SCSI board with high
quality audio capture and playback, and a full
feature Windows/DOS PC sound card.
- ---------------------------------------------------------------------------------------
NewCom NC Speaker Series Speakers incorporating Aura neo-radial speaker June 1997
technology housed in sound-enhancing wood
enclosures. Speakers offer between 10 to 15 W
total amplifier power, 5 to 7.5 W/(rms) per
channel with sound equalization and a
3-inch to 5.25-inch driver in each speaker.
</TABLE>
PRODUCTS UNDER DEVELOPMENT
The Company is in the process of designing the following new products and
product enhancements that it intends to introduce to market and ship within
the next twelve months:
NewCom CDR MPEG Multimedia Kit. This multimedia kit will include a CDR drive
with the features and functionality described above. In addition, the kit will
optimize storing video to the CDR drive by including MPEG video encoding and
decoding. The multimedia kit will include a 2X Write/4X Read Drive, MPEG 1
encoder/decoder (capture/playback), and a Windows/DOS PC SCSI controller card.
Management plans to ship this product in Fall 1997.
NewCom ISDN Modem. Basic ISDN service typically provides two 64,000bps
channels and one 16,000 bps channel. By incorporating ISDN technology, the
NewCom ISDN modem would allow for a potential data transmission rate of
128,000 bps, as compared to the 33,600 bps rate currently available with
standard analog modems. ISDN service currently can be made available to the
majority of U.S. homes by converting their current standard analog POTS phone
lines to ISDN lines. To allow users of an ISDN modem to communicate with
modems relying on non-ISDN services, the NewCom ISDN modem will be able to
operate as a standard analog 33,600 bps modem. This product also supports
throughput of speeds up to 921,000 bps using proprietary compression
techniques. As ISDN technology gains acceptance, the Company intends to
develop and market enhanced, faster versions of its ISDN modems. Management
plans to ship its first ISDN modems in Fall 1997.
NewTalk 2000 Modem with Video Conferencing. The Company anticipates that
users of this product, utilizing the same standard phone line connection used
to talk with the other party, will also be able to see a small video image of
the person with whom they are talking if that person is also using the NewCom
product. Management believes this product will offer a low cost solution for
video conferencing based on a flexible, software-defined DSP architecture. The
product will work with a color digital parallel camera and Audio Vision
application software on a single line. It will have modem capability of 33,600
bps data transmission and 14,400 bps send/receive fax transmission, a
speakerphone and voicemail. Management plans to ship this product in Fall
1997.
NewCom 3D SVGA Graphics Accelerator Card. This 64-bit video card, which is
still in early development stages, will have 2 megabytes of EDO RAM and will
use the new Cirrus Logic video chip to produce high performance 3D graphics;
this product will support Intel AGP (accelerated graphics port) and Microsoft
Direct3D, enabling arcade level 3D game play on desktop computers. Resolutions
ranging from 640 x 480 to 1600 x 1200 will be supported, with full 32 bit
(16.8 million) colors being supported up to 1024 x 768 in Microsoft Windows
3.1x, Windows 95, and Windows NT. This video card will have a connector that
will allow for future TV tuner or MPEG upgrades. Management plans to ship this
product in Summer 1998.
NewCom NetPro TV Tuner. The NetPro, which is still in early development
stages, will consist of a cable-ready, 125 channel TV tuner that displays
video in a scaleable window on top of any VGA or SVGA display. Management
believes the NetPro TV tuner, which will contain a Windows/DOS PC internal
board, will bring a state of the art TV solution to the VGA world with superb
video and audio quality. Management plans to ship this product in Summer 1998.
37
<PAGE>
NewCom DVD Drive Kit & NewCom DVD Multimedia Kits. These kits, which are
still in early development stages, will be similar to NewCom's other
multimedia kits except that the CD ROM drive will be replaced by a higher
capacity DVD drive. These DVD drives, while remaining backward compatible with
current 680 megabyte CD ROM disc media, will also be able to read the new 4.7
gigabyte DVD disc media. The upcoming dual layer DVD disc media will hold even
more data with a storage capacity of 8.5 gigabytes. Future DVD-Write Once and
DVD-Rewritable drives may also be offered at a later date. Management plans to
ship this product in Summer 1998.
COMMITMENT TO EMERGING TECHNOLOGIES
The Company continues to review opportunities for the development and
introduction of new products and product families that incorporate emerging
technologies to meet changing end-user needs. Although the Company believes
that to date it has been able to respond on a timely basis to technological
innovations and market changes drawing upon its engineering expertise, there
can be no assurance that the Company will be able to anticipate future market
developments or develop products to meet those needs on a timely basis with
price and performance characteristics which would permit those products to
compete successfully. See "Risk Factors--Rapid Technological Change; Short
Product Life Cycles" and "--Competition."
Cable Modem and ADSL Modem Technology. Modems utilizing cable technology are
projected to have an upstream speed of 54 Kbps to 500 Kbps and a downstream
speed of l0 Mbps and will have the advantage of a continuous connection. The
Yankee Group estimates that by the year 2000, there will be 7 million cable
modem customers. Modems utilizing Asymmetric Digital Subscriber Lines are
projected to have an upstream speed of 640 Kbps and a downstream speed of 2
Mbps to 6 Mbps. ADSL service can be made available to U.S. homes by converting
usage of current standard analog POTS phone lines. According to industry
forecasters such as Dataquest, ADSL modem technology is expected to strongly
challenge cable modem technology for control of the high end high speed modem
market. NewCom believes that both technologies currently have significant
potential for growth in the modem market.
Other Technology. NewCom is developing plans to incorporate into its future
modem product lines emerging communications technologies in which the Company
has proprietary rights. First, NewCom has licensed from Aura, on an exclusive
basis with respect to PC applications, rights to two patents with respect to
noise cancellation techniques and two patent applications in blind adaptive
filtering (BAF). The Company believes that these technologies may enhance
modem transmission speeds. Second, the Company has licensed from Aura, on an
exclusive basis with respect to PC applications, rights to two patent
applications with respect to a wavelet approach to spectral speech
compression. The Company believes this approach may facilitate the sending and
storage of speech using less bandwidth and drive space.
SALES AND DISTRIBUTION
As a result of management's broad prior experience in sales and marketing,
the Company has established a comprehensive sales, marketing and distribution
network. The Company's sales and marketing strategy consists of a highly
consumer-oriented approach to regional distributors and retailers/mass
merchants, supplemented by a targeted entry into the OEM/VAR channels. Current
sales of NewCom PC communications and multimedia products are summarized as
follows:
^ 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.
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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 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.
39
<PAGE>
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
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.
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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.
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:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
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
</TABLE>
- --------
(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, 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,
42
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aerospace, space, commercial and consulting activities. Mr. Harralson received
his B.A. in mathematics from California State University at Northridge.
Sonia Kiarashi has been the Director of Marketing and Sales for NewCom since
August 1995 and, prior thereto, served as NewCom's National Sales, Marketing
and Business Manager since September 1994. From June to September 1994, Ms.
Kiarashi was employed by Aura to perform special projects. Prior to joining
Aura, she was employed by Nuvo for several years in the capacity of Sales and
Marketing Manager for North and South America. Prior to that, she held various
management positions at I.C.C., C.P.I. and other companies. Ms. Kiarashi
graduated from the California State University at Fullerton with a B.A. in
business administration with an emphasis in international marketing.
Zane R. Alsabery has been a Director of NewCom since June 1997. From
September 1994 to June 1997, Mr. Alsabery served as the Company's Vice
President of Special Projects. Prior to joining the Company, from June to
September 1994, he was employed by Aura. From April 1984 to June 1994, Mr.
Alsabery served in several full time positions at Interstate Recruiters
Corporation, most recently as Vice President of Corporate Accounts, where he
managed Interstate's management consulting efforts in the high technology and
computer-related industries. Prior to Interstate, Mr. Alsabery served as the
Manager of multi-user system sales at Marcey, Inc. and as a sales
representative at Compal Computer Systems. He received his B.A. in economics
from the University of California, Los Angeles in 1979.
James M. Curran has been a Director of NewCom since June 1997. From August
1996 until the present, Mr. Curran has served as an independent business
consultant. From May 1995 to August 1996 he served as Executive Vice
President, Information Products and Systems, of Visa International. Prior
thereto, Mr. Curran was employed by International Business Machine Corporation
for 22 years, where he most recently served as a Division Director, Software
Solutions Division. He received his B.A. in philosophy from Cathedral College
Seminary in New York in 1972.
Gerald S. Papazian has been a Director of the Company since June 1997. He
joined Aura in August 1988 and currently serves as Aura's President and Chief
Operating Officer. Previously, Mr. Papazian worked at Bear Stearns & Co., an
investment banking firm, where he served from 1986 as Vice President,
Corporate Finance in the Investment Banking Division. Prior to joining Bear
Stearns, Mr. Papazian was an associate attorney in the law firm of Stroock &
Stroock & Lavan. Mr. Papazian received his B.A. in economics from the
University of Southern California in 1977 and a J.D./M.B.A. from the
University of California, Los Angeles, 1981.
Alexander Remington has been a director of NewCom since June 1997. Mr.
Remington is Chief Executive Officer of Micro Equipment Corporation
("M.E.C."), which he founded in 1983. M.E.C. is a distributor and manufacturer
of computer and peripherals products in the U.S. and worldwide. Prior to 1983,
Mr. Remington worked for First Financial Management Corporation for one half
year, during which time he started and managed the Micro Computer division.
Mr. Remington holds a Master of Science degree in Information Computer Science
(ICS).
The bylaws of the Company provide that the authorized number of directors
shall be nine until changed by amendment of the Bylaws duly adopted by the
shareholders amending the Bylaws' Section 1. The directors hold office until
the next annual meeting of shareholders and until their successors have been
elected and qualified. The Company has agreed, if requested by the
Representative at any time within four years after the date of the Prospectus,
to nominate and use its best efforts to elect two designees of the
Representative as directors of the Company or, at the Representative's option,
as non-voting advisors to the Company's Board of Directors. Each such designee
may be a director of the Representative. The persons to be designated by the
Representative have not been identified to date. See "Underwriting."
Directors do not receive any fees for service on the Board of Directors or
any Committee thereof. Directors are reimbursed for their expenses for each
meeting attended. Directors are eligible to participate in the Company's Stock
Plan described below, although as of the date of this Prospectus, no options
have been granted to non-employee directors.
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Each officer of the Company serves at the discretion of the Board of
Directors. There is no family relationship between Sultan W. Khan and Asif M.
Khan or among any other directors, officers or key employees of the Company.
In April 1994 a petition under the federal bankruptcy laws was filed against
Nuvo which ultimately resulted in the Chapter 7 dissolution and winding-up of
Nuvo and the liquidation of its business assets in September 1994. At the time
these bankruptcy proceedings commenced, Sultan W. Khan, the Company's Chief
Executive Officer, President and a Director, was president of Nuvo, and Asif
M. Khan, the Company's Executive Vice President and a Director, was vice
president of Nuvo.
In October 1996, the Commission issued an order (Securities Act Release No.
7352) instituting an administrative proceeding against Aura and two individual
parties. The proceeding was settled on consent of all the parties, without
admitting or denying any of the Commission's findings. In its order, the
Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and
1994 in connection with its reporting on two transactions in reports
previously filed with the Commission. The Commission's order directs that each
party cease and desist from committing or causing any future violation of
these provisions.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's two other most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers"), for services rendered in all capacities to the Company and Aura
during Fiscal 1997, 1996 and 1995. No other executive officer of the Company
earned compensation in excess of $100,000 in each of these periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND FISCAL ------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($)(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
President(3) 1996 127,783 -- --
1995 84,527 -- --
Steven C. Veen.......... 1997 144,749 -- 1,889
Vice President of
Finance, 1996 121,501 25,000(5) 1,701
Chief Financial
Officer(4) 1995 84,035 -- 1,179
</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.
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No options to acquire shares of Common Stock of the Company were granted or
exercised during the Company's fiscal year ended February 28, 1997.
STOCK INCENTIVE PLAN
In June 1997 the Company's Board of Directors adopted the Company's 1997
Stock Incentive Plan (the "Stock Plan"). A total of 1,000,000 shares of Common
Stock are currently reserved for issuance under the Stock Plan pursuant to the
direct award or sale of shares or the exercise of options granted under the
Stock Plan. If any option granted under the Stock Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to that option will once again be available for additional
option grants.
Under the Stock Plan, all employees (including officers) and directors of
the Company or any subsidiary and any independent contractor or advisor who
performs services for the Company or a subsidiary are eligible to purchase
shares of Common Stock and to receive awards of shares or grants of
nonstatutory options. Employees are also eligible to receive grants of
incentive stock options ("ISOs") intended to qualify under Section 422A of the
Internal Revenue Code of 1986, as amended ("Code"). The Stock Plan is
administered by a committee of the Board of Directors of the Company, which
selects the persons to whom shares will be sold or awarded or options will be
granted, determines the number of shares to be made subject to each sale,
award or grant, and prescribes other terms and conditions, including the type
of consideration to be paid to the Company upon sale or exercise and vesting
schedules, in connection with each sale, award or grant.
The exercise price under the nonstatutory options generally must be at least
85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value
of the Common Stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of the Company, not less than
110% of such fair market value. The term of an option cannot exceed ten years,
and the term of an ISO granted to a holder of more than 10% of the voting
power of the Company cannot exceed five years. Options generally expire not
later than ninety days following a termination of employment or six months
following the optionee's death or permanent disability. The purchase price of
shares sold under the Stock Plan generally must be at least 85% of the fair
market value of the Common Stock and, in the case of a holder of more than 10%
of the voting power of the Company, not less than 110% of such fair market
value. Under the Stock Plan, options granted pursuant to the Stock Plan will
generally vest over a period of five years, at a rate of 20% on each
anniversary of the date of grant. Options granted to the Named Executive
Officers vest over a period of four years, at a rate of 25% on each
anniversary of the date of grant.
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share.
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
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<PAGE>
unlawful payment of dividend or unlawful stock repurchase or redemption, as
provided Section 174 of the Delaware Law, or (iv) for any transaction from
which the director derived an improper personal benefit. Any amendment or
repeal of these provisions requires the approval of the holders of shares
representing at least 66 2/3% of the shares of the Company entitled to vote in
the election of directors, voting as one class.
The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law. The Company has entered into separate
indemnification agreements with its directors that could require the Company,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. The Company believes that the limitation of liability
provision in its Certificate of Incorporation and the indemnification
agreements will facilitate the Company's ability to continue to attract and
retain qualified individuals to serve as directors and officers of the
Company.
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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
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provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements. However, there can be no
assurance that each of such agreements, or the transactions provided for
therein, have been effected on terms at least as favorable to the Company as
could have been obtained from unaffiliated third parties.
Additional or modified arrangements and transactions may be entered into by
the Company, Aura and its subsidiaries after completion of the Offering. Any
such future arrangements and transactions will be determined through
negotiation between the Company and Aura, and it is possible that conflicts of
interest will be involved. The Audit Committee of the Board of Directors of
the Company, consisting of directors independent of both management and Aura
must independently approve all transactions by and between the Company and
Aura.
The following is a summary of certain arrangements and transactions between
the Company and Aura. The descriptions of agreements set forth below are
intended to be summaries and, while material terms of the agreements are set
forth herein, the descriptions are qualified in their entirety by reference to
the relevant agreements filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
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") pursuant to which, during the
period from June 1, 1997 up to and including the Deconsolidation Date, the
Company will not be required to reimburse Aura for any amounts of federal
income taxes that the Company would have been required to pay if the Company
were to file its own federal income tax return and was not part of Aura's
consolidated group. Any amount not required to reimbursed will be recorded by
the Company as an additional capital contribution by Aura effective as of the
Deconsolidation Date. 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.
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Prior to the completion of the Offering, the Company and Aura will enter
into a corporate services agreement (the "Corporate Services Agreement")
pursuant to which Aura will continue to provide to the Company on an interim
basis for certain routine and ordinary corporate services, including
financial, insurance accounting, employee benefits, payroll, tax and legal
services. The cash assets of the Company will not be commingled with those of
Aura. For these services, the Company will be assessed a fee of $50,000 per
month, payable on a monthly basis. With respect to matters covered by the
Corporate Services Agreement, the relationship between Aura and the Company is
intended to continue in a manner generally consistent with past practices. The
Company believes that the charges under the Corporate Services Agreement are
reasonable. The initial term of this agreement will be six months. Thereafter,
the agreement will expire unless extended by mutual agreement of the parties.
The agreement may be terminated by either party upon 60 days' prior written
notice.
Sublease Agreement. The Company currently subleases from Aura its principal
operating facilities in Westlake Village, California. In Fiscal 1997, the
Company made lease payments of $191,013 under the sublease, which payments
were made, with Aura's consent, directly to the landlord, and property tax
payments of $7,956.
RECENT SALES OF SECURITIES TO AFFILIATES
In connection with the formation of the Company, in June 1994 the Company
sold 935.35 shares of Common Stock to Aura and in September 1994 the Company
issued 64.65 shares to other individuals. Assuming an Offering Price of $9.00
per Unit, upon giving effect to the Stock Split these 1,000 shares will be
converted into 7,555,556 shares. See "Description of Securities--Registration
Rights."
In June 1997, incentive stock options to purchase Common Stock of the
Company were granted to certain of the directors, executive officers and key
employees of the Company as follows: Sultan W. Khan, Chief Executive Officer
and President of the Company, 192,720 shares; Asif M. Khan, Executive Vice
President of the Company, 192,720 shares; Zane R. Alsabery, a Director of the
Company, 35,000 shares; and Sonia Kiarashi, Director of Marketing and Sales of
the Company, 50,000 shares. The exercise price of such options was $8.00 per
share, the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. The options are subject to vesting over
a four-year period at a rate of 25% on each anniversary of the date of grant.
RELATED PARTY TRANSACTIONS
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
SHARES PERCENTAGE BENEFICIALLY OWNED(1)
BENEFICIALLY ---------------------------------
NAME AND ADDRESS OF OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------- ------------ --------------- -----------------
<S> <C> <C> <C>
Aura Systems, Inc.(3)(4)..... 7,511,533(5) 94% 77%(5)
Sultan W. Khan(3)(6)......... 220,622 3% 2%
Asif M. Khan(3)(6)........... 220,622 3% 2%
Steven C. Veen(3)............ -- -- --
Michael I. Froch(3).......... -- -- --
Zane R. Alsabery(3)(7)....... 26,984 * *
Gerald S. Papazian(3)........ -- -- --
Alexander Remington(3)....... -- -- --
James M. Curran(3)........... -- -- --
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/After Offering 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.
(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.
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OWNERSHIP OF AURA STOCK
The principal stockholder of the Company is Aura. The address of Aura is
2335 Alaska Avenue, El Segundo, California 90245. Prior to the completion of
the Offering, Aura will own 7,511,533 shares of Common Stock, representing 94%
of the shares of Common Stock then outstanding. Under Delaware law, Aura is
able, acting alone, to cause to be elected the entire Board of Directors of
the Company and to control the vote on all matters submitted to a vote of the
Company's stockholders, including extraordinary corporate transactions.
Currently, the Company's Board of Directors is comprised entirely of designees
of Aura and three of the Company's eight directors are also directors and/or
officers of Aura. Upon completion of the Offering, Aura will own approximately
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, 73,199 shares; Michael I. Froch, Secretary and Director,
15,362 shares; James M. Curran, Director, 0 shares; Alexander Remington,
Director, 34,000 shares; and all directors and executive officers as a group
(8 persons), 232,579 shares. To the Company's knowledge, the persons named in
above have sole voting and investment power with respect to all shares of Aura
common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the footnotes
to this table. None of the individual directors or the Named Executive
Officers beneficially own 1.0% or more of outstanding shares of Aura capital
stock. All of the Company's directors and the Named Executive Officers,
collectively as a group, beneficially own less than 1.0% of such capital
stock.
DESCRIPTION OF SECURITIES
Upon the closing of the Offering, the authorized capital stock of the
Company, after giving effect to the Recapitalization, will consist of
50,000,000 shares of Common Stock, $.001 par value per share and 5,000,000
shares of Preferred Stock, $.001 par value per share.
UNITS
Each of the 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
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such terms and conditions and for such consideration as the Board may deem
appropriate without further stockholder action. The above description
concerning the Common Stock of the Company does not purport to be complete.
Reference is made to the Company's Certificate of Incorporation and bylaws
which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of
stockholders.
Prior to the Offering, there has been no market for the Common Stock of the
Company, and no predictions can be made of the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock of the Company in the public market may adversely affect
prevailing market prices, and may impair the Company's ability to raise
capital at that time through the sale of its equity securities.
Each holder of Common Stock is entitled to one vote per share on all matters
on which such stockholders are entitled to vote. Since the shares of Common
Stock do not have cumulative voting rights, the holders of more than 50% of
the shares voting for the election of directors can elect all the directors if
they choose to do so and, in such event, the holders of the remaining shares
will not be able to elect any person to the Board of Directors. Immediately
following completion of the Offering (assuming no exercise of the
Underwriters' Over-allotment Option), Aura will hold 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 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
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<PAGE>
denominations, and may be exercised or transferred by presenting them at the
offices of the Transfer Agent. Holders of the Warrants may sell the Warrants
if a market exists rather than exercise them, subject to the requirement that
each Warrant may not trade separately from the Common Share to which it is
attached without the consent of the Representative or the Company, as
applicable. However, there can be no assurance that a market will develop or
continue as to the Warrants or the Units. If the Company is unable to qualify
its Common Stock underlying such Warrants for sale in certain states, holders
of the Company's Warrants in those states will have no choice but to either
sell such Warrants (or the Units of which they are a part) or allow such
Warrants to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The Warrants may be exercised in whole or
from time to time in part. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new Warrant certificate will be issued
for the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as
to terminate the Warrants, the Warrants may be exercised immediately prior to
such action. In the event of liquidation, dissolution or winding up of the
Company, holders of the Warrants are not entitled to participate in the
Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity
to profit from a rise in the market price of the Common Stock of the Company.
The exercise of the Warrants will result in the dilution of the then book
value of the Common Stock of the Company held by the public investors and
would result in a dilution of their percentage ownership of the Company. The
terms upon which the Company may obtain additional capital may be adversely
affected through the period that the Warrants remain exercisable. The holders
of these Warrants may be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain equity capital on terms more
favorable than those provided for by the Warrants. See "Risk Factors--Future
Issuances of Stock by the Company Without Stockholder Approval."
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement, the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
Common Stock underlying the Warrants are not registered or qualified for sale
in the state in which a Warrant holder resides, such holder might not be
permitted to exercise the Warrants. See "Risk Factors--Current Prospectus and
State Blue Sky Registration Requirements to Exercise Warrants."
In the event that the Warrants are called for redemption, the Warrant
holders may not be able to exercise their Warrants in the event that the
Company has not updated this Prospectus in accordance with the requirements of
the Act or these securities have not been qualified for sale under the laws of
the state where the Warrant holder resides. See "Risk Factors--Current
Prospectus and State Blue Sky Registration Requirements to Exercise Warrants."
In addition, in the event that the Warrants have been called for redemption,
such call for redemption could require the Warrant holder to either (i)
assuming the necessary updating to the Prospectus and state blue sky
qualifications have been effected, exercise the Warrants and pay the exercise
price at a time when, in the event of a decrease in market price from the
period preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price,
which, in the event of an increase in the price of the stock, could be
substantially less than the market value thereof at the time of redemption.
See "Risk Factors--Warrants Subject to Redemption."
OPTIONS
As of the date hereof, options to purchase an aggregate of 546,690 shares of
Common Stock have been granted and are outstanding. Options to purchase an
aggregate of 453,310 shares of the Company are reserved
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<PAGE>
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 Representative'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."
Aura Rights Agreement. Pursuant to the Aura Rights Agreement, Aura, or its
permitted transferee, is entitled to certain demand and incidental
registration rights with respect to the shares of Common Stock Aura will hold
upon completion of the Offering (the "Registrable Securities"), subject to
certain customary limitations. One year after the date of this Prospectus,
Aura will be entitled to request that the Company file a registration
statement under the Securities Act covering the resale of some or all of its
Registrable Securities, provided that during the first year following the
commencement of such rights Aura will not be permitted to cause more than
3,000,000 Registrable Securities to be so registered. The Company is required
to bear all costs associated with such registration. In addition, commencing
one year following the date of this Prospectus, whenever the Company proposes
to register any of its securities under the Securities Act, for its own
account or that of any other stockholder, holders of Registrable Securities
are entitled, subject to certain restrictions (including the 3,000,000 shares
limitation during the first year such rights are in effect and customary
underwriters' "cutback" limitations), to include their Registrable Securities
in such registration. Subject to certain limitations, the holders of
Registrable Securities may also require the Company to register such shares on
Form S-3 no more than once every 12 months (commencing on the first
anniversary of the date of this Prospectus), provided that the anticipated
aggregate proceeds would exceed $1.0 million. The Company is required to bear
all registration and selling expenses (other than underwriters' discounts and
commissions and the fees of more than a single special counsel to the selling
Stockholders) in connection with the registration of Registrable Securities in
one demand registration, two piggy-back registrations and all Form S-3
registrations. Registration rights under the Aura Rights Agreement may be
transferred to an assignee or transferee provided that such assignee or
transferee acquires at least 500,000 Registrable Securities held by the
transferring holder.
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These registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding. The
registration rights granted under the Aura Rights Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation and Bylaws. The Company's Amended and Restated
Certificate of Incorporation ("Restated Certificate") and Bylaws require the
Company to indemnify the current and former directors and officers of the
Company, and permit the Company to indemnify any current or former employee or
agent of the Company, to the fullest extent permitted by law. The Restated
Certificate eliminates a director's liability for monetary damages for conduct
as a director, unless the elimination of liability is prohibited by the
Delaware General Corporation Law, such as the breach of a director's duty of
loyalty or acts or omissions which involve intentional misconduct or knowing
violation of law. These provisions do not eliminate a director's duty of care.
Moreover, the provisions do not eliminate or limit a director's liability for
violation of certain laws, including federal securities laws. The Company
believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as directors and officers.
Under the Restated Certificate, the Board of Directors has the power to
authorize the issuance of up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of the Common Stock.
These provisions of the Restated Certificate could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. Such provisions, however, could have
the effect of discouraging others from making tender offers for the Company's
shares and, as a consequence, they also may inhibit fluctuations in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in the management of the Company.
The Restated Certificate provides that the Company's Bylaws may be repealed
or amended only by a two-thirds vote of the Board of Directors or a two-thirds
stockholder vote. Further, the Restated Certificate requires that all
stockholder action be taken at a stockholders' meeting. In addition, those
provisions of the Restated Certificate may only be amended or repealed by the
holders of at least two-thirds of the voting power of all the then-outstanding
shares of stock entitled to vote generally for the election of directors
voting together as a single class. The provisions described above, together
with the ability of the Board of Directors to issue Preferred Stock as
described under "--Preferred Stock," may have the effect of deterring a
hostile takeover or delaying a change in control or management of the Company.
See "Risk Factors--Effect of Anti-takeover Provisions."
Delaware Takeover Statute. The Company is subject to section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation
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outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Restated Certificate provides that any person purchasing or acquiring an
interest in shares of capital stock of the Company is deemed to have consented
to the following provisions relating to intercompany agreements and to
transactions with interested parties and corporate opportunities. The
corporate charter of Aura does not include comparable provisions relating to
intercompany agreements, transactions with interested parties or corporate
opportunities.
Transactions With Interested Parties. The Restated Certificate provides that
no contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) between the Company and Aura or any
Related Entity (as such terms are defined below) or between the Company and
any director or officer of the Company, Aura or any Related Entity shall be
void or voidable solely for the reason that Aura, a Related Entity or any one
or more of the officers or directors of the Company, Aura or any Related
Entity are parties thereto, or solely because of any such directors or
officers are present at, participate in or vote with respect to the
authorization of such contract, agreement, arrangement or transaction (or any
amendment, modification or termination thereof). Further, the Restated
Certificate provides that neither Aura nor any officer or director thereof or
of any Related Entity shall be liable to the Company or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in (or not
opposed to) the best interests of the Company or the derivation of any
improper personal benefit by reason of the fact that Aura or an officer or
director thereof or of such Related Entity in good faith takes any action or
exercises any rights or gives or withholds any consent in connection with any
agreement or contract between Aura or such Related Entity and the Company. No
vote cast or other action taken by any person who is an officer, director or
other representative of Aura or such Related Entity, which vote is cast or
action is taken by such person in his capacity as a director of the Company,
shall constitute an action of or the exercise of a right by or a consent of
Aura, such subsidiary or Related Entity for the purpose of any such agreement
or contract. For purposes of the foregoing, the "Company" and "Aura" include
all corporations and other entities in which the Company or Aura, as the case
may be, owns 50% or more of the outstanding voting stock, and "Related Entity"
means one or more corporations or other entities in which one or more of the
directors of the Company have a direct or indirect financial interest.
Competition by Aura with the Company; Corporate Opportunities. The Restated
Certificate provides that except as Aura may otherwise agree in writing:
(i) neither Aura nor any subsidiary of Aura (other than the Company)
shall have a duty to refrain from engaging directly or indirectly in the
same or similar business activities or lines of business as the Company;
and
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(ii) neither Aura nor any subsidiary (other than the Company), officer or
director thereof will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities or of such
person's participation therein.
The Restated Certificate also provides that if Aura or any subsidiary of
Aura (other than the Company) acquires knowledge of a potential transaction or
matter which may be a corporate opportunity both for Aura or such subsidiary
and for the Company, except as Aura may otherwise agree in writing, neither
Aura nor such subsidiary (nor the officers and directors of either thereof)
shall have a duty to communicate or offer such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach
of fiduciary duty as a stockholder of the Company or controlling person of a
stockholder by reason of the fact that Aura or such subsidiary pursues or
acquires such opportunity for itself, directs such corporate opportunity to
another person, or does not communicate information regarding such corporate
opportunity to the Company.
Further, the Restated Certificate provides that, except as Aura may
otherwise agree in writing, in the event that a director, officer or employee
of the Company who is also a director, officer or employee of Aura acquires
knowledge of a potential transaction or mater that may be a corporate
opportunity both for the Company and Aura (whether such potential transaction
or mater is proposed by a third party or is conceived by such director,
officer or employee of the Company), such director, officer or employee shall
be entitled to offer such corporate opportunity to the Company or Aura as such
director, officer or employee deems appropriate under the circumstances in his
or her sole discretion, and no such director, officer or employee shall be
liable to the Company or its stockholders for breach of any fiduciary duty or
duty of loyalty or failure to act in (or not opposed to) the best interests of
the Company or the derivation of any improper personal benefit by reason of
the fact that (i) such director, officer or employee offered such corporate
opportunity to Aura (rather than the Company) or did not communicate
information regarding such corporate opportunity to the Company or (ii) Aura
pursues or acquires such corporate opportunity for itself or directs such
corporate opportunity to another person or does not communicate information
regarding such corporate opportunity to the Company.
The enforceability of the provisions discussed above under Delaware
corporate law has not been established and, due to the absence of relevant
judicial authority, counsel to the Company is not able to deliver an opinion
as to the enforceability of such provisions. These provisions of the Restated
Certificate eliminate certain rights that might have been available to
stockholders under Delaware law had such provisions not been included in the
Restated Certificate, although the enforceability of such provisions has not
been established.
At the time of the consummation of the Offering, certain of the directors of
the Company will also be employees and/or directors of Aura.
The foregoing provisions of the Restated Certificate shall expire on the
date that Aura ceases to own beneficially Common Stock representing at least
20% of the number of outstanding shares of Common Stock and no person who is a
director or officer of the Company is also a director or officer of Aura or
its subsidiaries.
Actions Under Intercompany Agreements. The Company's Restated Certificate
will also limit the liability of Aura and its subsidiaries for certain
breaches of their fiduciary duties in connection with action that may be taken
or not taken in good faith under the intercompany agreements. See
"Relationship with Aura and Certain Transactions."
Advance Notice Provision. The Company's Amended and Restated Bylaws provide
for an advance notice procedure for the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors
as well as for other stockholder proposals to be considered at annual meetings
of stockholders. In general, notice of intent to nominate a director or raise
matters at such meetings will have to be received by the Company not less than
120 or more than 150 days prior to the first anniversary of the Company's
proxy statement in connection with the previous year's annual meeting, and
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
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Limitations on Directors' Liability. The Restated Certificate and the
applicable provisions of the DGCL provide that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions will be to eliminate the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.]
NASDAQ NATIONAL MARKET LISTING
The Company has applied for inclusion of its Common Stock and Warrants for
quotation on the Nasdaq National Market under the symbols "NWCM" and "NWCMW,"
respectively. This offering is the initial public offering of the Company's
Securities and, accordingly, there is currently no public trading market for
any such Securities. Even if the Company's Common Stock and Warrants are
accepted for quotation on Nasdaq National Market, there can be no assurance
that a public trading market will ever develop or, if one develops, that it
will be maintained. Although it has no legal obligation to do so, the
Representative from time to time may act as a market maker and otherwise
effect transactions for its own account, or for the account of others, in the
Company's Securities. The Representative, if it so participates, may be a
dominating influence in any market that may develop for any of the Company's
Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Warrant Agent
for the Warrants is Interwest Transfer Company, Inc., Salt Lake City, Utah.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Common Stock and Warrants annual
reports containing audited financial statements. The Company may issue other
unaudited interim reports to its securityholders as it deems appropriate.
Contemporaneously with the Offering, the Company shall register its Common
Stock with the Commission, under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, the Company will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no public market for the Common Stock
or Warrants of the Company, and no predictions can be made regarding the
effect, if any, that market sales of the Securities or the availability of
Securities for sale will have on the market price prevailing from time to
time. As described below, only a limited number of shares of Common Stock will
be available for sale shortly after the Offering due to certain contractual
and legal restrictions on resale. Nevertheless, sales of substantial amounts
of Common Stock of the Company in the public market after the restrictions
lapse could adversely affect the prevailing market price.
Upon completion of the Offering, the Company will have outstanding 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
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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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UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Joseph Charles & Associates, Inc. is
acting as representative (the "Representative"), have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters named below, the aggregate number of Units set forth opposite
there respective names in the table below at the price to the public less
underwriting discounts set forth on the cover page of this Prospectus. The
Units are being sold on a firm commitment basis. The Underwriting Agreement
provides, however, that the obligations of the Underwriters to pay for and
accept delivery of the Units are subject to certain conditions precedent, and
that the Underwriters are committed to purchase and pay for all Units if any
Units are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
------------ ---------
<S> <C>
Joseph Charles & Associates, Inc..................................
---------
Total........................................................... 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.
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The Company has agreed with the Representative not to solicit Warrant
exercises other than through the Representative. Upon exercise of any
Warrants, the Company will pay the Representative a fee of 3% of the aggregate
exercise price, if (i) the market price of the Company Common Shares on the
date the Warrant is exercised is greater than the then exercise price of the
Warrant; (ii) the exercise of the Warrant was solicited by a member of the
National Association of Securities Dealers, Inc. who is so designated in
writing by the holder exercising the Warrant; (iii) the Warrant is not held in
a discretionary account except where prior specific written approval for the
exercise has been received; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrant; (v) the solicitation of the exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Exchange Act; and (vi) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the date of this Prospectus or on
Warrants voluntarily exercised at any time without solicitation. In addition,
unless granted an exemption by the Commission from Rule 10b-6 under the
Exchange Act, the Representative will be prohibited from engaging in any
market making activities or solicited brokerage activities until the later of
the termination of such solicitations activity or the termination by waiver or
otherwise of any right the Representative may have to receive a fee for the
exercise of the Warrants following such solicitation. Such a prohibition,
while in effect, could impair the liquidity and market price of the
Securities.
Except in connection with acquisitions or the exercise of the Warrants, the
Representative's Option or options to purchase up to 1,000,000 Common Shares
that may be reserved or granted under the Company's Stock Plan, the Company
has agreed, for a period of one year from the closing of the Offering, that it
will not issue, sell or purchase any Common Shares, warrants or options or
other equity securities of the Company without the prior written consent of
the Representative. In addition, the officers, directors and principal
stockholders of the Company have agreed that they will not offer, sell or
otherwise dispose of any Common Shares, Warrants or other equity securities of
the Company owned by them to the public for a period of at least one year from
the effective date of the Offering, without the prior written consent of the
Representative. The Representative may in its discretion and without notice to
the public waive these lock-up agreements and permit 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.
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Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Shares and Warrants at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchases, for the purpose of
pegging, fixing or maintaining the price of the Common Shares or Warrants. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Representatives to reclaim a selling concession
from a syndicate member in connection with the offering when Common Shares or
Warrants sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq Stock Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Securities offered
hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP,
Menlo Park, California. Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California, has acted as counsel to the
Underwriters with respect to certain legal matters in connection with the
Offering.
EXPERTS
The financial statements of NewCom, Inc. at February 28, 1995, February 29,
1996 and February 28, 1997, for the nine-month period ended February 28, 1995,
and for each of the two years in the period ended February 28, 1997, included
in this Prospectus have been audited by Pannell Kerr Forster, Certified Public
Accountants, a Professional Corporation, Los Angeles, California, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus regarding the contents of
any contract or other document are not necessarily complete; with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. A copy of the Registration Statement, including
the exhibits and schedules thereto, may be inspected without charge at the
principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material may be obtained from such office upon
payment of the fees prescribed by the Commission.
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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 Using computers to perform telephone functions.
telephony
data fax modem Computer product used for transmission of computer data
and fax data over telephone lines.
DOS Disc operating system, generally refers to Microsoft DOS
or to other Microsoft compliant systems.
DSP Digital Signal Processing; a hardware device whose
functions can change with software modifications
DSVD Digital Simultaneous Voice and Data; allows both voice
and computer data to be simultaneously transmitted over a
single standard phone line.
DVC Desktop Videoconferencing
DVD-ROM Digital Video Disk-Read Only Memory; new standard in CD
technology that is faster and holds many times more data
than CD-ROM; allows data to be read but not written.
error correction Technology which allows for error free transmission over
less than error free phone lines.
full duplex Allows both parties to talk at the same time and be
speakerphone heard.
IDE Integrated Drive Electronics; standard computer interface
for CD-ROM and other drives.
Internet A global open network of thousands of interconnected
computer networks and millions of commuter connections
that allow individuals, businesses and other
organizations to communicate worldwide.
Internet content A phrase that encompasses all of the written, audio and
video information available on the Internet.
Internet page A location of information on the World Wide Web.
Internet phone Uses the Internet modem connection to exchange voice
packets of data, i.e., voice conversations.
ISA Industry Standard Architecture; standard Windows/DOS PC
bus interface slot.
ISDN Integrated Services Digital Network; phone line
connection that is digital rather then the standard
analog; allows for much higher data transmission speeds.
ITU
International Telecommunication Union
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.
63
<PAGE>
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.
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 Telephone conferencing in which each party see a video
conferencing transmission of the other party.
Web browsing A phrase used to describe the process of looking for
information on the Internet World Wide Web.
Windows/DOS PC A PC that uses Microsoft's operating system. Also known
as IBM PC clones.
WWW World Wide Web; linked computer around the world.
64
<PAGE>
NEWCOM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholder's Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NewCom, Inc.
Westlake Village, California
We have audited the accompanying balance sheets of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the related
statements of operations, statements of stockholder's equity (deficit) and
cash flows for each of the two years in the period ended February 28, 1997,
and for the nine months ended February 28, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the results of
its operations and its cash flows for each of the two years in the period
ended February 28, 1997, and for the nine months ended February 28, 1995, in
conformity with generally accepted accounting principles.
Los Angeles, California
June 11, 1997
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
F-2
<PAGE>
NEWCOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MAY 31,
--------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997 1996 1997 PRO FORMA(2)
------------ ------------ ------------ ----------- ----------- ------------
(NOTE 2)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash
equivalents.......... $ 335,706 $ 2,102,183 $ 2,813,631 $ 1,835,865 $ -- $ --
Accounts receivable,
net.................. 1,023,029 18,734,671 29,974,924 19,314,382 32,844,092 32,844,092
Inventories........... 272,761 3,578,767 11,495,503 3,217,704 15,480,804 15,480,804
Other current assets.. 200 55,617 45,069 57,617 4,151,124 4,151,124
---------- ----------- ----------- ----------- ----------- -----------
Total current
assets.............. 1,631,696 24,471,238 44,329,127 24,425,568 52,476,020 52,476,020
---------- ----------- ----------- ----------- ----------- -----------
Property and equipment,
at cost................ 186,262 410,901 2,532,278 439,406 2,590,657 2,590,657
Less accumulated
depreciation........... (21,553) (56,989) (260,908) (77,839) (281,758) (281,758)
---------- ----------- ----------- ----------- ----------- -----------
Net property and
equipment........... 164,709 353,912 2,271,370 361,567 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).... 650,303 505,791 361,279 469,663 325,151 325,151
Other assets............ 55,285 17,405 473,395 8,833 162,024 162,024
---------- ----------- ----------- ----------- ----------- -----------
Total assets............ $2,501,993 $25,348,346 $47,435,171 $25,265,631 $55,272,094 $55,272,094
---------- ----------- ----------- ----------- ----------- -----------
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT):
Current liabilities
Accounts payable...... $ 603,900 $ 7,202,642 $13,354,178 3,140,759 15,066,921 15,066,921
Accrued expenses...... 38,956 126,312 174,740 208,988 103,026 103,026
Other debt............ -- 2,397,657 8,883,656 3,414,415 5,740,236 5,740,236
---------- ----------- ----------- ----------- ----------- -----------
Total current
liabilities......... 642,856 9,726,611 22,412,574 6,764,162 20,910,183 20,910,183
---------- ----------- ----------- ----------- ----------- -----------
Due to Aura............. 1,238,354 20,186,283 17,249,874 22,343,605 25,522,706 21,495,706
---------- ----------- ----------- ----------- ----------- -----------
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 1)... 7,556 7,556 7,556 1 7,556 8,000
Additional paid-in
capital.............. 993,444 993,444 9,993,444 1,000,999 9,993,444 13,993,000
Accumulated deficit... (380,217) (5,565,548) (2,228,277) (4,843,136) (1,161,795) (1,134,795)
---------- ----------- ----------- ----------- ----------- -----------
620,783 (4,564,548) 7,772,723 (3,842,136) 8,839,205 12,866,205
---------- ----------- ----------- ----------- ----------- -----------
Total liabilities and
stockholder's equity
(deficit).............. $2,501,993 $25,348,346 $47,435,171 $25,265,631 $55,272,094 $55,272,094
========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
NEWCOM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
----------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997 1996 1997
------------ ------------ ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <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 STOCKHOLDERS' EQUITY (DEFICIT)
NINE MONTHS ENDED FEBRUARY 28, 1995 AND THE
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997
AND THE UNAUDITED THREE-MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNTS CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Stock issued for cash,
July 1, 1994........... 1,000 $ 5 $ 995 $ -- $ 1,000
Assets contributed by
stockholder
(note 1)............... -- -- 1,000,000 -- 1,000,000
Effect of 7,555.556 for
1 stock split (note
17).................... 7,554,556 7,551 (7,551) -- --
Net loss................ -- -- -- (380,217) (380,217)
--------- ------ ---------- ----------- ----------
Balance at February 28,
1995................... 7,555,556 7,556 993,444 (380,217) 620,783
Net loss................ -- -- -- (5,185,331) (5,185,331)
--------- ------ ---------- ----------- ----------
Balance at February 29,
1996................... 7,555,556 7,556 993,444 (5,565,548) (4,564,548)
Capital contribution by
stockholder (note 4)... -- -- 9,000,000 -- 9,000,000
Net income.............. -- -- -- 3,337,271 3,337,271
--------- ------ ---------- ----------- ----------
Balance at February 28,
1997................... 7,555,556 7,556 9,993,444 (2,228,277) 7,772,723
Net income (unaudited).. -- -- -- 1,066,482 1,066,482
--------- ------ ---------- ----------- ----------
Balance at May 31, 1997
(unaudited)............ 7,555,556 $7,556 $9,993,444 $(1,161,795) $8,839,205
========= ====== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
NEWCOM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss)...... $ (380,217) $ (5,185,331) $ 3,337,271 $ 722,412 $ 1,066,482
----------- ------------ ------------ ----------- -----------
Adjustments to
reconcile net income
(loss) to net cash
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.
Per share information
The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the year (see Note 17).
F-7
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
Research and development
Research and development costs are expensed as incurred.
Advertising costs
Advertising costs are expensed as incurred. Advertising charged to expense
in Fiscal 1995, 1996 and 1997 approximated $19,000, $1,523,000 and $3,990,000,
respectively.
Property and equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Machinery and equipment........ 3-10 years
Furniture and fixtures......... 5-10 years
Leasehold improvements......... Life of lease
</TABLE>
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1,712,184, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead. The Company
expects recovery of these costs from orders.
Depreciation expense of machinery and equipment, furniture and fixtures and
leasehold improvements was $21,553, $50,508 and $203,919, for Fiscal 1995,
1996 and 1997, respectively.
Engineering designs and drawings
Engineering designs and drawings represents the fair value of intangible
assets contributed by Aura in September 1994 (see note 1), and is being
amortized over 5 years on a straight-line basis.
The carrying value of these intangible assets is based on management's
current assessment of recoverability. Management evaluates recoverability
using both objective and subjective factors. Objective factors include
management's best estimates of projected future earnings and cash flows and
analysis of recent sales and earnings trends. Subjective factors include
competitive analysis and the Company's strategic focus.
Unaudited pro forma balance sheet
The unaudited pro forma balance sheet at May 31, 1997 gives effect to the
conversion of advances from Aura of $4,000,000 into 444,444 shares of the
Company's common stock upon the closing of the Company's initial public
offering, assuming an offering price per Unit of $9.00. The unaudited pro
forma balance sheet does not give effect to the offering itself.
Unaudited Note to Financial Statements
Management Opinion
In the opinion of Company management, the accompanying unaudited financial
statements as of May 31, 1997 and for the three months ended May 31, 1996 and
1997, reflect all adjustments (which include only normal
F-8
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
recurring adjustments) and reclassification for comparability necessary to
present fairly the financial position and results of operations.
NOTE 3--PRODUCT RETURN RISKS
The Company is exposed to the risk of product returns from its retailer mass
merchant and distributor customers as a result of several factors, including
returns from their customers, contractual stock rotation privileges, returns
of defective products or product components, 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.
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.
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 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>
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
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)
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 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>
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 11--LEASES
The Company subleases office facilities and equipment under operating leases
that expire through Fiscal 2000. Other costs, such as property taxes,
insurance and maintenance, are also paid by the Company. Rental expense
charged to operations was $22,568, $147,635 and $191,013 in Fiscal 1995, 1996
and 1997, respectively.
At February 28, 1997, minimum rentals under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1998................................ $193,228
1999................................ 199,025
2000................................ 204,996
--------
$597,249
========
</TABLE>
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 manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit chipsets which provide multimedia functionality, are available only
from a single source or limited sources. These components are generally in
short supply and frequently subject to allocation by semiconductor
manufacturers.
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 15--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
NOTE 16--SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Noncash investing and financing activities:
During September 1994, Aura contributed assets to the Company in the amount
of $1,000,000 (see note 1).
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.
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)
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share.
Options granted to the Company's directors, the Named Executive Officers, and
all directors and executive officers as a group included the following: Sultan
W. Khan, CEO, President and Director, 192,720 shares; Asif M. Khan, Executive
Vice President and Director, 192,720 shares; Zane Alsabery, Director, 35,000
shares; and all directors and executive officers as a group, 420,440 shares. A
total of 453,310 shares of Common Stock are available for future issuance
under the Company's stock plan. Pursuant to an underwriting agreement, the
Company has agreed that, for a period of one year following the date of the
Prospectus, the Company will not grant any additional options under the
Company's stock plan at an exercise price less than the initial public
offering price of the Common Shares, without the Underwriters' prior consent
which may be withheld in its sole discretion.
F-14
<PAGE>
[PHOTO OF PRODUCT] 33,600 BPS
EXTERNAL DATA/FAX MODEM
[PHOTO OF PRODUCT]
WEBPAL INTERNET APPLIANCE
[PHOTO OF PRODUCT] 24X
MULTIMEDIA UPGRADE KIT
[PHOTO OF PRODUCT] NC100
SPEAKERS
[PHOTO OF PRODUCT] 56,000 BPS INTERNAL
DATA/FAX MODEM
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 18
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 20
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 24
Business................................................................. 30
Management............................................................... 42
Relationship with Aura and Certain Transactions.......................... 47
Principal Stockholders................................................... 50
Description of Securities................................................ 51
Shares Eligible for Future Sale.......................................... 58
Underwriting............................................................. 60
Legal Matters............................................................ 62
Experts.................................................................. 62
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
1,700,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK
PURCHASE WARRANT
NEWCOM, INC.
---------------
PROSPECTUS
---------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee.......................................... $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.
(a) In June 1994, the Registrant issued 7,067,089 shares of its Common Stock
to Aura Systems, Inc., for an aggregate consideration of $935.35. The
Registrant relied on the exemption provided by Section 4(2) of the Act.
(b) In September 1994, the Registrant issued 488,467 shares of its Common
Stock to four of its employees for an aggregate consideration of $64.65. The
Registrant relied on the exemption provided by Section 4(2) of the Act.
II-1
<PAGE>
(c) On June 1, 1997, the Registrant granted options to acquire 520,440
shares of its Common Stock to five employees under its Stock Plan. The
exercise price per share was $8.00, for an aggregate consideration of $4.2
million. The Registrant relied on the exemption provided by Rule 701 under the
Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates and warrants issued in such transactions. All recipients had
adequate access, through employment or other relationships, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement
3(i).1* 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.
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.
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts (and accompanying Independent
Auditors' Report)
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
II-3
<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 this 25th day of July, 1997.
Newcom, Inc.
/s/ Sultan W. Khan
By __________________________________
Sultan W. Khan
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND
ON THE DATES INDICATED.
NAME TITLE DATE
/s/ Sultan W. Khan President and Chief
- ------------------------------------- Executive Officer July 25, 1997
SULTAN W. KHAN (Principal
Executive Officer)
and Director
Executive Vice
* Asif M. Khan President and July 25, 1997
- ------------------------------------- Director
ASIF M. KHAN
Vice President,
Finance and Chief July 25, 1997
Financial Officer
(Principal
Financial and
* Steven C. Veen Accounting Officer)
- -------------------------------------
STEVEN C. VEEN
II-4
<PAGE>
NAME TITLE DATE
* Michael I. Froch Secretary and
- ------------------------------------- Director July 25, 1997
MICHAEL I. FROCH
* Zane R. Alasbery Director July 25, 1997
- -------------------------------------
ZANE R. ALSABERY
* James M. Curran Director July 25, 1997
- -------------------------------------
JAMES M. CURRAN
* Gerald S. Papazian Director July 25, 1997
- -------------------------------------
GERALD S. PAPAZIAN
* Alexander Remington Director July 25, 1997
- -------------------------------------
ALEXANDER REMINGTON
/s/ Sultan W. Khan
By: ---------------------------------
Sultan W. Khan,
Attorney-in-Fact
II-5
<PAGE>
SCHEDULE II
NEWCOM, INC.
VALUATION AND QUALIFYING ACCOUNTS
NINE MONTHS ENDED FEBRUARY 28, 1995, AND YEARS ENDED FEBRUARY 29, 1996 AND
FEBRUARY 28, 1997, AND THREE MONTHS ENDED MAY 31, 1997
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Allowances are deducted
from the assets to
which they apply
Nine months ended
February 28, 1995:
Allowance for:
Uncollectible
Accounts............. $ -- $ 30,000 $-- $ -- $ 30,000
Year ended February 29,
1996:
Allowance for:
Reserve for potential
product
obsolescence......... $ -- $ 70,000 $-- $ -- $ 70,000
Uncollectible
accounts............. 30,000 935,000 -- (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 Amendment No. 1 to the Registration
Statement on Form S-1 of NewCom, Inc. of our reports, dated June 11, 1997, on
our audits of the balance sheets of NewCom, Inc. as of February 28, 1997,
February 29, 1996 and February 28, 1995, and the related statements of
operations, stockholder's 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 25, 1997
