<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended August 31, 1998 Commission File Number 0-23079
NEWCOM, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 95-4485355
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
31166 VIA COLINAS
WESTLAKE VILLAGE, CA 91362
(Address of principal executive offices)
Registrant's telephone number, including area code: (818) 597-3200
Former name, former address and former fiscal year, if changed since last
report: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES X NO __
-
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at October 14, 1998
----- -------------------------------
Common Stock, par value 10,000,000 Shares
$.001 per share
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NEWCOM, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 2
Condensed Balance Sheets as of August 31, 1998 and
February 28, 1998 3
Condensed Statement of Operations for the Three Months and Six months
Ended August 31, 1998 and 1997 4
Condensed Statements of Cash Flows for the Six Months Ended August 31,
1998 and 1997 5
Notes to Condensed Financial Statements 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to Vote by Security Holders 10
ITEM 6. Exhibits and Reports on Form 8-K 10
SIGNATURES 11
</TABLE>
<PAGE>
NEWCOM, INC.
QUARTER ENDED AUGUST 31, 1998
PART I. FINANCIAL INFORMATION
The financial statements included herein have been prepared by Newcom, Inc. (the
"Company"), without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). As contemplated by the SEC under
Rule 10-01 of Regulation S-X, the accompanying financial statements and
footnotes have been condensed and therefore do not contain all disclosures
required by generally accepted accounting principles. However, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Form 10-K and
any amendments thereto for the year ended February 28, 1998 as filed with the
SEC (file number 0-23079).
2
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NEWCOM, INC.
CONDENSED BALANCE SHEETS
(Unaudited)
AUGUST 31, FEBRUARY 28,
ASSETS 1998 1998
- -------- ----------- -----------
CURRENT ASSETS
Cash and equivalents $ 1,272,841 $ 1,982,436
Receivables-net 39,801,174 39,314,990
Inventories 37,756,897 41,223,718
Prepayments and deposits 3,652,548 7,463,622
Prepaid and deferred income taxes 1,426,220 1,156,220
Other current assets 182,221 296,214
----------- -----------
TOTAL CURRENT ASSETS 84,091,901 91,437,200
----------- -----------
Property and equipment, at cost 3,533,618 3,461,435
Less accumulated depreciation
and amortization (1,693,646) (1,113,636)
----------- -----------
NET PROPERTY AND EQUIPMENT 1,839,972 2,347,799
Engineering designs and drawings-net 144,512 216,768
Deferred tax asset 102,000 102,000
Long term investments 5,000,000 --
Other assets 1,440,828 2,023,249
----------- -----------
Total $92,619,213 $96,127,016
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $12,000,000 $ 6,580,676
Accounts payable 20,254,795 32,734,140
Due to Aura 20,192,757 19,433,338
Accrued expenses 679,954 274,490
----------- -----------
TOTAL CURRENT LIABILITIES 53,127,506 59,022,644
Notes payable 15,604 21,583
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock par value $.001 per share paid
in capital. Issued and outstanding
10,000,000 and 10,000,000 shares 32,223,221 32,223,221
respectively.
Retained earnings 7,252,882 4,859,568
----------- -----------
Total stockholders' equity 39,476,103 37,082,789
----------- -----------
Total $92,619,213 $96,127,016
=========== ===========
See accompanying notes to condensed financial statements.
3
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NEWCOM, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
--------------- ----------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
GROSS REVENUES $31,455,222 $27,292,831 $54,932,488 $43,374,223
Less discounts given 202,548 32,792 461,364 63,470
Less returns and allowances 8,018,186 4,933,304 8,921,409 5,554,341
----------- ----------- ----------- -----------
NET REVENUES 23,234,488 22,326,735 45,549,715 37,756,412
Cost of revenues 16,340,448 15,225,628 31,747,727 25,623,511
----------- ----------- ----------- -----------
GROSS PROFIT 6,894,040 7,101,107 13,801,988 12,132,901
EXPENSES
Selling, general and administrative 5,248,539 3,410,659 9,460,786 6,146,386
----------- ----------- ----------- -----------
Total costs and expenses 5,248,539 3,410,659 9,460,786 6,146,386
INCOME FROM OPERATION 1,645,501 3,690,448 4,341,202 5,986,515
OTHER (INCOME) AND EXPENSE
Other income (137,217) (30,071) (238,657) (47,221)
Interest expense-net 653,021 715,364 1,256,545 1,251,099
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 1,129,697 3,005,155 3,323,314 4,782,637
Provision for income taxes 302,000 756,399 930,000 1,467,399
----------- ----------- ----------- -----------
Net income $ 827,697 $ 2,248,756 $ 2,393,314 $ 3,315,238
=========== =========== =========== ===========
NET INCOME PER SHARE $ .08 $ .30 $ .24 $ .44
=========== =========== =========== ===========
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Basic/(a)/ 10,000,000 7,578,947 10,000,000 7,578,947
=========== =========== =========== ===========
Diluted/(a)/ 12,869,575 7,578,947 12,869,575 7,578,947
=========== =========== =========== ===========
</TABLE>
/a/-Adjusted to reflect a 7,578.947 for 1 stock split which occurred in
September, 1997 in conjunction with the Company's initial public offering.
See accompanying notes to condensed financial statements.
4
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NEWCOM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED AUGUST 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
NET CASH PROVIDED BY (USED) IN OPERATIONS $ 1,466,564 $ (6,467,424)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (72,183) (225,356)
Investment in stock (5,000,000) --
----------- ------------
NET CASH PROVIDED BY (USED) IN INVESTING
ACTIVITIES (5,072,183) (225,356)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds(payments) from borrowing 5,419,324 (1,883,656)
Cash advances from Aura 612,000 19,777,113
Cash repayments to Aura (3,135,300) (12,433,867)
----------- ------------
NET CASH PROVIDED BY (USED) IN FINANCING
ACTIVITIES: 2,896,024 5,459,590
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (709,595) (1,233,190)
Cash and cash equivalents at beginning of year 1,982,436 2,813,631
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,272,841 $ 1,580,441
=========== ============
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 527,591 $ 250,154
Income Tax 930,000 800
=========== ============
</TABLE>
See accompanying notes to condensed financial statements.
5
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NEWCOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1) MANAGEMENT OPINION
The condensed financial statements include the accounts of Newcom, Inc.
(the "Company").
In the opinion of management, the accompanying condensed financial
statements reflect all adjustments (which include only normal recurring
adjustments) and reclassifications for comparability necessary to present fairly
the financial position and results of operations as of and for the three and six
months ended August 31, 1998.
2) SIGNIFICANT CUSTOMERS
The Company sold communication and multi-media products to three
significant customers during the six months ended August 31, 1998. Sales of
communication and multi-media products to these major mass merchandisers
accounted for approximately $34.5 million in the six months ended August 31,
1998. Sales to these customers in the comparable prior year period totalled
approximately $19.1 million.
None of the above customers are related or affiliated with the Company or
any customers of the Company. The Company has no reason to believe that sales
to any of these customers will not continue.
3) CONTINGENCIES
The Company is engaged in legal actions arising in the ordinary course of
business. In the opinion of management based upon the advice of counsel, the
ultimate resolution of these matters will not have a material adverse effect.
Therefore, no provision for these matters has been made in the Company's
consolidated financial statements.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report may contain forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in such statements. Certain factors could also cause actual
results to differ materially from those discussed in such forward-looking
statements, including factors discussed in the Company's Form 10-K for the
period ended February 28, 1998, and factors discussed in this Report.
RESULTS OF OPERATIONS
The Company earned $827,697 after tax on net revenues of $23,234,488 for
the quarter ended August 31, 1998, compared to earnings of $2,248,756 after tax
on net revenues of $22,326,735 for the comparable prior year quarter. For the
six months ended August 31, 1998, the Company earned $2,393,314 after tax on net
revenues of $45,549,715, compared to earnings of $3,315,238 after tax on
revenues of $37,756,412 for the prior year six month period.
The increase in net revenues of $907,753 and $7,793,303 for the three and
six month periods ended August 31, 1998 over the corresponding prior year
periods is a result of an increase in the variety and volume of product sold to
mass merchandisers including products such as the 56K modem and higher speed
multi media kits.
Gross margins for the three months ended August 31, 1998 declined to 29.7%
from 31.8% in the prior year quarter, and for the six months ended August 31,
1998 declined to 30.3% from 32.1% in the prior year comparable period. The
primary reason for this decline is the reduction in margins for mature products
such as the 33.6K modems and lower speed CD ROM drives that were sold as the
56K modems and higher speed CD ROM drives became the primary products in the
modem and multimedia area.
Selling, general and administrative expense for the three and six month
periods ended August 31, 1998 increased by $1,837,880 and $3,314,400 over the
prior year like periods due primarily to increased levels of advertising support
associated with the increased sales levels and increased staffing as the Company
built up its infrastructure to support higher levels of sales and increased
complexity associated with dealing with large mass merchandisers. The increase
in general and administrative expenses is also partially due to an increase in
depreciation and amortization of $264,929 to $330,128 and $537,849 to $652,266
for the three and six months ended August 31, 1998 over the comparable periods
ended August 31, 1997.
Net interest expense decreased by $62,343 from $715,364 and increased by
$5,546 from $1,251,099 for the three and six month periods ended August 31, 1998
due primarily to a lower average level of borrowing on the Company's line of
credit offset partially by higher levels of borrowing from the Company's parent.
The provision for income taxes decreased to $302,000 from $756,399 and
$930,000 from $1,467,399 in the three and six months ended August 31, 1998
compared to the prior year periods due to the lower income levels.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended August 31, 1998, cash decreased by $709,595 to
$1,272,841 from $1,982,436, at February 28, 1998. Accounts payable and accrued
expenses decreased by $12,073,881 from February 28,1998. Inventories decreased
by $3,466,821 as the Company made a concerted effort to sell product currently
in stock and tighten its inventory control.
The increase in receivables of $486,184 is due to the increase in sales
volume which was concentrated in the last month of the quarter as sales began to
increase for the fall selling season.
7
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Cash flows provided by operations were $1,466,564 compared to cash used in
the prior year six months of $6,467,424. Working capital decreased to
$30,964,395 from $32,414,556 from the fiscal year end level, with the current
ratio improving slightly to 1.58:1 from 1.55:1.
As of September 30, 1998 approximately $17 million was due to Aura under a
promissory note from the Company to Aura, which note has been pledged by Aura to
an Aura investor as collateral to secure an Aura obligation. In September 1998
an agreement-in-principle was reached among the Company, Aura and the investor
to restructure the $17 million note. The proposed agreement calls for an initial
cash payment and the issuance by the Company of a $3 million convertible note to
the investor. The unpaid balance of the restructured note will continue to bear
interest at the rate of 9%, and the Company will have the right to redeem the
note subsequent to December 1, 1998, subject to certain conditions. The
agreement-in-principle is subject to certain conditions and the execution of
definitive documents.
In the past the Company's cash flow generated from operations has not been
sufficient to completely fund its working capital needs. Accordingly, the
Company has also relied upon external sources of financing to maintain its
liquidity, principally advances from the Company's parent, Aura Systems, and
bank indebtedness. In order to finance continued growth it will be necessary for
the Company to obtain additional working capital from external sources. The
Company is presently seeking additional sources of financing, including bank and
equity financing. No assurances can be provided that these funding sources will
be available at the times and in the amounts required. The ongoing financial
crisis in Asia may also have a negative effect on the Company's cash flow due to
the potential requirements for cash advances to Asian vendors in order to ensure
an adequate flow of product. However, this may be partially offset by reduced
prices from Asian suppliers.
FORWARD LOOKING STATEMENTS
The Company wishes to caution readers that important factors, in some
cases, have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual results for the third quarter of
Fiscal 1999, and beyond, to differ materially from those expressed in any
forward-looking statements made by, or on behalf of the Company.
Such factors include, but are not limited to, the following risks and
contingencies: Changed business conditions in the consumer electronic industry
and the overall economy; increased marketing and manufacturing competition and
accompanying prices pressures; contingencies in initiating production at new
factories along with their potential underutilization, resulting in production
inefficiencies and higher costs and start-up expenses and; inefficiencies,
delays and increased depreciation costs in connection with the start of
production in new plants and expansions.
Relating to the above are potential difficulties or delays in the
development, production, testing and marketing of products, including, but not
limited to, a failure to ship new products and technologies when anticipated.
There might exist a difficulty in obtaining raw materials, supplies, power and
natural resources and any other items needed for the production of Company and
other products, creating capacity constraints limiting the amounts of orders for
certain products and thereby causing effects on the Company's ability to ship
its products. Manufacturing economies may fail to develop when planned,
products may be defective and/or customers may fail to accept them in the
consumer marketplace.
In addition to the above, risks and contingencies may exist as to the
amount and rate of growth in the Company's selling, general and administrative
expenses, and the impact of unusual items resulting from the Company's ongoing
evaluation of its business strategies, asset valuations and organizational
structures. Furthermore, any financing or other financial incentives by the
Company under or related to major infrastructure contracts could result in
increased bad
8
<PAGE>
debt or other expenses or fluctuation of profit margins from period to period.
The focus by some of the Company's business on any large system order could
entail fluctuating results from quarter to quarter.
The effects of, and changes in, trade, monetary and fiscal policies, laws
and regulations, other activities of governments, agencies and similar
organizations, and social and economic conditions, such as trade restrictions
impose yet other constraints on any Company statements. The cost and other
effects of any legal proceedings may impose another factor which may or may not
have an impact.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 4 Submission of Matters to Vote by Security Holders
The Company's 1998 Annual Meeting of Shareholders was held on
August 25, 1998. At the Annual Meeting each of the company's nominees
were elected to serve as directors of the Company. The election results
are as follows:
<TABLE>
<CAPTION>
Name For Withheld Abstain
- ---- --- -------- -------
<S> <C> <C> <C>
Zane R. Alsabery 9,575,430 1,500 39,250
James M. Curran 9,565,730 11,200 39,250
Michael I. Froch 9,574,890 2,040 39,250
Saied Kashani 9,566,830 10,100 39,250
Asif M. Khan 9,572,715 4,000 39,250
Sultan W. Khan 9,572,715 4,215 39,250
Gerald Papazian 9,573,390 3,540 39,250
Richard A. Rappaport 9,299,040 277,890 39,250
Alexander Remington 9,573,430 3,500 39,250
Steven C. Veen 9,570,430 6,500 39,250
</TABLE>
The shareholders in addition, approved a proposal for the adoption of the 1998
Employee Stock Option Plan and for the adoption of the 1998 Non-Employee
Director Stock Option Plan. The approval results are as follows:
<TABLE>
<CAPTION>
For Against Withhold
--- ------- --------
<S> <C> <C> <C>
Employee Stock Option Plan 7,591,220 224,350 39,250
Non-Employee Director Stock
Option Plan 7,553,383 249,262 32,150
</TABLE>
ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits:
See Exhibit Index
b) Reports On Form 8-K:
None
10
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEWCOM, INC.
--------------------------------------------
(Registrant)
Date: OCTOBER 15, 1998 By: /s/Steven C. Veen
---------------- ---------------------------------------
STEVEN C. VEEN
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer)
11
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Page No.
<S> <C> <C>
EX-27 Financial Data Schedule
EX 10.18* Employee Stock Option Plan
EX 10.19* Non-Employee Director Stock Option Plan
</TABLE>
*Incorporated by reference to the Exhibits to the Company's Registration
Statement on Form S-8 (File No. 333-65189)
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 1,272,841
<SECURITIES> 0
<RECEIVABLES> 39,801,174
<ALLOWANCES> 0
<INVENTORY> 37,756,897
<CURRENT-ASSETS> 84,091,901
<PP&E> 3,533,618
<DEPRECIATION> (1,693,646)
<TOTAL-ASSETS> 92,619,213
<CURRENT-LIABILITIES> 53,127,506
<BONDS> 0
0
0
<COMMON> 32,223,221
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 92,619,213
<SALES> 45,549,715
<TOTAL-REVENUES> 45,549,715
<CGS> 31,747,727
<TOTAL-COSTS> 9,460,786
<OTHER-EXPENSES> (238,657)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,256,545
<INCOME-PRETAX> 3,323,314
<INCOME-TAX> 930,000
<INCOME-CONTINUING> 2,393,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,393,314
<EPS-PRIMARY> .24
<EPS-DILUTED> .19
</TABLE>
