<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 12, 1997
REGISTRATION NO. 333-31431
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
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) ............. 2,300,000 $ 10.00 $23,000,000 $ 6,970
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share(4)...... 2,300,000
- --------------------------------------------------------------------------------
Common Stock Purchase
Warrants(5)............. 2,300,000
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Common Stock, par value
$.001 per share,
underlying Warrants(6).. 2,300,000 $ 15.00 $34,500,000 $10,455
- --------------------------------------------------------------------------------
Representative's
Option(7)............... 1 $200.00 $ 200.00 $ 0
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Units underlying
Representative's Option,
each Unit consists of
one share of Common
Stock, par value $.001
per share, and one
Common Stock Purchase
Warrant................. 200,000 $ 14.50 $ 2,900,000 $ 879
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying
Representative's
Option.................. 200,000
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Common Stock Purchase
Warrants underlying
Representative's
Option.................. 200,000
- --------------------------------------------------------------------------------
Common Stock, par value
$.001 per share,
underlying Common Stock
Purchase Warrants
underlying
Representative's
Option.................. 200,000 $ 15.00 $ 3,000,000 $ 909
- --------------------------------------------------------------------------------
Total Fee................ $19,213*
</TABLE>
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- -------------------------------------------------------------------------------
* $19,061 previously paid.
(1) Pursuant to Rule 416 under the Securities Act of 1933 (the "Act"), this
Registration Statement covers such additional indeterminate number of
shares of Common Stock and Warrants as may be issued by reason of
adjustments in the number of shares of Common Stock and Warrants pursuant
to anti-dilution provisions contained in the Warrants and Representative's
Option. Because such additional shares of Common Stock and Warrants will,
if issued, be issued for no additional consideration, no registration fee
is required.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Includes 300,000 Units subject to the Underwriters' overallotment option
(the "Underwriters' Over-allotment Option"). The Common Shares included in
these Units will be offered by Aura Systems, Inc. and the Warrants
included in these Units will be offered by the Registrant.
(4) Includes 300,000 shares of Common Stock subject to the Underwriters' Over-
allotment Option.
(5) Includes 300,000 Warrants subject to the Underwriters' Over-allotment
Option. The Warrants are exercisable over a five year period commencing on
the Closing Date of the Offering at $14.85 per share.
(6) The number of shares of Common Stock specified is the number which may be
acquired upon exercise of the Warrants at the maximum exercise price
thereof.
(7) The Representative's Option entitles the Representative to purchase
200,000 Units at $12.00 per Unit. The Common Stock and Warrants included
in the Units underlying the Representative's Option may only be purchased
together. The Representative's Option is exercisable over a four year
period commencing on the Closing Date of the Offering.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 12, 1997
PROSPECTUS
2,000,000 UNITS
NEWCOM, INC.
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK PURCHASE
WARRANT
-----------
Each Unit ("Unit") of NewCom, Inc., a Delaware corporation (the "Company"),
consists of one share of Common Stock, $0.001 par value per share ("Common
Share"), and one Common Stock Purchase Warrant ("Warrant"). All of the Units
offered hereby (the "Offering") are being sold by the Company. The anticipated
initial public offering price of the Units is between $8.00 and $10.00 per Unit
("Offering Price"), of which $.10 is the public offering price allocated to the
Warrants. Upon completion of the Offering, the Common Shares and the Warrants
will immediately trade separately. Each Warrant entitles the holder to purchase
one share of Common Stock at a price of 150% of the Offering Price until that
date which is five years from the date of this Prospectus. The Warrants are
redeemable at the option of the Company, at $.05 per Warrant, at any time on or
after that date which is one year from the date of this Prospectus, or such
earlier date as may be determined by Joseph Charles & Associates, Inc., the
representative (the "Representative") of the Underwriters, upon at least 30
days' notice if the closing price of the Common Stock equals or exceeds 200% of
the Offering Price for 20 consecutive trading days ending within 30 days prior
to the date notice of redemption is given, and at such time as there is a
current effective registration statement covering the Common Shares underlying
the Warrants. Upon 30 days written notice to all holders of the affected class
of Warrants, the Company shall have the right to reduce the exercise price
and/or extend the term of the Warrants. The Units, Common Shares and Warrants
offered hereby are sometimes hereinafter collectively referred to as the
"Securities."
The Company is a majority-owned subsidiary of Aura Systems, Inc., a Delaware
corporation ("Aura"). Upon completion of the Offering, Aura will own
approximately 75% of the outstanding Common Stock of the Company (approximately
72% if the Underwriters' Over-allotment Option is exercised in full) and will
continue to control the Company. See "Principal Stockholders" and "Relationship
with Aura and Certain Transactions."
Prior to the Offering, there has been no public market for the Common Shares
or Warrants of the Company and there can be no assurance that such a market
will develop or be sustained after the Offering. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price of the Units and the terms of the Warrants. The Company has
applied to have the Common Shares and Warrants approved for quotation on the
Nasdaq National Market under the symbols NWCM and NWCMW, respectively, and the
Common Shares and the Warrants will trade separately immediately after the
Offering.
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE A HIGH DEGREE
OF RISK AND IMMEDIATE SUBSTANTIAL DILUTION. SEE "RISK FACTORS"
BEGINNING ON PAGE 7 AND "DILUTION."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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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 $200 of an option (the
"Representative's Option") to purchase 200,000 Units at a price of 145% of
the Offering Price, exercisable over a period of four years commencing one
year from the date of this Prospectus. The Company and Aura have also
agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated to be $1.1
million, including the Representative's non-accountable expense allowance.
(3) Aura and the Company have granted the Underwriters an option (the
"Underwriters' Over-allotment Option"), exercisable within 45 days from
the date of this Prospectus, to purchase up to 300,000 additional Units on
the same terms as set forth above, solely for the purpose of covering
over-allotments, if any. The Common Shares included in such additional
Units will be offered by Aura and the Warrants included in such additional
Units will be offered by the Company. If the Underwriters' Over-allotment
Option is exercised in full, the total Price to the Public, Underwriting
Discounts and Commissions, and Proceeds to the Company will be $ , $
and $ , respectively, and Aura will receive gross proceeds of $ after
payment of $ of Underwriting Discounts and Commissions. See
"Underwriting."
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OR
WARRANTS, INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
CONVERTING TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
FORWARD-LOOKING STATEMENTS
When included in this Prospectus, the words "expects," "intends,"
"anticipates," "plans," "projects" and "estimates," and analogous or similar
expressions are intended to identify forward-looking statements. Such
statements, which include statements contained in "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," are inherently subject to a variety of
risks and uncertainties that could cause actual results to differ materially
from those reflected in such forward-looking statements. For a discussion of
certain of such risks, see "Risk Factors." These forward-looking statements
speak only as of the date of this Prospectus. The Company expressly disclaims
any obligation or undertaking to release publicly any updates or revisions to
any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
----------------
As of the date of this Prospectus, the Company will become subject to the
reporting requirements of the Securities Exchange Act of 1934, and in
accordance therewith will file reports, proxy statements and other information
with the Securities and Exchange Commission (the "Commission"). The Company
intends to furnish its stockholders and the holders of Securities with annual
reports containing audited financial statements and such other periodic
reports as the Company deems appropriate or as may be required by law. The
Company's fiscal year ends February 28 (February 29 during leap years).
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information in this Prospectus
(i) assumes no exercise of the Warrants, the Underwriters' Over-allotment
Option or the Representative's Option, (ii) does not include a total of
1,000,000 shares of Common Stock (giving effect to the Stock Split described
below) reserved for issuance upon exercise of options either outstanding or
available for grant under the Company's 1997 Stock Incentive Plan (the "Stock
Plan"), and (iii) has been adjusted to reflect a recapitalization of the
Company (the "Recapitalization") to take effect immediately prior to the
closing date of the Offering (the "Closing Date") pursuant to which (x) a stock
split of the outstanding shares of Common Stock and shares subject to the Stock
Plan (the "Stock Split") will be effected as a result of which the outstanding
shares of Common Stock of the Company immediately prior to the Closing Date
will be 8,000,000 (for purposes of this Prospectus, assuming an Offering Price
of $9.00 per Unit, such Stock Split is 7,555.556-for-1.0), (y) the Certificate
of Incorporation of the Company will be amended (the "Certificate Amendment")
to increase the number of authorized shares of Common Stock to 50,000,000 and
to create and authorize 5,000,000 shares of Preferred Stock, and (z) Aura will
convert (the "Conversion") $4.0 million in intercompany debt from NewCom into
that number of shares of Common Stock equal to $4.0 million divided by the
Offering Price (for purposes of this Prospectus, assuming an Offering Price of
$9.00 per Unit, Aura will receive 444,444 shares of Common Stock in the
Conversion). See "Description of Securities" and "Underwriting." A glossary of
certain capitalized terms used in this Prospectus begins on page 70.
THE COMPANY
NewCom, Inc. ("NewCom" or the "Company") designs, manufactures and markets
high performance computer communication and multimedia products for the
personal computer ("PC") market. NewCom's communication products include a line
of high speed external and internal data/fax and voice modems, which link PCs
through the worldwide web and through direct connections over telephone lines,
and NewCom's WebPal, an Internet appliance enabling users to access the
worldwide web and perform Internet-specific tasks through their existing
television screens. NewCom's multimedia product line includes a broad range of
add-in subsystems, upgrade kits and Internet access kits that incorporate CD-
ROM drives, speakers, sound cards, modems, microphones and other telephony and
sound solutions. The Company's multimedia products are targeted both to users
that desire to convert their PCs into multimedia systems and to users desiring
to upgrade their current multimedia systems with faster CD-ROM drives, higher
quality sound and increased functionality.
The Company believes that demand for PC communication and multimedia products
is driven by a variety of factors including (i) the growing installed base of
PCs, particularly those sold into the consumer and small office/home office
("SOHO") markets, (ii) continuing advances in technology leading to faster
modems and CD-ROM drives and expanded multimedia functionality and (iii) the
rapid growth of Internet content, bandwidth-intensive interactive software, on-
line services and emerging PC applications such as digital video capture and
playback, video conferencing, telephony, paperless faxing, advanced desktop
publishing, voicemail, high resolution three-dimensional ("3D") games, and
interactive movies and other entertainment media, which increasingly
demonstrates to consumers the need for PC communications and multimedia
products.
NewCom had gross revenues of $73.1 million and $16.1 million, and net
revenues of $50.6 million and $15.4 million, during its fiscal year ended
February 28, 1997 ("Fiscal 1997") and the three months ended May 31, 1997 (the
"first quarter of Fiscal 1998"), respectively. The Company's sales channels
include a broad network of national and regional independent distributors and
leading retail and mass merchant chains and catalogues and, to a lesser extent,
original equipment manufacturers and value added resellers ("OEMs/VARs").
NewCom's distributor customers, which accounted for 57% of the Company's gross
revenues and 47% of net revenues during Fiscal 1997, include Dinorall
Corporation (dba Dinexim Corp.), MicroInformatica Corporation
3
<PAGE>
and Southern Electronic Distributors, Inc. The Company's retail and mass
merchant customers, which accounted for 36% of gross revenues and 46% of net
revenues during the same period, include Circuit City Stores, Inc., Best Buy
Company, Inc. and Fry's Electronics.
NewCom does not employ an internal research and development staff. Rather,
the Company strives to identify key emerging technologies in the PC
communication and multimedia industries and to innovatively combine these
technologies into its products using manufacturing techniques that enable the
Company to rapidly bring to market high-quality products at competitive prices.
New products currently being designed by NewCom and anticipated to be
introduced within the next year include a line of Integrated Services Digital
Network ("ISDN") modems, a 33,600 bps modem with video conferencing capability,
and multimedia kits featuring Digital Video Disc-Read Only Memory ("DVD-ROM"),
Compact Disk Recordable ("CDR"), and CDR MPEG (video encoding and decoding)
drives, as well as a 3D graphics card and a deluxe version of the WebPal
Internet appliance. Using integral compression, NewCom's ISDN modems are being
designed to support data rates of up to 512 Kbps. Moreover, unlike most ISDN
modems available today, NewCom's ISDN modems are being designed to function as
both ISDN and standard POTS modems, making it possible for users who have
upgraded their PCs to remain compatible with those who have not. In addition,
the Company is exploring opportunities to design new families of communications
and multimedia products utilizing emerging technologies in the industry such as
cable modem and Asymmetric Digital Subscriber Line ("ADSL") modem technology.
The Company was incorporated under the laws of Delaware in June 1994. The
Company's executive offices are located at 31166 Via Colinas, Westlake Village,
California 91362 and its telephone number is (818) 597-3200.
The NewCom logo is a trademark of the Company. NEWCOM(R) is a registered
trademark of the Company. NavPal, NetTalk, NetFax, NewPal, NewTalk and WebPal
are trademarks of the Company for which trademark applications are pending.
This Prospectus includes product names, trade names and marks of companies
other than the Company. All other company or product names are trademarks,
registered trademarks, trade names or marks of their respective owners and are
not the property of the Company.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 2,000,000 Units(1)
Common Stock Outstanding prior to 8,000,000 Shares
the Offering.....................
Common Stock to be Outstanding 10,000,000 Shares(2)
after the Offering...............
Use of Proceeds................... Proceeds from sale of the Units will be
used for the acquisition of products and
product components, repayment of existing
commercial indebtedness, marketing and
sales and working capital and other general
corporate purposes. The Company will not
receive the proceeds (if any) from the sale
of Common Shares underlying any Units sold
upon exercise of the Underwriters' Over-
allotment Option. See "Use of Proceeds."
Risk Factors...................... The Securities offered hereby involve a
high degree of risk and immediate
substantial dilution. See "Risk Factors"
and "Dilution."
Proposed Nasdaq National Market Common Shares--"NWCM"
symbols.......................... Warrants--"NWCMW"
</TABLE>
- --------
(1) Until completion of the Offering, the Units may only be purchased on the
basis of one Common Share and one Warrant per Unit. Upon completion of the
Offering, the Common Shares and the Warrants will be immediately detachable
and separately transferable. Each Warrant entitles the holder to purchase
one Common Share at a price per share equal to 150% of the Offering Price
until that date which is five years from the date of this Prospectus. The
Warrants are redeemable at the option of the Company, at $.05 per Warrant,
at any time after the first anniversary of the date of this Prospectus, or
such earlier date as may be consented to in writing by the Representative,
upon 30 days prior written notice, if the closing price of the Common
Shares, as reported by the principal exchange on which the Common Shares
are quoted, equals or exceeds 200% of the Offering Price for 20 consecutive
trading days within the 30 day period preceding the date of the notice of
redemption and at such time as there is a current effective registration
statement covering the Common Shares underlying the Warrants. Upon 30 days
written notice to all holders of the Warrants, the Company shall have the
right to reduce the exercise price and/or extend the term of the Warrants.
See "Description of Securities."
(2) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 300,000 shares of Common Stock included in
the Underwriters' Over-allotment Option, (iii) 300,000 shares of Common
Stock issuable upon exercise of the Warrants included in the Underwriters'
Over-allotment Option, (iv) 200,000 shares of Common Stock issuable upon
exercise of the Representative's Option, (v) 200,000 shares of Common Stock
issuable upon exercise of the Warrants included in the Representative's
Option, and (vi) 546,690 shares of Common Stock issuable upon the exercise
of options outstanding as of June 30, 1997. See "Description of
Securities," "Underwriting" and "Management--Stock Incentive Plan."
5
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS ENDED
ENDED YEAR ENDED MAY 31,
FEBRUARY 28, YEAR ENDED FEBRUARY 28, ---------------------------
1995 FEBRUARY 29, 1996 1997 1996 1997
------------ ----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $7,465,720 $16,081,392
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
Income (loss) from oper-
ations................. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Net income (loss)....... (380,217) (5,185,331) 3,337,271 614,412 1,066,482
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts(1)............. 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
Pro forma net income per
share(2)............... $.42 $.13
Number of shares used in
computing pro forma net
income per share(2).... 8,000,000 8,000,000
<CAPTION>
MAY 31, 1997
----------------------------------------
PRO FORMA
FEBRUARY 28, 1997 ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------------- ------------ ------------ --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total current assets................. $44,329,127 $52,476,020 $52,476,020 $64,626,020
Working capital...................... 21,916,553 31,565,837 31,565,837 47,215,837
Total assets......................... 47,435,171 55,272,094 55,272,094 67,422,094
Total current liabilities............ 22,412,574 20,910,183 20,910,183 17,410,183
Due to Aura(4)....................... 17,249,874 25,522,706 21,522,706 21,522,706
Stockholders' equity................. 7,772,723 8,839,205 12,839,205 28,489,205
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for information regarding
calculation of net income (loss) per share.
(2) Gives effect to the Conversion. Assuming the Conversion was effected June
1, 1996, pro forma net income would be approximately $3,981,000 or $.50 per
share, for the twelve months ended May 31, 1997.
(3) Adjusted to reflect the sale by the Company of 2,000,000 Units offered
hereby at an assumed Offering Price of $9.00 per Unit and the application
of the estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(4) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the Company
to Aura was approximately $17.0 million.
6
<PAGE>
RISK FACTORS
An investment in the Securities offered hereby involves a high degree of
risk. Prospective investors should consider carefully the following risk
factors in addition to the other information presented in this Prospectus,
before purchasing the Securities offered hereby. This Prospectus contains, in
addition to historical information, forward-looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from the results discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below,
as well as those discussed elsewhere in this Prospectus.
RISK FACTORS RELATING TO THE COMPANY
POTENTIAL FLUCTUATIONS IN FUTURE OPERATING RESULTS
The Company's future operating results may vary significantly from period to
period as a result of a number of factors, many of which are beyond the
Company's control. These factors include the timing and volume of orders
received during the period, the impact of price competition on the Company's
average selling prices, the availability and pricing of components for the
Company's products, market acceptance of new product introductions by the
Company and its competitors, the ability of the Company to timely collect
outstanding accounts receivable, changes in product or distribution channel
mix, the timing of expenditures in anticipation of future sales, product
returns or price protection charges from customers, the inventory levels and
financial health of the Company's customers, the overall state of the PC
industry and economic conditions generally. The volume and timing of orders
received during a quarter are difficult to forecast. Customers generally order
on an as-needed basis and, accordingly, the Company has historically operated
with a relatively small backlog. Moreover, as often occurs in the PC industry,
a disproportionate percentage of the Company's net sales in any quarter may be
generated in the last month of the quarter. As a result, a shortfall in sales
in any quarter as compared to expectations may not be identifiable until the
end of the quarter. Notwithstanding its relatively small backlog and the
difficulty in forecasting future sales, the Company generally must plan
production, order components and undertake its development, sales and
marketing activities and other commitments months in advance. Accordingly, any
shortfall in revenues in a given quarter may impact the Company's operating
results due to an inability to adjust expenses or inventory during the quarter
to match the level of revenues for the quarter. Although the Company, through
its use of "Just-in-Time" purchasing, whereby components and supplies are
purchased just before they are needed in the manufacturing cycle, and other
manufacturing strategies, has generally been able to avoid problems associated
with excess inventory, there can be no assurance that the market factors
described above will not cause the Company to possess excess inventory in one
or more future quarters, which could result in cash flow difficulties as well
as expenses associated with inventory writeoffs.
The Company's gross margins have been and will continue to be subject to
quarterly fluctuations, due to the market factors described above and changes
in the Company's mix of products sold and in the mix of its distribution
channels. The Company's multimedia products typically have higher gross
margins than its communications products. The Company's efforts to increase
its sales of communication products as a percentage of total revenues in
future periods will result in a reduction in its overall gross margins.
Currently the Company is attempting to increase sales to OEMs/VARs, which
traditionally have had lower gross margins, and to significantly increase its
sales to the retail/mass merchant channel, which typically provides higher
gross margins than OEM/VAR sales but requires higher sales and marketing
expenses. In addition, the Company's anticipated new product introductions,
which typically have higher initial development, production and marketing
expenses, may further negatively impact the Company's future operating
results. Moreover, the Company's industry is characterized by intense
competition and declining average selling prices. As a result of the foregoing
trends and competitive pricing pressures, the Company's margins and results of
operations may decline in the future from the levels experienced to date.
The Company believes that, due to industry seasonality, demand for the
Company's products is strongest during the fourth calendar quarter of the
year, as a result of year-end business purchases and holiday sales. This
seasonality may become more pronounced in the future to the extent that a
greater proportion of the Company's sales consist of sales into the
retail/mass merchant channel.
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LIMITED HISTORY OF INDEPENDENT OPERATIONS
While the Company has experienced substantial growth in total revenues since
its inception in 1994, the Company incurred net losses of approximately
$380,000 and $5.2 million, respectively, for the nine months ended February
28, 1995 ("Fiscal 1995") and the fiscal year ended February 29, 1996 ("Fiscal
1996"). The Company commenced operations in September 1994 and, at all times
prior to the Offering, has operated as a majority owned subsidiary of Aura. As
such, prior to the Offering, the Company benefitted from the financial,
administrative and other resources of Aura. In addition, prior to the
Offering, Aura exerted significant influence over the Company's Board of
Directors and thus the Company's business. Aura and NewCom have entered into
several intercompany agreements designed to permit the Company to operate,
following the Offering, to a greater extent as an independent business.
Accordingly, the Company's future prospects must be evaluated in light of the
risks, expenses and difficulties it encounters as an independent business.
There can be no assurance the Company will succeed in its efforts to operate
profitably at a greater level of independence from Aura. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
MANAGEMENT OF EXPANSION
Since March 1, 1996, the Company has experienced a significant expansion in
its overall level of business and operations, including product design,
marketing, technical support and sales and distribution. The Company's full-
time employee base has grown from 38 at March 1, 1996, to 76 at June 30, 1997.
This expansion in the scope of the Company's business and operations resulted
in a need for significant investment in infrastructure and systems. While
growth of the Company's business has generated significant accounts
receivable, much of the Company's available cash has been required to finance
the Company's capital expenditures and operations, particularly in the first
quarter of Fiscal 1998. Due to the increases in the Company's overhead and
operating expenses resulting from this expansion, the Company's operating
results, and opportunities for future growth, may be adversely affected if its
revenues remain flat or do not increase to the extent anticipated by the
Company. The Company's accounts receivable have recently increased
significantly due to greater revenues and also due to its receivables being
outstanding for a longer period. This longer collection period resulted, in
part, from the Company's revenue growth increasing beyond the capacity of its
credit and collections personnel. Of the Company's accounts receivable net at
May 31, 1997 of $32.8 million, $20.4 million was over 90 days old (including
$3.7 million which was due from C'More, Inc., a company controlled by
Alexander Remington, a director of the Company) and $9.8 million remained
outstanding as of September 5, 1997 (none of which was due from C'More, Inc.
or any other affiliated entities). In response, the Company has increased the
size of its credit and collections staff and intends to add additional staff
in the future. The inability of the Company to collect significant portions of
its accounts receivable on a timely basis or to obtain adequate financing, in
addition to the proceeds of this Offering, to meet its cash requirements could
limit the Company's future growth. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In addition, the Company's growth has placed significant demands on the
Company's management and on its financial and internal infrastructure. The
Company's future operating results depend on its ability to successfully
implement operating, manufacturing and financial procedures and
infrastructure, to improve coordination among different operating functions,
to strengthen management information systems and telecommunications systems,
and to continue to hire additional personnel, particularly in its customer
service, accounts receivable, engineering and technical support organizations.
Although management has taken actions intended to improve these areas and will
execute the Services Agreement with Aura on the closing of this Offering,
there can be no assurance that the Company will be able to manage these
activities and implement these additional procedures, systems and
infrastructure successfully, and any failure to do so would have a material
adverse effect upon the Company's operating results. There can be no assurance
that the Company's management team and other new personnel can successfully
manage the Company's rapidly evolving business, and failure to do so would
have a material adverse effect upon the Company's operating results.
FUTURE CAPITAL REQUIREMENTS; FUNDING BY AURA; UNCERTAINTY OF ADDITIONAL
FUNDING
The Company incurred a net loss of $5.1 million in Fiscal 1996. Although the
Company achieved profitability on an annual basis in Fiscal 1997 and the first
quarter of Fiscal 1998, there can be no assurance that revenue growth or
profitability will continue on a quarterly or annual basis in the future. The
Company operates
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in a capital-intensive industry. Since its formation, the Company has financed
it operations and capital requirements primarily with revenues generated from
sales, inter-company loans received from Aura and a secured commercial line of
credit. At June 30, 1997, the Company's outstanding indebtedness to Aura and
under the credit line was approximately $17.0 million and $3.6 million,
respectively. Immediately prior to the Closing Date, the Company intends to
discharge $4.0 million of the amount due to Aura by effecting the Conversion.
While the Company's current cash projections do not contemplate the need to
borrow additional funds from Aura following the completion of this Offering,
there can be no assurance that future events will not cause the Company to
look to Aura for funding. While Aura has indicated that it will not provide
working capital to the Company on a basis consistent with past practices, the
Company has not received any indication from Aura that it would not provide
term funding to the Company in the case of unforeseen circumstances. While the
Company intends to partially repay the amount owing under its commercial line
of credit with a portion of the net proceeds of this Offering, management's
internal cash projections estimate future borrowings under such facility or
any replacement thereof to finance operations in an amount equal to or in
excess of such repaid amount within the 12-month period following the
completion of this Offering. As a result, the Company will not significantly
benefit from any reduction in interest expense as a result of such debt
repayment.
The Company believes that current and future available capital resources,
including the net proceeds from the Offering, cash flow from operations, and
other existing sources of liquidity, will be adequate to fund its operations
for the 12-month period following the date of this Prospectus including, but
not limited to, funding of the Company's $8.25 million firm commitment to
purchase WebPal units manufactured for the Company (see Note 13 of Notes to
Financial Statements). However, there can be no assurance that sufficient
funds will be available following the completion of the Offering or that
future events will not cause the Company to seek additional capital sooner
including, but not limited to, the failure by the Company to timely collect
outstanding accounts receivable. To the extent the Company is in need of any
additional financing, there can be no assurance that it will be available to
the Company from Aura or any other source on terms acceptable to the Company,
or at all. If additional funds are raised by issuing equity securities,
further dilution to the existing stockholders may result. If adequate funds
are not available, the Company may be required to delay, scale back or
eliminate its product design, manufacturing and marketing programs or to
obtain funds through arrangements with partners or others that may require the
Company to relinquish rights to certain of its technologies or potential
products or other assets. Accordingly, the inability to obtain adequate
financing could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RAPID TECHNOLOGICAL CHANGE; SHORT PRODUCT LIFE CYCLES
The market for the Company's products is characterized by rapid
technological change, frequent new product introductions, evolving industry
requirements and short product life cycles. The Company believes that these
trends will continue into the foreseeable future. The Company believes that
its future success will depend in large part upon its ability to enhance its
existing products and to successfully bring to market new products that meet
customer requirements and gain market acceptance. There can be no assurance
that the Company will be successful in designing product enhancements or new
products on a timely basis, if at all, or that the Company will be able to
successfully market these enhancements and new products once designed. Since
the Company does not develop internally the software or hardware technology
used in its products, the Company is dependent on its ability to acquire on
commercially reasonable terms the proprietary technology of others. The
Company must monitor industry trends and make choices in selecting new
technologies and features to incorporate into its products. Each new product
cycle presents new opportunities for current or prospective competitors of the
Company to gain market share. If the Company does not successfully introduce
new products within a given product cycle, the Company's sales will be
adversely affected for that cycle and possibly subsequent cycles. Any such
failure could also impair the Company's brand name and ability to command
retail shelf space in future periods. Moreover, because of the short product
life cycles coupled with long lead times for many components used in the
Company's products, the Company may not be able to quickly reduce its
production or inventory levels in response to unexpected shortfalls in sales
or, conversely, to increase production in response to unexpected demand.
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Sales of individual products and product lines are typically characterized
by substantial declines in sales, pricing and margins toward the end of the
respective product's life cycle, the precise timing of which may be difficult
to predict. As new products are planned and introduced, the Company attempts
to monitor the inventory of older products and to phase out their manufacture
in a controlled manner. Nevertheless, the Company could experience unexpected
reductions in sales of older generation products as customers anticipate new
products. These reductions could give rise to additional charges for obsolete
or excess inventory, returns of older generation products by distributors and
mass merchant customers, or substantial price protection charges. See "--
Product Return Risks." To the extent that the Company is unsuccessful in
managing product transitions, its business and operating results could be
materially adversely affected.
The Company's multimedia products are individual add-in subsystems which
function with PCs to provide additional multimedia functionality.
Historically, as a given functionality becomes technologically stable and
widely accepted by PC users, the cost of providing the functionality is
typically reduced by means of large scale integration into semiconductor chips
which are then incorporated onto PC motherboards. The Company expects that
such migration will, in fact, occur with respect to the functionality provided
by the Company's current products. The Company's success is largely dependent
on its ability to continue to design products which incorporate new and
rapidly evolving technologies that system manufacturers have not yet fully
incorporated into PC motherboards. In addition, many OEMs/VARs are
increasingly incorporating sound cards, CD-ROM drives, speakers and other
components of multimedia upgrade kits in their PCs on a pre-installed basis.
The Company anticipates that this trend will result in a reduction in demand
for multimedia upgrade kits based upon such components in the future. While
the Company believes that a market will continue to exist for add-in
subsystems that provide advanced functionalities and offer flexibility in
systems configuration, there can be no assurance that incorporation of new
functionalities onto PC motherboards will not adversely affect the market for
the Company's products or that the Company will continue to design and
successfully introduce new types of multimedia upgrade kits.
COMPONENT SHORTAGES; RELIANCE ON LIMITED SOURCE SUPPLIERS AND THIRD-PARTY
ASSEMBLERS
The Company produces its products using components or subassemblies
purchased from third-party manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit ("ASIC") chipsets which provide multimedia functionality, are
available only from a single source or limited sources. These components are
generally in short supply and frequently subject to allocation by
semiconductor manufacturers. In particular, in Fiscal 1996 the Company
experienced substantial constraints in the availability of modem chipsets from
Rockwell International, its primary supplier at the time, which sharply
impacted the Company's production and sale of its communication products.
Although the Company has since increased its efforts to obtain required
supplies of components, including working closely with component manufacturers
and vendors and qualifying alternative components for inclusion in the
Company's products, component shortages may again become acute and there can
be no assurances that the Company can continue to obtain adequate supplies or
obtain such supplies at their historical cost levels. Currently, the Company
depends to a substantial degree upon Cirrus Logic as the Company's primary
supplier of chips. In addition, since the Company does not develop internally
the software or hardware technology used in its products, the Company depends
on acquiring rights to use the proprietary technology of others. In February
1997 the Company entered into an $8.25 million fixed-price firm commitment to
purchase WebPal units and during the first quarter of Fiscal 1998 made a $3.6
million deposit against initial purchases. Although the Company believes that
other sources of supply are available for delivery of WebPal units, the
Company is and will continue to be dependent upon the ability of the seller to
deliver the WebPal units in a timely manner and in accordance with Company
specifications. Additionally, there can be no assurance that the Company could
recover all or any portion of its deposit in the event of a dispute with or a
deterioration in the financial condition of the seller. Other than the
aforementioned fixed-price commitment, the Company has no guaranteed supply
arrangements with any of its sole or limited source suppliers, including its
chip suppliers. Moreover, the Company does not maintain an extensive inventory
of components and customarily purchases sole or limited source components
pursuant to purchase orders placed from time to time in the ordinary course of
business. The Company's suppliers may, from
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time to time, experience production shortfalls or interruptions which impair
the supply of components to the Company. Component shortages are likely to
continue, and there can be no assurance that such shortages will not adversely
affect future operating results.
The Company uses contract assemblers, primarily located in the Peoples
Republic of China, Taiwan and Mexico, to assemble its products. The Company's
relationships with its Chinese, Taiwanese and Mexican contract assemblers are
subject to greater political, legal, economic and other uncertainties than
with its contract assemblers located in the United States. In addition, the
Company typically uses only one contract assembler for a given design.
Products approved for sale in certain foreign countries require the use of a
manufacturing facility that has been approved by the applicable foreign
regulatory authority, which limits the number of facilities available to
assemble products for those countries. The failure of a contract assembler to
provide acceptable quality and timely service, or an interruption of supplies
from an assembler as a result of a fire, natural calamity, strike, political
unrest, increased import/export restrictions or other significant events,
could materially and adversely affect the Company's results of operations. See
"Business--Manufacturing."
COMPETITION
The markets for the Company's products are highly competitive. The Company
competes directly against a large number of suppliers of communication
products and multimedia add-in subsystems, and indirectly against OEMs to the
extent they manufacture their own products and add-in subsystems. Such
competitors may develop superior products or products of similar quality for
sale at the same or lower prices. Other competitors may have better access
than the Company to emerging technologies for use in their products, either
through their use of in-house research and development personnel or through
their relationships with third-party semiconductor manufacturers. In addition,
the multimedia market is expected to become increasingly competitive as
functionalities continue to converge and companies that previously supplied
products providing functionalities not currently addressed by the Company
emerge as competitors. Many of the Company's current and potential competitors
have significantly greater market presence, name recognition and financial and
technical resources than the Company, and many have longstanding market
positions and established brand names in their respective markets. While the
Company believes that its semiconductor vendor flexibility enables it to
select from among the most advanced components available, the captive
semiconductor supplies of certain of the Company's current and potential
competitors can provide to them greater control over component design,
availability and cost. The Company believes that certain of the Company's
current and potential competitors compete in their markets largely on the
basis of price, which may result in significant price competition, lower
margins for the Company's products or otherwise affect the market for the
Company's products. There can be no assurance that the Company will be able to
continue to compete successfully in its markets, or to compete successful
against current and new competitors, as the Company's markets continue to
evolve. See "Business--Competition."
Substantially all of the Company's sales to date have consisted of sales of
PC communication and multimedia products. Sales of communication products and
multimedia products accounted for approximately 19% and 81%, respectively, of
the Company's net revenues in Fiscal 1996 and 36% and 64%, 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 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 competition pressure of the market will not have a material
adverse effect on the Company's operations in the future.
DISTRIBUTION RISKS; DIVERSIFICATION OF SALES CHANNELS
The Company sells its products primarily to independent regional and
national distributors and retailers/mass merchants and, to a significantly
lesser extent, to OEMs/VARs. The Company's success is
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dependent on the continued viability and financial stability of its customer
base. The PC distribution and retail/mass merchant industries have been
historically characterized by rapid change, including periods of widespread
consolidations and the emergence of alternative distribution channels. Such
change has periodically subjected the PC distribution and retail/mass merchant
industries to financial difficulties. The loss of, or reduction in sales to,
the Company's key customers could have a material adverse effect on the
Company's operating results.
In Fiscal 1997, sales to independent regional and national distributors
accounted for approximately 57% of the Company's gross revenues and 47% of net
revenues. In the first quarter of Fiscal 1998, sales to distributors decreased
to approximatley 39% of gross revenues and 38% of net revenues. These
independent distributors are not contractually committed to future purchases
of the Company's products, are subject to only limited control by the Company,
and often carry competitors' products. As a result, the Company's distributors
could discontinue carrying the Company's products at any time.
During the first quarter of Fiscal 1998, sales to retailers/mass merchants
accounted for approximately 60% of the Company's gross revenues (increasing
from approximately 36% of gross revenues during Fiscal 1997) and 61% of the
Company's net revenues (increasing from 46% of net revenues during Fiscal
1997). The retail/mass merchant channel is substantially different from the
distributor and OEM/VAR channels. Due to competition for limited shelf space,
retailers are in a strong position to negotiate favorable terms of sale,
including price discounts and product return policies. See "--Product Return
Risks." There can be no assurance that the Company will be able to maintain or
increase its sales to retailers/mass merchants on favorable terms, if at all.
The Company's sales to OEMs/VARs accounted for approximately 7% of gross
revenues and 7% of net revenues during Fiscal 1997, as compared to 1% of gross
revenues and 1% of net revenues during the first quarter of Fiscal 1998. The
decrease in sales to OEMs/VARs for the first quarter of Fiscal 1998 was
primarily due to the Company's focus of its limited sales and marketing
resources on its other more substantial distribution channels. The Company
currently is expanding its sales and marketing efforts in an attempt to
increase the volume of its sales to OEMs. OEMs generally have significantly
different requirements from retailers/mass merchants and distributors, and
often have more stringent quality standards. OEMs generally also require
special distribution arrangements and product pricing. There can be no
assurance the Company will be successful in its efforts to increase sales to
OEMs. The inability of the Company to successfully penetrate the OEM channel
could have a material adverse effect on its future operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Sales and Distribution" and "--Technical Support
and Customer Service."
PRODUCT RETURN RISKS
The Company is exposed to the risk of product returns from its retailer/mass
merchant and distributor customers as a result of several factors, including
returns from their customers, contractual stock rotation privileges and
returns of defective products or product components. In addition, the Company
generally accepts returns of unsold product from customers with whom the
Company has severed its customer relationship. Overstocking by the Company's
customers could lead to higher than normal returns, which could have a
material adverse effect on the Company's results of operations. Returned
unused products generally are tested by the Company and, if undamaged, are
repackaged and put back into inventory to be resold. Returned used products
are tested, repaired and used as warranty replacements. Products returned to
the Company due to faulty work by Company subcontractors are returned to the
subcontractors for credit against future purchase orders. The Company also has
a policy of offering price protection to its customers for some or all of
their inventory, whereby when the Company reduces its prices for a product,
the customer receives a credit for the difference between the original
purchase price of the product and the Company's reduced price for the product.
As a result
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of this policy, significant reductions in prices have had, and may in the
future have, a material adverse effect on the Company's results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Returns and allowances for the first quarter of Fiscal 1998 were $621,000
(or 3.9% of gross revenues), and were $22.4 million (or 30.6% of gross
revenues) in Fiscal 1997 and $2.0 million (or 6.0% of gross revenues) in
Fiscal 1996. Of these returns in Fiscal 1997, approximately $19.0 million were
attributed to sales made by regional and national distributors and $3.4
million were attributed to sales made by retailers/mass merchants. The
disproportionately large increase in returns in Fiscal 1997 was partially due
to a problem encountered in the middle of the year with a chip used in the
Company's DSVD modems that was manufactured for the Company by Phylon
Communications, Inc. ("Phylon"). Due to a defect in the chip's software
design, which the Company believes was caused by Phylon, the chip vendor was
unable to satisfy the Company's specifications for DSVD performance. As a
result, the Company agreed to accept its customers' return of the modems,
which it thereafter repackaged and resold as a non-DSVD modem product. Since
the modem was so repackaged and sold at a profit, the Company did not seek
further satisfaction from Phylon. The Company has discontinued using Phylon as
a chip vendor. To reduce the likelihood of a similar problem occurring in the
future, the Company has instituted a program of additional beta testing of its
products and product components, sometimes in conjunction with its larger mass
merchant customers. Aggregate returns relating to the defective chips were
approximately $10.1 million, or 44.9% of total returns in Fiscal 1997. In
addition, in Fiscal 1997 the Company's efforts to upgrade the quality and
average size of its customer base and its resulting cessation of business with
several smaller customers resulted in a higher than normal incidence of
product returns from such customers. Aggregate returns in Fiscal 1997 from
customers with which the Company discontinued business (which may have
included returns due to the aforementioned defective chips) were approximately
$10.2 million, or 45.5% of total returns in Fiscal 1997. While the Company
believes that returns associated with the aforementioned chip defect should
not be material in future periods, it is expected that returns will continue
from smaller customers disenfranchised as a result of the Company's upgrading
of its customer base, possibly at significant levels. There can be no
assurance this factor, as well as the other factors described above, will not
continue to result in significant levels of product returns and allowances in
future periods, which may have a material adverse effect on the Company's
operations.
DEPENDENCE ON FUTURE GROWTH OF INTERNET AND INTERNET INFRASTRUCTURE
The growth of the markets for PC communication and multimedia products has
been driven in part by the rapid technological change in those markets and
increased use of the Internet. There can be no assurance that such rapid
technological change will continue or that the telecommunications
infrastructure will be developed to support the high-volume adoption of these
technologies. Moreover, the Company's future success is in significant
respects dependent upon continued growth in the use of and interest in the
Internet. Such growth is a recent phenomenon and there can be no assurance
that the current rate of growth will be sustained in future periods. To the
extent that the Internet continues to experience significant growth in the
number of users and level of use, there can be no assurance that the Internet
infrastructure will continue to be able to support the demands placed upon it
by such growth. In addition, the Internet could lose its viability due to
delays in the development or adoption of new standards and protocols required
to handle increased levels of Internet activity or due to increased
governmental regulation. Any of these factors could materially adversely
affect the market for PC communication and multimedia products and the
Company's results of operations. See "Business--Industry Overview."
RELIANCE ON KEY EMPLOYEES
The Company's success will depend in large part on the continued services of
its President, Chief Executive Officer and Director, Sultan W. Khan, its
Executive Vice President and Director, Asif M. Khan, and other key management
employees. The Company does not maintain "key person" insurance on the lives
of any of these individuals. The loss of one or more key management employees
or the failure to attract and retain additional personnel could have a
material adverse effect on the Company.
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PROPRIETARY RIGHTS
The Company does not employ an internal research and development staff and
acquires virtually all of the software and hardware technology used in its PC
communication and multimedia products by licensing such technology from third-
party manufacturers and suppliers. The Company establishes and protects its
proprietary rights in and to its product design, manufacturing, testing,
marketing and customer support methods primarily through a combination of
trade secret and copyright protections. There can be no assurance that the
Company's measures to protect its proprietary rights will deter or prevent
unauthorized use of the Company's trade secrets, proprietary information or
technology. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the
United States. As is typical in its industry, the Company from time to time
may be subject to legal claims asserting that the Company has violated
intellectual property rights of third parties. In the event a third party were
to sustain a valid claim against the Company and in the event any required
license were not available on commercially reasonable terms, the Company's
operating results could be materially and adversely affected. Litigation,
which could result in substantial cost to and diversion of resources of the
Company, may also be necessary to enforce intellectual property rights of the
Company or to defend the Company against claimed infringement of the rights of
others. See "Business--Commitment to Emerging Technologies."
RISK FACTORS RELATING TO THE OFFERING
CONTROL OF COMPANY BY AURA
Based upon the 10,000,000 shares of Common Stock which will be outstanding
upon completion of the Offering, Aura will beneficially own and control 75% of
the Company's outstanding Common Stock (or approximately 72% if the
Underwriters' Over-allotment Option is exercised in full). In addition,
cumulative voting (which provides that a stockholder can cast votes in the
election of directors equal to the number of shares owned by such stockholder
multiplied by the number of directors to be elected to a single candidate or
among the candidates as the stockholder wishes) is not permitted with respect
to the Company's Common Stock. Accordingly, Aura will have sufficient voting
power to control the outcome of all corporate matters submitted to the vote of
stockholders. Such matters could include the election of directors, changes in
the size and composition of the Board of Directors, proxy contests, mergers
involving the Company, tender offers, open-market purchase programs or other
purchases of Common Stock that could give stockholders of the Company the
opportunity to realize a premium over the then-prevailing market price for
their shares of Common Stock. In addition, the concentration of ownership in
Aura could have the effect of delaying or preventing a change in control of
the Company and may affect the market price of the Securities. See
"Management," "Relationship with Aura and Certain Transactions," "Principal
Stockholders" and "Description of Securities."
POTENTIAL CONFLICTS OF INTEREST; CERTAIN CHARTER PROVISIONS LIMITING LIABILITY
Various conflicts of interest between the Company and Aura could arise
following the completion of the Offering, and persons serving as directors,
officers and employees of both the Company and Aura may have conflicting
duties to each. Currently, Steven C. Veen, the Company's acting Chief
Financial Officer, also serves as Chief Financial Officer of Aura, Michael I.
Froch, the Company's Secretary and a Director, also serves as an employee of
Aura, and Gerald S. Papazian, a Director of the Company, also serves as
President and Chief Operating Officer of Aura. Although the Company currently
is searching for a new Chief Financial Officer to replace Mr. Veen, there can
be no assurance the Company will be successful in hiring such replacement
position in the foreseeable future or at all. Ownership interests of NewCom's
Directors or officers in the common stock of Aura could also create or appear
to create potential conflicts of interest when such directors and officers are
faced with decisions that could have different implications for the Company
and for Aura. See "Principal Stockholders--Ownership of Aura Stock."
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") includes provisions relating to competition by Aura
with the Company, allocations of corporate opportunities, transaction
14
<PAGE>
with interested parties and intercompany agreements and provisions limiting
the liability of certain persons. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions." The enforceability under
Delaware corporate law of such provisions which eliminate certain rights that
might have been available to stockholders under Delaware law had such
provisions not been included has not been established and thus counsel to the
Company is not able to render an opinion regarding the enforceability of such
provisions. The Company's Restated Certificate provides that any person
purchasing or acquiring an interest in shares of capital stock of the Company,
including the Underwriters, shall be deemed to have consented to the
provisions in the Restated Certificate relating to competition by Aura with
the Company, conflicts of interest, corporate opportunities and intercompany
agreements, and such consent may restrict such person's ability to challenge
transactions carried out in compliance with such provisions. The existence of
these terms and restrictions described above do not limit, impair or waive any
rights conferred by or under the federal securities laws. The Company intends
to disclose the existence of such provisions in its Annual Reports on Form 10-
K as well as in certain other filings with the Commission. The corporate
charter of Aura does not include compatible provisions and, as a result,
persons who are directors and/or officers of the Company and who are also
directors and/or officers of Aura may choose to take action in reliance on
such provisions rather than act in a manner that might be favorable to the
Company but adverse to Aura. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions."
Under the Restated Certificate, the personal monetary liability of the
directors of the Company for breach of their fiduciary duty of care, including
actions involving gross negligence, are eliminated to the fullest extent
permitted under Delaware law. See "Description of Securities--Certain
Certificate of Incorporation and Bylaw Provisions--Limitations on Directors'
Liability."
INTERCOMPANY AGREEMENTS NOT SUBJECT TO ARM'S-LENGTH NEGOTIATIONS
On or before the Closing Date, Aura and the Company will have entered into
certain intercompany agreements, including (i) a tax sharing agreement
pursuant to which, for the period prior to the date of deconsolidation of the
Company and Aura for tax purposes, Aura will have sole authority to respond to
and conduct all tax proceedings (including tax audits) relating to the
Company, to file federal, state and local returns on behalf of the Company and
to calculate the amount of the Company's tax liability, however, any tax
liability owed by the Company to Aura for the period from June 1, 1997 through
the Deconsolidation Date will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date. See
"Relationship with Aura and Certain Transactions--Arrangements and
Transactions with Aura Systems, Inc.--Tax Sharing Agreement", (ii) a
noncompetition agreement with terms described below (the "Noncompetition
Agreement"), (iii) an agreement pursuant to which Aura will continue to
provide various corporate services, as more fully described below, to the
Company on an interim basis following the Closing Date that may be material to
the conduct of the Company's business (the "Corporate Services Agreement"),
(iv) a redemption agreement pursuant to which Aura will have the option to
require the Company to apply up to 70% of the net proceeds the Company
receives from the exercise of the Warrants to redeem shares of Common Stock
held by Aura at the Warrant exercise price (the "Redemption Option
Agreement"), and (v) a registration rights agreement, pursuant to which Aura
can require the Company to register, at the Company's expense, all of the
Common Stock held by Aura, with 3.0 million shares subject to such rights
commencing one year from the date of this Prospectus and the balance of such
shares registrable one year thereafter (the "Aura Rights Agreement"). Because
the Company is currently a majority-owned subsidiary of Aura, none of the
intercompany agreements resulted from arm's-length negotiations. These
agreements may include terms and conditions that may be more or less favorable
to the Company than terms contained in similar agreements negotiated with
third parties.
Pursuant to the Underwriting Agreement to be executed by and between the
Representative, as representative of the several Underwriters, Aura and the
Company, the Company and Aura have granted the Underwriters the Underwriters'
Over-allotment Option to purchase up to 300,000 additional Units on the same
terms set forth herein, solely for the purpose of covering over-allotments, if
any. The Common Shares included in such additional Units will be offered by
Aura and the Warrants included in such additional Units will be offered by the
Company.
15
<PAGE>
With respect to matters covered by the Corporate Services Agreement, the
relationship between Aura and the Company is intended to continue on an
interim basis for six months following completion of the Offering, in a manner
generally consistent with past practices. The Corporate Services Agreement is
terminable by either party upon 60 days prior written notice. In the event
that Aura elects to terminate the agreement, there can be no assurance that
the Company would be able to secure alternative sources for such services
within 60 days or that such services could be obtained for costs comparable to
costs charged by Aura within such period. Pursuant to the Noncompetition
Agreement, Aura has covenanted, for a period of three years from the Closing
Date, not to compete with the Company in the design, manufacture, sale or
marketing of PC modem and certain multimedia products and to provide the
Company with an exclusive, fully paid, royalty free, worldwide license,
irrevocable during such three-year period, to make, use and sell any such
competitive products developed or offered by Aura. Except as set forth in the
Noncompetition Agreement, Aura is not restricted from competing with the
Company and there can be no assurance that Aura, following the expiration or
prior termination of the Noncompetition Agreement, will not expand, through
development of new lines of products or businesses, acquisitions or otherwise,
its operations in a way that might compete with the Company's business. See
"Relationship with Aura and Certain Transactions."
WARRANTS SUBJECT TO REDEMPTION
Each Warrant will entitle the holder to purchase one share of Common Stock
at an exercise price equal to 150% of the Offering Price until that date which
is five years from the date of this Prospectus. The Warrants are redeemable by
the Company for $.05 per Warrant at any time one year after the date of this
Prospectus (which period may be reduced or waived by the Representative in its
sole discretion) upon at least 30 days' prior written notice provided the
closing price of the Common Stock for 20 consecutive trading days within the
30 day period preceding the date of the notice of redemption equals or exceeds
200% of the Offering Price. A Warrant holder's right to exercise the Warrants
will terminate upon the redemption date, thereby depriving the Warrants of any
value except the right to receive the redemption price. In the event the
Company exercises the right to redeem the Warrants, a holder would be required
either to exercise the Warrants within the period of the notice of redemption
(which could occur at a time when it may be disadvantageous to do so), to sell
the Warrants at the then current market price when the holder might otherwise
wish to hold them, or to accept the redemption. The Company presently expects
to call all of the Warrants for redemption as soon as permitted provided that
a current prospectus relating to the Common Stock underlying such Warrants is
then in effect. See "Description of Securities--Warrants." There can be no
assurance that a Warrant holder would be able to sell the shares of Common
Stock received by it upon exercise of the Warrants at the then-current market
price or at a price which is in excess of the exercise price of such Warrants.
Further, as described in detail below, the Company may not be able to issue
shares of Common Stock to Warrant holders wishing to exercise their Warrants
in response to the Company's notice of redemption. See "--Current Prospectus
and State Blue Sky Registration Requirements to Exercise Warrants" and
"Description of Securities."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIREMENTS TO EXERCISE
WARRANTS
The Company will be able to issue shares of Common Stock upon the exercise
of the Warrants and the Representative's Option only if (i) there is a current
prospectus relating to such Common Stock under an effective registration
statement (including audited financial statements for any companies acquired)
filed with the Commission, and (ii) such Common Stock is then qualified for
sale or exempt therefrom under the applicable state securities laws of the
jurisdictions in which the various holders of Warrants reside. The Company has
agreed with the Representative in the Underwriting Agreement to use its best
efforts to have a registration statement effective at any time that the
exercise price of the Warrants is less than the market price of the Common
Stock (i.e., when the Warrants are "in the money"). After a registration
statement becomes effective, it may require updating by the filing of a post-
effective amendment. There can be no assurance, however, that the Company will
be successful in maintaining a current registration statement. Also, it is
possible that the Company may be unable, for unforeseen reasons, to cause a
registration statement covering the shares underlying the Warrants to be in
effect when the Warrants are exercisable. In that event, the Warrants may
expire unless extended by the Company as permitted by the Warrant.
16
<PAGE>
Because the Warrants and Common Shares included in the Units being offered
hereby will be immediately detachable and separately transferable, it is
possible that the Warrants may be acquired by persons residing in states where
the Company has not registered, or is not exempt from registration, such that
the shares of Common Stock underlying the Warrants may not be sold or
transferred upon exercise of the Warrants. Warrant holders residing in those
states would have no choice but to attempt to sell their Warrants or to let
them expire unexercised. Holders of Warrants should, therefore, contact their
own legal advisor or broker at such time as they may wish to exercise any
Warrants held by them to ascertain whether or not the Company is then
qualified to issue Common Stock under the state securities laws in the state
in which such holder resides. Accordingly, the market for the Warrants may be
limited because of the Company's obligation to fulfill the foregoing
requirements. See "Description of Securities--Warrants."
EFFECT OF ANTI-TAKEOVER PROVISIONS
Upon completion of the Offering, the Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights of such shares, without any further vote or action by
the Company's stockholders. Such charter provisions could have the effect of
delaying, deferring or preventing a change of control of the Company. The
rights of the holders of Common Stock will be subject to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no current plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Restated Certificate and of
Delaware law could delay or make more difficult a merger, tender offer or
proxy contest involving the Company. See "Description of Securities--Preferred
Stock" and "--Delaware Anti-takeover Law and Certain Charter Provisions." The
Company is subject to the anti-takeover provisions of section 203 of the
Delaware General Corporation Law, which prohibits the Company from engaging in
a "business combination" with an "interested stockholder" for a period of
three years after the date of the transaction in which the person first
becomes an "interested stockholder," unless the business combination is
approved in a prescribed manner. The application of section 203 could have the
effect of delaying or preventing a change of control of the Company. Certain
other provisions of the Company's Restated Certificate or Bylaws may have the
effect of delaying or preventing changes of control or management of the
Company, which could adversely affect the market price of the Company's Common
Stock. See "Description of Securities."
LACK OF PRIOR PUBLIC MARKET AND POSSIBLE VOLATILITY OF SECURITIES' PRICE
Prior to the Offering, there has been no public market for the Company's
Common Shares or Warrants and there can be no assurance that an active trading
market will develop or be sustained after the Offering. The Offering Price
will be determined through negotiations among the Company and the
Representative based on several factors and may not be indicative of the
market price of the Common Shares or Warrants after the Offering. See "--
Arbitrary Determination of Offering Price." The market price of the Securities
is likely to be highly volatile and may be significantly affected by factors
such as actual or anticipated fluctuations in the Company's results of
operations, announcements of technological innovations, introduction of new
products by the Company or its competitors, developments with respect to
patents, copyrights or proprietary rights, conditions and trends in the
computer and other technology industries or the market for add-in subsystems,
changes in or failure by the Company to meet securities analysts'
expectations, general market conditions and other factors. In addition, the
stock market has from time to time experienced significant price and volume
fluctuations that have particularly affected the market prices for the common
stocks of technology companies. These broad market fluctuations may adversely
affect the market price of the Securities. In the past, following periods of
volatility in the market price of a particular company's securities,
securities class action litigation has often been brought against that
company. There can be no assurance that such litigation will not occur in the
future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
operating results and financial condition. See "Underwriting."
17
<PAGE>
NO DIVIDENDS ON COMMON STOCK
The Company has not previously paid any cash or other dividends on its
Common Stock and does not anticipate payment of any dividends for the
foreseeable future, it being anticipated that any earnings would be retained
by the Company to finance its operations and future growth and expansion. See
"Dividend Policy."
ARBITRARY DETERMINATION OF OFFERING PRICE
The Offering Price for the Securities will be determined by negotiations
between the Company and the Representative and will not necessarily bear any
relationship to the assets, performance, book value or net worth of the
Company or any other recognized criteria of value. Among the factors to be
considered in determining such price are the business experience of the
Company's management, the prospects for the industry in which the Company
operates, growth prospects of the Company and prevailing market conditions
generally. The Offering Price should not be considered to be an indication of
the actual value of the Company. See "Dilution" and "Underwriting."
CONTRACTUAL OBLIGATIONS TO REPRESENTATIVE
The Underwriting Agreement with the Representative provides for the
Company's continuing involvement with the Representative after the Offering,
including (i) the Company's agreement to retain the Representative as a
consultant for two years from the date of this Prospectus for a fee of $3,000
per month, (ii) the Company's agreement to allow the Representative to
nominate two directors or to designate a consultant to the Board of Directors
for a period of four years from the date of this Prospectus and Aura's
agreement to vote all shares of the Company's Common Stock owned by Aura for
said nominees, (iii) the Company's agreement to appoint the Representative as
Warrant solicitation agent and to pay a fee for such services equal to 3% of
the exercise price of Warrant exercises solicited by the Representative, (iv)
the grant to the Representative of an option to purchase 200,000 Units at an
exercise price of 145% of the Offering Price, and (v) the right of the
Representative to allow the Company to redeem the Warrants at a date earlier
than 12 months after the date of this Prospectus provided the other conditions
for redemption have been satisfied. The ongoing fees to be paid to the
Representative will reduce the amount of working capital available for other
purposes. See "Underwriting." In addition, pursuant to a registration rights
agreement between the Company and the Representative, the holders of the
Representative's Option have the right to require the registration under the
Securities Act, at the Company's expense, of the Common Shares, and Warrants
issuable upon exercise of the Representative's Option and of the shares of
Common Stock issuable upon exercise of the Warrants included therein, as well
as certain "piggyback" registration rights. The cost to the Company of
effecting a demand registration may be substantial. See "Description of
Securities--Registration Rights."
To the extent the Representative elects to effect transactions in the
Company's Common Shares and Warrants, the Representative may exert a
dominating influence on the market for such Common Shares and Warrants. Such
market making activity may be discontinued at any time. In the event the
Representative elects or is forced to discontinue such activity following the
completion of the Offering, the price and liquidity of the Common Shares and
Warrants may be materially adversely affected. Further, as a result of the
Representative's role as Warrant solicitation agent, unless granted an
exemption by the Commission from Rule 10b-6, the Representative may be
prohibited from engaging in any market making activities with regard to the
Company's Securities for the period from two to nine business days prior to
any solicitation by the Representative of the exercise of the Warrants until
the later of (i) the termination of such solicitation activity, or (ii) the
termination, by waiver or otherwise, of any right that the Representative may
have to receive a fee for the exercise of the Warrants following the
solicitation. As a result, the Representative may be unable to continue to
provide a market for the Company's Securities under certain periods while the
Warrants are exercisable. See "Underwriting."
FUTURE ISSUANCES OF STOCK BY THE COMPANY WITHOUT STOCKHOLDER APPROVAL
Following the sale of the Securities offered hereby, the Company will have
outstanding 10,000,000 shares of Common Stock out of a total of 50,000,000
shares of Common Stock authorized, not including up to
18
<PAGE>
(i) 2,000,000 shares of Common Stock issuable upon exercise of the Warrants,
(ii) 200,000 shares of Common Stock issuable upon exercise of the
Representative's Option, (iii) 200,000 shares of Common Stock issuable upon
exercise of the Warrants included in the Representative's Option,
(iv) 300,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Underwriters' Over-allotment Option, and (v) 1,000,000 shares
reserved for issuance under the Company's Stock Plan. If the maximum number of
shares of Common Stock are issued as a result of the exercise of each of the
foregoing, a total of 13,700,000 shares of Common Stock will be issued and
outstanding. The remaining 36,300,000 shares of Common Stock and 5,000,000
shares of Preferred stock authorized but not issued may be issued without any
action or approval of the Company's stockholders. Although there are no
present plans, agreements or undertakings involving the issuance of such
shares, except as disclosed in this Prospectus, any such issuance could be
used as a method of discouraging, delaying or preventing a change in control
of the Company or could significantly dilute the public ownership of the
Company, which could adversely affect the market. There can be no assurance
that the Company will not undertake to issue such shares if it deems it
appropriate to do so.
The holders of the Warrants, Representative's Option and any other options,
warrants and other securities convertible into shares of Common Stock have the
opportunity to profit from a rise in the market price of the Common Stock, if
any, without assuming the risk of ownership, with a resulting dilution in the
interest of other stockholders. The existence of the aforementioned options
and warrants and any other options or warrants that may be granted in the
further may prove to be a hinderance to future equity financing by the
Company. Further, the holders of such warrants and options may exercise them
at a time when the Company would otherwise be able to obtain additional equity
capital on terms more favorable to the Company. See "Dilution," "Description
of Securities," and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
An investor in the Offering will experience immediate and substantial
dilution of $6.15, or 68%, per share between the adjusted pro forma net
tangible book value per share after the Offering and the Offering Price of
$9.00 per Unit. To the extent that any Warrants, options or other securities
convertible into shares of Common Stock currently outstanding or subsequently
granted to purchase the Common Stock are exercisable at a price less than the
net tangible book value per share following the Offering, there will be
further dilution upon the exercise of such securities. See "Dilution" and
"Description of Securities."
POSSIBLE ADVERSE EFFECTS DUE TO SHARES ELIGIBLE FOR FUTURE SALE
Sales in the public market after the Offering of substantial amounts of
previously issued and currently outstanding shares of Common Stock could
adversely affect the prevailing market price of the Company's Common Stock. In
addition to the 2,000,000 Common Shares offered hereby, and based upon shares
outstanding after giving effect to the Recapitalization, there will be
approximately 10,000,000 shares of Common Stock outstanding as of the Closing
Date, all of which existing shares are "restricted" shares (the "Restricted
Shares") under the Securities Act of 1933, as amended (the "Securities Act").
As a result of the expiration of certain lock-up agreements between certain
stockholders and the Representative, 8,000,000 shares will become available
for sale to the public market beginning one year after the date of this
Prospectus, pursuant to Rule 144 promulgated under the Securities Act, all of
which will be subject to the volume and other restrictions of Rule 144. The
Representative may in its discretion and without notice to the public waive
these lock-up agreements and permit Aura and other holders otherwise agreeing
to lock-up their shares to sell any or all of their shares, the effect of
which could be a substantial decline in the trading price of the Company's
Common Stock or Warrants. In addition, an aggregate of 109,338 shares issuable
upon the exercise of stock options will first become eligible for sale in the
public market one year following the date of this Prospectus and the
expiration of such lock-up agreements, all of which will be subject to the
volume and other restrictions of Rule 144. See "Shares Eligible for Future
Sale." In addition, shares of Common Stock held by Aura are subject to the
Redemption Option Agreement and the Aura Rights Agreement. See "Relationship
With Aura and Certain Transactions."
19
<PAGE>
THE COMPANY
The Company was incorporated in Delaware in June 1994. The Company's
executive offices are located at 31166 Via Colinas, Westlake Village,
California 91362 and its telephone number is (818) 597-3200.
ACQUISITION OF NUVO ASSETS FROM AURA
Prior to September 1994, the Company had no material assets and no
operations. As part of the Company's initial capitalization, in September 1994
Aura contributed to the Company certain assets that Aura had previously
purchased out of the Chapter 7 bankruptcy proceedings of Nuvo Corporation of
America ("Nuvo"). Prior to its bankruptcy, Nuvo had been in the business of
developing, manufacturing and supporting data communication for fax, modem and
memory products and laser printer accessories. The assets acquired from Nuvo
by Aura consisted of inventory, certain furniture, fixtures and equipment and
production drives and tooling equipment relating to Nuvo's modem business.
Aura acquired the Nuvo assets in consideration for issuing 133,333 shares of
Aura common stock valued at $1.0 million. Immediately after the acquisition,
the Nuvo assets were transferred to the Company. Upon the assets being
contributed to the Company, the Company evaluated the assets acquired and made
an allocation of purchase price under APB 16. The Company determined that the
inventory and fixed assets had an aggregate fair value of approximately
$277,000. The remaining purchase price of approximately $723,000 was allocated
to intangible assets consisting of the engineering designs and drawings
(including tooling) that were estimated to have a fair value during purchase
negotiations in excess of that amount. These intangible assets were assigned a
five year amortization period, and currently (approximately 33 months later)
are still utilized by the Company. In addition to purchasing the Nuvo assets,
Aura in late May 1994 hired four former employees of Nuvo including Sultan W.
Khan, Nuvo's former president, and Asif M. Khan, Nuvo's former vice president.
The hiring of the Nuvo employees was not part of the Nuvo asset purchase
transaction or the bankruptcy proceedings, but was negotiated separately
between Aura and each employee. In September 1994, Sultan W. Khan and Asif M.
Khan became the Company's President and Executive Vice President,
respectively.
20
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 Units offered
hereby are estimated to be approximately $15.7 million, assuming an Offering
Price of $9.00 per Unit and after deducting underwriting discounts and
commissions of approximately $1.3 million and other expenses of the Offering
estimated to be approximately $1.1 million (which includes the
Representative's non-accountable expense allowance). The Company expects to
use the proceeds substantially as follows:
<TABLE>
<CAPTION>
APPROXIMATE
APPROXIMATE PERCENTAGE OF
APPLICATION OF PROCEEDS DOLLAR AMOUNT NET PROCEEDS
----------------------- ------------- -------------
<S> <C> <C>
Products/Components Acquisition(1)............. $ 4.2 million 27%
Repayment of Commercial Line of Credit(2) ..... 3.5 million 22
Marketing and Sales............................ 2.1 million 13
Working Capital and Other General Corporate
Purposes...................................... 5.9 million 38
------------- ---
$15.7 million 100%
============= ===
</TABLE>
- --------
(1) The products and components to be purchased are expected to include those
contained in the computer communication and multimedia products currently
offered and under development by the Company; the Company is unable to
specifically identify the products or components or the quantities thereof
that will be so purchased. Purchases may include products and components
from Micro Equipment Corporation, a company which Alexander Remington, a
director of the Company, founded and of which he currently acts as Chief
Executive Officer, and from Aura. Such purchases will only be made if they
are approved by a majority of the Company's disinterested independent
directors, are on terms no less favorable to the Company than could be
obtained from unaffiliated parties and are reasonably expected to benefit
the Company. See "Certain Transactions."
(2) The Company's existing commercial line of credit bears interest at the
lending bank's prime rate plus 1.25% (the interest rate was 9.75% at June
30, 1997); at June 30, 1997 the outstanding principal balance of the
credit line was $3.6 million. (See Note 9 of Notes to Financial
Statements.)
The Board of Directors has broad discretion in determining how the net
proceeds of the Offering (other than with respect to the debt repayment
obligations described above) will be applied. Pursuant to the Receivables
Agreement, in the event Aura exercises its right to return to the Company
accounts receivable NewCom is unable to collect, the Company shall be required
to reimburse Aura for the full amount of such receivables. Such reimbursement
amount may be paid with the proceeds of the Offering. Proceeds may also be
used to acquire businesses, technology or products that complement the
business of the Company. No such transactions are being negotiated as of the
date of this Prospectus. Pending use of the proceeds from the Offering as set
forth above, the Company intends to invest all or a portion of such proceeds
in short-term bank certificates of deposit, U.S. Government obligations, money
market investments and short-term investment grade securities.
The Common Shares comprising any and all Units purchased pursuant to
exercise of the Underwriters' Over-allotment Option will be sold by Aura and
the Company will not receive any of the proceeds from the sale of such Common
Shares. The Company will receive the proceeds from the Warrants comprising all
Units purchased pursuant to exercise of the Underwriters' Over-allotment
Option, or $.10 per Unit thus purchased. In addition, pursuant to the
Redemption Option Agreement between the Company and Aura, Aura has the right,
exercisable at its option, to require the Company to apply up to 70% of the
net proceeds received by the Company from the sale of shares of Common Stock
pursuant to exercise of the Warrants (including any Warrants sold pursuant to
the Underwriters' Over-allotment Option and the Representative's Option),
subject to certain limitations, to redeem outstanding shares of Common Stock
currently held by Aura at the Warrant exercise price. Accordingly, the Company
will not retain or use for its benefit any of the proceeds from the sale of
Common Stock as to which Aura exercises its option under the Redemption
Agreement.
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<PAGE>
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock. The
Company intends to retain earnings, if any, to finance the development and
expansion of its business. Accordingly, the Company does not intend to pay
cash dividends in the foreseeable future on its Common Stock. Holders of the
Company's Common Stock are entitled to dividends when, as and if declared by
the Board of Directors out of funds legally available therefor. The payment of
dividends, therefore, is within the discretion of the Company's Board of
Directors. Cash dividends, if any, that may be paid in the future to holders
of Common Stock will be payable when, as and if declared by the Board of
Directors of the Company, based upon the Board's assessment of the financial
condition of the Company, its earnings, need for funds, capital requirements
and other factors, including any applicable laws. In addition, any financing
which the Company may obtain in the future may contain provisions restricting
the Company's ability to pay dividends. The Company is not currently a party
to any agreement restricting the payment of dividends.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of the
Company as of May 31, 1997:
<TABLE>
<CAPTION>
MAY 31, 1997
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
----------- ------------ --------------
<S> <C> <C> <C>
Short-term debt(3).................... $ 5,740,236 $ 5,740,236 $ 2,240,236
=========== =========== ===========
Due to Aura(4)........................ $25,522,706 $21,522,706 $21,522,706
----------- ----------- -----------
Stockholders' equity:
Preferred Stock, $.001 par value;
5,000,000 shares authorized(5); no
outstanding shares actual, pro forma
or pro forma as adjusted............ -- -- --
Common Stock, $.001 par value,
50,000,000 shares authorized(5);
7,555,556 shares outstanding,
actual; 8,000,000 shares
outstanding, pro forma; 10,000,000
shares outstanding, pro forma as
adjusted(6)......................... 7,556 8,000 10,000
Additional paid-in capital........... 9,993,444 13,993,000 29,641,000
Accumulated deficit.................. (1,161,795) (1,161,795) (1,161,795)
----------- ----------- -----------
Total stockholders' equity.......... 8,839,205 12,839,205 28,489,205
----------- ----------- -----------
Total capitalization.............. $34,361,911 $34,361,911 $50,011,911
=========== =========== ===========
</TABLE>
- --------
(1) Gives effect to the Conversion.
(2) Adjusted to reflect the sale by the Company of 2,000,000 Units offered
hereby at an assumed Offering Price of $9.00 per Unit and the application
of the estimated net proceeds therefrom. Of the $9.00 Offering Price,
$8.90 is attributed to one Common Share and $.10 is attributed to one
Warrant. See "Use of Proceeds."
(3) See Note 9 of Notes to Financial Statements.
(4) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the
Company to Aura was approximately $17.0 million.
(5) Gives effect to the Certificate Amendment.
(6) Excludes (i) 2,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants, (ii) 300,000 shares of Common Stock issuable
upon exercise of the Warrants included in the Underwriters' Over-allotment
Option if exercised in full, (iii) 200,000 shares of Common Stock issuable
upon exercise of the Representative's Option, (iv) 200,000 shares of
Common Stock issuable upon exercise of the Warrants included in the
Representative's Option, and (v) 1,000,000 shares of Common Stock issuable
upon the exercise of options outstanding as of June 30, 1997. See
"Description of Securities," "Underwriting" and "Management--Stock
Incentive Plan."
22
<PAGE>
DILUTION
As of May 31, 1997, after giving effect to the Conversion, the Company had a
pro forma net tangible book value of approximately $12.8 million or $1.60 per
share. Pro forma net tangible book value per share represents the amount of
total tangible assets less total liabilities of the Company, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale
of the 2,000,000 Units offered by the Company hereby at an assumed Offering
Price of $9.00 per Unit (and assuming no part of the Offering Price is
allocated to the Warrants), and after deduction of estimated underwriting
discounts and commissions and Offering expenses, the pro forma net tangible
book value of the Company at May 31, 1997 would have been approximately
$28.49 million or $2.85 per share. This represents an immediate increase in
such pro forma net tangible book value of $1.25 per share to existing
stockholders and an immediate dilution of $6.15 per share to new investors
purchasing Units in the Offering, which dilution amounts to approximately 68%
of the initial public offering price per share of Common Stock. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price of the Common Shares offered
hereby(1)..................................................... $9.00
Pro forma Net tangible book value before the offering........ $1.60
Increase per share attributable to new investors............. 1.25
-----
Pro forma net tangible book value after the offering........... 2.85
-----
Dilution per share to new investors (2)........................ $6.15
=====
</TABLE>
- --------
(1) Assumes no allocation of the Offering Price to the Warrants. Before
deduction of underwriting discounts and commissions.
(2) Does not reflect the issuance of up to (i) 2,000,000 shares of Common
Stock reserved for issuance upon exercise of the Warrants, (ii) 300,000
shares of Common Stock issuable if the Warrants included in the
Underwriters' Over-allotment Option are exercised in full, (iii) 400,000
shares of Common Stock issuable if the Representative's Option and the
Warrants included in the Representative's Option are exercised in full,
and (iv) 1,000,000 shares of Common Stock issuable upon the exercise of
options issued or issuable under the Company's Stock Plan, the exercise or
issuance of any of which could have a substantial dilutive effect to new
investors. See "Description of Securities," "Underwriting" and
"Management--Stock Incentive Plan."
The following table summarizes, on an unaudited pro forma basis as of May
31, 1997, after giving effect to the Recapitalization, the differences between
existing stockholders and purchasers of Securities in the Offering with
respect to the number of Common Shares purchased from the Company, the total
consideration paid to the Company, and the average consideration paid per Unit
(based upon an assumed Offering Price of $9.00 per Unit and before deduction
of estimated underwriting discounts and commissions and offering expenses
payable by the Company):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 8,000,000 80.0% $14,001,000(1) 43.8% $1.75
New investors.......... 2,000,000 20.0 18,000,000 56.2 $9.00(2)
---------- ----- ----------- -----
Total................ 10,000,000(3) 100.0% $32,001,000 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Includes (i) $1,000 contributed to acquire capital stock of the Company
effective June 1994, (ii) $1.0 million in assets contributed by Aura as
additional paid-in capital effective September 1994, (iii) $9.0 million
contributed by Aura as additional paid-in capital effective March 1996,
and (iv) $4.0 million contributed by Aura to acquire capital stock
pursuant to the Conversion, in each case as adjusted to reflect the Stock
Split and Certificate Amendment.
(2) Of the $9.00 Offering Price, $8.90 is attributed to one Common Share and
$.10 is attributed to one Warrant.
(3) Does not reflect the issuance of up to (i) 2,000,000 shares of Common
Stock reserved for issuance upon exercise of the Warrants,
(ii) 300,000 shares of Common Stock issuable if the Warrants included in
the Underwriters' Over-allotment Option are exercised in full,
(iii) 400,000 shares of Common Stock issuable if the Representative's
Option and the Warrants included in the Representative's Option are
exercised in full, and (iv) 1,000,000 shares of Common Stock issuable upon
the exercise of options issued or issuable under the Company's Stock Plan,
the exercise or issuance of any of which could have a substantial dilutive
effect to new investors. See "Description of Securities," "Underwriting"
and "Management--Stock Incentive Plan."
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data of the
Company for the periods indicated and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Financial Statements and the Notes related thereto included
elsewhere in this Prospectus. The Company was incorporated in June 1994 and
commenced operations in September 1994. Accordingly, prior to September 1994,
the Company had no operations and had no assets other than $1,000 in cash
representing Aura's initial purchase of Common Stock. The selected financial
data at February 28, 1995, February 29, 1996 and February 28, 1997 and for the
nine months ended February 28, 1995 and each of the two years in the period
ended February 28, 1997, respectively, have been derived from the financial
statements of the Company that have been audited by Pannell Kerr Forster,
Certified Public Accountants, A Professional Corporation, Los Angeles,
California, included herein. The statement of operations data for the three
months ended May 31, 1996 and 1997, and the balance sheet data at May 31, 1997
are derived from the Company's unaudited financial statements included
elsewhere in this Prospectus and include, in the opinion of the Company, all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of the Company's financial position at that date and results
of operations for those periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED THREE MONTHS ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $ 7,465,720 $ 16,081,392
Less discounts given... 24,923 128,400 89,117 24,337 30,678
Less returns and
allowances............ -- 1,986,758 22,399,974 -- 621,037
---------- ----------- ----------- ------------ -------------
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Cost of goods sold..... 2,059,545 30,131,245 33,619,084 4,854,512 10,397,883
---------- ----------- ----------- ------------ -------------
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
---------- ----------- ----------- ------------ -------------
Expenses:
Research and
development........... 4,201 -- 7,708 -- 6,870
Selling, general and
administrative........ 423,619 4,972,064 11,840,951 1,631,698 2,728,857
---------- ----------- ----------- ------------ -------------
Total expenses....... 427,820 4,972,064 11,848,659 1,631,698 2,735,727
---------- ----------- ----------- ------------ -------------
Income (loss) from
operations............. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Other (income) expense,
net.................... (3,710) 1,279,451 1,393,676 232,761 518,585
Provision for income
taxes.................. -- -- 433,000 108,000 711,000
---------- ----------- ----------- ------------ -------------
Net income (loss)....... $ (380,217) $(5,185,331) $ 3,337,271 $ 614,412 $ 1,066,482
========== =========== =========== ============ =============
Net income (loss) per
share(1)............... $(.05) $(.69) $.44 $.08 $.14
Number of shares used in
computing per share
amounts................ 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
<CAPTION>
MAY 31, 1997
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, -----------------------------
1995 1996 1997 ACTUAL PRO FORMA(2)
------------ ------------ ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA;
Total current assets.... 1,631,696 24,471,238 44,329,127 52,476,020 52,476,020
Working capital......... 988,840 14,744,627 21,916,553 31,565,837 31,565,837
Total assets............ 2,501,993 25,348,346 47,435,171 55,272,094 55,272,094
Total current
liabilities............ 642,856 9,726,611 22,412,574 20,910,183 20,910,183
Due to Aura(3).......... 1,238,354 20,186,283 17,249,874 25,522,706 21,522,706
Stockholders' equity
(deficit).............. 620,783 (4,564,548) 7,772,723 8,839,205 12,839,205
</TABLE>
- -------
(1) See Note 1 of Notes to Financial Statements for information regarding
calculation of net income (loss) per share.
(2) Gives effect to the Conversion.
(3) Represents long-term loans made by Aura to the Company to cover working
capital expenses. At June 30, 1997, the aggregate amount due by the
Company to Aura was approximately $17.0 million.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Financial Data" and the Company's Financial Statements and Notes
thereto included elsewhere in this Prospectus. Except for the historical
information contained herein, the discussion in this Prospectus contains
certain forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. See "Forward-Looking Statements." The Company's actual
results may differ materially from the results discussed in the forward-
looking statements as a result of certain factors, including, but not limited
to, those discussed in "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company's Statement of Operations includes revenue and costs directly
attributable to the Company, as well as certain allocations from Aura of
indirect costs. Such allocations generally are based upon the proportionate
labor costs of the Company and the rest of Aura. The results of operations
also include allocations of (i) costs for administrative functions and
services performed on behalf of the Company by centralized staff groups within
Aura; (ii) Aura's general corporate expenses; (iii) pension and other
retirement benefit costs; and (iv) cost of capital. Current and deferred
income taxes and related tax expense have been allocated to the Company as if
it were a separate taxpayer. The allocations and estimates in the financial
statements are based on assumptions which the Company's management believes
are, under the circumstances, a reasonable approximation of the Company's
results of operations on a "stand-alone" basis.
The Company does not employ an internal research and development staff, but
instead focuses on identifying and innovatively incorporating into its
products software and hardware technologies acquired from third-party
manufacturers and suppliers. Accordingly, the Company's research and
development expenses during the periods discussed have been insignificant.
Substantially all of the Company's current products are, and have been
throughout the Company's operating history, IBM compatible. For each of Fiscal
1995, Fiscal 1996, Fiscal 1997 and the first quarter of Fiscal 1998 over 99%
of the Company's gross revenues and net revenues were derived from the sale of
IBM compatible products.
In order to provide its distributors with a measure of price protection, the
Company has adopted a price protection policy which requires it to credit its
distributors with an amount equal to the full amount of any price decrease for
any products purchased during the 30-day period preceding the Company's notice
of change in its prices, or products remaining in the distributors' inventory
at the effective date of the price change. In the event of product "close-
outs" or "price-outs," the price protection policy extends only to inventory
on hand at the time the close-out or price-out was announced.
The Company's product return policy permits its distributors to return for
credit, less any prior credits or price adjustments, all products purchased
within the previous 60 days that the Company discontinues or removes from its
published price list. Returns of multimedia kits, however, are treated by the
Company as warranties or exchanges and no credit is issued.
25
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the years indicated, certain financial
data as a percentage of net revenues:
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES
-----------------------------------------------------
NINE MONTHS THREE MONTHS
ENDED YEAR ENDED YEAR ENDED ENDED MAY 31,
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, --------------
1995 1996 1997 1996 1997
------------ ------------ ------------ ------ ------
<S> <C> <C> <C> <C> <C>
Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 97.9 96.6 66.4 65.2 67.4
Gross profit............ 2.1 3.4 33.6 34.8 32.6
Expenses
Research and
development.......... 0.2 0.0 0.0 0.0 0.0
Selling, general and
administrative....... 20.1 15.9 23.4 21.9 17.7
Total expenses...... 20.3 15.9 23.4 21.9 17.7
Income (loss) from
operations............. (18.3) (12.5) 10.2 12.9 14.9
Other (income) and
expenses
Miscellaneous income.. (0.2) (0.1) (0.2) (0.0) (0.1)
Interest expense...... 0.0 4.2 3.0 3.2 3.5
Provision for income
taxes.................. 0.0 0.0 0.8 0.0 4.6
Net income (loss)....... (18.1) (16.6) 6.6 9.7 6.9
</TABLE>
THREE MONTHS ENDED MAY 31, 1997 AS COMPARED TO THREE MONTHS ENDED MAY 31, 1996
Revenues. Gross revenues in the first quarter of Fiscal 1998 increased by
$8.6 million to $16.1 million from $7.5 million in the first quarter of Fiscal
1997. Net revenues, representing gross revenues net of discounts and returns
and allowances, for the first quarter of Fiscal 1998 were $15.4 million as
compared to $7.4 million for the corresponding prior fiscal period, an
increase of 107.3%. The increase in revenues was primarily a result of the
Company's increased volume of sales to major mass merchandisers such as
Circuit City Stores, Inc. and Best Buy Company, Inc., which began in the
second half of Fiscal 1997. Revenues for the first quarter of Fiscal 1998 were
positively affected by improved volume of sales of multimedia products which
represented approximately 59.2% of net revenues, which in turn were driven by
the increased volume of sales of the NewCom 12X drive kit and multimedia kits,
NewCom 16X drive kit and multimedia kits and NewCom 16X Audiophile multimedia
kit, and offset by decreased volume of sales of the NewCom 8X drive kit and
multimedia kits. Sales of communication products for the first quarter of
Fiscal 1998 which represented approximately 40.8% of net revenues, were
positively affected by the increased volume of sales of the NewCom 33,600 ifx,
efx and efx-m fax modems, NewTalk 33,600 ifx, vifx and spifx modems and NewCom
56,000 ifx and fax modems, and offset by decreased sales of the NewTalk 2000
DSVD ifx modem. Revenues from sales of multimedia products for the first
quarter of Fiscal 1997 which represented approximately 57.7% of net revenues,
were positively affected by the increased volume of sales of the newly
introduced NewCom 6X drive kit and multimedia kits and NewCom 8X drive kit and
multimedia kits. Revenues from sales of communication products in the first
quarter of Fiscal 1997 which represented approximately 42.3% of net revenues
were driven by the increased volume of sales of the NewCom 14,400 ifx, efx and
efx-m fax modems and NewCom 28,800 ifx, efx and efx-m modems.
Discounts given for the first quarter of Fiscal 1998 were approximately
$31,000 on $16.1 million of gross revenue or 0.2%. Such discounts were
comparable to approximately $24,000 on $7.5 million or 0.3% in the
corresponding prior fiscal period.
Returns and allowances in the first quarter of Fiscal 1998 were $621,037,
compared to none in the corresponding prior fiscal period. In the first
quarter of Fiscal 1998, the returns and allowances were primarily due to
rotation of stock by customers and products returned for exchange by
consumers. Returns and allowances in the first quarter of Fiscal 1998 related
primarily to returns associated with the NewCom 33,600 ifx, efx and ifx-m fax
modems, NewCom 8X drive kit and multimedia kits and NewCom 12X drive kit and
multimedia kits. Such returns and allowances may vary substantially from
quarter to quarter depending on the customer base and general market
conditions.
26
<PAGE>
Cost of Goods Sold. Cost of goods sold increased to $10.4 million or 67.4%
of net revenues from $4.9 million or 65.2% in the first quarter of Fiscal 1998
of net revenues in the corresponding prior fiscal period. The increase in the
percentage cost of goods sold resulted from a shifting in the mix of products
sold, with a larger portion of the product being modems, which carry a lower
margin than the multimedia kits.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2.7 million or 17.7% of net revenues in the
first quarter of Fiscal 1998 as compared to $1.6 million or 21.9% of net
revenues in the corresponding prior fiscal period. The decrease as a
percentage of net revenues was due to the fact that expenses required to
establish the infrastructure necessary to achieve higher sales had been
incurred in prior periods.
Interest Expense. Interest expense in the first quarter of Fiscal 1998 has
increased to $535,735 from $240,171 in the corresponding prior fiscal period.
The increase is a result of higher levels of borrowing from commercial sources
during the current year quarter along with higher levels of advances from
Aura. While the Company intends to partially repay the amount owing under its
commercial line of credit with a portion of the net proceeds of this Offering,
management's internal cash projections estimate future borrowings under such
facility or any replacement thereof to finance operations in an amount equal
to or in excess of such repaid amount within the 12 month period following the
completion of this Offering. As a result, the Company will not significantly
benefit from any reduction in interest expense as a result of such debt
repayment.
Income Taxes. The Company incurred a $711,000 provision for income taxes in
the first quarter of Fiscal 1998 compared to $108,000 in the corresponding
prior fiscal period. The Company and Aura have agreed, pursuant to the Tax
Sharing Agreement (as that term is defined herein), that any tax liability
owed by the Company to Aura for the period from June 1, 1997 through that date
on which Aura owns less than 80% of the Company's outstanding Common Stock
(the "Deconsolidation Date") will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date. See
"Relationship with Aura and Certain Transactions--Arrangements and
Transactions with Aura Systems, Inc.--Tax Sharing Agreement."
Net Income. Net income for the first quarter of Fiscal 1998 was $1.1 million
as compared to net income of $614,000 for the corresponding prior fiscal
period. Net income for the three months ended May 31, 1996 was positively
affected by the utilization of the Company's net operating loss carry forward.
FISCAL 1997 AS COMPARED TO FISCAL 1996
Revenues. Gross revenues in Fiscal 1997 increased to $73.1 million from
$33.3 million in Fiscal 1996. Net revenues for Fiscal 1997 were $50.6 million
as compared to $31.2 million in Fiscal 1996, an increase of 62.2%. The
increase resulted from an increase in the volume of product sales during the
second half of the year to major mass merchandisers such as Best Buy Company,
Inc. and Circuit City Stores, Inc. Revenues for Fiscal 1997 were positively
affected by the improved volume of sales of multimedia products, which
represented approximately 64.1% of net revenues, which in turn was driven by
the increased volume of sales of the NewCom 8X drive kit and multimedia kits
and the NewCom 12X drive kit and multimedia kits introduced in April and
August 1996, respectively, and offset by the decreased volume of sales of
NewCom 4X drive kit and multimedia kits no longer offered by the Company.
Revenues from communication products, which represented approximately 35.9% of
net revenues, were positively affected by the increased volume of sales of the
NewCom 33,600 ifx, efx and efx-m fax modems and the NewTalk 2,000 DSVD ifx
modem, introduced in May and June 1996, respectively, and were offset by the
decreased volume of sales of the Company's 28,800 ifx, efx and efx-m fax
modems no longer offered by the Company. Revenues for Fiscal 1996 increased
primarily due to the increased volume of sales of multimedia products, which
represented approximately 80.5% of net revenues, primarily the NewCom 4X drive
kit and multimedia kits and the NewCom HiFi 16i sound board introduced in the
first quarter of Fiscal 1996. Revenues from communication products, which
represented approximately 19.5% of net revenues, were driven by the increased
volume of sales of the NewCom 14,400 ifx, efx and efx-m fax modems and the
28,800 ifx, efx and efx-m fax modems (no longer offered by the Company),
offset by the decreased volume of sales of the Company's discontinued 96424
ifx, efx and efx-m fax modems.
27
<PAGE>
Discounts given during Fiscal 1997 were approximately $89,000 on $73.1
million of gross revenues or 0.1%, as compared to approximately $128,000 on
$33.3 million or 0.4% in Fiscal 1996. The Company was required to give higher
discounts in Fiscal 1996 due to a heightened level of price competition for
CD-ROM drives included in the Company's multimedia kits.
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 6.0% of gross revenues) in Fiscal
1996. The disproportionately large increase in returns in Fiscal 1997 was
partially due to a problem encountered in the middle of the year with a chip
used in the Company's DSVD modems that was manufactured for the Company by
Phylon. Due to a defect in the chip's software design which the Company
believes was caused by Phylon, the chip vendor was unable to satisfy the
Company's specifications for DSVD performance. As a result, the Company agreed
to accept its customers' return of the modems, which it thereafter repackaged
and resold as a non-DSVD modem product. Since the modem was so repackaged and
sold at a profit, the Company did not seek further satisfaction from Phylon.
The Company has discontinued using Phylon as a chip vendor. To reduce the
likelihood of a similar problem occurring in the future, the Company has
instituted a program of additional beta testing, sometimes in conjunction with
its larger mass merchant customers. Aggregate returns relating to the
defective chips were approximately $10.1 million, or 44.9% of total returns in
Fiscal 1997. Also, in Fiscal 1997 the Company's efforts to upgrade the quality
and average size of its customer base and its resulting cessation of business
with several smaller customers resulted in a higher than normal incidence of
product returns from such customers. Aggregate returns in Fiscal 1997 from
customers with which the Company discontinued business (which may have
included returns due to the aforementioned defective chips) were approximately
$10.2 million, or 45.5% of total returns in Fiscal 1997. While the Company
believes that returns associated with the aforementioned chip defect should
not be material in future periods, it is expected that returns will continue
from smaller customers disenfranchised as a result of the Company's upgrading
of its customer base, possibly at significant levels. Returns and allowances
for Fiscal 1997 related primarily to returns associated with the NewCom 33,600
ifx, efx and ifx-m fax modems, NewCom 8X drive kit and multimedia kits and
NewCom 4X drive kit and multimedia kits. Returns and allowances for Fiscal
1996 related primarily to returns associated with NewCom 2X drive kit and
multimedia kits introduced and discontinued in Fiscal 1996, NewCom 4X drive
kit and multimedia kits, NewCom 14,400 ifx, efx and efx-m fax modems and the
Company's discontinued 28,800 ifx, efx and efx-m fax modems.
Cost of Goods Sold. Cost of goods sold increased from approximately $30.1
million in Fiscal 1996 to $33.6 million in Fiscal 1997 but, as a percentage of
net revenues, decreased to 66.4% from 96.6%. The decrease as a percentage of
net revenues was due to the fact the Company was able to buy components used
in its products at more favorable prices during Fiscal 1997 because of the
larger volume of its purchases and a decrease in the cost of such components.
The Company was able to take advantage of such cost decreases because of its
use of "Just in Time" inventory acquisition whereby the Company delays its
purchases until just before the components are needed in the manufacturing
cycle rather than pre-purchasing and warehousing inventory.
Gross Profit. Gross profit for Fiscal 1997 was 33.6% compared to 3.4% for
Fiscal 1996. The increase in gross profit resulted from a decrease in the cost
of goods sold as a percentage of net revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to approximately $11.8 million in Fiscal
1997 from $5.0 million in Fiscal 1996. The increase was a result of the rapid
expansion in infrastructure needed to sustain the growth in sales as well as
an increase in advertising from approximately $4.0 million in Fiscal 1997 as
compared to $1.5 million in Fiscal 1996.
Interest Expense. Interest expense for Fiscal 1997 was $1.5 million as
compared to $1.3 million for Fiscal 1996. The increase was due primarily to
the increase in borrowings against lines of credit and from Aura.
Income Taxes. The Company incurred $433,000 in income taxes for Fiscal 1997
compared to none in Fiscal 1996; no income taxes were due in Fiscal 1996
because of the Company's net loss.
28
<PAGE>
Net Income. Net income for Fiscal 1997 was $3.3 million as compared to a net
loss of $5.2 million for Fiscal 1996. Net income for Fiscal 1997 was
positively affected by the utilization of the Company's net operating loss
carry forward.
FISCAL 1996 AS COMPARED TO NINE MONTHS ENDED FEBRUARY 28, 1995
Revenues. Gross revenues for Fiscal 1996 increased to $33.3 million from
$2.1 million for Fiscal 1995. Net revenues for Fiscal 1996 were $31.2 million
as compared to $2.1 million in Fiscal 1995. The increase in revenues was due
to the establishment of the channels of distribution that the Company began
setting up in September 1994, when the Company first began shipping product.
Revenues for Fiscal 1996 increased primarily due to the increased volume of
sales of multimedia products, which represented approximately 80.5% of net
revenues, primarily the NewCom 4X drive kit and multimedia kits and the NewCom
Hi-Fi 16i sound board introduced in the first quarter of Fiscal 1996. Revenues
from communication products which represented approximately 19.5% of net
revenues, were driven by the increased volume of sales of the NewCom 14,400
ifx, efx and efx-m fax modems and the NewCom 28,800 ifx, efx and efx-m fax
modems (no longer offered by the Company), offset by the decreased volume of
sales of the Company's discontinued 96424 ifx, efx and efx-m fax modems.
Revenues for Fiscal 1995 consisted primarily of sales of communication
products, which represented 100% of net revenues, which sales were primarily
driven by the increased volume of sales of the 14,400 ifx, efx and efx-m fax
modems no longer offered by the Company.
Discounts given during Fiscal 1996 were approximately $128,000 on $33.3
million of gross revenues or 0.4% as compared to approximately $25,000 on $2.1
million of gross revenues or 1.2% in Fiscal 1995. The Company was required to
give higher discounts in Fiscal 1996 due to a heightened level of price
competition for CD-ROM drives included in the Company's multimedia kits.
Returns and allowances for Fiscal 1996 were approximately $2.0 million as
compared to none in Fiscal 1995. The returns and allowances in Fiscal 1996
were primarily due to rotation of stock by customers and products returned for
exchange by consumers. Such returns and allowances were associated primarily
with the Company's 2X drive kit and multimedia kits introduced and
discontinued in Fiscal 1996, NewCom 4X drive kit and multimedia kits, NewCom
14,400 ifx, efx and efx-m fax modems and the discontinued 28,800 ifx, efx and
efx-m fax modems.
Cost of Goods Sold. Cost of goods sold increased to $30.1 million from $2.1
million in Fiscal 1995 in conjunction with the increase in sales. As a
percentage of net revenues, cost of goods sold decreased to 96.6% from 97.9%
in Fiscal 1995.
Gross Profit. Gross profit for Fiscal 1996 was 3.4% as compared to 2.1% in
Fiscal 1995. The improvement in Fiscal 1996 was largely due to the improvement
in cost of goods sold as a percentage of net revenues.
Selling, General and Administrative Expenses. General and administrative
expenses for Fiscal 1996 increased to $5.0 million from $0.4 million in Fiscal
1995 as the Company set up its internal infrastructure.
Interest Expense. Interest expense for Fiscal 1996 was $1.3 million compared
to none in the prior year. The interest expense resulted from the
establishment of a line of credit with a lending institution for the financing
of the Company's accounts receivable, and to an interest charge by Aura on the
loan balances due.
29
<PAGE>
SELECTED QUARTERLY RESULTS OF OPERATIONS
The following table sets forth results of operations for each of the
Company's last 11 quarters. In the opinion of management, this information has
been presented on the same basis as the audited financial statements appearing
elsewhere in this Prospectus, and includes all adjustments, consisting only of
normal recurring adjustments and accruals, that the Company considers
necessary for a fair presentation. The unaudited quarterly information should
be read in conjunction with the audited financial statements of the Company
and the notes thereto. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
----------------------- --------------------------------------------------
THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER(1) QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 839,910 $ 1,263,528 $ 2,271,047 $ 8,250,841 $11,073,123 $ 9,602,418
Cost of goods sold...... 755,910 1,303,635 1,941,060 8,798,229 7,806,438 11,585,518
Gross profit............ 84,000 (40,107) 329,987 (547,388) 3,266,685 (1,983,100)
Expenses:
Research and develop-
ment................... -- 4,201 -- -- -- --
Selling, general and ad-
ministrative........... 255,454 168,165 252,153 427,453 643,231 3,649,227
Total expenses.......... 255,454 172,366 252,153 427,453 643,231 3,649,227
Income (loss) from oper-
ations................. (171,454) (212,473) 77,834 (974,841) 2,623,454 (5,632,327)
Interest expense........ -- -- 13,322 76,300 111,063 1,102,055
Other (income) expense.. -- (3,710) 25,120 49,740 (76,759) (21,390)
Income (loss) before in-
come taxes............. (171,454) (208,763) 39,392 (1,100,881) 2,589,150 (6,712,992)
Provision for income
taxes.................. -- -- -- -- -- --
Net income (loss)....... (171,454) (208,763) 39,392 (1,100,881) 2,589,150 (6,712,992)
Net income (loss) per
share.................. (.02) (.03) .01 (.15) .34 (.89)
<CAPTION>
FISCAL 1997 FISCAL 1998
------------------------------------------------- -----------
FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net revenues............ $7,441,383 $11,041,216 $17,920,915 $14,228,176 $15,429,677
Cost of goods sold...... 4,854,512 7,401,456 14,192,913 7,170,203 10,397,883
Gross profit............ 2,586,871 3,639,760 3,728,002 7,057,973 5,031,794
Expenses:
Research and develop-
ment................... -- -- -- 7,708 6,870
Selling, general and ad-
ministrative........... 1,631,698 2,769,972 2,327,698 5,111,583 2,728,857
Total expenses.......... 1,631,698 2,769,972 2,327,698 5,119,291 2,735,727
Income from operations.. 955,173 869,788 1,400,304 1,938,682 2,296,067
Interest expense........ 240,171 436,572 382,625 456,998 535,735
Other income............ (7,410) (7,230) (4,321) (103,729) (17,150)
Income before income
taxes.................. 722,412 440,446 1,022,000 1,585,413 1,777,482
Provision for income
taxes.................. 108,000 -- -- 325,000 711,000
Net income.............. 614,412 440,446 1,022,000 1,260,413 1,066,482
Net income per share.... .08 .06 .14 .17 .14
</TABLE>
- -------
(1) During the second quarter of 1995, the Company had no operations other
than charges payable to Aura for certain corporate services in the
aggregate amount of $20,000.
30
<PAGE>
The Company's past operating results have been, and its future operating
results will be, subject to quarterly and other fluctuations due to a variety
of factors, including changes in pricing policies by the Company, its
competitors or its suppliers, including anticipated and unanticipated
decreases in unit average selling prices of the Company's products,
availability and cost of products from the Company's suppliers, changes in the
mix of products sold and in the mix of sales by distribution channels, the
gain or loss of significant customers, new product introductions by the
Company or its competitors, market acceptance of new or enhanced versions of
the Company's products, seasonal customer demand, and the timing of
significant orders. Operating results could also be adversely affected by
general economic and other conditions affecting the timing of customer orders
and capital spending, a downturn in the market for PCs, and order
cancellations or rescheduling. The Company's customers may change delivery
schedules or cancel orders without significant penalty. The Company
anticipates that operating results will fluctuate on a quarterly basis as a
result of a number of factors, including the factors discussed above. See
"Risk Factors--Potential Fluctuations in Future Operating Results."
The Company believes that, due to industry seasonality, demand for the
Company's products is strongest during the third quarter of its fiscal year
(the fourth calendar quarter of the year), as a result of year-end business
purchases and holiday sales. This seasonality may become more pronounced in
the future to the extent that a greater proportion of the Company's sales
consist of sales into the retail/mass merchant channel.
Selling, general and administrative expenses are typically higher in the
fourth quarter of the Company's fiscal year primarily as a result of higher
advertising costs for the holiday season. In the fourth quarter of Fiscal
1996, the Company incurred approximately $1.4 million for the production and
airing of a television commercial during the Super Bowl. In the fourth quarter
of Fiscal 1997, advertising expense incurred during the holiday season
totalled approximately $2.2 million.
Through the first quarter of Fiscal 1996, the Company experienced no
merchandise returns on revenues of $4.4 million. During the quarter ended
August 31, 1995, the Company had returns of approximately $400,000 on gross
revenues of $8.6 million, and no returns during the quarter ended November 30,
1995 on revenues of $11.1 million. Due to the limited amount of returns from
inception through November 30, 1995, the Company at the time concluded that no
reserve for future returns was necessary in order to make a fair presentation
of its operating results. Commencing with the fourth quarter of Fiscal 1996,
the Company experienced returns of $1.6 million on sales of $11.2 million and,
at that time, determined that a reserve for future returns was required.
Accordingly, a reserve of $122,000 was recorded as of February 28, 1996. Such
reserve amount was reviewed at the end of the first three quarters of Fiscal
1997, and was determined to be adequate at each respective quarter end. Gross
revenues for the first three quarters of Fiscal 1997 were $7.5 million, $14.8
million and $19.3 million, respectively. Actual returns were $0, $3.8 million
and $1.3 million, respectively. Returns were larger in the second quarter of
Fiscal 1997 due primarily to returns from a single customer with which the
Company ceased doing business. For the fourth quarter of Fiscal 1997, gross
revenues were $31.5 million, and actual returns were $17.3 million. The larger
volume of returns in the fourth quarter of Fiscal 1997 was due primarily to
the DVSD chip problem and the upgrading of the Company's customer base which
resulted in the disenfranchisement of several smaller customers. At February
28, 1997, the reserve for returns was increased to $922,000 as a result of
increased revenues in that quarter.
For the first quarter of Fiscal 1998, gross revenues were $16.1 million and
actual returns were approximately $600,000. The Company concluded that the
reserve for returns of $922,000 at the end of Fiscal 1997 was adequate as of
May 31, 1997, and therefore did not adjust the reserve for returns as of that
date.
Management is of the opinion that its historical return experience is in
line with industry averages.
LIQUIDITY AND CAPITAL RESOURCES
At May 31, 1997 the Company had a cash overdraft of $23,507, which has been
reclassified to accounts payable, compared to the February 28, 1997 cash
balance of $2.8 million, due primarily to the reduction in debt owing to
commercial lenders. Accounts receivable were $32.8 million at May 31, 1997 as
compared to $30.0 million at February 28, 1997. Inventories were $15.5 million
at May 31, 1997 as compared to $11.5 at
31
<PAGE>
February 28, 1997 and $3.6 million at February 29, 1996. These increases were
due to the Company's increased sales volume. While the Company attempts to
purchase higher cost inventory items on a Just-in-Time basis, a large amount
of lower cost, longer lead-time items are required to be held in stock to
support the increasing sales volume. The inventory at February 28, 1997
represents approximately 110% of the cost of sales for the first quarter of
Fiscal 1998. Other current assets increased by $4.1 million at May 31, 1997
compared to February 28, 1997, primarily as a result of prepayments to vendors
to initiate manufacturing of the Company's WebPal product. Net cash used by
operating activities increased to $7.9 million at May 31, 1997 from
$3.4 million at February 28, 1997 due to the larger increases in accounts
receivable, the increased level of inventories necessary to support
anticipated future sales and a $3.6 million deposit made in connection with
the Company's $8.25 million firm commitment to purchase WebPal units
manufactured for the Company, offset partially by an increase in accounts
payable in the current year quarter as compared to a decrease in accounts
payable in the prior year quarter. See Note 13 of Notes to Financial
Statements.
Since inception, the Company has financed its operations through loans from
Aura. The outstanding balances payable to Aura at Fiscal 1995, 1996 and 1997
year-end and at May 31, 1997 were $1.2 million, $20.2 million, $17.2 million
and $25.5 million, respectively. Intercompany interest expense, included in
the outstanding balance at Fiscal 1996 and Fiscal 1997 year-end was $1.2
million and $1.1 million, respectively, and was charged at the rate of 9% and
8%, respectively, per annum. No interest was charged to the Company on
intercompany indebtedness during Fiscal 1995. Effective March 1, 1996, Aura
contributed $9.0 million of the Company's indebtedness to Aura as additional
paid-in capital, thereby reducing the amount reflected in "Due to Aura." In
addition, subsequent to Fiscal 1997, the Company notified its commercial
lender that it was replacing the facility with a different lender. As a
result, the commercial lender discontinued advancing funds under the line and
Aura agreed to finance the Company's working capital requirements until the
replacement commercial line was put in place. Between March 1, 1997 and May
31, 1997, Aura advanced $8.3 million to the Company; this amount was repaid in
June 1997 when the new commercial line of credit was put into effect with
borrowings under the new line and cash on hand. Immediately prior to the
Closing Date, Aura will effectuate the Conversion whereby $4.0 million in
intercompany indebtedness will be converted into 444,444 Shares of Common
Stock (assuming an Offering Price of $9.00 per Unit). All remaining
intercompany debt will be evidenced by an unsecured promissory note from the
Company to Aura due and payable in full in September 1998. The promissory note
will bear interest at the rate of 9% per annum and will have no prepayment
penalty.
Since March 1, 1996, the Company has experienced a significant expansion in
its overall level of business and operations, including product design,
marketing, technical support and sales and distribution. The Company's full-
time employee base has grown from 38 at March 1, 1996, to 76 at June 30, 1997.
This expansion in the scope of the Company's business and operations resulted
in a need for significant investment in infrastructure and systems. Growth of
the Company's business has generated significant accounts receivable; $32.8
million of accounts receivable net were outstanding at May 31, 1997. The
stated payment terms of the Company's sales are typically 30 days from the
date of shipment. The Company's accounts receivable have also recently
increased significantly due to its receivables being outstanding for a longer
period. While the aging of the Company's accounts receivable generally is
affected by the fact that a substantial portion of the Company's sales occur
in the final three weeks of the fiscal quarter, of the $32.8 million of
accounts receivable net outstanding at May 31, 1997, $20.4 million was over 90
days old ($3.7 million of which was due from C'More, Inc. a company controlled
by Alexander Remington, a director of the Company). Total receivables as of
September 5, 1997 were $33.8 million, of which approximately $9.8 million
consisted of amounts remaining from the May 31, 1997 balance (none of which
was due from C'More, Inc. or any other affiliated entities). Of this $9.8
million, the Company expects that approximately $2.4 million will be offset
against amounts owed to two major customers (Brysis, Inc. and Korea Data
Systems); approximately $3.8 million is due from large national retail and
mass merchant customers that typically pay slowly; approximately $550,000 is
subject either to pending collection litigation or litigation to be filed by
the Company within 60 days; and approximately $300,000 is payable pending
proof of delivery. The remaining amount (approximately $2.8 million)
represents amounts due from small customers that are making periodic payments
and have agreed to pay the remaining balances. Management believes that any
potential uncollectible amounts in this $9.8 million remaining from the May
31, 1997 balance is provided for by the Company's allowance for doubtful
accounts.
32
<PAGE>
This longer collection period resulted, in part, from the Company's revenue
growth increasing beyond the capacity of its credit and collections personnel.
In response, the Company has increased the size of its credit and collections
staff and intends to add additional staff in the future. The inability of the
Company to collect significant portions of its accounts receivable on a timely
basis or to obtain adequate financing, in addition to the proceeds of this
Offering, to meet its cash requirements could limit the Company's future
growth.
Aura also provided certain support services to the Company during these
periods including financial, legal, tax, audit, benefits administration and
personal property insurance. The costs for providing these support services
were allocated by Aura to the Company based upon formulas that in management's
opinion reasonably approximated the actual costs incurred by Aura in providing
these services. The expenses recorded by the Company for these allocations
were $80,000, $120,000 and $120,000 for Fiscal 1995, 1996 and 1997 year-end,
respectively. The amounts allocated by Aura are not necessarily indicative of
the actual costs which may have been incurred had the Company operated as an
unaffiliated entity. The Company intends to continue using the support
services of Aura on an interim basis with rates negotiated in accordance with
a Service Agreement for up to six months from the Offering.
In Fiscal 1996 and 1997, the Company had available a line of credit with a
commercial lending institution that permitted borrowings of up to the lesser
of $9.0 million or 80% of eligible accounts receivable, as defined in the
financing agreement with the lender. The line of credit had an interest rate
equal to the institution's prime rate plus 1/2%. The interest rate was 9.75%
at February 29, 1996 and 9.5% at February 28, 1997. The line of credit was
collateralized by accounts receivable and required the Company to maintain
certain financial ratios. The Company used this facility for funding its
operations during Fiscal 1996 and 1997. At February 29, 1996 and February 28,
1997, the outstanding balance under this line of credit was $2.4 million and
$8.8 million, respectively, with a maximum permitted balance of $2.5 million
and $9.0 million, respectively. In May 1997, the Company replaced this line
with another line of credit with another lending institution that permits
borrowings of up to the lesser of $7.0 million or 60% of eligible accounts
receivable, plus up to $2.0 million of inventory flooring. Eligible accounts
receivable consist of all receivables except those greater than 90 days past
due; receivables where more than 50% of the account balance is greater than 90
days past due; accounts originated under non-standard terms and/or which allow
for payment to be made more than 30 days from date of sale; receivables from
customers who are also vendors; receivables from non-domestic customers;
accounts for which the obligor is an officer, director, shareholder, parent,
employee, subsidiary or affiliate of the Company; accounts for which payment
is or may be conditional; accounts for which the obligor is not a commercial
or institutional entity or not a resident of the United States or Canada;
accounts evidenced by judgments or promissory notes; accounts which represent
goods purchased for personal purposes; accounts which represent goods used for
demonstration purposes; accounts which are progress payment, barter or contra
accounts, and any other account which the lender deems to be ineligible. This
new line of credit has an interest rate equal to the institution's prime rate
plus 1.25%. The interest rate was 9.75% at June 30, 1997. The new line of
credit is secured by substantially all of the operating assets of the Company.
In addition, the Company agreed to issue in favor of the lender irrevocable
letters of credit equal to $750,000. The stated interest rate on the new
financing agreement is higher by 0.75% than the former arrangement. However,
the former arrangement provided for additional lender's fees which in the
aggregate resulted in a substantially higher cost of funds overall.
Pursuant to the terms of the new line of credit, the Company must adhere to
the following financial covenants: (i) combined tangible net worth and
subordinated debt of not less than $10.0 million; (ii) a ratio of debt (not
including subordinated debt) to tangible net worth and subordinated debt of
not more than three to one; (iii) a ratio of current tangible assets to
current liabilities of not less than one and one-half to one; and (iv) net
income (before taxes and after extraordinary items and adjustments) of
$100,000 for each fiscal quarter beginning September 1, 1996 or, in the event
the Company fails to achieve net income of $100,000 in any fiscal quarter, a
net income of $100,000 for that portion of the Company's fiscal year that runs
through the end of such fiscal quarter. The Company believes it is currently
in compliance with the aforementioned financial covenants. At June 30, 1997,
the outstanding balance under the new line of credit was approximately $3.6
million.
33
<PAGE>
Net cash used by operating activities for Fiscal 1995, 1996 and 1997 was
$778,530, $19.3 million and $9.7 million, respectively. The Company's net cash
flow used by investing activities for Fiscal 1995, 1996 and 1997 was $125,118,
$224,639 and $2.1 million, respectively. Cash flows from financing activities
for Fiscal 1995, 1996 and 1997 were $1.2 million, $21.3 million and $12.5
million, respectively. During September 1994, Aura contributed assets to the
Company in the amount of $1.0 million. The contributed assets consisted of
inventory valued at $216,297 and property and equipment valued at $61,144 and
engineering designs and drawings valued at $722,559. Effective March 1, 1996,
Aura contributed $9.0 million of the Company's indebtedness to Aura as
additional paid-in capital, thereby reducing the amount reflected in "Due to
Aura."
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1.7 million, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead.
To date, inflation has not had a material effect on the Company's financial
results. There can be no assurance, however, that inflation may not adversely
affect the Company's financial results in the future.
The Company believes that current and future available capital resources,
including the net proceeds from the Offering, cash flow from operations, and
other existing sources of liquidity, will be adequate to fund its operations
for the 12-month period following the date of this Prospectus, including but
not limited to funding of the Company's $8.25 million firm commitment to
purchase WebPal units manufactured for the Company (see Note 13 of Notes to
Financial Statements). As of August 19, 1997, the Company had a cash balance
of $810,000, available borrowings under its commercial credit line of
approximately $3.1 million and current receivables of approximately $19.3
million. However, there can be no assurance that sufficient funds will be
available following the completion of this Offering or that future events will
not cause the Company to seek additional capital sooner including, but not
limited to, the failure by the Company to timely collect outstanding accounts
receivable. While the Company's current cash projections do not contemplate
the need to borrow additional funds from Aura following the completion of this
Offering, there can be no assurance that future events will not cause the
Company to look to Aura for funding. While Aura has indicated that it will not
provide working capital to the Company on a basis consistent with past
practices, the Company has not received any indication from Aura that it would
not provide term funding to the Company in the case of unforeseen
circumstances. To the extent the Company is in need of any additional
financing, there can be no assurance that it will be available to the Company
from Aura or any other source on terms acceptable to the Company, or at all.
If additional funds are raised by issuing equity securities, further dilution
to the existing stockholders may result. If adequate funds are not available,
the Company may be required to delay, scale back or eliminate its product
development, manufacturing and marketing programs or to obtain funds through
arrangements with partners or others that may require the Company to
relinquish rights to certain of its technologies or potential products or
other assets. Accordingly, the inability to obtain adequate financing could
have a material adverse affect on the Company's business, financial condition
and results of operations. See "Risk Factors--Future Capital Requirements;
Uncertainty of Additional Funding."
Although there are no present understandings, commitments or agreements with
respect to any acquisitions of other businesses, products or technologies, the
Company from time to time evaluates potential acquisitions of other
businesses, products and technologies and may in the future require additional
equity or debt financings to consummate such potential acquisitions.
34
<PAGE>
BUSINESS
The following discussion contains forward-looking statements which involve
risks and uncertainties. Such forward-looking statements include, but are not
limited to, statements regarding future events and the Company's plans and
expectations. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements as a result of certain
factors including, but not limited to, those discussed in "Risk Factors," as
well as those discussed elsewhere in the Prospectus or incorporated herein by
reference. See "Forward-Looking Statements."
COMPANY
NewCom, Inc. ("NewCom" or the "Company") designs, manufactures and markets
high performance computer communication and multimedia products for the
personal computer ("PC") market. NewCom's line of communication products
includes a line of high speed external and internal data/fax and voice modems,
which link PCs through the worldwide web and through direct connections over
telephone lines, and NewCom's WebPal, an Internet appliance enabling users to
access the worldwide web and perform Internet specific tasks through their
existing television screens. NewCom's multimedia product line includes a broad
range of add-in subsystems, upgrade kits and Internet access kits that
incorporate CD-ROM drives, speakers, sound cards, modems, microphones and
other telephony and sound solutions. The Company's multimedia products are
targeted both to users that desire to convert their PCs into multimedia
systems and to users desiring to upgrade their current multimedia systems with
faster CD-ROM drives, higher quality sound and increased functionality.
INDUSTRY OVERVIEW
The Company believes that demand for PC communication and multimedia
products is driven by a variety of factors including (i) the growing installed
base of PCs, particularly those sold into the consumer and small office/home
office ("SOHO") markets, (ii) continuing advances in technology, leading to
faster modems and CD drives and expanded multimedia functionality and (iii)
the rapid growth of Internet content, bandwidth-intense interactive software,
on-line services and emerging PC applications such as digital video capture
and playback, video conferencing, telephony, paperless faxing, advanced
desktop publishing, voicemail, high resolution 3D games, and interactive
movies and other entertainment media, which increasingly demonstrates to
consumers the need for PC communications and multimedia products.
Growth in PC Use. Many of NewCom's multimedia and communication products are
purchased for use in home PCs. According to data published by International
Data Corporation ("IDC"), the United States leads the world in the percentage
of households with PCs at 35%. According to a December 1996 IDC survey, as the
rate of growth in the number of U.S. homes with PCs tapers, growth will
continue to be fueled by increases in the number of households acquiring
multiple PCs. IDC projects that by the end of this decade, one in three PC
households will have more than one PC, compared to one in five households in
1996. IDC also reported that in 1996 64.6% of PC households used the PC at
least once per day, up from 55.2% in 1993. Increased usage of modems was also
reported in the survey; 39% of PC households with modems subscribed to an
online service in 1996, up from 26% in 1994. In 1996, 24% of those accessing
the Internet did so on a daily basis, with another 60% surfing on the Internet
at least once a week. IDC has projected that in 1997 PC spending worldwide
will grow by 15.5% to $182.5 billion.
The December 1996 IDC survey also showed that PCs have not achieved
significant penetration into lower and middle income U.S. households, in part
due to the relatively high purchase price of a complete PC system. Industry
sources indicate that Internet access, cost and ease of use are among the main
factors in families' choosing to purchase home systems. NewCom's WebPal has
been designed to address these factors by providing the consumer with an easy
to use, relatively inexpensive means to access the Internet.
Advances in Technology. PC users have consistently demonstrated a desire to
upgrade to higher speed modems, faster CD-ROM drives and higher quality
soundcards. Consumers have in the past replaced first 9,600
35
<PAGE>
bps modems, then 14,400 bps, and now 28,800 bps modems with faster modems as
they have became available at an affordable price. A May 1996 industry study
found that the number of PC power users accessing the Internet at 28,800 bps
had increased to 39% from 27% six months earlier. The Company believes the
speed advantage offered by today's emerging new 56,000 bps standard and future
standards (utilizing emerging ADSL and cable modem technologies) of more than
100 Kbps, will once again push many PC users tired of slow content download
and Internet response times to upgrade to the newer, faster standards.
Multimedia products, as well, have benefited from significant and continuing
improvements in speed, sound quality and functionality. New 16 speed and
higher CD-ROM drives, which can transfer data 16 times or more faster than the
once-standard single speed drives, now enable users to play many more high
speed video files directly off of the CD-ROM drive (without requiring any off
load to a fixed hard disk drive), thus saving the user valuable time and hard
disk space.
Expansion of Internet and Other PC Applications. In addition to improvements
in technology, the rapid growth and increased quality of Internet content, on-
line services and other PC applications have contributed to the increasing
number of new uses for PC communications products such as those offered by
NewCom. While recent estimates of the number of Internet users in the United
States range from 15 million to 35 million (depending on how Internet use is
identified), industry sources indicate that the Internet and the use of modems
to access the Internet continue to grow rapidly. IDC has estimated that the
number of Internet users worldwide will be approximately 200 million by the
end of 1999, an increase from approximately 56 million at the end of 1995. A
recent study by Hambrecht & Quist estimates that an industry providing
Internet-related technologies (including equipment, network services,
software, enabling services and Internet expertise) could become a $13 billion
industry by the year 2000.
Adding to the variety of uses for the Internet is the growing number of
software makers that offer new or upgraded software on-line. Hardware vendors,
as well, now almost routinely allow users to download the latest driver
updates off of the vendors' Internet sites. Downloads of large files are time
consuming and inconvenient with slower older modems, making newer faster
modems increasingly more attractive. Fax modem technology, which allows users
to send and receive faxes electronically via their computers without the need
for paper output, is gaining widespread acceptance among PC users. Computer
telephony also promises to increase the usefulness of PC communications
products. Internet phone technology allows users to make long distance phone
calls for the much lower cost of calling the local Internet provider. IDC
estimated that the number of Internet telephony users had grown to 500,000
active users by the end of 1995, and forecasts that such number will grow to
16 million by the end of 1999.
Using computer multimedia and communications technology, desktop
videoconferencing (DVC), audio/visual collaboration via the PC will allow
users to see as well as hear people in other locations while conferencing. IDC
projects that worldwide Desktop Videoconferencing will grow from $604 million
in 1996 to $1.29 billion in 2001.
The widening array of PC applications has also increased the market for
other multimedia products. The multimedia market has been fueled by the
increased volume of software that requires CD-ROM drives, soundcards and high
bandwidth delivery systems. Microsoft, Novell and other large vendors now ship
much of their software on compact discs. Popular games such as Lucas Art's
Rebel Assault and Dark Forces can only be played with a CD-ROM drive. Most
multimedia encyclopedias, as well as learning and game software, now
incorporate quality sound as an integral part of their software programs.
STRATEGY
NewCom's objective is to become a leading supplier of innovative, high
performance communications and multimedia products for the PC market. To
achieve this objective, the Company is pursuing the following strategies:
^ Capitalize on Engineering Expertise: The Company strives to identify and
innovatively incorporate into its products key emerging technologies in
the PC communications and multimedia industries.
36
<PAGE>
NewCom's engineers maintain a close working relationship with their
counterparts at the major chip manufacturers to ensure the Company is
kept apprised of the latest in chip technology and design.
. Promote Manufacturing Advantages: Management believes NewCom's success
in reaching a particular product niche and gaining market share stems
from its ability to produce products rapidly, cost effectively and with
a high level of reliability. NewCom's manufacturing strategy is
supported by its use of Just-in-Time manufacturing, whereby supplies and
components are purchased just before they are needed during the
manufacturing cycle, its design focus on utilizing interchangeable
circuit boards and other product components, and its relationships with
its primary manufacturing partners in China, Taiwan, Mexico and the
United States.
. Pursue Proven Markets: NewCom will continue to introduce to its existing
markets products with improved performance, additional features and
better pricing. NewCom's use of DSP technology allows software upgrades
to meet evolving standards and add enhancements, while "value
engineering" enables the Company to design and manufacture new
generations of existing products at reduced costs.
. Target Newly Forming Markets: NewCom seeks to identify newly forming
markets and emerging technologies and to capitalize on its ability to
deliver superior products with a favorable price/performance ratio.
Newly forming markets for 56,000 bps modems, CDR and CDR/MPEG drives and
Internet appliances such as WebPal offer the Company significant
opportunities for growth, allowing NewCom to gain access to valuable
shelf space, achieve higher margins and establish a larger presence in
strategic market segments.
. Maintain High Attention to Customer Satisfaction: The Company seeks to
differentiate itself through the quality and level of its technical
support and customer service. The Company performs extensive testing and
preshipping inspection of its products, ships products with installation
discs and user-friendly manuals, and maintains a skilled, full-time
technical support team to respond to customer inquiries.
CURRENT PRODUCTS
NewCom strives to design products that are technologically advanced,
multifunctional, reliable, easy to use and affordable. Below is a description
of NewCom's most current products, substantially all of which are IBM
compatible.
COMMUNICATIONS PRODUCTS
NewCom WebPal. Introduced in June 1997, WebPal is a communication appliance
designed specifically for the non-computer user. Similar in size and cost to a
VCR, WebPal allows users to access the Internet and the World Wide Web through
their existing television screens. WebPal incorporates a World Wide Web
browser and an E-mail service, and uses the television screen to display
information. WebPal connects to the Internet through a telephone line and a
modem included in the box, and requires a standard NTSC or PAL television set
or VGA monitor. A remote control unit is included with WebPal and an optional
remote keyboard is available. WebPal allows any consumer with a television set
and a standard wall telephone jack to surf the Internet and gain access to the
large number of interactive Internet text, graphic and audio pages and web
sites. WebPal is equipped with parallel port, which allows the user to print
output to a printer and to complete future parallel port upgrades such as
adding a hard disk drive. Both the browser/E-mail and the operating system are
stored in flash memory and are upgradable via Internet access. Also, WebPal
does not require the user to use a specific Internet Service Provider (ISP).
This allows many users with existing ISP accounts to continue using these same
accounts with the WebPal appliance, thus avoiding additional ISP monthly
access charges and the inconvenience of changing e-mail addresses. WebPal's
operating environment allows for easy user setup, provides seamless ISP
configuration and access, and supports a variety of add-on peripherals.
Additional specifications and features: 32-bit RISC Multimedia Processor,
standard 16-bit ISA bus for modem, ISDN adaptor or network card, built-in
ports for S-video and composite video for NTSC and PAL, VGA
37
<PAGE>
output, standard PS/2 style keyboard and mouse ports, infrared receiver for
remote control unit and remote keyboard, parallel printer port, stereo audio
output, and Smartcard socket.
NewCom 56,000 bps Data/Fax Modem. This high speed internal modem, introduced
by NewCom in May 1997, is a send/receive fax and data modem all in one
computer card. The modem uses X2(R)-compatible technology, currently the most
widely supported 56,000 bps system. The internal version permits installation
using either Plug and Play or ISA Bus Direct. Enhanced models of these modems
include voicemail features or speakerphone and answering machine features.
Since these products are able to be used over standard analog POTS phone
lines, management expects that consumer demand will increase once the 56,000
bps standard for analog modems is fully established in the industry. Although
this product currently has an optimal data download rate of 56,000 bps, noise
and other analog phone line limitations will limit the actual speed of this
modem to lower rates. Management plans to introduce the external versions of
this product in Fall 1997.
Additional specifications and features: built-in enhanced 16550 compatible
UART (with larger buffer), CCITT V.42/MNP 2-4 error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 2000 DSVD Data/Fax Voice Modem. This product consists of an internal
DSVD send/receive fax and data modem card, full duplex speakerphone and
voicemail system all in one computer card. The Company's DSVD technology
allows PC users to have both a voice phone connection and a computer data
connection sharing a single standard POTS phone line. The data modem operates
at 33,600 bps transmission rate with a throughput of up to 134,400 bps using
data compression. In fax mode, it operates as a 14,400 class 1 group 3
send/receive facsimile. The product is shipped complete with a microphone,
headset, 3-inch desktop multimedia speakers, a modular null phone cable, a
user manual and DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), error correction for reliable communications, V.42
bis/MNP 5 data compression, auto dial and auto answer capability, auto redial
of busy numbers, tone or pulse dialing, call waiting support, remote message
retrieval, password protected mailboxes, and fax on demand.
NewTalk 33,600 bps Speakerphone System. The NewTalk 33,600 bps Speakerphone
System is a full duplex speakerphone, voicemail system, send/receive fax and
data modem all in one computer card. The computer card fits inside a DOS,
Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. As a data modem, the system operates at
33,600 bps transmission rate, with a throughput of up to 134,400 bps using
data compression. In fax mode it operates as a 14,400 bps class 1 group 3
send/receive facsimile. The user can install this product using either Plug
and Play or ISA Bus Direct. This modem product line possesses the same data
modem and fax transmission rates as found in the NewTalk Data/Fax Voice Modem
described above. It is shipped complete with a microphone, headset, 3-inch
desktop multimedia speakers, a modular null phone cable, a user manual, and
DOS and Windows fax software and communications software.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
NewTalk 33,600 bps Data/Fax Voice Modem. This internal data/fax voice modem
is a voicemail system, send/receive fax and data modem all in one computer
card. The card goes inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. This product
operates using the fastest established analog modem industry standards
currently on the market. As a data modem, it operates at a 33,600 bps
transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. The user can install
38
<PAGE>
this product using either Plug and Play or ISA Bus Director. It is shipped
complete with a modular RJ11 phone cable and a user manual as well as DOS and
Windows fax software and communications software.
Additional specifications features: built in enhanced 16550 compatible UART
(with larger buffer), CCITT V.34, V.34+ error correction for reliable
communications, V.42 bis/MNP 5 data compression, auto dial and auto answer
capability, auto redial of busy numbers, tone or pulse dialing, call waiting
support, remote message retrieval, password protected mailboxes, and fax on
demand.
33,600 bps External Data/Fax Modem. This external data/fax modem hooks up to
the PC from the outside via a cable to the PC's serial port. One model is
designed to work with DOS, Windows 3.1x, or Windows95 PCs and another model is
designed to work with the Apple Macintosh. As a data modem, it operates at a
33,600 bps transmission rate with a throughput of up to 134,400 bps using data
compression. In fax mode, it operates as a 14,400 class 1 group 3 send/receive
facsimile. It is shipped with fax software and communications software, a
power supply, a modular RJ11 phone cable and a user manual.
Additional specifications and features: CCITT, V.34, V.34+ error correction,
V.42 bis/MNP 5 data compression, auto dial and auto answer capability, auto
redial of busy numbers, and tone or pulse dialing.
33,600 bps Internal DOS/Windows Data/Fax Modem. This internal data/fax modem
is a card that fits inside a DOS, Windows 3.x or Windows 95 PC and attaches to
the computer using the PC's standard ISA bus interface slot. As a data modem,
it operates at a 33,600 bps transmission rate with a throughput of up to
134,400 bps using data compression. In fax mode, it operates as a 14,400 class
1 group 3 send/receive facsimile. The user can install this product using
either Plug and Play or ISA Bus Direct. It is also shipped with DOS and
Windows fax software and communications software, a modular RJ11 phone cable
and a user manual.
Additional specifications and features: built in enhanced 16550 compatible
UART (with larger buffer), CCITT V.34, V.34+ error correction, V.42 bis/MNP 5
data compression, auto dial and auto answer capability, auto redial of busy
numbers, and tone or pulse dialing.
COMMUNICATION PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom 14,400 ifx, 14,400 bps data and 14,400 bps send/receive fax November 1994
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
NewCom 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax May 1996
efx & efx-m modem. Product line includes internal
Windows/DOS PC, external Windows/DOS PC, and
external Apple Macintosh PC versions.
- ---------------------------------------------------------------------------------------
New Talk 33,600 ifx, 33,600 bps data and 14,400 bps send/receive fax June 1997
Vifx & SPifx modem. This product is a Windows/DOS PC internal
card. DSP allows for future software upgrades.
Vifx model includes Voicemail feature. SPifx
model includes speakerphone and answering
machine.
- ---------------------------------------------------------------------------------------
NewTalk 2000 Digital simultaneous voice data modem, June 1996
DSVD ifx speakerphone, answering machine, 33,600 bps
data, 14,400 bps send/receive fax modem. This
product is a Windows/DOS PC internal card.
- ---------------------------------------------------------------------------------------
NewCom 56,000 ifx 56,000 bps data and 14,400 bps send/receive fax May 1997
modem X2-compatible technology. Product line
currently limited to internal Windows/DOS PC
versions.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 4 meg of RAM and 1 meg of Flash June 1997
memory, including 33,600 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
NewCom WebPal Internet box with 8 meg of RAM and 2 meg of Flash July 1997
Deluxe memory, including 56,000 bps data modem, 14,400
bps send/receive fax modem, web browser and E
mail service.
- ---------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
MULTIMEDIA PRODUCTS
As used in this Prospectus, "multimedia" refers to the transformation of the
PC from a task oriented device used for such things as word processing to a
user friendly multi-purpose device used for research, education, games,
entertainment and communication, in addition to traditional PC tasks.
Currently, in its basic form, a PC multimedia system is defined as any PC
equipped with a CD-ROM drive and high quality sound capability.
NewCom Multimedia Upgrade Kits. The Company's DOS, Windows 3.x or Windows 95
PC multimedia upgrade kit consists of a high-speed CD-ROM drive bundled with
desktop speakers and a sound card. The CD-ROM drives are compatible with audio
CDs, karaoke CDs and photo CDs, as well as game and reference CDs. NewCom's
multimedia upgrade kits are sold with a large number of included multimedia
CD-ROM software titles that allow the user to immediately utilize the product.
Drive kits without speakers and sound cards are also offered by the Company.
Another NewCom multimedia upgrade kit now being offered is the Audiophile
Multimedia Kit which features a high speed CD-ROM drive, a NewCom 32PnP
Wavetable Sound Card and NC100 speakers in sound enhancing wood based
enclosures. The Audiophile Multimedia Kit incorporates Aura's Neo-radial
speaker technology ("NRT") to provide cutting edge sound quality.
NewCom Multimedia Internet Kits. The Company's multimedia Internet kits
typically contain each of the components and features of its multimedia
upgrade kits, and also come equipped with a 33,600 bps modem and microphone to
provide full interactive connectivity to the Internet.
NewTalk High Fidelity 16i Sound Card. NewCom's internal 16 bit stereo
record/playback sound card is a core component of each of the Company's
multimedia upgrade and multimedia Internet kits. The sound card fits inside a
DOS, Windows 3.x or Windows 95 PC and attaches to the computer using the PC's
standard ISA bus interface slot. Once the sound card is installed, a PC can
play sounds from games, computer encyclopedias, Windows 3.x, Windows 95, and
many other software products. Additionally, the sound card can play standard
audio CDs using the PC's CD-ROM drive. The card has a built-in ATAPI/IDE
internal interface that supports compliant CD-ROM drives and multiple audio
internal interfaces that allow most popular brands of current CD-ROM drives to
hook up directly to it. External interfaces are provided for speakers, line
out, line in, microphone and game port. The sound card has been designed to be
compatible with SoundBlaster(TM), SoundBlaster Pro(TM), Adlib(TM), and Windows
Sound System(TM). The Company offers different enhanced versions of its
NewTalk sound card. One version includes a Wave Table. Another includes both a
Wave Table and SRS 3D(TM), a "surround sound" technology which attempts to
duplicate three-dimensional sound using only two speakers.
NewCom CDR Drive and CDR Multimedia Kits. Whereas conventional CD-ROM
technology only allows the user to retrieve, or "read," information from a
factory-prerecorded compact disc, the CDR drive allows the user to record
information directly onto the compact disc. This drive will utilize "read many
times/write once" technology, that is, once information is recorded onto the
CD it cannot be erased or recorded over again. However, data can be appended
onto the compact disc multiple times until all of the storage space is
utilized. The CDR multimedia kit includes a 2X Write/6X Read Drive, a
Windows/DOS PC SCSI board with high quality audio capture and playback, and a
Windows/DOS PC sound card. The Company also has developed and intends to
market an upgrade kit containing only the NewCom CDR Drive.
NewCom NC Speaker Series. These Audiophile-quality multimedia speakers
incorporate NRT within specially shaped wood enclosures. Many multimedia
speakers offered in the market today are enclosed in plastic. The wood
cabinets used in the NewCom NC speakers minimize resonance and produce sounds
that are cleaner and crisper than what would be produced if plastic were used.
In addition to yielding high quality sound, these NRT speakers emit low
amounts of magnetic leakage so that they can be placed near computer monitors
without adverse effect. A variety of different NC speaker systems are
currently being shipped. The NC100, with 20 W total amplifier power (10
W/channel) and 5 W/(rms) per channel with sound equalization, has one 3-inch
driver in each speaker. The NC 200 has similar specifications to the NC 100
but has the added feature of Polymide tweeters. The NC300, with 30 W total
amplifier power (15 W/channel) and 7.5 W/(rms) per channel with sound
equalization, has two 3-inch drivers and one tweeter in each speaker. The
NC400 subwoofer, with 30 W total amplifier power (15 W/channel) and 7.5
W/(rms) per channel with sound equalization, has one 5.25-inch driver in each
speaker.
40
<PAGE>
MULTIMEDIA PRODUCTS WITH DATE OF INITIAL SHIPMENT
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- -------------------------------------------------------------------------------------------
<S> <C> <C>
NewCom Hi-Fi 16i Windows/DOS PC Internal 16 bit stereo sound board April 1995
sound board with built in CD ROM IDE connector. Compatible
with SoundBlaster, SoundBlaster Pro.
- -------------------------------------------------------------------------------------------
NewCom 6X Drive Kit, Windows/DOS PC Internal six speed CD-ROM drive January 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 8X Drive Kit, Windows/DOS PC Internal eight speed CD-ROM drive April 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
28,800 ifx or 33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 10X Drive Kit, Windows/DOS PC Internal ten speed CD-ROM drive August 1996
Multimedia Kit and with audio cable and IDE cable. Multimedia Kit
Multimedia Internet Kit also has Hi-Fi 16i sound board, Titles, cables
and speakers. Multimedia Internet Kit also has
33,600 ifx modem and microphone.
- -------------------------------------------------------------------------------------------
NewCom 12X Drive Kit and Windows/DOS PC Internal twelve speed CD-ROM drive August 1996
Multimedia Kit with audio cable and IDE cable. Multimedia Kit
also has Windows/DOS PC Internal twelve speed
CD-ROM drive, Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 12X Multimedia Windows/DOS PC Internal twelve speed CD-ROM November 1996
Internet Kit drive, Hi-Fi 16i sound board, 33,600 ifx modem,
Titles, cables, microphone and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Drive Kit and Windows/DOS PC Internal sixteen speed CD-ROM February 1997
Multimedia Kit drive with audio cable and IDE cable. Multimedia
Kit also has Hi-Fi 16i sound board, Titles,
cables and speakers.
- -------------------------------------------------------------------------------------------
NewCom 16X Audiophile Windows/DOS PC Internal sixteen speed CD-ROM April 1997
Multimedia Kit drive, 32 PnP Wavetable Sound Card, speakers
using Aura Neo-radial speaker technology, sound
enhancing wood enclosures, Titles, cables and
microphone.
- -------------------------------------------------------------------------------------------
NewCom 20X Multimedia Twenty speed IDE CD ROM drive bundled with 3-inch May 1997
Upgrade Kit desktop speakers and a sound card. CD-ROM drive
is compatible with audio, karaoke and photo CDs,
and game and reference CDs. Includes large
number of multimedia CD-ROM software titles that
allow the user to immediately use the product.
Drive kits without speakers and sound cards will
also be offered by the Company.
- -------------------------------------------------------------------------------------------
NewCom 24X Multimedia Twenty-four speed IDE CD ROM drive bundled with July 1997
Upgrade Kit 3-inch desktop speakers and a sound card. CD-ROM
drive is compatible with audio, karaoke and
photo CDs, and game and reference CDs. Includes
large number of multimedia CD-ROM software
titles that allow the user to immediately use
the product. Drive kits without speakers and
sound cards will also be offered by the Company.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION DATE
- ---------------------------------------------------------------------------------------
<S> <C> <C>
NewCom CDR Two speed Write/six speed Read Drive, bundled May 1997
Multimedia Kit with a Windows/DOS PC SCSI board with high
quality audio capture and playback, and a full
feature Windows/DOS PC sound card.
- ---------------------------------------------------------------------------------------
NewCom NC Speaker Series Speakers incorporating Aura neo-radial speaker June 1997
technology housed in sound-enhancing wood
enclosures. Speakers offer between 10 to 15 W
total amplifier power, 5 to 7.5 W/(rms) per
channel with sound equalization and a
3-inch to 5.25-inch driver in each speaker.
</TABLE>
PRODUCTS UNDER DEVELOPMENT
The Company is in the process of designing the following new products and
product enhancements that it intends to introduce to market and ship within
the next twelve months:
NewCom CDR MPEG Multimedia Kit. This multimedia kit will include a CDR drive
with the features and functionality described above. In addition, the kit will
optimize storing video to the CDR drive by including MPEG video encoding and
decoding. The multimedia kit will include a 2X Write/4X Read Drive, MPEG 1
encoder/decoder (capture/playback), and a Windows/DOS PC SCSI controller card.
Management plans to ship this product in Fall 1997.
NewCom ISDN Modem. Basic ISDN service typically provides two 64,000bps
channels and one 16,000 bps channel. By incorporating ISDN technology, the
NewCom ISDN modem would allow for a potential data transmission rate of
128,000 bps, as compared to the 33,600 bps rate currently available with
standard analog modems. ISDN service currently can be made available to the
majority of U.S. homes by converting their current standard analog POTS phone
lines to ISDN lines. To allow users of an ISDN modem to communicate with
modems relying on non-ISDN services, the NewCom ISDN modem will be able to
operate as a standard analog 33,600 bps modem. This product also supports
throughput of speeds up to 921,000 bps using proprietary compression
techniques. As ISDN technology gains acceptance, the Company intends to
develop and market enhanced, faster versions of its ISDN modems. Management
plans to ship its first ISDN modems in Fall 1997.
NewTalk 2000 Modem with Video Conferencing. The Company anticipates that
users of this product, utilizing the same standard phone line connection used
to talk with the other party, will also be able to see a small video image of
the person with whom they are talking if that person is also using the NewCom
product. Management believes this product will offer a low cost solution for
video conferencing based on a flexible, software-defined DSP architecture. The
product will work with a color digital parallel camera and Audio Vision
application software on a single line. It will have modem capability of 33,600
bps data transmission and 14,400 bps send/receive fax transmission, a
speakerphone and voicemail. Management plans to ship this product in Fall
1997.
NewCom 3D SVGA Graphics Accelerator Card. This 64-bit video card, which is
still in early development stages, will have 2 megabytes of EDO RAM and will
use the new Cirrus Logic video chip to produce high performance 3D graphics;
this product will support Intel AGP (accelerated graphics port) and Microsoft
Direct3D, enabling arcade level 3D game play on desktop computers. Resolutions
ranging from 640 x 480 to 1600 x 1200 will be supported, with full 32 bit
(16.8 million) colors being supported up to 1024 x 768 in Microsoft Windows
3.1x, Windows 95, and Windows NT. This video card will have a connector that
will allow for future TV tuner or MPEG upgrades. Management plans to ship this
product in Summer 1998.
NewCom NetPro TV Tuner. The NetPro, which is still in early development
stages, will consist of a cable-ready, 125 channel TV tuner that displays
video in a scaleable window on top of any VGA or SVGA display. Management
believes the NetPro TV tuner, which will contain a Windows/DOS PC internal
board, will bring a state of the art TV solution to the VGA world with superb
video and audio quality. Management plans to ship this product in Summer 1998.
42
<PAGE>
NewCom DVD Drive Kit & NewCom DVD Multimedia Kits. These kits, which are
still in early development stages, will be similar to NewCom's other
multimedia kits except that the CD ROM drive will be replaced by a higher
capacity DVD drive. These DVD drives, while remaining backward compatible with
current 680 megabyte CD ROM disc media, will also be able to read the new 4.7
gigabyte DVD disc media. The upcoming dual layer DVD disc media will hold even
more data with a storage capacity of 8.5 gigabytes. Future DVD-Write Once and
DVD-Rewritable drives may also be offered at a later date. Management plans to
ship this product in Summer 1998.
NewCom CD-RW Multimedia Kit. This multimedia kit will be similar to the CDR
Multimedia Kit but will include a CD-RW (Compact Disc ReWriteable) drive
instead of a CDR drive. CD-RW technology allows users to record and rerecord
information onto a compact disc. The CD is sometimes referred to as having
read-many write-many capabilities. Management plans to ship this product in
Fall 1997.
COMMITMENT TO EMERGING TECHNOLOGIES
The Company continues to review opportunities for the development and
introduction of new products and product families that incorporate emerging
technologies to meet changing end-user needs. Although the Company believes
that to date it has been able to respond on a timely basis to technological
innovations and market changes drawing upon its engineering expertise, there
can be no assurance that the Company will be able to anticipate future market
developments or develop products to meet those needs on a timely basis with
price and performance characteristics which would permit those products to
compete successfully. See "Risk Factors--Rapid Technological Change; Short
Product Life Cycles" and "--Competition."
Cable Modem and ADSL Modem Technology. Modems utilizing cable technology are
projected to have an upstream speed of 54 Kbps to 500 Kbps and a downstream
speed of 10 Mbps and will have the advantage of a continuous connection. The
Yankee Group estimates that by the year 2000, there will be 7 million cable
modem customers. Modems utilizing Asymmetric Digital Subscriber Lines are
projected to have an upstream speed of 640 Kbps and a downstream speed of 2
Mbps to 6 Mbps. ADSL service can be made available to U.S. homes by converting
usage of current standard analog POTS phone lines. According to industry
forecasters such as Dataquest, ADSL modem technology is expected to strongly
challenge cable modem technology for control of the high end high speed modem
market. NewCom believes that both technologies currently have significant
potential for growth in the modem market.
Other Technology. NewCom is developing plans to incorporate into its future
modem product lines emerging communications technologies in which the Company
has proprietary rights. First, NewCom has licensed from Aura, on an exclusive
basis with respect to PC applications, rights to two patents with respect to
noise cancellation techniques and two patent applications in blind adaptive
filtering (BAF). The Company believes that these technologies may enhance
modem transmission speeds. Second, the Company has licensed from Aura, on an
exclusive basis with respect to PC applications, rights to two patent
applications with respect to a wavelet approach to spectral speech
compression. The Company believes this approach may facilitate the sending and
storage of speech using less bandwidth and drive space.
SALES AND DISTRIBUTION
As a result of management's broad prior experience in sales and marketing,
the Company has established a comprehensive sales, marketing and distribution
network. The Company's sales and marketing strategy consists of a highly
consumer-oriented approach to regional distributors and retailers/mass
merchants, supplemented by a targeted entry into the OEM/VAR channels. Current
sales of NewCom PC communications and multimedia products are summarized as
follows:
43
<PAGE>
^ Distributors--Approximately 57% of gross revenues and 47% of net
revenues in Fiscal 1997 and 39% and 38%, respectively, in the first
quarter of Fiscal 1998. Current national and regional customers include
D & H, Southern Electronic Distributors, Inc. ("S.E.D."), Tech Data,
Dinorall Corporation (dba DinExim) and MicroInformatica Corporation.
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
--------------------------------- --------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
MicroInformatica........ $ 3,697,853 5.1% 7.3% $ 693,461 4.3% 4.5%
DinExim................. 3,449,550 4.7 6.8 452,300 2.8 2.9
S.E.D................... 3,280,193 4.5 6.5 467,954 2.9 3.0
----------- ---- ---- ---------- ---- ----
$10,427,596 14.3% 20.6% $1,613,715 10.0% 10.4%
=========== ==== ==== ========== ==== ====
</TABLE>
^ Retailers/Mass Merchants--Approximately 36% of gross revenues and 46% of
net revenues in Fiscal 1997 and 60% and 61%, respectively, in the first
quarter of Fiscal 1998. Current customers include Fry's Electronics,
Circuit City Stores, Inc., CompUSA, Staples, Computer City, Sun TV,
Electronic Boutique and Best Buy Company, Inc.
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
--------------------------------- --------------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Circuit City............ $ 8,913,474 12.2% 17.6% $2,629,295 16.3% 17.0%
Best Buy................ 7,393,515 10.1 14.6 4,778,323 29.7 31.0
Fry's Electronics....... 3,685,009 5.0 7.3 654,654 4.1 4.2
----------- ---- ---- ---------- ---- ----
$19,991,998 27.3% 39.5% $8,062,272 50.1% 52.2%
=========== ==== ==== ========== ==== ====
</TABLE>
^ OEM/VARs--Approximately 7% of gross revenues and 7% of net revenues in
Fiscal 1997 as compared to 1% and 1%, respectively, in the first quarter
of Fiscal 1998. Customers include Powercom, Techmedia, and Data Storage
Marketing ("D.S.M.").
<TABLE>
<CAPTION>
FISCAL 1997 FIRST QUARTER OF FISCAL 1998
-------------------------------- -----------------------------
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF GROSS OF NET OF GROSS OF NET
REVENUES REVENUES REVENUES REVENUES
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Techmedia.... $2,195,104 3.0% 4.3% $ 0 0% 0%
PowerCom..... 1,614,618 2.2 3.2 0 0 0
D.S.M........ 872,300 1.2 1.7 32,271 .2 .2
---------- --- --- ------- --- ---
$4,682,022 6.4% 9.2% $32,271 .2% .2%
========== === === ======= === ===
</TABLE>
The loss of major customers may have a material adverse effect on the
Company.
Other customers include Micromatix, Misco, Global Computers, Tiger Direct,
Insight and Music Land. The majority of NewCom's sales are made and supported
on a national basis by sales representatives.
The Company reaches its various market segments by a concentrated
telemarketing campaign and a direct marketing approach, utilizing the
industry's top manufacturer's representatives. The Company believes the
strength of its relationships with vendors lies in its personal relationships
with key engineers and salespeople that have been cultivated through senior
management's many years of experience in the industry, which serves to provide
the Company with timely access to new technology and competitive pricing. In
addition, management believes NewCom's reputation for offering high quality
customer service and technical support has significantly enhanced its sales
efforts.
The Company's promotional strategy in both the distributor and mass merchant
channels focuses on utilizing a variety of methods, including improved product
packaging, national co-op advertising with distributors, national co-op
advertising with mass merchants, controlled direct national advertising,
incentive promotions, mass mailings, periodic press releases, and
participation in trade shows.
44
<PAGE>
Management is taking steps to attempt to increase the Company's sales to
OEM/VAR customers. The Company intends to use its new products and its
heightened name recognition to pursue the OEM/VAR channel and make it a larger
segment of NewCom's overall sales. There can be no assurance, however, that
the Company will be successful in increasing its penetration of the OEM/VAR
channel. See "Risk Factors--Distribution Risks; Diversification of Sales
Channels."
After first focusing on building name recognition in the United States,
NewCom has begun to implement plans to market its products overseas. To date,
distribution of the Company's products into foreign markets has been by sales
to domestic distributors who thereupon resell such products to foreign
customers. Accordingly, all of the Company's direct sales, including those
subject to resale to foreign customers, are denominated in U.S. dollars. The
Company has acquired modest market shares in South America and the Indian
subcontinent, and it is now turning its attention toward other foreign
markets.
PRODUCT DESIGN
In order to maintain the interest of its customer base and a competitive
advantage in its distribution channels, NewCom must regularly introduce new PC
communication and multimedia products. NewCom must also constantly update the
software drivers it incorporates into its products so that they stay current
with the changing needs of the market. The Company does not employ an internal
research and development staff and acquires virtually all the software and
hardware technology used in its PC communication and multimedia products by
licensing such technology from third-party manufacturers and suppliers. The
Company's product design efforts focus on achieving three goals: First, NewCom
performs "value engineering," which the Company defines as developing the
means to manufacture new generations of its existing products more efficiently
and with reduced costs. Second, the Company identifies and/or designs new
features and better performing models within its existing product lines by
acquiring and utilizing successively more innovative technologies. Third, the
Company designs new products and product families based on emerging
technologies in the industry. See "Risk Factors--Rapid Technological Change;
Short Product Life Cycles," "--Component Shortages; Reliance on Limited Source
Suppliers and Third Party Assemblers" and "--Proprietary Rights."
The Company believes that keeping current with changes in semiconductor chip
designs is essential to increase the performance and reduce the overall size
of each product. The Company presently maintains an in-house engineering staff
that is knowledgeable in the design of communication and multimedia hardware
and software drivers and utilities. In addition to its in-house engineers,
NewCom relies on outside engineers and utilizes strategic alliances with
industry standard telecommunication and multimedia chip vendors such as
Rockwell International Corporation, Texas Instruments, Cirrus Logic, Opti
Corporation, Yamaha Corporation and Analog Devices Incorporated. Working with
these major chip manufacturers, the Company designs its hardware based upon
the most current available technology. NewCom's engineering goal is to
integrate the latest technology onto the smallest board footprint possible
while maintaining a modular design that is easy for the PC user to upgrade and
maintain. In addition, in order to keep NewCom's products competitively
priced, the Company's engineering team has an ongoing mandate to continually
examine methods to reduce product costs by using newer, lower priced methods
and parts, without sacrificing quality or reliability.
The Company attempts to utilize common chips in its different products in
order to achieve cost effective procurement, improved compatibility, lower
production costs and faster future product design and manufacturing cycles.
NewCom's products are designed to be modular and the basic circuit board and
other components used by the Company are common to various of its products.
Product specific chips can then be purchased and installed as needed during
the completion phase of production. The Company continually evaluates and
licenses communication and multimedia software from established software
developers. This software is bundled with the Company's hardware and improves
the overall value of the product.
45
<PAGE>
MANUFACTURING
NewCom currently utilizes four primary independent contract manufacturers,
located in each of the Peoples Republic of China, Taiwan, Mexico and the
United States. In Fiscal 1997, the Chinese and Taiwanese contract
manufacturers accounted for 31.6% and 23.3%, respectively, of the Company's
manufacturing output; the North American contract manufacturers together
accounted for the remaining 45.1% of such manufacturing output. The Company
does not directly conduct any operations outside of the United States. In
house at its California facility, NewCom integrates the chip sets on to the
circuit boards, runs tests on 100% of the boards as part of its quality
control program, installs value added software to the products and performs
all of its own packaging, inspection and shipping. Products manufactured for
the Company in foreign countries are invoiced and paid in U.S. dollars.
For the Company to grow and achieve its business objectives, it is important
to receive from its manufacturing partners a large part of its product
requirements as finished goods in almost ready to ship condition. The Company
must do this while also securing favorable open account terms. These
manufacturing arrangements allow NewCom to reduce the time it takes to
introduce new products to market. Management believes NewCom's ability to
reach a particular niche and gain market share just as the market is gaining
momentum is dependent upon the Company's ability to produce products quickly,
cost effectively and with a high level of reliability. In forging these
manufacturing relationships NewCom takes great care to insure that its
manufacturing partners produce quality products.
NewCom employs a Just-in-Time ("JIT") manufacturing strategy whereby
supplies and components are purchased just before they are needed during the
manufacturing cycle, rather than purchased at the beginning of the cycle and
held in inventory. Management believes such a strategy has been successful in
limiting the risk of inventory obsolescence and in containing the Company's
investment in product inventory. To facilitate its JIT manufacturing strategy,
the Company designs products with a focus on a commonality of parts. As a
result, a growing number of NewCom's communications and multimedia products
have interchangeable circuit boards.
To reduce costs, NewCom has negotiated agreements with key component
suppliers that allow its manufacturing partners to competitively buy material
under blanket discount agreements.
The Company has no backlog as initial orders are typically 90 days from the
date of shipment.
TECHNICAL SUPPORT AND CUSTOMER SERVICE
NewCom offers its end users multiple avenues to receive technical support
and customer service.
. Phone Support: Support staff can be called by end users with questions
via NewCom's toll free 800 number. Currently a full time support staff
in the California office handles calls by end users weekdays from 6:00
a.m. to 10:00 p.m. P.S.T. and weekends from 8:00 a.m. to 5:00 p.m.
P.S.T. Each member of the support staff is equipped with a PC loaded
with software enabling the member to better help the end user find a
solution.
. E-mail Support: For users with Internet access, NewCom's staff maintains
a dedicated support e-mail address. E-mail is used to send end users the
latest drivers and text help files.
. On-line Support: NewCom offers 24 hour a day access to its on-line
support solutions. For those with access to the Internet, NewCom's web
page offers answers to frequently asked questions ("FAQ") and downloads
of the most up to date software drivers and files. NewCom's web page can
be found at "www.newcominc.com." For those with modems but who do not
have Internet access, NewCom maintains a bulletin board site with an up-
to-date list of FAQs and downloads similar to what is found on its
Internet web page.
. Fax Support: NewCom offers end users the ability to fax requests for
support. Whenever possible, solutions will be faxed back to the end user
which eliminates the need for further action by the end user and the
support staff.
The Company includes an installation disk with many NewCom products that
detects and reports back to the user which interrupts, DMA channels and COM
ports are available to the user when installing the product. Management
believes this software reduces the number of potential installation problems
and makes the Company's products more user friendly.
46
<PAGE>
COMPETITION
The Company has experienced a tremendous amount of competition in the PC
communication and multimedia products industry. In the communication products
market, the Company's direct U.S. competitors include Zoom Telephonic,
Cardinal Technology, Boca Research, Best Data, Hayes Microcomputers, U.S
Robotics and MicroCom. Potential overseas competitors in this market, such as
Aski, GVC and WiseCom, are primarily from the Far East and generally do not
compete in NewCom's retail market but instead focus on supplying large OEM's.
In the multimedia products market, the Company's direct competitors include
Creative Laboratory Ltd., Aztec Systems Ltd., Diamond Technology, Inc. and
Pinnacle Micro.
Many of the Company's current and potential competitors have a significantly
greater market presence, name recognition and financial and technical
resources than the Company, and many have long standing market positions and
established brand names in their respective markets. While the Company
believes that its semiconductor vendor flexibility enables it to select from
among the most advanced components available, the captive semiconductor
supplies of certain of the Company's current and potential competitors can
provide them with greater control over component design, availability and
cost. NewCom believes that certain of its current and potential competitors
compete in their markets largely on the basis of price, which may result in
significant price competition and lower margins for the Company's products or
otherwise affect the market for the Company's products. In addition, the PC
communication and multimedia industries have been marked by consolidations in
recent periods, with a number of firms suffering significant operating losses
and, in certain cases, cessation of business. Given the Company's
concentration in these markets, there can be no assurance that the volatility
and intense competitive pressure of the market will not adversely affect the
Company's operations in the future. See "Risk Factors--Competition."
The Company seeks to differentiate itself through the quality of its
products and the level of its support and service. The Company designs its
products for high reliability, good price value, compatibility with existing
and emerging industry standards, and up to date product features and
performance. NewCom has attempted to establish brand name recognition through
periodic advertising on prime time television and through print advertising in
major trade magazines and periodicals. To assure compatibility with multiple
PC's, the Company performs extensive testing on its products.
The market for the Company's products is characterized by rapidly changing
technology, short product life cycles, and evolving industry standards. The
Company believes that its future success will depend upon its ability to
continually enhance its existing products and to introduce new products on a
timely basis. Accordingly, the Company intends to continue to make investments
in product and technological development.
PERSONNEL
As of June 30, 1997, NewCom employed 76 full-time employees. From time to
time, the Company also hires temporary employees. The Company's employees are
not represented by any collective bargaining agreements and the Company has
never experienced a work stoppage. The Company believes that its relations
with its employees are good.
FACILITIES
The Company's headquarters are located in a 33,000 square foot facility in
Westlake Village, California, currently leased by Aura pursuant to an
assignable lease expiring in May 2000. Aura has agreed to assign the lease for
this facility to the Company. The landlord of the facility has orally approved
the lease assignment on terms acceptable to the Company and management
anticipates completing the assignment as soon as practicable following this
Offering. The Company believes that its current facilities, together with
certain additional warehouse and assembly facilities the Company intends to
lease in Fall 1997, will be adequate for the next 12 months. Although
management believes that such additional facilities will be available in the
future as needed on commercially reasonable terms, the Company has not entered
into any written or otherwise binding lease agreement regarding such
additional facilities and there can be no assurance the Company will enter
into any such agreements to lease additional facilities in the fall of 1997.
The Company has not at this time definitely determined any specific properties
it intends to lease as additional facilities. Except for its Westlake Village
facility, the Company does not intend to lease or sublease any of its current
or future facilities from an affiliate of the Company.
47
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The directors, executive officers and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Sultan W. Khan............. 52 Chief Executive Officer, President and Director
Asif M. Khan(1)............ 52 Executive Vice President and Director
Steven C. Veen(2).......... 41 Chief Financial Officer and Director
Michael I. Froch........... 35 Secretary and Director
David W. Harralson(3)...... 56 Director of Engineering
Sonia Kiarashi(3).......... 38 Director of Marketing and Sales
Zane R. Alsabery(2)........ 40 Director
James M. Curran(1)(2)...... 47 Director
Gerald S. Papazian(1)...... 42 Director
Alexander Remington(1)..... 40 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
(3) Not an executive officer position.
Sultan W. Khan has been President and Chief Executive Officer of NewCom
since September 1994. From June to September 1994, Mr. Khan was employed by
Aura to perform special projects. Prior to joining Aura, Mr. Khan was a
founder and President of Nuvo Corporation of America, Inc ("Nuvo"), a
developer, manufacturer and marketer of PC peripheral products. In addition,
he founded Computer Peripherals, Inc. which under his leadership grew into a
multi-million dollar sales company and an industry leader in modem
communication products. Prior to Computer Peripherals, Mr. Khan was employed
by Texas Instruments and, prior thereto, by Data Products, where he was
responsible for developing a high speed band printer family of products. Mr.
Khan received his B.S. in electrical engineering at Cal Polytechnic Institute,
San Luis Obispo, and a M.B.A. at Cal Lutheran College.
Asif M. Khan has been Executive Vice President of NewCom since September
1994. From June to September 1994, Mr. Khan was employed by Aura to perform
special projects. Prior to joining Aura from April 1990 through May 1994, Mr.
Khan served as Executive Vice President of Nuvo. Mr. Khan received his B.S. in
electrical engineering at West Coast University, Los Angeles, his B.S. in
physics and mathematics at Karachi University, Pakistan, and an M.B.A. at the
University of California at Los Angeles.
Steven C. Veen, a Certified Public Accountant, has been Chief Financial
Officer since June 1997. He joined Aura as its Controller in December 1992 and
became its Chief Financial Officer in March 1994, which position he currently
holds. Prior to that, Mr. Veen practiced for over twelve (12) years in varying
capacities in the public accounting profession. In particular, Mr. Veen served
from 1983 to December 1992 with Muller, King, Black, Mathys & Acker, Certified
Public Accountants. He received a B.A. in accounting from Michigan State
University in 1981.
Michael I. Froch has been Secretary and a Director of NewCom, Inc. since
June 1997. From July 1994 through February 1997, Mr. Froch served as Corporate
Attorney at Aura, following which he was appointed as Aura's General Corporate
Counsel and Secretary. From 1991 through 1994, Mr. Froch was engaged in
private law practice in California. Mr. Froch is admitted to the California
and District of Columbia bars. He received his Juris Doctor degree from Santa
Clara University School of Law in 1989 and his A.B. Degree from the University
of California, Berkeley in 1984.
David W. Harralson has been the Director of Engineering for NewCom since
January 1996. For the fifteen year period prior to his employment at NewCom,
Mr. Harralson owned his own software design company, Mephistopheles Systems
Design. Mr. Harralson has enjoyed a career of more than 30 years in military,
48
<PAGE>
aerospace, space, commercial and consulting activities. Mr. Harralson received
his B.A. in mathematics from California State University at Northridge.
Sonia Kiarashi has been the Director of Marketing and Sales for NewCom since
August 1995 and, prior thereto, served as NewCom's National Sales, Marketing
and Business Manager since September 1994. From June to September 1994, Ms.
Kiarashi was employed by Aura to perform special projects. Prior to joining
Aura, she was employed by Nuvo for several years in the capacity of Sales and
Marketing Manager for North and South America. Prior to that, she held various
management positions at I.C.C., C.P.I. and other companies. Ms. Kiarashi
graduated from the California State University at Fullerton with a B.A. in
business administration with an emphasis in international marketing.
Zane R. Alsabery has been a Director of NewCom since June 1997. From
September 1994 to June 1997, Mr. Alsabery served as the Company's Vice
President of Special Projects. Prior to joining the Company, from June to
September 1994, he was employed by Aura. From April 1984 to June 1994, Mr.
Alsabery served in several full time positions at Interstate Recruiters
Corporation, most recently as Vice President of Corporate Accounts, where he
managed Interstate's management consulting efforts in the high technology and
computer-related industries. Prior to Interstate, Mr. Alsabery served as the
Manager of multi-user system sales at Marcey, Inc. and as a sales
representative at Compal Computer Systems. He received his B.A. in economics
from the University of California, Los Angeles in 1979.
James M. Curran has been a Director of NewCom since June 1997. From August
1996 until the present, Mr. Curran has served as an independent business
consultant. From May 1995 to August 1996 he served as Executive Vice
President, Information Products and Systems, of Visa International. Prior
thereto, Mr. Curran was employed by International Business Machine Corporation
for 22 years, where he most recently served as a Division Director, Software
Solutions Division. He received his B.A. in philosophy from Cathedral College
Seminary in New York in 1972.
Gerald S. Papazian has been a Director of the Company since June 1997. He
joined Aura in August 1988 and currently serves as Aura's President and Chief
Operating Officer. Previously, Mr. Papazian worked at Bear Stearns & Co., an
investment banking firm, where he served from 1986 as Vice President,
Corporate Finance in the Investment Banking Division. Prior to joining Bear
Stearns, Mr. Papazian was an associate attorney in the law firm of Stroock &
Stroock & Lavan. Mr. Papazian received his B.A. in economics from the
University of Southern California in 1977 and a J.D./M.B.A. from the
University of California, Los Angeles, 1981.
Alexander Remington has been a director of NewCom since June 1997. Mr.
Remington is Chief Executive Officer of Micro Equipment Corporation
("M.E.C."), which he founded in 1983. M.E.C. is a distributor and manufacturer
of computer and peripherals products in the U.S. and worldwide. Prior to 1983,
Mr. Remington worked for First Financial Management Corporation for one half
year, during which time he started and managed the Micro Computer division.
Mr. Remington holds a Master of Science degree in Information Computer Science
(ICS).
The bylaws of the Company provide that the authorized number of directors
shall be determined from time to time by resolution of the Board of Directors.
The current number of directors is eight. The directors hold office until the
next annual meeting of stockholders and until their successors have been
elected and qualified. If requested by the Representative at any time within
forty eight (48) months following the completion of the Offering, the Company
has agreed, within 30 days of such request, 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, a non-voting advisor to the
Company's Board of Directors. If the Representative requests the inclusion of
designees, this request shall be satisfied by a resolution of the Board of
Directors increasing the authorized number of directors to accommodate the
designees and then appointing such designees to fill the newly created
vacancies. In addition, Aura has agreed to vote all shares of the Company's
Common Stock owned by it for said nominees. Each such designee may be a
director of the Representative. To date, the persons to be designated by the
Representative have not been identified. See "Underwriting."
Directors do not receive any fees for service on the Board of Directors or
any Committee thereof. Directors are reimbursed for their expenses for each
meeting attended. Directors are eligible to participate in the Company's Stock
Plan described below, although as of the date of this Prospectus, no options
have been granted to non-employee directors.
49
<PAGE>
Each officer of the Company serves at the discretion of the Board of
Directors. There is no family relationship between Sultan W. Khan and Asif M.
Khan or among any other directors, officers or key employees of the Company.
In April 1994 a petition under the federal bankruptcy laws was filed against
Nuvo which ultimately resulted in the Chapter 7 dissolution and winding-up of
Nuvo and the liquidation of its business assets in September 1994. At the time
these bankruptcy proceedings commenced, Sultan W. Khan, the Company's Chief
Executive Officer, President and a Director, was president of Nuvo, and Asif
M. Khan, the Company's Executive Vice President and a Director, was vice
president of Nuvo.
In October 1996, the Commission issued an order (Securities Act Release No.
7352) instituting an administrative proceeding against Aura and two individual
parties. The proceeding was settled on consent of all the parties, without
admitting or denying any of the Commission's findings. In its order, the
Commission found that Aura and the others violated the reporting,
recordkeeping and anti-fraud provisions of the securities laws in 1993 and
1994 in connection with its reporting on two transactions in reports
previously filed with the Commission. The Commission's order directs that each
party cease and desist from committing or causing any future violation of
these provisions.
EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer and to each of the Company's two other most highly
compensated executive officers other than the Chief Executive Officer whose
total annual salary and bonus exceeded $100,000 (the "Named Executive
Officers"), for services rendered in all capacities to the Company and Aura
during Fiscal 1997, 1996 and 1995. No other executive officer of the Company
earned compensation in excess of $100,000 in each of these periods.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
NAME AND FISCAL ------------------- UNDERLYING ALL OTHER
PRINCIPAL POSITION(1) YEAR SALARY($)(2) OPTIONS(#) COMPENSATION($)(3)
--------------------- ------ ------------------- ------------ ------------------
<S> <C> <C> <C> <C>
Sultan W. Khan.......... 1997 136,528 -- 1,976
Chief Executive Officer 1996 127,783 -- --
and President(4) 1995 84,527 -- --
Asif M. Khan............ 1997 136,528 -- 1,431
Executive Vice
President(4) 1996 127,783 -- --
1995 84,527 -- --
Steven C. Veen.......... 1997 144,749 -- 1,889
Vice President of
Finance, 1996 121,501 25,000(6) 1,701
Chief Financial
Officer(5) 1995 84,035 -- 1,179
</TABLE>
- --------
(1) The Company has not entered into, and does not currently contemplate
entering into, any employment contracts or compensation agreements with
any of its executive officers.
(2) Includes amounts deferred by each individual under the 401(k) Plan of the
Company or Aura, as applicable. No bonuses were paid to any such
individuals during the periods identified.
(3) Such compensation consists of total matching contributions made by Aura to
the plan account of each individual pursuant to Aura's 401(k) Plan.
(4) All compensation amounts were paid by the Company except $29,076 paid by
Aura through August 26, 1994.
(5) All compensation amounts were paid by Aura.
(6) Reflects options to acquire shares of Aura common stock, granted in
January 1996, having a term of 10 years, with an exercise price of $5.06
per share, vesting at a rate of 20% on each anniversary of the date of
grant.
50
<PAGE>
No options to acquire shares of Common Stock of the Company were granted or
exercised during the Company's fiscal year ended February 28, 1997.
STOCK INCENTIVE PLAN
In June 1997 the Company's Board of Directors adopted the Company's 1997
Stock Incentive Plan (the "Stock Plan"). A total of 1,000,000 shares of Common
Stock are currently reserved for issuance under the Stock Plan pursuant to the
direct award or sale of shares or the exercise of options granted under the
Stock Plan. If any option granted under the Stock Plan expires or terminates
for any reason without having been exercised in full, then the unpurchased
shares subject to that option will once again be available for additional
option grants.
Under the Stock Plan, all employees (including officers) and directors of
the Company or any subsidiary and any independent contractor or advisor who
performs services for the Company or a subsidiary are eligible to purchase
shares of Common Stock and to receive awards of shares or grants of
nonstatutory options. Employees are also eligible to receive grants of
incentive stock options ("ISOs") intended to qualify under Section 422A of the
Internal Revenue Code of 1986, as amended ("Code"). The Stock Plan is
administered by a committee of the Board of Directors of the Company, which
selects the persons to whom shares will be sold or awarded or options will be
granted, determines the number of shares to be made subject to each sale,
award or grant, and prescribes other terms and conditions, including the type
of consideration to be paid to the Company upon sale or exercise and vesting
schedules, in connection with each sale, award or grant.
The exercise price under the nonstatutory options generally must be at least
85% of the fair market value of the Common Stock on the date of grant. The
exercise price under ISOs cannot be lower than 100% of the fair market value
of the Common Stock on the date of grant and, in the case of ISOs granted to
holders of more than 10% of the voting power of the Company, not less than
110% of such fair market value. The term of an option cannot exceed ten years,
and the term of an ISO granted to a holder of more than 10% of the voting
power of the Company cannot exceed five years. Options generally expire not
later than ninety days following a termination of employment or six months
following the optionee's death or permanent disability. The purchase price of
shares sold under the Stock Plan generally must be at least 85% of the fair
market value of the Common Stock and, in the case of a holder of more than 10%
of the voting power of the Company, not less than 110% of such fair market
value. Under the Stock Plan, options granted pursuant to the Stock Plan will
generally vest over a period of five years, at a rate of 20% on each
anniversary of the date of grant. Options granted to the Named Executive
Officers vest over a period of four years, at a rate of 25% on each
anniversary of the date of grant.
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share
(giving effect to the Recapitalization). Options granted to the Company's
directors, the Named Executive Officers, and all directors and executive
officers as a group included the following: Sultan W. Khan, CEO, President and
Director, 192,720 shares; Asif M. Khan, Executive Vice President and Director,
192,720 shares; Zane R. Alsabery, Director, 35,000 shares; and all directors
and executive officers as a group, 420,440 shares. A total of 453,310 shares
of Common Stock are available for future issuance under the Stock Plan.
Pursuant to the Underwriting Agreement, the Company has agreed that, for a
period of one year following the date of this Prospectus, the Company will not
grant any additional options under the Stock Plan at an exercise price less
than the initial public offering price of the Common Shares, without the
Representative's prior consent which may be withheld in its sole discretion.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted provisions in its Certificate of Incorporation that
limit the liability of its directors for monetary damages for breach of their
fiduciary duty as directors, except for liability that cannot be eliminated
under the Delaware General Corporation Law ("Delaware Law"). The Delaware Law
provides that directors of a company will not be personally liable for
monetary damages for breach of their fiduciary duty as directors, except for
liability (i) for any breach of their duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for
51
<PAGE>
unlawful payment of dividend or unlawful stock repurchase or redemption, as
provided Section 174 of the Delaware Law, or (iv) for any transaction from
which the director derived an improper personal benefit. Any amendment or
repeal of these provisions requires the approval of the holders of shares
representing at least 66 2/3% of the shares of the Company entitled to vote in
the election of directors, voting as one class.
The Company's Certificate of Incorporation and Bylaws also provide that the
Company shall indemnify its directors and officers to the fullest extent
permitted by the Delaware Law. The Company has entered into separate
indemnification agreements with its directors that could require the Company,
among other things, to indemnify them against certain liabilities that may
arise by reason of their status or service as directors and to advance their
expenses incurred as a result of any proceeding against them as to which they
could be indemnified. The Company believes that the limitation of liability
provision in its Certificate of Incorporation and the indemnification
agreements will facilitate the Company's ability to continue to attract and
retain qualified individuals to serve as directors and officers of the
Company.
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<PAGE>
RELATIONSHIP WITH AURA AND CERTAIN TRANSACTIONS
PRINCIPAL STOCKHOLDER; CONTROL OF THE COMPANY
Prior to the Offering, Aura owned approximately 94% of the then-outstanding
shares of Common Stock of the Company. Upon completion of the Offering, Aura
will own approximately 75% of the outstanding Common Stock (approximately 72%
if the Underwriters' Over-allotment Option is exercised in full). For as long
as Aura continues to own shares of Common Stock representing more than 50% of
the combined voting power of the Common Stock of the Company, Aura will be
able, among other things, to determine any corporate action requiring approval
of holders of Common Stock representing a majority of the combined voting
power of the Common Stock, including the election of the entire Board of
Directors of the Company, without the consent of the other stockholders of the
Company. In addition, through its control of the Board of Directors and
beneficial ownership of Common Stock, Aura will be able to control certain
decisions including decisions with respect to the Company's dividend policy,
the Company's access to capital (including borrowing from third-party lenders
and the issuance of additional equity securities), mergers or other business
combinations involving the Company, the acquisition or disposition of assets
by the Company and any change in control of the Company.
Except for the limited activities described below under "Arrangements and
Transactions with Aura Systems, Inc.," the Company will be operated as a
company independent of Aura. The Company believes that, in the event of an
insolvency, bankruptcy or receivership proceeding involving Aura, a court,
exercising reasonable judgment after full consideration of all relevant
factors, would not order the substantive consolidation of the assets and
liabilities of the Company with Aura.
Other than pursuant to (i) the Underwriting Agreement, in which Aura has
agreed, subject to certain exceptions, not to sell or otherwise dispose of any
shares of Common Stock (or any security convertible into or exchangeable or
exercisable for Common Stock) owned by it for a period of one year following
the date of this Prospectus without the prior written consent of the
Representative, (ii) the Redemption Option Agreement (described below), and
(iii) the Aura Rights Agreement (described below), Aura has no agreement with
the Company not to sell or distribute the outstanding shares of Common Stock
it holds. There can be no assurance concerning the period of time during which
time Aura will maintain its ownership of the Common Stock.
The Company's Restated Certificate contains provisions relating to
competition by Aura with the Company, potential conflicts of interest that may
arise between the Company and Aura, the allocation of business opportunities
that may be suitable for either Aura or the Company and the approval of
transactions between the Company and Aura. The Company's Restated Certificate
also limits the liability of its directors for monetary damages arising from a
breach of their fiduciary duty as directors, except to the extent otherwise
required by the Delaware General Corporations Law. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company's Bylaws provide that the Company shall indemnify its directors
and officers to the fullest extent permitted by Delaware law, including in
circumstances in which indemnification is otherwise discretionary under
Delaware law. The Company has also entered into indemnification agreements
with its officers and directors containing provisions that may require the
Company, among other things, to indemnify such officers and directors against
certain liabilities that may arise by reason of their status or service as
directors or officers (other than liabilities arising from willful misconduct
of a culpable nature), to advance their expenses incurred as a result of any
proceeding against them as to which they could be indemnified, and to obtain
directors' and officers' insurance if available on reasonable terms.
ARRANGEMENTS AND TRANSACTIONS WITH AURA SYSTEMS, INC.
The Company and Aura have entered into agreements for the purpose of
defining their ongoing relationships, the material terms of which are
summarized below. These agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's-
length negotiations between independent parties. It is the intention of the
Company and Aura that such agreements and the transactions
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provided for therein, taken as a whole, are fair to both parties, while
continuing certain mutually beneficial arrangements. However, there can be no
assurance that each of such agreements, or the transactions provided for
therein, have been effected on terms at least as favorable to the Company as
could have been obtained from unaffiliated third parties.
Additional or modified arrangements and transactions may be entered into by
the Company, Aura and its subsidiaries after completion of the Offering. Any
such future arrangements and transactions will be determined through
negotiation between the Company and Aura, and it is possible that conflicts of
interest will be involved. The Audit Committee of the Board of Directors of
the Company, consisting of directors independent of both management and Aura
must independently approve all transactions by and between the Company and
Aura.
The following is a summary of certain arrangements and transactions between
the Company and Aura. The descriptions of agreements set forth below are
intended to be summaries and, while material terms of the agreements are set
forth herein, the descriptions are qualified in their entirety by reference to
the relevant agreements filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
Underwriting Agreement. Pursuant to the Underwriting Agreement to be
executed by and between the Representative, as representative of the several
Underwriters, Aura and the Company, the Company and Aura have granted the
Underwriters the Underwriters' Over-allotment Option to purchase up to 300,000
additional Units on the same terms set forth herein, solely for the purpose of
covering over-allotments, if any. The Common Shares included in such
additional Units will be offered by Aura and the Warrants included in such
additional Units will be offered by the Company.
Aura Rights Agreement. Prior to the completion of this Offering, the Company
and Aura will enter into the Aura Rights Agreement, pursuant to which Aura can
require the Company to register, at the Company's expense, all of the Common
Stock held by Aura, with 3.0 million shares subject to such rights commencing
one year from the date of this Prospectus and the balance of such shares
registrable one year thereafter.
Noncompetition Agreement. Pursuant to the Noncompetition Agreement, Aura has
covenanted, for a period of three years from the Closing Date, not to compete
with the Company in the design, manufacture, sale or marketing of PC modem and
certain multimedia products and to provide the Company with an exclusive,
fully paid, royalty free, worldwide license, irrevocable during such three-
year period, to make, use and sell any such competitive products developed or
offered by Aura within such period. Except as set forth in the Noncompetition
Agreement, Aura is not restricted from competing with the Company.
Redemption Option Agreement. Prior to the completion of the Offering, the
Company and Aura will enter into a Redemption Option Agreement, pursuant to
which Aura can require the Company, solely at Aura's option, to apply up to
70% of the net proceeds the Company receives from the exercise of the Warrants
to redeem shares of Common Stock held by Aura at the Warrant exercise price.
Tax Sharing Agreement. In general, the Company will be included in Aura's
consolidated group for federal income tax purposes for so long as Aura
beneficially owns at least 80% of the total voting power and value of the
outstanding Common Stock. Each member of a consolidated group is jointly and
severally liable for the federal income tax liability of each other member of
the consolidated group. Accordingly, the Company could be liable for any
federal tax incurred during a taxable period for which the Company is included
in Aura's consolidated group, if such tax liability is not discharged.
However, pursuant to the Tax Sharing Agreement (defined below), Aura has
agreed to indemnify and hold harmless the Company for any penalties and
interest in respect of any tax liability attributable to the Aura consolidated
group incurred on or before the date upon which Aura will own less than 80% of
the outstanding Common Stock (the "Deconsolidation Date"). After the
Deconsolidation Date, the Company will not file a federal consolidated return
with Aura. It is expected that the Company will continue to file California
combined reports with Aura for periods ending after the Deconsolidation Date.
Prior to the completion of the Offering, the Company and Aura plan to enter
into a tax sharing agreement (the "Tax Sharing Agreement") pursuant to which,
during the period from June 1, 1997 up
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to and including the Deconsolidation Date, the Company will not be required to
reimburse Aura for any amounts of federal income taxes that the Company would
have been required to pay if the Company were to file its own federal income
tax return and was not part of Aura's consolidated group. Any amount not
required to reimbursed will be recorded by the Company as an additional
capital contribution by Aura effective as of the Deconsolidation Date.
Corporate Services Agreement. The Company historically has been allocated
expenses of various administrative services provided by Aura. The costs of
such services were not directly attributable to a specific division or
subsidiary and primarily included general corporate overhead such as
accounting and cash management services, human resources, internal audit and
other administrative functions. These expenses were calculated as a pro rata
share of certain administrative costs based on relative assets and liabilities
of each division or subsidiary, which management believes was a reasonable
method of allocation. The allocations of expense for Fiscal 1995, 1996 and
1997 were $80,000, $120,000 and $120,000, respectively.
Prior to the completion of the Offering, the Company and Aura will enter
into a corporate services agreement (the "Corporate Services Agreement")
pursuant to which Aura will continue to provide to the Company on an interim
basis for certain routine and ordinary corporate services, including
financial, insurance accounting, employee benefits, payroll, tax and legal
services. The cash assets of the Company will not be commingled with those of
Aura. For these services, the Company will be assessed a fee of $50,000 per
month, payable on a monthly basis. With respect to matters covered by the
Corporate Services Agreement, the relationship between Aura and the Company is
intended to continue in a manner generally consistent with past practices. The
Company believes that the charges under the Corporate Services Agreement are
reasonable. The initial term of this agreement will be six months. Thereafter,
the agreement will expire unless extended by mutual agreement of the parties.
The agreement may be terminated by either party upon 60 days' prior written
notice.
Sublease Agreement. The Company currently subleases from Aura its principal
operating facilities in Westlake Village, California. In Fiscal 1997, the
Company made lease payments of $191,013 under the sublease, which payments
were made, with Aura's consent, directly to the landlord, and property tax
payments of $7,956.
Each of the Noncompetition Agreement, Redemption Option Agreement, Tax
Sharing Agreement, Corporate Services Agreement, Sublease Agreement and Aura
Rights Agreement are hereinafter collectively referred to as the "Intercompany
Agreements."
RECENT SALES OF SECURITIES TO AFFILIATES
In connection with the formation of the Company, in June 1994 the Company
sold 935.35 shares of Common Stock to Aura and in September 1994 the Company
issued 64.65 shares to other individuals. Assuming an Offering Price of $9.00
per Unit, upon giving effect to the Stock Split these 1,000 shares will be
converted into 7,555,556 shares. See "Description of Securities--Registration
Rights."
In June 1997, incentive stock options to purchase Common Stock of the
Company were granted to certain of the directors, executive officers and key
employees of the Company as follows: Sultan W. Khan, Chief Executive Officer
and President of the Company, 192,720 shares; Asif M. Khan, Executive Vice
President of the Company, 192,720 shares; Zane R. Alsabery, a Director of the
Company, 35,000 shares; and Sonia Kiarashi, Director of Marketing and Sales of
the Company, 50,000 shares. The exercise price of such options was $8.00 per
share, the fair market value of the Common Stock on the date of grant as
determined by the Board of Directors. The options are subject to vesting over
a four-year period at a rate of 25% on each anniversary of the date of grant.
RELATED PARTY TRANSACTIONS
Since inception, the Company has financed its operations through loans from
Aura. The outstanding balances payable to Aura at Fiscal 1995, 1996 and 1997
year-end and at May 31, 1997 were $1.2 million, $20.2 million, $17.2 million
and $25.5 million, respectively. Intercompany interest expense, included in
the
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outstanding balance at Fiscal 1996 and Fiscal 1997 year-end and at May 31,
1997, was $1.2 million, $1.1 million, and approximately $0.4 million,
respectively, and was charged at the rate of 9%, 8% and 8%, respectively, per
annum. No interest was charged to the Company on intercompany indebtedness
during Fiscal 1995. Effective March 1, 1996, Aura contributed $9.0 million of
the Company's indebtedness to Aura as additional paid-in capital, thereby
reducing the amount reflected in "Due to Aura." Subsequent to Fiscal 1997, the
Company notified its commercial lender that it was replacing the facility with
a different lender. As a result, the commercial lender discontinued advancing
funds under the line and Aura agreed to finance the Company's working capital
requirements until the replacement commercial line was put in place. Between
March 1, 1997 and May 31, 1997, Aura advanced $8.3 million to the Company;
this amount was repaid in June 1997 when the new commercial line of credit was
put into effect with borrowings under the new line and cash on hand.
Immediately prior to the Closing Date, Aura will effectuate the Conversion
whereby $4.0 million in intercompany indebtedness will be converted into
444,444 Shares of Common Stock (assuming an Offering Price of $9.00 per Unit).
All remaining intercompany debt will be evidenced by an unsecured promissory
note from the Company to Aura due and payable in full in September 1998. The
promissory note will bear interest at the rate of 9% per annum and will have
no prepayment penalty.
In Fiscal 1997, the Company purchased speaker components from Aura for use
in NewCom's multimedia kit products, for which Aura received $543,719.
Alexander Remington, a director of the Company, founded and currently serves
as Chief Executive Officer of Micro Equipment Corporation ("M.E.C.") and is
the controlling shareholder of C'More, Inc. M.E.C. and C'More, Inc. purchased
certain product from the Company in the aggregate amount of $6.1 million
through Fiscal 1997. There were no such purchases in the first quarter of
Fiscal 1998. The stated terms of the purchases were payment 30 days from the
date of shipment. At May 31, 1997, $3.7 million of the amount due to the
Company from C'More, Inc. was over 90 days old; all of such amount had been
paid by September 5, 1997.
In addition, M.E.C. served as a supplier of products and components to the
Company in the amount of $3.3 million and $12.5 million in the first quarter
of Fiscal 1998 and in Fiscal 1997, respectively. The Company may continue to
purchase products and components from M.E.C. in the future, generally
consisting of those products and components included in the Company's
communication and multimedia products currently offered and under development,
although the Company is unable to specifically identify the products or
components or amounts thereof that may be so purchased. Purchases from M.E.C.
will only be made if they are approved by a majority of the Company's
disinterested directors, are on terms no less favorable to the Company than
could be obtained from unaffiliated parties and are reasonably expected to
benefit the Company.
The Company currently subleases from Aura its facilities in Westlake
Village, California. In Fiscal 1997, the Company made lease payments of
$191,013 under the sublease, which payments were made, with Aura's consent,
directly to the landlord, and property tax payments of $7,956.
James M. Curran, a director of the Company, has served as a business sales
consultant to Aura since March 1997. For his services, Mr. Curran has received
$87,700 from Aura through June 30, 1997.
The Company believes that the foregoing transactions were in its best
interests. It is the Company's current policy, adopted in June 1997, that all
transactions by the Company with officers, directors, 5% stockholders and
their affiliates will be entered into only if such transactions are approved
by a majority of the disinterested independent directors, are on terms no less
favorable to the Company than could be obtained from unaffiliated parties and
are reasonably expected to benefit the Company. Each of the Intercompany
Agreements has been approved by a majority of the Company's disinterested
directors in accordance with the foregoing policy.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
OWNERSHIP OF NEWCOM STOCK
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock on a pro forma basis as of June 30,
1997, (i) by each person or entity known by the Company to own beneficially
more than 5% of the Company's Common Stock, (ii) by each of the Company's
directors, (iii) by each executive officer of the Company named in the Summary
Compensation Table and (iv) by all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
APPROXIMATE
SHARES PERCENTAGE BENEFICIALLY OWNED(1)
BENEFICIALLY ---------------------------------
NAME AND ADDRESS OF OWNER OWNED(1) BEFORE OFFERING AFTER OFFERING(2)
- ------------------------- ------------ --------------- -----------------
<S> <C> <C> <C>
Aura Systems, Inc.(3)(4)..... 7,511,533(5) 94% 75%(5)
Sultan W. Khan(3)(6)......... 220,622 3% 2%
Asif M. Khan(3)(6)........... 220,622 3% 2%
Steven C. Veen(3)............ -- -- --
Michael I. Froch(3).......... -- -- --
Zane R. Alsabery(3)(7)....... 26,974 * *
Gerald S. Papazian(3)........ -- -- --
Alexander Remington(3)....... -- -- --
James M. Curran(3)........... -- -- --
All executive officers and
directors as a group (8
persons).................... 468,218 5.9% 4.7%
</TABLE>
- --------
* Denotes less than 1%.
(1) Beneficial ownership is determined in accordance with rules of the
Commission, and includes generally voting power and/or investment power
with respect to securities. Shares of Common Stock subject to options
currently exercisable or exercisable within sixty days of the date of this
Prospectus are deemed outstanding for computing the beneficial ownership
percentage of the person holding such options but are not deemed
outstanding for computing the beneficial ownership percentage of any other
person. See "Management--Stock Incentive Plan." Except as indicated by
footnote, to the knowledge of the Company, the persons named in the table
above have the sole voting and investment power with respect to all shares
of Common Stock shown as beneficially owned by them.
(2) Adjusted to give effect to the sale of 2,000,000 Units offered hereby.
Assumes no exercise of the Warrants, Underwriters' Over-allotment Option,
Representative's Option or any options under the Company's Stock Plan.
(3) c/o NewCom, Inc.; 31166 Via Colinas; Westlake Village, CA 91362
(4) May be deemed to be a parent or promoter of the Company, as those terms
are defined in the Securities Act. Aura has agreed to vote all shares held
by it for a period of forty eight (48) months following the completion of
this Offering for the election to the Company's Board of Directors of two
designees of the Representative reasonably acceptable to the Company. See
"Underwriting."
(5) In the event the Underwriters' Over-allotment Option was exercised in full
by the Representative in the Offering, Aura's resulting Shares
Beneficially Owned and Approximate Percentage Beneficially Owned/After
Offering would be 7,211,533 shares and 72%, respectively. In the event all
of the Warrants issued in the Offering (including those included in the
Underwriters' Over-allotment Option) were exercised and Aura elected to
exercise in full its Redemption Option with respect thereto, Aura's
resulting Shares Beneficially Owned/After Offering and Approximate
Percentage Beneficially Owned would be 5,601,533 shares and 46%,
respectively.
(6) Includes 220,622 shares of Common Stock issued and outstanding and held by
Mr. Khan. Excludes 192,720 shares of Common Stock issuable pursuant to
options, none of which are exercisable within sixty days of June 30, 1997.
(7) Includes 26,974 shares of Common Stock issued and outstanding and held by
Mr. Alsabery. Excludes 35,000 shares of Common Stock issuable pursuant to
options, none of which are exercisable within sixty days of June 30, 1997.
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OWNERSHIP OF AURA STOCK
The principal stockholder of the Company is Aura. The address of Aura is
2335 Alaska Avenue, El Segundo, California 90245. Prior to the completion of
the Offering, Aura will own 7,511,533 shares of Common Stock, representing 94%
of the shares of Common Stock then outstanding. Under Delaware law, Aura is
able, acting alone, to cause to be elected the entire Board of Directors of
the Company and to control the vote on all matters submitted to a vote of the
Company's stockholders, including extraordinary corporate transactions.
Currently, the Company's Board of Directors is comprised entirely of designees
of Aura and three of the Company's eight directors are also directors and/or
officers of Aura. Upon completion of the Offering, Aura will own approximately
75% of the outstanding Common Stock of the Company (approximately 72% if the
Underwriters' Over-allotment Option is exercised in full), and the Company
will expand its Board of Directors to include two additional director
positions.
At June 30, 1997, the beneficial ownership of Aura common stock by the
Company's directors, the Named Executive Officers, and all directors and
executive officers as a group included the following: Sultan W. Khan, Chief
Executive Officer, President and Director, 973 shares; Asif M. Khan, Executive
Vice President and Director, 755 shares; Zane R. Alsabery, Director, 8 shares;
Gerald S. Papazian, Director, 123,282 shares; Steven C. Veen, Chief Financial
Officer and Director, 73,199 shares; Michael I. Froch, Secretary and Director,
15,362 shares; James M. Curran, Director, 0 shares; Alexander Remington,
Director, 34,000 shares; and all directors and executive officers as a group
(8 persons), 232,579 shares. To the Company's knowledge, the persons named in
above have sole voting and investment power with respect to all shares of Aura
common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in the footnotes
to this table. None of the individual directors or the Named Executive
Officers beneficially own 1.0% or more of outstanding shares of Aura capital
stock. All of the Company's directors and the Named Executive Officers,
collectively as a group, beneficially own less than 1.0% of such capital
stock.
DESCRIPTION OF SECURITIES
Upon the closing of the Offering, the authorized capital stock of the
Company, after giving effect to the Recapitalization, will consist of
50,000,000 shares of Common Stock, $.001 par value per share and 5,000,000
shares of Preferred Stock, $.001 par value per share.
UNITS
Each of the 2,000,000 Units offered hereby consists of one share of the
Company's Common Stock, $.001 par value per share, and one Common Stock
Purchase Warrant. Upon completion of the Offering, the Common Shares and
Warrants comprising the Units will be immediately detachable and separately
transferable. The assumed Offering Price of $9.00 per Unit is allocated $8.90
to the Common Share and $.10 to the Warrant.
COMMON STOCK
Upon giving effect to the Recapitalization and conversion, there will be
8,000,000 issued and outstanding shares of Common Stock. Immediately prior to
the date of this Prospectus, Aura was the stockholder of record of 7,511,533
shares, or 94% of the Company. Holders of the Common Stock do not have
preemptive rights to purchase additional shares of Common Stock or other
subscription rights. The Common Stock carries no conversion rights and is not
subject to redemption or to any sinking fund provisions. All shares of Common
Stock are entitled to share equally in dividends from sources legally
available therefor when, as and if declared by the Board of Directors and,
upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to stockholders. All outstanding shares of Common Stock are
validly authorized and issued, fully paid and nonassessable, and all shares to
be sold and issued as contemplated hereby, will be validly authorized and
issued, fully paid and nonassessable. The Board of Directors is authorized to
issue additional shares of Common Stock, not to exceed the amount authorized
by the Company's Certificate of Incorporation, and to issue options and
warrants for the purchase of such shares, on
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such terms and conditions and for such consideration as the Board may deem
appropriate without further stockholder action. The above description
concerning the Common Stock of the Company does not purport to be complete.
Reference is made to the Company's Certificate of Incorporation and bylaws
which are available for inspection upon proper notice at the Company's
offices, as well as to the applicable statutes of the State of Delaware for a
more complete description concerning the rights and liabilities of
stockholders.
Prior to the Offering, there has been no market for the Common Stock of the
Company, and no predictions can be made of the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. Nevertheless, sales of significant amounts
of the Common Stock of the Company in the public market may adversely affect
prevailing market prices, and may impair the Company's ability to raise
capital at that time through the sale of its equity securities.
Each holder of Common Stock is entitled to one vote per share on all matters
on which such stockholders are entitled to vote. Since the shares of Common
Stock do not have cumulative voting rights, the holders of more than 50% of
the shares voting for the election of directors can elect all the directors if
they choose to do so and, in such event, the holders of the remaining shares
will not be able to elect any person to the Board of Directors. Immediately
following completion of the Offering (assuming no exercise of the
Underwriters' Over-allotment Option), Aura will hold 75% of the outstanding
shares of Common Stock.
PREFERRED STOCK
There are currently no shares of Preferred Stock outstanding. Upon giving
effect to the Certificate Amendment, the Board of Directors has the authority,
without further action by the stockholders, to issue up to 5,000,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, conversion
rights, voting rights, terms of redemption, liquidation preferences, sinking
fund terms and the number of shares constituting any series or the designation
of such series, without any further vote or action by the stockholders. The
issuance of Preferred Stock could adversely affect the voting power of the
holders of Common Stock and the likelihood that such holders will receive
dividend payments and payments upon liquidation, and could have the effect of
delaying, deferring or preventing a change in the control of the Company. The
Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
There are currently no warrants issued by the Company outstanding. Upon
consummation of the sale of Units offered hereby, assuming no exercise of the
Underwriters' Over-allotment Option, 2,000,000 Warrants will be issued and
outstanding. The initial offering price of the Warrants is $0.10 per Warrant.
Upon completion of the Offering, the Common Shares and Warrants comprising the
Units will be immediately detachable and separately transferable. See "Risk
Factors."
Each Warrant entitles the holder to purchase one share of Common Stock at
150% of the Offering Price until that date which is five years from the date
of this Prospectus. The Common Stock underlying the Warrants will, upon
exercise of the Warrants, be validly issued, fully paid and nonassessable. The
Warrants are redeemable at the option of the Company for $.05 per Warrant, at
any time after the first anniversary of the date of this Prospectus, or at
such earlier date as may be determined by the Representative, upon 30 days
prior written notice, if the closing price of the Common Stock, as reported by
the principal exchange on which the Common Stock is traded, equals or exceeds
200% of the Offering Price per share, for 20 consecutive trading days during
the 30-day period preceding the date of the notice of redemption and at such
time as there is a current effective registration statement covering the
Common Stock underlying the Warrants. Upon 30 days prior written notice to all
holders of the Warrants, the Company shall have the right to reduce the
exercise price and/or extend the term of the Warrants.
The Company will deliver Warrant certificates to the purchasers of Units
representing one Warrant for each Unit purchased. Thereafter, Warrant
certificates may be exchanged for new certificates of different
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<PAGE>
denominations, and may be exercised or transferred by presenting them at the
offices of the Transfer Agent. Holders of the Warrants may sell the Warrants
if a market exists rather than exercise them, subject to the requirement that
each Warrant may not trade separately from the Common Share to which it is
attached without the consent of the Representative or the Company, as
applicable. However, there can be no assurance that a market will develop or
continue as to the Warrants or the Units. If the Company is unable to qualify
its Common Stock underlying such Warrants for sale in certain states, holders
of the Company's Warrants in those states will have no choice but to either
sell such Warrants (or the Units of which they are a part) or allow such
Warrants to expire.
Each Warrant may be exercised by surrendering the Warrant certificate, with
the form of election to purchase on the reverse side of the Warrant
certificate properly completed and executed, together with payment of the
exercise price to the Warrant Agent. The Warrants may be exercised in whole or
from time to time in part. If less than all of the Warrants evidenced by a
Warrant certificate are exercised, a new Warrant certificate will be issued
for the remaining number of Warrants.
Holders of the Warrants are protected against dilution of the equity
interest represented by the underlying shares of Common Stock upon the
occurrence of certain events, including, but not limited to, issuance of stock
dividends. If the Company merges, reorganizes or is acquired in such a way as
to terminate the Warrants, the Warrants may be exercised immediately prior to
such action. In the event of liquidation, dissolution or winding up of the
Company, holders of the Warrants are not entitled to participate in the
Company's assets.
For the life of the Warrants, the holders thereof are given the opportunity
to profit from a rise in the market price of the Common Stock of the Company.
The exercise of the Warrants will result in the dilution of the then book
value of the Common Stock of the Company held by the public investors and
would result in a dilution of their percentage ownership of the Company. The
terms upon which the Company may obtain additional capital may be adversely
affected through the period that the Warrants remain exercisable. The holders
of these Warrants may be expected to exercise them at a time when the Company
would, in all likelihood, be able to obtain equity capital on terms more
favorable than those provided for by the Warrants. See "Risk Factors--Future
Issuances of Stock by the Company Without Stockholder Approval."
The Warrants can only be exercised when there is a current effective
registration statement covering the shares of Common Stock underlying the
Warrants. If the Company does not or is unable to maintain a current effective
registration statement, the Warrant holders will be unable to exercise the
Warrants and the Warrants may become valueless. Moreover, if the shares of
Common Stock underlying the Warrants are not registered or qualified for sale
in the state in which a Warrant holder resides, such holder might not be
permitted to exercise the Warrants. See "Risk Factors--Current Prospectus and
State Blue Sky Registration Requirements to Exercise Warrants."
In the event that the Warrants are called for redemption, the Warrant
holders may not be able to exercise their Warrants in the event that the
Company has not updated this Prospectus in accordance with the requirements of
the Act or these securities have not been qualified for sale under the laws of
the state where the Warrant holder resides. See "Risk Factors--Current
Prospectus and State Blue Sky Registration Requirements to Exercise Warrants."
In addition, in the event that the Warrants have been called for redemption,
such call for redemption could require the Warrant holder to either (i)
assuming the necessary updating to the Prospectus and state blue sky
qualifications have been effected, exercise the Warrants and pay the exercise
price at a time when, in the event of a decrease in market price from the
period preceding the issuance of the call for redemption, it may be less than
advantageous economically to do so, or (ii) accept the redemption price,
which, in the event of an increase in the price of the stock, could be
substantially less than the market value thereof at the time of redemption.
See "Risk Factors--Warrants Subject to Redemption."
OPTIONS
As of the date hereof, options to purchase an aggregate of 546,690 shares of
Common Stock have been granted and are outstanding. Options to purchase an
aggregate of 453,310 shares of the Company are reserved
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for future issuance under the Stock Plan. See "Management--Stock Incentive
Plan." Shares of Common Stock received upon the exercise of such options are
subject to the provisions of Commission Rule 144.
REPRESENTATIVE'S OPTION
At the closing of this offering, the Company has agreed to sell to the
Representative, for an aggregate purchase price of $200, a warrant (the
"Representative's Option") to purchase up to 200,000 Units (each Unit
consisting of one share of Common Stock and one Warrant, each identical to the
Common Shares and Warrants offered hereby). The Representative's Option will
be exercisable for a period of four years commencing one year after the
Closing Date at 145% of the Offering Price and will contain customary
antidilution provisions. The Representative's Option will be restricted from
sale, assignment, transfer or hypothecation prior to its exercise date except
to officers of the Representative and members of the selling group and
officers and partners thereof.
REGISTRATION RIGHTS
Representative's Option. The Representative's Option to acquire up to
200,000 Units contains certain registration rights under the Securities Act
relating to the shares of Common Stock and Warrants included in the Units
underlying the Representative's Option and the shares of Common Stock issuable
upon exercise of the Warrants included in such Units (collectively, the
"Representative Shares"). Under the terms of the Representative's Option, the
Company is obligated to register all or part of the Representative Shares if
it receives a request to do so by the holders owning or entitled to purchase a
majority of the Representative Shares, provided that the request is made 12
months after the date of this Prospectus. The Representative's Option provides
for one such request, at the Company's expense. The demand registration right
contained in the Representative's Option will expire five years from the date
of this Prospectus. In addition, if the Company proposes to register any of
its securities under the Securities Act for its own account, holders of the
Representative's Option or Representative Shares are entitled to notice of
such registration and the Company is obligated to use all reasonable efforts
to cause the Representative Shares to be included, provided that the
underwriter of any such offering shall have the right to limit the number of
shares included in the registration. The Company is responsible for all
expenses incurred in connection with any such piggyback registration of the
Representative Shares. The piggyback registration rights contained in the
Representative's Option will expire no later than five years from the date of
this Prospectus. The exercise of such registration rights by the
Representative may result in dilution in the interests in the Company of then-
present stockholders, hinder efforts by the Company to arrange future
financings of the Company and/or have an adverse effect on the market price of
the Company's Common Stock and Warrants. See "Underwriting."
Aura Rights Agreement. Pursuant to the Aura Rights Agreement, Aura, or its
permitted transferee, is entitled to certain demand and incidental
registration rights with respect to the shares of Common Stock Aura will hold
upon completion of the Offering (the "Registrable Securities"), subject to
certain customary limitations. One year after the date of this Prospectus,
Aura will be entitled to request that the Company file a registration
statement under the Securities Act covering the resale of some or all of its
Registrable Securities, provided that during the first year following the
commencement of such rights Aura will not be permitted to cause more than
3,000,000 Registrable Securities to be so registered. The Company is required
to bear all costs associated with such registration. In addition, commencing
one year following the date of this Prospectus, whenever the Company proposes
to register any of its securities under the Securities Act, for its own
account or that of any other stockholder, holders of Registrable Securities
are entitled, subject to certain restrictions (including the 3,000,000 shares
limitation during the first year such rights are in effect and customary
underwriters' "cutback" limitations), to include their Registrable Securities
in such registration. Subject to certain limitations, the holders of
Registrable Securities may also require the Company to register such shares on
Form S-3 no more than once every 12 months (commencing on the first
anniversary of the date of this Prospectus), provided that the anticipated
aggregate proceeds would exceed $1.0 million. The Company is required to bear
all registration and selling expenses (other than underwriters' discounts and
commissions and the fees of more than a single special counsel to the selling
Stockholders) in connection with the registration of Registrable Securities in
one demand registration, two piggy-back registrations and all Form S-3
registrations. Registration rights under the Aura Rights Agreement may be
transferred to an assignee or transferee provided that such assignee or
transferee acquires at least 500,000 Registrable Securities held by the
transferring holder.
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These registration rights may be amended or waived (either generally or in a
particular instance) only with the written consent of the Company and the
holders of a majority of the Registrable Securities then outstanding. The
registration rights granted under the Aura Rights Agreement shall not be
exercisable by a holder during the period in which the holder may sell all of
the holder's shares under Rule 144 or Rule 144A during a single 90-day period.
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS
Certificate of Incorporation and Bylaws. The Company's Amended and Restated
Certificate of Incorporation ("Restated Certificate") and Bylaws require the
Company to indemnify the current and former directors and officers of the
Company, and permit the Company to indemnify any current or former employee or
agent of the Company, to the fullest extent permitted by law. The Restated
Certificate eliminates a director's liability for monetary damages for conduct
as a director, unless the elimination of liability is prohibited by the
Delaware General Corporation Law, such as the breach of a director's duty of
loyalty or acts or omissions which involve intentional misconduct or knowing
violation of law. These provisions do not eliminate a director's duty of care.
Moreover, the provisions do not eliminate or limit a director's liability for
violation of certain laws, including federal securities laws. The Company
believes that these provisions will assist the Company in attracting or
retaining qualified individuals to serve as directors and officers.
Under the Restated Certificate, the Board of Directors has the power to
authorize the issuance of up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without further vote or action by the
stockholders. The issuance of Preferred Stock, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, may have the effect of delaying, deferring or preventing a change in
control of the Company, may discourage bids for the Common Stock at a premium
over the market price of the Common Stock and may adversely affect the market
price of and the voting and other rights of the holders of the Common Stock.
These provisions of the Restated Certificate could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company. These provisions are intended to enhance the likelihood of continuity
and stability in the composition of the Board of Directors and in the policies
formulated by the Board of Directors and to discourage certain types of
transactions that may involve an actual or threatened change of control of the
Company. These provisions are designed to reduce the vulnerability of the
Company to an unsolicited acquisition proposal and to discourage certain
tactics that may be used in proxy fights. Such provisions, however, could have
the effect of discouraging others from making tender offers for the Company's
shares and, as a consequence, they also may inhibit fluctuations in the market
price of the Company's shares that could result from actual or rumored
takeover attempts. Such provisions also may have the effect of preventing
changes in the management of the Company.
The Restated Certificate provides that the Company's Bylaws may be repealed
or amended only by a two-thirds vote of the Board of Directors or a two-thirds
stockholder vote. Further, the Restated Certificate requires that all
stockholder action be taken at a stockholders' meeting. In addition, those
provisions of the Restated Certificate may only be amended or repealed by the
holders of at least two-thirds of the voting power of all the then-outstanding
shares of stock entitled to vote generally for the election of directors
voting together as a single class. The provisions described above, together
with the ability of the Board of Directors to issue Preferred Stock as
described under "--Preferred Stock," may have the effect of deterring a
hostile takeover or delaying a change in control or management of the Company.
See "Risk Factors--Effect of Anti-takeover Provisions."
Delaware Takeover Statute. The Company is subject to section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation
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outstanding at the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned (x) by persons
who are directors and also officers and (y) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or (iii) on or subsequent to such date, the business
combination is approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock that is
not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
CERTAIN CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Restated Certificate provides that any person purchasing or acquiring an
interest in shares of capital stock of the Company is deemed to have consented
to the following provisions relating to intercompany agreements and to
transactions with interested parties and corporate opportunities. The
corporate charter of Aura does not include comparable provisions relating to
intercompany agreements, transactions with interested parties or corporate
opportunities.
Transactions With Interested Parties. The Restated Certificate provides that
no contract, agreement, arrangement or transaction (or any amendment,
modification or termination thereof) between the Company and Aura or any
Related Entity (as such terms are defined below) or between the Company and
any director or officer of the Company, Aura or any Related Entity shall be
void or voidable solely for the reason that Aura, a Related Entity or any one
or more of the officers or directors of the Company, Aura or any Related
Entity are parties thereto, or solely because of any such directors or
officers are present at, participate in or vote with respect to the
authorization of such contract, agreement, arrangement or transaction (or any
amendment, modification or termination thereof). Further, the Restated
Certificate provides that neither Aura nor any officer or director thereof or
of any Related Entity shall be liable to the Company or its stockholders for
breach of any fiduciary duty or duty of loyalty or failure to act in (or not
opposed to) the best interests of the Company or the derivation of any
improper personal benefit by reason of the fact that Aura or an officer or
director thereof or of such Related Entity in good faith takes any action or
exercises any rights or gives or withholds any consent in connection with any
agreement or contract between Aura or such Related Entity and the Company. No
vote cast or other action taken by any person who is an officer, director or
other representative of Aura or such Related Entity, which vote is cast or
action is taken by such person in his capacity as a director of the Company,
shall constitute an action of or the exercise of a right by or a consent of
Aura, such subsidiary or Related Entity for the purpose of any such agreement
or contract. For purposes of the foregoing, the "Company" and "Aura" include
all corporations and other entities in which the Company or Aura, as the case
may be, owns 50% or more of the outstanding voting stock, and "Related Entity"
means one or more corporations or other entities in which one or more of the
directors of the Company have a direct or indirect financial interest.
Competition by Aura with the Company; Corporate Opportunities. The Restated
Certificate provides that except as Aura may otherwise agree in writing:
(i) neither Aura nor any subsidiary of Aura (other than the Company)
shall have a duty to refrain from engaging directly or indirectly in the
same or similar business activities or lines of business as the Company;
and
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(ii) neither Aura nor any subsidiary (other than the Company), officer or
director thereof will be liable to the Company or to its stockholders for
breach of any fiduciary duty by reason of any such activities or of such
person's participation therein.
The Restated Certificate also provides that if Aura or any subsidiary of
Aura (other than the Company) acquires knowledge of a potential transaction or
matter which may be a corporate opportunity both for Aura or such subsidiary
and for the Company, except as Aura may otherwise agree in writing, neither
Aura nor such subsidiary (nor the officers and directors of either thereof)
shall have a duty to communicate or offer such corporate opportunity to the
Company and shall not be liable to the Company or its stockholders for breach
of fiduciary duty as a stockholder of the Company or controlling person of a
stockholder by reason of the fact that Aura or such subsidiary pursues or
acquires such opportunity for itself, directs such corporate opportunity to
another person, or does not communicate information regarding such corporate
opportunity to the Company.
Further, the Restated Certificate provides that, except as Aura may
otherwise agree in writing, in the event that a director, officer or employee
of the Company who is also a director, officer or employee of Aura acquires
knowledge of a potential transaction or mater that may be a corporate
opportunity both for the Company and Aura (whether such potential transaction
or mater is proposed by a third party or is conceived by such director,
officer or employee of the Company), such director, officer or employee shall
be entitled to offer such corporate opportunity to the Company or Aura as such
director, officer or employee deems appropriate under the circumstances in his
or her sole discretion, and no such director, officer or employee shall be
liable to the Company or its stockholders for breach of any fiduciary duty or
duty of loyalty or failure to act in (or not opposed to) the best interests of
the Company or the derivation of any improper personal benefit by reason of
the fact that (i) such director, officer or employee offered such corporate
opportunity to Aura (rather than the Company) or did not communicate
information regarding such corporate opportunity to the Company or (ii) Aura
pursues or acquires such corporate opportunity for itself or directs such
corporate opportunity to another person or does not communicate information
regarding such corporate opportunity to the Company.
The enforceability of the provisions discussed above under Delaware
corporate law has not been established and, due to the absence of relevant
judicial authority, counsel to the Company is not able to deliver an opinion
as to the enforceability of such provisions. These provisions of the Restated
Certificate eliminate certain rights that might have been available to
stockholders under Delaware law had such provisions not been included in the
Restated Certificate, although the enforceability of such provisions has not
been established.
At the time of the consummation of the Offering, certain of the directors of
the Company will also be employees and/or directors of Aura.
The foregoing provisions of the Restated Certificate shall expire on the
date that Aura ceases to own beneficially Common Stock representing at least
20% of the number of outstanding shares of Common Stock and no person who is a
director or officer of the Company is also a director or officer of Aura or
its subsidiaries.
Actions Under Intercompany Agreements. The Company's Restated Certificate
will also limit the liability of Aura and its subsidiaries for certain
breaches of their fiduciary duties in connection with action that may be taken
or not taken in good faith under the intercompany agreements. See
"Relationship with Aura and Certain Transactions."
Advance Notice Provision. The Company's Amended and Restated Bylaws provide
for an advance notice procedure for the nomination, other than by or at the
direction of the Board of Directors, of candidates for election as directors
as well as for other stockholder proposals to be considered at annual meetings
of stockholders. In general, notice of intent to nominate a director or raise
matters at such meetings will have to be received by the Company not less than
120 or more than 150 days prior to the first anniversary of the Company's
proxy statement in connection with the previous year's annual meeting, and
must contain certain information concerning the person to be nominated or the
matters to be brought before the meeting and concerning the stockholder
submitting the proposal.
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Limitations on Directors' Liability. The Restated Certificate and the
applicable provisions of the DGCL provide that no director of the Company
shall be liable to the Company or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) in respect of certain unlawful
dividend payments or stock redemptions or repurchases or (iv) for any
transaction from which the director derived an improper personal benefit. The
effect of these provisions will be to eliminate the rights of the Company and
its stockholders (through stockholders' derivative suits on behalf of the
Company) to recover monetary damages against a director for breach of
fiduciary duty as a director (including breaches resulting from grossly
negligent behavior), except in the situations described above.
The existence of these terms and restrictions described above do not limit,
impair or waive any rights conferred by or under the federal securities laws.
NASDAQ NATIONAL MARKET LISTING
The Company has applied for inclusion of its Common Stock and Warrants for
quotation on the Nasdaq National Market under the symbols "NWCM" and "NWCMW,"
respectively. This offering is the initial public offering of the Company's
Securities and, accordingly, there is currently no public trading market for
any such Securities. Even if the Company's Common Stock and Warrants are
accepted for quotation on Nasdaq National Market, there can be no assurance
that a public trading market will ever develop or, if one develops, that it
will be maintained. Although it has no legal obligation to do so, the
Representative from time to time may act as a market maker and otherwise
effect transactions for its own account, or for the account of others, in the
Company's Securities. The Representative, if it so participates, may be a
dominating influence in any market that may develop for any of the Company's
Securities.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and the Warrant Agent
for the Warrants is Interwest Transfer Company, Inc., Salt Lake City, Utah.
REPORTS TO SECURITYHOLDERS
The Company will furnish to holders of its Common Stock and Warrants annual
reports containing audited financial statements. The Company may issue other
unaudited interim reports to its securityholders as it deems appropriate.
Contemporaneously with the Offering, the Company shall register its Common
Stock with the Commission, under the provisions of Section 12(g) of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, the Company will be required to comply with certain
reporting, proxy solicitation and other requirements of the Exchange Act.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering there has been no public market for the Common Stock
or Warrants of the Company, and no predictions can be made regarding the
effect, if any, that market sales of the Securities or the availability of
Securities for sale will have on the market price prevailing from time to
time. As described below, only a limited number of shares of Common Stock will
be available for sale shortly after the Offering due to certain contractual
and legal restrictions on resale. Nevertheless, sales of substantial amounts
of Common Stock of the Company in the public market after the restrictions
lapse could adversely affect the prevailing market price.
Upon completion of the Offering, the Company will have outstanding
10,000,000 shares of Common Stock, out of a total of 50,000,000 shares of
Common Stock authorized, not including up to (i) 2,000,000 shares of Common
Stock issuable upon exercise of the Warrants, (ii) 200,000 shares of Common
Stock issuable upon exercise of the Representative's Option,
(iii) 200,000 shares of Common Stock issuable upon exercise of the Warrants
included in the Representative's Option, (iv) 300,000 shares of Common Stock
issuable upon exercise
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of the Warrants included in the Underwriters' Over-allotment Option, and (v)
1,000,000 shares of Common Stock reserved for issuance under the Company's
Stock Plan. Of the 10,000,000 shares of Common Stock outstanding, the
2,000,000 shares of Common Stock being sold hereby will be freely tradable
without restriction or registration under the Securities Act, except for any
shares purchased by an affiliate of the Company (in general, a person who has
a control relationship with the Company), which shares will be subject to the
resale limitations of Rule 144 under the Securities Act. All remaining shares
were issued and sold by the Company in private transactions ("Restricted
Shares") and, upon the expiration of the Lock-up Period described below, will
be eligible for public sale if registered under the Securities Act or sold in
accordance with Rule 144 or Rule 701 thereunder.
In general, under Rule 144 as in effect commencing April 29, 1997, beginning
ninety days after the date of this Prospectus, an affiliate of the Company, or
a holder of Restricted Shares who owns beneficially shares that were not
acquired from the Company or an affiliate of the Company within the previous
one year, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares
of Common Stock (approximately 100,000 shares immediately after the Offering,
assuming no exercise of the Underwriters' Over-allotment Option) or the
average weekly trading volume of the Common Stock during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission (the "Commission"). Sales under Rule 144
are subject to certain requirements relating to manner of sale, notice and
availability of current public information about the Company. However, a
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the ninety days immediately
preceding the sale and who owns beneficially Restricted Shares is entitled to
sell such shares under Rule 144(k) without regard to the limitations described
above, provided that at least two years have elapsed since the later of the
date the shares were acquired from the Company or from an affiliate of the
Company. The foregoing is a summary of Rule 144 and is not intended to be a
complete description of it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the closing
of the Offering, pursuant to written compensatory benefit plans or written
contracts relating to the compensation of such persons. In addition, the
Commission has indicated that Rule 701 will apply to stock options granted by
the Company before the Offering, along with the shares acquired upon exercise
of such options. Securities issued in reliance on Rule 701 are deemed to be
Restricted Shares and, beginning ninety days after the date of this Prospectus
(unless subject to the contractual restrictions described above), may be sold
by persons other than affiliates subject only to the manner of sale provisions
of Rule 144 and by affiliates under Rule 144 without compliance with its two
year minimum holding period requirements.
Aura, which upon completion of the Offering will hold an aggregate of
7,511,533 shares of Common Stock, and the Company's directors and executive
officers have agreed pursuant to certain agreements that they will not sell
any Common Stock owned by them or issuable upon the exercise of options
previously granted or reserved for grant, without the prior written consent of
the Representative for a period of one year from the date of this Prospectus
(the "Lockup Period"). The Representative may in its discretion and without
notice to the public waive these lock-up agreements and permit Aura and other
holders otherwise agreeing to lock-up their shares to sell any or all of their
shares, the effect of which could be a substantial decline in the trading
price of the Company's Common Stock or Warrants. Following the expiration of
the Lockup Period, approximately 8,109,338 shares of Common Stock, including
109,338 shares issuable upon the exercise of certain options that are
exercisable on or before such expiration, will be available for sale in the
public market subject to compliance with Rule 144 or Rule 701. See
"Underwriting."
In addition, shares of Common Stock held by Aura are subject to the
Redemption Option Agreement and the Aura Rights Agreement.
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UNDERWRITING
Under the terms and subject to the conditions of the Underwriting Agreement,
the Underwriters named below, for whom Joseph Charles & Associates, Inc. is
acting as representative (the "Representative"), have severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters named below, the aggregate number of Units set forth opposite
there respective names in the table below at the price to the public less
underwriting discounts set forth on the cover page of this Prospectus. The
Units are being sold on a firm commitment basis. The Underwriting Agreement
provides, however, that the obligations of the Underwriters to pay for and
accept delivery of the Units are subject to certain conditions precedent, and
that the Underwriters are committed to purchase and pay for all Units if any
Units are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS UNITS
------------ ---------
<S> <C>
Joseph Charles & Associates, Inc..................................
---------
Total........................................................... 2,000,000
=========
</TABLE>
The Representative has informed the Company that the Underwriters do not
expect to sell any Units to any account over which they have discretionary
authority.
The Representative has advised the Company that the Underwriters propose to
offer the Units directly to the public at the initial public offering prices
set forth on the cover page of this Prospectus, and to selected dealers at
that price, less a concession of not more than $0. per Unit. The
Underwriters may allow a discount of not more than $0. per Unit on sales to
certain other dealers. After the initial public offering, the price to the
public of the Units, Common Shares and Warrants and the other terms may be
changed.
The Company and Aura have granted the Representative an option, exercisable
during the 45-day period following the date of this Prospectus, to purchase up
to 300,000 additional Units at the Offering Price less the underwriting
discounts and commissions. The Common Shares included in such additional Units
will be offered by Aura and the Warrants included in such additional Units
will be offered by the Company. The Representative may exercise such option
only for the purpose of covering any overallotments in the sale of the Units
offered hereby.
The Company has agreed to pay the Representative a nonaccountable expense
allowance of 2.5% of the gross proceeds from the sale of Units, or $450,000
(based upon an assumed Offering Price of $9.00 per Unit), against which
$40,000 has heretofore been paid. In addition to the Underwriter's discount
and the non-accountable expense allowance, the Company is required to pay the
costs of qualifying the Securities under federal and state securities laws,
together with legal and accounting fees, printing, road show and other costs
in connection with the Offering.
The Company has agreed to retain the Representative as a financial
consultant for a period of two years from the date of this Prospects for a fee
of $3,000 per month payable on a monthly basis. The financial consulting
services to be provided by the Representative include assisting in the
development of a long-term financial strategy and working with financial
analysts.
The bylaws of the Company provide that the authorized number of directors
shall be determined from time to time by resolution of the Board of Directors.
The current number of directors is eight. The directors hold office until the
next annual meeting of stockholders and until their successors have been
elected and qualified. If requested by the Representative at any time within
forty eight (48) months following the completion of the offering, the Company
has agreed, within 30 days of such request, 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, a non-voting
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advisor to the Company's Board of Directors. If the Representative requests
the inclusion of designees, this request shall be satisfied by a resolution of
the Board of Directors increasing the authorized number of directors to
accommodate the designees and then appointing such designees to fill the newly
created vacancies. In addition, Aura has agreed to vote all shares of the
Company's Common Stock owned by it for said nominees. Each such designee may
be a director of the Representative. To date, the persons to be designated by
the Representative have not been identified. See "Underwriting."
The Company has agreed with the Representative not to solicit Warrant
exercises other than through the Representative. Upon exercise of any
Warrants, the Company will pay the Representative a fee of 3% of the aggregate
exercise price, if (i) the market price of the Company Common Shares on the
date the Warrant is exercised is greater than the then exercise price of the
Warrant; (ii) the exercise of the Warrant was solicited by a member of the
National Association of Securities Dealers, Inc. who is so designated in
writing by the holder exercising the Warrant; (iii) the Warrant is not held in
a discretionary account except where prior specific written approval for the
exercise has been received; (iv) disclosure of compensation arrangements was
made both at the time of the offering and at the time of exercise of the
Warrant; (v) the solicitation of the exercise of the Warrant was not in
violation of Rule 10b-6 promulgated under the Exchange Act; and (vi) the
Representative provides bona fide services in connection with the solicitation
of the Warrant. No solicitation fee will be paid to the Representative on
Warrants exercised within one year of the date of this Prospectus or on
Warrants voluntarily exercised at any time without solicitation. In addition,
unless granted an exemption by the Commission from Rule 10b-6 under the
Exchange Act, the Representative will be prohibited from engaging in any
market making activities or solicited brokerage activities until the later of
the termination of such solicitations activity or the termination by waiver or
otherwise of any right the Representative may have to receive a fee for the
exercise of the Warrants following such solicitation. Such a prohibition,
while in effect, could impair the liquidity and market price of the
Securities.
Except in connection with acquisitions or the exercise of the Warrants, the
Representative's Option or options to purchase up to 1,000,000 Common Shares
that may be reserved or granted under the Company's Stock Plan, the Company
has agreed, for a period of one year from the closing of the Offering, that it
will not issue, sell or purchase any Common Shares, warrants or options or
other equity securities of the Company without the prior written consent of
the Representative. In addition, the officers, directors and principal
stockholders of the Company have agreed that they will not offer, sell or
otherwise dispose of any Common Shares, Warrants or other equity securities of
the Company owned by them to the public for a period of at least one year from
the effective date of the Offering, without the prior written consent of the
Representative. The Representative may in its discretion and without notice to
the public waive these lock-up agreements and permit Aura and other holders
otherwise agreeing to lock-up their shares to sell any or all of their shares,
the effect of which could be a substantial decline in the trading price of the
Company's Common Stock or Warrants.
At the closing of the Offering, the Company will sell and deliver to the
Representative, for an aggregate purchase price of $200, the Representative's
Option to purchase 200,000 Units at a price that is equal to 145% of the
Offering Price. The Warrants underlying the Representative's Option will have
an exercise price and other terms identical to the Warrants being offered to
the public pursuant to this Prospectus. The Representative's Option will be
exercisable during the four-year period commencing one year after the date of
this Prospectus. The Representative's Option will be restricted from sale,
assignment, transfer or hypothecation prior to its exercise date except to
officers of the Representative and members of the selling group and officers
and partners thereof. The Representative's Option will also contain
antidilution provisions for stock splits, stock dividends, recombinations and
reorganizations, a one-time demand registration provision (at the Company's
expense) and piggyback registration rights (which registration rights will
expire five years from the date of this Prospectus) and will otherwise be in
form and substance satisfactory to the Representative.
Prior to the Offering, there has been no public market for the Common Shares
or Warrants and there can be no assurance that a market will develop or be
sustained following the Offering. The Offering Price and the exercise price of
the Warrants will be determined by negotiations between the Representative and
the Company.
68
<PAGE>
Among the factors considered in determining the Offering Price and the
exercise price of the Warrants will be the prospects for the Company, an
assessment of the industries in which the Company operates, the assessment of
management, the number of Units offered, the price that purchasers of Units
might be expected to pay given the nature of the Company and the general
condition of the securities markets at the time of the offering. Accordingly,
the Offering Price set forth on the cover page of this Prospectus should not
necessarily be considered an indication of the actual value of the Company or
the Units, Common Shares or Warrants.
Certain persons participating in the Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Shares and Warrants at levels above those which might otherwise
prevail in the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A stabilizing bid
means the placing of any bid or effecting of any purchases, for the purpose of
pegging, fixing or maintaining the price of the Common Shares or Warrants. A
syndicate covering transaction means the placing of any bid on behalf of the
underwriting syndicate or the effecting of any purchase to reduce a short
position created in connection with the offering. A penalty bid means an
arrangement that permits the Representatives to reclaim a selling concession
from a syndicate member in connection with the offering when Common Shares or
Warrants sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq Stock Market, in
the over-the-counter market, or otherwise. Such stabilizing, if commenced, may
be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Securities offered
hereby will be passed upon for the Company by Pillsbury Madison & Sutro LLP,
Menlo Park, California. Freshman, Marantz, Orlanski, Cooper & Klein, a law
corporation, Beverly Hills, California, has acted as counsel to the
Underwriters with respect to certain legal matters in connection with the
Offering.
EXPERTS
The financial statements of NewCom, Inc. at February 28, 1995, February 29,
1996 and February 28, 1997, for the nine-month period ended February 28, 1995,
and for each of the two years in the period ended February 28, 1997, included
in this Prospectus have been audited by Pannell Kerr Forster, Certified Public
Accountants, a Professional Corporation, Los Angeles, California, as stated in
their report appearing herein, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to such Registration Statement, exhibits and
schedules. Statements contained in this Prospectus regarding the contents of
any contract or other document are not necessarily complete; with respect to
each such contract or document filed as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. A copy of the Registration Statement, including
the exhibits and schedules thereto, may be inspected without charge at the
principal office of the Commission, 450 Fifth Street, N.W., Washington, D.C.
20549, and copies of such material may be obtained from such office upon
payment of the fees prescribed by the Commission.
69
<PAGE>
GLOSSARY OF TERMS
16550 UART Universal Asynchronous Receiver Transmitter. Buffer
memory that allows for high fax and modem speeds by
holding data until the computer has time to process it.
ADSL Asymmetric Digital Subscriber Line; a fast new modem
technology.
bps Bits per second--the speed at which data and fax are
transmitted. One Kbps is equal to 1,000 bits per second
and one Mbps is equal to 1,000,000 bits per second.
Bus Direct The direct link to a computer's motherboard.
cable modems Modems that hook up to cable systems once used
exclusively for TV.
CCITT Comite Consultatif International Telegraphique et
Telephonique, the international standards body now known
as ITU.
CD Compact Disc.
CD-ROM Compact Disk-Read Only Memory; CD drive technology that
allows data to be read but not written.
CD-RW Compact Disc ReWriteable; CD drive technology that allows
users to record and rerecord information onto a compact
disc. Sometimes referred to as having read-many write-
many capabilities.
CDR Compact Disc Recordable; CD drive technology that allows
data to be read and written; current technology usually
permits data to be read many times but written only once.
computer Using computers to perform telephone functions.
telephony
data fax modem Computer product used for transmission of computer data
and fax data over telephone lines.
DOS Disc operating system, generally refers to Microsoft DOS
or to other Microsoft compliant systems.
DSP Digital Signal Processing; a hardware device whose
functions can change with software modifications
DSVD Digital Simultaneous Voice and Data; allows both voice
and computer data to be simultaneously transmitted over a
single standard phone line.
DVC Desktop Videoconferencing
DVD-ROM Digital Video Disk-Read Only Memory; new standard in CD
technology that is faster and holds many times more data
than CD-ROM; allows data to be read but not written.
error correction Technology which allows for error free transmission over
less than error free phone lines.
full duplex Allows both parties to talk at the same time and be
speakerphone heard.
IDE Integrated Drive Electronics; standard computer interface
for CD-ROM and other drives.
Internet A global open network of thousands of interconnected
computer networks and millions of commuter connections
that allow individuals, businesses and other
organizations to communicate worldwide.
Internet content A phrase that encompasses all of the written, audio and
video information available on the Internet.
Internet page A location of information on the World Wide Web.
Internet phone Uses the Internet modem connection to exchange voice
packets of data, i.e., voice conversations.
ISA
Industry Standard Architecture; standard Windows/DOS PC
bus interface slot.
ISDN
Integrated Services Digital Network; phone line
connection that is digital rather then the standard
analog; allows for much higher data transmission speeds.
ITU
International Telecommunication Union
70
<PAGE>
Just-in-Time NewCom's purchasing strategy, whereby components and
supplies are purchased just before they are needed in the
manufacturing process.
MNP 5 Microcom Networking Protocol level 5--A data compression
method sometimes used in modems. Produces a compression
ratio of approximately 2 to 1 and is often used as a
fallback to the higher compression V.42bis.
Modem Modulator/Demodulator--An electronic device that converts
binary data to analog tones and voltages that are
suitable for transmissions over standard telephone lines.
MPEG One of the more popular video compression standards that
permits a large amount of video data to be stored or
transmitted in a compressed amount of space.
multimedia Currently in its basic form, a PC multimedia system is
defined as any system with a CD-ROM drive and high
quality sound capability.
NTSC National Television System Committee--The method used to
transmit television signals in North America and Japan.
PAL Phase-Alternational Line--The broadcast color television
standard used in Western Europe and Australia.
POTS Plain Old Telephone Service; standard home or office
analog telephone service.
RISC Reduced Instruction-Set Computer--A central processing
unit technology that is designed to provide faster and
lower-cost processing than the CISC (Complex Instruction-
Set Computing) technology used in most personal
computers.
RJ11 Standard single line or two line telephone modular jack.
S-Video Super-Video--A higher resolution VHS (Video Home System)
video cassette recorder format.
SCSI Small Computer System Interface; A standard computer
system interface that is used on the Apple Macintosh and
has growing usage on Windows/DOS PCs.
sound card A hardware card that hooks up to the bus of a PC and
which outputs sound signals to speakers.
UART Universal Asynchronous Receiver Transmitter.
SVGA Super Video Graphics Array; a video adapter standard.
V.34, V.34+ Error correction standards which allow for high speed
transmission.
V.42 A standard for error detection and error correction
(through retransmission) often implemented in modems.
V.42bis A data compression method sometimes used in modems.
Produces a compression ratio of approximately 4 to 1.
V.42bis/MNP 5 Data compression standard which can increase the
throughput of data transmission by compressing the amount
of data that must be sent.
VAR Value Added Reseller.
VGA Video Graphics Array; a video adapter standard.
video Telephone conferencing in which each party see a video
conferencing transmission of the other party.
Web browsing A phrase used to describe the process of looking for
information on the Internet World Wide Web.
Windows/DOS PC A PC that uses Microsoft's operating system. Also known
as IBM PC clones.
WWW World Wide Web; linked computer around the world.
71
<PAGE>
NEWCOM, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................ F-2
Balance Sheets.............................................................. F-3
Statements of Operations.................................................... F-4
Statements of Stockholder's Equity (Deficit)................................ F-5
Statements of Cash Flows.................................................... F-6
Notes to Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
NewCom, Inc.
Westlake Village, California
We have audited the accompanying balance sheets of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the related
statements of operations, statements of stockholder's equity (deficit) and
cash flows for each of the two years in the period ended February 28, 1997,
and for the nine months ended February 28, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NewCom, Inc. as of
February 28, 1997, February 29, 1996 and February 28, 1995 and the results of
its operations and its cash flows for each of the two years in the period
ended February 28, 1997, and for the nine months ended February 28, 1995, in
conformity with generally accepted accounting principles.
Los Angeles, California
June 11, 1997
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
F-2
<PAGE>
NEWCOM, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
MAY 31, 1997
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, ------------------------
1995 1996 1997 ACTUAL PRO FORMA
------------ ------------ ------------ ----------- -----------
(NOTE 2)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash
equivalents.......... $ 335,706 $ 2,102,183 $ 2,813,631 $ -- $ --
Accounts receivable,
net.................. 1,023,029 18,734,671 29,974,924 32,844,092 32,844,092
Inventories........... 272,761 3,578,767 11,495,503 15,480,804 15,480,804
Deposits on inventory
purchase............. -- -- -- 3,580,000 3,580,000
Other current assets.. 200 55,617 45,069 571,124 571,124
---------- ----------- ----------- ----------- -----------
Total current
assets.............. 1,631,696 24,471,238 44,329,127 52,476,020 52,476,020
---------- ----------- ----------- ----------- -----------
Property and equipment,
at cost................ 186,262 410,901 2,532,278 2,590,657 2,590,657
Less accumulated
depreciation........... (21,553) (56,989) (260,908) (281,758) (281,758)
---------- ----------- ----------- ----------- -----------
Net property and
equipment........... 164,709 353,912 2,271,370 2,308,899 2,308,899
---------- ----------- ----------- ----------- -----------
Engineering designs and
drawings, net of
accumulated
amortization of $72,256
(1995), $216,768 (1996)
and $361,280 (1997).... 650,303 505,791 361,279 325,151 325,151
Other assets............ 55,285 17,405 473,395 162,024 162,024
---------- ----------- ----------- ----------- -----------
Total assets............ $2,501,993 $25,348,346 $47,435,171 $55,272,094 $55,272,094
---------- ----------- ----------- ----------- -----------
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT):
Current liabilities
Accounts payable...... $ 603,900 $ 7,202,642 $13,354,178 15,066,921 15,066,921
Accrued expenses...... 38,956 126,312 174,740 103,026 103,026
Line of credit........ -- 2,397,657 8,883,656 5,740,236 5,740,236
---------- ----------- ----------- ----------- -----------
Total current
liabilities......... 642,856 9,726,611 22,412,574 20,910,183 20,910,183
---------- ----------- ----------- ----------- -----------
Due to Aura............. 1,238,354 20,186,283 17,249,874 25,522,706 21,522,706
---------- ----------- ----------- ----------- -----------
Commitments and
contingencies
Stockholder's equity
(deficit)
Common Stock, par
value $.001 per
share, authorized
50,000,000 shares,
issued and
outstanding 7,555,556
shares (note 17); pro
forma shares issued
and outstanding
8,000,000 (note 2)... 7,556 7,556 7,556 7,556 8,000
Additional paid-in
capital.............. 993,444 993,444 9,993,444 9,993,444 13,993,000
Accumulated deficit... (380,217) (5,565,548) (2,228,277) (1,161,795) (1,161,795)
---------- ----------- ----------- ----------- -----------
620,783 (4,564,548) 7,772,723 8,839,205 12,839,205
---------- ----------- ----------- ----------- -----------
Total liabilities and
stockholder's equity
(deficit).............. $2,501,993 $25,348,346 $47,435,171 $55,272,094 $55,272,094
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
F-3
<PAGE>
NEWCOM, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
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>
Gross revenues.......... $2,128,361 $33,312,587 $73,120,781 $7,465,720 $16,081,392
Less discounts given.... 24,923 128,400 89,117 24,337 30,678
Less returns and
allowances............. -- 1,986,758 22,399,974 -- 621,037
---------- ----------- ----------- ---------- -----------
Net revenues............ 2,103,438 31,197,429 50,631,690 7,441,383 15,429,677
Cost of goods sold...... 2,059,545 30,131,245 33,619,084 4,854,512 10,397,883
---------- ----------- ----------- ---------- -----------
Gross profit............ 43,893 1,066,184 17,012,606 2,586,871 5,031,794
---------- ----------- ----------- ---------- -----------
Expenses
Research and
development.......... 4,201 -- 7,708 -- 6,870
Selling, general and
administrative
expenses............. 423,619 4,972,064 11,840,951 1,631,698 2,728,857
---------- ----------- ----------- ---------- -----------
Total expenses...... 427,820 4,972,064 11,848,659 1,631,698 2,735,727
---------- ----------- ----------- ---------- -----------
Income (loss) from
operations............. (383,927) (3,905,880) 5,163,947 955,173 2,296,067
Other (income) and
expenses
Miscellaneous income.. (3,710) (23,289) (122,690) (7,410) (17,150)
Interest expense...... -- 1,302,740 1,516,366 240,171 535,735
---------- ----------- ----------- ---------- -----------
Income (loss) before
taxes.................. (380,217) (5,185,331) 3,770,271 722,412 1,777,482
Provision for income
taxes.................. -- -- 433,000 108,000 711,000
---------- ----------- ----------- ---------- -----------
Net income (loss)....... $ (380,217) $(5,185,331) $ 3,337,271 $ 614,412 $ 1,066,482
---------- ----------- ----------- ---------- -----------
Net income (loss) per
common share........... $ (.05) $ (.69) $ .44 $ .08 $ .14
---------- ----------- ----------- ---------- -----------
Weighted average number
of common shares (note
2)..................... 7,555,556 7,555,556 7,555,556 7,555,556 7,555,556
========== =========== =========== ========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
NEWCOM, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
NINE MONTHS ENDED FEBRUARY 28, 1995 AND THE
YEARS ENDED FEBRUARY 29, 1996 AND FEBRUARY 28, 1997
AND THE UNAUDITED THREE-MONTH PERIOD ENDED MAY 31, 1997
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON COMMON PAID-IN ACCUMULATED STOCKHOLDER'S
SHARES AMOUNTS CAPITAL DEFICIT EQUITY (DEFICIT)
--------- ------- ---------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
Stock issued for cash,
July 1, 1994........... 1,000 $ 5 $ 995 $ -- $ 1,000
Assets contributed by
stockholder
(note 1)............... -- -- 1,000,000 -- 1,000,000
Effect of 7,555.556 for
1 stock split (note
17).................... 7,554,556 7,551 (7,551) -- --
Net loss................ -- -- -- (380,217) (380,217)
--------- ------ ---------- ----------- ----------
Balance at February 28,
1995................... 7,555,556 7,556 993,444 (380,217) 620,783
Net loss................ -- -- -- (5,185,331) (5,185,331)
--------- ------ ---------- ----------- ----------
Balance at February 29,
1996................... 7,555,556 7,556 993,444 (5,565,548) (4,564,548)
Capital contribution by
stockholder (note 4)... -- -- 9,000,000 -- 9,000,000
Net income.............. -- -- -- 3,337,271 3,337,271
--------- ------ ---------- ----------- ----------
Balance at February 28,
1997................... 7,555,556 7,556 9,993,444 (2,228,277) 7,772,723
Net income (unaudited).. -- -- -- 1,066,482 1,066,482
--------- ------ ---------- ----------- ----------
Balance at May 31, 1997
(unaudited)............ 7,555,556 $7,556 $9,993,444 $(1,161,795) $8,839,205
========= ====== ========== =========== ==========
</TABLE>
See accompanying notes to financial statements
F-5
<PAGE>
NEWCOM, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED
MAY 31,
------------------------
NINE MONTHS
ENDED YEAR ENDED YEAR ENDED
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1995 1996 1997 1996 1997
------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities
Net income (loss)...... $ (380,217) $ (5,185,331) $ 3,337,271 $ 722,412 $ 1,066,482
----------- ------------ ------------ ----------- -----------
Adjustments to
reconcile net income
(loss) to net cash
used by operating
activities
Depreciation and
amortization......... 93,809 195,020 348,420 56,978 56,978
Changes in operating
assets and
liabilities
Accounts receivable... (1,023,029) (17,711,642) (11,240,253) (579,711) (2,869,168)
Inventories........... (56,464) (3,306,006) (7,916,736) 361,063 (4,045,301)
Deposits on inventory
purchase............. -- -- -- -- (3,580,000)
Other current assets.. (200) (55,417) 10,548 (2,000) (526,055)
Other assets.......... (55,285) 22,808 (455,990) 8,572 371,371
Accounts payable...... 603,900 6,598,742 6,151,536 (4,061,923) 1,712,743
Accrued expenses...... 38,956 87,356 48,428 82,716 (71,714)
----------- ------------ ------------ ----------- -----------
Total adjustments.... (398,313) (14,169,139) (13,054,047) (4,134,305) (8,951,146)
----------- ------------ ------------ ----------- -----------
Net cash used by
operating
activities.......... (778,530) (19,354,470) (9,716,776) (3,411,893) (7,884,664)
----------- ------------ ------------ ----------- -----------
Cash flows used by
investing activities...
Additions to property
and equipment......... (125,118) (224,639) (2,121,366) (28,505) (58,379)
----------- ------------ ------------ ----------- -----------
Cash flows from
financing activities...
Net proceeds (payments)
from borrowings....... -- 2,397,657 6,485,999 1,016,758 (3,143,420)
Proceeds from issuance
of common stock....... 1,000 -- -- -- --
Cash advances from
Aura.................. 1,581,034 22,237,586 14,832,091 4,057,322 16,200,832
Cash repayments to
Aura.................. (342,680) (3,289,657) (8,768,500) (1,900,000) (7,928,000)
----------- ------------ ------------ ----------- -----------
Net cash provided by
financing
activities.......... 1,239,354 21,345,586 12,549,590 3,174,080 5,129,412
----------- ------------ ------------ ----------- -----------
Net increase (decrease)
in cash and cash
equivalents............ 335,706 1,766,477 711,448 (266,318) (2,813,631)
Cash and cash
equivalents at
beginning of period.... -- 335,706 2,102,183 2,102,183 2,813,631
----------- ------------ ------------ ----------- -----------
Cash and cash
equivalents at end of
period................. $ 335,706 $ 2,102,183 $ 2,813,631 $ 1,835,865 $ --
=========== ============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements
F-6
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 1--BUSINESS AND ORGANIZATION OF COMPANY
NewCom, Inc. (the "Company") specializes in the manufacturing and selling of
high performance computer communication and multimedia products for the IBM
compatible and Apple Macintosh personal computer markets. The Company offers a
line of products including, among others, internal and external data fax
modems, speaker phones, sound cards, and multimedia kits.
The Company was incorporated in June 1994 and commenced operations in early
September 1994. Prior to commencing its operations, the Company had no assets
other than cash of $1,000 from the sale of its stock to Aura Systems, Inc.
("Aura") and other founders.
Concurrent with the commencement of the Company's operations, Aura
contributed to the Company certain assets, valued at $1,000,000, purchased
from the bankruptcy proceeding of Nuvo Corporation of America ("Nuvo"). The
contributed assets consisted of inventory valued at $216,297 and property and
equipment valued at $61,144. The remaining purchase price paid by Aura was
attributed to engineering designs and drawings in the amount of $722,559.
Aura acquired the assets in September 1994 in exchange for 133,333 shares of
its common stock valued at $1,000,000. Previous to Aura's acquisition, Nuvo
had filed for bankruptcy in April 1994, and had ceased operations shortly
thereafter.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition
The Company recognizes revenue for product sales upon shipment. The Company
provides for estimated returns and allowances based upon experience (see note
3).
The Company also earns a portion of its revenues from license fees, and
generally records these fees as income when the Company has fulfilled its
obligations under the particular agreement.
Cash equivalents
The Company considers all highly liquid assets, having an original maturity
of less than three months, to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual future results could differ from those estimates.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Stock options
The Company intends to account for stock-based compensation under the
provisions of APB Opinion No. 25. Additional pro forma disclosures as to net
income and earnings per share, as if the fair value-based method of accounting
defined by SFAS No. 123 was applied, will be disclosed in the reporting period
of grant.
Per share information
The net income (loss) per common share is based on the weighted average
number of common shares outstanding during the year (see note 17).
F-7
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Research and development
Research and development costs are expensed as incurred.
Advertising costs
Advertising costs are expensed as incurred. Advertising charged to expense
in Fiscal 1995, 1996 and 1997 approximated $19,000, $1,523,000 and $3,990,000,
respectively.
Property and equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over their estimated useful lives as follows:
<TABLE>
<S> <C>
Machinery and equipment........ 3-10 years
Furniture and fixtures......... 5-10 years
Leasehold improvements......... Life of lease
</TABLE>
During Fiscal 1995, 1996 and 1997, the Company capitalized costs of
$120,571, $55,235 and $1,712,184, respectively, on special tools and
equipment, which have been designed for the manufacturing and development of
electronic products. The capitalized amounts, included in machinery and
equipment, include allocated costs of direct labor and overhead. The Company
expects recovery of these costs from orders.
Depreciation expense of machinery and equipment, furniture and fixtures and
leasehold improvements was $21,553, $50,508 and $203,919, for Fiscal 1995,
1996 and 1997, respectively.
Engineering designs and drawings
Engineering designs and drawings represents the fair value of intangible
assets contributed by Aura in September 1994 (see note 1), and is being
amortized over 5 years on a straight-line basis.
The carrying value of these intangible assets is based on management's
current assessment of recoverability. Management evaluates recoverability
using both objective and subjective factors. Objective factors include
management's best estimates of projected future earnings and cash flows and
analysis of recent sales and earnings trends. Subjective factors include
competitive analysis and the Company's strategic focus.
Unaudited pro forma balance sheet
The unaudited pro forma balance sheet at May 31, 1997 gives effect to the
conversion of advances from Aura of $4,000,000 into 444,444 shares of the
Company's common stock upon the closing of the Company's initial public
offering, assuming an offering price per Unit of $9.00. The unaudited pro
forma balance sheet does not give effect to the offering itself.
Unaudited Note to Financial Statements
Management Opinion
In the opinion of Company management, the accompanying unaudited financial
statements as of May 31, 1997 and for the three months ended May 31, 1996 and
1997, reflect all adjustments (which include only normal
F-8
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
recurring adjustments) and reclassification for comparability necessary to
present fairly the financial position and results of operations.
NOTE 3--PRODUCT RETURN RISKS
The Company is exposed to the risk of product returns from its retailer mass
merchant and distributor customers as a result of several factors, including
returns from their customers, contractual stock rotation privileges, returns
of defective products or product components. In addition, the Company
generally accepts returns of unsold product from customers with whom the
Company has severed its customer relationship. Overstocking by the Company's
customers could lead to higher than normal returns, which could have a
material adverse effect on the Company's results of operations. The Company
also has a policy of offering price protection to its customers for some or
all of their inventory, whereby when the Company reduces its prices for a
product, the customer receives a credit for the difference between the
original purchase price of the product and the Company's reduced price for the
product. As a result of this policy, significant reductions in prices have
had, and may in the future have, a material adverse effect on the Company's
results of operations. The financial statements include adequate provisions to
reserve for future product returns.
Returns and allowances in Fiscal 1997 were $22.4 million (or 30.6% of gross
revenues), as compared to $2.0 million (or 6.0% of gross revenues) in Fiscal
1996. The disproportionately large increase in returns in Fiscal 1997 was
partially due to a problem encountered in the middle of the year with a chip
used in the Company's DSVD modems that was manufactured for the Company by
Phylon Communications, Inc. ("Phylon"). Due to a defect in the chip's software
design which the Company believes was caused by Phylon, the chip vendor was
unable to satisfy the Company's specifications for DSVD performance. As a
result, the Company agreed to accept its customers' return of the modems,
which it thereafter repackaged and resold as a non-DSVD modem product. Since
the modem was so repackaged and sold at a profit, the Company did not seek
further satisfaction from Phylon. The Company has discontinued using Phylon as
a chip vendor. To reduce the likelihood of a similar problem occurring in the
future, the Company has instituted a program of additional beta testing,
sometimes in conjunction with its larger mass merchant customers. Aggregate
returns relating to the defective chips were approximately $10.1 million, or
44.9% of total returns in Fiscal 1997. Also, in Fiscal 1997 the Company's
efforts to upgrade the quality and average size of its customer base and its
resulting cessation of business with several smaller customers resulted in a
higher than normal incidence of product returns from such customers. Aggregate
returns in Fiscal 1997 from customers with which the Company discontinued
business (which may have included returns due to the aforementioned defective
chips) were approximately $10.2 million, or 45.5% of total returns in Fiscal
1997. While the Company believes that returns associated with the
aforementioned chip defect should not be material in future periods, it is
expected that returns will continue from smaller customers disenfranchised as
a result of the Company's upgrading of its customer base, possibly at
significant levels. Returns and allowances for Fiscal 1997 related primarily
to returns associated with the NewCom 33,600 ifx, efx and ifx-m fax modems,
NewCom 8X drive kit and multimedia kits and NewCom 4X drive kit and multimedia
kits. Returns and allowances for Fiscal 1996 related primarily to returns
associated with NewCom 2X drive kit and multimedia kits introduced and
discontinued in Fiscal 1996, NewCom 4X drive kit and multimedia kits, NewCom
14,400 ifx, efx and efx-m fax modems and the Company's discontinued 28,800
ifx, efx and efx-m fax modems.
NOTE 4--RELATED PARTY TRANSACTIONS
During Fiscal years 1995, 1996 and 1997, Aura loaned funds to the Company as
needed. The balances outstanding were $1,238,354, $20,186,283 and $17,249,874
at February 28, 1995, February 29, 1996 and
F-9
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 4--RELATED PARTY TRANSACTIONS--(CONTINUED)
February 28, 1997, respectively. The balance outstanding at the end of each
period was considered long-term debt. Effective March 1, 1996, Aura
contributed $9,000,000 of the balance outstanding at February 29, 1996 to the
Company as additional paid-in capital. Intercompany interest expense, included
in the outstanding balance at Fiscal 1996 and 1997, was $1,202,236 and
$1,147,621, respectively, and was computed at approximately 9% and 8%,
respectively. The interest rates used were determined by Aura with reference
to its estimated cost of borrowed funds. No interest was charged to the
Company on intercompany indebtedness during Fiscal 1995. Fiscal 1995
transactions with Aura that resulted in the balance due to Aura at February
28, 1995 consisted of cash advances of $1,501,034 and an $80,000 charge for
certain support services described below. Repayments during the period totaled
$342,680. The average outstanding balance due Aura during Fiscal 1995 was
approxixmately $625,000.
In Fiscal 1997, the Company purchased speaker components from Aura, for use
in multimedia kit products in the amount of $543,719.
The Company currently subleases from Aura its facilities in Westlake
Village, California. In Fiscal 1997, the Company made lease payments of
$191,013 under the sublease, which payments were made, with Aura's consent,
directly to the landlord, and property taxes payments of $7,956.
Aura provided certain support services to the Company including financial,
legal, tax, audit, benefits administration and personal property insurance.
These charges are allocated by Aura to the Company based on various formulas
that, in management's opinion, reasonably approximate the actual costs
incurred. The expenses recorded by the Company for these allocations were
$80,000, $120,000 and $120,000 for Fiscal 1995, 1996 and 1997, respectively,
and are included in selling, general and administrative expenses in the
accompanying statements of operations. The amounts allocated by Aura are not
necessarily indicative of the actual costs which may have been incurred had
the Company operated as an unaffiliated entity. However, the Company believes
that the allocation is a reasonable approximation of the Company's operations
on a "stand-alone" basis and is in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin No. 55.
The Company intends to continue using the support services of Aura on an
interim basis at rates negotiated in accordance with a service agreement to be
entered into between the Company and Aura.
NOTE 5--ACCOUNTS RECEIVABLE
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Trade debtors........... $1,053,029 $19,791,671 $31,824,924 $34,684,092
Less allowance for
doubtful accounts...... (30,000) (1,057,000) (1,850,000) (1,840,000)
---------- ----------- ----------- -----------
$1,023,029 $18,734,671 $29,974,924 $32,844,092
========== =========== =========== ===========
</TABLE>
Bad debt expense was approximately $30,000, $1,057,000 and $812,000 in
Fiscal 1995, 1996 and 1997, respectively.
F-10
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 5--ACCOUNTS RECEIVABLE--(CONTINUED)
Accounts receivable due from major customers were as follows:
<TABLE>
<CAPTION>
FEBRUARY 29, 1996 FEBRUARY 28, 1997
----------------------------------------------
AMOUNT PERCENT AMOUNT PERCENT
---------------- ------- ----------- -------
<S> <C> <C> <C>
$ 5,115,804 27.3% $ 4,444,058 14.8%
1,464,300 7.8 3,653,000 12.2
1,406,981 7.5 3,041,096 10.1
1,332,020 7.1 2,742,085 9.2
1,317,333 7.0 1,646,762 5.5
---------------- ---- ----------- ----
$10,636,438 56.7% $15,527,001 51.8%
================ ==== =========== ====
</TABLE>
The above accounts receivable are due from well established mass-market
retailers and distributors. Accordingly, management believes that
recoverability of these receivables does not represent a substantial credit
risk.
NOTE 6--INVENTORIES
Inventories, stated at the lower of cost (first-in, first-out) or market,
consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Raw materials............. $187,761 $2,053,152 $ 5,882,390 $ 7,172,005
Finished goods............ 85,000 1,525,615 5,613,113 8,308,799
-------- ---------- ----------- -----------
$272,761 $3,578,767 $11,495,503 $15,480,804
======== ========== =========== ===========
</TABLE>
At February 29, 1996, February 28, 1997 and May 31, 1997, raw material
inventory is presented net of a $70,000, $355,000 and $355,000, respectively,
reserve for potential product obsolescence.
NOTE 7--PROPERTY AND EQUIPMENT
Property and equipment, at cost is comprised as follows:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Machinery and
equipment............. $125,118 $311,010 $2,382,646 $2,438,435
Furniture and
fixtures.............. 61,144 62,296 112,037 114,627
Leasehold
improvements.......... -- 37,595 37,595 37,595
-------- -------- ---------- ----------
$186,262 $410,901 $2,532,278 $2,590,657
======== ======== ========== ==========
</TABLE>
NOTE 8--ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31,
1995 1996 1997 1997
------------ ------------ ------------ --------
<S> <C> <C> <C> <C>
Accrued payroll and
related expenses......... $38,956 $114,808 $166,650 $90,776
Other..................... -- 11,504 8,090 12,250
------- -------- -------- --------
$38,956 $126,312 $174,740 $103,026
======= ======== ======== ========
</TABLE>
F-11
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 9--LINE OF CREDIT
In Fiscal 1996 and 1997, the Company had available a line of credit with a
commercial lending institution that permitted borrowings of up to the lesser
of $9.0 million or 80% of eligible accounts receivable, as defined in the
financing agreement with the lender. The line of credit had an interest rate
equal to the institution's prime rate plus 1/2%. The interest rate was 9.5% at
each of February 29, 1996 and February 28, 1997. The line of credit was
collateralized by accounts receivable and required the Company to maintain
certain financial ratios. The Company used this facility for funding its
operations during Fiscal 1996 and 1997. At February 29, 1996 and February 28,
1997, the outstanding balance under this line of credit was $2.4 million and
$8.8 million, respectively with a maximum of $2.5 million and $9.0 million,
respectively. In May 1997, the Company replaced this line with another line of
credit with another lending institution that permits borrowings of up to the
lesser of $7.0 million or 60% of eligible accounts receivable, plus up to $2.0
million of inventory flooring. Eligible accounts receivable consist of all
receivables except those greater than 90 days past due; receivables where more
than 50% of the account balance is greater than 90 days past due; accounts
originated under non-standard terms and/or which allow for payment to be made
more than 30 days from date of sale; receivables from customers who are also
vendors; receivables from non-domestic customers; accounts for which the
obligor is an officer, director, shareholder, parent, employee, subsidiary or
affiliate of the Company; accounts for which payment is or may be conditional;
accounts for which the obligor is not a commercial or institutional entity or
not a resident of the United States or Canada; accounts evidenced by judgments
or promissory notes; accounts which represent goods purchased for personal
purposes; accounts which represent goods used for demonstration purposes;
accounts which are progress payment, barter or contra accounts; or any other
account which the lender deems to be ineligible.
This new line of credit has an interest rate equal to the institution's
prime rate plus 1.25%. The interest rate was 9.75% at June 30, 1997. The new
line of credit is secured by substantially all of the operating assets of the
Company. In addition, the Company agreed to issue in favor of the lender
irrevocable letters of credit equal to $750,000. The stated interest rate on
the new financing agreement is higher by 0.75% than the former arrangement.
However, the former arrangement provided for additional lender's fees which in
the aggregate resulted in a substantially higher cost of funds overall.
Pursuant to the terms of the new line of credit, the Company must adhere to
the following financial covenants: (i) combined tangible net worth and
subordinated debt of not less than $10 million; (ii) a ratio of debt (not
including subordinated debt), to tangible net worth and subordinated debt of
not more than three to one; (iii) a ratio of current tangible assets to
current liabilities of not less than one and one-half to one; and (iv) net
income (before taxes and after extraordinary items and adjustments) of
$100,000 for each fiscal quarter beginning September 1, 1996 or, in the event
the Company fails to achieve net income of $100,000 in any fiscal quarter, a
net income of $100,000 for that portion of the Company's fiscal year that runs
through the end of such fiscal quarter. The Company believes it is currently
in compliance with the aforementioned financial covenants. At June 30, 1997,
the outstanding balance under the new line of credit was approximately $3.6
million.
NOTE 10--INCOME TAXES
Under SFAS 109 "Accounting for Income Taxes" the Company utilizes the
liability method of accounting for income taxes. The objective of accounting
for income taxes is to recognize the amount of current and deferred taxes
payable (or refundable) at the date of financial statements (a) as a result of
all events that have been recognized in the financial statements and (b) as
measured by the provisions of enacted tax laws. Income taxes currently payable
are based on the taxable income for the year. A deferred tax liability or
asset is calculated for tax consequences estimated to occur in future years.
F-12
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 10--INCOME TAXES--(CONTINUED)
The Company's taxable income is included in the consolidated federal income
tax return filed by Aura. For financial reporting purposes the Company's
income tax expense or benefit is computed on a separate entity basis, with the
resulting current income taxes payable or receivable and related deferred
income taxes settled through the intercompany accounts. During Fiscal 1997,
the Company utilized its net operating losses carryforwards of $4,281,000
(Federal) and $3,154,000 (state) to reduce its tax liability to Aura. At
February 28, 1997, the Company had no remaining net operating loss
carryforwards for Federal and state income tax purposes.
The provision differs from the expense that would result from applying
federal statutory rates to income before taxes because of the inclusion of a
provision for state income taxes.
Temporary differences arise primarily from differences in timing in the
deduction of bad debts, inventory reserves, state income taxes, capitalization
of certain costs in inventory for tax purposes and the use of the straight-
line method of depreciation for financial reporting purposes and accelerated
methods of depreciation for tax purposes.
<TABLE>
<CAPTION>
1995 1996 1997
----- ----- --------
<S> <C> <C> <C>
Federal................................................ $ -- $ -- $270,000
State.................................................. -- -- 163,000
----- ----- --------
$ -- $ -- $433,000
===== ===== ========
</TABLE>
The following is a summary of the company's deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- ---------------------- ---------------------
CURRENT NONCURRENT CURRENT NONCURRENT CURRENT NONCURRENT
-------- ---------- --------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Deferred tax liabilities
resulting from taxable
temporary differences.. $ -- $ -- $ -- $ -- $ -- $(30,000)
Deferred tax assets
resulting from
deductible temporary
differences and loss
carryforwards.......... 12,000 121,000 451,000 1,771,000 882,000 96,000
Valuation allowance..... (12,000) (121,000) (451,000) (1,771,000) (882,000) (66,000)
-------- --------- --------- ----------- --------- --------
$ -- $ -- $ -- $ -- $ -- $ --
======== ========= ========= =========== ========= ========
</TABLE>
NOTE 11--LEASES
The Company subleases office facilities and equipment under operating leases
that expire through Fiscal 2000. Other costs, such as property taxes,
insurance and maintenance, are also paid by the Company. Rental expense
charged to operations was $22,568, $147,635 and $191,013 in Fiscal 1995, 1996
and 1997, respectively.
At February 28, 1997, minimum rentals under noncancellable operating leases
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR AMOUNT
----------- --------
<S> <C>
1998................................ $193,228
1999................................ 199,025
2000................................ 204,996
--------
$597,249
========
</TABLE>
F-13
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
NOTE 12--SIGNIFICANT CUSTOMERS
Sales to significant customers were as follows:
<TABLE>
<CAPTION>
FEBRUARY 28,
1997 MAY 31, 1997
---------------- ---------------
<S> <C> <C> <C> <C>
Circuit City.............................. $ 8,913,474 12.2% $2,295,505 14.3%
Best Buy.................................. 7,393,515 10.1 3,748,524 23.3
Fry's Electronics......................... 3,685,009 5.0 650,001 4.0
----------- ---- ---------- ----
$19,991,998 27.3% $6,694,030 41.6%
=========== ==== ========== ====
</TABLE>
NOTE 13--COMMITMENTS
The Company has a firm fixed price commitment to purchase a certain number
of units of the "WebPal set-top-box" at a total cost of $8,250,000. The price
is fixed and not subject to change. After reaching a threshold purchase of a
certain number of units, the Company and seller have agreed to reevaluate and
renegotiate the pricing and scheduling of an additional number of units
specified in this purchase agreement. The stated purchase price for all units
included in the agreement total $16,500,000. During the first quarter of
Fiscal 1998, deposits of $3,580,000 were paid to the seller to be applied
against the initial purchases under the agreement.
NOTE 14--CONCENTRATIONS OF RISK
The Company's financial instruments potentially subject to concentrations of
credit risk consist primarily of cash, cash equivalents, accounts receivable,
accounts payable and other debt. The carrying value of these financial
instruments approximate their fair value at February 28, 1997.
The Company maintains cash balances at a local financial institution.
Accounts at the institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. At February 28, 1997, the Company's uninsured cash
balances total $2,850,000.
The Company produces its products using components or subassemblies
purchased from third-party manufacturers and suppliers. Certain of these
components, particularly modem chipsets and application specific integrated
circuit chipsets which provide multimedia functionality, are available only
from a single source or limited sources. These components are generally in
short supply and frequently subject to allocation by semiconductor
manufacturers.
The Company performs credit checks and evaluates the credit worthiness of
any potential new customers prior to granting credit. UCC financing statements
are filed, when deemed necessary.
NOTE 15--RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." The
statement is effective for financial statements for periods ending after
December 15, 1997, and changes the method in which earnings per share will be
determined. Adoption of this statement by the Company will not have a material
impact on earnings per share.
NOTE 16--SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Noncash investing and financing activities:
During September 1994, Aura contributed assets to the Company in the amount
of $1,000,000 (see note 1).
F-14
<PAGE>
NEWCOM, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MAY 31, 1997 AND FOR THE THREE MONTH PERIODS ENDED
MAY 31, 1996 AND 1997 IS UNAUDITED)
Effective March 1, 1996, Aura contributed $9,000,000 to additional paid-in
capital, which was reflected in "Due to Aura" at February 29, 1996 (see note
4).
Cash paid for income taxes was $800, $800 and $800 for Fiscal 1995, 1996 and
1997, respectively. Cash paid for interest was $0, $100,504 and $310,204 for
Fiscal 1995, 1996 and 1997, respectively.
NOTE 17--SUBSEQUENT EVENTS
The Company is currently in the process of an initial public offering (the
"Offering") of its common stock.
In connection with the Offering, the Company intends to effect a 7,555.556-
for-1 Common stock split, change the Common Stock par value from $.005 to
$.001 per share, and change the authorized shares of Common Stock from 100,000
to 50,000,000. In addition, 5,000,000 shares of Preferred Stock, par value
$.001 per share, will be authorized prior to the Offering. The accompanying
financial statements give retroactive effect to the stock split and the par
value change as though effected at the beginning of the initial period
presented.
Upon the closing of the Offering, advances from Aura, totaling $4,000,000,
will be converted into 444,444 shares of the Company's common stock, assuming
an offering price of $9.00 per Unit.
Aura and the Company have entered into certain intercompany agreements,
including (i) a tax sharing agreement pursuant to which, for the period prior
to the date on which Aura owns less than 80% of the Company's outstanding
Common Stock (the Deconsolidation Date), Aura will have sole authority to
respond to and conduct all tax proceedings (including tax audits) relating to
the Company, to file federal, state and local returns on behalf of the Company
and to calculate the amount of the Company's tax liability, any tax liability
owed by the Company to Aura for the period from June 1, 1997 through the
Deconsolidation Date will be recorded by the Company as an additional capital
contribution by Aura effective as of the Deconsolidation Date, (ii) a
noncompetition agreement, (iii) an agreement pursuant to which Aura will
continue to provide various corporate services to the Company on an interim
basis following the effective date of the initial public offering ("IPO") that
may be material to the conduct of the Company's business, (iv) a redemption
agreement pursuant to which Aura will have the option to require the Company
to apply up to 70% of the net proceeds the Company receives from the exercise
of the Warrants to redeem shares of Common Stock held by Aura at the Warrant
exercise price, and (v) a registration rights agreement, pursuant to which
Aura can require the Company to register, at the Company's expense, all of the
Common Stock held by Aura, with 3.0 million shares subject to such rights
commencing one year from the date of the IPO and the balance of such shares
registrable one year thereafter. Because the Company is currently a majority-
owned subsidiary of Aura, none of the intercompany agreements resulted from
arm's-length negotiations. These agreements may include terms and conditions
that may be more or less favorable to the Company than terms contained in
similar agreements negotiated with third parties.
Effective June 1, 1997, the Company granted options to purchase an aggregate
of 546,690 shares of Common Stock at an exercise price of $8.00 per share.
Options granted to the Company's directors, the Named Executive Officers, and
all directors and executive officers as a group included the following: Sultan
W. Khan, CEO, President and Director, 192,720 shares; Asif M. Khan, Executive
Vice President and Director, 192,720 shares; Zane Alsabery, Director, 35,000
shares; and all directors and executive officers as a group, 420,440 shares. A
total of 453,310 shares of Common Stock are available for future issuance
under the Company's stock plan. Pursuant to an underwriting agreement, the
Company has agreed that, for a period of one year following the date of the
Prospectus, the Company will not grant any additional options under the
Company's stock plan at an exercise price less than the initial public
offering price of the Common Shares, without the Underwriters' prior consent
which may be withheld in its sole discretion.
F-15
<PAGE>
[PHOTO OF PRODUCT] 33,600 BPS
EXTERNAL DATA/FAX MODEM
[PHOTO OF PRODUCT] WEBPAL INTERNET APPLIANCE
[PHOTO OF PRODUCT] 24X
MULTIMEDIA UPGRADE KIT
[PHOTO OF PRODUCT] NC100
SPEAKERS
[PHOTO OF PRODUCT] 56,000 BPS INTERNAL
DATA/FAX MODEM
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE UN-
LAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 7
The Company.............................................................. 20
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 22
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 35
Management............................................................... 48
Relationship with Aura and Certain Transactions.......................... 53
Principal Stockholders................................................... 57
Description of Securities................................................ 58
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 69
Experts.................................................................. 69
Additional Information................................................... 69
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON STOCK AND ONE COMMON STOCK
PURCHASE WARRANT
NEWCOM, INC.
---------------
PROSPECTUS
---------------
JOSEPH CHARLES & ASSOCIATES, INC.
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee.......................................... $ 19,213
National Association of Securities Dealers, Inc. filing fee... 6,840
Nasdaq filing fee............................................. 28,000
Printing and engraving expenses............................... 200,000
Registrar and Transfer Agent fees............................. 10,000
Accounting fees and expenses.................................. 100,000
Legal fees and expenses....................................... 175,000
Blue Sky fees and expenses.................................... 30,000
Representative's Nonaccountable Expense Allowance............. 517,500
Miscellaneous................................................. 13,447
----------
Total....................................................... $1,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). The Registrant's Restated
Certificate of Incorporation (Exhibit 3(i)(2) hereto) and the Registrant's
Bylaws (Exhibit 3(ii) hereto) provide for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Delaware General Corporation Law. The
Registrant has also entered into agreements with its directors that will
require the Registrant, among other things, to indemnify them against certain
liabilities that may arise by reason of their status or service as directors
to the fullest extent not prohibited by law.
The Underwriting Agreement (Exhibit 1.1) provides for indemnification by the
Representative of the Registrant, its directors and officers, and by the
Registrant of the Representative, 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 Revised form of Underwriting Agreement.
3(i).1* Certificate of Incorporation.
3(i).2* Form of Amended and Restated Certificate of Incorporation to be filed prior
to the effective date of this Registration Statement.
3(ii)* Bylaws of the Registrant, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Form of Redeemable Common Stock Purchase Warrant.
4.3* Form of Representative's Warrant.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1 Revised form of Lease Assignment Agreement Between NewCom, Inc. and Aura
Systems, Inc.
10.2* Form of Corporate Services Agreement Between NewCom, Inc. and Aura Systems,
Inc.
10.3* Form of Tax Sharing Agreement between NewCom, Inc. and Aura Systems, Inc.
10.4* Form of Noncompetition Agreement between NewCom, Inc. and Aura Systems, Inc.
10.5* Form of Redemption Option Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.6* 1997 Stock Incentive Plan and Forms of Agreements thereunder.
10.7* Form of Registration Rights Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.8* Form of Indemnification Agreement.
10.9* Form of Promissory Note of NewCom, Inc. issuable to Aura Systems, Inc.
10.10* Form of Warrant Agreement between NewCom, Inc. and Interwest Transfer
Company, Inc.
10.11* Common Stock Purchase Agreement dated June 20, 1994 between NewCom, Inc. and
Aura Systems, Inc.
10.12* Form of Employee Stock Purchase Agreement dated September 1, 1994 between
NewCom, Inc. and each of Sultan Khan, Asif Khan, Zane Alsabery, and
Geoffrey Farrer.
10.13(a)* Business Financing Agreement dated as of December 23, 1996 between Deutsche
Financial Services Corporation ("Deutsche") and NewCom, Inc.
10.13(b)* Agreement for Wholesale Financing dated as of April 16, 1997 between
Deutsche and NewCom, Inc.
10.14* Form of Financial Consulting Agreement.
10.15* Form of Distributor Purchase Agreement.
10.16* Form of Authorized Independently Contracted Sales Agent Agreement.
11.1* Statement of computation of earnings per share.
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A
Professional Corporation
23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
II-2
<PAGE>
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts (and accompanying Independent
Auditors' Report)
Schedules other than those referred to above have been omitted because they
are not applicable or not required or because the information is included
elsewhere in the Financial Statements or the notes thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) The Registrant will provide to the underwriters at the closing(s)
specified in the underwriting agreement certificates in such denominations
and registered in such names as required by the underwriters to permit
prompt delivery to each purchaser.
(4) The Registrant will remove from registration by means of a post-
effective amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned Registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 4 to Form S-1 Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Westlake Village, State of California, on this 12th day of September,
1997.
Newcom, Inc.
/s/ Sultan W. Khan
By __________________________________
Sultan W. Khan
President and Chief Executive
Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
NAME TITLE DATE
/s/ Sultan W. Khan President and Chief September 12, 1997
- ------------------------------------- Executive Officer
SULTAN W. KHAN (Principal
Executive Officer)
and Director
* Asif M. Khan Executive Vice September 12, 1997
- ------------------------------------- President and
ASIF M. KHAN Director
* Steven C. Veen Vice President, September 12, 1997
- ------------------------------------- Finance and Chief
STEVEN C. VEEN Financial Officer
(Principal
Financial and
Accounting Officer)
II-4
<PAGE>
NAME TITLE DATE
* Michael I. Froch Secretary and September 12, 1997
- ------------------------------------- Director
MICHAEL I. FROCH
* Zane R. Alsabery Director September 12, 1997
- -------------------------------------
ZANE R. ALSABERY
* James M. Curran Director September 12, 1997
- -------------------------------------
JAMES M. CURRAN
* Gerald S. Papazian Director September 12, 1997
- -------------------------------------
GERALD S. PAPAZIAN
* Alexander Remington Director September 12, 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 1,057,000 -- (152,000) 935,000
Reserve for returns
and discounts........ -- 2,115,000 -- (1,993,000) 122,000
---------- ----------- ---- ------------ ----------
$ 30,000 $ 3,242,000 $-- $ (2,145,000) $1,127,000
========== =========== ==== ============ ==========
Year ended February 28,
1997:
Allowance for:
Reserve for potential
product
obsolescence......... $ 70,000 $ 285,000 $-- $ -- $ 355,000
Uncollectible
accounts............. 935,000 812,000 -- (824,000) 923,000
Reserve for returns
and discounts........ 122,000 22,489,000 -- (21,684,000) 927,000
---------- ----------- ---- ------------ ----------
$1,127,000 $23,586,000 $-- $(22,508,000) $2,205,000
========== =========== ==== ============ ==========
Three months ended May
31, 1997:
Allowance for:
Reserve for potential
product
obsolescence......... $ 355,000 -- -- -- 355,000
Uncollectible
accounts............. 923,000 61,000 -- (66,000) 918,000
Reserve for returns
and discounts........ 927,000 652,000 -- (657,000) 922,000
---------- ----------- ---- ------------ ----------
$2,205,000 $ 713,000 $-- $ (723,000) $2,195,000
========== =========== ==== ============ ==========
</TABLE>
S-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Our audits were made for the purpose of forming an opinion on the basic
financial statements as of February 28, 1997, February 29, 1996 and February
28, 1995 and for the two years ended February 28, 1997 and the nine months
ended February 28, 1995 taken as a whole. The schedule listed in the
accompanying Index at Item 16 is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California
June 11, 1997
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Revised form of Underwriting Agreement.
3(i).1* Certificate of Incorporation.
3(i).2* Form of Amended and Restated Certificate of Incorporation to be filed prior
to the effective date of this Registration Statement.
3(ii)* Bylaws of the Registrant, as amended.
4.1* Specimen Common Stock Certificate.
4.2* Form of Redeemable Common Stock Purchase Warrant.
4.3* Form of Representative's Warrant.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1 Revised form of Lease Assignment Agreement Between NewCom, Inc. and Aura
Systems, Inc.
10.2* Form of Corporate Services Agreement Between NewCom, Inc. and Aura Systems,
Inc.
10.3* Form of Tax Sharing Agreement between NewCom, Inc. and Aura Systems, Inc.
10.4* Form of Noncompetition Agreement between NewCom, Inc. and Aura Systems, Inc.
10.5* Form of Redemption Option Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.6* 1997 Stock Incentive Plan and Forms of Agreements thereunder.
10.7* Form of Registration Rights Agreement between NewCom, Inc. and Aura Systems,
Inc.
10.8* Form of Indemnification Agreement.
10.9* Form of Promissory Note of NewCom, Inc. issuable to Aura Systems, Inc.
10.10* Form of Warrant Agreement between NewCom, Inc. and Interwest Transfer
Company, Inc.
10.11* Common Stock Purchase Agreement dated June 20, 1994 between NewCom, Inc. and
Aura Systems, Inc.
10.12* Form of Employee Stock Purchase Agreement dated September 1, 1994 between
NewCom, Inc. and each of Sultan Khan, Asif Khan, Zane Alsabery, and
Geoffrey Farrer.
10.13(a)* Business Financing Agreement dated as of December 23, 1996 between Deutsche
Financial Services Corporation ("Deutsche") and NewCom, Inc.
10.13(b)* Agreement for Wholesale Financing dated as of April 16, 1997 between
Deutsche and NewCom, Inc.
10.14* Form of Financial Consulting Agreement.
10.15* Form of Distributor Purchase Agreement.
10.16* Form of Authorized Independently Contracted Sales Agent Agreement.
11.1* Statement of computation of earnings per share.
23.1 Consent of Pannell Kerr Forster, Certified Public Accountants, A
Professional Corporation
23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as
Exhibit 5.1 to this Registration Statement).
24.1* Power of Attorney.
27.1* Financial Data Schedule.
</TABLE>
- --------
*Previously filed.
<PAGE>
EXHIBIT 1.1
NEWCOM, INC.
31166 Via Colinas
Westlake Village, CA 91362
UNDERWRITING AGREEMENT
----------------------
____________, 1997
Joseph Charles & Associates, Inc.
As Representative of the Several Underwriters
Named in Schedule I hereto
9701 Wilshire Boulevard, Ninth Floor
Beverly Hills, CA 90212
Ladies and Gentlemen:
NEWCOM, INC., a Delaware corporation (the "Company"), proposes to issue and
sell to the Underwriters named in Schedule I hereto (the "Underwriters")
pursuant to this Underwriting Agreement (the "Agreement"), an aggregate of
2,000,000 Units, each Unit consisting of one (1) share of Common Stock, $.001
par value per share (the "Shares"), and one (1) Redeemable Common Stock Purchase
Warrant (the "Warrants"), each exercisable to purchase one (1) share of Common
Stock at any time commencing on the effective date of the Registration Statement
(the "Effective Date") and ending on the fifth anniversary of the Effective
Date. The Warrant exercise price, subject to adjustment described below, will
be $_______ (150% of the initial public offering price of the Units). The
Warrants are subject to redemption at $.05 per Warrant on thirty (30) days'
prior written notice (i) if the closing bid price of the Common Stock as
reported on NASDAQ exceeds 200% of the initial public offering price of the
Units for a period of twenty (20) consecutive trading days ending within thirty
(30) days of the notice of redemption, or (ii) with your prior written consent.
The Shares and the Warrants will be separately transferable immediately upon
issuance. In addition, the Company and Aura Systems, Inc. ("Aura") propose to
grant to the Underwriters the option referred to in Section 2(b) to purchase all
or any part of an aggregate of 300,000 additional Units. The shares of Common
Stock included in such additional Units will be offered by Aura and the Warrants
included in such additional Units will be offered by the Company. Unless the
context otherwise indicates, the term "Units" shall include the additional Units
referred to above.
The aggregate of 2,000,000 Units, together with all or any part of the
300,000 Units which the Underwriters have the option to purchase, and the Shares
and the Warrants comprising such Units, are herein called the "Units." The
Common Stock of the Company to be outstanding after giving effect to the sale of
the Shares is herein called the "Common Stock." The Units, and the Shares and
Warrants included in the Units (including the 300,000 Units which the
Underwriters have the option to purchase) are herein collectively called the
"Securities."
1
<PAGE>
You have advised the Company and Aura that you desire to purchase the
Units, and that you have been authorized to execute this Agreement as
representative of the Underwriters (the "Representative"). The Company and Aura
confirm the agreements made by it with respect to the purchase of the Units by
you, as follows:
1. Representations and Warranties.
------------------------------
A. Representations and Warranties of the Company and Aura.
------------------------------------------------------
Each of the Company and Aura represents and warrants to, and agrees
with, each Underwriter that:
(a) A registration statement (File No. 333-31431) on Form S-1 relating
to the public offering of the Units, including a preliminary form of prospectus,
copies of which have heretofore been delivered to you, has been prepared by the
Company in conformity with the requirements of the Securities Act of 1933, as
amended (the "Act") and the rules and regulations (the "Rules and Regulations")
of the Securities and Exchange Commission (the "Commission") thereunder, and has
been filed with the Commission under the Act. "Preliminary Prospectus" shall
mean each prospectus filed pursuant to Rule 430 of the Rules and Regulations.
The registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective and the final prospectus included
therein are respectively referred to as the "Registration Statement" and the
"Prospectus," except that (i) if the prospectus first filed by the Company
pursuant to Rule 424(b) or Rule 430A of the Rules and Regulations or otherwise
utilized and not required to be so filed shall differ from said prospectus as
then amended, the term "Prospectus" shall mean the prospectus first filed
pursuant to Rule 424(b) or Rule 430A or so utilized from and after the date on
which it shall have been filed or utilized, and (ii) if such registration
statement or prospectus is amended or such prospectus is supplemented, after the
effective date of such registration statement and prior to the Option Closing
Date (as defined in Section 2(b)), the term "Registration Statement" shall
include such registration statement as so amended, and the term "Prospectus"
shall include the prospectus as so amended or supplemented, or both, as the case
may be.
(b) At the time the Registration Statement becomes effective and at
all times subsequent thereto up to the Option Closing Date (hereinafter
defined), (i) the Registration Statement and Prospectus will in all material
respects conform to the requirements of the Act and the Rules and Regulations;
and (ii) neither the Registration Statement nor the Prospectus will include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
in light of the circumstances under which they were made; provided, however,
that neither the Company nor Aura make representations, warranties or agreements
as to information contained in or omitted from the Registration
2
<PAGE>
Statement or Prospectus in reliance upon, and in conformity with, written
information furnished to the Company by you or on behalf of any Underwriter
through you specifically for use in the preparation thereof. It is understood
that the statements set forth in the Prospectus with respect to stabilization,
the material set forth under the heading "Underwriting" and the identity of
counsel to the Underwriters under the heading "Legal Matters" constitute the
only information furnished in writing by you, or by any Underwriter through you,
for inclusion in the Registration Statement and Prospectus, as the case may be.
(c) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the jurisdiction of its
incorporation, with full power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus and is duly
qualified to do business as a foreign corporation and is in good standing in all
other jurisdictions in which the nature of its business or the character or
location of its properties requires such qualification, except where failure to
so qualify is not reasonably likely to materially adversely affect the Company's
business, properties or financial condition.
(d) The authorized capital stock of the Company as of the Effective
Date was as set forth under "Capitalization" in the Prospectus. The shares of
issued and outstanding capital stock of the Company set forth thereunder have
been duly authorized, validly issued and are fully paid and non-assessable;
except as set forth in the Prospectus, no options, warrants or other rights to
purchase, agreements or other obligations to issue, or agreements or other
rights to convert any obligation into, any shares of capital stock of the
Company have been granted or entered into by the Company. The Units, Shares,
Warrants and Representative's Warrant (as that term is defined in Section 12
herein, the "Representative's Warrant") conform in all material respects to all
statements relating thereto contained in the Registration Statement and
Prospectus.
(e) The Units and Shares are duly authorized and, when issued,
delivered and paid for pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. The certificates evidencing the Shares are
in valid and proper legal form. The Warrants and the Representative's Warrant
will be exercisable for shares of Common Stock of the Company in accordance with
the terms of the Warrants and the Representative's Warrant and at the prices
therein provided for. The shares of Common Stock have been duly authorized and
reserved for issuance upon such exercise, and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and the Representative's
Warrant and when the price is paid, shall be fully paid and non-assessable.
Neither the filing of the Registration Statement nor the offering or sale of the
Units or any of the Securities as contemplated in this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to the
3
<PAGE>
registration of any securities of the Company, except as described in the
Registration Statement.
(f) This Agreement, the Warrant Agreement and the Representative's
Warrant have been duly and validly authorized, executed and delivered by the
Company and Aura, as applicable, and assuming due execution by the other party
or parties hereto and thereto, constitute valid and binding obligations of the
Company enforceable against the Company and Aura, as applicable, in accordance
with their respective terms, except as rights to indemnity and contribution
hereunder may be limited by applicable law and except as enforceability may be
limited by bankruptcy, insolvency or other laws affecting the rights of
creditors generally or by general equitable principles. Each of the Company and
Aura has full power and lawful authority to authorize, issue and sell the
Securities to be sold by it hereunder on the terms and conditions set forth
herein, and no consent, approval, authorization or other order of any
governmental authority is required in connection with such authorization,
execution and delivery or with the authorization, issue and sale of the
Securities or the Representative's Warrant, except such as may be required under
the Act or state securities laws.
(g) Except as described in the Prospectus, neither the Company nor
Aura is in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement, the Warrant Agreement and the Representative's Warrant will not
conflict with, or result in a breach of, any of the terms or provisions of, or
constitute a default under, or result in the creation or imposition of any lien,
charge or encumbrance pursuant to the terms of, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which either the
Company or Aura is a party or by which either the Company or Aura may be bound
or to which any of the property or assets of the Company or Aura are subject,
which would have a material adverse effect on the business, properties or
financial condition of the Company or Aura, nor will such action result in any
violation of the provisions of any statute or any order, rule or regulation
applicable to the Company or Aura of any court or of any regulatory authority or
other governmental body having jurisdiction over the Company or Aura, which
would have a material adverse effect on the business, properties or financial
condition of the Company or Aura or of the certificate of incorporation or the
by-laws of the Company or Aura, as amended.
(h) The Company owns no real property and, subject to the
qualifications stated in the Prospectus, the Company has good and valid title to
all properties and assets described in the Prospectus as owned by it, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
not materially significant or important in relation to its business; all of the
leases and subleases under which the Company is the lessor or sublessor of
properties or assets or under which the Company holds properties or assets as
lessee or sublessee as described in the Prospectus are in full force and effect,
and, except as described
4
<PAGE>
in the Prospectus, the Company is not in default in any respect with respect to
any of the terms or provisions of any of such leases or subleases which would
have a material adverse effect on the business, properties or financial
condition of the Company, and no claim has been asserted by anyone adverse to
rights of the Company as lessor, sublessor, lessee or sublessee under any of the
leases or subleases mentioned above, or affecting or questioning the right of
the Company to continued possession of the leased or subleased premises or
assets under any such lease or sublease except as described or referred to in
the Prospectus, which would have a material adverse effect on the business
properties or financial condition of the Company; and the Company owns or leases
all such properties described in the Prospectus as are necessary to its
operations as now conducted and, except as otherwise stated in the Prospectus,
as proposed to be conducted as set forth in the Prospectus.
(i) Pannell Kerr Forster, who have given their report on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are with respect
to the Company independent public accountants as required by the Act and the
Rules and Regulations.
(j) The financial statements and schedules, together with related
notes, set forth in the Prospectus or the Registration Statement present fairly
the financial position and results of operations and changes in financial
position of the Company on the basis stated in the Registration Statement, at
the respective dates and for the respective periods to which they apply. Said
statements and schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a basis which is consistent
during the periods involved.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, the Company has not incurred
any liabilities or obligations, direct or contingent, not in the ordinary course
of business, or entered into any transaction not in the ordinary course of
business, which is material to the business of the Company, and there has not
been any change in the capital stock of, or any incurrence of long-term debt by,
the Company or any issuance of options, warrants or other rights to purchase the
capital stock of the Company or any adverse change or any development involving,
so far as the Company can now reasonably foresee, a prospective adverse change
in the condition (financial or other), net worth, results of operations,
business, key personnel or properties of it which would be material to the
business or financial condition of the Company, and the Company has not become
party to, and neither the business nor the property of the Company has become
the subject of, any material litigation whether or not in the ordinary course of
business.
(l) Except as set forth in the Prospectus, there is not now pending
nor, to the knowledge of the Company, threatened, any action, suit or proceeding
(including those related to environmental matters or discrimination on the basis
of age, sex,
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religion or race) to which the Company is a party before or by any court or
governmental agency or body, which, if adversely determined, would result in any
material adverse change in the condition (financial or other), business
prospects, net worth or properties of the Company; and, except as set forth in
the Prospectus, no labor disputes involving the employees of the Company exist
which, if adversely determined, would result in any material adverse change in
the condition (financial or otherwise), business prospects, net worth or
property of the Company.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company
which has not been adequately reserved for on the Company's balance sheet.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its business
or the ownership of its property as described in the Prospectus and is in all
material respects complying therewith and owns or possesses adequate rights to
use all material patents, patent applications, trademarks, mark registrations,
copyrights and licenses necessary for the conduct of such business and has not
received any notice of conflict with the asserted rights of others in respect
thereof. None of the activities or business of the Company is in violation of,
or causes the Company to violate, any law, rule, regulation or order of the
United States, any state, county or locality, or of any agency or locality, the
violation of which would have a material adverse effect upon the condition
(financial or otherwise), business prospects, net worth or properties of the
Company.
(o) The Company has not, directly or indirectly, at any time (i) made
any contributions to any candidate for foreign political office, or if made,
failed to disclose fully any such contribution made in violation of law, or (ii)
made any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments or contributions required or allowed by applicable law. The
Company's internal accounting controls and procedures are sufficient to cause
the Company to comply in all material respects with the Foreign Corrupt
Practices Act of 1977, as amended.
(p) On the Closing Dates (as defined in Section 2(c)), all transfer or
other taxes (including franchise, capital stock or other tax, other than income
taxes imposed by any jurisdiction), if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriters hereunder
will have been fully paid or provided for by the Company or Aura, as applicable,
and all laws imposing such taxes will have been fully complied with.
6
<PAGE>
(q) All contracts and other documents of the Company which are, under
the Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) Neither the Company nor Aura has taken and will not take, directly
or indirectly, any action designed to cause or result in, or which has
constituted or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the Units, Shares or Warrants or
to facilitate the sale or resale of the Securities.
(s) The Company has no subsidiaries.
(t) Except for this Agreement and other agreements with the
Representative, neither the Company nor Aura has entered into any agreement
pursuant to which any person is entitled either directly or indirectly to
compensation from the Company for services as a finder in connection with the
proposed public offering.
(u) The Shares of Common Stock and Warrants have been approved by
listing on the Nasdaq National Market.
(v) Except for such rights which have been waived or satisfied and
expect as set forth in the Prospectus, no holder of securities of the Company
has any rights to the registration of securities of the Company because of the
filing of the Registration Statement or otherwise in connection with the sale of
the Units contemplated hereby.
(w) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940.
(x) The Company (i) is in compliance with any and all applicable
foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental Laws"), (ii)
has received all permits, licenses or other approvals required of it under
applicable Environmental Laws to conduct its respective business and (iii) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance, failure to receive required permits,
licenses or other approvals or failure to comply with the terms and conditions
of such permits, licenses or approvals will not in the aggregate have a material
adverse effect on the Company.
7
<PAGE>
(y) The Company maintains a system of internal accounting controls
that, taken as a whole, are sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences. The Company maintains its own cash management
system and none of the proceeds of this Offering payable to the Company shall in
any way be controlled or subject to direction by Aura or co-mingled with any
account or monies directly or indirectly controlled by Aura.
B. Representations and Warranties of Aura.
--------------------------------------
(a) Aura is the lawful owner of the shares of Common Stock to be sold
by it pursuant to this Agreement and has, and on the Option Closing Date will
have, good and clear title to such
8
<PAGE>
Shares, free of all restrictions on transfer, liens, encumbrances, security
interests and claims whatsoever.
(b) Upon delivery of and payment for such shares of Common Stock
pursuant to this Agreement, good and clear title to such shares will pass to the
Underwriters, free of all restrictions on transfer, liens, encumbrances,
security interests and claims whatsoever.
(c) Aura has, and on the Option Closing Date will have, full legal
right, power and authority to enter into this Agreement and the Custody
Agreement between Aura and Interwest Transfer Company, Inc., Custodian (the
"Custody Agreement") and to sell, assign, transfer and deliver such Shares in
the manner provided herein and therein, and this Agreement and the Custody
Agreement have been duly authorized, executed and delivered by or on behalf of
Aura and each of this Agreement and the Custody Agreement is a valid and binding
agreement of Aura enforceable against Aura in accordance with its terms, except
as rights to indemnity and contribution hereunder may be limited by applicable
law and except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
(d) All information furnished by or on behalf of Aura relating to Aura
and Aura's shares of Common Stock that is set forth in the Registration
Statement and the Prospectus is, and at the time the Registration Statement
became or becomes, as the case may be, effective and at all times subsequent
thereto up to and on the Closing Date (hereinafter defined) was or will be,
true, correct and complete, and does not, and at the time the Registration
Statement became or becomes, as the case may be, effective and at all times
subsequent thereto up to and on the Closing Date, will not, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such information not misleading.
(e) Neither Aura nor any of Aura's affiliates directly, or indirectly
through one or more intermediaries, controls, or is controlled by, or is under
common control with, or had any other association with (within the meaning of
Article I of the Bylaws of the National Association of Securities Dealers, Inc.
(the "NASD")), any member firm of the NASD.
(f) Aura shall in no event control or direct any of the proceeds of
this Offering payable to the Company or co-mingle any of said funds with any
account or monies directly or indirectly controlled by Aura.
2. Purchase, Delivery and Sale of the Units.
----------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties
9
<PAGE>
and agreements herein contained, the Company agrees to issue and sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to buy from
the Company at $_____ per Unit at the place and time hereinafter specified, the
number of Units set forth opposite each Underwriter's name in Schedule I hereto
(the "Firm Units").
Delivery of the Firm Units against payment therefor shall take place
at the offices of Joseph Charles & Associates, Inc., 9701 Wilshire Boulevard,
Ninth Floor, Beverly Hills, California 90212 (or at such other place as may be
designated by agreement between you and the Company) at 10:00 a.m. New York time
on __________________, 1997, or at such other time and date, not later than 5
business days thereafter, as you may designate, such time and date of payment
and delivery for the Firm Units being herein called the "First Closing Date."
Time shall be of the essence and delivery at the time and place specified in
this subsection (a) is a further condition to the obligations of the
Underwriters hereunder.
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company and Aura hereby grant the Underwriters an option
to purchase all or any part of an aggregate of 300,000 additional Units at the
same price per Unit as the Underwriters pay for the Firm Units being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Units being referred to herein as the "Option Units"). The shares of Common
Stock included in such Option Units will be offered by Aura and the Warrants
included in such Option Units will be offered by the Company. The purchase
price for each Warrant will be $.10. This option may be exercised on one
occasion within 45-days after the Effective Date upon notice by you to the
Company and Aura advising each of them as to the amount of Option Units as to
which the option is being exercised, the names and denominations in which the
certificates for such Option Units are to be registered and the time and date
when such certificates are to be delivered. Such time and date shall be
determined by you but shall not be earlier than three and not later than five
full business days after the exercise of said option, nor in any event prior to
the First Closing Date, and such time and date is referred to herein as the
"Option Closing Date." Delivery of the Option Units against payment therefor
shall take place at the offices of Joseph Charles & Associates, Inc., 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212. Time shall be
of the essence and delivery at the time and place specified in this subsection
(b) is a further condition to the obligations of the Underwriters hereunder.
The Option granted hereunder may be exercised only to cover over-
allotments in the sale by the Underwriters of Firm Units referred to in
subsection (a) above.
(c) The Company and Aura, as applicable, will make the certificates
for the Securities comprising the Units to be
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<PAGE>
purchased by the Underwriters hereunder available to you for checking at least
two full business days prior to the First Closing Date or the Option Closing
Date (which are collectively referred to herein as the "Closing Dates" and
individually as a "Closing Date"), as the case may be. The certificates shall be
in such names and denominations as you may request, at least two full business
days prior to the relevant Closing Dates. Time shall be of the essence and the
availability of the certificates at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Definitive certificates in negotiable form for the Securities to be
purchased by the Underwriters hereunder will be delivered by the Company and
Aura, as applicable, to you for the several accounts of the Underwriters against
payment of the purchase price by you, at your option, by certified or bank
cashier's checks in New York Clearing House funds or by wire transfer, payable
to the order of the Company.
In addition, in the event the Underwriters exercise the option to
purchase from the Company and Aura all or any portion of the Option Units
pursuant to the provisions of subsection (b) above, payment for such Option
Units shall be made to or upon the order of the Company and Aura by you, for the
several accounts of the Underwriters at your option, by certified or bank
cashier's checks payable in New York Clearing House funds or by wire transfer,
at the offices of Joseph Charles & Associates, Inc. at the time and date of
delivery of such Option Units as required by the provisions of subsection (b)
above, against receipt of the certificates for such Option Units by you, for the
several accounts of the Underwriters registered in such names and in such
denominations as you may request. The shares of Common Stock included in such
Option Units will be offered by Aura and the Warrants included in such Option
Units will be offered by the Company. The purchase price for each Warrant will
be $.10.
It is understood that the Underwriters propose to offer the Units to
be purchased hereunder to the public upon the terms and conditions set forth in
the Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company.
------------------------
The Company covenants and agrees with the Underwriters that:
(a) Company will use its best efforts to cause the Registration Statement
to become effective and, upon notification from the Commission that the
Registration Statement has become effective, will so advise you and will not at
any time, whether before or after the Effective Date, file any amendment to the
Registration Statement or supplement to the Prospectus of which you shall not
previously have been advised and furnished with a copy or to which you or your
counsel shall have reasonably objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the
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<PAGE>
completion by you of the distribution of the Units contemplated hereby (but in
no event more than nine months after the Effective Date) and (B) 25 days after
the Effective Date, the Company will prepare and file with the Commission,
promptly upon your request, any amendments or supplements to the Registration
Statement or Prospectus which, in your reasonable opinion, may be necessary or
advisable in connection with the distribution of the Units.
Promptly after you or the Company is advised thereof, you will advise the
Company or the Company will advise you, as the case may be, and confirm the
advice in writing, of the receipt of any comments of the Commission, of the
effectiveness of any post-effective amendment to the Registration Statement, of
the filing of any supplement to the Prospectus or any amended Prospectus, of any
request made by the Commission for amendment of the Registration Statement or
for supplementing of the Prospectus or for additional information with respect
thereto, of the issuance by the Commission or any state or regulatory body of
any stop orders or other order suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or of the suspension of the qualification of the
Units for offering in any jurisdiction, or the institution of any proceedings
for any of such purposes, and will use its best efforts to prevent the issuance
of any such order and, if issued, to obtain as soon as possible the lifting
thereof.
The Company has caused to be delivered to you copies of each Preliminary
Prospectus, and the Company has consented and hereby consents to the use of such
copies for the purposes permitted by the Act. The Company authorizes the
Underwriters and selected dealers to use the Prospectus in connection with the
sale of the Units for such period not to exceed nine months from the Effective
Date as in the reasonable opinion of counsel for you the use thereof is required
to comply with the applicable provisions of the Act and the Rules and
Regulations. In case of the happening, at any time within such period as a
Prospectus is required under the Act to be delivered in connection with sales by
an underwriter or dealer, of any event of which the Company or Aura has
knowledge and which materially affects the Company or the Securities, or which
in the opinion of counsel for the Company or counsel for the Underwriters should
be set forth in an amendment to the Registration Statement or a supplement to
the Prospectus in order to make the statements therein not then misleading, in
light of the circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Units, or in case it shall be necessary to amend
or supplement the Prospectus to comply with the Act or with the Rules and
Regulations, the Company or Aura will notify you promptly and forthwith prepare
and furnish to you copies of such amended Prospectus or of such supplement to be
attached to the Prospectus, in such quantities as you may reasonably request, in
order that the Prospectus, as so amended or supplemented, will not contain any
untrue statement of a material fact or omit to state any material facts
necessary in order to make the statements in the Prospectus, in the light of the
circumstances under which they are made, not misleading. The preparation and
furnishing of
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<PAGE>
any such amendment or supplement to the Registration Statement or amended
Prospectus or supplement to be attached to the Prospectus shall be without
expense to the Underwriters, except that in case the Underwriters are required,
in connection with the sale of the Units, to deliver a Prospectus nine months or
more after the Effective Date, the Company will upon request of and at your
expense, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriters with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
(b) The Company will comply with the Act, the Rules and Regulations
and the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the
rules and regulations thereunder in connection with the offering and issuance of
the Units.
The Company will use its best efforts to qualify or register the Securities
for sale under the securities or "blue sky" laws of such jurisdictions as you
may have designated in writing prior to the execution hereof and will make such
applications and furnish such information to counsel for the Underwriters as may
be required for that purpose and to comply with such laws, provided that the
Company shall not be required to qualify as a foreign corporation or a dealer in
securities or to execute a general consent to service process in any
jurisdiction. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as you may reasonably require for the
distribution of the Units. Legal fees for such qualifications shall be itemized
based on the time expended and costs incurred, shall be reasonable and shall not
in any event exceed $30,000.00, exclusive of filing fees.
(c) The Company will instruct its transfer agent to provide you with
copies of the Depository Trust Company stock transfer sheets on a weekly basis
for a period of six months from the First Closing Date and on a monthly basis
thereafter for six additional months.
(d) The Company will use its best efforts to cause a Registration
Statement under the Exchange Act to be declared effective on the Effective Date.
(e) For so long as the Company is a reporting company under either
Section 12(g), 13 or 15(d) of the Exchange Act, the Company, at its expense,
will furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail and
at its expense, will furnish to you during the period ending five years from the
date hereof, (i) as soon as practicable after the end of each fiscal year, a
balance sheet of the Company and any subsidiaries as at the end of such fiscal
year, together with statements of income, stockholders' equity and cash flows of
the Company and any subsidiaries as at the end of such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report thereon
of independent accountants; (ii) as soon as they are available, a copy of all
reports (financial or other) mailed to
13
<PAGE>
security holders; (iii) as soon as they are available, a copy of all non-
confidential reports and financial statements furnished to or filed with the
Commission; and (iv) such other information of a public nature as you may from
time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing
Date one signed copy of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto. The
Company will deliver to or upon your order, from time to time until the
Effective Date as many copies of any Preliminary Prospectus filed with the
Commission prior to the Effective Date as the Underwriters may reasonably
request. The Company will deliver to you on the Effective Date and thereafter
for so long as a Prospectus is required to be delivered under the Act, from time
to time, as many copies of the Prospectus, in final form, or as thereafter
amended or supplemented, as the Underwriters may from time to time reasonably
request.
(h) The Company will make generally available to its security holders
and deliver to you as soon as it is practicable to do so, but in no event later
than 90 days after the end of 12 months after its current fiscal quarter, an
earnings statement (which need not be audited) covering a period of at least 12
consecutive months beginning after the Effective Date which shall satisfy the
requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units
substantially for the purposes set forth under "Use of Proceeds" in the
Prospectus, and will file such reports with the Commission with respect to the
sale of the Units and the application of the proceeds therefrom as may be
required pursuant to Rule 463 of the Rules and Regulations.
(j) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration Statement,
preliminary Prospectus or Prospectus and take any other action, which in the
opinion of Freshman, Marantz, Orlanski, Cooper & Klein, counsel to you may be
reasonably necessary or advisable in connection with the distribution of the
Units and will use its best efforts to cause the same to become effective as
promptly as possible.
(k) Prior to the Effective Date, the Company will cause Aura and all
of the Company's directors and executive officers to enter into a written
agreement with the Representative, which, among other things, shall provide that
for a period of 12 months following the closing date of the Offering, Aura and
such persons will not sell, assign, hypothecate or pledge, other than intra-
family transfers or transfers to trusts for estate planning
14
<PAGE>
purposes, any of the shares of Common Stock of the Company owned by them on the
Effective Date, or subsequently acquired by the exercise of any options or
warrants or conversion of any convertible security of the Company held by them
on the Effective Date directly or indirectly, except with your prior written
consent, which consent may be unreasonably withheld, and such stockholders will
permit all certificates evidencing those shares to be stamped with an
appropriate restrictive legend, and will cause the transfer agent for the
Company to note such restrictions on the transfer books and records of the
Company.
(l) The Company shall, upon the initial filing of the Registration
Statement, make all filings required to obtain approval for the quotation of the
Shares and Warrants on the National Association of Securities Dealers, Automated
Quotation System ("NASDAQ") National Market System and will use its best efforts
to effect and maintain the aforesaid approval for at least five (5) years from
the date of this Agreement. Within ten (10) days after the Effective Date, the
Company shall cause the Company to be listed in the Moody's OTC Industrial
Manual and cause such listing to be maintained for five years from the date of
this Agreement.
(m) The Company represents that it has not taken, and agrees that it
will not take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result in the
stabilization or manipulation of the price of the Units, Shares or Warrants or
to facilitate the sale or resale of the Securities.
(n) During the period of the offering, and for a period of twelve (12)
months from the Effective Date, the Company will not sell or otherwise dispose
of any securities of the Company (except for up to 1,000,000 shares under the
Company's Stock Option Plan) without your prior written consent.
(o) The Company shall retain a public relations firm reasonably
acceptable to you, and shall continue to retain such firm, or any alternate firm
acceptable to you, for a minimum period of one (1) year following the Effective
Date.
(p) The Company will reserve and keep available that maximum number of
its authorized but unissued securities which are issuable upon exercise of the
Warrants and the Representative's Warrant outstanding from time to time.
(q) So long as any Warrants are outstanding, the amendments to the
Registration Statement which may be on Form SB-2, S-1, S-2 or S-3 to become
effective in compliance with the Act and without any lapse of time between the
effectiveness of any such post-effective amendments, and cause a copy of each
Prospectus, as then amended, to be delivered to each holder of record of a
Warrant and to furnish to each Underwriter and each dealer as many copies of
each such Prospectus as such Underwriters or dealers may reasonably request. In
addition, for so long as any Warrant is
15
<PAGE>
outstanding, the Company will provide you with copies of all filings made by the
Company pursuant to the provisions of the Act and the Securities Exchange Act of
1934, as amended.
(r) The Company shall deliver to you, at the Company's expense, three
(3) bound volumes containing the Registration Statement and all exhibits filed
therewith, and all amendments thereto, and all other material correspondence,
filings, certificates and other documents filed and/or delivered in connection
with this offering. The Company shall use its reasonably best efforts to
deliver such volumes with one hundred eighty (180) days of the First Closing
Date.
(s) The Company shall deliver to you an executed financial consulting
agreement in form and substance reasonably acceptable to you whereby you agree
to act as a financial consultant for a period of two years from the First
Closing Date for a fee of $3,000 per month payable on a monthly basis.
(t) For a period of forty-eight (48) months from the First Closing
Date, the Representative shall have the right to designate two members of the
Board of Directors provided that the designees are acceptable to the Company and
Aura shall vote the shares of the Company held by Aura in favor of electing such
designees to the Board of Directors of the Company. If notified by the
Representative of its election to designate said two members, the Company will
cause such election to occur within 30 days of the date of election. If the
Representative requests said inclusion of designees, this request shall be
satisfied by a resolution of the Board of Directors increasing the authorized
number of directors to accommodate the designees and then appointing such
designees to fill the newly created vacancies. In addition, the Company shall
cause such designees to be on the slate of directors presented to the Company's
stockholders for election at any annual or special meeting of stockholders where
directors of the Company are elected and the Company and Aura shall cause such
designees to be included in any of their respective proxy material prepared for
use at such meeting. Such members shall be entitled to the same compensation,
reimbursements and indemnification as other members of the Company's Board of
Directors. In the event that the Company is unable to obtain the Directors' and
Officers' Liability Insurance described in sub-paragraph (u) below, the
Representative shall have the right for such forty-eight (48) month period to
designate a consultant to the Board of Directors of the Company, which
consultant shall have the right to attend all Board and Board committee meetings
and shall be compensated on the same basis as outside members of the Board.
(u) The Company shall have acquired a reasonable amount of Directors'
and Officers' Liability Insurance (provided that such insurance can be obtained
at a reasonable cost as determined by the Company and the Representative) from a
responsible insurer, all reasonably satisfactory to the Representative.
(v) The Company will not solicit Warrant exercises other than through
the Representative. Upon exercise of any Warrants, the Company will pay the
Representative a fee of 3% of the aggregate exercise price, if (i) the market
price of the Company Common Shares on the date the Warrant is exercised is
greater than the then exercise price of the Warrant; (ii) the exercise of the
Warrant was solicited by a member of the National Association of Securities
Dealers, Inc. 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
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<PAGE>
the Warrant. No solicitation fee will be paid to the Representative on Warrants
exercised within one year of the First Closing Date or on Warrants voluntarily
exercised at any time without solicitation.
4. Conditions of Obligations of Joseph Charles & Associates, Inc.
--------------------------------------------------------------
The obligations of the Underwriters to purchase and pay for the Units which
they have agreed to purchase hereunder are subject to the accuracy (as of the
date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by the
Company of its obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and you
shall have received notice thereof not later than 5:00 p.m., New York time, on
the date of this Agreement, or at such later time or on such later date as to
which you may agree in writing; on the Closing Dates, no stop order suspending
the effectiveness of the Registration Statement shall have been issued and no
proceedings for that or any similar purpose shall have been instituted or shall
be pending or, to the knowledge of any Underwriter or to the knowledge of the
Company, shall be contemplated by the Commission; any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper & Klein, counsel
to you; and no stop order shall be in effect denying or suspending effectiveness
of the Registration Statement nor shall any stop order proceedings with respect
thereto be instituted or pending or threatened under the Act.
(b) At the First Closing Date, you shall have received the opinion,
dated as of the First Closing Date, of Pillsbury Madison & Sutro LLP, counsel
for the Company and Aura, in form and substance reasonably satisfactory to
counsel for you, to the effect that:
(i) the Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware and
is duly qualified or licensed to do business as a foreign corporation in
good standing in each other jurisdiction in which the ownership or leasing
of its properties or the conduct of its business requires such
qualification, except where failure to so qualify will not have a material
adverse effect in the business, properties or financial condition of the
Company. The Company has the corporate power to own, lease and operate its
properties and to conduct its business as described in the Prospectus and
to enter into and perform its obligations under this Agreement, the Warrant
Agreement and the Representative Warrant;
(ii) the authorized capitalization of the Company as of the date of
the Prospectus was as set forth in the Prospectus;
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all of the shares of the Company's outstanding stock requiring
authorization for issuance by the Company's Board of Directors have been
duly authorized and validly issued, are fully paid and non-assessable and
conform in all material respects to the description thereof contained in
the Prospectus; to such counsel's knowledge, the outstanding shares of
Common Stock of the Company have not been issued in violation of the
preemptive rights of any stockholder and the stockholders of the Company do
not have any preemptive rights or other rights to subscribe for or to
purchase; except for the transfer restrictions regarding "affiliates"
contained in Rule 144 promulgated under the Act and restrictions provided
for in this Agreement, to the knowledge of such counsel, there are no
restrictions upon the voting or transfer of, any of the Shares; the Common
Stock, the Warrants, the Underwriter's Warrant and the Warrant Agreement
dated as of _______________, 1997 between and among the Company and
Interwest Transfer Company, Inc. (the "Warrant Agreement") conform in all
material respects to the respective descriptions thereof contained in the
Prospectus; the Shares and Warrants to be issued as contemplated in the
Registration Statement and this Agreement have been duly authorized and,
when paid, will be validly issued, fully paid and non-assessable and free
of preemptive rights contained in the Company's certificate of
incorporation or By-laws, or any other document, instrument or agreement
known to counsel; a sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Warrants and the
Representative's Warrant; neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this
Agreement gives rise to any registration rights or other rights, other than
those contemplated by the Representative's Warrant or which have been
waived or satisfied, for or relating to the registration of the Securities.
The Company has no subsidiaries;
(iii) this Agreement, the Warrant Agreement and the Representative's
Warrant (sometimes hereinafter collectively referred to as the
"Representative Agreements") have been duly and validly authorized,
executed and delivered by the Company, and assuming due execution and
delivery of this Agreement by you, and of the Warrant Agreement by you and
the Warrant Agent, all of such agreements are, or when duly executed will
be, the valid and legally binding obligations of the Company except as
enforceability may be limited by bankruptcy, insolvency, moratorium or
other laws affecting the rights of creditors, or by general equitable
principles; provided that no opinion need be expressed as to the
enforceability of the indemnity and contribution provisions contained in
Section 6 or the contribution provisions contained in Section 7 of this
Agreement;
(iv) the certificates evidencing the Shares and Warrants are in valid
and proper legal form; the Warrants and the Representative's Warrant will
be exercisable for shares of Common Stock of the Company in accordance with
the terms of the Warrants and the Representative's Warrant and at the
prices therein provided for; the shares of Common Stock of the Company
issuable upon exercise of the Warrants and the Underwriter's Warrants have
been duly authorized and reserved
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for issuance upon such exercise, and such shares, when issued upon such
exercise in accordance with the terms of the Warrants and the
Representative's Warrant and when the price is paid shall be fully paid and
non-assessable;
(v) Such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company is a party which are required
to be described or referred to in the Registration Statement which are not
so described or referred to;
(vi) The execution and delivery of this Agreement, the Warrant
Agreement and the Representative's Warrant and the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated will not result in a violation
of, or constitute a default under, the certificate or articles of
incorporation or by-laws of the Company, or in a violation of or default
under any obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness or in any
of the contracts, indentures, mortgages, loan agreements, leases, joint
ventures or other agreements or instruments to which the Company is a party
that are filed as Exhibits to the Registration Statement or otherwise known
to counsel, except where such violation or default would not have a
material adverse effect on the Company or result in a violation of, or
constitute a default under the certificate of articles of incorporation or
by-laws of the Company;
(vii) The Registration Statement has become effective under the Act,
and to such counsel's knowledge, no stop order suspending the effectiveness
of the Registration Statement is in effect, no proceedings for that purpose
have been instituted or are pending before, or threatened by, the
Commission and the Registration Statement and the Prospectus (except, in
the case of both the Registration Statement and any Amendment thereto, and
the Prospectus and any supplement thereto for the financial statements and
notes and schedules thereto, and other financial information or statistical
data contained therein, or omitted therefrom, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act and the Rules and Regulations;
(viii) All descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts, plans,
options and other documents are accurate and fairly present the information
required to be shown, and such counsel is familiar with all contracts and
other documents referred to in the Registration Statement and the
Prospectus and any such amendment or supplement, or filed as exhibits to
the Registration Statement, and such counsel does not know of any contracts
or documents of a character required to be summarized or described therein
or to be filed as exhibits thereto which are not so summarized, described
or filed;
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(ix) No authorization, approval, consent or license of any
governmental or regulatory authority or agency is necessary in connection
with the authorization, issuance, transfer, sale or delivery of the
Securities by the Company, in connection with the execution, delivery and
performance of this Agreement, the Warrant Agreement or the Underwriter's
Warrant by the Company or in connection with the taking of any action
contemplated herein or therein, or the issuance of the Underwriter's
Warrant or the Securities underlying the Warrants and Underwriter's
Warrant, other than registration or qualification of the Securities under
applicable state or foreign securities or blue sky laws (as to which such
counsel need express no opinion) and registration under the Act;
(x) The statements in the Registration Statement under the caption
"Description of Securities," to the extent that such statements constitute
a matter of law or legal conclusion have been reviewed by such counsel and
are correct in all material respects;
(xi) The Common Stock and Warrants have been approved for listing on
the Nasdaq National Market;
(xii) The Company is not, and immediately after receipt of payment for
the Units will not be, an "investment company" within the meaning of the
Investment Company Act;
(xiii) Except as disclosed in the Prospectus, to the best knowledge
of such counsel, there are no persons with registration or other similar
rights to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by this
Agreement;
(xiv) Neither the Company nor Aura is in default in the performance
and observance of any obligation, agreement, covenant or condition
contained in any material existing instrument, except in each such case for
such violations or defaults as would not, individually or in the aggregate,
result in a material adverse change in the financial condition or results
of operations of either the Company or Aura or is in violation of its
charter or by-laws or any law, administrative regulation or administrative
or court decree known to such counsel applicable to the Company;
(xv) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and is a valid and binding agreement of
Aura, enforceable in accordance with its terms, except as rights to
indemnification and contribution thereunder may be limited by applicable
law and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles;
20
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(xvi) The execution and delivery by Aura of, and the performance by
Aura of its obligations under, the Underwriting Agreement and its Custody
Agreement will not contravene or conflict with, result in a breach of, or
constitute a default under, the charter or by-laws, partnership agreement,
trust agreement or other organizational documents, as the case may be, of
Aura, or to the best of such counsel=s knowledge, violate or contravene any
provision of applicable law or regulation, or violate, result in a breach
of or constitute a default under the terms of any other agreement or
instrument to which Aura is a party or by which it is bound or any
judgment, order or decree applicable to any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over Aura except where such violations, contraventions, breaches or
defaults will not have a material adverse effect on Aura.
(xvii) Aura has good and valid title to all of the Common Stock which
may be sold by Aura under the Underwriting Agreement and has the legal
right and power, and all authorizations and approvals required under its
charter and bylaws or other organizational documents, as the case may be,
to enter into this Agreement and its Custody Agreement, to sell, transfer
and deliver all of the Common Stock which may be sold by Aura under the
Underwriting Agreement and to comply with its other obligations under the
Underwriting Agreement and the Custody Agreement of Aura has been duly
authorized, executed and delivered by Aura and is a valid and binding
agreement of Aura, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(xviii) Assuming that the Underwriters purchase the Common Stock
which is sold by Aura pursuant to the Underwriting Agreement for value, in
good faith and without notice of any adverse claim, the delivery of such
Common Stock pursuant to the Underwriting Agreement will pass good and
valid title to such Common Stock, free and clear of any security interest,
mortgage, pledge, lien, encumbrance or other claim known to such counsel
after reasonable investigation and
(xix) No consent, approval, authorization or other order of, or
registration or filing with, any court or governmental authority or agency,
is required for the consummation by Aura of the transactions contemplated
in the Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD (as to
which such counsel need express no opinion)
Such counsel has participated in the preparation of the Registration
Statement and the Prospectus and although such counsel has not reviewed the
accuracy or completeness of the statements contained in the Registration
Statement or Prospectus nothing has come to the attention of such counsel
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that caused such counsel to believe that the Registration Statement or any
amendment thereto at the time it became effective contained any untrue
statement of a material fact or omitted to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus or any supplement thereto contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make statements therein in light of the circumstances
under which they were made not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus and any
supplement thereto, for the financial statements, notes and schedules
thereto and other financial information and statistical data contained
therein, as to which such counsel need express no opinion);
In rendering such opinion, such counsel may rely upon certificates of
any officer of the Company, Aura or public officials as to matters of fact;
and in rendering such opinion may rely as to (i) all matters of law
regarding Aura, upon opinions of Aura in-house counsel and (ii) all matters
of law other than the law of the United States or of the State of
California, upon opinions of counsel satisfactory to you, in which case the
opinion of Aura in-house counsel or such other counsel shall state that
they have no reason to believe that you and they are not entitled to so
rely.
(c) All corporate proceedings and other legal matters relating to this
Agreement, the Registration Statement, the Prospectus, and other related matters
shall be reasonably satisfactory to or approved by Freshman, Marantz, Orlanski,
Cooper & Klein, counsel to the Underwriters, and you shall have received from
such counsel a signed opinion, dated as of the First Closing Date, with respect
to the validity of the issuance of the Units, the form of the Registration
Statement and Prospectus (other than the financial statements and other
financial data contained therein), the execution of this Agreement and other
related matters as you may reasonably require. The Company shall have furnished
to counsel for the Underwriters such documents as they may reasonably request
for the purpose of enabling them to render such opinion.
(d) You shall have received a letter on and as of the Effective Date
and again on and as of the First Closing Date, in each instance describing
procedures carried out to a date within five (5) days of the date of the letter,
from Pannell Kerr Forster, independent public accountants for the Company,
substantially in the form approved by you.
(e) At each of the Closing Dates, (i) the representations and
warranties of the Company and Aura contained in this Agreement shall be true and
correct with the same effect as if made on and as of such Closing Date, and each
of the Company and Aura shall have performed all of its obligations hereunder
and satisfied all the conditions on its part to be satisfied at or prior to such
Closing Date; (ii) the Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements which are
required to be stated therein in
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in accordance with the Act and the Rules and Regulations, and shall in all
material respects conform to the requirements thereof, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto shall contain any untrue statements of a material fact or omit to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances under which they
were made; (iii) there shall have been, since the respective dates as of which
information is given, no material adverse change in the business, properties,
condition (financial or otherwise), results of operations, capital stock, long-
term or short-term debt or general affairs of the Company from that set forth in
the Registration Statement and the Prospectus, except changes which the
Registration Statement and Prospectus indicate might occur after the Effective
Date and the Company shall not have incurred any material liabilities nor
entered into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus; and (iv) except as set
forth in the Prospectus, no action, suit or proceeding at law shall be pending
or threatened against the Company which would be required to be disclosed in the
Registration Statement, and no proceedings shall be pending or threatened
against the Company before or by any commission, board or administrative agency
in the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the
Company. In addition, you shall have received, at the First Closing Date, a
certificate signed by the President and the principal financial or accounting
officer of each of the Company and Aura, dated as of the First Closing Date,
evidencing compliance with the provisions of this subsection (e).
(f) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the several Underwriters to purchase and pay for the Option
Units referred to therein will be subject (as of the date hereof and as of the
Option Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the Option
Closing Date, no stop order suspending the effectiveness thereof shall have
been issued, and no proceedings for that purpose shall have been instituted
or shall be pending, or, to your knowledge or the knowledge of the Company,
shall be contemplated by the Commission, and any reasonable request on the
part of the Commission for additional information shall have been complied
with to the reasonable satisfaction of Freshman, Marantz, Orlanski, Cooper
& Klein, counsel to the Underwriters.
(ii) At the Option Closing Date there shall have been delivered to you
the signed opinion of Pillsbury Madison & Sutro LLP, counsel for the
Company and Aura, dated as of the Option Closing Date, in form and
substance reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper &
Klein, counsel to the Underwriters, which opinion shall be
23
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substantially the same in scope and substance as the opinion furnished to
you at the First Closing Date pursuant to Section 4(b) hereof, except that
such opinion, where appropriate, shall cover the Option Units rather than
the Firm Units. If the First Closing Date is the same as the Option Closing
Date, such opinions may be combined.
(iii) At the Option Closing Date, there shall have been delivered to
you a certificate of the President and the Chairman of the Board of each of
the Company and Aura dated the Option Closing Date, in form and substance
reasonably satisfactory to Freshman, Marantz, Orlanski, Cooper & Klein,
counsel to the Underwriters, substantially the same in scope and substance
as the certificates furnished to you at the First Closing Date pursuant to
Section 4(e) hereof.
(iv) At the Option Closing Date, there shall have been delivered to
you a letter in form and substance satisfactory to you from Pannell Kerr
Foster, dated the Option Closing Date and addressed to you, confirming the
information in their letter referred to in Section 4(d) hereof as of the
date thereof and stating that, without any additional investigation
required, nothing has come to their attention during the period from the
ending date of their review referred to in said letter to a date not more
than five (5) days prior to the Option Closing Date which would require any
change in said letter if it were required to be dated the Option Closing
Date.
(v) All proceedings taken at or prior to the Option Closing Date in
connection with the sale and issuance of the Option Units shall be
reasonably satisfactory in form and substance to you, and you and Freshman,
Marantz, Orlanski, Cooper & Klein, counsel to the Underwriters, shall have
been furnished with all such documents and certificates as you may request
in connection with this transaction in order to evidence the accuracy and
completeness of any of the representations, warranties or statements of
each of the Company and Aura or either of their compliance with any of the
covenants or conditions contained therein.
(g) If any of the conditions herein provided for in this Section shall
not have been completely fulfilled as of the date indicated, this Agreement and
all obligations of the Underwriters under this Agreement may be canceled at, or
at any time prior to, each Closing Date by your notifying the Company and Aura
of such cancellation in writing or by telegram at or prior to the applicable
Closing Date. Any such cancellation shall be without liability of any
Underwriter to the Company and Aura, as applicable, except as otherwise provided
herein.
5. Conditions of the Obligations of the Company and Aura.
-----------------------------------------------------
The obligation of the Company and Aura, as applicable, to sell and deliver
the Units is subject to the following conditions:
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(a) The Registration Statement shall have become effective not later
than 5:00 p.m. New York time, on the date of this Agreement, or on such later
date or time as you and the Company may agree in writing.
(b) On the Closing Dates, no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the Act or any
proceedings therefor initiated or threatened by the Commission.
If the conditions to the obligations of the Company and Aura, provided for
in this Section have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the Option Closing Date,
then only the obligation of the Company and Aura to sell and deliver the Option
Units on exercise of the option provided for in Section 2(b) hereof shall be
affected.
6. Indemnification.
---------------
(a) Indemnification of the Underwriters. The Company and Aura,
jointly and severally, agree to indemnify and hold harmless each Underwriter,
its officers and employees, and each person, if any, who controls any
Underwriter within the meaning of the Securities Act and the Exchange Act
against any loss, claim, damage, liability or expense, as incurred, to which
such Underwriter or such controlling person may become subject, under the
Securities Act, the Exchange Act or other federal or state statutory law or
regulation, or at common law or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of the
Company or Aura), insofar as such loss, claim, damage, liability or expense (or
actions in respect thereof as contemplated below) arises out of or is based (i)
upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, or any amendment thereto, including any
information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under
the Securities Act, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading; or (ii) upon any untrue statements or alleged untrue statement
of a material fact contained in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading; or
(iii) in whole or in part upon any inaccuracy in the representations and
warranties of the Company or Aura contained herein, or (iv) any act or failure
to act or any alleged act or failure to act by any Underwriter in connection
with, or relating in any manner to, the Common Stock or Warrants or the offering
contemplated hereby, and which is included as part of
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or referred to in any loss, claim, damage, liability or action arising out of or
based upon any matter covered by clause (i) or (ii) above, provided that the
Company and Aura shall not be liable under this clause (iv) to the extent that
a court of competent jurisdiction shall have determined by a final judgment that
such loss, claim, damage, liability or action resulted directly from any such
acts or failures to act undertaken or omitted to be taken by such Underwriter
through its bad faith or willful misconduct; and to reimburse each Underwriter
and each such controlling person for any and all expenses (including the fees
and disbursements of counsel chosen by Joseph Charles & Associates, Inc.) as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; provided,
however, that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company or Aura by the Representative
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto); and provided, further,
that with respect to any preliminary prospectus, the foregoing indemnity
agreement shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased units, or any
person controlling such Underwriter, if copies of the Prospectus were timely
delivered to the Underwriter pursuant to the provision hereunder and a copy of
the Prospectus (as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if required by law so to have been
delivered, at or prior to the written confirmation of the sale of the Units to
such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage, liability or expense;
and provided, further, that the Company, and Aura may agree, as among themselves
and without limiting the rights of the Underwriters under this Agreement, as to
the respective amounts of such liability for which they each shall be
responsible. The indemnity agreement set forth in this Section 6(a) shall be in
addition to any liabilities that the Company may otherwise have.
(b) Indemnification of the Company, Aura and each of their Directors
and Officers. Each Underwriter agrees, severally and not jointly, to indemnify
and hold harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, Aura and each of its officers and directors
and each person, if any, who controls the Company or Aura within the meaning of
the Securities Act or the Exchange Act, against any loss, claim, damage,
liability or expense, as incurred to which the Company, Aura or any such
director, officer or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation, or
at common law or
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otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto, or arises out of or is based upon the omission or alleged omission to
state therein a material fact required to be stated thereon or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in reliance
upon and in conformity with written information furnished to the Company and
Aura by the Representative expressly for use therein; and to reimburse the
Company, Aura, or any such director, officer or controlling person for any legal
and other expense reasonably incurred by the Company, Aura, or any such
director, officer or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company and Aura hereby acknowledges
that the only information that the Underwriters have furnished to the Company
and Aura expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) are the
statements set forth (A) as the paragraph on the inside front cover page of the
Prospectus concerning stabilization by the Underwriters and (B) information
under the caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in this
Section 6(b) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 6 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 6, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 6 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party;
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provided, however, if the defendants in any such action include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of any
such action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of such indemnifying parties election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 6 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the provisions to the next preceding
sentence (it being understood, however, that the indemnifying party shall not be
liable for the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (Joseph Charles & Associates, Inc.
In the case of Section 6(b) and Section 7), representing the indemnified parties
who are parties to such action) or (ii) the indemnifying party shall not have
employed counsel satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of commencement of the
action, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 6 shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
against any loss, claim, damage, liability or expense by reason of such
settlement or judgment. Notwithstanding the foregoing sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel as contemplated by Section
6(c) hereof, the indemnifying party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than 30 days after receipt by such indemnifying
party of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement, compromise or consent
to the entry of judgment in any pending or threatened action, suit or proceeding
in respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an
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<PAGE>
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such action, suit or proceeding.
7. Contribution.
------------
If the indemnification provided for in Section 6 is for any reason held to
be unavailable to or otherwise insufficient to hold harmless an indemnified
party of any losses, claims, damages, liabilities or expenses referred to
therein, then each indemnifying party shall contribute to the aggregate amount
paid or payable by such indemnified party, as incurred, as a result of any
losses, claims, damages, liabilities or expenses referred to therein (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and Aura, on the one hand, and the Underwriters, on the other hand, from
the offering of the Units pursuant to this Agreement or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company, and Aura, on
the one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions or inaccuracies in the representations and warranties
herein which resulted in such losses, claims, damages, liabilities or expenses,
as well as any other relevant equitable considerations. The relative benefits
received by the Company, and Aura, on the one hand, and the Underwriters, on the
other hand, in connection with the offering of the Units pursuant to this
Agreement shall be deemed to be in the same respective proportions as the total
net proceeds from the offering of the Units pursuant to this Agreement (before
deducting expenses) received by the Company, and Aura, and the total
underwriting discount received by the Underwriters, in each case as set forth on
the front cover page of the Prospectus bear to the aggregate initial public
offering price of the Units as set forth on such cover. The relative fault of
the Company, and Aura, on the one hand, and the Underwriters, on the other hand,
shall be determined by reference to, among other things, whether any such untrue
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company, or
Aura, on the one hand, or the Underwriters, on the other hand, and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 6(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 6(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 7; provided, however, that no
additional notice shall be required
29
<PAGE>
with respect to any action for which notice has been given under Section 6(c)
for purposes of indemnification.
The Company, Aura and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in this Section 7.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 7 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule I. For purposes of this Section 7, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
8. Costs and Expenses.
------------------
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriters is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company, including
but not limited to the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), each Preliminary Prospectus and the Prospectus, as amended or
supplemented, the fee of the National Association of Securities Dealers, Inc.
("NASD") in connection with the filing required by the NASD relating to the
offering of the Units contemplated hereby; all expenses, including reasonable
fees (but not in excess of the amount set forth in Section 3(b)) and
disbursements of counsel to the Underwriters, in connection with the
qualification of the Units under the State Securities or Blue Sky Laws which you
shall designate; the cost of printing and furnishing to you copies of the
Registration Statement, each Preliminary Prospectus, the Prospectus, this
Agreement, the Warrant Agreement and the Blue Sky Memorandum; the cost of
printing the certificates representing the Securities, the expenses of Company
due diligence meetings and presentations, (but not of any Underwriter or
Underwriter's counsel in connection therewith) and
30
<PAGE>
the expense (which shall not exceed $7,500) of placing one or more "tombstone"
advertisements as directed by you. The Company shall reimburse you for "road
shows" expenses incurred in an amount not to exceed $10,000.00. The Company
shall pay any and all taxes (including any transfer, franchise, capital stock or
other tax imposed by any jurisdiction) on sales to the Underwriters hereunder.
The Company will also pay all costs and expenses incident to the furnishing of
any amended Prospectus or of any supplement to be attached to the Prospectus as
called for in Section 3(a) of this Agreement except as otherwise set forth in
said Section.
(b) In addition to the foregoing expenses, the Company shall at the
First Closing Date pay to you the balance of a non-accountable expense allowance
2.5% of the gross proceeds of the offering, of which a portion has been paid.
In the event the over-allotment option is exercised in part or in full, the
Company shall pay to you at the Option Closing Date an additional amount equal
to 2.5% of the gross proceeds received upon exercise of the over-allotment
option. In the event the transactions contemplated hereby are not consummated
for any reason, the Company shall be liable for your actual accountable out-of-
pocket expenses (with credit given to the amount heretofore paid), including
legal fees, provided however, that any portion of the $40,000 paid by the
Company that has not been utilized by you in connection with the offering on an
accountable basis shall be refunded by you to the Company; and further provided
that if the contemplated transactions are not consummated by reason of breach by
the Company of this Agreement or of any representation, warranty, covenant or
condition contained herein, the Company shall be liable for your accountable
out-of-pocket expenses.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from any Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless each Underwriter, and the Underwriters
agree to indemnify and hold harmless, severally and not jointly, the Company
from and against any losses, claims, damages or liabilities, joint or several
(which shall, for all purposes of this Agreement, include, but not be limited
to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees), to which the indemnified party may become subject insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the claim of any person (other than an employee
of the party claiming indemnity) or entity that he or it is entitled to a
finder's fee in connection with the proposed offering by reason of such person's
or entity's influence or prior contact with the indemnifying party.
9. Default of One or More of the Several Underwriters.
--------------------------------------------------
If, on the First Closing Date or the Option Closing Date, as the case may
be, any one or more of the several Underwriters fail or refuse to purchase Units
that it or they have agreed to purchase
31
<PAGE>
hereunder on such date, and the aggregate number of Units which such defaulting
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Units to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Units set forth opposite their respective names on Schedule I bears to
----------
the aggregate number of Firm Units set forth opposite the names of all such non-
defaulting Underwriters, or in such other proportions as may be specified by the
Representatives with the consent of the non-defaulting Underwriters, to purchase
the Units which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase on such date. If, on the First Closing Date or the Option
Closing Date, as the case may be, any one or more of the Underwriters shall fail
or refuse to purchase Units and the aggregate number of Units with respect to
which such default occurs exceeds 10% of the aggregate number of Units to be
purchased on such date, and arrangements satisfactory to the Representative and
the Company for the purchase of such Units are not made within 48 hours after
such default, this Agreement shall terminate without liability of any party to
any other party except that the provisions of Section 6, Section 7 and Section 8
shall at all times be effective and shall survive such termination. In any such
case either the Representative or the Company shall have the right to postpone
the First Closing Date or the Option Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other document or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
9. Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
10. Effective Date.
--------------
The Agreement shall become effective upon its execution, except that you
may, at your option, delay its effectiveness until the earlier to occur of 10:00
A.M., New York time on the first full business day following the Effective Date
as you in your discretion shall first commence the initial public offering by
you of any of the Units. The time of the initial public offering shall mean the
time of release by you of the first newspaper advertisement with respect to the
Units, or the time when the Units are first generally offered by you to dealers
by letter or telecopier, whichever shall first occur. This Agreement may be
terminated by you at any time before it becomes effective as provided above,
except that Sections 6, 7, 8, 13, 14, 15 and 16 shall remain in effect
notwithstanding such termination.
11. Termination.
-----------
32
<PAGE>
(a) This Agreement, except for Sections 6, 7, 8, 13, 14, 15 and 16,
may be terminated at any time prior to the First Closing Date, and the option
referred to in Section 2(b), if exercised, may be canceled, at any time prior to
the Option Closing Date, by you if in your judgment it is impracticable to offer
for sale or to enforce contracts made by you for the resale of the Units agreed
to be purchased hereunder, by reason of (i) the Company having sustained a
material loss, whether or not insured, by reason of fire, earthquake, flood,
accident or other calamity, or from any labor dispute or court or government
action, order or decree, (ii) trading in securities on the New York Stock
Exchange or the American Stock Exchange having been suspended or limited, (iii)
material governmental restrictions having been imposed on trading in securities
generally which are not in force and effect on the date hereof, (iv) a banking
moratorium having been declared by federal of New York State authorities, (v) an
outbreak of major international hostilities or other national or international
calamity having occurred, (vi) the passage by the Congress of the United States
or by any state legislative body of similar impact, of any act or measure, or
the adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably believed likely by you to have a material adverse impact on
the business, financial condition or financial statements of the Company, (vii)
any material adverse change in the financial or securities markets beyond normal
fluctuations in the United States having occurred since the date of this
Agreement, or (viii) any material adverse change having occurred, since the
respective dates for which information is given in the Registration Statement
and Prospectus, in the earnings, business, prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or facsimile
transmission, confirmed by letter.
12. Representative's Warrant.
------------------------
On the First Closing Date, the Company will issue to you, for a
consideration of $200.00 and upon the terms and conditions set forth in the form
of Representative's Warrant annexed as an exhibit to the Registration Statement,
the Representative's Warrant to purchase $200,000 Units. In the event of
conflict in the terms of this Agreement and the Representative's Warrant, the
language of the Representative's Warrant shall control.
13. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective indemnities, agreements, representations, warranties and
other statements of the Company or its Existing Shareholders, where appropriate,
and you, set forth in or made pursuant to this Agreement will remain in full
force and effect
33
<PAGE>
regardless of any investigation made by or on behalf of the Underwriters, the
Company or any of its officers or directors or any controlling persons and will
survive delivery of and payment for the Units and the termination of this
Agreement.
14. Notice.
------
All communications hereunder will be in writing and, except as otherwise
expressly provided herein, if sent to any Underwriter, will be mailed, delivered
or telecopied and confirmed to it at Joseph Charles & Associates, Inc., 9701
Wilshire Boulevard, Ninth Floor, Beverly Hills, California 90212, with a copy
sent to Thomas J. Poletti, Esq. at Freshman, Marantz, Orlanski, Cooper & Klein,
9100 Wilshire Boulevard, 8th Floor East, Beverly Hills, California 90212-3480,
of if sent to the Company, will be mailed, delivered, or facsimiled and
confirmed to NewCom, Inc., 31166 Via Colinas, Westlake Village, California
91362, with a copy sent to Jorge A. del Calvo, Esq. at Pillsbury Madison &
Sutro, 2700 Sand Hill Road, Menlo Park, California 94025-7020.
15. Parties in Interest.
-------------------
The Agreement herein set forth is made solely for the benefit of the
Underwriters, the Company and, to the extent expressed, Aura, any person
controlling the Company, Aura or any Underwriter, and directors of the Company,
nominees for directors of the Company (if any) named in the Prospectus, the
officers of the Company who have signed the Registration Statement, and their
respective executors, administrators, successors and assigns, and no other
person shall acquire for have any right under or by virtue of this Agreement.
The term "successors and assigns" shall not include any purchaser, as such
purchaser, from any Underwriter of the Units.
16. Applicable Law.
---------------
This Agreement will be governed by, and construed in accordance with, the
laws of the State of California applicable to agreements made and to be entirely
performed within California.
34
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
kindly sign and return this Underwriting Agreement, whereupon it will become a
binding agreement between the Company and the Underwriters in accordance with
its terms.
Very truly yours,
NewCom, Inc.
Dated: ___________, 1997 By:___________________________
Sultan W. Khan
Chief Executive Officer
and President
The foregoing Underwriting Agreement is hereby confirmed and accepted as of
the date first above written.
Joseph Charles & Associates, Inc.
Date: ___________, 1997 By:___________________________
Authorized Officer
35
<PAGE>
SCHEDULE I
----------
Underwriting Agreement dated ____________, 1997
Number of Firm Units
Underwriter to be Purchased
- ----------- --------------------
Joseph Charles & Associates, Inc.
Total . . . . . . . . . . . . . . 2,000,000
36
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF PILLSBURY MADISON & SUTRO LLP]
September 12, 1997
NewCom, Inc.
31166 Via Colinas
Westlake Village, CA 91362
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We are acting as counsel for NewCom, Inc., a Delaware corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, of (i) 2,000,000 Units, each Unit consisting of one share of
Common Stock, par value $.001 per share (the "Common Stock"), of the Company and
one Common Stock Purchase Warrant (including the shares of Common Stock issuable
upon exercise of such Common Stock Purchase Warrants, the "Warrants"), all of
which are to be offered and sold by the Company, (ii) up to 300,000 Units
subject to the underwriters' over-allotment option, of which all of the Warrants
underlying such Units are to be offered and sold by the Company, and (iii) a
Representative's Option entitling the underwriters' representative to purchase
200,000 Units, all of which are to be offered and sold by the Company (all of
such Units, Common Stock and Warrants being offered and sold by the Company,
collectively, the "Securities"). In this regard, we have participated in the
preparation of a registration statement on Form S-1 (Registration No. 33-31431)
relating to such Securities. Such Registration Statement, as amended, and
including any registration statement related thereto and filed pursuant to
Rule 462(b) under the Securities Act (a "Rule 462(b) registration statement")
is herein referred to as the "Registration Statement."
We are of the opinion that the Securities to be offered and sold by the
Company (including any such Securities registered pursuant to a Rule 462(b)
registration statement) have been duly authorized and, when issued and sold by
the Company in the manner described in the Registration Statement and in
accordance with the resolutions adopted by the Board of Directors of the
Company, will be legally issued, fully paid and nonassessable.
<PAGE>
NewCom, Inc.
September 12, 1997
Page 2
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
<PAGE>
EXHIBIT 10.1
ASSIGNMENT OF LEASE
-------------------
This ASSIGNMENT OF LEASE ("Assignment") is made and entered into as of
June 15, 1997 ("Assignment Date"), between AURA SYSTEMS, INC., a Delaware
corporation ("Assignor"), and NEWCOM, INC., a Delaware corporation ("Assignee"),
in connection with that certain Standard Industrial/Commercial Multi-Tenant
Lease - Modified Net, dated March 31, 1995 ("Lease"), between L/B VIA COLINAS
LLC ("Lessor") and Assignor, for the premises located at 31166 Via Colinas,
Westlake Village, California 91362 ("Property"), and more particularly described
in the Lease. A copy of the Lease is attached as Exhibit "A" and incorporated
herein by reference. Unless otherwise indicated in this Assignment, defined
terms used in this Assignment have the same meanings as in the Lease.
1. Assignment of Lease. Assignor hereby grants, conveys and assigns to
-------------------
Assignee, effective as of the Assignment Date, all of Assignor's right, title
and interest in and to the Lease, subject to Assignor's continuing obligations
to Lessor under Section 12.2(a) of the Lease.
2. Assumption of Obligations. Assignor hereby assigns to Assignee, and
-------------------------
Assignee hereby assumes, all obligations and liabilities of Assignor under the
Lease that accrue on or after the Assignment Date. Assignee hereby agrees to
defend, indemnify and hold Assignor harmless from all claims, demands, causes of
action, liabilities, losses, costs and expenses (including, without limitation,
attorneys' fees) arising from or in connection with the obligations and
liabilities assumed by Assignee under this Assignment. Accordingly, Assignee
shall pay and perform directly to Lessor, for Lessor's benefit, all monetary and
non-monetary obligations accruing under the Lease on or after the Assignment
Date. Assignor hereby agrees to defend, indemnify and hold Assignee harmless
from all claims, demands, causes of action, liabilities, losses, costs and
expenses (including, without limitation, attorneys' fees) arising from or in
connection with any obligations or liabilities of Assignor under the Lease that
accrue and are due and payable prior to the Assignment Date.
3. Consent to Assignment. Notwithstanding anything to the contrary contained
---------------------
herein, no assignment by Assignor to Assignee described herein shall be
effective unless and until Assignor and Assignee shall have obtained the consent
of Lessor to this Assignment.
4. Pro-Rations. All Base Rent, Common Area Operating Expenses, Real Property
-----------
Taxes and other charges payable under the Lease or in connection with the
Property shall be pro-rated between Assignor and Assignee as of the Assignment
Date. All utilities and insurance payable under the Lease or in connection with
the Property shall be pro-rated between Assignor and Assignee as of the
Assignment Date.
5. Further Assurances. Each party to this Assignment shall execute and
------------------
deliver to each other party all documents, and shall take all actions,
reasonably required by such other party from time to time to confirm or effect
the matters set forth in this Assignment, or otherwise to carry out the purposes
of this Assignment.
<PAGE>
6. Miscellaneous. This Assignment shall bind, and shall inure to the benefit
-------------
of, the successors and assigns of the parties hereto. This Assignment may be
executed in counterparts with the same effect as if the parties had executed one
instrument, and each such counterpart shall constitute an original of this
Assignment. No provision of this Assignment that is held to be inoperative,
unenforceable or invalid shall affect the remaining provisions, and to this end
all provisions of this Assignment shall be severable. Time is of the essence of
this Assignment. This Assignment shall be governed by the laws of the State of
California.
IN WITNESS WHEREOF, the parties have executed this Assignment as of the date
first written above.
ASSIGNOR:
--------
AURA SYSTEMS, INC., a Delaware corporation
By:
-----------------------------------------------
Gerald S. Papazian, President
By:
-----------------------------------------------
Michael I. Froch, General Counsel and Secretary
ASSIGNEE:
--------
NEWCOM, INC., a Delaware corporation
By:
-----------------------------------------------
Sultan W. Khan, President
By:
-----------------------------------------------
Asif M. Khan, Executive Vice President
-2-
<PAGE>
LESSOR'S CONSENT
----------------
The undersigned is the owner of the Property and the Lessor under the Lease
described in the foregoing Assignment and hereby consents to the Assignment of
the Lease described in the Assignment, without waiving any rights as lessor
against Assignor under Section 12.2(a) of the Lease.
LESSOR:
------
L/B VIA COLINAS LLC
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
<PAGE>
EXHIBIT "A"
-----------
LEASE
[ attached ]
<PAGE>
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO APPEARS HERE]
1. BASIC PROVISIONS ("BASIC PROVISIONS").
1.1 PARTIES: This Lease ("LEASE"), dated for reference purposes only,
March 31, 1995, is made by and between L/B Via Colinas LLC ("LESSOR") and Aura
Systems, Inc., a Delaware Corporation ("LESSEE"), (collectively the "PARTIES,"
or individually a "PARTY").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of 31166 Via Colinas located in the City of
Westlake Village County of Los Angeles, State of California with zip code 91362
as outlined on Exhibit ___ attached hereto ("PREMISES"). The "Building" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building): Approximately 30,976 square feet of
industrial space which is part of a larger 55,647 square foot industrial
building located on M-1 land in Westlake Village as identified in*. In addition
to Lessee's right to use and occupy the Premises as hereinafter specified,
Lessee shall have non-exclusive rights to the Common Areas (as defined in
Paragraph 2.7 below) as hereinafter specified, but shall not have any rights to
the roof, exterior walls or utility raceways of the Building or to any other
buildings in the Industrial Center. The Premises, the Building, the Common
Areas, the land upon which they are located, along with all other buildings and
improvements thereon, are herein collectively referred to as the "INDUSTRIAL
CENTER." (Also see Paragraph 2.)
1.2(b) PARKING: See Addendum One *** unreserved vehicle parking spaces
("UNRESERVED PARKING SPACES"); and 0 reserved vehicle parking spaces ("RESERVED
PARKING SPACES"). (Also see Paragraph 2.6) *** Item 1.2 Parking Continued.
1.3 TERM: 5 years and 0 months ("ORIGINAL TERM") commencing Upon
completion of tenant improvements ("Commencement Date") and ending May 31, 2000
("EXPIRATION DATE"). (Also see Paragraph 3.) See Addendum Two
1.5 BASE RENT: $15,178.24 per month ("BASE RENT"), payable on the 1st
day of each month commencing June 1, 1995 (Also see Paragraph 4.)
[X] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 53, attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $15,178.24 as Base Rent for the
period June 1995.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: fifty-five &
seventenths percent 55.7% ("LESSEE'S SHARE") as determined by
[X] prorata square footage of the Premises as compared to the total square
footage of the Building or [] other criteria as described in Addendum ____.
1.7 SECURITY DEPOSIT: $15,178.24 ("SECURITY DEPOSIT"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: The assembly, packaging, warehousing and
distribution of electronic parts. ("PERMITTED USE") (Also see
Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "INSURING PARTY," (Also see
Paragraph 8
1.10(a) REAL ESTATE BROKERS. The following real estate broker(s)
(collectively, the "BROKERS") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[X] The Seeley Company represents Lessor exclusively ("LESSOR'S BROKER");
[X] CB Commercial represents Lessee exclusively ("LESSEE'S BROKER"); or
[_] represents both Lessor and Lessee ("DUAL AGENCY"). (Also see Paragraph
15.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $**)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by N/A ("GUARANTOR"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 57, and Exhibits A through C, all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and
free of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense. ****
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it
has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"APPLICABLE LAWS") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to Lessee's
occupancy of the Premises and/or the terms of this Lease; and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties with respect to said matters other than as set forth in this
Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in
this Paragraph 2 shall be of no force or effect if immediately prior to the date
set forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any non-
compliance of the premises with said warranties.
*Exhibit A attached hereto. ****See Addendum One Item 2.2 Condition Continued.
**Per Listing Agreement
<PAGE>
2.6 VEHICLE PARKING. Lessee shall be entitled to use the number of
Unreserved Parking Spaces and Reserved Parking Spaces specified in Paragraph
1.2(b) on those portions of the Common Areas designated from time to time by
Lessor for parking. Lessee shall not use more parking spaces than said number.
Said parking spaces shall be used for parking by vehicles no larger than
full-size passenger automobiles or pick-up trucks, herein called "PERMITTED SIZE
VEHICLES." Vehicles other than Permitted Size Vehicles shall be parked and
loaded or unloaded as directed by Lessor in the Rules and Regulations (as
defined in Paragraph 40) issued by Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong to or
are controlled by Lessee or Lessee's employees, suppliers, shippers, customers,
contractors or invitees to be loaded, unloaded or parked in areas other than
those designated by Lessor for such activities.
(b) If Lessee permits or allows any of the prohibited activities
described in this Paragraph 2.6, then Lessor shall have the right, without
notice, in addition to such other rights and remedies that it may have, to
remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
(c) Lessor shall at the Commencement Date of this Lease, provide the
parking facilities required by Applicable Law.
2.7 COMMON AREAS - DEFINITION. The term "COMMON AREAS" is defined as all
areas and facilities outside the Premises and within the exterior boundary line
of the Industrial Center and interior utility raceways within the Premises that
are provided and designated by the Lessor from time to time for the general non-
exclusive use of Lessor, Lessee and other Lessees of the Industrial Center and
their respective employees, suppliers, shippers, customers, contractors and
invitees, including parking areas, loading and unloading areas, trash areas,
roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 COMMON AREAS - LESSEE'S RIGHT. Lessor hereby grants to Lessee, for the
benefit of Lessee and its employees, suppliers, shippers, contractors, customers
and invitees, during the term of this Lease, the non-exclusive right to use, in
common with others entitled to such use, the Common Areas as they exist from
time to time, subject to any rights, powers, and privileges reserved by Lessor
under the terms hereof or under the terms of any rules and regulation or
restrictions governing the use of the Industrial Center. Under no circumstances
shall the right herein granted to use the Common Areas be deemed to include the
right to store any property, temporarily or permanently, in the Common Areas.
Any such storage shall be permitted only by the prior written consent of Lessor
or Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 COMMON AREAS - RULES AND REGULATIONS. Lessor or such other persons(s)
as Lessor may appoint shall have the exclusive control and management of the
Common Areas and shall have the right, from time to time, to establish, modify,
amend and enforce reasonable Rules and Regulations with respect thereto in
accordance with Paragraph 40. Lessee agrees to abide by and conform to all such
Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other Lessees of the Industrial Center.
2.10 COMMON AREAS - CHANGES. Lessor shall have the right, in Lessor's sole
discretion, from time to time:
(a) To make changes to the Common Areas, including, without
limitation, changes in the location, size, shape and number of driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways;
(b) To close temporarily any of the Common Areas for maintenance
purposes so long as reasonable access to the Premises remains available;
(c) To designate other land outside the boundaries of the Industrial
Center to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common Areas;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Industrial Center, or any portion
thereof; and
(f) To do and perform such other acts and make such other changes in,
to or with respect to the Common Areas and Industrial Center as Lessor may, in
the exercise of sound business judgment, deem to be appropriate.
3. TERM.
3.1 TERM. The Commencement Date, Expiration Date and Original Term of this
Lease are as specified in Paragraph 1.3.
3.2 EARLY POSSESSION. If an Early Possession Date is specified in
Paragraph 1.4 and if Lessee totally or partially occupies the Premises after the
Early Possession Date but prior to the Commencement Date, the obligation to pay
Base Rent shall be abated for the period of such early occupancy. All other
terms of this Lease, however, (including, but not limited to the obligations to
pay Lessee's Share of Common Area Operating Expenses and to carry the insurance
required by Paragraph 8) shall be in effect during such period. Any such early
possession shall not affect nor advance the Expiration Date of the Original
Term.
3.3 DELAY IN POSSESSION. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee. If possession of the Premises is not
delivered to Lessee within sixty (60) days after the Commencement Date, Lessee
may, at its option, by notice in writing to Lessor within ten (10) days after
the end of the said sixty (60) day period, cancel this Lease, in which event the
parties shall be discharged from all obligations hereunder, provided further,
however, that if such written notice of Lessee is not received by Lessor within
said ten (10) day period, Lessee's right to cancel this Lease hereunder shall
terminate and be of no further force or effect. Except as may be otherwise
provided, and regardless of when the Original Term actually commences, if
possession is not tendered to Lessee when required by this Lease and Lessee does
not terminate this Lease, as aforesaid, the period free of the obligation to pay
Base Rent, if any, that Lessee would other wise have enjoyed shall run from the
date of delivery of possession and continue for a period equal to the period
during which the Lessee would have otherwise enjoyed under the terms hereof, but
minus any days of delay caused by the acts, changes or omissions of Lessee.
4. RENT.
4.1 BASE RENT. Lessee shall pay Base Rent and other rent or charges, as
the same may be adjusted from time to time, to Lessor in lawful money of the
United States, without offset or deduction, on or before the day on which it is
due under the terms of this Lease. Base Rent an all other rent and charges for
any period during the term hereof which is for less than one full month shall be
prorated based upon the actual number of days of the month involved. Payment of
Base Rent and other charges shall be made to Lessor at its address stated herein
or to such other persons or, at such other addresses as Lessor may from time to
time designate in writing to Lessee.
4.2 COMMON AREA OPERATING EXPENSES. Lessee shall pay to Lessor during the
term hereof, in addition to the Base Rent, Lessee's Share (as specified in
Paragraph 1.6(b)) of all Common Area Operating Expenses, as hereinafter defined,
during each calendar year of the term of this Lease, in accordance with the
following provisions:
(a) "COMMON AREA OPERATING EXPENSES" are defined, for purposes of
this Lease, as all costs incurred by Lessor relating to the ownership and
operation of the Industrial Center, including, but not limited to, the
following:
(i) The operation, repair and maintenance, in neat, clean,
good order and condition, of the following:
(aa) The Common Areas, including parking areas, loading
and unloading areas, trash areas, roadways, sidewalks, walkways, parkways,
driveways, landscaped areas, striping, bumpers, irrigation systems, Common Area
lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) Fire detection and sprinkler systems.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas.
(iii) Trash disposal, property management and security services
and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Real Property Taxes (as defined in Paragraph 10.2) to be
paid by Lessor for the Building and the Common Areas under Paragraph 10 hereof.
(vi) The cost of the premiums for the insurance policies
maintained by Lessor under Paragraph 8 hereof.
(vii) Any deductible portion of an insured loss concerning the
Building or the Common Areas.
(viii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(b) Any Common Area Operating Expenses and Real Property Taxes that
are specifically attributable to the Building or to any other building in the
Industrial Center or to the operation, repair and maintenance thereof, shall be
allocated entirely to the Building or to such other building. However, any
Common Area Operating Expenses and Real Property Taxes that are not specifically
attributable to the Building or to any other building or to the operation,
repair and maintenance thereof, shall be equitably allocated by Lessor to all
buildings in the Industrial Center.
(c) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have said improvements or facilities or to provide those
services unless the Industrial Center already has the same, Lessor already
provides the services, or Lessor has agreed elsewhere in this Lease to provide
the same or some of them.
(d) Lessee's Share of Common Area Operating Expenses shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time of Lessor's Share of annual
Common Area Operating Expenses and the same shall be payable monthly or
quarterly, as Lessor shall designate, during each 12-month period of the Lease
term, on the same day as the Base Rent is due hereunder. Lessor shall deliver to
Lessee within sixty (60) days after the expiration of each calendar year a
reasonably detailed statement showing Lessee's Share of the actual Common Area
Operating Expenses incurred during the preceding year. If Lessee's payments
under this Paragraph 4.2(d) during said preceding year exceed Lessee's Share as
indicated on said statement, Lessee shall be credited the amount of such over-
<PAGE>
payment against Lessee's Share of Common Area Operating Expenses next becoming
due. If Lessee's payments under this Paragraph 4.2(d) during said preceding year
were less than Lessee's Share as indicated on said statement, Lessee shall pay
to Lessor the amount of the deficiency within ten (10) days after delivery by
Lessor to Lessee of said statement.
5. SECURITY DEPOSIT. Lessee shall deposit with Lessor upon Lessee's execution
hereof the Security Deposit set forth in Paragraph 1.7 as security for Lessee's
faithful performance of Lessee's obligations under this Lease. If Lessee fails
to pay Base Rent or other rent or charges due hereunder, or otherwise Defaults
under this Lease (as defined in Paragraph 13.1), Lessor may use, apply or retain
all or any portion of said Security Deposit for the payment of any amount due
Lessor or to reimburse or compensate Lessor for any liability, cost, expense,
loss or damage (including attorneys' fees) which Lessor may suffer or incur by
reason thereof. If Lessor uses or applies all or any portion of said Security
Deposit, Lessee shall within ten (10) days after written request therefore
deposit monies with Lessor sufficient to restore said Security Deposit to the
full amount required by this Lease. Any time the Base Rent increases during the
term of this Lease, Lessee shall, upon written request from Lessor, deposit
additional monies with Lessor as an addition to the Security Deposit so that the
total amount of the Security Deposit shall at all times bear the same proportion
to the then current Base Rent as the initial Security Deposit bears to the
initial Base Rent set forth in Paragraph 1.5. Lessor shall not be required to
keep all or any part of the Security Deposit separate from its general accounts.
Lessor shall, at the expiration or earlier termination of the term hereof and
after Lessee has vacated the Premises, return to Lessee (or, at Lessor's option,
to the last assignee, if any, of Lessee's interest herein), that portion of the
Security Deposit not used or applied by Lessor. Unless otherwise expressly
agreed in writing by Lessor, no part of the Security Deposit shall be considered
to be held in trust, to bear interest or other increment for its use, or to be
prepayment for any monies to be paid by Lessee under this Lease.**
**See Addendum One Item 5 Security Deposit Continued.
6. USE.
6.1 PERMITTED USE.
(a) Lessee shall use and occupy the Premises only for the Permitted
Use set forth in Paragraph 1.8, or any other legal use which is reasonably
comparable thereto, and for no other purpose. Lessee shall not use or permit the
use of the Premises in a manner that is unlawful, creates waste or a nuisance,
or that disturbs owners and/or occupants of, or causes damage to the Premises or
neighboring premises or properties.
(b) Lessor hereby agrees to not unreasonably withhold or delay its
consent to any written request by Lessee, Lessee's assignees or subtenants, and
by prospective assignees and subtenants of Lessee, its assignees and subtenants,
for a modification of said Permitted Use, so long as the same will not impair
the structural integrity of the improvements on the Premises or in the Building
or the mechanical or electrical systems therein, does not conflict with uses by
other lessees, is not significantly more burdensome to the Premises or the
Building and the improvements thereon, and is otherwise permissible pursuant to
this Paragraph 6. If Lessor elects to withhold such consent, Lessor shall within
five (5) business days after such request give a written notification of same,
which notice shall include an explanation of Lessor's reasonable objections to
the change in use.
6.2 HAZARDOUS SUBSTANCES. See Addendum One Item 6.2 Hazardous Materials
Continued.
(a) REPORTABLE USES REQUIRE CONSENT. The term "HAZARDOUS SUBSTANCE"
as used in this Lease shall mean any product, substance, chemical, material or
waste whose presence, nature, quantity and/or intensity of existence, use,
manufacture, disposal, transportation, spill, release or effect, either by
itself or in combination with other materials expected to be on the Premises, is
either: (i) potentially injurious to the public health, safety or welfare, the
environment, or the Premises; (ii) regulated or monitored by any governmental
authority; or (iii) a basis for potential liability of Lessor to any
governmental agency or third party under any applicable statute or common law
theory. Hazardous Substance shall include, but not be limited to, hydrocarbons,
petroleum, gasoline, crude oil or any products or by-products thereof. Lessee
shall not engage in any activity in or about the Premises which constitutes a
Reportable Use (as hereinafter defined) of Hazardous Substances without the
express prior written consent of Lessor and compliance in a timely manner (at
Lessee's sole cost and expense) with all Applicable Requirements (as defined in
Paragraph 6.3). "REPORTABLE USE" shall mean (i) the installation or use of any
above or below ground storage tank, (ii) the generation, possession, storage,
use, transportation, or disposal of a Hazardous Substance that requires a permit
from, or with respect to which a report, notice, registration or business plan
is required to be filed with, any governmental authority, and (iii) the presence
in, on or about the Premises of a Hazardous Substance with respect to which any
Applicable Laws require that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, Lessee
may, without Lessor's prior consent, but upon notice to Lessor and in compliance
with all Applicable Requirements, use any ordinary and customary materials
reasonably required to be used by Lessee in the normal course of the Permitted
Use, so long as such use is not a Reportable Use and does not expose the
Premises or neighboring properties to any meaningful risk of contamination or
damage or expose Lessor to any liability therefor. In addition, Lessor may (but
without any obligation to do so) condition its consent to any Reportable Use of
any Hazardous Substance by Lessee upon Lessee's giving Lessor such additional
assurances as Lessor, in its reasonable discretion, deems necessary to protect
itself, the public, the Premises and the environment against damage,
contamination or injury and/or liability therefor, including but not limited to
the installation (and, at Lessor's option, removal on or before Lease expiration
or earlier termination) of reasonably necessary protective modifications to the
Premises (such as concrete encasememts) and/or the deposit of an additional
Security Deposit under Paragraph 5 hereof.
(b) DUTY TO INFORM LESSOR. If Lessee knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under or
about the Premises or the Building, other than as previously consented to by
Lessor, Lessee shall immediately give Lessor written notice thereof, together
with a copy of any statement, report, notice, registration, application, permit,
business plan, license, claim, action, or proceeding given to, or received from,
any governmental authority or private party concerning the presence, spill,
release, discharge of, or exposure to, such Hazardous Substance including but
not limited to all such documents as may be involved in any Reportable Use
involving the Premises. Lessee shall not cause or permit any Hazardous Substance
to be spilled or released in, on, under or about the Premises (including,
without limitation, through the plumbing or sanitary sewer system).
(c) INDEMNIFICATION. Lessee shall indemnify, protect, defend and
hold Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control. Lessee's
obligations under this Paragraph 6.2(c) shall include, but not be limited to,
the effects of any contamination or injury to person, property or the
environment created or suffered by Lessee, and the cost of investigation
(including consultants' and attorneys' fees and testing), removal, remediation,
restoration and/or abatement thereof, or of any contamination therein involved,
and shall survive the expiration or earlier termination of this Lease. No
termination, cancellation or release agreement entered into by Lessor and Lessee
shall release Lessee from its obligations under this Lease with respect to
Hazardous Substances, unless specifically so agreed by Lessor in writing at the
time of such agreement.
6.3 LESSEE'S COMPLIANCE WITH REQUIREMENTS. Lessee shall, at Lessee's
sole cost and expense, fully, diligently and in a timely manner, comply with all
"APPLICABLE REQUIREMENTS," which term is used in this Lease to mean all laws,
rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, relating in any manner to the Premises (including
but not limited to matters pertaining to (i) industrial hygiene, (ii)
environmental conditions on, in, under or about the Premises, including soil and
groundwater conditions, and (iii) the use, generation, manufacture, production,
installation, maintenance, removal, transportation, storage, spill, or release
of any Hazardous Substance), now in effect or which may hereafter come into
effect. Lessee shall, within five (5) days after receipt of Lessor's written
request, provide Lessor with copies of all documents and information, including
but not limited to permits, registrations, manifests, applications, reports and
certificates, evidencing Lessee's compliance with any Applicable Requirements
specified by Lessor, and shall immediately upon receipt, notify Lessor in
writing (with copies of any documents involved) of any threatened or actual
claim, notice, citation, warning, complaint or report pertaining to or involving
failure by Lessee or the Premises to comply with any Applicable Requirements.
6.4 INSPECTION; COMPLIANCE WITH LAW. Lessor, Lessor's agents, employees,
contractors and designated representatives, and the holders of any mortgages,
deeds of trust or ground leases on the Premises ("Lenders") shall have the right
to enter the Premises at any time in the case of an emergency, and otherwise at
reasonable times, for the purpose of inspecting the condition of the Premises
and for verifying compliance by Lessee with this Lease and all Applicable
Requirements (as defined in Paragraph 6.3), and Lessor shall be entitled to
employ experts and/or consultants in connection therewith to advise Lessor with
respect to Lessee's activities, including but not limited to Lessee's
installation, operation, use, monitoring, maintenance, or removal of any
Hazardous Substance on or from the Premises. The costs and expenses of any such
inspections shall be paid by the party requesting same, unless a Default or
Breach of this Lease by Lessee or a violation of Applicable Requirements or a
contamination, caused or materially contributed to by Lessee, is found to exist
or to be imminent, or unless the inspection is requested or ordered by a
governmental authority as the result of any such existing or imminent violation
or contamination. In such case, Lessee shall upon request reimburse Lessor or
Lessor's Lender, as the case may be, for the costs and expenses of such
inspections.***See Addendum One Item 6.3 Inspections/Entries Continued.
7. MAINTENANCE, REPAIRS, UTILITY INSTALLATIONS, TRADE FIXTURES AND
ALTERATIONS.
See Addendum One Item 7 Maintenance, Repairs, Utility Installation, Trade
Fixtures and Alterations Continued.
7.1 LESSEE'S OBLIGATIONS
(a) Subject to the provisions of Paragraph 2.2 (Condition), 2.3
(Compliance with Covenants, Restrictions and Building Code), 7.2 (Lessor's
Obligations), 9 (Damage or Destruction), and 14 (Condemnation), Lessee shall, at
Lessee's sole cost and expense and at all times, keep the Premises and every
part thereof in good order, condition and repair (whether or not such portion of
the Premises requiring repair, or the means of repairing the same, are
reasonably or readily accessible to Lessee, and whether or not the need for such
repairs occurs as a result of Lessee's use, any prior use, the elements or the
age of such portion of the Premises), including, without limiting the generality
of the foregoing, all equipment or facilities specifically serving the Premises,
such as plumbing, heating, air conditioning, ventilating, electrical, lighting
facilities, boilers, fired or unfired pressure vessels, fire hose connections if
within the Premises, fixtures, interior walls, interior surfaces of exterior
walls, ceilings, floors, windows, doors, plate glass, and skylights, but
excluding any items which are the responsibility of Lessor pursuant to Paragraph
7.2 below. Lessee, in keeping the Premises in good order, condition and repair,
shall repair, shall exercise and perform good maintenance practices. Lessee's
obligations shall include restorations, replacements or renewals when necessary
to keep the Premises and all improvements thereon or a part thereof in good
order, condition and state of repair.
(b) Lessee shall, at Lessee's sole cost and expense, procure and
maintain a contract, with copies to Lessor, in customary form and substance for
and with a contractor specializing and experienced in the inspection,
maintenance and service of the heating, air conditioning and ventilation system
for the Premises. However, Lessor reserves the right, upon notice to Lessee, to
procure and maintain the contract for the heating, air conditioning and
ventilating systems, and if Lessor so elects, Lessee shall reimburse Lessor,
upon demand, for the cost thereof.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
* 7.2 LESSOR'S OBLIGATIONS. Subject to the provisions of Paragraphs 2.2
(Condition), 2.3 (Compliance with Covenants, Restrictions and Building Code),
4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's Obligations), 9
(Damage or Destruction) and 14 (Condemnation), Lessor, subject to reimbursement
pursuant to Paragraph 4.2, shall keep in good order, condition and repair the
foundations, exterior walls, structural condition of interior bearing walls,
exterior roof, fire sprinkler and/or standpipe and hose (if located in the
Common Areas) or other automatic fire extinguishing system including fire alarm
and/or smoke
*See Addendum
-3-
<PAGE>
detection systems and equipment, fire hydrants, parking lots, walkways,
parkways, driveways, landscaping, fences, signs and utility systems serving
the Common Areas and all parts thereof, as well as providing the services
for which there is a Common Area Operating Expense pursuant to Paragraph 4.2.
Lessor shall not be obligated to paint the exterior or interior surfaces of
exterior walls nor shall Lessor be obligated to maintain, repair or replace
windows, doors or plate glass of the Premises. Lessee expressly waives the
benefit of any statute now or hereafter in effect which would otherwise afford
Lessee the right to make repairs at Lessor's expense or to terminate this Lease
because of Lessor's failure to keep the Building, Industrial Center or Common
Areas in good order, condition and repair.
7.3 UTILITY INSTALLATIONS, TRADE FIXTURES, ALTERATIONS.
(a) DEFINITIONS; CONSENT REQUIRED. The term "UTILITY INSTALLATIONS"
is used in this Lease to refer to all air lines, power panels, electrical
distribution, security, fire protection systems, communications systems,
lightning fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "TRADE FIXTURES"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "ALTERATIONS" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "LESSEE-OWNED ALTERATIONS AND/OR UTILITY INSTALLATIONS" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent. Lessee may, however, make
non-structural Utility Installations to the interior of the Premises (excluding
the roof) without Lessor's consent but upon notice to Lessor, so long as they
are not visible from the outside of the Premises, do not involve puncturing,
relocating or removing the roof or any existing walls, or changing or
interfering with the fire sprinkler or fire detection systems and the cumulative
cost thereof during the term of this Lease as extended does not exceed
$2,500.00.
(b) CONSENT. Any Alterations or Utility Installations that Lessee
shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities: (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may, (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation.
(c) LIEN PROTECTION. Lessee shall pay when due all claims for labor
or materials furnished or alleged to have been furnished to or for Lessee at or
for use on the Premises, which claims are or may be secured by any mechanic's
or materialmen's lien against the Premises or any interest therein. Lessee shall
give Lessor not less than ten (10) days' notice prior to the commencement of
any work in, on, or about the Premises, and Lessor shall have the right to post
notices of non-responsibility in or on the Premises as provided by law. If
Lessee shall, in good faith, contest the validity of any such lien, claim or
demand, then Lessee shall, at its sole expense, defend and protect itself,
Lessor and the Premises against the same and shall pay and satisfy any such
adverse judgement that may be rendered thereon before the enforcement thereof
against the Lessor or the Premises. If Lessor shall require, Lessee shall
furnish to Lessor a surety bond satisfactory to Lessor in an amount equal to one
and one-half times the amount of such contested lien claim or demand,
indemnifying Lessor against liability for the same, as required by law for the
holding of the Premises free from the effect of such lien or claim, in addition,
Lessor may require Lessee to pay Lessor's attorneys' fees and costs in
participating in such action if Lessor shall decide it is to its best interest
to do so.
7.4 OWNERSHIP, REMOVAL, SURRENDER, AND RESTORATION.
(a) OWNERSHIP. Subject to Lessor's right to require their removal and
to cause Lessee to become the owner thereof as hereinafter provided in this
Paragraph 7.4, all Alterations and Utility Installations made to the Premises by
Lessee shall be the property of and owned by Lessee, but considered a part of
the Premises. Lessor may, at any time and at its option, elect in writing to
Lessee to be the owner of all or any specified part of the Lessee-Owned
Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof, all Lessee-Owned Alterations and Utility
Installations shall, at the expiration or earlier termination of this Lease,
become the property of Lessor and remain upon the Premises and be surrendered
with the Premises by Lessee.
(b) REMOVAL. Unless otherwise agreed in writing. Lessor may require
that any or all Lessee-Owned Alterations or Utility Installations be removed by
the expiration or earlier termination of this Lease, notwithstanding that their
installation may have been consented to by Lessor. Lessor may require the
removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) SURRENDER/RESTORATION. Lessee shall surrender the Premises by the
end of the last day of the Lease term or any earlier termination date, clean and
free of debris and in good operating order, condition and state of repair,
ordinary wear and tear excepted. Ordinary wear and tear shall not include any
damage or deterioration that would have been prevented by good maintenance
practice or by Lessee performing all of its obligations under this Lease. Except
as otherwise agreed or specified herein, the Premises, as surrendered, shall
include the Alterations and Utility Installations. The obligation of Lessee
shall include the repair of any damage occasioned by the installation,
maintenance or removal of Lessee's Trade Fixtures, furnishings, equipment, and
Lessee-Owned Alterations and Utility Installations as well as the removal of any
storage tank installed by or for Lessee, and the removal, replacement, or
remediation of any soil, material or ground water contaminated by Lessee, all as
may then be required by Applicable Requirements and/or good practice. Lessee's
Trade Fixtures shall remain the property of Lessee and shall be removed by
Lessee subject to its obligation to repair and restore the Premises per this
Lease.
8. INSURANCE; INDEMNITY.
8.1 PAYMENT OF PREMIUMS. The cost of the premiums for the insurance
policies maintained by Lessor under this Paragraph 8 shall be a Common Area
Operating Expense pursuant to Paragraph 4.2 hereof. Premiums for policy periods
commencing prior to, or extending beyond, the term of this Lease shall be
prorated to coincide with the corresponding Commencement Date or expiration
Date.
8.2 LIABILITY INSURANCE.
(a) CARRIED BY LESSEE. Lessee shall obtain and keep in force during
the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $1,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused
by heat, smoke or fumes from a hostile fire. The policy shall not contain any
intra-insured exclusions as between insured persons or organizations, but shall
include coverage for liability assumed under this Lease as an "INSURED CONTRACT"
for the performance of Lessee's indemnity obligations under this Lease. The
limits of said insurance required by this Lease or as carried by Lessee shall
not, however, limit the liability of Lessee nor relieve Lessee of any obligation
hereunder. All insurance to be carried by Lessee shall be primary to and not
contributory with any similar insurance carried by Lessor, whose insurance shall
be considered excess insurance only.
(b) CARRIED BY LESSOR. Lessor shall also maintain liability insurance
described in Paragraph 8.2(a) above, in addition to and not in lien of, the
insurance required to be maintained by Lessee. Lessee shall not be named as an
additional insured therein.
8.3 PROPERTY INSURANCE-BUILDING, IMPROVEMENTS AND RENTAL VALUE.
(a) BUILDING AND IMPROVEMENTS. Lessor shall obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and to any Lender(s), insuring against loss or damage to
the Premises. Such insurance shall be for full replacement cost, as the same
shall exist from time to time, or the amount required by any Lender(s), but in
no event more than the commercially reasonable and available insurable value
thereof if, by reason of the unique nature or age of the improvements involved,
such latter amount is less than full replacement cost. Lessee-Owned Alterations
and Utility Installations, Trade Fixtures and Lessee's personal property shall
be insured by Lessee pursuant to Paragraph 8.4. If the coverage is available and
commercially appropriate, Lessor's policy or policies shall insure against all
risks of direct physical loss or damage (except the perils of flood and/or
earthquake unless required by a Lender), including coverage for any additional
costs resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Building required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) RENTAL VALUE. Lessor shall also obtain and keep in force during
the term of this Lease a policy or policies in the name of Lessor, with loss
payable to Lessor and any Lender(s), insuring the loss of the full rental and
other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the Premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) ADJACENT PREMISES. Lessee shall pay for any increase in the
premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Industrial Center if said increase is caused by
Lessee's acts, omissions, use or occupancy of the Premises.
(d) LESSEE'S IMPROVEMENTS. Since Lessor is the insuring Party, Lessor
shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 LESSEE'S PROPERTY INSURANCE. Subject to the requirements of
Paragraph 8.5. Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade Fixtures and Lessee-Owned
Alterations and Utility Installations in, on, or about the Premises similar in
coverage to that carried by Lessor as the Insuring Party under Paragraph 8.3(a).
Such insurance shall be full replacement cost coverage with a deductible not to
exceed $1,000 per occurrence. The proceeds from any such insurance shall be used
by Lessee for the replacement of personal property and the restoration of Trade
Fixtures and Lessee-Owned Alterations and Utility Installations. Upon request
from Lessor, Lessee shall provide Lessor with written evidence that such
insurance is in force.
8.5 INSURANCE POLICIES. Insurance required hereunder shall be in companies
duly licensed to transact business in the state where the Premises are located,
and maintaining during the policy term a "General Policyholders Rating" of at
least B+, V, or such other rating as may be required by a Lender, as set forth
in the most current issue of "Best's Insurance Guide" Lessee shall not do or
permit to be done anything which shall invalidate the insurance policies
referred to in
-4-
<PAGE>
this Paragraph 8. Lessee shall cause to be delivered to Lessor, within seven (7)
days after the earlier of the Early Possession Date or the Commencement Date,
certified copies of, or certificates evidencing the existence and amounts of,
the insurance required under Paragraph 8.2(a) and 8.4. No such policy shall be
cancellable or subject to modification except after thirty (30) days' prior
written notice to Lessor. Lessee shall at least thirty (30) days prior to the
expiration of such policies, furnish Lessor with evidence of renewals or
"insurance binders" evidencing renewal thereof, or Lessor may order such
insurance and charge the cost thereof to Lessee, which amount shall be payable
by Lessee to Lessor upon demand.
8.6 WAIVER OF SUBROGATION. Without affecting any other rights or remedies,
Lessee and Lessor each hereby release and relieve the other, and waive their
entire right to recover damages (whether in contract or in tort) against the
other, for loss or damage to their property arising out of or incident to the
perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 INDEMNITY. Except for Lessor's negligence and/or breach of express
warranties, Lessee shall indemnify, protect, defend and hold harmless the
Premises, Lessor and its agents, Lessor's master or ground lessor, partners and
Lenders, from and against any and all claims, loss of rents and/or damages,
costs, liens, judgements, penalties, loss of permits, attorneys' and
consultants' fees, expenses and/or liabilities arising out of, involving, or in
connection with, the occupancy of the Premises by Lessee, the conduct of
Lessee's business, any act, omission or neglect of Lessee, its agents,
contractors, employees or invitees, and out of any Default or Breach by Lessee
in the performance in a timely manner of any obligation on Lessee's part to be
performed under this Lease. The foregoing shall include, but not be limited to,
the defense or pursuit of any claim or action or proceeding involved therein,
and whether or not (in the case of claims made against Lessor) litigated and/or
reduced to judgement. In case any action or proceeding be brought against Lessor
by reason of any of the foregoing matters, Lessee upon notice from Lessor shall
defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor
and Lessor shall cooperate with Lessee in such defense. Lessor need not have
first paid any such claim in order to be so indemnified.
8.8 EXEMPTION OF LESSOR FROM LIABILITY. Lessor shall not be liable for
injury or damage to the person or goods, wares, merchandise or other property of
Lessee. Lessee's employees, contractors, invitees, customers, or any other
person in or about the Premises, whether such damage or injury is caused by or
results from fire, steam, electricity, gas, water or rain, or from the breakage,
leakage, obstruction or other defects of pipes, fire sprinklers, wires,
appliances, plumbing, air conditioning or lightning fixtures, or from any other
cause, whether said injury or damage results from conditions arising upon the
Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the Industrial Center. Notwithstanding Lessor's negligence or
breach of this Lease, Lessor shall under no circumstances be liable for injury
to Lessee's business or for any loss of income or profit therefrom.
9 DAMAGE OR DESTRUCTION.
9.1 DEFINITIONS.
(a) "PREMISES PARTIAL DAMAGE" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is less than fifty percent(50%) of
the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "PREMISES TOTAL DESTRUCTION" shall mean damage or destruction to
the Premises, other than Lessee-Owned Alterations and Utility Installations, the
repair cost of which damage or destruction is fifty percent (50%) or more of the
then Replacement Cost of the Premises (excluding Lessee-Owned Alterations and
Utility Installations and Trade Fixtures) immediately prior to such damage or
destruction. In addition, damage or destruction to the Building, other than
Lessee-Owned Atlerations and Utility Installations and Trade Fixtures of any
lessees of the Building, the cost of which damage or destruction is fifty
percent (50%) or more of the then Relpacement Cost (excluding Lessee-Owned
Alterations and Utility Installations and Trade Fixtures of any lessees of the
Building) of the Building shall, at the option of Lessor, be deemed to be
Premises Total Destruction.
(c) "INSURED LOSS" shall mean damage or destruction to the Premises,
other than Lessee-Owned Alterations and Utility Installations and Trade
Fixtures, which was caused by an event required to be covered by the insurance
described in Paragraph 8.3(a) irrespective of any deductible amounts or coverage
limits involved.
(d) "REPLACEMENT COST" shall mean the cost to repair or rebuild the
improvements owned by Lessor at the time of the occurrence to their condition
existing immediately prior thereto, including demolition, debris removal and
upgrading required by the operation of applicable building codes, ordinances or
laws, and without deduction for depreciation.
(e) "HAZARDOUS SUBSTANCE CONDITION" shall mean the occurence or
discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 PREMISES PARTIAL DAMAGE - INSURED LOSS. If Premises Partial Damage
that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair
such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations and
Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is
a shortage of insurance proceeds and such shortage is due to the fact that, by
reason of the unique nature of the improvements in the Premises, full
replacement cost insurance coverage was not commercially reasonable and
available, Lessor shall have no obligation to pay for the shortage in insurance
proceeds or to fully restore the unique aspects of the Premises unless Lessee
provides Lessor with the funds to cover same, or adequate assurance thereof,
within ten (10) days following receipt of written notice of such shortage and
request therefor. If Lessor receives said funds or adequate assurance thereof
within said ten (10) day period. Lessor shall complete them as soon as
reasonably possible and this Lease shall remain in full force and effect. If
Lessor does not receive such funds or assurance within said period. Lessor may
nevertheless elect by written notice to Lessee within ten (10) days thereafter
to make such restoration and repair as is commercially reasonable with Lessor
paying any shortage in proceeds, in which case this Lease shall remain in full
force and effect. If Lessor does not receive such funds or assurance within such
ten (10) day period, and if Lessor does not so elect to restore and repair, then
this Lease shall terminate sixty (60) days following the occurence of the damage
or destruction. Unless otherwise agreed, Lessee shall in no event have any right
to reimbursement from Lessor for any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding
that there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either party.
9.3 PARTIAL DAMAGE - UNINSURED LOSS. If Premises Partial Damage that is
not an Insured Loss occurs, unless caused by a negligent or willful act of
Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect). Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessors of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 TOTAL DESTRUCTION. Notwithstanding any other provision hereof, if
Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate sixty (60) days
following the date of such Premises Total Destruction, whether or not the damage
or destruction is an insured Loss or was caused by a negligent or willful act of
Lessee. In the event, however, that the damage or destruction was caused by
Lessee, Lessor shall have the right to recover Lessor's damages from Lessee
except as released and waived in Paragraph 9.7.
9.5 DAMAGE NEAR END OF TERM. If at any time during the last six (6) months
of the term of this Lease there is damage for which the cost to repair exceeds
one month's Base Rent, whether or not an Insured Loss, Lessor may, at Lessor's
option, terminate this Lease effective sixty (60) days following the date of
occurrence of such damage by giving written notice to Lessee of Lessor's
election to do so within thirty (30)days after the date of occurence of such
damage. Provided, however, if Lessee at that time has an exercisable option to
extend this Lease to purchase the Premises, then Lessee may preserve this Lease
by (a) exercising such option, and (b) providing Lessor with any shortage in
insurance proceeds (or adequate assurance thereof) needed to make the repairs on
or before the earlier of (i) the date which is ten (10) days after Lessee's
receipt of Lessor's written notice purporting to terminate this Lease, or (ii)
the day prior to the date upon which such option expires, if Lessee duly
exercises such option during such period and provides Lessor with funds (or
adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor
shall, at Lessor's expense repair such damage as soon as reasonably possible and
this Lease shall continue in full forth and effect. If Lessee fails to exercise
such option and provide such funds or assurance during such period, then this
Lease shall terminate as of the date set forth in the first sentence of this
Paragraph 9.5.
9.6 ABATEMENT OF RENT; LESSEE'S REMEDIES.
(a) In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Lessee is not legally responsible, the Base Rent,
Common Area Operating Expenses and other charges, if any, payable by Lessee
hereunder for the period during which such damage or condition, its repair,
remediation or restoration continues, shall be abated in proportion to the
degree to which Lessee's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph 8.3(b). Except
for abatement of Base Rent, Common Area Operating Expenses and other charges, if
any, as aforesaid, all other obligations of Lessee hereunder shall be performed
by Lessee, and Lessee shall have no claim against Lessor for any damage
suffered by reason of any such damage, destruction, repair, remediation or
restoration.
(b) If Lessor shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence, in a
substantial and meaningful way, the repair or restoration of the Premises within
ninety (90) days after such obligation shall accrue. Lessee may, at any time
prior to the commencement of such repair or restoration, give written notice to
Lessor and to any Lenders of which Lessee has actual notice of Lessee's election
to terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect "COMMENCE" as used in this Paragraph 9.6
shall mean either the unconditional authorization of the preparation of the
required plans, or the beginning of the actual work on the Premises, whichever
occurs first.
9.7 HAZARDOUS SUBSTANCE CONDITIONS. If a Hazardous Substance Condition
occurs, unless Lessee is legally responsible therefor (in which case Lessee
shall make the investigation and remediation thereof required by Applicable
Requirements and this Lease shall continue in full force and effect, but
subject
<PAGE>
to Lessor's rights under Paragraph 6.2(c) and Paragraph 13), Lessor may at
Lessor's option either (i) investigate and remediate such Hazardous Substance
Condition, if required, as soon as reasonably possible at Lessor's expense, in
which event this Lease shall continue in full force and effect, or (ii) if the
estimated cost to investigate and remediate such condition exceeds twelve (12)
times the then monthly Base Rent or $100,000 whichever is greater, give written
notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of
the occurrence of such Hazardous Substance Condition of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the excess costs of (a) investigation and remediation of such
Hazardous Substance Condition to the extent required by Applicable Requirements,
over (b) an amount equal to twelve (12) times the then monthly Base Rent or
$100,000, whichever is greater. Lessee shall provide Lessor with the funds
required of Lessee or satisfactory assurance thereof within thirty (30) days
following said commitment by Lessee. In such event this Lease shall continue in
full force and effect, and Lessor shall proceed to make such investigation and
remediation as soon as reasonably possible after the required funds are
available. If Lessee does not give such notice and provide the required funds or
assurance thereof within the time period specified above, this Lease shall
terminate as of the date specified in Lessor's notice of termination.
9.8 TERMINATION - ADVANCE PAYMENTS. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 WAIVER OF STATUTES. Lessor and Lessee agree that the terms of this
Lease shall govern the effect of any damage to or destruction of the Premises
and the Building with respect to the termination of this Lease and hereby waive
the provisions of any present or future statute to the extent it is inconsistent
herewith.
10. REAL PROPERTY TAXES.
10.1 PAYMENTS OF TAXES. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2, applicable to the Industrial Center, and except as
otherwise provided in Paragraph 10.3, any such amounts shall be included in the
calculation of Common Area Operating Expenses in accordance with the provisions
of Paragraph 4.2.
10.2 REAL PROPERTY TAX DEFINITION. As used herein, the term "REAL
PROPERTY TAXES" shall include any form of real estate tax or assessment,
general, special, ordinary or extraordinary, and any license fee, commercial
rental tax, improvement bond or bonds, levy or tax (other than inheritance,
personal income or estate taxes) imposed upon the Industrial Center by any
authority having the direct or indirect power to tax, including any city, state
or federal government, or any school, agricultural, sanitary, fire, street,
drainage, or other improvement district thereof, levied against any legal or
equitable interest of Lessor in the Industrial Center or any portion thereof,
Lessor's right to rent or other income therefrom, and/or Lessor's business of
leasing the Premises. The term "REAL PROPERTY TAXES" shall also include any tax,
fee, levy, assessment or charge, or any increase therein, imposed by reason of
events occurring, or changes in Applicable Law taking effect, during the term of
this Lease, including but not limited to a change in the ownership of the
Industrial Center or in the improvements thereon, the execution of this Lease,
or any modification, amendment or transfer thereof, and whether or not
contemplated by the Parties. In calculating Real Property Taxes for any calendar
year, the Real Property Taxes for any real estate tax year shall be included in
the calculation of Real Property Taxes for such calendar year based upon the
number of days which such calendar year and tax year have in common.
10.3 ADDITIONAL IMPROVEMENTS. Common Area Operating Expenses shall not
include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Industrial
Center by other lessees or by Lessor for the exclusive enjoyment of such other
lessees. Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to
Lessor at the time Common Area Operating Expenses are payable under Paragraph
4.2, the entirety of any increase in Real Property Taxes if assessed solely by
reason of Alterations, Trade Fixtures or Utility Installations placed upon the
Premises by Lessee or at Lessee's request.
10.4 JOINT ASSEESMENT. If the Building is not separately assessed, Real
Property Taxes allocated to the Building shall be an equitable proportion of the
Real Property Taxes for all of the land and improvements included within the tax
parcel assessed, such proportion to be determined by Lessor from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Lessor's reasonable determination thereof, in good
faith, shall be conclusive.
10.5 LESSEE'S PROPERTY TAXES. Lessee shall pay prior to delinquency all
taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Industrial Center. When
possible, Lessee shall cause its Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
If any of Lessee's said property shall be assessed with Lessor's real property,
Lessee shall pay Lessor the taxes attributable to Lessee's property within ten
(10) days after receipt of a written statement setting forth the taxes
applicable to Lessee's property.
11. UTILITIES. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d).
12. ASSIGNMENT AND SUBLETTING.
12.1 LESSOR'S CONSENT REQUIRED.
(a) Lessee shall not voluntarily or by operation of law assign,
transfer, mortgage or otherwise transfer or encumber (collectively, "assign") or
sublet all or any part of Lessee's interest in this Lease or in the Premises
without Lessor's prior written consent given under and subject to the terms of
Paragraph 36.
(b) A change in the control of Lessee shall constitute an
assignment requiring Lessor's consent. The transfer, on a cumulative basis, of
twenty-five percent (25%) or more of the voting control of Lessee shall
constitute a change in control for this purpose.
(c) The involvement of Lessee or its assets in any transaction,
or series of transactions (by way of merger, sale, acquisition, financing,
refinancing, transfer, leveraged buy-out or otherwise), whether or not a formal
assignment or hypothecation of this Lease or Lessee's assets occurs, which
results or will result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount equal to or greater than twenty-five percent (25%) of such
Net Worth of Lessee as it was represented to Lessor at the time of full
execution and delivery of this Lease or at the time of the most recent
assignment to which Lessor has consented, or as it exists immediately prior to
said transaction or transactions constituting such reduction, at whichever time
said Net Worth of Lessee was or is greater, shall be considered an assignment of
this Lease by Lessee to which Lessor may reasonably withhold its consent. "NET
WORTH OF LESSEE" for purposes of this Lease shall be the net worth of Lessee
(excluding any Guarantors) established under generally accepted accounting
principles consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to either: (i) terminate this Lease, or (ii) upon thirty
(30) days' written notice ("LESSOR'S NOTICE"), increase the monthly Base Rent
for the Premises to the greater of the then fair market rental value of the
Premises, as reasonably determined by Lessor, or one hundred ten percent (110%)
of the Base Rent then in effect. Pending determination of the new fair market
rental value, if disputed by Lessee, Lessee shall pay the amount set forth in
Lessor's Notice, with any overpayment credited against the next installment(s)
of Base Rent coming due, and any underpayment for the period retroactively to
the effective date of the adjustment being due and payable immediately upon the
determination thereof. Further, in the event of such Breach and rental
adjustment, (i) the purchase price of any option to purchase the Premises held
by Lessee shall be subject to similar adjustment to the then fair market value
as reasonably determined by Lessor (without the Lease being considered an
encumbrance or any deduction for depreciation or obsolescence, and considering
the Premises at its highest and best use and in good condition) or one hundred
ten percent (110%) of the price previously in effect, (ii) any index-oriented
rental or price adjustment formulas contained in this Lease shall be adjusted to
require that the base index be determined with reference to the index applicable
to the time of such adjustment, and (iii) any fixed rental adjustments scheduled
during the remainder of the Lease term shall be increased in the same ratio as
the new rental bears to the Base Rent in effect immediately prior to the
adjustment specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 TERMS AND CONDITIONS APPLICABLE TO ASSIGNMENT AND SUBLETTING.
(a) Regardless of Lessor's consent, any assignment or subletting
shall not (i) be effective without the express written assumption by such
assignee or sublessee of the obligations of Lessee under this Lease, (ii)
release Lessee of any obligations hereunder, nor (iii) alter the primary
liability of Lessee for the payment of Base Rent and other sums due Lessor
hereunder or for the performance of any other obligations to be performed by
Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending aproval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such
assignment nor the acceptance of any rent for performance shall constitute a
waiver or estoppel of Lessor's right to exercise its remedies for the Default or
Breach by Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting shall
not constitute a consent to any subsequent assignment or subletting by Lessee or
to any subsequent or successive assignment or subletting by the assignee or
sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default or Breach of Lessee's obligation
under this Lease, Lessor may proceed directly against Lessee, any Guarantors or
anyone else responsible for the performance of the Lessee's obligations under
this Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Each request for consent to an assignment or subleting shall
be in writing, accompanied by information relevant to Lessor's determination as
to the financial and operational responsibility and appropriateness of the
proposed assignee or sublessee, including but not limited to the intended use
and/or required modification of the Premises, if any, together with a
non-refundable deposit of $1,000 or ten percent (10%) of the monthly Base Rent
applicable to the portion of the Premises which is the subject of the proposed
assignment or sublease, whichever is greater, as reasonable consideration for
Lessor's considering and processing the request for consent. Lessee agrees to
provide Lessor with such other or additional information and/or documentation
as may be reasonably requested by Lessor.
(f) Any assignee of, or sublessee under, this Lease shall, by
reason of accepting such assignment or entering into such sublease, be deemed,
for the benefit of Lessor, to have assumed and agreed to conform and comply with
each and every term, covenant, condition and obligation herein to be observed or
performed by Lessee during the term of said assignment or sublease, other than
such obligations as are contrary to or inconsistent with provisions of an
assignment or sublease to which Lessor has specifically consented in writing.
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(g) The occurrence of a transaction described in Paragraph 12.2(c)
shall give Lessor the right (but not the obligation) to require that the
Security Deposit be increased by an amount equal to six (6) times the then
monthly Base Rent, and Lessor may make the actual receipt by Lessor of the
Security Deposit increase a condition to Lessor's consent to such transaction.
(h) Lessor, as a condition to giving its consent to any assignment or
subletting, may require that the amount and adjustment schedule of the rent
payable under this Lease be adjusted to what is then the market value and/or
adjustment schedule for property similar to the Premises as then constituted, as
determined by Lessor.
12.3 ADDITIONAL TERMS AND CONDITIONS APPLICABLE TO SUBLETTING. The
following terms and conditions shall apply to any subletting by Lessee of all or
any part of the Premises and shall be deemed included in all Subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of Lessee's
interest in all rentals and income arising from any sublease of all or a portion
of the Premises heretofore or hereafter made by Lessee, and Lessor may collect
such rent and income and apply same toward Lessee's obligations under this
Lease; provided, however, that until a Breach (as defined in Paragraph 13.1)
shall occur in the performance of Lessee's obligations under this Lease, Lessee
may, except as otherwise provided in this Lease, receive, collect and enjoy the
rents accruing under such sublease. Lessor shall not, by reason of the foregoing
provision or any other assignment of such sublease to Lessor, nor by reason of
the collection of the rents from a sublessee, be deemed liable to the sublessee
for any failure of Lessee to perform and comply with any of Lessee's obligations
to such sublessee under such Sublease. Lessee hereby irrevocably authorizes and
directs any such sublessee, upon receipt of a written notice from Lessor stating
that a Breach exists in the performance of Lessee's obligations under this
Lease, to pay to Lessor the rents and other charges due and to become due under
the sublease. Sublessee shall rely upon any such statement and request from
Lessor and shall pay such rents any other charges to Lessor without any
obligation or right to inquire as to whether such Breach exists and
notwithstanding any notice from or claim from Lessee to the contrary. Lessee
shall have no right or claim against such sublessee, or, until the Breach has
been cured, against Lessor, for any such rents and other charges so paid by said
sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of its
obligations under this Lease, Lessor, at its option and without any obligation
to do so, may require any sublessee to attorn to Lessor, in which event Lessor
shall undertake the obligations of the Sublessor under such sublease from the
time of the exercise of said option to the expiration of such sublease;
provided, however, Lessor shall not be liable for any prepaid rents or security
deposit paid by such sublessee to such sublessor or for any other prior defaults
or breaches of such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor under
a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall further
assign or sublet all or any part of the Premises without Lessor's prior written
consent.
(e) Lessor shall deliver a copy of any notice of Default or Breach by
Lessee to the sublessee, who shall have the right to cure the Default of Lessee
within the grace period, if any, specified in such notice. The sublessee shall
have a right of reimbursement and offset from and against Lessee for any such
Defaults cured by the sublessee.
13. DEFAULT; BREACH; REMEDIES.
13.1 DEFAULT; BREACH. Lessor and Lessee agree that if an attorney is
consulted by Lessor in connection with a Lessee Default or Breach (as
hereinafter defined), $350.00 is a reasonable minimum sum per such occurrence
for legal services and costs in the preparation and service of a notice of
Default, and that Lessor may include the cost of such services and costs in said
notice as rent due and payable to cure said default. A "DEFAULT" by Lessee is
defined as a failure by Lessee to observe, comply with or perform any of the
terms, covenants, conditions or rules applicable to Lessee under this Lease. A
"BREACH" by Lessee is defined as the occurrence of any one or more of the
following Defaults, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to reoccupy
same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the failure
by Lessee to make any payment of Base Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the failure
by Lessee to provide Lessor with reasonable written evidence (in duly executed
original form, if applicable) of (i) compliance with Applicable Requirements per
Paragraph 6.3, (ii) the inspection, maintenance and service contracts required
under Paragraph 7.1(b), (iii) the rescission of an unauthorized assignment or
subletting per Paragraph 12.1, (iv) a Tenancy Statement per Paragraphs 16 or 37,
(v) the subordination or non-subordination of this Lease per Paragraph 30, (vi)
the guaranty of the performance of Lessee's obligations under this Lease if
required under Paragraphs 1.11 and 37, (vii) the execution of any document
requested under Paragraph 42 (easements), or (viii) any other documentation or
information which Lessor may reasonably require of Lessee under the terms of
this lease, where any such failure continues for a period of ten (10) days
following written notice by or on behalf of Lessor to Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions or
provisions of this Lease, or of the rules adopted under Paragraph 40 hereof that
are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above , where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure, then it shall not be deemed to be a Breach of this Lease by Lessee if
Lessee commences such cure within said thirty (30) day period and thereafter
diligently prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the making by
Lessee of any general arrangement or assignment for the benefit of creditors;
(ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section 101 or any
successor statute thereto (unless, in the case of a petition filed against
Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of
a trustee or receiver to take possession of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where possession
is not restored to Lessee within thirty (30) days; or (iv) the attachment,
execution or other judicial seizure of substantially all of Lessee's assets
located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of Lessee or
of any Guarantor, given to Lessor by Lessee or any Guarantor, was materially
false.
(g) If the performance of Lessee's obligations under this Lease is
guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's
liability with respect to this Lease other than in accordance with the terms of
such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a
bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a
Guarantor's breach of its guaranty obligation on an anticipatory breach basis,
and Lessee's failure, within sixty (60) days following written notice by or on
behalf of Lessor to Lessee of any such event, to provide Lessor with written
alternative assurances of security, which, when coupled with the then existing
resources of Lessee, equals or exceeds the combined financial resources of
Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2 REMEDIES. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in Paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by any
lawful means, in which case this Lease and the term hereof shall terminate and
Lessee shall immediately surrender possession of the Premises to Lessor. In such
event Lessor shall be entitled to recover from Lessee: (i) the worth at the time
of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in provision (iii) of the immediately preceding
sentence shall be computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco or the Federal Reserve Bank District
in which the Premises are located at the time of award plus one percent (1%).
Efforts by Lessor to mitigate damages caused by Lessee's Default or Breach of
this Lease shall not waive Lessor's right to recover damages under this
Paragraph 13.2. If termination of this Lease is obtained through the provisional
remedy of unlawful detainer, Lessor shall have the right to recover in such
proceeding the unpaid rent and damages as are recoverable therein, or Lessor may
reserve the right to recover all or any part thereof in a separate suit for such
rent and/or damages. If a notice and grace period required under Subparagraph
13.1(b), (c) or (d) was not previously given, a notice to pay rent or quit, or
to perform or quit, as the case may be, given to Lessee under any statute
authorizing the forfeiture of leases for unlawful detainer shall also constitute
the applicable notice for grace period purposes required by Subparagraph
13.1(b), (c) or (d). In such case, the applicable grace period under the
unlawful detainer statute shall run concurrently after the one such statutory
notice, and the failure of Lessee to cure the Default within the greater of two
(2) such grace periods shall constitute both an unlawful detainer and a Breach
of this Lease entitling Lessor to the remedies provided for in this Lease and/or
by said statute.
(b) Continue the Lease and Lessee's right to possession in effect (in
California under California Civil Code Section 1951.4) after Lessee's Breach and
recover the rent as it becomes due, provided Lessee has the right to sublet or
assign, subject only to reasonable limitations. Lessor and Lessee agree that the
limitations on assignment and subleting in this Lease are reasonable. Acts of
maintenance or preservation, efforts to relet the Premises, or the appointment
of a receiver to protect the Lessor's interest under this Lease, shall not
constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to Lessor
under the laws or judicial decisions of the state wherein the Premises are
located.
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(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 INDUCEMENT RECAPTURE IN EVENT OF BREACH. Any agreement by Lessor for
free or abated rent or other charges applicable to the Premises, or for the
giving or paying by Lessor to or for Lessee of any cash or other bonus,
inducement or consideration for Lessee's entering into this Lease, all of which
concessions are hereinafter referred to as "Inducement Provisions" shall be
deemed conditioned upon Lessee's full and faithfull performance of all of the
terms, covenants and conditions of this Lease to be performed or observed by
Lessee during the term hereof as the same may be extended. Upon the occurrence
of a Breach (as defined in Paragraph 13.1) of this Lease by Lessee, any such
Inducement Provisions shall automatically be deemed deleted from this Lease and
of no further force or effect, and any rent, other charge, bonus, inducement or
consideration theretofore abated, given or paid by Lessor under such an
Inducement Provision shall be immediately due and payable by Lessee to Lessor,
and recoverable by Lessor, as additional rent due under this Lease,
notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by
Lessor of rent or the cure of the Breach which initiated the operation of this
Paragraph 13.3 shall not be deemed a waiver by Lessor of the provisions of this
Paragraph 13.3 unless specifically so stated in writing by Lessor at the time of
such acceptance.
13.4 LATE CHARGES. Lessee hereby acknowledges that late payment by Lessee
to Lessor of rent and other sums due hereunder will cause Lessor to incur costs
not contemplated by this Lease, the exact amount of which will be extremely
difficult to ascertain. Such costs include, but are not limited to, processing
and accounting charges, and late charges which may be imposed upon Lessor by the
terms of any ground lease, mortgage or deed of trust covering the Premises.
Accordingly, if any installment of rent or other sum due from Lessee shall not
be received by Lessor or Lessor's designee within ten (10) days after such
amount shall be due, then, without any requirement for notice to Lessee, Lessee
shall pay to lessor a late charge equal to six percent (6%) of such overdue
amount. The parties hereby agree that such late charge represents a fair and
reasonable estimate of the costs Lessor, will incur by reason of late payment by
Lessee. Acceptance of such late charge by Lessor shall in no event constitute a
waiver of Lessee's Default or Breach with respect to such overdue amount, nor
prevent Lessor from exercising any of the other rights and remedies granted
hereunder. In the event that a late charge is payable hereunder, whether or not
collected, for three (3) consecutive installments of Base Rent, then
notwithstanding Paragraph 4.1 or any other provision of this Lease to the
contrary, Base Rent shall, at Lessor's option, become due and payable quarterly
in advance.
13.5 BREACH BY LESSOR. Lessor shall not be deemed in breach of this Lease
unless Lessor fails within a reasonable time to perform an obligation required
to be performed by Lessor. For purposes of this Paragraph 13.5, a reasonable
time shall in no event be less than thirty (30) days after receipt by Lessor,
and by any Lender(s) whose name and address shall have been furnished to Lessee
in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. CONDEMNATION. If the Premises or any portion thereof are taken under the
power of eminent domain or sold under the threat of the exercise of said power
(all of which are herein called "condemnation"), this Lease shall terminate as
to the part so taken as of the date the condemning authority takes title or
possession, whichever first occurs. If more than ten percent (10%) of the floor
area of the Premises, or more than twenty-five percent (25%) of the portion of
the Common Areas designated for Lessee's parking, is taken by condemnation,
Lessee may, at Lessee's option, to be exercised in writing within ten (10) days
after Lessor shall have given Lessee written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
shall have taken possession) terminate this Lease as of the date the condemning
authority takes such possession. If Lessee does not terminate this Lease in
accordance with the foregoing, this Lease shall remain in full force and effect
as to the portion of the Premises remaining, except that the Base Rent shall be
reduced in the same proportion as the rentable floor area of the Premises taken
bears to the total rentable floor area of the Premises. No reduction of Base
Rent shall occur if the condemnation does not apply to any portion of the
Premises. Any award for the taking of all or any part of the Premises under the
power of eminent domain or any payment made under threat of the exercise of such
power shall be the property of Lessor, whether such award shall be made as
compensation for diminution of value of the leasehold or for the taking of the
fee, or as severence damages; provided, however, that Lessee shall be entitled
to any compensation, separately awarded to Lessee for Lessee's relocation
expenses and/or loss of Lessee's Trade Fixtures. In the event that this Lease is
not terminated by reason of such condemnation, Lessor shall to the extent of its
net severance damages received, over and above Lessee's Share of the legal and
other expenses incurred by Lessor in the condemnation matter, repair any damage
to the Premises caused by such condemnation authority. Lessee shall be
responsible for the payment of any amount in excess of such net severance
damages required to complete such repair.
15. BROKERS' FEES.
15.1 PROCURING CAUSE. The Broker(s) named in Paragraph 1.10 is/are the
procuring cause of this Lease.
15.2 ADDITIONAL TERMS. Unless Lessor and Broker(s) have otherwise agreed in
writing, Lessor agrees that: (a) if Lessee exercises any Option (as defined in
Paragraph 39.1) granted under this Lease or any Option subsequently granted, or
(b) if Lessee acquires any rights to the Premises or other premises in which
Lessor has an interest, or (c) if Lessee remains in possession of the Premises
with the consent of Lessor after the expiration of the term of this Lease after
having failed to exercise an Option, or (d) if said Brokers are the procuring
cause of any other lease or sale entered into between the Parties pertaining to
the Premises and/or any adjacent property in which Lessor has an interest, or
(e) if Base Rent is increased, whether by agreement or operation of an
escalation clause herein, then as to any of said transactions, Lessor shall pay
said Broker(s) a fee in accordance with the schedule of said Broker(s) in effect
at the time of the execution of this Lease.
15.3 ASSUMPTION OF OBLIGATIONS. Any buyer or transferee of Lessor's
interest in this Lease, whether such transfer is by agreement or by operation of
law, shall be deemed to have assumed Lessor's obligation under this Paragraph
15. Each Broker shall be an intended third party beneficiary of the provisions
of Paragraph 1.10 and of this Paragraph 15 to the extent or its interest in any
commission arising from this Lease and may enforce that right directly against
Lessor and its successors.
15.4 REPRESENTATIONS AND WARRANTIES. Lessee and Lessor each represent and
warrant to the other that it has had no dealings with any person, firm, broker
or finder other than as named in Paragraph 1.10(a) in connection with the
negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
16. TENANCY AND FINANCIAL STATEMENTS.
16.1 TENANCY STATEMENT. Each Party (as "RESPONDING PARTY") shall within ten
(10) days after written notice from the other Party (the "REQUESTING PARTY")
execute, acknowledge and deliver to the Requesting Party a statement in writing
in a form similar to the then most current "TENANCY STATEMENT" form published by
the American Industrial Real Estate Association, plus such additional
information, confirmation and/or statements as may be reasonably requested by
the Requesting Party. *the most recent annual reports of Aura Systems
Corporation
16.2 FINANCIAL STATEMENT. If Lessor desires to finance, refinance, or sell
the Premises or the Building, or any part thereof, Lessee and all Guarantors
shall deliver to any potential lender or purchaser designated by Lessor such
financial statements of Lessee and such Guarantors as may be reasonably required
by such lender or purchaser, including but not limited to. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. LESSOR'S LIABILITY. The term "LESSOR" as used herein shall mean the owner
or owners at the time in question of the fee title to the Premises. In the event
of a transfer of Lessor's title or interest in the Premises or in this Lease,
Lessor shall deliver to the transferee or assignee (in cash or by credit) any
unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. SEVERABILITY. The invalidity of any provision of this Lease, as determined
by a court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
19. INTEREST ON PAST-DUE OBLIGATIONS. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. TIME OF ESSENCE. Time is of the essence with respect to the performance of
all obligations to be performed or observed by the Parties under this Lease.
21. RENT DEFINED. All monetary obligations of Lessee to Lessor under the terms
of this Lease are deemed to be rent.
22. NO PRIOR OR OTHER AGREEMENTS; BROKER DISCLAIMER. This Lease contains all
agreements between the Parties with respect to any matter mentioned herein, and
no other prior or contemporaneous agreement or understanding shall be effective.
Lessor and Lessee each represents and warrants to the Brokers that it has made,
and is relying solely upon, its own investigation as to the nature, quality,
character and financial responsibility of the other Party to this Lease and as
to the nature, quality and character of the Premises. Brokers have no
responsibility with respect thereto or with respect to any default or breach
hereof by either Party. Each Broker shall be an intended third party beneficiary
of the provisions of this Paragraph 22.
23. NOTICES.
23.1 NOTICE REQUIREMENTS. All notices required or permitted by this Lease
shall be in writing and may be delivered in person (by hand or by messenger or
courier service) or may be sent by regular, certified or registered mail or U.S.
Postal Service Express Mail, with postage prepaid, or by facsimile transmission
during normal business hours, and shall be deemed sufficiently given if served
in a manner specified in this Paragraph 23. The addresses noted adjacent to a
Party's signature on this Lease shall be that Party's address for delivery or
mailing of notice purposes. Either Party may be written notice to the other
specify a different address for notice purposes, except that upon Lessee's
taking possession of the Premises, the Premises shall constitute Lessee's
address for the purpose of mailing or delivering notices to Lessee. A copy of
all notices required or permitted to be given to Lessor hereunder shall be
concurrently transmitted to such party or parties at such addresses as Lessor
may from time to time hereafter designate by written notice to Lessee.
23.2 DATE OF NOTICE. Any notice sent by registered or certified mail,
return receipt requested, shall be deemed given on the date of delivery shown on
the receipt card, or if no delivery date is shown, the postmark thereon. If sent
by regular mail, the notice shall be deemed given forty-eight (48) hours after
the same is addressed as required herein and mailed with postage prepaid.
Notices delivered by United States Express Mail or overnight courier that
guarantees next day
-8-
<PAGE>
delivery shall be deemed given twenty-four (24) hours after delivery of the same
to the United States Postal Service or courier. If any notice is transmitted
by facsimile transmission or similar means, the same shall be deemed served or
delivered upon telephone or facsimile confirmation of receipt of the
transmission thereof, provided a copy is also delivered via delivery or mail. If
notice is received on a Saturday or a Sunday or a legal holiday, it shall be
deemed received on the next business day.
24. WAIVERS. No waiver by Lessor of the Default or Breach of any term, covenant
or condition hereof by Lessee, shall be deemed a waiver of any other term,
covenant or condition hereof, or of any subsequent Default or Breach by Lessee
of the same or any other term, covenant or condition hereof. Lessor's consent
to, or approval of, any such act shall not be deemed to render unnecessary the
obtaining of Lessor's consent to, or approval of, any subsequent or similar act
by Lessee, or be construed as the basis of an estoppel to enforce the provision
or provisions of this Lease requiring such consent. Regardless of Lessor's
knowledge of a Default or Breach at the time of accepting rent, the acceptance
of rent by Lessor shall not be a waiver of any Default or Breach by Lessee of
any provision hereof. Any payment given Lessor by Lessee may be accepted by
Lessor on account of moneys or damages due Lessor, notwithstanding any
qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. RECORDING. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease for payment of recording purposes. The Party requesting recordation shall
be responsible for payment of any fees or taxes applicable thereto.
26. NO RIGHT TO HOLDOVER. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to two hundred
percent(200%) of the Base Rent applicable during the month immediately preceding
such expiration or earlier termination. Nothing contained herein shall be
construed as a consent by Lessor to any holding over by Lessee.
27. CUMULATIVE REMEDIES. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. COVENANTS AND CONDITIONS. All provisions of this Lease to be observed or
performed by Lessee are both covenants and conditions.
29. BINDING EFFECT; CHOICE OF LAW. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. SUBORDINATION; ATTORNMENT; NON-DISTURBANCE.
30.1 SUBORDINATION. This Lease and any Option granted hereby shall be
subject and subordinate to any ground lease, mortgage, deed of trust, or other
hypothecation or security device (collectively, "SECURITY DEVICE"), now or
hereafter placed by Lessor upon the real property of which the Premises are a
part, to any and all advances made on the security thereof, and to all renewals,
modifications, consolidations, replacements and extensions thereof. Lessee
agrees that the Lenders holding any such Security Device shall have no duty,
liability or obligation to perform any of the obligations of Lessor under this
Lease, but that in the event of Lessor's default with respect to any such
obligation, Lessee will give any Lender whose name and address have been
furnished Lessee in writing for such purpose notice of Lessor's default pursuant
to Paragraph 13.5. If any Lender shall elect to have this Lease and/or any
Option granted hereby superior to the lien of its Security Device and shall give
written notice thereof to Lessee, this Lease and such Options shall be deemed
prior to such Security Device, notwithstanding the relative dates of the
documentation or recordation thereof.
30.2 ATTORNMENT. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 NON-DISTURBANCE. With respect to Security Devices entered into by
Lessor after the execution of this lease, Lessee's subordination of this Lease
shall be subject to receiving assurance (a "non-disturbance agreement") from the
Lender that Lessee's possession and this Lease, including any options to extend
the term hereof, will not be disturbed so long as Lessee is not in Breach hereof
and attorns to the record owner of the Premises.
30.4 SELF-EXECUTING. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents: provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or non-disturbance agreement
as is provided for herein.
31. ATTORNEYS' FEES. If any Party or Broker brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "PREVAILING PARTY" shall include,
without limitation, a Party or Broker who substantially obtains or defeats the
relief sought, as the case may be, whether by compromise, settlement, judgment,
or the abandonment by the other Party or Broker of its claim or defense. The
attorneys' fee award shall not be computed in accordance with any court fee
schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
incurred. Lessor shall be entitled to attorneys' fees, costs and expenses
incurred in preparation and service of notices of Default and consultations in
connection therewith, whether or not a legal action is subsequently commenced in
connection with such Default or resulting Breach. Broker(s) shall be intended
third party beneficiaries of this Paragraph 31.
32. LESSOR'S ACCESS; SHOWING PREMISES; REPAIRS. Lessor and Lessor's agents
shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at time place on or about the Premises
or Building any ordinary "For Sale" signs and Lessor may at any time during the
last one hundred eighty (180) days of the term hereof place on or about the
Premises any ordinary "For Lease" signs. All such activities of Lessor shall be
without abatement of rent or liability to Lessee.
33. AUCTIONS. Lessee shall not conduct, nor permit to be conducted, either
voluntarily or involuntarily, any auction upon the Premises without first having
obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. SIGNS. Lessee shall not place any sign upon the exterior of the Premises or
the Building, except that Lessee may, with Lessor's prior written consent,
install (but not on the roof) such signs as are reasonably required to advertise
Lessee's own business so long as such signs are in a location designated by
Lessor and comply with Applicable Requirements and the signage criteria
established for the Industrial Center by Lessor. The installation of any sign on
the Premises by or for Lessee shall be subject to the provisions of Paragraph 7
(Maintenance, Repairs, Utility Installations, Trade Fixtures and Alterations).
Unless otherwise expressly agreed herein, Lessor reserves all rights to the use
of the roof of the Building, and the right to install advertising signs on the
Building, including the roof, which do not unreasonably interfere with the
conduct of Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. TERMINATION; MERGER. Unless specifically stated otherwise in writing by
Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. CONSENTS.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise provided
herein, wherever in this Lease the consent of a Party is required to an act by
or for the other Party, such consent shall not be unreasonably withheld or
delayed. Lessor's actual reasonable costs and expenses (including but not
limited to architects', attorneys', engineers' and other consultants' fees)
incurred in the consideration of, or response to, a request by Lessee for any
Lessor consent pertaining to this Lease or the Premises, including but not
limited to consents to an assignment a subletting or the presence or use of a
Hazardous Substance, shall be paid by Lessee to Lessor upon receipt of an
invoice and supporting documentation therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgment that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessor's consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. GUARANTOR.
37.1 FORM OF GUARANTY. If there are to be any Guarantors of this Lease per
Paragraph 1.11, the form of the guaranty to be executed by each such Guarantor
shall be in the form most recently published by the American Industrial Real
Estate Association, and each such Guarantor shall have the same obligations as
Lessee under this lease, including but not limited to the obligation to provide
the Tenancy Statement and information required in Paragraph 16.
37.2 ADDITIONAL OBLIGATIONS OF GUARANTOR. It shall constitute a Default of
the Lessee under this Lease if any such Guarantor fails or refuses, upon
reasonable request by Lessor to give: (a) evidence of the due execution of the
guaranty called for by this Lease, including the authority of the Guarantor (and
of the party signing on Guarantor's behalf) to obligate such Guarantor on said
guaranty, and resolution of its board of directors authorizing the making of
such guaranty, together with a certificate of incumbency showing the signatures
of the persons authorized to sign on its behalf, (b) current financial
statements of Guarantor as may from time to time be requested by Lessor, (c) a
Tenancy Statement, or (d) written confirmation that the guaranty is still in
effect.
38. QUIET POSSESSION. Upon payment by Lessee of the rent for the Premises and
the performance of all of the covenants, conditions and provisions on Lessee's
part to be observed and performed under this Lease, Lessee shall have quiet
possession of the Premises for the entire term hereof subject to all of the
provisions of this Lease.
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<PAGE>
39. OPTIONS.
39.1 DEFINITION. As used in this Lease, the word "Option" has the following
meaning: (a) the right to extend the term of this Lease or to renew this Lease
or to extend or renew any lease that Lessee has on other property of Lessor;
(b) the right of first refusal to lease the Premises or the right of first offer
to lease the Premises or the right of first refusal to lease other property of
Lessor or the right of first offer or lease other property of Lessor; (c) the
right to purchase the Premises, or the right of first refusal to purchase the
Premises, or the right of first offer to purchase the Premises, or the right to
purchase other property of Lessor, or the right of first refusal to purchase
other property of Lessor, or the right of first offer to purchase other property
of Lessor.
39.2 OPTIONS PERSONAL TO ORIGINAL LEASE. Each Option granted to Lessee in
this Lease is personal to the original Lessee named in Paragraph 1.1 hereof, and
cannot be voluntarily or involuntarily assigned or exercised by any person or
entity other than said original Lessee while the original Lessee while the
original Lessee is in full and actual possession of the Premises and without the
intention of thereafter assigning or subletting. This Options, if any, herein
granted to Lessee are not assignable, either as a part of an assignment of this
Lease or separately or apart therefrom, and no Option may be separated from this
Lease in any manner, by reservation or otherwise.
39.3 MULTIPLE OPTIONS. In the event that Lessee has any multiple Option to
extent or renew this Lease, a later option cannot be exercised unless the prior
Options to extend or renew this Lease have been validly exercised.
39.4 EFFECT OF DEFAULT ON OPTIONS.
(a) Lessee shall have no right to exercise an Option, notwithstanding
any provision in the grant of Option to the contrary: (i) during the period
commencing with the giving of any notice of Default under Paragraph 13.1 and
continuing until the noticed Default is cured, or (ii) during the period of time
any monetary obligation due Lessor from Lessee is unpaid (without regard to
whether notice thereof is given Lessee), or (iii) during the time Lessee is in
Breach of this Lease, or (iv) in the event that Lessor has given to Lessee three
(3) or more notices of separate Defaults under Paragraph 13.1 during the twelve
(12) month period immediately preceding the exercise of the Option, whether or
not the Default are cured.
(b) The period of time within which an Option may be exercised shall
not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option shall
terminate and be of no further force or effect, notwithstanding Lessee's due and
timely exercise of the Option, if, after such exercise and during the term of
this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of Lessee
for a period of thirty (30) days after such obligation becomes due (without any
necessity of Lessor to give notice thereof to Lessee), or (ii) Lessor gives to
Lessee three (3) or more notices of separate Defaults under Paragraph 13.1
during any twelve (12) month period, whether or not the Defaults are cured, or
(iii) if Lessee commits a Breach of this Lease.
40. RULES AND REGULATIONS. Lessee agrees that it will abide by, and keep and
observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and unloading of vehicles and the
preservation of good order, as well as for the convenience of other occupants or
tenants of the Building and the Industrial Center and their invitees.
41. SECURITY MEASURES. Lessee hereby acknowledges that the rental payable to
Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties.
42. RESERVATIONS. Lessor reserves the right, from time to time, to grant,
without the consent or joinder of Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility raceways, dedications, maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
43. PERFORMANCE UNDER PROTEST. If at any time a dispute shall arise as to any
amount or sum of money to be paid by one Party to the other under the provisions
hereof, the Party against whom all the obligation to pay the money is asserted
shall have the right to make payment "under protest" and such payment shall not
be regarded as a voluntary payment and there shall survive the right on the
part of said Party to institute suit for recovery of such sum. If it shall be
adjudged that there was no legal obligation on the part of said Party to pay
such sum or any part thereof, said Party shall be entitled to recover such sum
or so much thereof as it was not legally required to pay under the provisions of
this Lease.
44. AUTHORITY. If either Party hereto is a corporation, trust, or general or
limited partnership, each individual executing this Lease on behalf of such
entity represents and warrants that he or she is duly authorized to execute and
deliver this Lease in its behalf. If Lessee is a corporation, trust or
partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. CONFLICT. Any conflict between the printed provisions of this Lease and the
typewritten or handwritten provisions shall be controlled by the typewritten or
handwritten provisions.
46. OFFER. Preparation of this Lease by either Lessor or Lessee or Lessor's
agent or Lessee's agent and submission of same to Lessee or Lessor shall not be
deemed an offer to lease. This Lease is not intended to be binding until
executed and delivered by all Parties hereto.
47. AMENDMENTS. This Lease may be modified only in writing, signed by the
Parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder. Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the Property
of which the Premises are a part.
48. MULTIPLE PARTIES. Except as otherwise expressly provided herein, if more
than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
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<PAGE>
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED. THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR
ATTORNEY'S REVIEW AND APPROVAL, FURTHER, EXPERTS SHOULD BE CONSULTED
TO EVALUATE THE CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF
ASBESTOS, UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO
REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL
REAL ESTATE ASSOCIATION OR BY THE REAL ESTATE BROKERS OR THEIR
CONTRACTORS, AGENTS OR EMPLOYEES AS TO THE LEGAL SUFFICIENCY, LEGAL
EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH
IT RELATES; THE PARTIES SHALL RELY SOLELY UPON THE ADVICE OF THEIR OWN
COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. IF THE
SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN ATTORNEY FROM
THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signature.
<TABLE>
<S> <C>
Executed at:_____________________________________ Executed at:_______________________________
on:______________________________________________ on: 4-18-95
---------------------------------------
By LESSOR: By LESSEE:
L/B Via Colinas LLC Aura Systems, Inc., a Delaware Corporation
- ------------------------------------------------- -------------------------------------------
_________________________________________________ ___________________________________________
By: /s/ George Linder By: /s/ Steve Veen
---------------------------------------------- ----------------------------------------
Name Printed: GEORGE LINDER Name Printed: STEVE VEEN
------------------------------------ ------------------------------
Title: Co-Owner Title: Chief Financial Officer
------------------------------------------- -------------------------------------
By:______________________________________________ By:________________________________________
Name Printed: JOSEPH BERMAN Name Printed:______________________________
------------------------------------
Title: Co-Owner Title:_____________________________________
-------------------------------------------
Address: P.O. Box 49621 Address: 2335 Alaska Avenue
----------------------------------------- -----------------------------------
Los Angeles, California 90049 El Segundo, California 90245
- ------------------------------------------------- -------------------------------------------
Telephone: (310) 204-3445 Telephone: (310) 643-5300
-------------------------------- --------------------------
Facsimile: (310) 840-5726 Facsimile: (310) 643-8719
-------------------------------- --------------------------
BROKER: THE SEELEY COMPANY BROKER: CB COMMERCIAL
Executed at:_____________________________________ Executed at: 4/20/95
-------------------------------
on:______________________________________________ on:________________________________________
By: [SIGNATURE ILLEGIBLE] By: /s/ Bob Boyer /s/ Bob Pettit
---------------------------------------------- ----------------------------------------
Name Printed: JOHN R. DEGRINIS/GRANT L. HARRIS Name Printed: BOB BOYER/BOB PETTIT
------------------------------------ ------------------------------
Title: Sr. Marketing Executive/Marketing Executive Title: Senior Associate/Associate
------------------------------------------- -------------------------------------
Address: 16830 Ventura Blvd., Suite S Address: 5280 Valentine Rd., Suite 105
----------------------------------------- -----------------------------------
Encino, California 91436 Ventura, California 93003-7338
- ------------------------------------------------- -------------------------------------------
Telephone: (818) 905-5800 Telephone: (805) 642-7500
-------------------------------- --------------------------
Facsimile (818) 905-6130 Facsimile (805) 654 -6265
--------------------------------- ----------------------------
</TABLE>
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 345
So. Figueroa St, M-1, Los Angeles, CA 90071. (213) 687-8777.
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<PAGE>
ADDENDUM ONE TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -
MODIFIED NET BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS,
INC., A DELAWARE CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE,
CALIFORNIA DATED MARCH 31, 1995
ITEM 1.2 CONTINUED:
PARKING. Lessee shall have access to thirty-seven (37) parking spaces
during the hours of 12:00 a.m. to 6:00 a.m. seven (7) days per week.
Otherwise, Lessee shall have access to sixty-two (62) parking spaces as
identified by Lessor during normal business hours.
ITEM 2.2 CONTINUED:
CONDITION. Lessor warrants, in addition to the items enumerated in
Paragraph 2.2, that all additional items listed in Paragraph 2.7, 4.2, and
7.1 shall be in "good operating condition" on the Commencement Date of this
lease. Within ten (10) working days from the Commencement Date of this
lease, Lessor shall make a full disclosure of all patent defects it knows
or has reason to know exist on the Premises. Lessee shall not be liable, at
any time for the condition of disclosed defects nor any warranted item
found reasonably to be in less than "good operating condition".
ITEM 5 CONTINUED:
SECURITY DEPOSIT. Lessor agrees to return the Security Deposit in its
entirety within thirty (30) days from the expiration of the lease term
provided that Lessee returns the Premises in as good a condition as found
on the Commencement Date of this lease, ordinary wear and tear excepted.
Should Lessor decide to retain a portion of the Security Deposit, Lessor
shall notify the reason to Lessee within ten (10) working days, in writing,
from the expiration of the lease term. Lessor thereafter waives any right
to withhold any part of the Security Deposit. Any decision to withhold
Security Deposit monies shall be based upon this paragraph, an objective
reasonableness standard, and any applicable language found in Paragraph 5.0
concerning Security Deposits.
ITEM 6.2 CONTINUED:
HAZARDOUS MATERIALS. Notwithstanding the foregoing, Lessor shall indemnify,
defend and hold harmless Lessee against any and all claims and demands
incurred by Lessee or to which Lessee may be exposed by reason of any
environmental problem which occurred prior to the date on which Lessee is
given possession of the Premises. Lessor shall provide to Lessee a Phase I
environmental site assessment for the Premises.
ITEM 6.3 CONTINUED:
INSPECTIONS; ENTRIES. Any entry onto the Premises, except in case of an
emergency, desired by the Lessor, his agents or assigns shall be permitted,
but only upon prior written notice, which permission shall not be
unreasonably withheld. It is agreed that such notice shall be given to
Lessee or its designated representative, as least three (3) days prior to
any entry onto the Premises. Lessee discloses that it conducts sensitive
activities on behalf of shareholders and for the Department of Defense of
the United States of America which mandate such notice requirements.
<PAGE>
ADDENDUM ONE TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE -
MODIFIED NET BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS,
INC., A DELAWARE CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE,
CALIFORNIA DATED MARCH 31, 1995
ITEM 7. CONTINUED.
MAINTENANCE; REPAIR; UTILITY INSTALLATIONS; TRADE FIXTURES; AND
ALTERATIONS.
Lessee's obligations pertaining to certain maintenance and repairs shall be
limited to the following: Lessee shall be obligated to pay for all air
conditioning and heating repairs at an aggregate cost not exceeding Five
Thousand Dollars and No Cents ($5,000.00) per year for the original lease
term. These limitations shall not be applicable to, nor include, any
maintenance or repairs to utility installations, Lessee's trade fixtures,
alterations made by Lessee, any of Lessee's obligations under the
provisions of Paragraph 7.1 herein or which may be necessitated as result
of damage, Lessee's misuse or negligence.
This Agreement has been prepared for submission to your attorney for your
attorney's approval. No representation or recommendation is made by The Seeley
Company or its agents or employees as to the legal sufficiency, legal effect, or
tax consequences of this Agreement or the Transaction relating thereto.
The Parties hereto endorse, accept and ratify this Second Addendum to the lease
as of the date of execution of said lease.
AGREED AND ACCEPTED:
/s/ George Linder /s/ Joseph Berman /s/ Steve Veen
- ----------------------------------- ---------------------------------
LESSOR LESSEE
4-18-95
- -----------------------------------
<PAGE>
ADDENDUM TWO TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET
BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS, INC., A DELAWARE
CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE, CALIFORNIA DATED
MARCH 31, 1995
50. REPAIRS AND IMPROVEMENTS BY LESSOR:
Prior to May 1, 1995, or as reasonably soon thereafter, the Lessor, at its
sole cost and expense, shall make the following alternations to the
Premises.
a) Repaint the iron railing at the front of the building in a color
mutually agreeable to Lessor and Lessee.
b) Repair, re-slurry and re-stripe the entire parking area.
c) Refurbish the landscaping including, but not limited to:
1) Restoring the fountain (including fountain lighting) to working
condition.
2) Trim trees where necessary.
3) Plant low maintenance shrubbery and/or flowers in the planter
areas across front of building and westerly side of the office area.
d) Repair all damage to the concrete warehouse floor including removal of
raised area in rear. Thoroughly clean, buff and seal the entire
warehouse floor.
e) Replace all missing warehouse area foil insulation.
f) Restore all existing warehouse lighting to good operating condition
and raise the level of the lower hanging lights to the level of the
rest of the lights.
g) Paint the interior warehouse and columns.
<PAGE>
ADDENDUM TWO TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET
BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS, INC., A DELAWARE
CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE, CALIFORNIA DATED
MARCH 31, 1995
50. REPAIRS AND IMPROVEMENTS BY LESSOR (CONTINUED):
h) Separately meter the 1000 amps, 277/480 volt, three phase power to the
premises.
i) Repair/rebuild the damaged wall in the rear yard area.
j) Construct two (2) new large executive offices with double door
entries, and one (1) large 18'x16' conference room in the westerly
most front office area with a double door entry (See Exhibit B FLoor
Plan).
k) Remove exhaust venting system in rear of warehouse.
l) Remove the easterly most wall of the lobby area, creating a large
lobby out of the existing lobby and conference room. Remove the lobby
mirror. Lessor will remove existing tile in entry area. Lessor will
provide an allowance not to exceed Two Thousand Five Hundred Dollars
and No Cents ($2,500.00) for the purchase and installation of a two
foot wide marble tile border in the entire new lobby area and above
standard carpet acceptable to Lessee in the balance of the lobby area.
Color of tile and carpet to be mutually agree upon by Lessor and
Lessee. (See Exhibit B Floor Plan.)
m) Remove a portion of the telemarketing room workstation furniture and
all hinges on doors in remaining workstations shall be in good working
order.
n) Replace all damaged office ceiling tiles and repair and patch any
office area holes and/or cracks (including restoring the warehouse
office to the east of the air conditioning equipment room).
o) Re-paint and re-carpet the entire office area and install new office
area baseboards (exception - westerly most office marked '5' to be
tile flooring. In addition, Lessor shall re-tile office bathrooms.
Carpet in all office areas will be industrial grade similar in quality
to the existing carpet in bullpen areas. Color to be mutually agreed
upon by Lessor and Lessee.
p) Repair or replace all malfunctioning sliding closet doors and the
door currently leading from the office area to the warehouse.
q) Seal up the window that currently exists in the southerly most wall of
the CFO Acct. office (See Exhibit B Floor Plan).
r) Replace the missing window pane in the air conditioning equipment room
door.
<PAGE>
ADDENDUM TWO TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET
BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS, INC., A DELAWARE
CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE, CALIFORNIA DATED
MARCH 31, 1995
50. REPAIRS AND IMPROVEMENTS BY LESSOR (CONTINUED):
s) Reinstall the sealed door leading from the telemarketing area to the
warehouse (See Exhibit B Floor Plan).
t) Clean or replace all dirty or damaged air conditioning return screens
and plastic light covers.
u) Seal the exterior front entry area tiles.
v) Refurbish warehouse are restrooms by repairing and painting the walls
and ceilings, and replacing mirrors as required. Lessor shall repair
or replace any damaged floor tiles. Any replacements tiles shall be of
the original tile color.
w) Install locks on doors or approximately twelve (12) offices including
the new executive offices and conference rooms.
x) Construct a floor plan to ceiling demising wall, finished and painted
on Newcom's side of the wall, separating Newcom's premises from that
to be occupied by the L.A. Times.
y) Demolish offices marked #1 and entire wall marked #2 (See Exhibit B
Floor Plan).
z) Construct a 4 foot high wall where shown on plan (See Exhibit B Floor
Plan).
aa) Demolish walls in credit and collection area marked #3, making one (1)
large carpeted office. Seal opening between credit and collection and
accounts payable (See Exhibit B Floor Plan).
bb) In area #4, demolish wall where indicated. Remove all paneling,
recarpet (See Exhibit B Floor Plan).
cc) In area #5, demolish wall where indicated. Remove all paneling and
install tile flooring (See Exhibit B Floor Plan).
dd) Clean and remove any debris or mezzanine floor.
ee) Lessor will repair, finish or replace and damaged floor tiles and
repair malfunctioning cabinet doors in the warehouse lunch room.
51. ADA/TITLE 24/NEW EARTHQUAKE CODES:
The Lessor, at its sole cost and expense, shall be responsible for
compliance prior to occupancy and during the entire lease term or any
extension thereof.
<PAGE>
ADDENDUM TWO TO STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE - MODIFIED NET
BY AND BETWEEN L/B VIA COLINAS LLC AS LESSOR AND AURA SYSTEMS, INC., A DELAWARE
CORPORATION AS LESSEE FOR 31166 VIA COLINAS, WESTLAKE VILLAGE, CALIFORNIA DATED
MARCH 31, 1995
52. RENT ESCALATION:
On June 1, 1996; June 1, 1997; June 1, 1998 and June 1, 1999 the monthly
rent shall be increased per the terms and conditions attached hereto and
made a part hereof.
53. OPTION TO EXTEND:
The Lessor shall grant to Lessee one (1) five (5) year option to extend the
term of the lease according to the terms and conditions attached hereto and
made a part hereof.
54. LESSOR/LESSEE'S OBLIGATIONS:
Lessor shall be responsible for the maintenance of the foundation, exterior
walls and exterior roof of the subject building. The Lessee shall only be
responsible for the reimbursement to the Lessor for the cost of said
maintenance and/or repair in the event of damage to these items that is
caused by the Lessee, Lessee's employees or Lessee's agents.
55. RENTAL ABATEMENT:
Lessee shall be relieved from paying rent in the form of one-half (1/2)
rent for the months of May 1996 and May 1997, representing one (1) month
free rent.
56. DELIVERY OF POSSESSION:
The lease commencement date shall begin upon completion of those interior
tenant improvements agreed to be done by Landlord at Landlord's sole cost
and expense.
57. CONSULT YOUR ATTORNEYS/ADVISORS:
This document has been prepared for approval by your attorney. No
representation or recommendation is made by The Seeley Company of its
agents or employees as to the legal sufficiency, legal effect, or tax
consequences of this document or the transaction to which it relates. These
are questions for your attorney.
In any real estate transaction, it is recommended that you consult with a
professional, such as a civil engineer, industrial hygienist or other
person, with experience in evaluating the condition of the Property,
including the possible presence of asbestos, hazardous materials and
underground storage tanks.
AGREED AND ACCEPTED:
By: /s/ George Linder /s/ Joseph Berman By: /s/ Steve Veen
--------------------------------------- ----------------------
LESSOR LESSEE
DATE: 4-18-95
-----------------------
<PAGE>
[LOGO APPEARS HERE]
RENT ADJUSTMENT(S)
ADDENDUM TO
STANDARD LEASE
DATED March 31, 1995
BY AND BETWEEN (LESSOR) L/B Via Colinas LLC
(LESSEE) Aura Systems, Inc., a Delaware Corporation
PROPERTY ADDRESS: 31166 Via Colinas, Westlake Village, California
91362
Paragraph 52
A. RENT ADJUSTMENTS:
The monthly rent for each month of the adjustment period(s) specified below
shall be increased using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[X] 1. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): June 1, 1996; June 1, 1997;
June 1, 1998; and June 1, 1999 the monthly rent payable under paragraph 1.5
("Base Rent") of the attached Lease shall be adjusted by the change, if any,
from the Base Month specified below, in the Consumer Price Index of the Bureau
of Labor Statistics of the U.S. Department of Labor for (select one): [ ] CPIW
(Urban Wage Earners and Clerical Workers) or [X] CPIU (All Urban Consumers), for
(Fill in Urban Area): Los Angeles-Anaheim-Riverside, All Items (1982-1984 =
100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
of the calendar month which is two (2) months prior to (select one): [ ] the
first month of the term of this Lease as set forth in paragraph 1.3 ("Base
Month"), or [ ] (Fill in Other "Base Month"): _________________________. The sum
so calculated shall constitute the new monthly rent hereunder, but in no event,
shall any such new monthly rent be less than the rent payable for the month
immediately preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in accordance with the then rules of
said association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
(d) In no event shall said increases be less than three percent (3%)
or more than six percent (6%) per annum.
RENT ADJUSTMENT(S)
PAGE 1 OF 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form:
American Industrial Real Estate Association, 345 South Figueroa Street,
Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-
8616.
<PAGE>
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached Lease.
RENT ADJUSTMENT(S)
PAGE 2 OF 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form; American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles, CA 90071, (213) 687-8777.
Fax No. (213) 687-8616.
(c) 1991 American Industrial Real Estate Association.
<PAGE>
[LOGO APPEARS HERE]
OPTION(S) TO EXTEND
ADDENDUM TO
STANDARD LEASE
DATED March 31, 1995
BY AND BETWEEN (LESSOR) L/B Via Colinas LLC
(LESSEE) Aura Systems, Inc., a Delaware Corporation
PROPERTY ADDRESS: 31166 Via Colinas, Westlake Village, California
91362
Paragraph 53
A. OPTION(S) TO EXTEND:
Lessor hereby grants to Lessee the option to extend the term of this
Lease for 1 additional 60 month period(s) commencing when the prior term expires
upon each and all of the following terms and conditions:
(i) Lessee gives to Lessor, and Lessor actually receives on a date which is
prior to the date that the option period would commence (if exercised) by at
least 6 and not more than 9 months, a written notice of the exercise of the
option(s) to extend this Lease for said additional term(s), time being of
essence. If said notification of the exercise of said option(s) is (are) not so
given and received, the option(s) shall automatically expire; said option(s) may
(if more than one) only by exercised consecutively;
(ii) The provisions of paragraph 39, including the provision relating to
default of Lessee set forth in paragraph 39.4 of this Lease are conditions of
this Option;
(iii) All of the terms and conditions of this Lease except where specifically
modified by this option shall apply;
(iv) The monthly rent for each month of the option period shall be calculated
as follows, using the method(s) indicated below:
(Check Method(s) to be Used and Fill in Appropriately)
[X] 1. COST OF LIVING ADJUSTMENT(S) (COL)
(a) On (Fill in COL Adjustment Date(s): June 1, 2000 the monthly rent
payable under paragraph 1.5 ("Base Rent") of the attached Lease shall be
adjusted by the change, if any, from the Base Month specified below, in the
Consumer Price Index of the Bureau of Labor Statistics of the U.S. Department of
Labor for (select one): [ ] CPI W (Urban Wage Earners and Clerical Workers) or
[X] CPI U (All Urban Consumers), for (Fill in Urban Area): Los Angeles-Anaheim-
Riverside, All Items (1982-1984 = 100), herein referred to as "C.P.I."
(b) The monthly rent payable in accordance with paragraph AI(a) of
this Addendum shall be calculated as follows: the Base Rent set forth in
paragraph 1.5 of the attached Lease, shall be multiplied by a fraction the
numerator of which shall be the C.P.I. of the calendar month 2 (two) months
prior to the month(s) specified in paragraph AI(a) above during which the
adjustment is to take effect, and the denominator of which shall be the C.P.I.
of the calendar month which is two (2) months prior to (select one): [X] the
first month of the term of this Lease as set forth in paragraph 1.3 ("Base
Month") or [ ] (Fill in Other "Base Month"): ______________________. The sum so
calculated shall constitute the new monthly rent hereunder, but in no event,
shall any such new monthly rent be less than the rent payable for the month
immediately preceding the date for rent adjustment.
(c) In the event the compilation and/or publication of the C.P.I.
shall be transferred to any other governmental department or bureau or agency or
shall be discontinued, then the index most nearly the same as the C.P.I. shall
be used to make such calculation. In the event that Lessor and Lessee cannot
agree on such alternative index, then the matter shall be submitted for decision
to the American Arbitration Association in accordance with the then rules of
said association and the decision of the arbitrators shall be binding upon the
parties. The cost of said Arbitrators shall be paid equally by Lessor and
Lessee.
(d) In no event shall said increases be less than three percent (3%)
or more than six percent (6%) per annum.
OPTIONS TO EXTEND
PAGE 1 OF 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form:
American Industrial Real Estate Association, 345 South Figueroa Street,
Suite M-1, Los Angeles, CA 90071. (213) 687-8777. Fax No. (213) 687-
8616.
<PAGE>
C. BROKER'S FEE:
The Real Estate Brokers specified in paragraph 1.10 of the attached Lease
shall be paid a Brokerage Fee for each adjustment specified above in
accordance with paragraph 15 of the attached Lease.
OPTION(S) TO EXTEND
Page 2 of 2
NOTICE: These forms are often modified to meet changing requirements of law and
industry needs. Always write or call to make sure you are utilizing the
most current form; American Industrial Real Estate Association, 345
South Figueroa Street, Suite M-1, Los Angeles. CA 90071, (213) 687-
8777. Fax No. (213) 687-8616.
<PAGE>
EXHIBIT C
TRIPLE NET EXPENSES FOR 1995
31166 VIA COLINAS BUILDING, WESTLAKE VILLAGE
<TABLE>
<S> <C>
Taxes: $28,971.53
Insurance: $12,000.00
Common Area Maintenance
Landscape, Gardening, Sweeping: $ 7,200.00
Water (estimate): $ 3,600.00
----------
Total Annual Expenses: $51,771.53
Divided by 55,647 square feet equals: .078
Triple Net charge per square foot are: +/-.08
</TABLE>
NOTE: These costs are subject to change at any time.
- ----
<PAGE>
[LOGO OF SEELEY COMPANY]
[MAP APPEARS HERE]
[MAP APPEARS HERE]
<PAGE>
[FLOOR PLAN APPEARS HERE]
EXHIBIT B
FLOOR PLAN
<PAGE>
[FLOOR PLAN APPEARS HERE]
EXHIBIT B
FLOOR PLAN
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in Amendment No. 3 to the Registration
Statement on Form S-1 of NewCom, Inc. of our reports, dated June 11, 1997, on
our audits of the balance sheets of NewCom, Inc. as of February 28, 1997,
February 29, 1996 and February 28, 1995, and the related statements of
operations, stockholder's equity (deficit) and cash flows for each of the two
years in the period ended February 28, 1997, and for the nine months ended
February 28, 1995. We also hereby consent to the reference to our firm under
the captions "Selected Financial Data" and "Experts" in the Registration
Statement.
Pannell Kerr Forster
Certified Public Accountants
A Professional Corporation
Los Angeles, California
September 12, 1997
