ITEM 1. BUSINESS.
OVERVIEW
Aurora Electronics, Inc. ("Aurora" or the "Company") provides spare parts distribution and electronics recycling services to major personal computer manufacturers and computer service organizations. Aurora operates worldwide through its wholly-owned subsidiary, Aurora Electronics Group, Inc. ("AEG"), with facilities in the United States, Canada, and Europe. AEG distributes new and refurbished computer spare parts, primarily to the field service departments of computer original equipment manufacturers ("OEMs"), third-party maintenance and multivendor service organizations ("TPMOs" and "MVSOs", respectively) computer resellers and dealers, and large corporate self-maintainers. AEG distributes spare parts from over 500 manufacturers, with particular emphasis on products from Apple Computer, AST Computer, AT&T, Compaq, Dell Computer, Digital Equipment Corporation ("DEC"), Hewlett-Packard, IBM and Toshiba. In addition, AEG provides a broad range of materials management services, such as advance exchange, returned materials management, inventory management, and electronic materials recycling and remarketing.
CAPITALIZATION
In March 1996, the Company completed a comprehensive recapitalization of the Company (the "Recapitalization"). The Recapitalization included: (1) a tender offer pursuant to which the Company repurchased approximately 4,268,000 shares of $.03 par value common stock (the "Common Stock") at $2.875 per share; (2) the Company's sale of $40 million of convertible preferred stock, $.01 par value per share (the "Preferred Stock"), and $10 million in subordinated debt (with approximately 607,000 shares of common stock attached) to partnerships managed by Welsh, Carson, Anderson & Stowe ("WCAS"), affiliates of WCAS and certain other purchasers; (3) the establishment of a new $35 million senior credit facility with The Chase Manhattan Bank (formerly Chemical Bank, N.A.) (the "Credit Agreement"); (4) the repayment in full of AEG's existing senior bank indebtedness of approximately $26 million; and (5) the redemption of the Company's 9-1/4% Senior Subordinated Notes (approximately $9.3 million). The Preferred Stock is convertible into Common Stock at $2.125 per share, subject to anti-dilution adjustments, and votes on an as-converted basis.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance with certain financial covenants under the Credit Agreement. To obtain waivers of noncompliance from the lenders, on September 30, 1996, the Company, AEG and WCAS (the Company's largest shareholder) entered into a Financial Support Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed $16,292,000, the total borrowings currently outstanding under the Credit Agreement, and the Company has granted WCAS warrants to purchase 2,227,902 shares of Common Stock at prices ranging from $1.025 to $2.10 per share. The Credit Agreement has been amended to waive all events of non-compliance with financial covenants, to eliminate future financial covenants and to establish the maturity date for the facility as April 30, 1999. At present, no additional borrowings are available under the Credit Agreement.
INDUSTRY
The worldwide personal computer installed base has grown to approximately 180 million units, and requires a wide range of support, maintenance, upgrade and recycling services. Due to the competitiveness of the personal computer industry and the increasingly short manufacturing life cycle of the products, companies involved in the manufacture, service and distribution of computers are seeking outsourcing solutions to meet these requirements, preferably from a single source. Aurora offers its customers a wide range of these critical aftermarket services through integrated outsourcing programs provided on a worldwide basis, thereby allowing its customers to achieve cost savings associated with reduced inventories, lower headcount and less investment in plant and equipment.
As a result of the trend toward outsourcing of support, maintenance, upgrade and recycling activities, an independent spare parts distribution, recycling and repair industry has emerged in support of personal computer manufacturers and maintenance service providers. This industry is comprised of companies that are unaffiliated with the manufacturers of computers and computer parts, yet possess expertise in providing spare parts procurement, distribution, logistics, repair and recycling services. Companies in this industry operate in the secondary market for both new and used spare parts, relying on thousands of parts sourcing contacts among system and subsystem manufacturers, distributors, brokers and large end-users. Aurora is among the largest companies in the independent parts distribution, recycling and repair industry.
SERVICES
The range of spare parts distribution, electronics recycling services and aftermarket service programs which AEG provides includes:
o Spare Parts Distribution. AEG sources and distributes a wide range of spare parts, many of which are out-of-warranty and often out-of-production. AEG sources these parts either from its own inventory or by utilizing its parts sourcing database to locate and procure the parts, and then ships them to the customer, typically within 24 hours. Currently, approximately 70% of AEG's shipments are products that are sourced, reconditioned and tested the same day. AEG also works directly with computer OEMs and spare parts manufacturers as an authorized parts distributor, providing same and next-day shipment of new spare parts stocked by AEG on behalf of the OEM.
o Aurora Exchange Programs. AEG provides selected customers with good working parts at a discounted price in exchange for their defective parts. In most cases, the defective unit is repaired and placed back into inventory to fulfill future requests under this program.
o Asset Recovery and Re-marketing. AEG refurbishes, reconditions, and redistributes systems and subsystems received as a result of manufacturing fallout, field dispositions, dealer and distributor returns, stock rotations, excess and obsolete inventories and customer trade-in and exchange programs. Refurbished systems and subsystems are either utilized for AEG's spare parts inventories or redistributed worldwide.
o Returns Management Programs. AEG's returns management program assists OEMs and distributors by facilitating the return of units which are defective, returned due to buyer's remorse or stock rotation or otherwise removed from the marketplace. Returned units are received, processed, tested, refurbished, as required, and either returned to the manufacturer, sold in secondary channels or used for spare parts inventory.
o Parts Procurement Outsourcing. In some cases, customers are interested in total outsourcing of the parts ownership, management and logistics function. In these cases, AEG commits to certain service levels with respect to parts availability and response time, and takes responsibility for all aspects of the parts fulfillment process, including ownership of the part.
CUSTOMERS AND SUPPLIERS
AEG provides spare parts sourcing and distribution services primarily to five groups of customers:
o Customer Maintenance Departments of Major Computer OEMs -- AEG provides spare parts and related repair, spare parts inventory management and logistics programs to support the customer maintenance departments of customers such as AT&T, Compaq, DEC, Hewlett-Packard, IBM and ICL.
o Third-Party Maintenance Organizations and Multi-Vendor Service Organizations -- Customers in this category include not only independent field service organizations (DecisionOne, Entex, Granada, Sorbus, Vanstar), but also MVSOs of current or former computer OEMs (IBM, DEC, Hewlett-Packard, Data General, Unisys).
o Computer Resellers, Distributors and Dealers -- Major computer resellers, distributors and dealers are increasingly offering maintenance services to their customers as a means of capturing additional margin. AEG supports these organizations through parts sourcing and inventory remarketing programs. Typical customers include Circuit City, Compucom, Inacomp and Microage.
o Corporate Self-Maintainers -- An increasing number of large corporations are satisfying their internal service requirements through in-house organizations which meet their spare parts requirements through external suppliers such as AEG.
o Major Computer OEM's -- By using recycling services, OEM customers, such as Apple Computer, Compaq Computer, Dell Computer, Hewlett-Packard, IBM and Storage Technology, can reduce or eliminate the potential liability and expense related to disposing of excess, obsolete and defective products, while realizing an economic return on these products.
For fiscal 1997 and 1996, IBM accounted for approximately 11% and 19%, respectively, of the Company's sales.
OPERATIONS
AEG services more than 5,000 customers worldwide, maintains a parts sourcing database of over 8,000 contacts, and completes over 150,000 transactions annually.
o Sales and Marketing. AEG believes that it is a market leader in terms of its approach to the sales and marketing of its materials management services, spare parts, and recycled parts, and its utilization of sophisticated information systems to support these efforts. AEG maintains an internal sales and customer support group of 76 employees which handles daily sales transactions involving spare parts and recycled product sales. In addition, AEG's materials management services are marketed through a direct sales force of 9 employees, who work closely with computer OEMs, TPMOs and MVSOs, and computer resellers in developing customized programs that meet their particular materials management requirements. Supporting these sales forces is a marketing department comprised of 9 employees who perform: (i) marketing communications; (ii) OEM and distributor relations; (iii) industry and competitive analysis; and (iv) development of new customer targets and new applications for AEG services.
o Purchasing. Because customers are often under severe time pressure in procuring spare parts, AEG's ability to confirm a customer request immediately from inventory, rather than initiating just-in-time procurement from its parts sourcing suppliers, increases the likelihood of completing a transaction. In order to increase the percentage of spare parts sourced directly from inventory, AEG maintains a department which procures a variety of commonly requested parts in advance and attempts to select parts from the recycle flow which can be sold as spares. AEG's information system regularly examines parts usage patterns and available stocks and performs trend-line analyses to assist this department in its procurement activities.
o Processing. AEG provides its spare parts distribution services primarily through distribution facilities in Marina del Rey, California; Toronto, Canada; and Hoofddorp, The Netherlands; and through its recycling facility in San Diego, California. AEG's distribution operations receive purchased spare parts or perform specific tear-down of whole systems in order to obtain spare parts, identify and cross-reference those parts for the AEG database, test and/or refurbish, as required, package, warehouse and ship. Often these activities must be performed within a 12 hour period in order to fulfill same-day requirements. AEG's recycling operations rely on the Company's ability to receive, identify, test, tear down as appropriate and
dispose of materials rapidly, in large volumes and consistent with customers' requirements. The Company's San Diego facility is ISO 9002 certified. AEG has developed proprietary methods for recycling and reconditioning certain materials, particularly including integrated circuits (ICs), the purpose of which is to produce material that is of the highest value for either return to the recycling customer or resale. A key value to customers is the Company's ability to dispose of all unsalable materials in environmentally safe ways, thus minimizing such customers', and the Company's, environmental liability.
COMPETITION
The independent spare parts distribution and the electronic recycling services industry is fragmented with widespread competition from a variety of small independent suppliers. AEG believes that competition for OEM, TPMO and MVSO customers is based on a number of factors, including: (i) breadth of parts distributed; (ii) ability to offer sophisticated inventory and materials management programs; (iii) ability to offer rapid delivery and sophisticated logistics programs; and (iv) price. Among AEG's major independent competitors are DecisionOne, Data Trend, PC Service Source, and The Cerplex Group.
PATENTS / TRADEMARKS
The Company does not currently hold any patents or registered trademarks. However, the Company has developed several private labels for use in its business, including PartSmart, Micro-C, Memory Master, MM, and Advantage. The Company has applied for registration of "The PartSmart Company" trademark. While management believes that this approach helps distinguish the Company to its customers, none of these brand names is material to the continuation of the business.
ENVIRONMENTAL REGULATION
The Company's business is subject to various federal, state and local environmental laws and regulations relating to the disposal of waste material. The Company believes that it is in compliance with such environmental laws and regulations and is not aware of any situation or condition that could reasonably be expected to have a material adverse affect on the Company's financial condition or competitive position.
SEASONALITY
The Company does not consider its business to be seasonal.
EMPLOYEES
On December 20, 1997, the Company had approximately 260 employees. None of the Company's employees is represented by a union and none are subject to a collective bargaining agreement. The Company has never experienced a work stoppage due to labor difficulties and believes that its employee relations are good.
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth certain information as of December 20, 1997 relating to the Company's principal properties, all of which are leased. The Company believes that its properties are adequate and suitable for its current needs.
(1) The Company subleased 48,473 square feet of the Marina del Rey, California facility to an unrelated third party for a five year period, which commenced December 1, 1994.
(2) The Chicago facility is subject to a sale/leaseback arrangement between the Company and an unrelated third party, as lessor. This property relates to a discontinued operation. See Note D of the Notes to Consolidated Financial Statements -- Discontinued Operations, and Note N of the Notes to Consolidated Financial Statements -- Commitments and Contingencies. The lease expires in 2005.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is engaged in routine legal proceedings incidental to its business, none of which the Company believes will have a material adverse effect on the financial position of the Company. See Note N of the Notes to Consolidated Financial Statements -- Commitments and Contingencies.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II.
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Until December 12, 1997, the Company's Common Stock was traded on the American Stock Exchange ("AMEX") under the symbol AUR. Commencing December 15, 1997, the Company's Common Stock is reported on the OTC Bulletin Board under the symbol AURU. The following table sets forth the range of the high and low sales prices for the Common Stock for each quarterly period during the last two fiscal years.
On December 12, 1997, the last sale price of the Common Stock as reported by AMEX was $ 1-1/4 per share. As of December 20, 1997, the Company had 1,020 holders of record of its Common Stock, and two (2) holders of warrants to purchase up to 2,227,902 shares of its Common Stock at prices ranging from $1.025 to $2.100 per share. See Note K of the Notes to Consolidated Financial Statements -- Stockholders' Deficit.
The Company has not paid any cash or stock dividend on its Common Stock since September 30, 1993. At present, it is the policy of the Company to retain all earnings for reinvestment into the Company. In addition, the Credit Agreement restricts AEG's ability to pay dividends to the Company, and thus limits the Company's ability to pay dividends to its stockholders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth selected financial data regarding the Company's results of operations and financial position. This information should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Consolidated Financial Statements and related notes included elsewhere herein.
(1) During the fourth quarter of fiscal 1997, approximately $29,602 relating to a write-down of intangible assets acquired in fiscal 1994 in connection with the Century acquisition were charged to operations
(2) During the fourth quarter of fiscal 1996, approximately $16,580 relating to a write-down of intangible assets acquired in fiscal 1992 in connection with the Micro-C Corporation acquisition was charged to operations.
(3) During fiscal 1995, approximately $7,400 relating to a write-down of intangible assets associated with the repair business acquired in fiscal 1993 in connection with the FRS, Inc. acquisition was charged to operations.
(4) During fiscal 1994, approximately $2,400 relating to a write-down of intangible assets associated with a covenant not to compete was charged to operations.
(5) During fiscal 1995, the Company substantially completed a major corporate reorganization into two core businesses operating through the IC recycling and recovery division and the spare parts distribution division.
(6) In connection with the Recapitalization, on March 29, 1996, the Company repurchased approximately 4,268 shares of Common Stock and issued 607 shares of Common Stock and 400 shares of Preferred Stock to WCAS and certain other purchasers. The Preferred Stock is convertible into 18,824 shares of Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (In thousands, except per share figures)
OVERVIEW
Aurora, as it exists today, was formed on September 30, 1992. Prior to September 30, 1992, the corporation was known as BSN Corp. and was engaged in the sporting goods industry. From 1990 through 1992, BSN divested itself of a majority of its sporting goods assets and, effective September 30, 1992, announced that all of its remaining sporting goods assets would be accounted for as discontinued operations and that such operations would be sold. Effective September 30, 1992, the Company entered the computer and electronics industry through the acquisition of Micro-C Corporation, a San Diego, California based company founded in 1985, which provided both integrated circuits ("IC") recycling services to computer OEMs and memory IC distribution services for semiconductor manufacturers. Effective September 30, 1993, Aurora acquired FRS, Inc., a Sacramento, California based company founded in 1984, which provided depot repair services to computer and peripheral OEMs. Effective March 1, 1994, Aurora acquired Century Computer Marketing, a Marina del Rey, California based company founded in 1984, a leading supplier of new and refurbished spare parts to the computer maintenance market.
In the third quarter of fiscal 1995, the Company completed a corporate reorganization, in which it: (a) exited the memory upgrade manufacturing and supply business formerly known as the Premier Division; and (b) substantially downsized its depot repair services operation acquired in the FRS, Inc. acquisition, and refocused these operations to support the Company's remaining spare parts distribution and electronic recycling services business.
In March 1996, the Company completed the Recapitalization. See Item 1. Business - -- Overview.
In October of 1997, the Company completed the sale of the remainder of its depot repair services operation and sold its Irvine, Scotland recovery processing facility. A reserve for the losses resulting from these transactions was accrued in the fourth quarter of fiscal 1997.
RESULTS OF OPERATIONS YEAR ENDED SEPTEMBER 30, 1997 COMPARED WITH YEAR ENDED SEPTEMBER 30, 1996
Net revenues for the year ended September 30, 1997 for the Company were $64,892 as compared to $98,019 for the year ended September 30, 1997. Gross profit for fiscal 1997 was $12,986 (20.0% of net revenues) as compared to gross profit for fiscal 1996 of $24,443 (24.9% of net revenues). The Company's decline in revenues and gross profit was due to a continued decline in the average sales prices for DRAM memory chips in the Asset Recovery Services Division (ARS) and an overall decline in the prices of computer repair parts in its Parts Services Supply Division ("PSS").
Selling, General and Administrative ("SG&A") expenses for fiscal 1997 were $23,466 (36.2% of revenue) as compared to $25,943 (26.5% of revenue) for fiscal
1996. Included in the 1996 SG&A expenses were approximately $725 in one time charges related to the Recapitalization. The increase of the SG&A expenses as a percentage of revenue was due to the reduction in revenues described in the preceding paragraph.
Amortization expense for fiscal 1997 was $34,044 as compared with $18,042 in fiscal 1996. The 1997 expense included $29,602 of unamortized goodwill and other intangibles remaining from the acquisition of Century Computer Marketing and $3,390 of computer system software and development costs in PSS. In consideration of the continued decline in prices for computer repair parts, management's projections do not support recovery of these assets over their amortization lives. The fiscal 1996 amortization included the write-off of $16,580 of goodwill related to the acquisition of Micro-C Corporation, Inc.
Net interest expense for fiscal 1997 was $4,050, or 6.2% of revenue, as compared to $6,221, or 6.3% of revenue, for fiscal 1996. The interest expense for fiscal 1996 includes approximately $2,243 of charges related to the Recapitalization, which includes approximately $1,070 of previously capitalized financed charges, $917 of interest, fees and expenses due to the Company's previous lenders and $256 relating to the 9-1/4% Senior Subordinated Notes.
Other expense for 1997 was $498, including a loss of approximately $450 from the sales of its repair facility in Sacramento, California, and its asset recovery facility in Irvine, Scotland. Other expense for fiscal 1996 was $1,284 including writedowns and disposal of property and equipment totaling $1,369.
Provision for income taxes for fiscal 1997 was $533 as compared to $3,306 for fiscal 1996. The fiscal 1997 provision includes the increase in the deferred income tax valuation allowance in the amount of $500 for deferred tax assets not anticipated to be realized. The fiscal 1996 provision includes the increase of the deferred income tax valuation allowance in the amount of $3,234 due to management's determination that the deferred tax asset will not be fully realized.
Net loss applicable to common stockholders for fiscal 1997 was $52,427 as compared to $31,753 for fiscal 1996. The fiscal 1997 loss included dividends on preferred stock of approximately $2,822, writedowns of information system software and development costs of approximately $3,390, and the write-off of goodwill from the Century acquisition of approximately $29,602.
RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1996, COMPARED WITH YEAR ENDED SEPTEMBER 30, 1995.
Net revenues for the year ended September 30, 1996 for the Company were $98,019 as compared to $141,852 for the year ended September 30, 1995. The Company's decline in revenues was due primarily to the discontinuation of the Premier Division ($36,254) during fiscal 1995. Excluding the Premier Division, net revenues for fiscal 1996 decreased 7.2% over the comparable period in fiscal 1995. The decrease was due to a 27.4% decline in revenues in the IC recycling and recovery business, offset by an increase of 5.3% in revenues for PSS. The decline in revenues for ARS was due primarily to a decline during the year in the average sales price for DRAM chips of approximately 87.0%.
Gross profit for fiscal 1996 was $24,443 (24.9% of net revenues) as compared to gross profit for fiscal 1996 of $34,582 (24.4% of net revenues). The decrease in gross profit was due primarily to the discontinuation of the Premier Division and the decrease of approximately $6,261 for ARS over the comparable period in fiscal 1995. This decline in gross profit was due to the decline of DRAM prices discussed above.
SG&A expenses for fiscal 1996 were $25,943, (26.5% of revenue) as compared to $28,170, (19.9% of revenue) for fiscal 1995. Included in the SG&A expenses were approximately $725 in one time charges related to the Recapitalization. The increase of the SG&A expenses as a percentage of revenue was due to the reduction in revenues from the discontinuation of the Premier Division and the decline in revenues for ARS.
Amortization expense for fiscal 1996 was $18,042 (18.4% of revenue), as compared to $9,073, (6.4% of revenue) for fiscal 1995. The increase was due to the write-off in the fourth quarter of fiscal 1996 of $16,580 of goodwill related to the acquisition of Micro-C Corporation, which was only partially matched by the third quarter of fiscal 1995 write-off of goodwill related to the acquisition of FRS, Inc. Management wrote off the goodwill related to the Micro-C acquisition due to the deterioration of the pricing levels in the IC market and their negative effects on the Company's business prospects going forward.
Net interest expense for fiscal 1996 was $6,221, (6.3% of revenue) as compared to $5,522 (3.9% of revenue) for fiscal 1995. The interest expense for 1996 includes approximately $2,243 of charges related to the Recapitalization which includes approximately $1,070 of previously capitalized financed charges, $917 of interest, fees and expenses due to the Company's previous lenders and $256 relating to the 9-1/4% Senior Subordinated Notes.
Other income (expense) for fiscal 1996 included writedowns and disposal of property and equipment totaling $(1,369).
Provision for income taxes for fiscal 1996 was $3,306 (3.4% of revenue) as compared to $1,320 (.9% of revenue) for fiscal 1995. This provision includes the increase of the deferred income tax valuation allowance in the amount of $3,234 due to management's determination that the deferred tax asset will not be fully realized. Management reached this conclusion as a result of the limitation in the utilization of the Company's net operating loss carryforwards caused by the change of ownership pursuant to the Recapitalization.
Net loss applicable to common stockholders for fiscal 1996 was $31,753 as compared to a net loss of $15,030 for fiscal 1995. The fiscal 1996 loss included approximately $6,620 of charges incurred in the second quarter of fiscal 1996 due to the Recapitalization completed on March 29, 1996, $6,320 of reduced operating income from the ARS when compared to 1995, dividends on preferred stock of approximately $1,400, writedowns and disposal of property and equipment totaling $1,369, and the write-off of goodwill from the Micro-C acquisition totaling $16,580.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are related to its accounts receivable, inventory levels, improvements to its property and equipment, investment in data processing equipment and software development, costs resulting from the consolidation of its businesses and funding its losses from operations. The Company's working capital was $(3,113) as of September 30, 1997, compared to $610 as of September 30, 1996.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance with certain financial covenants under the Credit Agreement. To obtain waivers of noncompliance from the lenders, on September 30, 1996, the Company, AEG and WCAS (the Company's largest shareholder) entered into a Financial Support Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed $16,292, the total borrowings currently outstanding under the Credit Agreement, and the Company has granted WCAS warrants to purchase 2,228 Shares of Common Stock at prices ranging from $1.025 to $2.10 per share. The Credit Agreement has been amended to waive all events of non-compliance with financial covenants, to eliminate future financial covenants and to establish the maturity date for the facility as April 30, 1999. At present, no additional borrowings are available under the Credit Agreement. See Note K of the Notes to Consolidated Financial Statements -- Stockholders' Equity and Item 12 -- Security Ownership of Certain Beneficial Owners and Management.
Subsequent to the Recapitalization on March 29, 1996, WCAS has provided additional capital to the Company through purchases of Redeemable Convertible Preferred Stock and a 10% Senior Subordinated Demand Note as follows:
Management believes that the Company will continue to experience operating losses and negative cash flow in fiscal 1998 and does not have additional funds available to it pursuant to the Credit Agreement. Since the Recapitalization, WCAS has provided the Company financial support by loan guarantees, preferred stock purchases and a direct loan. There can be no assurance that such additional capital will be available to the Company. Absent continued financial support of WCAS, it is unlikely that the Company can successfully implement its 1998 business plans and strategies. These matters raise substantial doubt about the Company's ability to continue as a going concern. See Note A to the Consolidated Financial Statements.
OUTLOOK AND UNCERTAINTIES
The following is a "safe harbor" statement under the Private Securities Litigation Reform Act of 1995: The matters discussed in this Annual Report on Form 10-K contain statements that constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. The words "expect," "estimate," "anticipate," "predict," "believe," and similar expressions and variations thereof are intended to identify forward-looking statements. Such statements appear in a number of places in this Annual Report on Form 10-K and include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect thereto, among other things: (i) trends affecting the Company's financial condition or results of operations; (ii) the Company's financing plans; and (iii) the Company's business growth strategies. Readers are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. These risks and uncertainties include, but are not limited to, the following:
o Other Uncertainties. Other operating, financial or legal risks or uncertainties are discussed in the Form 10-K or in the Company's other filings with the Commission from time to time in specific contexts. The Company is, of course, also subject to general economic risks, the risk of interruption in the source of supply, the risk of loss of a major customer and other risks and uncertainties.
o Market in Early Stages of Development. The Company believes that the market for its spare parts distribution and electronics recycling services is in the early stages of development and that awareness among certain potential customers of the availability of these services may be relatively low. Once customers are made aware of the availability of and benefits provided by these aftermarket support services, however, the Company's experience is that customers are generally receptive to making these services an important element of their manufacturing, post-sales support and environmental strategies. While the Company believes that it offers a mutually beneficial solution to large customers' and field service organizations' spare parts, recycling and asset recovery requirements, and has therefore targeted these entities as its primary potential customers, there is no assurance that these entities will choose to make use of these services, continue to outsource their spare parts, recycling and asset recovery needs, or choose not to become direct competitors of the Company. The Company addresses these issues in many ways, particularly including the development of information tools to use in its business, and the installation of information processing software. These projects require large budgets and manpower commitments, and have uncertain time schedules. Successful completion of these projects is not certain, and a failure of these projects may have adverse consequences for the development of the Company's business and/or its ability to successfully compete.
o Dependence on the Computer Industry. The Company's business is dependent upon the continued growth, viability and financial stability of its customers and potential customers in the computer industry. The computer industry has been characterized by rapid technological change, compressed product life cycles, and pricing and margin pressures. While these factors could be beneficial to the Company's business, such factors affecting segments of the computer industry in general, and the Company's customers in particular, could have an adverse effect on the Company's business.
o Inventory Obsolescence. The market for personal computers and subsystems is characterized by rapidly changing technology and frequent new product introductions. Innovations and improvements in computer and subsystem design, engineering and production may shorten the useful lives of existing systems and associated spare parts. Such rapid changes and improvements in technology, coupled with the need to maintain sufficient inventory levels of spare parts to ensure ready availability, subject the Company to the
risk of inventory obsolescence. The Company has successfully reduced its exposure to such inventory obsolescence by maintaining rapid inventory turnover. There can be no assurance that the Company's efforts in this area will continue to be successful.
o Lack of Long-Term Supply Contracts. The Company's success is dependent on its ability to continue to sell spare parts to its customers and to attract a reliable stream of recyclable material from its customers. Generally, the Company distributes spare parts to, and receives its recyclable material from, customers pursuant to non-exclusive contracts that to do not contain guaranteed or minimum quantities and are subject to cancellation on short notice at the customer's discretion. There is no assurance that the Company's customers will continue to do business with the Company. The termination of a material contract or any substantial decrease in demand for spare parts or of the supply of recyclable material from significant customers could result in a significant decrease in the Company's sales.
o Dependence on Key Personnel. The success of the Company is dependent, in part, upon key management personnel. The loss of the services of any of the Company's key management personnel could have a material adverse effect on the Company. Expansion of the Company's business may require additional managers and employees with industry experience. Competition for skilled management personnel in the industry is intense.
o Competition. The independent spare parts distribution and the electronic recycling services industry is fragmented with widespread competition from a variety of small independent suppliers. The Company believes that competition for OEM, TPMO and MVSO customers is based on a number of factors, including: (i) breadth of parts distributed; (ii) ability to offer sophisticated inventory and materials management programs; (iii) ability to offer rapid delivery and sophisticated logistics programs; and (iv) price. Among the Company's major independent competitors are DecisionOne, Data Trend, PC Service Source, and The Cerplex Group. Certain of these competitors are larger in total company revenue or have larger capitalizations than the Company.
o Control by and Dependence on Major Shareholder. As discussed above under "Recapitalization," WCAS, and their affiliates, own approximately 79.5% of the Company's voting stock. As a result, WCAS is able to elect the entire Board of Directors, and will retain the voting power to control all matters requiring shareholder approval. The Company's ability to raise additional capital or to sell control of the Company to third parties depends on WCAS's approval. Absent continued financial support of WCAS, it is unlikely that the Company can successfully implement its 1998 business plans and strategies. These matters raise substantial doubt about the Company's ability to continue as a going concern. See Note A to the Consolidated Financial Statements.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement is effective for both interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS and basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options under the treasury stock method. Management does not believe that adoption of this standard will have a significant impact on earnings per share.
In June 1997, FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." FASB No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company does not believe that adoption of these standards will have a material effect on the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
All other financial statement schedules are omitted as the required information is presented in the financial statements or the notes thereto or is not necessary.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Aurora Electronics, Inc.:
We have audited the accompanying consolidated balance sheets of Aurora Electronics, Inc. (a Delaware Corporation) and subsidiaries as of September 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 1997. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and the schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aurora Electronics, Inc. and subsidiaries as of September 30, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1997 in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has experienced declining revenues, significant operating losses, has negative working capital and a deficit in stockholders' equity. In addition, since a recapitalization of the Company in March 1996, the Company has relied upon the financial support of its largest shareholder for additional capital and to maintain its existing credit facilities. The Company's losses are expected to continue for the foreseeable future and the Company will require additional funding and financial support from its largest shareholder or another third party. There can be no assurance that such additional funding and financial support will be available on acceptable terms, or that such funds, if available, would enable the Company to continue operating. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in the index to the consolidated financial statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated 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 consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Orange County, California January 12, 1998
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
The accompanying notes are an integral part of these financial statements.
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
The accompanying notes are an integral part of these financial statements.
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands)
The accompanying notes are an integral part of these financial statements.
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these financial statements.
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The accompanying notes are an integral part of these financial statements.
AURORA ELECTRONICS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except per share figures)
NOTE A - CURRENT FINANCIAL CONDITION
During the years ended September 30, 1997, 1996 and 1995 the Company experienced significant declines in revenues and increasing levels of operating losses. As a result of these losses, at September 30, 1997 the Company has a deficit of $83,320 in stockholders' equity and negative working capital of $3,113. In addition, since a recapitalization of the Company in March 1996, the Company has relied upon the financial support of its largest shareholder for additional capital and to maintain its existing credit facilities. The Company's losses are expected to continue for the foreseeable future and the Company will require additional funding and financial support from its largest shareholder or another third party. There can be no assurance that such additional funding and financial support will be available on acceptable terms, or that such funds, if available, would enable the Company to combine operating. These matters raise substantial doubt about the Company's ability to continue as a going concern.
Management has made significant changes in its business to address its adverse financial position. The remaining portion of its depot repair business has been sold. In its asset recovery business, its Scotland facility has been sold and its product selection is limiting its exposure to the price fluctuations in integrated circuits and emphasizing system and sub-systems. In parts service, the Company is implementing an internet-based, electronic sales and fulfillment system which is expected to reduce inventory exposure, increase order fill rates and be more cost efficient than the existing process. Management believes that, when fully implemented, the new process will be a market advantage over its competition.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Aurora Electronics, Inc. operates in one business segment providing spare parts distribution and electronics recycling services to major personal computer manufacturers and field service organizations.
Principles of Consolidation. The accompanying consolidated financial statements include the accounts of Aurora Electronics, Inc. (the "Company") and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's industry is subject to significant fluctuations in prices and technologies.
Cash and Cash Equivalents. The Company considers all liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents.
Inventories. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. Reserves for cost in excess of net realizable value are determined periodically by comparing sales prices and volumes to cost and quantity of inventory on hand.
Property, Plant and Equipment. Property, plant and equipment is recorded at cost and is depreciated over the estimated useful lives of the related assets by the straight-line method for financial reporting purposes, and accelerated methods with respect to certain assets for income tax purposes. Property, plant and equipment includes computer hardware, software and implementation costs which are purchased, acquired and modified for internal use. The Company's policy is to capitalize and accumulate such costs as incurred and to commence amortization when placed in service. Leasehold improvements are amortized over the terms of the related leases or their useful lives, whichever is shorter.
Intangible Assets. Goodwill associated with the acquisition of MicroLine, Inc. is amortized using the straight-line method over five years. Goodwill resulting from prior acquisitions has been written off. (See Note G -- Intangible and Other Assets.) The Company assesses the recoverability of its goodwill by determining whether the amortization of the goodwill balance over its remaining life can be recovered through projected non-discounted future cash flows over the remaining amortization period. If projected future cash flows indicate that unamortized goodwill will not be recovered, an adjustment is made to reduce the net goodwill to an amount consistent with projected future cash flows discounted at the Company's incremental borrowing rate. Cash flow projections, although subject to a degree of uncertainty, are based on trends of historical performance and management's estimate of future performance, giving consideration to existing and anticipated competitive and economic conditions.
Revenue Recognition. Revenue is recognized upon shipment of products to customers. The Company warrants products against defects and has policies permitting the return of products under certain circumstances. Provisions are made for warranty costs and returns. Such costs generally have not been material. The Company does not offer price protection to its customers. The Company performs ongoing credit evaluations of its customers and has established provisions for potential credit losses.
Earnings Per Share of Common Stock. Earnings per share of common stock is based upon the weighted average number of common and common equivalent shares outstanding, less cumulative dividends to holders of the Company's preferred stock. Outstanding stock options and warrants are treated under the treasury
stock method as common stock equivalents when dilution results from their assumed exercise. The Company's Redeemable Convertible Preferred Stock, 7-3/4% Convertible Subordinated Debentures due April 15, 2001, and 7% Subordinated Convertible Promissory Notes (the "7% Notes") due September 30, 1998, were not common stock equivalents at the time of issuance and are therefore not included in the calculation of primary earnings per share. Fully diluted net earnings per share is not presented as it is anti-dilutive.
Stock-Based Compensation. In October 1995, the Financial Accounting Standards Board issued SFAS 123 "Accounting for Stock Based Compensation." This standard, if fully adopted, requires the accounting for employee stock-based compensation using a fair value methodology. For stock options, fair value is determined using an option pricing model that takes into account the stock price at the date of grant, the exercise price, the expected life of the option, the volatility of the underlying stock, the expected dividends and the risk-free interest rate. For stock based compensation issued to non-employees, the standard requires measurement based on the value of the related services performed or the stock based compensation issued,whichever is more reliably measurable.
The adoption of the accounting methodology of SFAS 123 related to employees is optional and as permitted under SFAS 123, the Company intends to continue to account for employee stock options using the Intrinsic value methodology in accordance with APB Opinion No. 25; however, pro forma disclosure as if the Company adopted the accounting methodology of SFAS 123 are required to be presented.
New Accounting Standards. The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." This statement is effective for both interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 replaces primary EPS and basic EPS and fully diluted EPS with diluted EPS. Basic EPS is computed by dividing reported earnings by weighted average shares outstanding. Diluted EPS is computed in the same way as fully diluted EPS, except that the calculation now uses the average share price for the reporting period to compute dilution from options under the treasury stock method.
In June 1997, the FASB issued SFAS Nos. 130 and 131 "Reporting Comprehensive Income" and "Disclosures about Segments of an Enterprise and Related Information." FASB No. 130 and No. 131 are effective for fiscal years beginning after December 15, 1997, with earlier adoption permitted.
The Company does not believe that adoption of these new standards will have a material effect on the Company.
NOTE C - ACQUISITIONS
Micro-C Corporation ("Micro-C")
Effective September 30, 1992, the Company acquired all of the outstanding Common Stock of Micro-C, a recycler of integrated circuits for the electronics industry. The purchase price consisted of $10,949 in cash and the issuance of the 7% Notes in the original principal amount of $7,379. Additionally, the purchase agreement provided for the issuance of up to approximately 447 shares of the Company's Common Stock valued at $11.20 per share (subject to anti-dilution adjustments) to the sellers over a three year period commencing in 1993. In fiscal 1996, 1995 and 1994, the Company issued 82, 77 and 61 shares, respectively in connection with the fiscal 1995, 1994 and 1993 operating results. Pursuant to the terms of a settlement agreement, the remaining 227 shares will not be issued.
FRS, Inc. ("FRS")
On September 30, 1993, the Company acquired all of the outstanding Common Stock of FRS, a provider of maintenance and repair services on selected computer peripherals and products. FRS also provides inventory management control services to certain manufacturers of electronic products and third party maintenance organizations. Pursuant to the Merger Agreement, the total consideration paid to the former shareholders of FRS was approximately $5,400 comprised of cash of approximately $100 and 744 shares of the Company's Common Stock valued at $7.125 per share (the last closing share price of Aurora's Common Stock prior to signing the Merger Agreement on September 12, 1993).
Century Computer Marketing ("Century")
Effective March 1, 1994, the Company acquired substantially all of the assets and assumed substantially all of the liabilities of Century. Century is a distributor of new and refurbished spare parts to the computer maintenance market, supporting the products of over 500 manufacturers. Pursuant to the terms of the Asset Purchase Agreement, the total consideration paid to Century was approximately $29,000 in cash, $2,000 in Common Stock of the Company and an additional $2,700 in Common Stock of the Company. The Company financed the acquisition of Century with proceeds from a five year $25,000 senior term loan and internally generated cash.
MicroLine, Inc.
Effective March 31, 1997, the Company acquired MicroLine, Inc. the developer and operator of PowerSource On-line, an internet-based information service that matches computer parts buyers to available inventories from distributors that participate in the on-line parts data base of PowerSource. The consideration to the former shareholders of MicroLine was 235,116 shares of common stock of the Company. The business now operates as the PowerSource Division of AEG.
All acquisitions have been accounted for by the purchase method of accounting, and accordingly each purchase price has been allocated to the assets acquired and the liabilities assumed based on the estimated fair values at the date of the acquisitions. The excess of the purchase price over the estimated fair values of the net assets acquired was recorded as goodwill amortizable over 40 years, or 5 years for MicroLine.
Goodwill from the Micro-C, FRS and Century acquisitions has been written off. See Note G -- Intangibles and Other Assets.
The estimated fair value of assets and liabilities as of the date of the acquisition of MicroLine is summarized as follows:
NOTE D - DISCONTINUED OPERATIONS
Commencing in 1990, the Company began to discontinue its sporting goods operations and divest itself of the related assets. Effective September 30, 1992, the Company announced that its remaining sporting goods operations would be accounted for as discontinued operations and the remaining assets would be sold. As of September 30, 1994, no material assets remained related to the discontinued operations. Obligations and contingencies relating to discontinued operations consists primarily of a leased building. (See Note N of the Notes to Consolidated Financial Statements -- Commitments and Contingencies).
NOTE E - INVENTORIES
Inventories at September 30, 1997 and 1996 consisted of the following:
NOTE F - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1997 and 1996 consisted of the following:
The Company leases office, processing and warehousing facilities under various operating leases through 2002. Future minimum lease payments under non-cancelable operating leases with remaining terms in excess of one year for the fiscal year ending September 30 are as follows: 1998 - $988; 1999 - $941; 2000 - $539; 2001 - $58. Rent expense was approximately $1,531, $1,246, and $1,662 for the years ended September 30, 1997, 1996 and 1995, respectively.
In connection with changes in the Parts Services Division (formerly Century), the Company charged $3,390 of capitalized information systems software and development costs to operations in the fourth quarter of fiscal 1997. (See Note G -- Intangibles and Other Assets).
NOTE G - INTANGIBLES AND OTHER ASSETS
Intangibles and other assets at September 30, 1997 and 1996 consisted of the following:
In fiscal 1997, due to continuing declines in the prices for replacement and repair parts, the Parts Services Division (formerly Century) experienced a continued decrease in inventory values and increasing levels of operating losses. As a result management decided to reorganize its parts business to reduce inventory exposure and to more cost effectively deliver parts to its customers. The plan is to utilize the internet-based electronic processing technology acquired in the MicroLine acquisition (see Note C -- Acquisitions) to replace its inventory and labor intensive operating methods. As a result, management charged the remaining balance of goodwill and the database valuation resulting from the acquisition of Century, aggregating $29,602, to operations in the fourth quarter of fiscal 1997. These charges were determined necessary as management estimated that the amortization of the respective intangible balances over their remaining lives would not be recovered through the projected non-discounted future cash flows over their respective remaining amortization periods. Also, the new internet technology made obsolete much of the Company's capitalized information systems software and development cost and, therefore, $3,390 of formerly capitalized costs were charged to operations in the fourth quarter of fiscal 1997.
Due to the deterioration of the pricing levels in the integrated circuit market in the latter part of fiscal 1996 and their related negative effects on the Company's business prospects, management charged the remaining balance of goodwill related to the acquisition of Micro-C, totaling $16,580, to operations in the fourth quarter of fiscal 1996. Also, upon the completion of a major corporate reorganization in the third quarter of fiscal 1995, management charged the remaining balance of goodwill related to the acquisition of FRS, totaling $7,407, to operations in fiscal 1995. These charges were determined necessary as management estimated that the amortization of the respective goodwill balances over their remaining lives would not be recovered through the projected non-discounted future cash flows over their respective remaining amortization periods. Other reductions of goodwill related to the reduction of the notes payable due to the sellers of Micro-C as a result of a favorable arbitration award in April 1995. (See Note H -- Long-term Debt.)
NOTE H - LONG-TERM DEBT
Long-term debt at September 30, 1997 and 1996 consists of the following:
Bank Financing
In March 1996, in conjunction with the recapitalization of the Company ("Recapitalization"), the Company's operating subsidiary, Aurora Electronics Group, Inc. ("AEG"), entered into a Credit Agreement with a group of lenders which provided for up to $35,000 of borrowings for working capital and for approved acquisitions. Borrowings under the Credit Agreement are secured by substantially all of the assets of AEG. The term of the Credit Agreement was originally five years. The interest rate is based on LIBOR plus 2.75% or the Bank's Base Rate plus 1.25%, with interest rate adjustments based on the ratio of total funded senior debt to the Company's earnings before interest, taxes, amortization and depreciation.
At June 30, 1996, and at various subsequent dates, AEG was not in compliance with certain financial covenants under the Credit Agreement. To obtain waivers of noncompliance from the lenders, on September 30, 1996, the Company, AEG and WCAS (the Company's largest shareholder) entered into a Financial Support Agreement, pursuant to which, with subsequent amendments, WCAS has guaranteed $16,292, the total borrowings currently outstanding under the Credit Agreement, and the Company has granted WCAS warrants to purchase 2,228 Common Shares at prices ranging from $1.025 to $2.10 per share. At September 30, 1997 the Credit Agreement has been amended to waive all events of non-compliance with financial covenants, to eliminate future financial covenants and to establish the maturity date for the facility as April 30, 1999. At present, no additional borrowings are available under the Credit Agreement.
10% Senior Subordinated Notes
In connection with the Recapitalization, the Company issued 10% Notes to its largest shareholder with a face value of $10 million due September 30, 2001. The Notes are shown net of the value of 607 shares of common stock issued simultaneously with the Notes which is reflected as a discount to the related debt. The discount is being amortized through the maturity date of the 10% Notes. Interest on the Notes is payable on March 31 and September 30 of each year beginning September 30, 1996 through maturity. Unpaid interest totaling $500 was added to the principal balance of the Notes in the fourth quarter of fiscal 1997, pursuant to the terms of the Notes. The proceeds of the Notes were used to repay the 9-1/4% Senior Subordinated Notes due November 1996. (See Note K of the Notes to Consolidated Financial Statements -- Stockholders' Equity.)
7-3/4% Convertible Subordinated Debentures
The 7-3/4% Convertible Subordinated Debentures mature April 15, 2001 ("Convertible Debentures") and are shown net of unamortized discount of approximately $98 and $125 at September 30, 1997 and 1996, respectively. The Company is required to make partial sinking fund payments of approximately $117 and $2,516 in 1999 and 2000, respectively. The Convertible Debentures are convertible into Common Stock of the Company at a conversion price, subject to adjustment in certain instances, of $11.66 per share, and are redeemable at the option of the Company at face value plus accrued interest thereon. Interest on the 7-3/4% Debentures is payable on April 14 and October 14 of each year through maturity.
7% Subordinated Convertible Promissory Notes
In connection with the acquisition of Micro-C, the Company issued 7% Notes to the sellers aggregating approximately $7,379. In April 1995, the Company was
awarded in arbitration a final settlement which reduced the outstanding balance of the notes to $2,648. Interest on the 7% Notes is payable on March 31 and September 30 of each year beginning March 31, 1993 through maturity. The remaining principal balance of the 7% Notes is due in monthly installments totaling $74 beginning September 30, 1996 through September 30, 1998. The 7% Notes are convertible into shares of the Company's Common Stock at a rate of $11.20 per share, subject to certain adjustments as defined in the note agreements.
Subsequent to September 30, 1997, the Company borrowed $2,800 from its largest shareholder under the terms of a 10% Demand Promissory Note.
Other Long-term Debt
Additional long-term debt consists primarily of secured equipment financing and capital lease obligations with interest rates ranging from 8.9% to 12.9%, due in monthly installments through 1999.
Aggregate maturities of long-term debt for the fiscal years ending September 30 are as follows:, 1998 - $1,177, 1999 - $16,586, 2000 - $2,553 and 2001 - $17,447.
NOTE I - INCOME TAXES
The provision for income taxes consists of the following:
The provision (benefit) for income taxes in the accompanying consolidated statements of operations differs from the amount of tax based on the statutory federal income tax rate as follows:
The components of the Company's deferred income tax benefit are as follows:
At September 30, 1997, the Company had tax basis net operating losses ("NOLs") of approximately $54,513 available to offset future ordinary taxable income. The utilization of the Company's NOLs will be substantially limited due to the Recapitalization. These carryforwards begin to expire during 2007. The income tax benefit related to these NOLs, as well as to certain reserves recorded by the Company, have been reflected in the deferred income tax asset accounts to the extent they are considered realizable.
The Company has established a valuation allowance for the entire deferred tax asset because it is not likely to be realized in the foreseeable future.
NOTE J - REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company has issued, in series, Redeemable Convertible Preferred Stock (the "Shares"), primarily to its largest shareholder. The Shares have a par value of $.01 per share and were issued for $100 per share. The Shares have a liquidation preference of $100 per share plus accrued and unpaid dividends. Dividends accrue at 7% per annum. The Shares (including all unpaid dividends) are convertible into common stock of the Company and are subject to mandatory redemption by the Company on September 30, 2006 at the price of $100 per share plus all
accrued and unpaid dividends to the redemption date. The holders of the Shares have voting rights equivalent to the holders of Common Stock on an "as converted" basis. The issues were:
Series A - 400 shares issued concurrent with the Recapitalization with a current conversion price of $1.91 as adjusted for anti-dilution adjustments.
Series B - 25 shares issued August 14, 1997 with a current conversion price of $1.37 as adjusted for anti-dilution adjustments.
Subsequent to September 30, 1997, the Company issued an additional 45 shares to its largest shareholder.
NOTE K - STOCKHOLDERS' EQUITY
The Company has 1,000 shares of authorized $.01 par value preferred stock, with none issued or outstanding. The Company has 50,000 shares of authorized $.03 par value Common Stock with 11,590 shares issued and 6,847 shares outstanding at September 30, 1997, (compared to 10,486 and 5,743, respectively, at September 30, 1996).
In October 1995, the Company sold 340 shares of Common Stock to investors in a private placement of equity securities in exchange for proceeds totaling $883, net of issuance costs. Proceeds from the offering were used to make the principal payment due September 30, 1996 on the 7% notes payable.
In March 1996, the Company completed a comprehensive Recapitalization of the Company, pursuant to which the Company (a) sold (i) 400 shares of Redeemable Convertible Preferred Stock, $.01 par value, to WCAS and certain other investors for an aggregate purchase price of $40,000 and (ii) 607 shares of Common Stock, along with a $10,000 10% Senior Subordinated Note due September 2001, to WCAS Capital Partners II, L.P. ("WCAS CP II") for an aggregate purchase price of $10,000, and (b) repurchased 4,268 shares of the Company's Common Stock at $2.875 per share pursuant to a tender offer for up to 6,500 shares of Common Stock.
In consideration for WCAS guaranteeing borrowings under the AEG senior secured revolving credit facility, the Company has granted WCAS warrants to purchase 2,228 Common Shares at prices ranging from $2.10 to $1.025 per share. See Note H - - Long-term Debt.
In connection with AEG's prior Senior Credit Agreement dated May 1994, and the Third Amendment effective September 30, 1995 which was repaid in full as part of the Recapitalization, the Company issued Warrants to the lenders to acquire 397 shares of common stock at $2.18 per share.
NOTE L - EMPLOYEE STOCK AND SAVINGS PLANS
Employee stock purchase plan. Effective October 1, 1994, the Company established an employee stock purchase plan for all eligible employees. Under the plan, shares of the Company's Common Stock may be purchased at three-month intervals at 85% of the lower of the fair market value on the first or the last day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.
Savings plan. The Company has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S. employees may defer up to 15% of their pretax salary, but not more than statutory limits. The Company contributes a discretionary amount, set by the Board of Directors, for each dollar contributed by a participant, with a maximum of 6% of participant earnings. The Company's matching contribution to the savings plan was $207, $252, and $279 for the years ended September 30, 1997, 1996 and 1995, respectively.
Stock option plan. The Company has a stock option plan for directors, officers, and key employees which provides for incentive and nonqualified stock options. A committee comprised of disinterested directors determines the option price (not less than the fair market value of the stock at the date of grant). The options generally expire ten years from the date of grant and generally vest over four years. As of September 30, 1997, options for 4,420 shares were issued and 988 shares were available for future grants under the plan. Options for 200 shares
were issued outside the Stock Option Plan. The new stock option plan was instituted at the time of the Recapitalization. At that time, the Company offered to exchange options issued under prior stock option plans for options under the new plan at the market price per share at the time of the Recapitalization ($2.125).
The Company accounts for its stock option plans under APB Opinion No. 25, under which no compensation cost has been recognized. The following pro forma disclosures represent what the Company's net income and earnings per share would have been had the Company recorded compensation cost for these plans in accordance with the provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation." (SFAS No. 123).
Because the method of accounting required under Statement No. 123 has not been applied to options granted prior to October 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years.
The weighted-average grant-date fair value of options granted during fiscal 1997 and 1996 was $1.18 and $1.67, respectively.
The 4,420 shares under the 1996 plan outstanding at September 30, 1997 and 1996 have a weighted average exercise price of $1.93 and $2.39, respectively.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 1997 and 1996, respectively: risk-free interest rates of 6.5% and 6.6%; no expected dividend yield; expected lives of 4 years; expected volatility of 117% in both years.
Pursuant to a Tax Indemnity Agreement entered into between the Company and Sport Supply Group, Inc. ("SSG") in connection with the SSG Public Offering, the Company agreed to indemnify SSG against certain consolidated income tax liabilities of the Company incurred prior to the SSG Public Offering. The Company does not believe that amounts paid, if any, pursuant to these agreements will have a material effect on the results of operations and financial condition of the Company.
Class Action Settlement
In connection with the settlement of a class action complaint, the parties reached agreement on the terms of a settlement, which required the Company to contribute $250 in cash and $1,250 in Common Stock priced at the issuance date. The balance of the settlement ($1,500 in cash) was funded by the Company's insurer. The settlement was approved on September 5, 1995. In fiscal 1997, the Company issued 775 shares of its Common Stock in final settlement of this action.
NOTE O - EXPORT SALES AND MAJOR CUSTOMERS
Export sales to customers in foreign countries amounted to approximately $16,244, $21,192, and $28,032 in fiscal 1997, 1996 and 1995, respectively. Revenues from the Company's foreign operations approximated $9,905, $9,278, and $10,109 in 1997, 1996 and 1995, respectively. In fiscal 1997 one customer accounted for approximately 11% of net revenues. One customer accounted for 19% percent or more of net revenues in fiscal 1996 and no customer accounted for more than 10% of net revenues in 1995.
SCHEDULE II
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(amounts in thousands)
(1) Uncollectible accounts written off, net of recoveries.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company as of December 20, 1997 were as follows:
JIM C. COWART, since December 31, 1992, has served as the Chairman of the Board and until October 1997 as Chief Executive Officer, and formerly served as Vice President of Strategic Development of the Company. Since February 1992, Mr. Cowart has served as Chairman of EOS Capital, Inc., a private capital firm which has been, from time to time, retained by the Company. Mr. Cowart is also a director of B/E Aerospace, Inc. ("BEAV" - NASD), a leading manufacturer of aircraft cabin interior products. Mr. Cowart has been a director of the Company since October 1992. Mr. Cowart and Mr. Cash are first cousins.
HARVEY B. CASH, from June 1985 to present, has been a general partner of InterWest Partners III, and from June 1989 to present, Mr. Cash has been a general partner of InterWest Partners IV, both of which are venture capital firms. Mr. Cash, since December 1983, has also been a general partner of Berry Cash Southwest Partnership, a venture capital firm. Mr. Cash is a director of Cirrus Logic, Inc. ("CRUS" - NASD), a semiconductor company and ProNet, Inc., ("PNET" - NASD), a distributor of medical pagers and electronic tracking systems. He served as a director of Cyrix Corporation ("CYRX" - NASD), a manufacturer and distributor of math co-processors until it was acquired by National Semiconductor in 1997. Mr. Cash has served as a director of the Company since September 1993. Mr. Cash and Mr. Cowart are first cousins.
DAVID A. LAHAR, since February 1992 has served as President of EOS Capital, Inc., a private capital firm which has been, from time to time, retained by the Company. From December 31, 1992 until July 1996, Mr. Lahar also served as the President of the Company and formerly served as the Chief Financial Officer of the Company. Mr. Lahar has been a director of the Company since October 1992.
THOMAS E. McINERNEY, since 1987, has been a general partner of Welsh, Carson, Anderson & Stowe and has been a general partner of the respective sole general partners of its associated limited partnerships. Mr. McInerney, since 1988, has served as a Director of DecisionOne Holdings Corp. ("DOCI" - NASD), and from 1994 to 1995, served as its Chairman. Mr. McInerney is also a director of Bisys Group, Inc. ("BSYS" - NASD). Mr. McInerney has been a director of the Company since March 1996.
RICHARD H. STOWE, since 1979, has been a general partner of Welsh, Carson, Anderson & Stowe and has been a general partner of the respective sole general partners of its associated limited partnerships. Mr. Stowe is a director of EmCare Holdings Inc. ("EMCR" - NASD), a provider of physician services management in hospital emergency departments; Medaphis Corporation ("MEDA" - NASD), a provider of accounts receivable management services to hospital-affiliated physicians and hospitals; Health Management Systems, Inc.("HMSY" - NASD), a provider of revenue enhancement services for health care providers and payors, and several private companies. Mr. Stowe has been a director of the Company since March 1996.
JOHN F. THOMPSON joined the Company in July 1997 as President and Chief Operating Officer and was appointed Chief Executive Officer in October 1997. Prior to joining the Company, he was employed for thirteen years at Merisel, Inc., or its predecessors, an international distributor of computer accessories, software and peripherals last holding the position of Senior Vice President, Worldwide Operations. His prior experience includes senior management positions with Vidal Sassoon, Inc, Max Factor, Cutter Labs and Mattel Toys.
JAMES N. CONTARDI joined the Company in May 1997. Prior to joining the Company, he was Vice President - Sales and marketing for PC Services Source of Dallas, Texas where he was employed for three years. His earlier experience included nine years in various positions at IBM.
GEORGE M. KORCHINSKY joined Aurora in November 1996. From May 1991 to October 1996, Mr. Korchinsky served as Vice President & Managing Director - Europe, Middle East, Africa for Symantec. From January 1989 to May 1991, Mr. Korchinsky served as General Manager Northern & Central Europe from Cognos Ltd. From January 1987 to January 1989, Mr. Korchinsky served as Managing Director Data Communications Equipment for Paradyne Ltd. and from 1984 to 1987 held various sales, marketing and technical management positions with Paradyne Ltd.
THOMAS M. PECK joined the Company with the acquisition of MicroLine, Inc. in April 1997. Mr. Peck was a founder of and President of MicroLine since 1992. Prior to founding MicroLine, he was an Account Manager with Computer Systems Repair of Secaucas, New Jersey.
JAMES STAMENSON joined the Company in October 1997 after six years with Aeroquip/Vickers Corporation of Los Angeles, California, lastly as Director of Operations of the Vickers Fluid Control and Actuation Division. His prior experience was with Parker Hannifin Corporation and Bertea Industries.
F. WAYNE WITHERS joined the Company in July 1997 following five years as Chief Financial Officer of PrimeSource, Inc. a Dallas, Texas based privately-owned wholesale distributor of building products and construction fasteners. His earlier experience includes Chief Financial Officer positions at public companies Naugles, Inc., Sav-On Drugs, Inc. and Denny's, Inc.
AMIR ASADI joined Aurora in April 1996 as Vice President - Information Systems. From June 1990 to April 1996, Mr. Asadi served as Vice President, Information Systems for Home Fashions Inc. From October 1987 to June 1990, Mr. Asadi served as Director, Systems Development of Beech Street of California. From May 1986 to October 1987, Mr. Asadi served as Information Systems Consultant, Project Manager for Fremont Indemnity.
ERIC AUGUSTA joined the Company with the acquisition of Century in 1994 and has served in various financial positions since then. Prior to Century, he was a Senior Financial Analysts with Xerox Corporation.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information with respect to the compensation paid by the Company to the Named Executive Officers during fiscal 1997, 1996 and 1995:
(1) The amounts in this column consist only of Company contributions under the Company's 401(k) plan.
(2) Mr. Cowart resigned as Chief Executive Officer of the Company on October 22, 1997. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
(3) In connection with the Recapitalization, Messrs. Cowart and Grazer received bonuses in the amounts of $112,000 and $105,000, respectively, in respect of 1995 performance that became payable in the event that a satisfactory recapitalization of the Company was obtained.
(4) During May 1996, Mr. Cowart surrendered for cancellation all of his outstanding options to purchase shares of Common Stock, and he was issued replacement options under the Company's 1996 Stock Option Plan (the "1996 Plan") to purchase an aggregate of 1,334,954 shares of Common Stock.
(5) During May 1995, the Compensation and Stock Option Committee of the Board of Directors offered each optionee the opportunity to surrender for cancellation his or her outstanding options and replace such outstanding options with non-qualified stock options to acquire eighty percent (80%) of the number of shares of the options as canceled, at a price per share equal to twenty-five cents ($0.25) over the closing price of the Common Stock on May 15, 1995.
(6) On October 22, 1996, the Company and Mr. Grazer entered into an employment agreement concurrent with Mr. Grazer becoming President as well as Chief Financial Officer that provided for a one-time bonus for accepting the position of $150,000, annual base salary of $175,000 and other provisions relating to stock options and severance benefits. Mr. Grazer resigned from the Company effective in May of 1997 and the agreement terminated. See - EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
(7) During May 1996, Mr. Grazer surrendered for cancellation all of his outstanding options to purchase shares of Common Stock, and he was issued replacement options under the 1996 Plan to purchase an aggregate of 899,668 shares of Common Stock.
(8) During May 1996, Mr. Kain surrendered for cancellation all of his outstanding options to purchase shares of Common Stock, and he was issued replacement options under the 1996 Plan to purchase an aggregate of 100,000 shares of Common Stock.
COMPENSATION OF DIRECTORS
Each non-employee director receives $2,500 for each quarter that such person serves as a director of the Company. Officers of the Company do not receive any fees for serving on the Board of Directors. Non-employee directors are automatically granted nonqualified stock options to purchase 25,000 shares of Common Stock upon election to the Board of Directors and options to purchase 5,000 shares of Common Stock on the date of each annual meeting of the Company's stockholders when such non-employee director has served on the Board of Directors for the immediately preceding 181 consecutive days, has agreed to serve as a director upon such re-election and is re-elected to the Board of Directors. All directors are entitled to reimbursement for expenses incurred for attendance at each meeting.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
Jim C. Cowart. Mr. Cowart and the Company entered into an employment letter effective as of May 18, 1995, pursuant to which he served as Chairman of the Board and Chief Executive Officer of the Company. Under the employment letter, Mr. Cowart receives an annual base salary and an incentive bonus based upon certain financial performance targets of the Company. If the Company terminates Mr. Cowart's employment without cause (as defined in the letter), Mr. Cowart's compensation and option vesting will continue for twelve (12) months. In the event of a change of control of the Company, Mr. Cowart's stock options vest immediately, and his compensation will continue for a period of two years. On October 22, 1997 Mr. Cowart resigned as Chief Executive Officer and agreed to continue as Chairman of the Board pursuant to the terms of the employment letter until October 21, 1998.
John P. Grazer. Mr. Grazer and the Company entered into an employment letter effective as of October 22, 1996, pursuant to which he served as President and Chief Financial Officer of the Company. Under the employment letter, Mr. Grazer received an annual base salary and an incentive bonus based upon certain financial performance targets of the Company. If the Company terminates Mr. Grazer's employment without cause (as defined in the letter), Mr. Grazer's compensation will continue for fifteen (15) months. In the event of a change of control of the Company that leads to Mr. Grazer's termination, Mr. Grazer's compensation will continue for a period of fifteen (15) months, and his stock options will vest immediately (unless otherwise determined by the Compensation Committee). Mr. Grazer resigned from the Company effective in May of 1997 and the agreement terminated.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Harvey B. Cash, Thomas E. McInerney (Chairman) and Richard H. Stowe served on the Compensation and Stock Option Committee of the Board of Directors during the last fiscal year. Neither Mr. Cash, Mr. McInerney nor Mr. Stowe are current or former officers or employees of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table and notes thereto set forth certain information with respect to the beneficial ownership of the Company's Common Stock as of December 31, 1997 by (i) each of the "Named Executive Officers" (as defined in Regulation S-K to the 1933 Securities Act, as amended), (ii) each director of the Company, (iii) each beneficial owner of more than 5% of the Company's Common Stock and (iv) all executive officers and directors of the Company as a group.
Except as otherwise indicated, each of the stockholders named below has sole voting and investment power with respect to the shares of Common Stock beneficially owned:
* Director ** Named Executive Officer *** Less than one percent (1)
(1) Sole voting and investment power unless otherwise indicated, subject to community property laws where applicable. Shares of Common Stock that can be acquired through the conversion of Convertible Preferred Stock are deemed outstanding for the purpose of computing the percentage of beneficial ownership. Shares of Common Stock that were not outstanding but that could be acquired through the exercise of stock options, warrants or the conversion of convertible debentures within 60 days of January 31, 1997 are deemed outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by a particular person. However, such shares are not deemed outstanding for the purpose of computing the percentage of outstanding shares beneficially owned by any other person.
(2) Address at: 320 Park Avenue, Suite 2500 New York, NY 10022-6815
(3) Includes (i) currently exercisable stock options to purchase 40,000 shares of the Company's Common Stock, (ii) 2,000 shares of the Company's Convertible Preferred Stock directly owned by Mr. Cash, which if converted, represents 104,712 shares of Common Stock and (iii) 20,000 shares of Common Stock owned by Mr. Cash.
(4) Includes (i) currently exercisable stock options to purchase 688,834 shares of the Company's Common Stock, (ii) 2,000 shares of the Company's Convertible Preferred Stock directly owned by Mr. Cowart, which if converted, represents 104,714 shares of Common Stock and (iii) 47,729 shares of Common Stock owned by Mr. Cowart.
(5) Includes (i) currently exercisable stock options to purchase 676,546 shares of the Company's Common Stock and (ii) 21,287 shares of Common Stock owned by Mr. Lahar.
(6) Messrs. McInerney and Stowe are general partners of the respective sole general partners of WCAS Capital Partners II, L.P., Welsh, Carson, Anderson & Stowe VII, L.P. and WCAS Information Partners, L.P., and may be deemed to beneficially own the shares of Common Stock and Convertible Preferred stock owned by such partnerships
(7) Includes (i) currently exercisable stock options to purchase 30,000 shares of the Company's Common Stock, (ii) 2,067 shares of the Company's Convertible Preferred Stock owned directly by Mr. McInerney, which if converted, represents 119,001 shares of Common Stock, (iii) 607,211 shares of the Company's Common Stock beneficially owned by WCAS Capital Partners, II L.P., (iv) 433,319 shares of the Company's Convertible Preferred Stock, which if converted, represents 24,947,998 shares of Common Stock beneficially owned by Welsh, Carson, Anderson & Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible Preferred Stock, which if converted, represents 340,096 shares of Common Stock beneficially owned by WCAS Information Partners, L.P.
(8) Includes (i) currently exercisable stock options to purchase 30,000 shares of the Company's Common Stock, (ii) 1,772 shares of the Company's Convertible Preferred Stock owned directly by Mr. Stowe, which if converted, represents 102,024 shares of Common Stock, (iii) 607,211 shares of the Company's Common Stock beneficially owned by WCAS Capital Partners, II L.P., (iv) 433,319 shares of the Company's Convertible Preferred Stock, which if converted, represents 24,947,998 shares of Common Stock beneficially owned by Welsh, Carson, Anderson & Stowe VII, L.P. and (v) 5,907 shares of the Company's Convertible Preferred Stock, which if converted, represents 340,096 shares of Common Stock beneficially owned by WCAS Information Partners, L.P. .
(9) Includes (i) currently exercisable stock options to purchase 154,987 shares of the Company's Common Stock, and (ii) 3,431 shares of Common Stock.
(10) Includes (i) currently exercisable stock options to purchase 154,987 shares of the Company's Common Stock.
(11) Includes (i) currently exercisable stock options to purchase 154,987 shares of the Company's Common Stock.
(12) Includes (i) currently exercisable stock options to purchase 154,987 shares of the Company's Common Stock.
(13) Reflects ownership of 607,211 shares of Common Stock beneficially owned and warrants to purchase 75,749 shares of common stock.
(14) Reflects ownership of 433,319 shares of Convertible Preferred Stock, which if converted, represents 24,947,998 shares of Common Stock and warrants to purchase 2,152,153 shares of common stock.
(15) Reflects ownership of 5,907 shares of Convertible Preferred Stock, which if converted, represents 340,096 shares of Common Stock.
(16) Includes (i) 92,447 shares of Common Stock, (ii) 1,755,367 shares of Common Stock issuable upon exercise of stock options and (iii) 379,050 shares of Convertible Preferred Stock, which if converted, represents 17,837,647 shares of Common Stock.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: January 12, 1998
AURORA ELECTRONICS, INC.
By: /s/ F. Wayne Withers ------------------------ F. Wayne Withers, Senior Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on January 12, 1998 by the following persons on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE - --------- ----- /s/ John F. Thompson President and Chief Executive Officer - --------------------------- (Principal Executive Officer) John F. Thompson
/s/ Jim C. Cowart Chairman - --------------------------- Jim C. Cowart
/s/ Harvey B. Cash Director - --------------------------- Harvey B. Cash
/s/ David A. Lahar Director - --------------------------- David A. Lahar
/s/ Thomas E. McInerney Director - --------------------------- Thomas E. McInerney
/s/ Richard H. Stowe Director - --------------------------- Richard H. Stowe
INDEX TO EXHIBITS
Exhibit Number Description of Exhibits - ------ ----------------------- 3.1 The Restated Certificate of Incorporation of the Company, as amended (incorporated by reference from Exhibit 3.1 to the Company's Transition Report on Form 10-K for the transition period from December 31, 1991 to September 30, 1992).
3.2 Bylaws of the Company, as amended (incorporated by reference from Exhibit 4.2 to the Company's Registration Statement on Form S-8 (Registration No. 33-79426)).
4.1 Indenture between the Company and MBank Dallas, National Association relating to the Company's 7-3/4% Convertible Subordinated Debentures due 2001, including form of Debenture (incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-2 (Registration No. 33-4276)).
4.2 First Supplemental Indenture relating to the Company's 7-3/4% Convertible Subordinated Debentures, dated December 1, 1987, between the Company and MTrust Corp., National Association, appointing MTrust Corp. as successor trustee to MBank Dallas (incorporated by reference from Exhibit 4.2 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993).
4.3 Tripartite Agreement relating to the Company's 7-3/4% Convertible Subordinated Debentures, dated as of January 7, 1990, by and among MTrust Corp., National Association, Ameritrust Texas N.A., and the Company (incorporated by reference from Exhibit 4.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989).
4.4 Second Supplemental Indenture relating to the Company's 7-3/4% Convertible Subordinated Debentures, dated to be effective as of November 30, 1992, between the Company and Society National Bank (incorporated by reference from Exhibit 4.4 to the Company's Post-Effective Amendment No. 1 to Registration Statement on Form S-3 (No. 33-32377)).
4.5 Certificate of Designations, Preferences and Rights of Convertible [__] Preferred Stock dated March 1996 relating to 400,000 shares of Preferred Stock.
4.6 Common Stock Purchase Warrant (Paribas), Form of Warrant to Purchase 94,903 Shares of Common Stock of Aurora Electronics, Inc., dated May 12, 1994, issued to each of Banque Paribas and Banque Indosuez (incorporated by reference from Exhibit 4.2 to the Company's Report on Form 8-K dated May 26, 1994).
4.7 Common Stock Warrant (Lender) Banque Indosuez, Form of Warrant to Purchase Shares of Common Stock of Aurora
Electronics, Inc., dated May 12, 1994, issued to each of Banque Paribas, Banque Indosuez and Union Bank (incorporated by reference from Exhibit 4.3 to the Company's Report on Form 8-K dated May 26, 1994).
4.8 Aurora Electronics, Inc. Common Stock Purchase Warrant, dated September 30, 1996, issued to Welsh, Carson, Anderson & Stowe VII, L.P.
4.9 Aurora Electronics, Inc. Common Stock Purchase Warrant, dated September 30, 1996, issued to WCAS Capital Partners II, L.P.
4.10 Form of Aurora Electronics, Inc. Common Stock Purchase Warrant, issued to Welsh, Carson, Anderson & Stowe VII, L.P.
4.11 Form of Aurora Electronics, Inc. Common Stock Purchase Warrant, issued to WCAS Capital Partners II, L.P.
*4.12 Welsh, Carson, Anderson & Stowe January 6, 1998 Waiver of Right to Receive Warrants under Financial Support Agreement, dated as of September 30, 1996, as amended.
*4.13 Certificate of Designations, Preferences and Relative Rights of Series B Preferred Stock dated August 14, 1997 relating to 25,000 shares of Series B Preferred Stock.
*4.14 Certificate of Designations, Preferences and Relative Rights of Series C Preferred Stock dated October 2, 1997 relating to 25,000 shares of Series C Preferred Stock.
*4.15 Certificate of Designations, Preferences and Relative Rights Regarding Series D Preferred Stock dated October 2, 1997 relating to 20,000 shares of Series D Preferred Stock.
10.1 Aurora Electronics, Inc. 1993 Stock Option Plan, as amended by Amendment No. 1 dated to be effective as of March 1, 1994 and by Amendment No. 2 dated to be effective as of March 1, 1994 (incorporated by reference from Exhibit 4.3 to the Company's Registration Statement on Form S-8 (Registration No. 33-79426)).
10.2 Aurora Electronics, Inc. 1996 Stock Option Plan (incorporated by reference from Exhibit 10.19 to the Company's Form 10-Q for the quarter ended June 30, 1996).
10.3 Form of Indemnification Agreement entered into between the Company and each of the directors of the Company (incorporated by reference from Exhibit 10.3 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.4 Letter Agreement, dated October 22, 1996, between the Company and John P. Grazer relating to employment.
10.5 Letter Agreement, dated March 1, 1994, between the Company and Jim C. Cowart relating to employment (incorporated by reference from Exhibit 10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994).
10.5.1 Letter Agreement, dated May 18, 1995, between the Company and Jim C. Cowart relating to employment (incorporated by reference from Exhibit 10.5.1 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995)
10.8 Standard Multi-Tenant Net Lease, dated November 3, 1992, by and between Sorrento Mesa Properties, Inc. and Micro-C Corporation (now Aurora Electronics Group, Inc.) (incorporated by reference from Exhibit 10.7 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993).
10.9 Standard Industrial Lease - Net, dated March 27, 1984, by and between Northgate Investment Company (now David Pick) and
Repair Services, Inc. (now Aurora Electronics Group, Inc.) (incorporated by reference from Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993).
10.10 Standard Industrial / Commercial Single Tenant Lease - Net dated November 30, 1994, by and between The Equitable Life Assurance Society of the United States and Aurora Electronics Group, Inc. (incorporated by reference from Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994).
10.11 Standard Lease Agreement dated October 27, 1992, by and between Crow-Brindell-Mitchell and Aurora Electronics Group, Inc. as Assignee of CCB Computer Brokers, Inc. d/b/a Century Computer Services, Inc. (incorporated by reference from Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994).
10.12 Lease Agreement Shelby Distribution Center dated November 11, 1994 by and between J. Shea Leatherman, William A. Leatherman, Jr., Irwin L. Zanone and Aurora Electronics Group, Inc. (incorporated by reference from Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994).
10.13 Lease dated July 14, 1988, by and between American National Bank and Trust Company of Chicago and BSN Corp. (now Aurora Electronics, Inc.) (incorporated by reference from Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1994).
10.14 Form of Tax Indemnity Agreement by and between the Company and SSG (incorporated by reference from Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1991).
10.15 Stock Purchase Agreement, dated as of September 30, 1992, by and among the Company, Robert E. Morris and Norma J. Morris, Trustees of the Robert and Norma Morris Family Trust and The Robert and Norma Morris Charitable Remainder Unitrust (incorporated by reference from Exhibit 2.1 to Form 8-K filed on October 19, 1992).
10.16 Merger Agreement and Plan of Reorganization, dated September 12, 1993, by and between the Company and FRS, Inc. (incorporated by reference from Exhibit 2.1 to the Company's Current Report on Form 8-K, dated October 15, 1993).
10.17 Asset Purchase Agreement, dated March 15, 1994 to be effective as of March 1, 1994, as amended, by and among the Company, Aurora Electronics Group, Inc. and CCB Computer Brokers, Inc. and CCM Computers International, Ltd. (incorporated by reference from Exhibit (b)(1) to the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1994).
10.18 Aurora Electronics, Inc. 401-K Plan (incorporated by reference from Exhibit 10.13 to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1993).
10.19 Securities Purchase Agreement among Aurora Electronics, Inc., Welsh, Carson, Anderson & Stowe VII, L.P., WCAS Capital Partners II, L.P. and the Several Purchasers Named Therein, dated February 21, 1996, incorporated by reference from Exhibit (b)(2) of the Company's Issuer Tender Offer Statement on Schedule 13E-4, which was filed with the Securities and Exchange Commission on February 23, 1996.
10.20 Aurora Electronics Inc. Offer to Purchase for Cash up to 6,500,000 Shares of Its Common Stock at $2.875 Per Share, dated February 23, 1996, incorporated by reference from Exhibit (a)(1) of the Company's Issuer Tender Offer Statement on Schedule 13E-4, which was filed with the Securities and Exchange Commission on February 23, 1996.
10.21 Credit Agreement among Aurora Electronics Group, Inc., as Borrower, the Guarantors Named Therein, the Lenders Named therein and Chemical Bank, N.A., as Agent, dated March 29, 1996 (incorporated by reference from Exhibit 10.21 to the Company's Report on Form 8-K dated March 29, 1996).
10.22 $15,000,000 Tranche A Note between Aurora Electronics Group, Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March 29, 1996 (incorporated by reference from Exhibit 10.22 to the Company's Report on Form 8-K dated March 29, 1996).
10.23 $20,000,000 Tranche B Note between Aurora Electronics Group, Inc., as Maker, and Chemical Bank, N.A., as Lender, dated March 29, 1996 (incorporated by reference from Exhibit 10.23 to the Company's Report on Form 8-K dated March 29, 1996).
10.24 Pledge Agreement among Aurora Electronics Group, Inc., Aurora Electronics, Inc. and Chemical Bank, N.A., dated March 29, 1996 (incorporated by reference from Exhibit 10.24 to the Company's Report on Form 8-K dated March 29, 1996).
10.25 Security Agreement among Aurora Electronics Group, Inc., Aurora Electronics, Inc. and Chemical Bank, N.A., dated March 29, 1996 (incorporated by reference from Exhibit 10.25 to the Company's Report on Form 8-K dated March 29, 1996).
10.26 Security Agreement and Mortgage -- Patents and Trademarks among Aurora Electronics Group, Inc., Aurora Electronics, Inc. and Chemical Bank, N.A., dated March 29, 1996 (incorporated by reference from Exhibit 10.26 to the Company's Report on Form 8-K dated March 29, 1996).
10.27 Assignment for Security (Patents) among Aurora Electronics Group, Inc., as Assignor, and Chemical Bank, as Assignee, dated March 29, 1996 (incorporated by reference from Exhibit 10.27 to the Company's Report on Form 8-K dated March 29, 1996).
10.28 Assignment for Security (Patents) among Aurora Electronics, Inc., as Assignor, and Chemical Bank, as Assignee, dated March 29, 1996 (incorporated by reference from Exhibit 10.28 to the Company's Report on Form 8-K dated March 29, 1996).
10.29 Assignment for Security (Trademarks) among Aurora Electronics Group, Inc., as Assignor, and Chemical Bank, as Assignee, dated March 29, 1996 (incorporated by reference from Exhibit 10.29 to the Company's Report on Form 8-K dated March 29, 1996).
10.30 Assignment for Security (Trademarks) among Aurora Electronics, Inc., as Assignor, and Chemical Bank, as Assignee, dated March 29, 1996 (incorporated by reference from Exhibit 10.30 to the Company's Report on Form 8-K dated March 29, 1996).
10.31 Registration Rights Agreement, among Aurora Electronics, Inc., Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Capital Partners II, L.P., dated March 29, 1996.
10.32 Aurora Electronics, Inc. 10% Senior Subordinated Note due September 30, 2001, by Aurora Electronics, Inc. as payor to WCAS Capital Partners II, L.P., as payee, dated March 29, 1996.
10.33 Financial Support Agreement, among Aurora Electronics, Inc., Aurora Electronics Group, Inc., Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Capital Partners II, L.P., dated as of September 30, 1996.
10.34 Limited (Overadvance) Guarantee, made by Welsh, Carson, Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P., each a Guarantor, and collectively, the Guarantors, in favor of The Chase Manhattan Bank (formerly known as Chemical Bank), as Agent for the Lenders, dated as of September 30, 1996.
10.35 Limited (Acquisition) Guarantee, made by Welsh, Carson, Anderson & Stowe, VII, L.P. and WCAS Capital Partners II, L.P., each a Guarantor, and collectively, the Guarantors, in favor of The Chase Manhattan Bank (formerly known as Chemical Bank), as Agent for the Lenders, dated as of September 30, 1996.
10.36 Form of Note, Aurora Electronics Group, Inc. 10% Senior Subordinated Note due September 30, 2001, by Aurora Electronics Group, Inc. as payor.
10.37 Amendment No. 1 to Registration Rights Agreement, among Aurora Electronics, Inc. and the parties listed on Schedule I thereto, dated as of September 30, 1996.
*10.38 Letter Agreement, dated November 21, 1997, between the Company and John F. Thompson relating to employment.
*10.39 Amended and Restated Financial Support Agreement, among Aurora Electronics, Inc., Aurora Electronics Group, Inc., Welsh, Carson, Anderson & Stowe VII, L.P., and WCAS Capital Partners II, L.P., dated as of , 1997.
*10.40 Securities Purchase Agreement dated August 14, 1997 between Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P. for the purchase of Aurora Electronics, Inc. Series B Preferred Stock.
*10.41 Securities Purchase Agreement dated October 2, 1997 between Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P. for the purchase of Aurora Electronics, Inc. Series C Preferred Stock.
*10.42 Securities Purchase Agreement dated October 24, 1997 between Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P. for the purchase of Aurora Electronics, Inc. Series D Preferred Stock.
*10.43 Senior Subordinated Note Purchase Agreement among Aurora Electronics, Inc. and Welsh, Carson, Anderson & Stowe VII, L.P.
*10.44 Form of $2,800,000 10% Senior Subordinated Demand Note dated December 5, 1997 between Aurora Electronics, Inc., as payor, and Welsh, Carson, Anderson & Stowe VII, L.P., as payee.
*11 Computation of Earnings Per Share
21.1 Subsidiaries of the Company:
21.2
*23.1 Consent of Arthur Andersen LLP
*27 Financial Data Schedule
*Filed herewith.