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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 May 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 July 13, 1998
----- ----------------------------
Common Stock, par value 10,000,000 Shares
$.001 per share
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NEWCOM, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Statement Regarding Financial Information 1
Condensed Balance Sheets as of May 31, 1998 and
February 28, 1998 2
Condensed Statement of Operations for the Three
Months Ended May 31, 1998 and 1997 3
Condensed Statements of Cash Flows for the Three
Months Ended May 31, 1998 and 1997 4
Notes to Condensed Financial Statements 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 9
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NEWCOM, INC.
QUARTER ENDED MAY 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).
1
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NEWCOM, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
May 31, February 28,
ASSETS 1998 1998
- ------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS
Cash and equivalents $ 1,335,558 $ 1,982,436
Receivables-net 38,810,631 39,314,990
Inventories 42,453,721 41,223,718
Prepayments and deposits 3,671,995 7,463,622
Prepaid and deferred income taxes 1,728,220 1,156,220
Other current assets 192,700 296,214
----------- -----------
TOTAL CURRENT ASSETS 88,192,825 91,437,200
----------- -----------
Property and equipment, at cost 3,526,819 3,461,435
Less accumulated depreciation
and amortization (1,407,636) (1,113,636)
----------- -----------
NET PROPERTY AND EQUIPMENT 2,119,183 2,347,799
Engineering designs and drawings-net 180,640 216,768
Deferred tax asset 102,000 102,000
Long term investments 5,000,000 --
Other assets 1,926,239 2,023,249
----------- -----------
Total $97,520,887 $96,127,016
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Line of credit $10,978,638 $ 6,580,676
Accounts payable 28,288,985 32,734,140
Due to Aura 19,160,805 19,433,338
Accrued expenses 427,610 274,490
----------- -----------
TOTAL CURRENT LIABILITIES 58,856,038 59,022,644
Notes payable 16,443 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 respectively. 32,223,221 32,223,221
Retained earnings 6,425,185 4,859,568
----------- -----------
Total stockholders' equity 38,648,406 37,082,789
----------- -----------
Total $97,520,887 $96,127,016
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
2
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NEWCOM, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
------------
1998 1997
---- ----
<S> <C> <C>
GROSS REVENUES $23,477,266 $16,081,392
Less discounts given 258,816 30,678
Less returns and allowances 903,223 621,037
----------- -----------
NET REVENUES 22,315,227 15,429,677
Cost of revenues 15,407,279 10,397,883
----------- -----------
GROSS PROFIT 6,907,948 5,031,794
EXPENSES
Research and development -- 6,870
Selling, general and administrative 4,212,247 2,728,857
----------- -----------
Total expenses 4,212,247 2,735,727
----------- -----------
INCOME FROM OPERATIONS 2,695,701 2,296,067
OTHER (INCOME) AND EXPENSE
Other income (101,440) (17,150)
Interest expense 603,524 535,735
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INCOME BEFORE INCOME TAXES 2,193,617 1,777,482
Provision for income taxes 628,000 711,000
----------- -----------
Net income $ 1,565,617 $ 1,066,482
=========== ===========
BASIC EARNINGS PER SHARE $ .16 $ .14
=========== ===========
DILUTED EARNINGS PER SHARE $ .12 $ .14
=========== ===========
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING
BASIC/(a)/ 10,000,000 7,578,947
=========== ===========
DILUTED 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.
3
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NEWCOM, INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED NOVEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATIONS $ 925,684 $(7,884,664)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (65,384) (58,379)
Investment in stock (5,000,000)
----------- -----------
NET CASH (USED) BY INVESTING ACTIVITIES (5,065,384) (58,379)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds(payments) from borrowing 4,397,962 (3,143,420)
Repayment of debt (5,140) --
Cash advances from Aura -- 16,200,832
Cash repayments to Aura (900,000) (7,928,000)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES: 3,492,822 5,129,412
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (646,878) (2,813,631)
Cash and cash equivalents at beginning of year 1,982,436 2,813,631
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,335,558 $ --
=========== ===========
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest $ 228,524 $ 108,821
Income Tax 628,000 800
=========== ===========
</TABLE>
See accompanying notes to condensed financial statements.
4
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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 months
ended May 31, 1998.
2) CAPITAL
On September 19, 1997 the Company completed an initial public offering of
2,300,000 Units at $9.50 per Unit, each Unit consisting of one share of NewCom
Stock and one Warrant to purchase NewCom Common Stock at $14.25 for a period of
five years. Of the units offered to the public, 300,000 shares were sold by the
Company's parent, Aura Systems, Inc. NewCom received proceeds of approximately
$16.1 million, net of underwriting commissions, discounts and expenses of the
offering.
3) SIGNIFICANT CUSTOMERS
The Company sold communication and multi-media products to four significant
customers during the three months ended May 31, 1998. Sales of communication
and multi-media products to these four major mass merchandisers accounted for
approximately $17.7 million in the three months ended May 31, 1998 as compared
to approximately $7.0 million in the three month period in the prior year.
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.
4) 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.
5
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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 that could cause actual
results to differ materially from those discussed in such forward-looking
statements include the risks described in the Company's Registration Statement
on Form S-1 filed with the SEC in connection with its September 1997 initial
public offering, which factors are incorporated herein by reference.
RESULTS OF OPERATIONS
The Company earned $1,565,617 on net revenues of $22,315,227 for the
quarter ended May 31, 1998, compared to earnings of $1,066,482 on net revenues
of $15,429,677 for the comparable prior year quarter.
The increase in net revenues of $6,885,550 for the three month period ended
May 31, 1998 over the corresponding prior year period is a result of an increase
in the volume of product sold primarily to the Company's mass market retail
customers, including products such as the 56K V.90 modem, higher speed multi
media kits and CD drives.
Discounts and returns and allowances increased by $510,324 to $1,162,039 in
the quarter ended May 31, 1998 from $651,715 in the comparable prior year
quarter due primarily to the higher level of sales volume.
Gross margins for the three months ended May 31, 1998 decreased to 30.9%
from 32.6% in the prior year quarter, due primarily to the mix of products sold
in the periods and the decline in margins on products such as the 33.6K modem
and the slower speed multimedia kits and CD drives, partially offset by higher
margins on the new 56K V.90 modem, higher speed multi media kits and CD drives.
Selling, general and administrative expense for the three month period
ended May 31, 1998 increased by $1,483,390 over the prior year period 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.
Net interest expense increased to $603,524 from $535,735 for the three
month period ended May 31, 1998 over the prior year comparable period due to
higher levels of borrowing on the Company's line of credit partially offset by
lower levels of borrowing from the Company's parent.
The provision for income taxes decreased to $628,000 from $711,000 in the
three months ended May 31, 1998 compared to the prior year period. The decrease
was due to tax timing differences including the balance of the net operating
loss carry forward being utilized.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended May 31, 1998, cash decreased by $646,878 to
$1,335,558 from $1,982,436 at February 28, 1998. Accounts payable and accrued
expenses decreased by $4,292,045 from February 28, 1998 due to lower levels of
purchasing of products for resale. Inventories increased by $1,230,003 due to
the need to increase inventories to support the higher levels of sales volume on
a continuing basis and due to the increasing variety of products carried by the
Company. The increase in inventories is also attributable to the need to
purchase long term lead item, such as chipsets, in advance for the Company's
modems, sound cards and 3D sound cards that are being sold to the major
retailers.
6
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The slight decrease in receivables of $504,359 is due to a more
concentrated effort being placed on collections.
Cash flows provided by operations were $925,684 compared to cash used of
$7,884,664 in the prior year three months. Working capital decreased to
$29,336,787 from $32,414,556 over the fiscal year end level, with the current
ratio decreasing 1.50:1 from 1.55:1.
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. No assurances can be provided that these funding sources
will be available in the future. The Company expects that, with the increasing
shipments of the multimedia kits, modems, sound cards and other products the
Company will bring to market, cash flows and results of operations should be
favorably impacted in the future. The ongoing financial crisis in Asia may 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.
7
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PART II - OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K
a) Exhibits:
See Exhibit Index
b) Reports On Form 8-K:
None
8
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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: JULY 15, 1998 By: /s/ Steven C. Veen
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STEVEN C. VEEN
Senior Vice President
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
9
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER PAGE NO.
<C> <S> <C>
EX-27 FINANCIAL DATA SCHEDULE
</TABLE>
10
<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> MAY-31-1998
<CASH> 1,335,558
<SECURITIES> 0
<RECEIVABLES> 38,810,631
<ALLOWANCES> 0
<INVENTORY> 42,453,721
<CURRENT-ASSETS> 88,192,825
<PP&E> 3,526,819
<DEPRECIATION> (1,407,636)
<TOTAL-ASSETS> 97,520,887
<CURRENT-LIABILITIES> 58,856,038
<BONDS> 0
0
0
<COMMON> 32,223,221
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 97,520,887
<SALES> 22,315,227
<TOTAL-REVENUES> 22,315,227
<CGS> 15,407,279
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,110,807
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 603,524
<INCOME-PRETAX> 2,193,617
<INCOME-TAX> 628,000
<INCOME-CONTINUING> 1,565,617
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,565,617
<EPS-PRIMARY> .16
<EPS-DILUTED> .12
</TABLE>
