Ailing Accessory Distributor NewCom Seeks IPO
NewCom Inc., a computer accessory distributor, is overdrawn at the bank by $23,507. It owes its parent company $17 million. Customers’ unpaid bills exceed its revenue for the last six months.
Now it wants to go public.
The Westlake Village firm filed last week to sell as much as $17 million in stock in an initial public offering that would value the company at more than $75 million.
The sale is the work of parent Aura Systems Inc., which bought NewCom’s predecessor out of bankruptcy less than three years ago for $1 million in stock. El Segundo-based Aura would continue to hold 77% of NewCom after the IPO.
Aura has been footing the bill for its subsidiary and now wants to pass that role to investors as it faces its own cash crunch.
“It’s going to the public to raise money because it’s been sucking up a lot of cash,” said Richard Rappaport, managing director for corporate finance at Joseph Charles & Associates of Beverly Hills, NewCom’s underwriter.
Aura and NewCom executives didn’t return calls seeking comment.
Aura poured $8.3 million in cash into NewCom in the quarter ended May 31. During the quarter, Aura’s own cash fell to $3.4 million from $7.1 million. Without a capital infusion, Aura could be out of cash by the end of the summer if its keeps burning funds at its current rate.
Aura has stumbled in its efforts to transform its military technologies to peacetime products. Its shares lost 75% of their value in the last three years, closing Friday down 6 cents at $1.81 in Nasdaq trading.
A successful IPO of NewCom would let Aura conserve cash and focus on its own problems. Apart from NewCom, its main business is now making audio speakers.
In a preliminary prospectus filed with the Securities and Exchange Commission last week, NewCom said it would use proceeds from the stock sale to acquire new products and repay debts.
Aura will let NewCom convert $4 million of its $17 million loan into shares of NewCom. The remaining $13 million loan from Aura becomes due and payable in September 1998.
NewCom sells fax modems and multimedia products. It recently introduced a product called WebPal that allows consumers to surf the Internet using a TV. NewCom is committed to buying an unspecified number of the devices for $16.5 million from its supplier, according to the prospectus.
NewCom blames the need to repay bank debt for its cash shortfall. Some time after Feb. 28, NewCom’s $8.8-million loan from its former bank was terminated, the prospectus says. NewCom found a new lender but had to agree to pay a loan rate that was 0.75 point higher.
At May 31, NewCom was out of cash and its bank debt was $3.1 million.
What about the revenue NewCom generates selling computer accessories through retailers such as Best Buy Co. and Circuit City Stores? Much of it may be sitting in its customers’ pockets, according to the prospectus: As of May 31, NewCom had $32.8 million of accounts receivable--more than the $29.7 million it reported as net revenue over the prior six months.
“It’s not the company’s policy to let receivables get out of hand,” said Rappaport. “We’re confident they’re not just shipping products without expecting to get paid.”
Bad debt reserves were $1.85 million on Feb. 28.
NewCom continues to be run by the two men who led its predecessor, Nuvo Corp. of America, into liquidation. Aura bought the inventory and product designs of Nuvo out of bankruptcy in 1994.
Sultan Khan, NewCom’s current president, and Asif Khan, its vice president, held the same positions at Nuvo at the time.
NewCom is seeking to sell 1.7 million units for between $8 and $10, with each unit containing one share and one five-year warrant to purchase a share at 150% of the IPO price. The IPO shares represent about 17% ownership of NewCom.
The IPO values NewCom at between $77 million and $97 million. If the IPO succeeds, Aura’s 7.5 million NewCom shares would be worth as much as $75 million, about half of Aura’s current market value.
In 1996 the SEC filed fraud charges against Aura, alleging its financial reports misled investors. Aura settled the case, without admitting wrongdoing, by agreeing not to defraud investors in the future.
