<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
Commission File Number: 0-9725
AURORA ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 75-1539534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
2030 Main Street, Suite 1120, Irvine, California 92714
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 660-1232.
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicated below is the number of shares outstanding of each class of the
registrant's common stock, as of February 9, 1995.
<TABLE>
<S> <C>
Title of Each Class of Common Stock Number Outstanding
----------------------------------- ------------------
Common Stock, $0.03 par value 7,475,325 shares
</TABLE>
Page 1 of 14 sequentially numbered pages.
Index to Exhibits appears on page 12.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
</TABLE>
2
<PAGE> 3
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1994 1994
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 366 $ 1,539
Short-term investments 1,171 1,171
Trade receivables, less allowance for doubtful accounts
of $1,117 and $1,046, respectively 16,421 16,841
Inventories 10,126 9,445
Deferred income taxes 4,454 5,038
Other current assets 1,305 1,067
-------- ---------
Total current assets 33,843 35,101
Property, plant and equipment, net 5,922 6,075
Intangible and other assets 61,286 61,751
-------- --------
Total assets $101,051 $102,927
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,629 $ 5,622
Accounts payable 11,173 11,583
Accrued compensation 1,567 1,763
Accrued acquisition expenses 838 900
Accrued interest 360 980
Reserve for discontinued operations 4,986 5,024
Other current liabilities 378 601
-------- --------
Total current liabilities 24,931 26,473
-------- --------
Long-term debt 48,340 49,551
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 1,000 shares authorized, none issued - -
Common stock, 8,097 and 8,020 shares issued, respectively 242 240
Additional paid-in capital 61,825 61,827
Accumulated deficit (28,423) (29,300)
Treasury stock, at cost, 561 shares (5,864) (5,864)
-------- --------
Total stockholders' equity 27,780 26,903
-------- --------
Total liabilities and stockholders' equity $101,051 $102,927
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
December 31,
-------------------------
1994 1993
------- -------
<S> <C> <C>
Net revenues $37,761 $21,248
Cost of sales 27,770 17,144
------- -------
Gross profit 9,991 4,104
Selling, general and administrative expenses 6,666 1,883
Amortization of intangibles 428 386
Program development costs -- 233
------- -------
Operating income 2,897 1,602
Interest expense (1,347) (556)
Income from investments in unconsolidated affiliates -- 17
Other income (expense), net (89) 81
------- -------
Earnings from continuing operations before provision for income taxes 1,461 1,144
Provision for income taxes 584 436
------- -------
Net income $ 877 $ 708
======= =======
Earnings per share of common stock $ 0.11 $ 0.10
======= =======
Weighted average number of common and common equivalent shares 8,060 7,338
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the three months
ended December 31,
-------------------------
1994 1993
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 877 $ 708
Adjustments to reconcile net income to net cash flows
from operating activities:
Foreign currency translation - (22)
Depreciation and amortization 902 655
Gain on sale of securities - (17)
Changes in assets and liabilities, net of acquisitions:
Trade receivables, inventories and other assets 36 (3,482)
Accounts payable and other liabilities (889) (1,396)
Accrued interest and income taxes receivable/payable (620) -
------- -------
Net cash flows from continuing operations 306 (3,554)
Net cash flows from discontinued operations (38) (1,308)
------- -------
Net cash flows from operating activities 268 (4,862)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (226) (653)
Additional investment costs (10) -
Proceeds from sales of marketable securities and SSG note - 481
------- -------
Net cash flows from investing activities (236) (172)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on debt (1,021) -
Purchases of treasury stock - (225)
Repayments under line of credit (184) (1,839)
------- -------
Net cash flows from financing activities (1,205) (2,064)
------- -------
Net change in cash and cash equivalents (1,173) (7,098)
Cash and cash equivalents at beginning of period 1,539 16,201
------- -------
Cash and cash equivalents at end of period $ 366 $ 9,103
======= =======
</TABLE>
The accompanying notes are an integral part of thesse financial statements.
5
<PAGE> 6
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE A. BASIS OF PRESENTATION
The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. However, the Company believes that the
disclosures are adequate to make the information presented not misleading.
These unaudited consolidated financial statements should be read in conjunction
with the financial statements and the notes thereto included in the Company's
annual report on Form 10-K/A for the year ended September 30, 1994.
The accompanying unaudited consolidated financial statements include
the accounts of Aurora Electronics, Inc. and all of its subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain operating segments that have been sold and segments for
which a plan of disposal had been adopted as of September 30, 1992 have been
reported as discontinued operations. In the opinion of management, the
statements reflect all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position as of December
31, 1994 and the results of operations and cash flows for the periods shown.
Investments in affiliated companies are included based upon the equity or cost
methods of accounting, as appropriate. Operating results for the interim
period ending December 31, 1994 are not necessarily indicative of the results
that may be expected for the year ending September 30,1995.
NOTE B. ACQUISITIONS
Micro - C Corporation ("Micro-C")
Pursuant to the terms of the purchase agreement for the acquisition
of Micro-C, the Company was required to pay certain additional consideration to
the sellers of Micro-C based upon Micro-C's annual operating results and
revenues during a three year period beginning with the fiscal year ended
September 30, 1993. As a result of actual operating results achieved by
Micro-C during the year, the Company issued 77,414 and 60,820 shares of common
stock on December 31, 1994 and 1993, respectively.
Century Computer Marketing ("Century")
Effective March 1, 1994, the Company acquired substantially all of
the assets and liabilities of Century. Century is a distributor of new and
refurbished spare parts to the computer maintenance market, supporting the
products of over 500 manufactures. Pursuant to the terms of the Asset Purchase
Agreement the total consideration paid to Century was approximately $29 million
in cash and $4.7 million in common stock of the Company. The Company financed
the acquisition of Century with proceeds from a new five year $25 million bank
term loan facility and internally generated cash.
NOTE C. 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. 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 7-3/4% Convertible Subordinated Debentures due April 15, 2001 and 7%
6
<PAGE> 7
Subordinated Convertible Promissory Notes (the "7% Notes") due September 30,
1997 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 due to its anti-dilutive
effect.
NOTE D. INVENTORIES
Inventories at December 31, 1994, and September 30, 1994 include
material, labor and overhead and consist of the following:
<TABLE>
<CAPTION>
December 31, 1994 September 30, 1994
----------------- ------------------
<S> <C> <C>
Spare and repair parts $ 462 $1,083
Work in process 533 1,152
Finished goods and purchased product 9,131 7,210
------- ------
Total Inventories $10,126 $9,445
======= ======
</TABLE>
NOTE E. CONCENTRATION RISK
During the three months ended December 31, 1994, the Company derived
approximately 22% of its revenues from material received by one supplier, as
compared to 51% for the three months ended December 31, 1993. In December
1994, this major supplier indefinitely suspended the program under which it
supplied the integrated circuits to the Company. Although the Company was able
to obtain in total an acceptable supply of materials from this major supplier
and new suppliers during the three months ended December 31, 1994, there can be
no assurance that the Company will be able to secure a continued supply in the
future. In the event these new relationships do not provide the expected
levels of revenue and profits, or the Company's major supplier does not resume
its shipments to the Company, there would be a substantial negative effect on
the Company's business and results of operations.
NOTE F. GOODWILL
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.
NOTE G. COMMITMENTS AND CONTINGENCIES
Settlement of Class Action Complaint
In the fourth quarter of fiscal 1994, the Company recorded a charge to
operations in the amount of $1,693 to reflect a preliminary agreement to settle
a securities class action complaint against the Company. The settlement
requires the Company to issue $1,250 of common stock valued at fair market
value at the time of issuance and $250 in cash. The balance of the settlement
of $1,500 will be funded by the Company's insurer. In addition, legal fees
incurred during the year of $193 relating to this
7
<PAGE> 8
complaint were included in the charge to operations. The settlement is subject
to mutually agreeable settlement documents and court approval.
Indemnification Claim
In accordance with the stock purchase agreement relating to the
Micro-C acquisition, the Company and the former owners of Micro-C (who
currently beneficially own directly and indirectly, through ownership of the 7%
Subordinated Convertible Promissory Notes ("7% Notes", 9.7% of the Company's
Common Stock), submitted to arbitration a dispute concerning a claim by the
Company against the former owners for indemnification under the stock purchase
agreement. On December 27, 1994, the arbitrator awarded the Company $3,507 in
damages, a portion of the interest previously paid on the 7% Notes and
attorneys fees and costs. Although the final resolution is subject to a future
hearing, the Company has recorded the $3,507 damages portion of the arbitration
award as a reduction in the principal balance of the 7% Notes and a
corresponding reduction in cost in goodwill, net of expenses of $500.
Contingent Lender Warrants
The Company's lenders are entitled to additional Warrants (Contingent
Lender Warrants) calculated by dividing the balance of the outstanding
principal and accrued interest on the 7% Notes on March 31, 1995 by 50% of the
fair market value of the Company's Common Stock on March 31, 1995 (the exercise
price). However, upon the occurrence of any of the following events prior to
March 31, 1995, these Warrants shall be null and void: (i) the 7% Notes are
restructured to extend the first principal payment beyond October 1, 1999;
(ii) the 7% Notes are converted to Common Stock; or (iii) payment of the 7%
Notes with proceeds of a Common Stock offering or subordinated debt with no
principal payments prior to October 1, 1999.
As discussed above the 7% Notes were reduced from $7,379 to $3,872
based on the arbitration ruling described above. Management is pursuing
various alternatives to render the Contingent Lender Warrants null and void, or
otherwise re-negotiate the terms of the Contingent Lender Warrants. Management
believes they will be successful in achieving one of these alternatives.
However, should the Company be unable to achieve one of the events noted above,
or re-negotiate the terms of the Contingent Lender Warrants, the Company will
incur a non-cash charge to operations during the six month period ending March
31, 1995 for the amount of the principal and accrued interest on the 7% Notes
at that date (approximately $3,918 as of December 31, 1994).
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands, except share data)
RESULTS OF OPERATIONS - THREE MONTHS ENDED DECEMBER 31, 1994 AS COMPARED TO THE
THREE MONTHS ENDED DECEMBER 31, 1993
Net revenues for the three months ended December 31, 1994 were $37,761
as compared to $21,248 in net revenues for the three months ended December 31,
1993. Approximately $12,000 of the increase in revenues was due to the
addition of the Century business. The increase also reflects a combined 37.9%
growth in revenues generated by the ARS and Premier Computer Products divisions
and offsets a decrease in the repair business revenues.
Gross profit for the three months ended December 31, 1994 was $9,991
or 26.5% of net revenue as compared to $4,104 in gross profit for the three
months ended December 31, 1993 or 19.3% of net revenue. The gross profit
dollars and the gross profit as a percentage of net revenues increased from the
comparable quarter last year due to the addition of the Century business.
8
<PAGE> 9
Selling, general and administrative expenses for the three months
ended December 31, 1994 were $6,666, or 17.7% of revenues as compared to $1,883
or 8.9% for the comparable 1993 period. The increase of $4,783. was primarily
due to the addition of the Century business, which, although it generates a
higher gross profit, the business has a historically higher SG&A cost structure
when compared to the other divisions of the Company. In addition, the Company
has made investments in systems and in the number of employees and related
expenses required to support the growth in the Company's operations.
Amortization expense, a component of operating expenses, was $428 or
1.1% of revenues as compared to $386 or 1.8% for the comparable 1993 period.
This $42 increase was caused by the increase in intangible assets resulting
from the acquisition of Century but was partially offset by the write-off of
the non-compete agreement taken in fiscal 1994 for the Micro-C acquisition.
During the quarter, there were no program development costs for the
three months ended December 31, 1994 as compared to $233 or 1.1% of revenues
for the comparable 1993 period. The decrease is related to completed
development of a new service line to complement the existing repair business
during fiscal year ended September 30, 1994.
Net interest expense for the three months ended December 31, 1994 was
$1,347 or 3.6% of revenues as compared to $556 or 2.6% of revenues for the
comparable 1993 period. The increase of $791 was primarily due to additional
debt incurred as a result of the acquisition of Century during fiscal year
1994.
Net income for the three months ended December 31, 1994 was $877 or
2.3% of revenues, as compared to net income of $708 or 3.3% for the comparable
period in 1993. The decrease in the net income as a percentage of revenue is
due to higher interest expense as a result of the increases in the interest
rate and Company borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are directly related to
its levels of accounts receivable, inventories, additions to its property and
equipment, costs resulting from the consolidation of its businesses, and
required debt principal payments. The Company's working capital was $8,912 as
of December 31, 1994, compared to $8,628 as of September 30, 1994. The Company
has financed acquisitions to date using bank debt, internally generated cash
and issuances of common stock.
As of December 31, 1994, the Company held 86,000 shares of the
outstanding common stock of Sport Supply Group, Inc. ("SSG" - NYSE). Based on
the current market price of SSG common stock, the value of these shares is
approximately $1,171. The Company disposed of its holdings in SSG during
January 1995 and used the proceeds to reduce the revolving line of credit.
Other than the funds required for the anticipated move of certain
facilities and certain operations during fiscal 1995 and funds for the
remaining discontinued operations, the Company had no material capital
commitments at December 31, 1994.
Management believes that cash on hand, cash flows from operations, and
funds available under its credit facilities will be sufficient to meet the
Company's operating requirements, integration plans, capital commitments and
the required principal payments on the long-term debt.
9
<PAGE> 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Inapplicable.
Item 2. Changes in Securities
Inapplicable.
Item 3. Defaults Upon Senior Securities
Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
Inapplicable.
Item 5. Other Information
Inapplicable.
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<S> <C> <C>
(a)(1) Exhibit 11 -- Computation of Per Share Earnings 13
(a)(2) Exhibit 27 -- Financial Data Schedule 14
(b)(1) A Current Report on Form 8-K, dated December 13, 1994, was
filed to report the indefinite suspension of reduced specification
integrated circuits from the Company's largest supplier.
</TABLE>
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AURORA ELECTRONICS, INC.
February 14, 1995 By: /s/John P. Grazer
-------------------------------
John P. Grazer,
Senior Vice President-Finance
and Administration and
Chief Financial Officer
(Principal Accounting and
Financial Officer)
11
<PAGE> 12
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Item Description of Exhibits Page
---- ----------------------- ----
<S> <C> <C>
Exhibit 11 Computation of Per Share Earnings 13
Exhibit 27 Financial Data Schedule -- Article 5 of Regulation S-X 14
</TABLE>
12
<PAGE> 1
Exhibit 11
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
----------------------------------------------------
1994 1993
------------------------ ------------------------
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Net income $ 877 $ 877 $ 708 $ 708
Add: Interest expense, net of income
tax, on debenture due 2001 and
Promissory Notes due 1997 - 163 - 207
----- ------ ----- -----
Adjusted net earnings $ 877 $1,040 $ 708 $ 915
===== ====== ===== =====
Adjusted Number of Common Shares
Weighted average shares outstanding 7,780 7,780 7,112 7,112
Incremental shares for exercise of stock
options and warrants and common stock
issuable 280 379 226 226
Weighted average shares issuable upon
conversion of Debenture due 2001
and Promissory Notes due 1997 - 1,243 - 1,556
---- ------ ---- -----
Adjusted number of common shares 8,060 9,402 7,338 8,894
===== ====== ===== =====
Net earnings per common shares $0.11 $ 0.11 $0.10 $0.10
===== ====== ===== =====
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 366
<SECURITIES> 1,171
<RECEIVABLES> 16,421
<ALLOWANCES> 1,117
<INVENTORY> 10,126
<CURRENT-ASSETS> 33,843
<PP&E> 5,922
<DEPRECIATION> 1,737
<TOTAL-ASSETS> 101,051
<CURRENT-LIABILITIES> 24,931
<BONDS> 48,340
<COMMON> 242
0
0
<OTHER-SE> 27,538
<TOTAL-LIABILITY-AND-EQUITY> 101,051
<SALES> 37,761
<TOTAL-REVENUES> 37,761
<CGS> 27,770
<TOTAL-COSTS> 27,770
<OTHER-EXPENSES> 7,183
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,347
<INCOME-PRETAX> 1,461
<INCOME-TAX> 584
<INCOME-CONTINUING> 877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 877
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
