<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995
/ / 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)
DELAWARE 75-1539534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered:
- ------------------- ------------------------------------------
<S> <C>
Common Stock, $.03 Par Value American Stock Exchange
9 1/4% Senior Subordinated Notes, Due 1996 American Stock Exchange
Series A and Series B
7 3/4% Convertible Subordinated American Stock Exchange
Debentures, Due 2001
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant on December 29, 1995 based on the closing price of the Common
Stock on the American Stock Exchange was approximately $16,341,272.
Indicated below is the number of shares outstanding of each class of the
registrant's Common Stock, as of December 29,1995.
<TABLE>
<CAPTION>
Title of Each Class of Common Stock Number of Outstanding
- ----------------------------------- ---------------------
<S> <C>
Common Stock, $.03 par value 7,923,041
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
Document Part of the Form 10-K
- -------- ---------------------
<S> <C>
Proxy Statement for the 1996 Annual Meeting Part III
of Stockholders
</TABLE>
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<PAGE> 2
PART I
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 field service organizations. Aurora operates
worldwide, with facilities in the United States, Canada, the United Kingdom
and the Netherlands.
According to industry sources, the personal computer industry continues
to expand rapidly, with shipments of new computers estimated to have risen to
27% in 1995 to 59 million units valued at $116 billion. As a result, the
worldwide personal computer installed base has grown to approximately 132
million units. This large installed base requires a wide range of support,
maintenance, upgrade and recycling services. Computer manufacturers and field
service organizations are seeking outsourcing solutions to meet these
requirements, preferably from a single source. Aurora is one of the few
companies in the industry offering its customers a wide range of these
critical aftermarket services through integrated outsourcing programs provided
on a worldwide basis.
In the third quarter of fiscal 1995, Aurora initiated and substantially
completed a corporate reorganization focusing the Company on the businesses
which were determined to have the highest growth potential -- spare parts
distribution and electronics recycling and asset recovery -- and eliminated
unprofitable or non-strategic business activities. The Company now operates
through two divisions (see Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations).
- Through its Century Division ("Century"), the Company is a leading
provider of spare parts distribution and related services for the
computer maintenance market. Century distributes new and refurbished
computer spare parts, primarily to the field service departments of
major computer original equipment manufacturers ("OEMs"), third-party
maintenance organizations and multivendor service organizations,
computer resellers and dealers, and the internal service organizations
of large corporations. Century's spare parts inventories include
products from over 500 personal computer and subsystems manufacturers.
Century also provides a broad range of related support services, such
as spare parts inventory management and logistics programs, warranty
and return materials management programs, repair and advance exchange
services, and system and subsystem recycling and remarketing. Major
customers include AT&T, Compucom, DEC, DecisionOne, EDS, Entex
Information Services, Hewlett-Packard, IBM, Inacom and Vanstar.
Management believes that the Company is one of the largest independent
spare parts distributor in the industry.
- Through its Asset Recovery Services Division ("ARS"), the Company has
become the world's largest supplier of integrated circuit ("IC")
recycling and recovery services. ARS provides major computer OEMs with
an environmentally sound, technologically secure and economically
beneficial approach to recovering value from and disposing of their
excess, obsolete or defective electronic products. While technology
applications are known for rapidly changing product designs, the ICs
used in these designs typically have long useful lives and can be
recycled into different applications for a worldwide customer base.
Major customers for the Company's IC recycling services include Apple
Computer, Compaq Computer, Dell Computer, Hewlett-Packard, IBM, and
Storage Technology. The Company's IC recycling and recovery services
involve the removal, reconditioning, testing and remarketing of
commonly used ICs, such as memory devices and various standard
microprocessors, which are found on excess, obsolete or defective
printed circuit boards. Reconditioned ICs are sold to a variety of
manufacturers and distributors worldwide. Management believes that ARS
is the largest supplier of these services in the world.
2
<PAGE> 3
CENTURY COMPUTER MARKETING DIVISION
The Company is one of the largest independent providers of spare parts
distribution and related services through its Century Division, which supports
computer OEMs and service organizations worldwide. Century distributes new and
refurbished computer spare parts, primarily to the field service departments of
computer OEMs, third-party maintenance and multivendor service organizations
("TPMOs" and "MVSOs"), computer resellers and dealers, and large corporate
self-maintainers. Century's spare parts inventories include products from over
500 manufacturers, with particular emphasis on products from Apple Computer,
AT&T, AST Computer, Compaq, Dell Computer, Digital Equipment Corporation,
Hewlett-Packard, IBM and Toshiba. In addition, Century provides a broad range of
materials management services, such as depot repair, advance exchange programs,
warranty materials and returned material management programs, and system and
subsystem recycling and remarketing programs.
SERVICES. The range of spare parts distribution, inventory logistics
management and aftermarket support services which Century provides includes:
Spare Parts Sourcing and Distribution. Century sources and distributes a
wide range of spare parts, many of which are out-of-warranty and often
out-of-production. Century 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 Century's shipments are products that are
sourced, reconditioned and tested the same day. Century 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 Century on behalf of the OEM.
Spare Parts Inventory and Logistics Management. Century provides its
customers with the ability to outsource various spare parts inventory
management and logistics activities through customized programs, such as:
Returned Materials Programs in which Century handles all returned
materials from customers or dealer / reseller channels. Returned
materials are received, processed, tested, refurbished, as required,
and either returned to the manufacturer or used for spare parts
inventory.
Parts Reutilization Programs in support of OEM customers and as a means
to lower Century's acquisition cost for spare parts, Century maintains
a wide range of parts reutilization and repair capabilities, with
technical expertise in floppy disks, tape drives, laser printers,
monitors, flat panel displays, and CD-ROMs.
Advance Exchange Programs in which Century offers selected customers
spare parts which are supplied from a standard selection menu in
advance of receiving the defective unit back from the field. In most
cases, the defective unit is repaired and placed back into inventory to
fulfill future A/E requests.
Inventory Liquidation Programs in which Century 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 Century's spare parts inventories or
redistributed worldwide in cost-conscious markets.
3
<PAGE> 4
SALES AND MARKETING. Aurora believes that Century is a market leader in
terms of its approach to the sales and marketing of its spare parts distribution
services and its utilization of sophisticated information systems to support
these efforts. With 89 employees operating in its sales and customer support
group and with eight locations worldwide, management believes that Century has
the largest spare parts sales force in the independent spare parts distribution
industry. Century services more than 5,000 customers worldwide, maintains a
parts sourcing database of over 8,000 contacts, and completes over 100,000
transactions annually.
Century's materials management services are marketed through a direct
sales force of eight employees, who work closely with computer OEMs, TPMOs and
MVSOs, and computer resellers in developing customized programs that meet their
particular materials management requirements.
CUSTOMERS. Century provides spare parts sourcing and distribution
services primarily to four groups of customers:
Customer Maintenance Departments of Major Computer OEMs -- Century provides
spare parts and related 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.
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).
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. Century supports
these organizations through parts sourcing and inventory management
programs. Typical customers include Circuit City, Compucom, Inacom,
Microage.
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 Century.
For fiscal 1995 and fiscal 1994, approximately 27.9% and 27.3%,
respectively, of Century's revenues were from international sales.
For fiscal 1995 and fiscal 1994, no single Century customer accounted
for more than 10% of the Company's revenues.
OPERATIONS. Century provides its spare parts distribution and materials
management services primarily through distribution facilities in Marina del Rey,
California; Toronto, Canada; and Hoofddorp, The Netherlands; and repair
facilities in Sacramento, California.
Century's operations depend upon the ability to rapidly identify,
locate, procure, as is necessary, and deploy a particular spare part from among
the thousands of parts that comprise the computer industry installed base.
Critical to Century's success is a sophisticated information system, which
relies on a spare parts identification and sourcing database developed over the
last ten years. This database allows Century's sales force to quickly find and
deliver a spare part from inventory or, if a part is not available in inventory,
to rapidly query the spare parts sourcing database to locate and procure the
part from the hundreds of sources with which Century regularly does business.
The database also allows the salesperson to identify functional equivalents for
a part to fill customer orders which are not model or make sensitive. The system
provides the salesperson with a complete pricing history for the part to assist
in price discussions with the customer, as well as a transaction history with
that particular customer.
4
<PAGE> 5
Because customers are often under severe time pressure in procuring
spare parts, Century's ability to fill 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,
Century maintains a department which procures a variety of commonly requested
parts in advance. Century's information system regularly examines parts usage
patterns and available stocks and performs trend-line analyses to assist this
department in its procurement activities.
COMPETITION. The independent spare parts distribution industry is
fragmented with widespread competition from a variety of small independent
suppliers. Century 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. PC Service Source is the only competitor which is public and of
comparable size to Century.
ASSET RECOVERY SERVICES DIVISION
Through its Asset Recovery Services Division, the Company has become
the world's largest supplier of IC recycling services, providing major computer
OEMs with an environmentally sound, technologically secure and economically
beneficial approach to recovering value from and disposing their excess,
obsolete or defective electronic products. While technology applications are
known for rapidly changing product designs, the ICs used in these designs
typically have long useful lives and can be recycled into different applications
for a worldwide customer base. ARS's IC recycling services involve the removal,
sorting, reconditioning and testing of commonly used ICs, such as dynamic random
access memories ("DRAMs"), static random access memories ("SRAMs"), erasable,
programmable read-only memories ("EPROMs"), and microprocessors, which are found
on excess, obsolete or defective printed circuit boards ("PCBs"). The
reconditioned ICs are then resold to a wide variety of manufacturers, brokers
and distributors worldwide.
ARS's major OEM customers include Apple Computer, Compaq Computer, Dell
Computer, Hewlett-Packard, IBM, and Storage Technology. By using ARS's IC
recycling services, OEM customers can reduce or eliminate the liability and
expense related to disposing of excess, obsolete and defective products, and
realize an economic return on these products.
SALES AND MARKETING. ARS maintains two sales forces, one of which
markets its IC recycling services to major OEM customers, and the other of which
sells its reconditioned ICs primarily to manufacturers who specialize in
board-level computer subsystems. ARS's services sales force includes ten
national and international account managers and service support personnel. ARS's
reconditioned IC sales force includes three telephone-based salespeople.
CUSTOMERS/SUPPLIERS. ARS provides IC recycling services primarily to
computer OEMs and other electronics manufacturers. Major OEM customers include
Apple Computer, Compaq Computer, Dell Computer, Hewlett-Packard, IBM, and
Storage Technology. During fiscal 1995, ARS's top ten suppliers (computer OEMs
and electronic manufacturers, whom ARS provides IC recycling services to),
accounted for approximately 86% of ARS's disbursements to suppliers for
recyclable material received. Two of these OEMs individually accounted for
more than 10% and together accounted for approximately 61% of ARS's
disbursements to suppliers for recyclable material received for such period.
For the fiscal year ended September 30, 1994, ARS's top ten suppliers
accounted for approximately 71% of such disbursements, and the same two
suppliers individually accounted for more than 10% and together accounted for
approximately 74% of such disbursements. The loss of a major OEM supplier of
recyclable materials could have a material adverse effect on ARS.
5
<PAGE> 6
ARS sells its recycled ICs to a wide variety of OEMs who are typically
manufacturing board-level computer subsystems. Applications in which the
Company's recycled ICs are used may include graphics and video controllers,
printer-related products, modem and fax/modem products, multi-media subsystems,
memory upgrade products, and consumer electronics products. For fiscal 1995,
1994 and 1993, no single ARS customer accounted for more than 10% of the
Company's revenues.
OPERATIONS. ARS's IC recycling operations are located in San Diego,
California and Irvine, Scotland. The first step in the recycling and
reconditioning process is "pulling" those ICs identified as valuable for resale
from the printed circuit boards. ICs pulled in Scotland are sent to San Diego
for further reconditioning and processing. Freight costs are minimal because the
ICs have been removed from the printed circuit boards prior to shipment to
San Diego. The remaining PCBs, including ICs not pulled because of their
proprietary nature or low value, are either returned to the customer or
shipped to metal refineries that extract the precious metals, reduce the
remaining scrap and dispose of the resulting ash. ARS deals only with a
limited number of fully licensed metal refineries and transports its products
only through fully licensed waste haulers.
After the ICs have been removed from the PCBs, they are then
reconditioned, which could include: (i) lead straightening; (ii) solder dipping;
(iii) solvent baths to remove labels; (iv) erasure of software contained in
programmable memories; and (v) other processes designed to yield an IC in as
near new condition as possible. Although the reconditioning process includes a
substantial amount of hand labor, high volume production equipment has been
purchased and developed by ARS to automate the processing requirements. As a
result, ARS has realized substantial productivity improvements over the last two
years. To maintain quality, ARS employs a controlled-lot testing program. ICs
are batch tested, on a sample basis, for electrical fit, form, function and
access time. The recycling and reconditioning process is generally accomplished
within five to ten days after recyclable material is received.
CYCLICALITY AND PRICE FLUCTUATIONS. ARS derives its revenues from
the sale of ICs. The IC industry has been characterized in the past by
periods of cyclicality in which prices of commodity ICs, such as DRAMs, SRAMs,
EPROMs and microprocessors have fluctuated. In periods of IC oversupply,
prices have declined. Significant declines in unit volume demand or unit
pricing could have an adverse effect on the Company's business.
COMPETITION. Competition for major OEM customers is based on several
factors, including: (i) overall service levels; (ii) management of environmental
matters; (iii) security with respect to materials being processed, proprietary
products, technology and trade secrets; (iv) ability to handle large
fluctuations in material volumes; and (v) pricing and economic return to the
customer. The IC recycling services industry is highly fragmented, with a
variety of smaller, private competitors. The Company believes that it is
currently the largest supplier of IC recycling services in the world, and that
it is substantially larger than the next largest competitor.
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 Micro-C, Memory Master, MM, Premier and Advantage. 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 all 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.
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<PAGE> 7
SEASONALITY
The Company does not consider its business to be seasonal.
EMPLOYEES
On December 29, 1995, the Company had approximately 419 employees. None
of the Company's employees is represented by a union and none is 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. PROPERTIES.
The following table sets forth certain information as of December 29, 1995
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.
<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION DIVISION PRINCIPAL USE FOOTAGE
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marina del Rey, CA (1) Century Office, Warehouse and Service Facility 106,715
San Diego, CA ARS Office, Processing and Warehouse Facility 44,808
Sacramento, CA Century Office, Processing and Warehouse Facility 35,000
San Jose, CA Century Sales Office 1,050
Irvine, CA Corporate Corporate Headquarters 1,775
Toronto, Canada Century Warehouse and Service Facility 9,475
Hoofddorp, Netherlands Century Warehouse and Service Facility 8,945
Irvine, Scotland ARS Processing Facility 3,000
Birmingham, England Century Sales Office, Warehouse and Service Facility 1,785
Chicago, IL (2) Corporate Discontinued Operations 163,000
</TABLE>
(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,
commencing 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 C -- Discontinued
Operations, and Note L -- Commitments and Contingencies. The lease
expires in 2005. The Company is currently discussing the termination of
the existing lease with the landlord.
ITEM 3. LEGAL PROCEEDINGS.
An amended class action complaint ("Complaint") consolidating three
separate earlier filed class action complaints, was filed on June 7, 1993 in the
United States District Court for the Central District of California. The
Complaint alleged violations of the federal securities laws and named the
Company, and certain directors and officers, as defendants. The Complaint was
filed on behalf of a purported class of persons purchasing the Company's Common
Stock between January 28, 1993 and June 4, 1993. Plaintiffs alleged that the
Company made various misrepresentations and/or failed to disclose material
omissions relating to an alleged cessation of supply of integrated circuits from
its primary supplier. The parties reached agreement on the terms of a
settlement, which required the Company to contribute $250,000 in cash and
$1,250,000 in Common Stock priced at the issuance date. The balance of the
settlement ($1,500,000 in cash) would be funded by the Company's insurer. The
settlement was approved on September 5, 1995. The Company will issue the
settlement stock after proofs of claims have been filed and verified as
entitling the holders thereof to a share of the settlement proceeds.
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The Company is engaged in various other legal proceedings which the
Company believes will not have a material adverse effect on the financial
position of the Company. See Note L -- Commitments and Contingencies.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the AMEX under the symbol AUR. 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.
<TABLE>
<CAPTION>
FISCAL YEAR 1995 FISCAL YEAR 1994
---------------------------------- -----------------------------------
HIGH LOW HIGH LOW
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
First Quarter 5-3/4 4-1/4 8-1/2 6
Second Quarter 5-1/8 3-3/8 9-3/8 7-5/8
Third Quarter 3-15/16 2-7/8 8-7/8 7
Fourth Quarter 4-11/16 2-15/16 8-7/8 5-3/8
</TABLE>
On December 29, 1995, the last sale price of the Common Stock as
reported by AMEX was $2.063 per share. As of December 29, 1995, the Company had
789 recordholders of its Common Stock and 7 holders of warrants to purchase its
Common Stock.
The Company has not paid any cash or stock dividend since September 30,
1993. At present, it is the policy of the Company to retain all earnings for
reinvestment into the Company. Certain restrictions set forth in the Company's
Senior Secured Credit Agreement dated May 12, 1994 limit the Company's ability
to pay dividends. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
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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. Certain of the
selected financial data for the year ended December 31, 1991 have been restated
to reflect the exclusion of discontinued operations.
(In thousands, except per share figures)
<TABLE>
<CAPTION>
FOR THE NINE FOR THE YEAR
FOR THE YEAR ENDED MONTHS ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
---------------------------------------- -------------
OPERATING DATA 1995 1994 1993 1992 1991
--------------------------------------------------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues $141,852 $120,386 $ 58,328 $ -- $ --
Gross profit 34,582 26,350 11,274 -- --
SG&A expenses 28,170 17,573 4,657 1,864 --
Amortization of intangibles 9,073 (2) 4,539 (1) 1,284 -- --
Restructuring charge and other 5,643 (3) 2,161 -- -- --
Litigation settlement -- 1,943 -- -- --
Operating income (loss) (8,304) 134 5,333 (1,864) (2,165)
Other income (expenses) (5,406) (4,252) (1,276) 2,269 4,282
Earnings (loss) from continuing
operations (13,710) (4,118) 2,505 (1,791) 1,397
Net income (loss) (15,030) (6,518) 3,005 (13,505) (10,637)
Earnings (loss) from continuing
operations per share $ (1.79) $ (0.55) $ 0.40 $ (0.38) $ 0.30
Net income (loss) per share $ (1.79) $ (0.87) $ 0.48 $ (2.85) $ (2.26)
Weighted average number of shares
outstanding 8,379 7,491 6,273 4,738 4,701
Cash dividend declared per share $ -- $ -- $ -- $ -- $ 0.58
</TABLE>
(1) 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.
(2) 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.
(3) During the third quarter of fiscal 1995, the Company substantially
completed a major corporate reorganization into two core businesses
operating through the ARS Division and the Century Division.
<TABLE>
<CAPTION>
AT
AT SEPTEMBER 30, DECEMBER 31,
---------------------------------------------------------- ----------------
BALANCE SHEET DATA 1995 1994 1993 1992 1991
---------------------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C>
Working capital $ 196 $ 9,013 $ 10,713 $ 1,732 $ 16,603
Total assets 80,716 102,927 76,857 48,468 41,077
Long-term obligations (less current
maturities) 46,183 51,761 25,904 24,081 18,966
Stockholders' equity 12,338 26,903 26,655 4,710 18,405
</TABLE>
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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-based company
founded in 1985, which provided both IC recycling services to computer OEMs and
memory IC distribution services for semiconductor manufacturers. Effective
September 30, 1993, Aurora acquired FRS, Inc., a Sacramento-based company
founded in 1984, which provided depot repair services to computer and
peripherals OEMs. Effective March 1, 1994, Aurora acquired Century Computer
Marketing, a leading supplier of new and refurbished spare parts to the computer
maintenance market.
In the third quarter of fiscal 1995, Aurora initiated and substantially
completed a corporate reorganization focusing the Company on the businesses
which were determined to have the highest growth potential -- spare parts
distribution and electronics recycling and asset recovery -- and eliminated
unprofitable or non-strategic business activities. Management determined that
Aurora had developed leadership positions in both the independent spare parts
distribution and electronics recycling and asset recovery industries, and that
the Company's resources should be focused on those activities. Furthermore,
management determined that: (a) Aurora had minor positions in the memory upgrade
and depot repair services industries; (b) the Company had little prospect of
developing leadership positions in those industries, given the resources at the
Company's disposal; and (c) that Aurora's activities in these industries were
non-strategic to the future direction of the Company.
As a consequence of this reorganization, Aurora: (a) exited its memory
upgrade manufacturing and supply business (formerly the Premier Division); and
(b) substantially downsized its depot repair services operations (acquired
through the FRS, Inc. acquisition), and refocused these operations to support
Century's spare parts distribution, inventory management and logistics
activities.
As a result of the restructuring, the Premier Division's primary
facility was closed, repair service centers in Memphis, Tennessee and Houston,
Texas were consolidated into the Sacramento, California facility, and the repair
operations were significantly downsized.
In addition to, and in conjunction with the restructuring, the Company
negotiated modifications of certain terms and condition and covenants to the
Senior Secured Credit Agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1995, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1994.
Net revenues for the year ended September 30, 1995 for the Company were
$141,852 as compared to $120,386 in net revenues for the year ended September
30, 1994. The increase in revenues was primarily due to the inclusion of the
Century business for a full twelve months ($27,860) and a 54% revenue growth in
the ARS business ($15,752). These revenue increases offset a 53% revenue
decrease in the Century repair business and a 24% revenue decrease in the
Premier division.
Gross profit for the year ended September 30, 1995 was $34,582 (24.4%
of net revenues) as compared to $26,350 in gross profit for the year ended
September 30, 1994 (21.9% of net revenues). The increase was due primarily to
the gross profits associated with the higher volumes in ARS and Century's
10
<PAGE> 11
parts distribution business. This increase was partially offset by the
significant decreases in the volume and profitability for both the Premier
Division and Century's repair business.
Selling, general and administrative expenses for the year ended
September 30, 1995 were $28,170, or 19.9% of revenues, as compared to $17,573,
or 14.6% for the comparable 1994 period. The increase of approximately $10,600
is due primarily to the inclusion of a full year of Century's selling, general
and administrative expenses, expenditures related to the reorganization,
non-recurring professional fees, and the investments in systems and support
costs required to support the growth in the Company business.
Amortization expense for the year ended September 30, 1995 was $9,073,
or 6.4% of revenue, as compared to $4,539, or 3.8% for the comparable 1994
period. With 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. This charge was
determined to be necessary as management estimated that the amortization of the
goodwill balance over its remaining life would not be recovered through the
projected non-discounted future cash flows over the remaining amortization
period.
Restructuring charges for the year ended September 30, 1995 were $5,643
and consisted of costs related to the shutdown of the Premier Division and the
restructuring and downsizing of the Company's repair services operations. The
charge consists primarily of $2,800 in inventory writedowns, $900 in employee
severance, and $600 in facilities termination costs associated with the
reorganized product lines and businesses. In addition, there were no program
development costs for the year ended September 30, 1995 as compared to $925 or
.8% of revenues for the comparable 1994 period. The expense in the 1994 period
was related to development of a new service line to complement the then existing
repair business. Also included in the restructuring charges were losses on
disposition of assets of approximately $944. This is primarily due to a charge
of $695 related to the writedown of the investment in the Aurora Merchant
Systems joint venture.
Net interest expense for the year ended September 30, 1995 was $5,522
or 3.9% of revenues, as compared to $4,449 or 3.7% for the comparable 1994
period. The increase of $1,073 in net interest expense was principally the
interest expense related to the Company's working capital facilities.
The net loss for the year ended September 30, 1995 was $15,030 as
compared to net loss of $6,518 for the comparable period in 1994. The increase
in net loss is due primarily to the charges recorded in connection with the
restructuring and reorganization of the Company's businesses.
RESULTS OF OPERATIONS - YEAR ENDED SEPTEMBER 30, 1994, COMPARED WITH YEAR ENDED
SEPTEMBER 30, 1993.
Net revenues for the year ended September 30, 1994 were $120,386 as
compared to $58,328 in net revenues for the year ended September 30, 1993. The
increase in revenues was primarily due to the acquisitions of the Century and
FRS businesses and a 27.3% revenue growth in the ARS (IC recycling) and Premier
Computer Products product lines.
Previously, the Premier Computer Products Division's business depended
on its ability to continue to acquire a reliable stream of salable ICs.
Generally, the Division procured its supply of both non-conforming and
conforming (sometimes called reduced specification and full specification,
respectively) ICs from clients pursuant to short-term, non-exclusive contracts.
These contracts did not contain guaranteed or minimum quantities. During fiscal
1994, the Company derived approximately 42% of its revenue from non-conforming
material received from one supplier, as compared to 66% for the prior fiscal
year. On a pro forma basis, the concentration of supply would have been
approximately 37% if Century had been part of the Company for the 12 months
ended September 30, 1994. The Company experienced intermittent interruptions,
shifts or reductions in that source of supply.
11
<PAGE> 12
On December 12, 1994 the Company announced that the major supplier
advised the Company that it had indefinitely suspended the program under which
it supplied reduced specification ICs to the Company. The December 12th
announcement also stated that the Company had established additional supply
relationships for both full and reduced specification products.
Gross profit for the year ended September 30, 1994 was $26,350 or 21.9%
of net revenue as compared to $11,274 or 19.3% of net revenue for the same
period in 1993. The increase was primarily due to the acquisition of the Century
and FRS businesses. This increase, along with the improvement in gross profit
performance in ARS, offset the decrease in gross profit that occurred in Premier
Computer Products. The primary reason for the decrease in Premier's gross profit
during 1994 was a change in the terms of trade with the Company's largest
supplier from a revenue sharing arrangement to a more standard distribution
(fixed price) arrangement.
Selling, general and administrative expenses for the year ended
September 30, 1994 were $17,573 or 14.6% of net revenue, as compared to $4,657
or 8.0% of net revenue for the same period in 1993. The increase of $12,916
relates principally to the inclusion of operating expenses of the acquisition of
the Century and FRS businesses, investment in information systems and an
increase in employees required to support increases in the Company's operations.
Amortization of intangibles included in operating expenses was $4,539
or 3.8% of net revenue, compared to $1,284 or 2.2% of net revenue for the same
period in 1993. In the fourth quarter of fiscal 1994, management determined that
the remaining unamortized balance of $2,400 which had been assigned to a
non-compete agreement with the sellers of Micro-C, should be charged to
operations. The non-compete agreement was determined to be of no continuing
value due to the decision of the Company's major supplier to indefinitely
suspend shipments (see above), the significant decrease in the Company's level
of business in the processing of reduced specification ICs (which was the
primary emphasis of the non-compete agreement) and a shift in the Premier
division's business mix toward the manufacture of products which utilize full
specification rather than reduced specification ICs. The additional $905
increase was caused by the increase in intangible assets resulting from the
Century and FRS acquisitions.
During the fourth quarter of fiscal 1994 the Company recorded a charge
to operating expense of $2,161 consisting of $925 related to the cost incurred
to establish the "System Recovery" program (also known as the "TQR" program).
This program gave the Company the ability to refurbish, recondition and
redistribute systems received from manufacturing fallout, field dispositions,
excess and obsolete inventories, and customer trade-in and exchange programs.
Refurbished systems and subsystems are redistributed worldwide in cost-conscious
markets. Also included is a loss of approximately $711 relating to the sale of
the Company's European repair operation and the contribution of certain assets
of Aurora Merchant Systems division (credit card terminal repair and parts
management) into a joint venture. In addition, approximately $400 of costs were
incurred in connection with evaluating the computer products distribution
business. Such effort was terminated.
During the fourth quarter of fiscal 1994, the Company recorded a $1,693
charge to reflect a preliminary agreement to settle the class action complaint
against the Company. See Item 3 -- Legal Proceedings. 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 ($1,500 in
cash) will be funded by the Company's insurer. The Company is involved in a
dispute submitted to binding arbitration concerning a claim against the former
owners of Micro-C for indemnification under the stock purchase agreement. On
December 27, 1994 the arbitrator awarded the Company approximately $3,507. This
award has been accounted for by a reduction of the 7% Subordinated Convertible
Promissory Notes and a corresponding reduction of goodwill (net of expenses of
$500).
Net interest expense for the year ended September 30, 1994 was $4,449
or 3.7% of net revenue as compared to $1,965 or 3.4% of net revenue for the same
period in 1993. This increase was due to the
12
<PAGE> 13
additional debt incurred for the Century acquisition and a higher revolving
line of credit balance carried during fiscal 1994. In addition, due to the
disposition of substantially all of the assets attributable to discontinued
operations, the Company no longer allocates interest expense to discontinued
operations.
Other income for the year ended September 30, 1994 was $197 as compared
to $689 for the same period in 1993. The primary component of other income is
interest income. The amount in 1993 included a $300 insurance claim received
from a previous insurer of the Company.
The loss from discontinued operations for the year ended September 30,
1994 was $2,400 as compared to charge of $2,234 in fiscal 1993. The current year
charge is the result of additional losses incurred and adjustment of the reserve
of discontinued operations to management's estimate of future obligations. The
increase in the reserve relates primarily to the estimated operating costs and
early termination of the building lease in Chicago. For other contingencies
related to discontinued operations see Note L -- Commitments and Contingencies.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are directly related to
its accounts receivable, inventory levels and improvements to its property and
equipment, as well as costs resulting from the consolidation of its businesses.
The Company's working capital was $196 as of September 30, 1995, compared to
$9,013 as of September 30, 1994. The Company has financed acquisitions to date
using bank debt, internally generated cash and issuance of common stock.
During the third quarter of fiscal 1995, the Company substantially
completed a major corporate reorganization into two core businesses operating
through the ARS Division and the Century Division. As part of this
reorganization, the Company's memory upgrade business, as pursued through the
Premier Division, has been discontinued and the repair service operations have
been consolidated and downsized to a support role. Substantially all of the
funds, approximately $2,500, required for the reorganization have been provided
by the liquidation of certain inventories related to Premier's memory upgrade
business and the Company's repair services operations.
In May 1994, in conjunction with the Century acquisition, the Company
entered into a $35,000 Senior Secured Credit Agreement (the "Agreement") with a
group of financial institutions (lenders). The Agreement consists of a $10,000
revolving line of credit, and a $25,000 senior term loan. During fiscal 1995,
the average outstanding balance under the revolving line of credit was
approximately $8,211 bearing an average interest rate of 9.2%.
All indebtedness of the Company under the Agreement is secured by
substantially all of the assets of the Company and imposes a number of
restrictions, covenants relating to the Company's financial performance, and
various other limitations on the Company. The Company is restricted from
entering into any transaction, other than in the ordinary course of its
business, including any merger, consolidation, dissolution or corporate
acquisition, without the lenders prior written consent. The Company is
restricted from paying or declaring any dividends on its outstanding common
stock or effecting any redemption, retirement or repurchase of its stock.
The Company entered into a Third Amendment ("Amendment") to the
Agreement effective September 30, 1995. This Amendment includes waivers and
adjustments to the financial covenants mentioned above, a material adverse
effect clause and the Company's agreement to recapitalize prior to June 30, 1996
(the "Recapitalization"). As defined in the Amendment, the Recapitalization
includes repayment of the senior term loan and the revolving line of credit, as
well as repayment of the 9 1/4% Senior Subordinated Notes. According to the
Amendment, in the event the Recapitalization does not occur by June 30, 1996,
certain conditions will restrict all future payments due on all of the Company's
subordinated debt and will prohibit all future payments due on the
non-cancelable building lease associated with discontinued operations. See Note
L -- Commitments and Contingencies. These events
13
<PAGE> 14
could cause a default under the subordinated debt and operating lease. In the
event of such a default, management believes, based on the terms of the three
subordinated debt issues, that payments of principal and interest on the
subordinated debt would be prohibited unless waived by the holders of the
senior indebtedness pursuant to the Agreement.
In consideration for this Amendment the banks will receive amendment
fees of $50 at the closing date of the Amendment, an additional $100 at March
31, 1996, and an additional $150 on June 30, 1996 if the Company has not
effected the Recapitalization as of March 31, 1996. In addition, if, as of June
30, 1996, the Company has not effected the Recapitalization, the interest rate
on the revolving line of credit and senior term loan will be increased by 2% per
annum. In addition, if the Company has not effected the Recapitalization by
March 31, 1996, a penalty fee of $200 will be due to the banks, such fee
increasing by $50 per month for each month that the Recapitalization has not
been completed. Also as consideration for this Amendment, the exercise price of
certain warrants received by the banks in May 1994 will be repriced to the
average closing price of the Company's Common Stock over the ten trading days
preceding and including the Third Amendment closing date.
During the fourth quarter of fiscal 1995, Management retained financial
advisors to investigate and recommend a recapitalization of the Company
including sources of capital for the retirement of the 9 1/4% Senior
Subordinated Notes due in November of 1996.
Other than the funds for the remaining discontinued operations, the
Company had no material capital commitments outstanding at September 30, 1995.
While management believes that cash on hand, cash flow from
operations, and funds available under its credit facilities will be sufficient
to meet the Company's operating requirements, capital commitments and required
principal payments on the long-term debt through September 30, 1996, management
also believes that consummating the Recapitalization on or before June 30, 1996
is important to ensuring an adequate level of liquidity going forward. Funds
for the principal payment on the 9 1/4% Senior Subordinated Notes due in
November 1996, for example, are expected to be satisfied by the proceeds of the
new source of capital sought in the Recapitalization. If the Company is unable
to consummate the Recapitalization by June 30, 1996, the Company will be
required to explore other financing alternatives.
NEW ACCOUNTING STANDARDS
The Company will be required to adopt new accounting standards in the
future. In 1996, the Company will be required to adopt SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of. In addition, the Company will be required to adopt SFAS No. 123, Accounting
for Stock-Based Compensation. However, the Company has decided to continue to
account for employee stock options under Accounting Principles Board Opinion No.
25. This standard will be effective for transactions entered into after December
15, 1995. The primary impact of this standard will relate to certain disclosures
about the Company's stock option plans.
14
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
AURORA ELECTRONICS, INC. AND SUBSIDIARIES PAGE
----
<S> <C>
1. Index to the Company's Financial Statements and Financial Statement Schedules.
Report of Independent Public Accountants ................................................... 16
Consolidated Balance Sheets as of September 30, 1995 and September 30, 1994 ................ 17
Consolidated Statements of Operations for the years ended September 30, 1995, 1994
and 1993............................................................................... 18
Consolidated Statements of Stockholders' Equity for the years ended September 30,
1995, 1994 and 1993.................................................................... 19
Consolidated Statements of Cash Flows for the years ended September 30, 1995, 1994
and 1993............................................................................... 20
Notes to Consolidated Financial Statements.................................................. 22
Schedule II- Valuation and Qualifying Accounts for the years ended September 30,
1995, 1994 and 1993.................................................................... 34
</TABLE>
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.
15
<PAGE> 16
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,
1995 and 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended September 30, 1995,
1994 and 1993. 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.
As discussed further in Note G to the consolidated financial statements, the
9 1/4% Senior Subordinated Notes outstanding at September 30, 1995 ($9,029,000)
become due and payable in November 1996. Management is pursuing various
alternatives to recapitalize the Company and has entered into an amended Senior
Secured Credit Agreement ("Agreement") with its current lenders. The terms of
the Agreement, under certain conditions, restrict all payments due subsequent
to June 30, 1996 on all subordinated notes and certain operating leases. If
the recapitalization does not occur by June 30, 1996, such restriction could
cause a default under the subordinated notes and operating lease.
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, 1995 and 1994, and the results of
their operations and their cash flows for the years ended September 30, 1995,
1994 and 1993 in conformity with generally accepted accounting principles.
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 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.
Orange County, California
January 12, 1996
ARTHUR ANDERSEN LLP
16
<PAGE> 17
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30,
------------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 81 $ 1,539
Short - term investments -- 1,171
Trade receivables, less allowance for doubtful accounts
of $1,414 ($1,046 in 1994) 15,828 16,841
Inventories 4,021 9,445
Deferred income taxes 1,532 3,213
Other current assets 516 1,067
- -----------------------------------------------------------------------------------------------
Total current assets 21,978 33,276
Property, plant and equipment, net 5,752 6,075
Deferred income taxes 2,202 1,825
Intangible and other assets 50,784 61,751
- -----------------------------------------------------------------------------------------------
Total assets $ 80,716 $102,927
===============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 6,700 $ 5,622
Accounts payable 8,105 11,583
Accrued compensation 2,021 1,763
Accrued interest 920 980
Current portion of reserve for discontinued operations 1,569 2,814
Other current liabilities 2,467 1,501
- -----------------------------------------------------------------------------------------------
Total current liabilities 21,782 24,263
Reserve for discontinued operations 2,504 2,210
Long-term debt 44,092 49,551
Commitments and contingencies
Stockholders' equity:
Preferred stock, 1,000 shares authorized, none issued -- --
Common stock, 8,062 shares issued (8,020 shares in 1994) 242 240
Additional paid-in capital 61,932 61,827
Accumulated deficit (44,683) (29,300)
Treasury stock, at cost, 561 shares (638 shares in 1994) (5,153) (5,864)
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 12,338 26,903
- -----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 80,716 $102,927
===============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 18
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE FIGURES)
<TABLE>
<CAPTION>
Years ended September 30
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net revenues $141,852 $120,386 $ 58,328
Cost of sales 107,270 94,036 47,054
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 34,582 26,350 11,274
Selling, general and administrative expenses 28,170 17,573 4,657
Amortization of intangibles, including write-offs of $7,407 and $2,400
in 1995 and 1994, respectively 9,073 4,539 1,284
Restructuring charges and other 5,643 2,161 -
Provision for litigation settlements - 1,943 -
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) (8,304) 134 5,333
Interest expense (5,522) (4,449) (1,965)
Other income, net 116 197 689
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations before provision for income taxes (13,710) (4,118) 4,057
Provision for income taxes 1,320 - 1,552
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) from continuing operations (15,030) (4,118) 2,505
Discontinued operations, net of income taxes:
Loss on disposal - (2,400) (2,234)
- ---------------------------------------------------------------------------------------------------------------------
Loss from discontinued operations - (2,400) (2,234)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of change in accounting for income taxes (15,030) (6,518) 271
Cumulative effect of change in accounting for income taxes - - 2,734
=====================================================================================================================
Net income (loss) $(15,030) $ (6,518) $ 3,005
=====================================================================================================================
Earnings (loss) per share of common stock:
Continuing operations $ (1.79) $ (0.55) $ 0.40
Discontinued operations - (0.32) (0.36)
- ---------------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of change in accounting for income taxes (1.79) (0.87) 0.04
Cumulative effect of change in accounting for income taxes - - 0.44
=====================================================================================================================
Net income (loss) $ (1.79) $ (0.87) $ 0.48
=====================================================================================================================
Weighted average number of common and common equivalent shares 8,379 7,491 6,273
=====================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE> 19
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common stock Additional
----------------- paid-in Accumulated Treasury
Shares Par Value capital deficit stock Total
----------------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1992 5,700 $171 $ 47,834 $(25,400) $(17,895) $ 4,710
Exercise of stock options-including related income tax benefit 323 10 2,522 - 100 2,632
Issuance of common stock-acquisitions 744 22 5,280 - - 5,302
Purchase of treasury stock - - - - (122) (122)
Exercise of common stock purchase warrants 904 27 7,722 - 1,675 9,424
Stock split effected as a dividend - - (8,882) - 8,882 -
Conversion of debt to common stock 73 2 784 - - 786
Issuance of treasury stock-employment contract - - - (42) 368 326
Stock bonus with issuance of treasury stock - - - (246) 838 592
Net income - - - 3,005 - 3,005
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1993 7,744 232 55,260 (22,683) (6,154) 26,655
Issuance of common stock/treasury stock-acquisitions 271 8 4,718 (99) 560 5,187
Common stock to be issued-acquisitions - - 559 - - 559
Exercise of stock options 5 - 40 - - 40
Purchase of treasury stock - - - - (226) (226)
Treasury stock-sale of assets - - - - (44) (44)
Common stock to be issued-litigation settlement - - 1,250 - - 1,250
Net loss - - - (6,518) - (6,518)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1994 8,020 240 61,827 (29,300) (5,864) 26,903
Issuance of common stock/treasury stock-acquisitions 42 2 (240) (353) 711 120
Common stock to be issued-acquisitions - - 345 - - 345
Net loss - - - (15,030) - (15,030)
===================================================================================================================================
Balance at September 30, 1995 8,062 $242 $ 61,932 $(44,683) $ (5,153) $ 12,338
===================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE> 20
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended September 30
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings (loss) from continuing operations $(15,030) $ (4,118) $ 2,505
Adjustments to reconcile earnings (loss) from
continuing operations to net cash flows
from operating activities:
Depreciation and amortization 10,493 6,451 1,503
Noncash interest expense 655 352 --
Noncash stock bonus to employees -- -- 592
Noncash portion of litigation provision -- 1,250 --
Loss on disposition of assets 944 711 --
Gain from investments and unconsolidated affiliates -- -- (54)
Changes in assets and liabilities, net of acquisitions:
Trade receivables, inventories and other assets 6,667 (5,113) (7,337)
Accounts payable and other liabilities (1,789) 454 (3,162)
Accrued interest and income taxes receivable/payable (60) 260 (2,108)
Deferred income taxes 1,304 -- 1,801
- --------------------------------------------------------------------------------------------------
Net cash flows from continuing operations 3,184 247 (6,260)
Net cash flows from discontinued operations (951) (1,336) 5,447
- --------------------------------------------------------------------------------------------------
Net cash flows from operating activities 2,233 (1,089) (813)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment (1,440) (1,993) (2,708)
Payments for purchases of companies, net of cash acquired -- (12,131) (3,661)
Proceeds from sales of marketable securities and SSG note 1,171 975 2,385
- --------------------------------------------------------------------------------------------------
Net cash flows from investing activities (269) (13,149) (3,984)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (4,092) (5,840) (1,897)
Issuances of common stock -- 40 11,991
Purchases of treasury stock -- (226) (122)
Advances under line of credit 12,070 22,238 3,171
Repayments under line of credit (11,400) (16,636) --
- --------------------------------------------------------------------------------------------------
Net cash flows from financing activities (3,422) (424) 13,143
- --------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,458) (14,662) 8,346
Cash and cash equivalents at beginning of period 1,539 16,201 7,855
- --------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 81 $ 1,539 $ 16,201
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Years ended September 30
---------------------------
1995 1994 1993
------ -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid (refunded) for:
Interest $5,582 $ 3,837 $ 2,224
============================================================================================================
Income taxes $ 16 $ (337) $ 262
============================================================================================================
In conjunction with the acquisition of the stock or assets of certain entities,
the following liabilities were assumed as follows:
Fair value of assets acquired $ -- $ 45,039 $ 12,207
Cash paid for the acquisitions, net of cash acquired -- (7,356) 230
Imputed interest -- 352 --
Debt issued for the acquisitions -- (27,345) --
Common stock issued for the acquisitions -- (4,660) (5,302)
- ------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- $ 6,030 $ 7,135
============================================================================================================
Stock dividends paid with treasury stock $ -- $ -- $ 8,882
============================================================================================================
Conversion of debt to common stock $ -- $ -- $ 786
============================================================================================================
Payment of employment contract with issuance of stock $ 119 $ -- $ 326
============================================================================================================
Payment of stock bonus with issuance of treasury stock $ -- $ -- $ 592
============================================================================================================
Issuance of promissory notes for additional acquisition costs $ -- $ -- $ 2,420
============================================================================================================
Contingent shares issuable for additional acquisition costs $ 345 $ 445 $ 464
============================================================================================================
Reduction in 7% debt as a result of indemnity claim settlement $1,224 $ 3,507 $ --
============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share figures)
NOTE A - 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. 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.
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.
Short-Term Investments. Effective October 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("FAS 115"), which resulted in a
change in the Company's accounting method, the effect of which was not material
to the consolidated financial statements. Prior to October 1, 1994, the Company
carried debt and equity securities at the lower of aggregate cost or market
value.
Inventories. Inventories are stated at the lower of cost or market.
Cost is determined using the first-in, first-out method.
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. As of September 30, 1995,
substantially all the Company assets were being depreciated. Leasehold
improvements are amortized over the terms of the related leases or their useful
lives, whichever is shorter.
Intangible Assets. Goodwill associated with acquisitions is amortized
using the straight-line method over forty years. 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.
22
<PAGE> 23
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. 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% 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.
Reclassifications. Certain reclassifications have been made for
consistent presentation.
NOTE B - 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 1995 and 1994, the Company issued 77 and 61
shares, respectively in connection with the fiscal 1994 and 1993 operating
results. The Company will issue 82 shares to the sellers in connection with the
fiscal 1995 operating results and 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 million in cash, $2.0 million in Common Stock of the Company
and an additional $2.7 million in Common Stock of the Company to be issued on
December 31, 1995. The Company financed the acquisition of Century with proceeds
from a five year $25 million senior term loan and internally generated cash.
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 has been recorded as goodwill, which
(except for the goodwill from the FRS acquisition - see Note F below) is being
amortized over 40 years. The contingent consideration was recorded as
additional goodwill when the related contingencies were resolved and the
consideration was determined.
23
<PAGE> 24
The estimated fair value of assets and liabilities as of the date of
the acquisitions are summarized as follows:
<TABLE>
<CAPTION>
MICRO-C FRS CENTURY
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 4,911 $ 3,588 $ 8,545
Machinery and equipment 497 1,082 947
Identifiable intangible and other assets 4,000 142 3,578
Goodwill 15,444 7,625 31,569
Liabilities (12,302) (7,135) (5,630)
-------------------------------------
$ 12,550 $ 5,302 $39,009
=====================================
</TABLE>
The following table presents the unaudited pro forma results of
operations of the Company for the years ended September 30, 1994 and 1993,
assuming the above acquisitions had occurred on October 1, 1992.
<TABLE>
<CAPTION>
1994 1993
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $137,236 $118,457
Gross Profit 32,988 32,793
Operating income 2,315 8,966
Earnings (loss) from continuing operation before tax (3,510) 5,686
Net income (loss) (6,151) 4,053
Net income (loss) per share $ (0.82) $ 0.65
</TABLE>
NOTE C - 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. During 1994, management revised the estimated reserve
for remaining contractual and contingent obligations resulting in a provision
for loss on disposal of $2,400. Such obligations and contingencies relate
primarily to a leased building, reserves for helmet litigation, and estimation
of liabilities due to an income tax dispute (See Note L -- Commitments and
Contingencies). The Company recorded a provision for loss on disposal of $2,234
(net of tax of $1,489) in 1993.
NOTE D - INVENTORIES
Inventories at September 30, 1995 and 1994 consisted of the following:
<TABLE>
<CAPTION>
1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Spare and repair parts $ 535 $1,083
Work in process 253 1,152
Finished goods 3,233 7,210
--------------------
Total Inventories $4,021 $9,445
====================
</TABLE>
24
<PAGE> 25
NOTE E - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at September 30, 1995 and 1994 consisted
of the following:
<TABLE>
<CAPTION>
ESTIMATED
LIFE 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Furniture, fixtures and equipment 3 - 5 years $ 7,801 $ 6,779
Leasehold improvements 1 - 5 years 707 654
------------------------
8,508 7,433
Less accumulated depreciation and amortization (2,756) (1,358)
------------------------
Total property, plant and equipment $ 5,752 $ 6,075
========================
</TABLE>
The Company leases office, processing and warehousing facilities under
various operating leases through 2000. 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: 1996 - $1,648; 1997 -
$1,550; 1998 - $1,505; 1999 - $1,422; 2000 - $773; thereafter - $104. Rent
expense was approximately $1,662, $1,393, and $313 for the years ended September
30, 1995, 1994 and 1993, respectively.
NOTE F - INTANGIBLES AND OTHER ASSETS
Intangibles and other assets at September 30, 1995 and 1994 consisted
of the following:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Goodwill $50,152 $59,035
Database valuation 1,462 1,462
Debt issuance costs 1,939 1,939
Other 832 1,223
Less accumulated amortization (3,601) (1,908)
---------------------------
$50,784 $61,751
===========================
</TABLE>
With 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. This charge was
determined necessary as management estimated that the amortization of the
goodwill balance over its remaining life would not be recovered through the
projected non-discounted future cash flows over the remaining amortization
period. 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.
In fiscal 1994, management determined that the remaining unamortized
balance of $2,400, which had been assigned to a non-compete agreement with the
sellers of Micro-C, should be charged to operations. The non-compete agreement
was determined to be of no continuing value due to the decision by the Company's
major supplier of reduced specification ICs to indefinitely suspend shipments
and to the decline of the Company's activities in general in the reduced
specification IC business.
25
<PAGE> 26
NOTE G - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving line of credit $ 9,295 $ 8,625
Senior term loan 19,000 23,000
9-1/4% Senior subordinated notes 8,724 8,486
7-3/4% Convertible subordinated debentures 10,299 10,273
7% Subordinated convertible promissory notes 2,648 3,872
Capital lease financing 826 917
- -------------------------------------------------------------------------------------------------
50,792 55,173
Less current portion of long-term debt (6,700) (5,622)
- -------------------------------------------------------------------------------------------------
$44,092 $49,551
=================================================================================================
</TABLE>
Bank Financing
In May 1994, in conjunction with the Century acquisition, the Company
entered into a $35,000 Senior Secured Credit Agreement (the "Agreement") with a
group of financial institutions (lenders). The Agreement consists of a $10,000
revolving line of credit, and a $25,000 senior term loan. All borrowings under
the Agreement are secured by substantially all of the assets of the Company.
Borrowings under the $10,000 revolving line of credit bear interest at
the rate of LIBOR plus 3% or prime plus 1% (8.88% and 9.75%, respectively at
September 30, 1995) and expire on March 31, 1997. During fiscal 1995, the
average outstanding balance under the revolving line of credit was approximately
$8,211 bearing an average interest rate of 9.2%. Borrowings under the senior
term loan bear interest at the rate of LIBOR plus 3.0% and are due in quarterly
installments of principal plus accrued interest through March 31, 1999.
The Agreement includes covenants relating to the financial performance
of the Company including: required current ratios; minimum quarterly debt
service and interest coverage ratios; maximum consolidated leverage ratios;
required domestic to foreign asset ratios; required quarterly net profitability
amounts; and a material adverse effect clause. Additionally, the Company is
required to repay principal outstanding under the Agreement equal to 100% of
excess cash flow (as defined in the Agreement) annually each December 30 over
the term of the Agreement. Based on the Company's operating results in fiscal
1995, no payment will be required.
The Company entered into a Third Amendment ("Amendment") to the
Agreement effective September 30, 1995. This Amendment includes waivers and
adjustments to the financial covenants mentioned above, a material adverse
effect clause and the Company's agreement to recapitalize prior to June 30, 1996
(the "Recapitalization"). As defined in the Amendment, the Recapitalization
includes repayment of the senior term loan and the revolving line of credit, as
well as repayment of the 9 1/4% Senior Subordinated Notes. According to the
Amendment, in the event the Recapitalization does not occur by June 30, 1996,
certain conditions will restrict all future payments due on all of the Company's
subordinated debt and will prohibit all future payments due on the
non-cancelable building lease associated with discontinued operations. See Note
L -- Commitments and Contingencies. These events could cause a default under the
subordinated debt and operating lease. In the event of such a default,
management believes, based on the terms of the three subordinated debt issues,
that payments of principal and interest on the subordinated debt would be
prohibited unless waived by the holders of the senior indebtedness pursuant to
the Agreement.
26
<PAGE> 27
In consideration for this Amendment the banks will receive amendment
fees of $50 at the closing date of the Amendment, an additional $100 at March
31, 1996, and an additional $150 on June 30, 1996 if the Company has not
effected the Recapitalization as of March 31, 1996. In addition, if, as of June
30, 1996, the Company has not effected the Recapitalization, the interest rate
on the revolving line of credit and senior term loan will be increased by 2% per
annum. In addition, if the Company has not effected the Recapitalization by
March 31, 1996, a penalty fee of $200 will be due to the banks, such fee
increasing by $50 per month for each month that the Recapitalization has not
been completed. Also as consideration for this Amendment, the exercise price of
certain warrants received by the banks in May 1994 will be repriced to the
average closing price of the Company's Common Stock over the ten trading days
preceding and including the Third Amendment closing date.
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 principal balance of the 7% Notes is due in equal installments on
September 30, 1995 (paid October 2, 1995), 1996 and 1997. 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.
9-1/4% Senior Subordinated Notes
These Notes in the amount of approximately $9,029 were issued in
conjunction with an exchange offer in 1989. The principal amount of the 9-1/4%
Notes is due in November 1996. The 9-1/4% Notes are shown net of unamortized
discount of approximately $305 and $543 at September 30, 1995 and 1994,
respectively. Interest on the 9-1/4 % Notes is payable on May 14 and November 14
of each year through maturity. During the fourth quarter of fiscal 1995,
Management retained financial advisors to investigate and recommend a
recapitalization of the Company including sources of capital for the retirement
of the 9 1/4% Senior Subordinated Notes due in November of 1996.
7-3/4% Convertible Subordinated Debentures
The 7-3/4% Convertible Subordinated Debentures mature April 15, 2001
(the "Convertible Debentures") and are shown net of unamortized discount of
approximately $152 and $178 at September 30, 1995 and 1994, 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.
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: 1996 - $6,700, 1997 - $24,673, 1998 - $6,089, 1999
- - $3,148, 2000 - $2,516 and thereafter - $7,666.
27
<PAGE> 28
NOTE H - Income Taxes
The provision for income taxes for the years ended September 30, 1995,
1994 and 1993 consists of the following:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current provision (benefit)- Federal $ -- $ -- $1,334
- State -- -- 312
----------------------------------------------
Total current provision -- -- 1,646
----------------------------------------------
Deferred provision (benefit):
Net operating loss generated (3,193) (2,639) --
Net reversal of non-deductible accruals and reserves 213 1,935 --
Reserve method for allowance for doubtful accounts (146) (174) --
Depreciation 276 (623) --
Goodwill amortization 616 -- --
Deferred benefit not currently recognized 2,234 1,501 --
Increase in non-utilization of deferred tax asset due to
uncertainty of recovery 1,304 -- --
Other 16 -- (94)
----------------------------------------------
Total deferred provision 1,320 -- (94)
----------------------------------------------
Total federal income tax provision exclusive of
discontinued operations $ 1,320 $ -- $1,552
==============================================
</TABLE>
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:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Provision (benefits) for income taxes at statutory rate $(4,661) $(1,400) $1,410
Nondeductible expenses 3,227 331 198
Deferred benefit not currently recognized 2,234 1,501 --
Increase in non-utilization of deferred tax asset due to
uncertainty 1,304 -- --
State taxes, net of Federal benefit (823) (253) 203
FSC benefit -- (75) (126)
Reversal of Riddell book gain -- -- (62)
Other 39 (104) (71)
-----------------------------------------------
Total provision for income taxes $ 1,320 $ -- $1,552
===============================================
</TABLE>
28
<PAGE> 29
The components of the Company's deferred income tax benefit as of
September 30, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Reserves for discontinued operations $ 1,679 $ 2,157
Net operating loss carryforwards - current 1,576 4,851
Allowance for doubtful accounts 565 419
Inventory reserves 499 204
Non-deductible accruals 1,558 1,588
Valuation allowance - current (4,345) (6,006)
----------------------------
Current deferred income tax benefit 1,532 3,213
----------------------------
Depreciation 352 628
Net operating loss carryforwards - long-term 7,681 1,213
Capital loss carryback 3,218 3,218
Goodwill amortization (616) --
Valuation allowance - long-term (8,433) (3,234)
----------------------------
Long-term deferred income tax benefit 2,202 1,825
----------------------------
$ 3,734 $ 5,038
============================
</TABLE>
At September 30, 1995, the Company had tax basis NOLs of approximately
$27,200 available to offset future ordinary taxable income. The utilization of
the Company's NOL may be substantially limited if certain cumulative changes in
ownership of more than 50% occur within any three year period. 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. (See Note L -- Commitments and Contingencies.)
With the adoption of FAS No. 109 in 1993, the Company recorded income
and a deferred tax asset equal to the cumulative effect of the accounting change
of $2,734. In order to fully realize the deferred tax asset, the Company will
need to generate future taxable income of approximately $42,000 prior to the
expiration of the NOLs which begin to expire in 2007. Based on the historical
and current pre-tax earnings of the Company's continuing operations, management
believes it is more likely than not that the Company will realize the benefit of
the NOLs existing at September 30, 1995, before the net operating loss
carryforwards begin to expire in 2007. Further, management believes the existing
net deductible temporary differences will reverse during periods in which the
Company generates net taxable income. There can be no assurance, however, that
the Company will generate any earnings or any specific level of continuing
earnings.
A valuation allowance is provided against the deferred tax asset when
it is more likely than not that some portion of the deferred tax asset will not
be realized. The Company has established a valuation allowance for the portion
of the deferred tax asset which is not likely to be realized within
approximately the next fiscal year based on Management's best estimate of
results of operations for that upcoming period. As a result no net income tax
benefit was recorded in fiscal 1995 and 1994.
NOTE I - STOCKHOLDERS' EQUITY
Common Stock
The Company has 1,000 shares of authorized $.01 par value preferred
stock with none issued or outstanding. The Company has 25,000 shares of
authorized $.03 par value Common Stock with approximately 8,062 shares issued
and approximately 7,501 shares outstanding (8,020 and 7,382, respectively, at
September 30, 1994).
29
<PAGE> 30
During fiscal 1993, the Company effected a five for four stock split in
the form of a stock dividend. The stock split was retroactively reflected in the
accompanying consolidated financial statements and footnotes.
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, 1995 on the 7% notes payable.
Warrants
In connection with the $35,000 Senior Secured Credit Agreement discussed
in Note G -- Long- Term Debt, the Company issued Warrants to the Lenders to
acquire 380 shares of Common Stock at the average closing price of the Company's
Common Stock as of the Third Amendment to the Senior Secured Credit Agreement.
In the event the Company issues common shares in the future in connection with
(i) the conversion of the 7% Notes; (ii) contingent shares in connection with
the Century acquisition; or (iii) the conversion of the 7-3/4% Convertible
Subordinated Debentures, the Lenders would be entitled to Warrants equal to
1-1/4% of such common shares issued at same per share as stated above.
Management's estimate of the fair value of these warrants is not material. Also,
in connection with the Amendment, all previously issued contingent lender
warrants were terminated.
In March 1993, the Company completed a Warrant call. As a result of the
Warrant call, approximately 904 Warrants were exercised resulting in the
issuance of approximately 904 shares of the Company's Common Stock. In addition,
194 treasury shares were issued due to the effect of the five for four stock
split. As a result of the Warrant call, the Company received net cash proceeds
of approximately $9,424.
During fiscal 1992, the Company's Chairman and Chief Executive Officer
and President were issued warrants to purchase an aggregate of 463 shares of the
Company's Common Stock at a per share price of $5.60 and 237 shares of the
Company's Common Stock at a per share price of $6.40. During August of 1995, the
compensation and stock option committee of the Company's board of directors
approved and offered to the Company's Chairman and Chief Executive Officer and
President the opportunity to surrender for cancellation their original
outstanding warrants ("original warrants") and replace such original warrants
with new warrants ("new warrants") to acquire eighty percent (80%) of the number
of shares of the Company's Common Stock as canceled in the original warrants, at
a price per share of $3.625, but with all other terms of the original warrants
to remain substantially the same. The new warrants are fully exercisable.
NOTE J - 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. At October
1, 1995, 350 shares were reserved for future issuance.
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 $279, $161 and $50 for the years ended September 30, 1995, 1994
and 1993, respectively.
30
<PAGE> 31
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 vest over five
years. As of September 30, 1995, options for 895 shares were issued and 255
shares were available for future grants under the plan. Options for 250 shares
were issued outside the Stock Option Plan.
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 Company's Common Stock as canceled, at a price per share equal
to twenty-five cents ($0.25) over the closing price of the Company's Common
Stock on May 15, 1995. The effect of the repricing has been included in the
stock option chart below.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-------------------------------------------------
SHARES RANGE OF OPTION PRICES
-------------------------------------------------
<S> <C> <C>
Outstanding at September 30, 1992 408,472 $4.10 - 6.60
Granted 585,150 6.40 -11.80
Exercised (408,472) 4.10 - 6.60
Forfeited -- --
-------------------------------------------------
Outstanding at September 30, 1993 585,150 6.40 -11.75
Granted 487,400 7.00 - 8.13
Exercised (5,360) 7.00 - 7.50
Forfeited (99,440) 7.00 - 8.13
-------------------------------------------------
Outstanding at September 30, 1994 967,750 6.40 -11.75
Granted 1,130,600 3.38 - 4.50
Exercised -- --
Forfeited (953,110) 7.00 - 8.13
-------------------------------------------------
Outstanding at September 30, 1995 1,145,240 $3.38 -11.75
-------------------------------------------------
</TABLE>
NOTE K - FAIR VALUE INFORMATION
The following disclosure of the estimated fair value of financial
instruments at September 30, 1995 and 1994 is made in accordance with the
requirements of SFAS No. 107 "disclosures about Fair Value of Financial
Instruments." The estimated fair value amounts have been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company could
realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair
value amounts.
The carrying amounts of cash and cash equivalents, short - term
investments, trade receivables, and accounts payable are a reasonable estimate
of their fair value. The carrying amount of long - term debt approximates fair
value because the obligations either bear interest at floating rates, or compare
favorably with fixed rate obligations that would be available to the Company.
The fair value information presented herein is based on pertinent
information available to management as of September 30, 1995. Although
management is not aware of any factors that would significantly affect the
estimated fair value amounts, such amounts have not been comprehensively
revalued for purposes of these consolidated financial statements since that
date, and current estimates of fair value may differ significantly from the
amounts presented herein.
31
<PAGE> 32
NOTE L - COMMITMENTS AND CONTINGENCIES
Discontinued operations
In conjunction with the sale of certain Discontinued Operations, the
Company remained liable for (i) certain then existing lawsuits relating to
football helmets allegedly involved in causing injury; and (ii) any liabilities
resulting from certain claims, lawsuits or proceedings instituted before
September 23, 1994 . As a result, the Company has obtained a three-year product
liability insurance policy specifically to cover any products liability claims
that the Company remains liable for. Such policy is limited to $1,000 per
occurrence with a $250 deductible and $2,000 in the aggregate, per year. As of
December 13, 1995, the Company's principal outstanding lawsuit relating to a
football helmet accident was settled awaiting court approval. The costs of the
settlement will be covered by the product liability insurance discussed above
and included in the reserves for discontinued operations.
The Company is subject to a non-cancelable building lease though 2005.
Management is pursuing various alternatives which would terminate this
obligation prior to the expiration of the lease and has recorded a reserve which
contemplates termination prior to 1999. In estimating the reserve management has
considered operating costs, net present value of the remaining lease payments,
an early termination payment and sublease rental income. However, additional
reserves may be needed in the event management is not able to successfully
negotiate an early termination of the lease.
The U.S. Internal Revenue Service ("IRS") examinations of the federal
income tax returns for the years 1986 through 1991 resulted in the issuance of a
deficiency notice. Based on the IRS's most recent offer to settle, the Company
would be required to pay additional taxes and interest of approximately $600 and
the net operating loss carryforward would be reduced by $2,200. The Company is
vigorously contesting this matter and management believes the amount accrued is
adequate.
Pursuant to a Tax Indemnity Agreement entered into between the Company
and 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 $250,000 in cash and $1,250,000 in Common Stock priced at
the issuance date. The balance of the settlement ($1,500,000 in cash) would be
funded by the Company's insurer. The settlement was approved on September 5,
1995. The Company will issue the settlement stock after proofs of claims have
been filed and verified as entitling the holders thereof to a share of the
settlement proceeds.
NOTE M - EXPORT SALES AND MAJOR CUSTOMERS
Export sales to customers in foreign countries amounted to approximately
$28,032, $15,600 and $11,800 in fiscal 1995, 1994 and 1993, respectively.
Revenues from the Company's foreign operations approximated $10,109 and $8,100
in 1995 and 1994, respectively. No customer accounted for 10 percent or more of
sales in fiscal 1995 and 1994. In fiscal 1993, the Company's three major
customers accounted for 18 percent, 17 percent and 10 percent of sales.
NOTE N - TRANSACTIONS WITH RELATED PARTIES
The Company's Chairman and Chief Executive Officer and President are
owners of EOS Capital, Inc. ("EOS"), a private capital firm previously retained
by the Company for consulting and investment
32
<PAGE> 33
banking services. During fiscal 1993 and the first quarter of fiscal 1994,
the Company did not pay the Chairman and Chief Executive Officer and the
President salaries as they were not employees of the Company until
January 1, 1994. The Company paid EOS $180 and $45 for consulting and
investment banking services for fiscal 1993 and the first quarter of fiscal
1994, respectively. Additionally, the Company paid EOS $200 for services
rendered in the acquisition of FRS in fiscal 1993 and $303 and $21 in fiscal
1993 and the first quarter of fiscal 1994, respectively, for reimbursement of
incurred expenses. The $200 was included as part of the acquisition cost of
FRS. Effective January 1, 1994, the Company's Chairman and Chief Executive
Officer and President became employees of the Company.
33
<PAGE> 34
SCHEDULE II
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged to
beginning of costs and other Balance at end
period expenses accounts Deductions of period
---------- ---------- -------- ------------ --------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED SEPTEMBER 30, 1995
Allowance for doubtful accounts $1,046,000 $ 857,000 $ -- $ 489,000 (1) $1,414,000
========== ========== ======== ========== ==========
Inventory reserves $ 657,000 $ 592,000 $ -- $ -- $1,249,000
========== ========== ======== ========== ==========
Reserve for discontinued operations $5,024,000 $ -- $ -- $ 951,000 $4,073,000
========== ========== ======== ========== ==========
FOR THE YEAR ENDED SEPTEMBER 30, 1994
Allowance for doubtful accounts $ 788,000 $ 205,000 $300,000 (3) $ 247,000 (1) $1,046,000
========== ========== ======== ========== ==========
Inventory reserves $ 882,000 $ 725,000 $363,000 (3) $1,313,000 $ 657,000
========== ========== ======== ========== ==========
Reserve for discontinued operations $5,166,000 $2,400,000 $ -- $2,542,000 $5,024,000
========== ========== ======== ========== ==========
FOR THE YEAR ENDED SEPTEMBER 30, 1993
Allowance for doubtful accounts $ 875,000 $ 7,000 $231,000 (2) $ 325,000 (1) $ 788,000
========== ========== ======== ========== ==========
Inventory reserves $ 948,000 $1,259,000 $500,000 (2) $1,825,000 $ 882,000
========== ========== ======== ========== ==========
Reserve for discontinued operations $4,186,000 $2,234,000 $972,000 $2,226,000 $5,166,000
========== ========== ======== ========== ==========
</TABLE>
- ----------------
(1) Uncollectible accounts written off, net of recoveries
(2) FRS Acquisition
(3) Century Acquisition
34
<PAGE> 35
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The directors and executive officers of the Company as of December 29,
1995 were as follows:
<TABLE>
<CAPTION>
OFFICER
DIRECTOR/EXECUTIVE NAME Age Position Since
- ----------------------- --- -------- -----
<S> <C> <C>
Jim C. Cowart 44 Chairman of the Board and Chief Executive 1992
Officer
David A. Lahar 38 President, Director 1992
Harvey B. Cash 57 Director 1993
Amin J. Khoury 56 Director 1993
William H. Watkins, Jr. 54 Director 1983
John P. Grazer 41 Chief Financial Officer and Senior Vice President, 1993
Finance and Administration
Harold Haagsma 56 President, ARS Division 1992
William M. McMahon 47 President, Century Division 1994
</TABLE>
- -------------
JIM C. COWART has served as a Director, Chairman of the Board and Chief
Executive Officer of the Company since 1992. Since February 1992, Mr. Cowart has
served as Chairman of EOS Capital, Inc. and as a founding General Partner of EOS
Partners, a private capital firm which has been, from time to time, retained by
the Company. From 1987 to 1991, Mr. Cowart was a founding General Partner of
Capital Resource Partners, a private capital firm and investment manager for
institutional investors. Mr. Cowart is also a director of BE Aerospace, Inc.
("BEAV" - NASD), a leading manufacturer of aircraft cabin interior products.
DAVID A. LAHAR has served as a Director and President of the Company since 1992.
Since February 1992, Mr. Lahar has served as President of EOS Capital, Inc. and
as a founding General Partner of EOS Partners, a private capital firm which has
been, from time to time, retained by the Company. From 1987 to February 1992,
Mr. Lahar was a First Vice President and a Managing Director with the Corporate
Finance Department of PaineWebber Incorporated.
HARVEY B. CASH has served as a Director of the Company since September 1993. Mr.
Cash has been a general partner of InterWest Partners III from June 1985 to
present and from June 1989 to present, Mr. Cash has been a general partner of
InterWest Partners IV, both of which are venture capital firms. Also, Mr. Cash
has been a general partner of Berry Cash Southwest Partnership, a venture
capital firm, since December 1983. Mr. Cash serves as a director of the
following companies: Cirrus Logic, Inc. ("CRUS" - NASD), a semiconductor
company; Convex Computer Corporation ("CNX" - NYSE), a manufacturer and
distributor of super-mini mainframe computers; Cyrix Corporation ("CYRX" -
NASD), a manufacturer and distributor of math-co processors; and ProNet, Inc.,
("PNET" - NASD), a distributor of medical pagers and electronic tracking
systems. Mr. Cash and Mr. Cowart are first cousins.
AMIN J. KHOURY has served as a Director of the Company since January 1993. Since
July 1987, Mr. Khoury has served as Chairman of the Board and Chief Executive
Officer of B/E Aerospace, Inc. ("BEAV" - NASD), a leading manufacturer of
aircraft cabin interior products. Mr. Khoury is Chairman of the Board of
Directors of Applied Extrusion Technologies, Inc. ("AETC" - NASD), a leading
manufacturer of packaging films, polymer nets and other specialty products. Mr.
Khoury is a director of Brooks
35
<PAGE> 36
Automation, Inc. ("BRKS" -- NASD), a leading manufacturer of vacuum
central wafer handling systems for the semiconductor process industry.
WILLIAM H. WATKINS, JR. has served as a Director of the Company since 1983. Mr.
Watkins has been a partner and certified public accountant with Watkins, Watkins
& Keenan since December 1971.
JOHN P. GRAZER has served as Chief Financial Officer and Senior Vice President,
Finance and Administration of the Company since May 1993. From 1992 to April
1993, Mr. Grazer served as Vice President of Finance and Administration of Home
Fashions Inc. From 1990 to 1992, Mr. Grazer served as Vice President of Finance
and Chief Financial Officer of RB Industries, Inc. From 1985 to 1990, Mr. Grazer
served as Vice President, Finance of Amplica, Inc. a COMSAT company.
HAROLD HAAGSMA has served as the President of the ARS Division of the Company
since March 1994. From July 1993 to March 1994, Mr. Haagsma was the Vice
President of Operations for Micro-C Corporation. From 1992 to July 1993, Mr.
Haagsma was the Vice President of Manufacturing and Production for Micro-C
Corporation. From 1990 to 1992, Mr. Haagsma was Vice President of Manufacturing
for Four Pi Systems. From 1988 to 1990, Mr. Haagsma was Vice President of
Operations for Topaz / Square D.
WILLIAM M. MCMAHON has served as the President of the Century Division of the
Company since April 1995. Mr. McMahon joined the Company in November 1994 as the
President of the Premier Division. From 1992 until joining the Company, Mr.
McMahon served as the President and Chief Executive Officer of Upsonic
Electronics International. From 1991 to 1992, Mr. McMahon served as the Vice
President, Business Development, Sales and Marketing for Total MultiMedia, Inc.
From 1990 to 1991 Mr. McMahon served as the Vice President and General Manager
of KCS Computer Services. From 1981 to 1990, Mr. McMahon served as the Regional
Vice President and General Manager of Arrow Electronics. From 1980 to 1981, Mr.
McMahon served as General Manager for Marshall Industries.
ITEM 11. EXECUTIVE COMPENSATION.
Information regarding the Company's compensation of its executive
officers and other highly compensated employees under the caption "Executive
Compensation" contained in the Proxy Statement for the 1996 Annual Meeting of
Stockholders, which is incorporated herein by reference except that information
in subsections titled "Report of Compensation and Stock Option Committee on
Executive Compensation" and "Performance Graph" of such section are not
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information regarding security ownership of certain beneficial owners
and management is under the caption "Security Ownership of Management and
Principal Stockholders" contained in the Proxy Statement for the 1996 Annual
Meeting of Stockholders, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information regarding transactions with the Company's executive officers
and directors is under the caption "Transactions with Management and Related
Parties" contained in the Proxy Statement for the 1996 Annual Meeting of
Stockholders, which is incorporated herein by reference.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements. See Item 8.
(a)(2) Supplemental Schedules Supporting Financial Statements. See Item 8.
(c) Exhibits. See Index to Exhibits.
37
<PAGE> 38
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, 1996
AURORA ELECTRONICS, INC.
By: /s/ John P. Grazer
---------------------------------------
John P. Grazer, Senior Vice President,
Finance and Administration and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on January 11, 1996 by the following persons on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
- ------------------------ ------------------------------------------------------
/s/ Jim C. Cowart Director, Chairman and Chief Executive Officer
- ------------------------ (Principal Executive Officer)
Jim C. Cowart
/s/ David A. Lahar Director and President
- ------------------------
David A. Lahar
/s/ John P. Grazer Chief Financial Officer and Senior Vice President,
- ------------------------ Finance and Administration (Principal Accounting
John P. Grazer and Financial Officer)
/s/ Harvey B. Cash Director
- ------------------------
Harvey B. Cash
/s/ Amin J. Khoury Director
- ------------------------
Amin J. Khoury
/s/ William H. Watkins Director
- ------------------------
William H. Watkins
38
<PAGE> 39
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
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 Indenture, dated as of November 15, 1989, between the Company --
and Ameritrust Texas N.A. (formerly MTrust Corp., National
Association), relating to the Company's 9-1/4% Senior subordinated
Notes due 1996, including form of Note (incorporated by reference
from Exhibit (a) (1) to Schedule 13E-3 filed October 19, 1989).
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
4.6 First Supplemental Indenture relating to the Company's 9-1/4% --
Senior Subordinated Notes due 1996, dated as of June 29, 1990, by
and between Ameritrust Texas, N.A. and the Company
(incorporated by reference to Exhibit 4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1990).
4.7 Agreement relating to the Company's 9-1/4% Senior Subordinated --
Notes due 1996, dated March 31, 1991, among the Company,
Ameritrust Texas N.A. and American Stock Transfer & Trust
Company (incorporated by reference from Exhibit 4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1991).
4.8 Second Supplemental Indenture relating to the Company's 9-1/4% --
Senior Subordinated Notes due 1996, dated to be effective as of
November 30, 1992, between the Company and American Stock
Transfer & Trust Company (incorporated by reference from Exhibit
4.8 to the Company's Post-Effective Amendment No. 1 to
Registration Statement on Form S-3 (No. 33-32377)).
4.9 Forms of Warrants to Messrs. Lahar and Cowart, two of which are --
dated August 8, 1992, and one of which is dated September 30,
1992 (incorporated by reference from Exhibit 10.17 to the
Company's Transition Report on Form 10-K for the transition period
from December 31, 1991 to September 30, 1992).
4.10 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).
4.11 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).
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)).
</TABLE>
40
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
10.2 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).
10.3 Letter Agreement, dated August 5, 1993, between the Company and --
Robert G. Allison relating to employment (incorporated by
reference from Exhibit 10.3 to the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 1993).
*10.3.1 Letter Agreement, dated May 18, 1995, between the Company and 45
Robert G. Allison relating to employment.
10.4 Letter Agreement, dated March 19, 1993, between the Company and --
John P. Grazer relating to employment (incorporated by reference
from Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1993).
*10.4.1 Letter Agreement, dated May 18, 1995, between the Company and 49
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 53
Jim C. Cowart relating to employment.
10.6 Letter Agreement, dated March 1, 1994, between the Company and --
David A. Lahar relating to employment. (incorporated by reference
from Exhibit 10.6 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
*10.6.1 Letter Agreement, dated May 18, 1995, between the Company and 57
David A. Lahar relating to employment.
10.7 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).
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 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).
10.13 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).
10.14 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).
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
10.15 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).
10.16 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).
10.17 Senior Secured Credit Agreement dated as of May 12, 1994, by and --
among Aurora Electronics Group, Inc., Banque Paribas, Banque
Indosuez, Union Bank and Banque Paribas, as Agent (incorporated
by reference from Exhibit 4.1 to the Company's Report on Form 8-K
dated May 26, 1994).
10.17.1 First Amendment to Senior Secured Credit Agreement and First --
Amendment to Guaranty dated as of December 27, 1994, by and
among Aurora Electronics Group, Inc., Aurora Electronics, Inc.,
Banque Paribas as Agent on behalf of itself, Banque Indosuez and
Union Bank (incorporated by reference from Exhibit 10.17.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1994).
*10.17.2 Second Amendment to Senior Secured Credit Agreement, Second 61
Amendment to Guaranty and First Amendment to Warrants entered into
as of March 31, 1995, by and among Aurora Electronics Group, Inc.,
Aurora Electronics, Inc., Banque Paribas as Agent on behalf
of itself, Banque Indosuez and Union Bank.
*10.17.3 Third Amendment to Senior Secured Credit Agreement, Third 73
Amendment to Guaranty entered into as of December 31, 1995,
by and among Aurora Electronics Group, Inc., Aurora
Electronics, Inc., Banque Paribas as Agent on behalf
of itself, Banque Indosuez, Indosuez Capital Funding II,
Limited and Union Bank.
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).
*11 Computation of Earnings Per Share 93
</TABLE>
43
<PAGE> 44
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits Page
- ----------- ------------------------------------------------------------------- ------
<S> <C> <C>
21.1 Subsidiaries of the Company:
JURISDICTION
NAME OF INCORPORATION
------------------------------ ----------------
Aurora Electronics Group, Inc. California
Aurora Electronics Limited United Kingdom
Micro-C (Barbados) Ltd. Barbados
*23.1 Consent of Arthur Andersen LLP 94
27 Financial Data Schedule 95
</TABLE>
- --------------------
*Filed herewith.
44
<PAGE> 1
EXHIBIT 10.3.1
May 18, 1995
Mr. Robert G. Allison
31401 Via Las Palmas
San Juan Capistrano, CA 92675
Dear Bobby:
I am writing to confirm our recent discussions regarding the compensation
package for your work as the Chief Operating Officer of Aurora Electronics, Inc.
Attached is a copy of the Fiscal 1995 - 1996 Executive Compensation Plan -
Update (the "Plan"). Your compensation will be paid pursuant to the terms and
conditions described in this letter as further explained in the Plan, and also
subject to normal company policies as they apply now and change from time to
time. Details include:
BASE SALARY: $225,000 per year. Payments will be made on the normal
payroll schedule.
DEBT REDUCTION For debt reduction from Corporate Transactions, as described
BONUS #1: in the Plan, your bonus percentage shall be 0.20%
DEBT REDUCTION For debt reduction from Operations, as described in the Plan,
BONUS #2: your bonus percentage shall be 0.65%
EVA BONUS: For EVA bonus payments, as described in the Plan, your EVA
factor shall be 0.026
STOCK OPTIONS: As described in the Plan, you were granted options to
purchase an additional 50,000 shares of Aurora common stock
by the Options Committee of the Board, with an exercise price
of $3.375 per share on May 15, 1995.
SEVERANCE: The Company recognizes the difficulties that this period
places on its executives. As a result, it wishes to modify
the severance terms of your employment as well. This
paragraph replaces entirely all of Aurora's prior severance
agreements with you.
This letter and your response do not constitute a contract of
employment for a stated term. As always since you joined
Aurora, you have the right to terminate your employment at
any time, and Aurora retains a similar right to terminate
your employment at will. Termination by the Company may be
for (1) cause, or (2) other. In the event that you are
terminated for cause (e.g. insubordination, moral turpitude,
theft, violation of the law, breach of fiduciary duties,
abuse of employees, willful misrepresentation, etc.), or you
voluntarily resign, your compensation will cease after 30
days, and the vesting of your options will cease immediately.
If you are terminated for any other reason, your compensation
and option vesting will continue for 12 months.
<PAGE> 2
CHANGE OF In the event of a change of control of the Company, the
CONTROL: following will occur:
- All of your stock options will be deemed to have vested
immediately prior to such change;
- If within 90 days you are not offered employment from the
surviving company under terms and conditions acceptable to
you, or you are terminated by the surviving company within
those 90 days, you may resign unconditionally and you will
continue to receive your base salary, insurance and
automobile benefits for a period of two years. You will
also receive a full and immediate payout of all earned but
unpaid bonuses and deferred compensation (vested and
unvested).
A change of control shall be defined as a (a) an event that
results in a change in ownership of over 40% of the common
stock of the corporation or the change in over 50% of the
membership of the Board of Directors, or (b) the sale of a
majority of the assets of the Company.
The remainder of your terms of employment remain unchanged.
Best personal regards,
/s/ Jim C. Cowart
- -----------------
Jim C. Cowart
Accepted and agreed: /s/ Robert G. Allison
-----------------------------------------
Robert G. Allison
05/24/95
-----------------------------------------
(Date)
2
<PAGE> 3
AURORA ELECTRONICS, INC.
FISCAL 1995 - 96 EXECUTIVE COMPENSATION PLAN - UPDATE
DISCUSSION OF SPECIFIC TERMS
1. Bonus formulas are designed to target two goals: (a) reduction of debt, and
(b) generation of net income (EVA). Debt reduction bonus payments will be
calculated according to the following table:
<TABLE>
<CAPTION>
DEBT REDUCTION VIA DEBT REDUCTION FROM
CORPORATE TRANSACTIONS OPERATIONS
---------------------- ----------
<S> <C> <C>
Jim C. Cowart
Bobby Allison See attached letter
Dave Lahar
John Grazer
</TABLE>
At the end of each of the six quarters ending 9/30/96, the cumulative net
reduction of total debt since 3/31/95 will be calculated, and the indicated
executive will earn a bonus (subject to the Payment Terms discussed below)
equal to that debt reduction multiplied by the percentage in the table for
the source of funds for that debt reduction. Corporate Transaction debt
reduction will include proceeds from external financing, litigation, sale of
businesses, negotiated restructurings, etc. All other debt reductions
(including income from affiliates after the establishment of their
affiliation) will be considered from Operations.
2. EVA bonus payments will be calculated according to the following table:
<TABLE>
<CAPTION>
EVA FACTOR
----------
<S> <C>
Jim C. Cowart
Bobby Allison See attached letter
Dave Lahar
John Grazer
</TABLE>
EVA bonus payments will be calculated for the five quarters ending 9/30/96,
and the indicated executive will earn a bonus (subject to the Payment Terms
discussed below) equal to the factor indicated in the table multiplied by
the amount, if any, by which earnings of the company exceeds a 17.5% return
on shareholders' average equity. Average equity shall be calculated as one
half the sum of the beginning and ending equity amounts. Net earnings of the
company shall be calculated using actual taxes paid.
3. Each executive shall be granted 50,000 options exercisable at market on the
day of the grant. The specific targets for option vesting are as shown in
the following table:
<TABLE>
<CAPTION>
QUARTER ENDING EBITA MARGIN PRE TAX INCOME
-------------- ------------ --------------
<S> <C> <C>
9/30/95 7.60% $ 900,000
12/31/95 8.60% 1,500,000
3/31/96 10.50% 2,500,000
6/30/96 9.90% 2,300,000
9/30/96 9.90% 2,300,000
</TABLE>
Each quarter that the target is met, 5,000 of the options shall vest. Once a
target is missed, the options shall revert to the option pool.
3
<PAGE> 4
4. Payment Terms. There are six quarters for the Debt Reduction Bonus plan, and
five quarters for the EVA Bonus plan. It is desirable to (a) maintain an
incentive for continuing performance in every quarter, (b) protect the
Company against payments that become too large as a result of declines in
performance, and (c) distribute cash to executives as soon as it is earned.
At the end of each quarter, the total bonus payable under that plan from its
inception to that date will be calculated, and a payment shall be made to
the eligible executive such that the total payments under that plan to the
end of the quarter shall be as shown in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING DEBT REDUCTION PLAN EVA PLAN
-------------- ------------------- --------
<S> <C> <C>
6/30/95 1/21 n/a
9/30/95 3/21 1/15
12/31/95 6/21 3/15
3/31/96 10/21 6/15
6/30/96 15/21 10/15
9/30/96 100% 100%
</TABLE>
Payment dates shall be the date of the filing of the 10-Q or 10-K covering
the relevant quarter. Bonuses will be payable to an executive only if he was
employed by the company on the first and last day of the quarter.
4
<PAGE> 1
EXHIBIT 10.4.1
May 18, 1995
Mr. John P. Grazer
22646 Sacedon
Mission Viejo, CA 92691
Dear John:
I am writing to confirm our recent discussions regarding the compensation
package for your work as the Chief Financial Officer of Aurora Electronics, Inc.
Attached is a copy of the Fiscal 1995 - 1996 Executive Compensation Plan -
Update (the "Plan"). Your compensation will be paid pursuant to the terms and
conditions described in this letter as further explained in the Plan, and also
subject to normal company policies as they apply now and change from time to
time. Details include:
BASE SALARY: $140,000 per year. Payments will be made on the normal
payroll schedule.
DEBT REDUCTION For debt reduction from Corporate Transactions, as described
BONUS #1: in the Plan, your bonus percentage shall be 0.25%
DEBT REDUCTION For debt reduction from Operations, as described in the Plan,
BONUS #2: your bonus percentage shall be 0.40%
EVA BONUS: For EVA bonus payments, as described in the Plan, your EVA
factor shall be 0.020
STOCK OPTIONS: As described in the Plan, you were granted options to
purchase an additional 50,000 shares of Aurora common stock
by the Options Committee of the Board, with an exercise price
of $3.375 per share on May 15, 1995.
SEVERANCE: The Company recognizes the difficulties that this period
places on its executives. As a result, it wishes to modify
the severance terms of your employment as well. This
paragraph replaces entirely all of Aurora's prior severance
agreements with you.
This letter and your response do not constitute a
contract of employment for a stated term. As always
since you joined Aurora, you have the right to terminate
your employment at any time, and Aurora retains a
similar right to terminate your employment at will.
Termination by the Company may be for (1) cause, or (2)
other. In the event that you are terminated for cause
(e.g. insubordination, moral turpitude, theft, violation
of the law, breach of fiduciary duties, abuse of
employees, willful misrepresentation, etc.), or you
voluntarily resign, your compensation will cease after
30 days, and the vesting of your options will cease
immediately. If you are terminated for any other reason,
your compensation and option vesting will continue for
12 months.
<PAGE> 2
CHANGE OF In the event of a change of control of the Company, the
CONTROL: following will occur:
- All of your stock options will be deemed to have vested
immediately prior to such change;
- If within 90 days you are not offered employment from the
surviving company under terms and conditions acceptable to
you, or you are terminated by the surviving company within
those 90 days, you may resign unconditionally and you will
continue to receive your base salary, insurance and
automobile benefits for a period of two years. You will
also receive a full and immediate payout of all earned but
unpaid bonuses and deferred compensation (vested and
unvested).
A change of control shall be defined as a (a) an event that
results in a change in ownership of over 40% of the common
stock of the corporation or the change in over 50% of the
membership of the Board of Directors, or (b) the sale of a
majority of the assets of the Company.
The remainder of your terms of employment remain unchanged.
Best personal regards,
/s/ Jim C. Cowart
- -----------------
Jim C. Cowart
Accepted and agreed: /s/ John P. Grazer
-----------------------------------------
John P. Grazer
05/22/95
-----------------------------------------
(Date)
2
<PAGE> 3
AURORA ELECTRONICS, INC.
FISCAL 1995 - 96 EXECUTIVE COMPENSATION PLAN - UPDATE
DISCUSSION OF SPECIFIC TERMS
1. Bonus formulas are designed to target two goals: (a) reduction of debt, and
(b) generation of net income (EVA). Debt reduction bonus payments will be
calculated according to the following table:
<TABLE>
<CAPTION>
DEBT REDUCTION VIA DEBT REDUCTION FROM
CORPORATE TRANSACTIONS OPERATIONS
---------------------- ----------
<S> <C> <C>
Jim C. Cowart
Bobby Allison
Dave Lahar
John Grazer See attached letter
</TABLE>
At the end of each of the six quarters ending 9/30/96, the cumulative net
reduction of total debt since 3/31/95 will be calculated, and the indicated
executive will earn a bonus (subject to the Payment Terms discussed below)
equal to that debt reduction multiplied by the percentage in the table for
the source of funds for that debt reduction. Corporate Transaction debt
reduction will include proceeds from external financing, litigation, sale of
businesses, negotiated restructurings, etc. All other debt reductions
(including income from affiliates after the establishment of their
affiliation) will be considered from Operations.
2. EVA bonus payments will be calculated according to the following table:
<TABLE>
<CAPTION>
EVA FACTOR
----------
<S> <C>
Jim C. Cowart
Bobby Allison
Dave Lahar
John Grazer See attached letter
</TABLE>
EVA bonus payments will be calculated for the five quarters ending 9/30/96,
and the indicated executive will earn a bonus (subject to the Payment Terms
discussed below) equal to the factor indicated in the table multiplied by
the amount, if any, by which earnings of the company exceeds a 17.5% return
on shareholders' average equity. Average equity shall be calculated as one
half the sum of the beginning and ending equity amounts. Net earnings of the
company shall be calculated using actual taxes paid.
3. Each executive shall be granted 50,000 options exercisable at market on the
day of the grant. The specific targets for option vesting are as shown in
the following table:
<TABLE>
<CAPTION>
QUARTER ENDING EBITA MARGIN PRE TAX INCOME
-------------- ------------ --------------
<S> <C> <C>
9/30/95 7.60% $ 900,000
12/31/95 8.60% 1,500,000
3/31/96 10.50% 2,500,000
6/30/96 9.90% 2,300,000
9/30/96 9.90% 2,300,000
</TABLE>
Each quarter that the target is met, 5,000 of the options shall vest. Once a
target is missed, the options shall revert to the option pool.
3
<PAGE> 4
4. Payment Terms. There are six quarters for the Debt Reduction Bonus plan, and
five quarters for the EVA Bonus plan. It is desirable to (a) maintain an
incentive for continuing performance in every quarter, (b) protect the
Company against payments that become too large as a result of declines in
performance, and (c) distribute cash to executives as soon as it is earned.
At the end of each quarter, the total bonus payable under that plan from its
inception to that date will be calculated, and a payment shall be made to
the eligible executive such that the total payments under that plan to the
end of the quarter shall be as shown in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING DEBT REDUCTION PLAN EVA PLAN
-------------- ------------------- --------
<S> <C> <C>
6/30/95 1/21 n/a
9/30/95 3/21 1/15
12/31/95 6/21 3/15
3/31/96 10/21 6/15
6/30/96 15/21 10/15
9/30/96 100% 100%
</TABLE>
Payment dates shall be the date of the filing of the 10-Q or 10-K covering
the relevant quarter. Bonuses will be payable to an executive only if he was
employed by the company on the first and last day of the quarter.
4
<PAGE> 1
EXHIBIT 10.5.1
May 18, 1995
Mr. Jim C. Cowart
28681 Abantes Place
Laguna Niguel, CA 92677
Dear Jim:
I am writing to confirm our recent discussions regarding the
compensation package for your work as the Chairman of the Board and Chief
Executive Officer of Aurora Electronics, Inc. Attached is a copy of the Fiscal
1995 - 1996 Executive Compensation Plan - Update (the "Plan"). Your
compensation will be paid pursuant to the terms and conditions described in
this letter as further explained in the Plan, and also subject to normal
company policies as they apply now and change from time to time. Details
include:
<TABLE>
<S> <C>
BASE SALARY: $150,000 per year. Payments will be made on the normal
payroll schedule.
DEBT REDUCTION For debt reduction from Corporate Transactions, as
BONUS #1: described in the Plan, your bonus percentage shall be
0.65%
DEBT REDUCTION For debt reduction from Operations, as described in the
BONUS #2: Plan, your bonus percentage shall be 0.20%
EVA BONUS: For EVA bonus payments, as described in the Plan, your
EVA factor shall be 0.039
STOCK OPTIONS: As described in the Plan, you were granted options to
purchase an additional 50,000 shares of Aurora common
stock by the Options Committee of the Board, with an
exercise price of $3.375 per share on May 15, 1995.
SEVERANCE: The Company recognizes the difficulties that this period
places on its executives. As a result, it wishes to
modify the severance terms of your employment as well.
This paragraph replaces entirely all of Aurora's prior
severance agreements with you.
This letter and your response do not constitute a contract
of employment for a stated term. As always since you
joined Aurora, you have the right to terminate your
employment at any time, and Aurora retains a similar right
to terminate your employment at will. Termination by the
Company may be for (1) cause, or (2) other. In the event
that you are terminated for cause (e.g. insubordination,
moral turpitude, theft, violation of the law, breach of
fiduciary duties, abuse of employees, willful
misrepresentation, etc.), or you voluntarily resign, your
compensation will cease after 30 days, and the vesting of
your options will cease immediately. If you are
terminated for any other reason, your compensation and
option vesting will continue for 12 months.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
CHANGE OF In the event of a change of control of the Company, the
CONTROL: following will occur:
- All of your stock options will be deemed to have
vested immediately prior to such change;
- If within 90 days you are not offered employment from
the surviving company under terms and conditions
acceptable to you, or you are terminated by the
surviving company within those 90 days, you may resign
unconditionally and you will continue to receive your
base salary, insurance and automobile benefits for a
period of two years. You will also receive a full and
immediate payout of all earned but unpaid bonuses and
deferred compensation (vested and unvested). A change
of control shall be defined as a (a) an event that
results in a change in ownership of over 40% of the
common stock of the corporation or the change in over
50% of the membership of the Board of Directors, or
(b) the sale of a majority of the assets of the
Company.
</TABLE>
Your compensation and expense reimbursement, or any part thereof, may
be paid directly to you or to your personal management company, EOS Capital,
Inc. However, with respect to any payments made to EOS, you agree that Aurora
will not be liable for any amounts in excess of that amount for which it would
be liable if payments were made directly to you.
The remainder of your terms of employment remain unchanged.
Best personal regards,
/s/ David A. Lahar
- ---------------------
David A. Lahar
Accepted and agreed: /s/ Jim C. Cowart
-------------------------------
Jim C. Cowart
05/19/95
-------------------------------
(Date)
2
<PAGE> 3
AURORA ELECTRONICS, INC.
FISCAL 1995 - 96 EXECUTIVE COMPENSATION PLAN - UPDATE
DISCUSSION OF SPECIFIC TERMS
1. Bonus formulas are designed to target two goals: (a) reduction of debt, and
(b) generation of net income (EVA). Debt reduction bonus payments will be
calculated according to the following table:
<TABLE>
<CAPTION>
DEBT REDUCTION VIA DEBT REDUCTION FROM
CORPORATE TRANSACTIONS OPERATIONS
---------------------- ----------
<S> <C> <C>
Jim C. Cowart See attached letter
Bobby Allison
Dave Lahar
John Grazer
</TABLE>
At the end of each of the six quarters ending 9/30/96, the cumulative net
reduction of total debt since 3/31/95 will be calculated, and the indicated
executive will earn a bonus (subject to the Payment Terms discussed below)
equal to that debt reduction multiplied by the percentage in the table for
the source of funds for that debt reduction. Corporate Transaction debt
reduction will include proceeds from external financing, litigation, sale
of businesses, negotiated restructurings, etc. All other debt reductions
(including income from affiliates after the establishment of their
affiliation) will be considered from Operations.
2. EVA bonus payments will be calculated according to the following table:
<TABLE>
<CAPTION>
EVA FACTOR
----------
<S> <C>
Jim C. Cowart See attached letter
Bobby Allison
Dave Lahar
John Grazer
</TABLE>
EVA bonus payments will be calculated for the five quarters ending 9/30/96,
and the indicated executive will earn a bonus (subject to the Payment Terms
discussed below) equal to the factor indicated in the table multiplied by
the amount, if any, by which earnings of the company exceeds a 17.5% return
on shareholders' average equity. Average equity shall be calculated as one
half the sum of the beginning and ending equity amounts. Net earnings of
the company shall be calculated using actual taxes paid.
3. Each executive shall be granted 50,000 options exercisable at market on
the day of the grant. The specific targets for option vesting are as shown
in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING EBITA MARGIN PRE TAX INCOME
-------------- ------------ --------------
<S> <C> <C>
9/30/95 7.60% $ 900,000
12/31/95 8.60% 1,500,000
3/31/96 10.50% 2,500,000
6/30/96 9.90% 2,300,000
9/30/96 9.90% 2,300,000
</TABLE>
Each quarter that the target is met, 5,000 of the options shall vest. Once
a target is missed, the options shall revert to the option pool.
3
<PAGE> 4
4. Payment Terms. There are six quarters for the Debt Reduction Bonus plan,
and five quarters for the EVA Bonus plan. It is desirable to (a) maintain
an incentive for continuing performance in every quarter, (b) protect the
Company against payments that become too large as a result of declines in
performance, and (c) distribute cash to executives as soon as it is earned.
At the end of each quarter, the total bonus payable under that plan from
its inception to that date will be calculated, and a payment shall be made
to the eligible executive such that the total payments under that plan to
the end of the quarter shall be as shown in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING DEBT REDUCTION PLAN EVA PLAN
-------------- ------------------- --------
<S> <C> <C>
6/30/95 1/21 n/a
9/30/95 3/21 1/15
12/31/95 6/21 3/15
3/31/96 10/21 6/15
6/30/96 15/21 10/15
9/30/96 100% 100%
</TABLE>
Payment dates shall be the date of the filing of the 10-Q or 10-K covering
the relevant quarter. Bonuses will be payable to an executive only if he
was employed by the company on the first and last day of the quarter.
4
<PAGE> 1
EXHIBIT 10.6.1
May 18, 1995
Mr. David A. Lahar
1737 Webster St.
San Francisco, CA 94115
Dear Dave:
I am writing to confirm our recent discussions regarding the
compensation package for your work as the President of Aurora Electronics, Inc.
Attached is a copy of the Fiscal 1995 - 1996 Executive Compensation Plan -
Update (the "Plan"). Your compensation will be paid pursuant to the terms and
conditions described in this letter as further explained in the Plan, and also
subject to normal company policies as they apply now and change from time to
time. Details include:
<TABLE>
<S> <C>
BASE SALARY: $150,000 per year. Payments will be made on the normal
payroll schedule.
DEBT REDUCTION For debt reduction from Corporate Transactions, as
BONUS #1: described in the Plan, your bonus percentage shall be
0.65%
DEBT REDUCTION For debt reduction from Operations, as described in the
BONUS #2: Plan, your bonus percentage shall be 0.20%
EVA BONUS: For EVA bonus payments, as described in the Plan, your EVA
factor shall be 0.039
STOCK OPTIONS: As described in the Plan, you were granted options to
purchase an additional 50,000 shares of Aurora common
stock by the Options Committee of the Board, with an
exercise price of $3.375 per share on May 15, 1995.
SEVERANCE: The Company recognizes the difficulties that this period
places on its executives. As a result, it wishes to
modify the severance terms of your employment as well.
This paragraph replaces entirely all of Aurora's prior
severance agreements with you.
This letter and your response do not constitute a contract
of employment for a stated term. As always since you
joined Aurora, you have the right to terminate your
employment at any time, and Aurora retains a similar right
to terminate your employment at will. Termination by the
Company may be for (1) cause, or (2) other. In the event
that you are terminated for cause (e.g. insubordination,
moral turpitude, theft, violation of the law, breach of
fiduciary duties, abuse of employees, willful
misrepresentation, etc.), or you voluntarily resign, your
compensation will cease after 30 days, and the vesting of
your options will cease immediately. If you are
terminated for any other reason, your compensation and
option vesting will continue for 12 months.
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
CHANGE OF In the event of a change of control of the Company, the
CONTROL: following will occur:
- All of your stock options will be deemed to have
vested immediately prior to such change;
- If within 90 days you are not offered employment
from the surviving company under terms and conditions
acceptable to you, or you are terminated by the
surviving company within those 90 days, you may resign
unconditionally and you will continue to receive your
base salary, insurance and automobile benefits for a
period of two years. You will also receive a full and
immediate payout of all earned but unpaid bonuses and
deferred compensation (vested and unvested).
A change of control shall be defined as a (a) an event
that results in a change in ownership of over 40% of the
common stock of the corporation or the change in over 50%
of the membership of the Board of Directors, or (b) the
sale of a majority of the assets of the Company.
</TABLE>
Your compensation and expense reimbursement, or any part thereof, may
be paid directly to you or to your personal management company, EOS Capital,
Inc. However, with respect to any payments made to EOS, you agree that Aurora
will not be liable for any amounts in excess of that amount for which it would
be liable if payments were made directly to you.
The remainder of your terms of employment remain unchanged.
Best personal regards,
/s/ Jim C. Cowart
- ---------------------
Jim C. Cowart
Accepted and agreed: /s/ David A. Lahar
------------------------------
David A. Lahar
05/19/95
------------------------------
(Date)
2
<PAGE> 3
AURORA ELECTRONICS, INC.
FISCAL 1995 - 96 EXECUTIVE COMPENSATION PLAN - UPDATE
DISCUSSION OF SPECIFIC TERMS
1. Bonus formulas are designed to target two goals: (a) reduction of debt, and
(b) generation of net income (EVA). Debt reduction bonus payments will be
calculated according to the following table:
<TABLE>
<CAPTION>
DEBT REDUCTION VIA DEBT REDUCTION FROM
CORPORATE TRANSACTIONS OPERATIONS
---------------------- ----------
<S> <C> <C>
Jim C. Cowart
Bobby Allison
Dave Lahar See attached letter
John Grazer
</TABLE>
At the end of each of the six quarters ending 9/30/96, the cumulative net
reduction of total debt since 3/31/95 will be calculated, and the indicated
executive will earn a bonus (subject to the Payment Terms discussed below)
equal to that debt reduction multiplied by the percentage in the table for
the source of funds for that debt reduction. Corporate Transaction debt
reduction will include proceeds from external financing, litigation, sale
of businesses, negotiated restructurings, etc. All other debt reductions
(including income from affiliates after the establishment of their
affiliation) will be considered from Operations.
2. EVA bonus payments will be calculated according to the following table:
<TABLE>
<CAPTION>
EVA FACTOR
-----------
<S> <C>
Jim C. Cowart
Bobby Allison
Dave Lahar See attached letter
John Grazer
</TABLE>
EVA bonus payments will be calculated for the five quarters ending 9/30/96,
and the indicated executive will earn a bonus (subject to the Payment Terms
discussed below) equal to the factor indicated in the table multiplied by
the amount, if any, by which earnings of the company exceeds a 17.5% return
on shareholders' average equity. Average equity shall be calculated as one
half the sum of the beginning and ending equity amounts. Net earnings of
the company shall be calculated using actual taxes paid.
3. Each executive shall be granted 50,000 options exercisable at market on
the day of the grant. The specific targets for option vesting are as shown
in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING EBITA MARGIN PRE TAX INCOME
-------------- ------------ --------------
<S> <C> <C>
9/30/95 7.60% $ 900,000
12/31/95 8.60% 1,500,000
3/31/96 10.50% 2,500,000
6/30/96 9.90% 2,300,000
9/30/96 9.90% 2,300,000
</TABLE>
Each quarter that the target is met, 5,000 of the options shall vest. Once
a target is missed, the options shall revert to the option pool.
3
<PAGE> 4
4. Payment Terms. There are six quarters for the Debt Reduction Bonus plan,
and five quarters for the EVA Bonus plan. It is desirable to (a) maintain
an incentive for continuing performance in every quarter, (b) protect the
Company against payments that become too large as a result of declines in
performance, and (c) distribute cash to executives as soon as it is earned.
At the end of each quarter, the total bonus payable under that plan from
its inception to that date will be calculated, and a payment shall be made
to the eligible executive such that the total payments under that plan to
the end of the quarter shall be as shown in the following table:
<TABLE>
<CAPTION>
QUARTER ENDING DEBT REDUCTION PLAN EVA PLAN
-------------- ------------------- --------
<S> <C> <C>
6/30/95 1/21 n/a
9/30/95 3/21 1/15
12/31/95 6/21 3/15
3/31/96 10/21 6/15
6/30/96 15/21 10/15
9/30/96 100% 100%
</TABLE>
Payment dates shall be the date of the filing of the 10-Q or 10-K covering
the relevant quarter. Bonuses will be payable to an executive only if he
was employed by the company on the first and last day of the quarter.
4
<PAGE> 1
EXHIBIT 10.17.2
SECOND AMENDMENT TO
SENIOR SECURED CREDIT AGREEMENT,
SECOND AMENDMENT TO GUARANTY
AND
FIRST AMENDMENT TO WARRANTS
THIS SECOND AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT, SECOND
AMENDMENT TO GUARANTY AND FIRST AMENDMENT TO WARRANTS ("Amendment") is made and
entered into as of March 31, 1995, by and among AURORA ELECTRONICS GROUP, INC.,
a California corporation ("Borrower"), AURORA ELECTRONICS, INC., a Delaware
corporation ("Parent") and BANQUE PARIBAS as Agent ("Agent") on behalf of
itself, BANQUE INDOSUEZ, UNION BANK and each other lender which may hereafter
execute and deliver an instrument of assignment pursuant to Section 11.10 of the
Senior Secured Credit Agreement (any one individually, a "Lender" and
collectively, "Lenders").
RECITALS
A. Borrower, Lenders and Agent have entered into that certain Senior
Secured Credit Agreement dated as of May 12, 1994 as amended by that First
Amendment to Senior Secured Credit Agreement and First Amendment to Guaranty
dated as of December 27, 1994 (as such may be further amended, modified,
supplemented or restated, the "Credit Agreement"), pursuant to which Lenders
made certain credit facilities available to Borrower. In consideration for and
an inducement for the extension of such credit facilities, Parent guaranteed the
obligations of Borrower and undertook separate obligations pursuant to the terms
of that Guaranty Agreement of Parent made as of May 12, 1994 in favor of Agent
and Lenders, as amended by that First Amendment to Senior Secured Credit
Agreement and First Amendment to Guaranty dated as of December 27, 1994 (as such
may be further amended, modified, supplemented or restated, the "Parent
Guaranty").
B. Pursuant to the requirements of the Credit Agreement, the Warrants
were issued in favor of each of Lenders.
C. Borrower and Parent have requested that the Credit Agreement, the
Parent Guaranty and the Warrants be modified as set forth herein.
D. Lenders and Agent are willing to accommodate Borrower's and
Parent's requests but only on the terms and subject to the conditions specified
herein.
1.
<PAGE> 2
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants herein set forth, and intending to be legally bound, the
parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms defined
in the Credit Agreement have the same meaning when used herein. The following
definitions shall have the following meanings:
"FACILITY-A RESERVE" shall be zero dollars ($0.00), provided,
however, that on such date as all Lenders, in their sole and
absolute discretion, shall provide written notice to Borrower
stating that Facility-C is again available, the Facility-A Reserve
means the followings amounts during the following periods:
<TABLE>
<S> <C>
Closing Date through 3/30/95 $0
3/31/95 through 6/29/95 $1,100,000
6/30/95 through 9/29/95 $1,466,667
9/30/95 through 12/30/95 $1,833,333
12/31/95 through 3/30/96 $2,200,000
3/31/96 through 6/29/96 $2,566,666
6/30/96 through 9/30/96 $2,933,333
9/31/96 and thereafter $3,300,000
</TABLE>
provided, further, that each such amount listed in the foregoing
proviso shall be reduced by the amount by which Borrower shall
have demonstrated to the satisfaction of Requisite Lenders amounts
have been paid after the Closing Date to reduce the principal
amount outstanding under the 9 1/4% Subordinated Debt."
"7% SUBORDINATED DEBT PRINCIPAL PAYMENT DATE" shall mean any or
all of September 30, 1995, September 30, 1996 and September 30,
1997."
2. AMENDMENTS TO CREDIT AGREEMENT.
a. 7% SUBORDINATED DEBT RESTRUCTURING. Section 5.12 of the
Credit Agreement is deleted in its entirety and replaced with the following:
"5.12 RESTRUCTURING OF SUBORDINATED DEBT. Prior to each 7%
Subordinated Debt Principal Payment Date, Borrower shall provide
evidence satisfactory to Requisite Lenders that either (a) Parent
has restructured its 7% Subordinated Debt such that the principal
payment due on such 7% Subordinated Debt Principal Payment Date is
either canceled or rescheduled to fall due not earlier than 180
days following the Final Payment Date, (b) the holders of the 7%
Subordinated Debt shall have caused that portion of the principal
falling due on
2.
<PAGE> 3
such 7% Subordinated Debt Principal Payment Date to be converted
into Stock of Parent, or (c) Parent shall have prepaid the
principal amount falling due on such 7% Subordinated Debt
Principal Payment Date with the net proceeds of the issuance of
Parent's Stock or additional Indebtedness of Parent (i) which is
subordinate in time and right of payment at least to the same
extent as the 7% Subordinated Debt, (ii) the first scheduled
principal repayment of which shall be at least 180 days following
the Final Payment Date and (iii) the interest rate, amortization
and other terms of which are satisfactory to Requisite Lenders.
The parties hereto understand and agree that Agent and Lenders
have priced the Facilities on the assumption that Borrower and
Parent will comply with the requirements of this Section 5.12 and
that in the event Borrower or Parent fails to comply with these
requirements the risk to Agent and Lenders will be substantially
increased and that such failure will constitute an Event of
Default hereunder. In recognition of such substantially increased
risk, the Warrants to be issued on the Closing Date shall become
exercisable only in the event Borrower and Parent fail to comply
with the requirements of this Section 5.12. The parties hereto
have specifically negotiated the number of Subject Shares (as
defined in the Warrants) and the Stock Purchase Price (as defined
in the Warrants) both to compensate Agent and Lenders for such
increased risk and to act as liquidated damages for the breach of
the requirements of this Section 5.12. The parties acknowledge and
agree that the calculation of damages for the breach of this
Section 5.12 would be difficult or impossible to ascertain and the
Warrants bear a reasonable relationship to such damages by
providing Agent and Lenders a vehicle which, under certain
circumstances, could permit Agent and Lenders to obtain funds from
sale of the Subject Shares equal to either (y) an amount
sufficient to purchase the 7% Subordinated Debt at par in the
event there is an acceleration, demand or other enforcement action
in respect of the 7% Subordinated Debt or (z) an amount sufficient
to purchase that portion of the 7% Subordinated Debt which shall
not have been paid on a 7% Subordinated Debt Principal Payment
Date in the event there is not an acceleration, demand or other
enforcement action in respect of the 7% Subordinated Debt."
3. AMENDMENTS TO PARENT GUARANTY.
a. 7% SUBORDINATED DEBT RESTRUCTURING. Section 6.10 of the
Parent Guaranty is deleted in its entirety and replaced with the following:
"6.10 RESTRUCTURING OF SUBORDINATED DEBT. Prior to each 7%
Subordinated Debt Principal Payment Date, Guarantor shall provide
evidence satisfactory to Requisite Lenders that either (a)
Guarantor has restructured its 7% Subordinated Debt such that the
principal payment due on such 7% Subordinated Debt Principal
Payment Date is either canceled or rescheduled to fall due not
earlier than 180 days following the Final Payment Date, (b) the
holders of the 7% Subordinated Debt shall have caused that portion
of the principal falling due on
3.
<PAGE> 4
such 7% Subordinated Debt Principal Payment Date to be converted
into Stock of Guarantor, or (c) Guarantor shall have prepaid the
principal amount falling due on such 7% Subordinated Debt
Principal Payment Date with the net proceeds of the issuance of
Guarantor's Stock or additional Indebtedness of Guarantor (i)
which is subordinate in time and right of payment at least to the
same extent as the 7% Subordinated Debt, (ii) the first scheduled
principal repayment of which shall be at least 180 days following
the Final Payment Date and (iii) the interest rate, amortization
and other terms of which are satisfactory to Requisite Lenders.
The parties hereto understand and agree that Agent and Lenders
have priced the Facilities on the assumption that Borrower and
Guarantor will comply with the requirements of this Section 6.10
and that in the event Borrower or Guarantor fails to comply with
these requirements the risk to Agent and Lenders will be
substantially increased and that such failure will constitute an
Event of Default hereunder. In recognition of such substantially
increased risk, the Warrants to be issued on the Closing Date
shall become exercisable only in the event Borrower and Guarantor
fail to comply with the requirements of this Section 6.10. The
parties hereto have specifically negotiated the number of Subject
Shares (as defined in the Warrants) and the Stock Purchase Price
(as defined in the Warrants) both to compensate Agent and Lenders
for such increased risk and to act as liquidated damages for the
breach of the requirements of this Section 6.10. The parties
acknowledge and agree that the calculation of damages for the
breach of this Section 6.10 would be difficult or impossible to
ascertain and the Warrants bear a reasonable relationship to such
damages by providing Agent and Lenders a vehicle which, under
certain circumstances, could permit Agent and Lenders to obtain
funds from sale of the Subject Shares equal to either (y) an
amount sufficient to purchase the 7% Subordinated Debt at par in
the event there is an acceleration, demand or other enforcement
action in respect of the 7% Subordinated Debt or (z) an amount
sufficient to purchase that portion of the 7% Subordinated Debt
which shall not have been paid on a 7% Subordinated Debt Principal
Payment Date in the event there is not an acceleration, demand or
other enforcement action in respect of the 7% Subordinated Debt."
4. AMENDMENTS TO WARRANTS. Each of the Warrants shall be amended as
follows:
a. Each of the Warrants is amended to delete the date "April 1,
1995" wherever it appears therein and to substitute therefor the date "October
1, 1995." In addition, each of the Warrants is amended to delete the date "March
31, 1995" wherever it appears therein and to substitute therefor the date
"September 30, 1995."
b. The second paragraph of the text of each of the Warrants is
deleted in its entirety and substituted with the following paragraphs:
"This Warrant has been issued pursuant to the requirements of that
certain Senior Secured Credit Agreement dated as of May 12, 1994
between Aurora Electronics
4.
<PAGE> 5
Group, Inc., Banque Paribas as agent, and the lenders named
therein, as amended (the "Credit Agreement").
"The Stock Purchase Price shall be equal to fifty percent (50%) of
the Fair Market Value (as defined in Section 2.2 below) of the
Common Stock calculated as of the date of Holder's exercise. The
number of shares constituting the "Subject Shares" which shall be
issuable at any time shall be
(a) in the event any amount shall be due and owing under the
7% Subordinated Debt (as defined in the Credit Agreement,
hereinafter the "7% Subordinated Debt") and there shall have
been an acceleration, demand for payment or other enforcement
action by any holder of the 7% Subordinated Debt (whether or
not the default upon which such acceleration, demand or other
enforcement action shall have been waived or cured) (an
"Acceleration"), the number of shares of Common Stock
calculated by dividing (i) the balance of principal and
accrued and unpaid interest outstanding under the 7%
Subordinated Debt by (ii) the Stock Purchase Price, in each
case (i) and (ii) as of the date of Holder's exercise of its
rights hereunder or
(b) in the event any amount shall be due and owing under the
7% Subordinated Debt and there shall NOT have been an
Acceleration, the number of shares calculated by dividing (i)
the amount past due for principal and interest under the 7%
Subordinated Debt by (ii) the Stock Purchase Price, in each
case (i) and (ii) as of the date of Holder's exercise of its
rights hereunder.
The exercise of rights under this Warrant for the full number of
Subject Shares issuable upon exercise of this Warrant shall not
preclude the subsequent exercise of rights under this Warrant in
respect of that additional number of Subject Shares issuable
pursuant to this Warrant at any later time; provided, however,
that in calculating the number of Subject Shares issuable pursuant
to this Warrant in any such subsequent exercise, the amount of
principal and interest in respect of the 7% Subordinated Debt
which shall have formed the basis for a calculation of Subject
Shares in any prior exercise of rights hereunder shall be excluded
from the calculation of Subject Shares for any subsequent exercise
of rights hereunder.
If on October 1, 1997, the covenant set forth in Section 5.12 of
the Credit Agreement has been fully complied with, then this
Warrant shall be null and void and the Company shall be under no
obligation to issue shares of Common stock hereunder."
c. Section 4.4 of each of the Warrants is deleted in its
entirety and substituted with the following paragraph:
5.
<PAGE> 6
"4.4 ADJUSTMENT FOR SHORTFALL. Whether or not there has been an
Acceleration, in the event Holder at any time exercises its rights
hereunder and at such time the product of (a) the number of
Subject Shares and (b) the Stock Purchase Price (the "Warrant
Value") is less than one million two hundred ninety thousand
dollars ($1,290,000) (such amount being referred to herein as the
"Threshold Value"), then, at the option of the Company, either (x)
the number of Subject Shares shall be increased by a number of
shares of Common Stock equal to: (i) the difference between the
Threshold Value and the Warrant Value, divided by (ii) the Stock
Purchase Price, or (y) the Company shall pay to the Holder an
amount in cash equal to the Holder's Percentage times the
difference between the Threshold Value and the Warrant Value;
provided, however, that unless the Company exercises its foregoing
option to pay cash by paying cash to the Holder by that date 30
days following the date any principal amount becomes due and is
unpaid under the 7% Subordinated Debt, the option to pay cash
shall terminate and the number of Subject Shares shall on such
date automatically be increased as set forth in clause (x) above."
d. Nothing in this Amendment shall be construed to cause there
to be any amendment to the warrants issued to Banque Paribas and to Indosuez
issued pursuant to the Banque Paribas Side Letter, the Indosuez Side Letter or
the First Amendment.
5. LIMITED AMENDMENT; FULL FORCE AND EFFECT. The amendments set forth
in this Amendment shall be limited precisely as written and shall not be deemed
(a) to be an amendment or waiver of any other term or condition of the Credit
Agreement, the Parent Guaranty or the Warrants, to prejudice any right or remedy
which Agent or Lenders may now have or may have in the future under or in
connection with the Credit Agreement, the Parent Guaranty or the Warrants or (b)
to be a consent to any future amendment. Except as expressly amended hereby, the
Credit Agreement, the Parent Guaranty and the Warrants shall continue in full
force and effect.
6. BORROWER'S REPRESENTATIONS AND WARRANTIES. In order to induce
Agent and Lenders to enter into this Amendment and to amend the Credit
Agreement, Borrower and Guarantor each represent and warrant to each Lender and
Agent as follows:
a. CORPORATE POWER AND AUTHORITY. Borrower and Parent have all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform their respective
obligations under the Credit Agreement, the Parent Guaranty and the Warrants,
each as amended by this Amendment (the "Amended Agreements"). The Certificate of
Incorporation of Parent and the Articles of Incorporation of Borrower and Bylaws
of each of Borrower and Parent have not been amended since May 12, 1994 other
than the Certificate of Amendment of Restated Certificate of Incorporation filed
with the Delaware Secretary of State on March 29, 1995 and attached hereto as
Exhibit A.
6.
<PAGE> 7
b. AUTHORIZATION OF AGREEMENTS. The execution and delivery of
this Amendment and the performance of the Amended Agreements have been duly
authorized by all necessary corporate action on the part of the Borrower and
Parent, as applicable.
c. NO CONFLICT. The execution and delivery by the Borrower and
Parent of this Amendment and the performance by the Borrower and Parent of the
Amended Agreements do not and will not contravene (i) any law or regulation
binding on or affecting Borrower, Parent or any of their respective
Subsidiaries, (ii) the Certificate of Incorporation of Parent or Articles of
Incorporation of Borrower or Bylaws of any of either of them, (iii) any order,
judgment or decree of any court of other agency of government binding on either
of Borrower, Parent, or any of their respective Subsidiaries or (iv) any
contractual restriction binding on or affecting Borrower, Parent or any of their
respective Subsidiaries.
d. GOVERNMENTAL CONSENTS. The execution and delivery by Borrower
and Parent of this Amendment and the performance by Borrower and Parent of the
Amended Agreements, as applicable, do not and will not require any authorization
or approval of, or other action by, or notice to or filing with any governmental
authority or regulatory body.
e. BINDING OBLIGATION. This Amendment and the Amended Agreements
have been duly executed and delivered by Borrower and Parent and are the binding
obligations of Borrower and Parent, enforceable against them in accordance with
their respective terms, except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, liquidation, moratorium or other similar
laws of general application and equitable principles relating to or affecting
creditors' rights.
f. ABSENCE OF DEFAULT AND MODIFICATION OF AGREEMENTS WITH OTHER
CREDITORS. No event has occurred and is continuing or will result from the
consummation of the transactions contemplated by this Amendment that would
constitute an Event of Default as defined in either the Credit Agreement or the
Parent Guaranty. Neither Borrower nor Parent has modified any agreement with any
creditor of Borrower or Parent, other than by this Amendment, unless Borrower or
Parent has disclosed the terms of such modification to Lenders in writing.
7. LENDERS' REPRESENTATIONS AND WARRANTIES. Each Lender hereby
represents to Borrower, Parent, each other Lender and Agent that it has the full
right and power to amend each of the Amended Documents and continues to possess
all rights of the Holder (as defined in each Warrant) under the Warrant issued
in such Lender's favor.
8. CONDITIONS PRECEDENT. This Amendment shall be deemed effective as
of March 31, 1995 (the "Second Amendment Effective Date") upon satisfaction of
all of the following conditions precedent prior to April 14, 1995:
a. CORPORATE DOCUMENTS OF BORROWER. Agent and Lenders shall each
have received a certificate of a responsible officer of Borrower as to the
effectiveness of resolutions
7.
<PAGE> 8
of the Board of Directors of Borrower authorizing Borrower to enter into this
Amendment and such other corporate documents as Agent shall reasonably request,
all in form and substance satisfactory to Agent.
b. CORPORATE DOCUMENTS OF PARENT. Agent and Lenders shall each
have received a certificate of a responsible officer of Parent as to the
effectiveness of resolutions of the Board of Directors of Parent authorizing
Parent to enter into this Amendment and such other corporate documents as Lender
shall reasonably request.
c. COST REIMBURSEMENT. All costs incurred by Agent incurred in
connection with the negotiation of this Agreement and Borrower's satisfaction of
the conditions precedent to the effectiveness hereof, together with all
outstanding reimbursable costs required to be paid under the Credit Agreement as
of such effective date, including, without limitation, the legal fees of Cooley
Godward Castro Huddleson & Tatum, shall have been paid in full.
d. UPDATE OF REPRESENTATIONS AND WARRANTIES. Agent and Lenders
shall each have received a certificate of responsible officers of Borrowers and
Parent certifying that the representations and warranties in Section 4 of the
Credit Agreement and Section 5 of the Parent Guaranty continue to be true and
complete in all material respects as of the date hereof after giving effect to
this Amendment (except to the extent such specifically relate to another date or
as specifically described therein and expressly approved by Requisite Lenders).
e. APPROVAL OF LENDERS. Agent shall have received from Requisite
Lenders written approval of this Amendment in form satisfactory to Agent.
f. DISPUTE RELATING TO 7% SUBORDINATED DEBT. Borrower and Parent
shall have provided to Agent and each Lender the certificate of a responsible
officer of each of Borrower and Parent attaching a true and complete list of all
documents in their possession regarding the disputes between Parent and/or
Borrower on the one hand and the holders of the 7% Subordinated Debt on the
other hand, which represents a list of all material documents evidencing awards,
findings and decisions made as of the date hereof by the arbitrator of the
disputes.
g. OTHER DOCUMENTS. Agent and Lenders shall have received such
other documents, information and items from Borrower and Parent as they shall
reasonably request.
9. RELEASE AND WAIVER.
a. Each of Borrower and Parent hereby acknowledge and agree
that: (1) it has no claim or cause of action against Lender or any parent,
subsidiary or affiliate of Lender, or any of Lender's officers, directors,
employees, attorneys or other representatives or agents (all of which parties
other than Lender being, collectively, "Lender's Agents") in connection with the
Credit Agreement, the loans thereunder or the transactions contemplated therein
and herein; (2) it has no offset or defense against any of its respective
obligations, indebtedness or
8.
<PAGE> 9
contracts in favor of Lender; and (3) it recognizes that Lender has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower.
b. Although Lender regards its conduct as proper and does not
believe Borrower to have any claim, cause of action, offset or defense against
Lender or any of Lender's Agents in connection with the Credit Agreement, the
loans thereunder or the transactions contemplated therein, Lender wishes and
Borrower agrees to eliminate any possibility that any past conditions, acts,
omissions, events, circumstances or matters could impair or otherwise affect any
rights, interests, contracts or remedies of Lender. Therefore, Borrower
unconditionally releases and waives (1) any and all liabilities, indebtedness
and obligations, whether known or unknown, of any kind Lender or of any of
Lender's Agents to Borrower, except the obligations remaining to be performed by
Lender as expressly stated in the Credit Agreement, this Amendment and the other
Loan Documents executed by Lender; (2) any legal, equitable or other obligations
or duties, whether known or unknown, of Lender or of any of Lender' Agents to
Borrower (and any rights of Borrower against Lender) besides those expressly
stated in the Credit Agreement, this Amendment and the other Loan Documents; (3)
any and all claims under any oral or implied agreement, obligation or
understanding with Lender or any of Lender's Agents, whether known or unknown,
which is different from or in addition to the express terms of the Credit
Agreement, this Amendment or any of the other Loan Documents; and (4) all other
claims, causes of action or defenses of any kind whatsoever (if any), whether
known or unknown, which Borrower might otherwise have against Lender or any of
Lender's Agents, on account of any condition, act, omission, event, contract,
liability, obligation, indebtedness, claim, cause of action, defense,
circumstance or matter of any kind whatsoever which existed, arose or occurred
at any time prior to the execution and delivery of this Amendment or which could
arise concurrently with the effectiveness of this Amendment.
c. Each of Borrower and Parent agree that it understands the
meaning and effect of Section 1542 of the California Civil Code, which provides:
Section 1542. Certain Claims Not Affected by General Release. A
general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing
the release, which if known by him must have materially affected
his settlement with the debtor.
EACH OF BORROWER AND PARENT AGREE TO ASSUME THE RISK OF ANY AND ALL UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS,
LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS AMENDMENT
IN FAVOR OF LENDER AND LENDER'S AGENTS, AND EACH OF BORROWER AND PARENT HEREBY
WAIVE AND RELEASE ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE UNDER
THE AFOREMENTIONED SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD TO THE
RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES
OF ACTION,
9.
<PAGE> 10
CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS. TO THE EXTENT (IF ANY)
WHICH ANY SUCH LAWS MAY BE APPLICABLE, EACH OF BORROWER AND PARENT WAIVE AND
RELEASE (TO THE MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT OR DEFENSE WHICH IT
MIGHT OTHERWISE HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE JURISDICTION WHICH
MIGHT LIMIT OR RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR
RELEASES UNDER THIS AMENDMENT.
10. GUARANTOR CONSENT AND ACKNOWLEDGEMENT. Each party listed on the
signature pages hereto as a "Guarantor" hereby consents to this Amendment and
agrees that its guarantee of the Obligations of the Borrower under the Credit
Agreement shall continue in full force and effect, shall be valid and
enforceable and shall not be impaired or otherwise affected by the execution of
this Amendment or any other document or instrument delivered in connection
herewith.
11. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent
expressly provided in this Amendment, the terms and conditions of the Credit
Agreement and the Parent Guaranty shall remain in full force and effect. This
Amendment and the other Loan Documents constitute and contain the entire
agreement of the parties hereto and supersede any and all prior agreements,
negotiations, correspondence, understandings and communications between the
parties, whether written or oral, respecting the subject matter hereof. The
parties hereto further agree that the Loan Documents comprise the entire
agreement of the parties thereto and supersede any and all prior agreements,
negotiations, correspondence, understandings and other communications between
the parties thereto, whether written or oral respecting the extension of credit
by Lender to Borrower and/or its Affiliates.
12. MISCELLANEOUS.
a. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND THE OTHER
LOAN DOCUMENTS. On and after the First Amendment Effective Date, each reference
in the Credit Agreement, the Parent Guaranty or the Warrants to "this
Agreement," "hereunder," "hereof," "herein" or words of like import referring to
the Credit Agreement, the Parent Guaranty or the Warrants and each reference in
the Loan Documents to the "Credit Agreement," the "Parent Guaranty," the
"Warrants, "thereunder," "thereof" or words of like import referring to the
Credit Agreement, the Parent Guaranty or the Warrants shall mean and be a
reference to the Amended Agreements.
b. FEES AND EXPENSES. Borrower acknowledges that all costs, fees
and expenses as described in Section 10.1 of the Credit Agreement incurred by
the Agent and its counsel with respect to this Amendment and the documents and
transactions contemplated hereby shall be for the account of the Borrower.
10.
<PAGE> 11
c. HEADINGS. Section and subsection headings in this Amendment
are included herein for convenience of reference only and shall not constitute a
part of this Amendment for any other purpose or be given any substantive effect.
d. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE
STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
e. COUNTERPARTS. This Amendment may be executed in counterparts,
each of which when so executed shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument;
signature pages may be detached from multiple separate counterparts and attached
to a single counterpart so that all signature pages are physically attached to
the same document.
[INTENTIONALLY BLANK]
11.
<PAGE> 12
WITNESS the due execution hereof by the respective duly authorized
officer of the undersigned as of the date first written above.
BORROWER AURORA ELECTRONICS GROUP, INC.
By:/s/ John P. Grazer
---------------------------
Name: John P. Grazer
-------------------------
Title: Chief Financial Officer
------------------------
PARENT AURORA ELECTRONICS, INC.
By:/s/ John P. Grazer
---------------------------
Name: John P. Grazer
-------------------------
Title: Chief Financial Officer
------------------------
AGENT BANQUE PARIBAS
By:/s/ P. Yount
---------------------------
Name: P. Yount
-------------------------
Title: VP
------------------------
GUARANTORS AURORA ELECTRONICS, INC.
By:/s/ John P. Grazer
---------------------------
Name: John P. Grazer
-------------------------
Title: Chief Financial Officer
------------------------
AURORA ELECTRONICS LIMITED
By:/s/ John P. Grazer
---------------------------
Name: John P. Grazer
-------------------------
Title: Chief Financial Officer
------------------------
12.
<PAGE> 1
EXHIBIT 10.17.3
THIRD AMENDMENT TO
SENIOR SECURED CREDIT AGREEMENT,
THIRD AMENDMENT TO GUARANTY
AND
AMENDMENT TO WARRANTS
THIS THIRD AMENDMENT TO SENIOR SECURED CREDIT AGREEMENT, THIRD
AMENDMENT TO GUARANTY AND AMENDMENT TO WARRANTS(this "AMENDMENT") is made and
entered into as of December 31, 1995, by and among AURORA ELECTRONICS GROUP,
INC., a California corporation ("BORROWER"), AURORA ELECTRONICS, INC., a
Delaware corporation ("PARENT"), and BANQUE PARIBAS ("AGENT") in its capacity
as Agent on behalf of itself, BANQUE INDOSUEZ, INDOSUEZ CAPITAL FUNDING II,
LIMITED, UNION BANK and each other lender which may hereafter execute and
deliver an instrument of assignment pursuant to Section 11.10 of the Senior
Secured Credit Agreement (any one individually, a "LENDER" and collectively,
"LENDERS").
RECITALS
A. Borrower, Lenders and Agent have entered into that certain
Senior Secured Credit Agreement dated as of May 12, 1994 as amended by that
First Amendment to Senior Secured Credit Agreement and First Amendment to
Guaranty (the "FIRST AMENDMENT") dated as of December 27, 1994, and that Second
Amendment to Senior Secured Credit Agreement, Second Amendment to Guaranty and
First Amendment to Warrants (the "SECOND AMENDMENT") dated as of March 31, 1995
(as such may be further amended, modified, supplemented or restated, the
"CREDIT AGREEMENT"), pursuant to which Lenders made certain credit facilities
available to Borrower. In consideration for and an inducement for the
extension of such credit facilities, Parent guaranteed the obligations of
Borrower and undertook separate obligations pursuant to the terms of that
Guaranty Agreement of Parent made as of May 12, 1994 in favor of Agent and
Lenders, as amended by the First Amendment and Second Amendment (as such may be
further amended, modified, supplemented or restated, the "PARENT GUARANTY").
B. Borrower has failed to comply with certain terms, conditions
and covenants set forth in the Credit Agreement and currently remains in
default thereunder.
C. Borrower and Parent have requested waivers and modifications
of certain of the terms, conditions and covenants set forth in the Credit
Agreement and the Parent Guaranty.
D. Lenders and Agent are willing to accommodate Borrower's and
Parent's requests but only on the terms and subject to the conditions specified
herein.
1.
<PAGE> 2
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and the
mutual covenants herein set forth, and intending to be legally bound, the
parties hereto agree as follows:
1. DEFINITIONS. Unless otherwise defined herein, all terms
defined in the Credit Agreement have the same meaning when used herein. The
following definitions shall have the following meanings:
"ASSET SALE" shall have the meaning set forth in the Credit
Agreement, except that clause (w) of the proviso thereof shall be deleted
therefrom.
"CONSOLIDATED NET INCOME FOR PROFITABILITY" means, on a consolidated
basis, as measured quarterly as of the last day of each fiscal quarter of
Borrower, determined for the preceding four (4) fiscal quarters, including the
quarter in which such measurement date occurs, or if such measurement date
occurs prior to June 30, 1996, for the shorter period from July 1, 1995 to such
measurement date, the average quarterly net income (or loss), excluding
extraordinary gains but including extraordinary losses, of Parent and its
Subsidiaries or Borrower and its Subsidiaries, as appropriate, for such period
taken as a single accounting period, as determined and computed in accordance
with GAAP; provided, however, that there shall be excluded from the
determination of Consolidated Net Income for Profitability the income (or loss)
of any Person accrued prior to the date it becomes a Subsidiary of Borrower or
is merged into or consolidated with Borrower or any of its Subsidiaries or that
Person's assets are acquired by Borrower or any of its Subsidiaries.
"FACILITY-A RESERVE" means zero dollars ($0.00).
"FIRST SCHEDULED RECAPITALIZATION DATE" means March 31, 1996.
"INITIAL PARIBAS WARRANT" means that Warrant dated
May 12, 1994 in favor of Banque Paribas issued in connection with the Closing.
"INITIAL INDOSUEZ WARRANT" means that Warrant dated
May 12, 1994 in favor of Banque Indosuez issued in connection with the Closing.
"LENDERS' CONSULTANTS" means such consultants as Agent shall
retain in connection with the review of Borrower's, Parent's and Borrower's
Subsidiaries' business, condition (financial or otherwise), operations and
prospects.
"MATERIAL ADVERSE EFFECT" means any set of circumstances or
events which (a) has or could reasonably be expected to have any material
adverse effect upon the validity or enforceability of any material provision of
any Loan Document, (b) is or could reasonably be expected to be material and
adverse to the business, condition (financial or otherwise) or operations of
Parent or Borrower, (c) materially impairs or could reasonably be expected to
2.
<PAGE> 3
materially impair the ability of Parent or Borrower to perform its Obligations,
(d) materially impairs or could reasonably be expected to materially impair the
ability of Agent or any Lender to enforce any of its legal remedies pursuant to
the Loan Documents, or (e) materially impairs or could reasonably be expect to
materially impair the priority or value of Lenders' security interests in the
Collateral.
"RATE SPREAD" means (a) with respect to Facility-A Base
Rate Loans, one percent (1.00%) per annum and Facility-A LIBOR Loans,
two and one-half of one percent (2.50%) per annum, and (b) with respect
to Facility-B Base Rate Loans, one and one-half percent (1.50%) per
annum and Facility-B LIBOR Loans, three percent (3.00%) per annum; except
that if the Recapitalization shall not have occurred by the Second
Scheduled Recapitalization Date, then from and after the Second Scheduled
Recapitalization Date, the applicable interest rate in each case (a) and
(b) above shall be automatically increased by an additional two percent (2.00%)
per annum.
"RECAPITALIZATION" means the recapitalization of Parent and
Borrower described in that Private Placement Memorandum for the issuance of
$35,000,000 in Senior Subordinated Notes Due 2000 with Warrants to Purchase
Common Stock in the form presented to Agent and Lenders prior to the date
hereof with such modifications thereto as Parent and Borrower shall determine
to be reasonably necessary or such other alternative recapitalization
transaction [in form and substance reasonably satisfactory to Lenders]
involving the issuance and sale for cash of not less than $35,000,000 of debt
and equity securities, provided, however, that any such recapitalization shall
in all events (i) prepay in full Facility-B and provide for the redemption of
the 9 1/4% Subordinated Debt immediately upon consummation of the
recapitalization, (ii) provide at least $5,000,000 in additional liquidity to
Borrower, and (iii) not require Agent or Lenders to release, or consent to
release any of the Collateral or to permit a junior lien thereon.
"REGISTRATION RIGHTS AGREEMENT" means that certain
Paribas/Indosuez Registration Rights Agreement dated as of May 12, 1994 by and
between Parent, Banque Paribas and Banque Indosuez as amended by those letter
agreements dated December 30, 1994, between the parties to such agreement.
"SECOND PARIBAS WARRANT" means that Warrant dated
December 30, 1994 in favor of Banque Paribas issued in connection with the
closing of the First Amendment.
"SECOND INDOSUEZ WARRANT" means that Warrant dated
December 30, 1994 in favor of Banque Indosuez issued in connection with the
closing of the First Amendment.
"SECOND SCHEDULED RECAPITALIZATION DATE" means June 30, 1996.
"THIRD AMENDMENT" means that Third Amendment to Senior Secured
Credit Agreement, Third Amendment to Guaranty and Amendment to Warrants made
and entered into as of December 31, 1995, by and among Borrower, Parent, Banque
Paribas, Banque Indosuez,
3.
<PAGE> 4
Union Bank, each other lender which may become a Lender under the Agreement,
and Banque Paribas in its capacity as Agent on behalf of Lenders.
"THIRD AMENDMENT CLOSING DATE" shall have the meaning set
forth in the Third Amendment.
"THIRD AMENDMENT DISCLOSURE LETTER" means that Disclosure
Letter in form an substance acceptable to Agent and Requisite Lenders in their
sole and absolute discretion and accepted in connection with the closing of the
Third Amendment.
"THIRD AMENDMENT EFFECTIVE DATE" shall have the meaning set
forth in the Third Amendment.
"THIRD AMENDMENT SIDE LETTER" means that side letter by
Borrower and Parent in favor of Agent and Lenders dated the Third Amendment
Closing Date whereby certain fees are paid to Agent and Lenders in certain
circumstances.
2. AMENDMENTS TO CREDIT AGREEMENT.
a. LIMITATION OF PREPAYMENT FEE. The proviso of Section
2.2.1(b) is deleted. An additional sentence is added to the end of such
Section 2.2.1(b) as follows:
"The amount required to be paid pursuant to this Section shall not
exceed $150,000 in the aggregate."
b. EXCESS CASH FLOW PREPAYMENTS. Section 2.2.2(a) of
the Credit Agreement is deleted in its entirety and replaced with the
following:
"(A) EXCESS CASH FLOW PREPAYMENTS. Notwithstanding anything
to the contrary set forth in this Agreement, in addition to the
scheduled repayments of principal set forth in Section 2.1.2(c)
and 2.1.3(c) and the mandatory prepayments of principal set forth
in Section 2.2.2(b) and (c), Borrower shall prepay principal amounts
outstanding under Facility-B on or before December 30 of each year,
commencing December 30, 1994, in an amount equal to 100% of the
greater of either (i) Borrower's Excess Cash Flow, or (ii) Parent's
Excess Cash Flow, in each case on a consolidated basis for the fiscal
year of Borrower most recently ended, determined upon the basis of
Parent's and Borrower's audited year-end consolidated financial
statements furnished to Agent in accordance with Section 5.1(b). Any
voluntary prepayments made by Borrower under Section 2.2.1 during
any fiscal year of principal outstanding under Facility-B will be
credited against Borrower's obligation to make Excess Cash Flow
prepayments, if any, at the end of such fiscal year."
4.
<PAGE> 5
c. AMENDMENT OF DISCLOSURE LETTER. The Third Amendment
Disclosure Letter is substituted for the Disclosure Letter.
d. CAPITAL RESTRUCTURING. Borrower and Parent are
currently in the process of affecting the Recapitalization and anticipate the
Recapitalization will be accomplished by the First Scheduled Recapitalization
Date. In the event, however, the Recapitalization shall not have for any
reason occurred prior to the First Scheduled Recapitalization Date, Borrower
and Parent have assured Agent and Lenders that the period beginning on the date
hereof through the Second Scheduled Recapitalization Date provides ample time
to complete the Recapitalization. In connection therewith, Section 5.18 of the
Credit Agreement is added as follows:
"5.18 RECAPITALIZATION. Borrower shall cause the
Recapitalization to occur prior to the Second Scheduled
Recapitalization Date."
e. DOMINION ACCOUNT. Section 5.19 of the Credit
Agreement is added as follows:
"5.19 DOMINION OF FUNDS. Borrower agrees to collect and
enforce payment of all Accounts until Agent directs Borrower to the
contrary and, from and after such direction, Borrower agrees to fully
and promptly cooperate with and assist Agent or any other person as
Agent may designate (the "DOMINION BANK") in the collection and
enforcement of all Accounts. Immediately upon notice to such effect
by Agent to Borrower and at all times thereafter, Borrower shall
(a) indorse to the Dominion Bank and forthwith deliver to the Dominion
Bank all payments received by Borrower on Accounts or from the sale of
any Inventory or arising from any other rights or interests of
Borrower therein, in the form received by Borrower without commingling
with any funds belonging to Borrower, and (b) forthwith deliver to the
Dominion Bank all property in Borrower's possession or hereafter
coming into Borrower's possession through any enforcement of any such
rights or interests. All payments so received by the Dominion Bank
shall be applied in payment of any Obligations then due and owing,
first to interest, then to principal (in inverse order of their
maturities if principal amounts are due in installments) and the
surplus, if any, shall be available to Borrower.
f. INVESTMENTS AND ACQUISITIONS. Section 6.2(a) is
deleted in its entirety and is replaced as follows:
"(A) Investments in Borrower and Investments in Subsidiaries
existing on the Third Amendment Closing Date."
The figure in Section 6.2(c) is reduced to $50,000. Section 6.2(e) is hereby
deleted. The figure in Section 6.2(f) is reduced to $25,000.
5.
<PAGE> 6
g. LIMITATIONS ON INDEBTEDNESS; CONTINGENT OBLIGATIONS.
The figure in Section 6.3(g) is reduced to $25,000.
h. EXECUTIVE COMPENSATION. Section 6.4(b) is deleted in
its entirety and replaced with the following:
"(b) Except for the provision of equity incentives described on
Schedule 6.4(b), Borrower shall not, and shall not permit Parent or
any of Borrower's Subsidiaries to, in any fiscal year pay bonus
or other incentive compensation to its officers which in the
aggregate over any fiscal year exceeds five percent (5%) of the
sum of (i) Borrower's EBITDA and (ii) Borrower's accrued incentive
compensation for such officers, each for the preceding fiscal year.
For purposes of the preceding sentence Borrower's EBITDA shall have
the meaning set forth in the clause (a) of the definition of Senior
Interest Coverage Ratio herein."
i. DIVIDENDS. Borrower, Parent and Lenders anticipate
that the Restructuring will provide funds for refinancing the 9 1/4%
Subordinated Debt, the payment of all interest falling due under all
Subordinated Debt, and all corporate overhead. Consequently, Borrower, Parent
and Lenders agree that, as of the Second Scheduled Recapitalization Date,
subsections (c) and (d) of Section 6.5 are deleted. Subsection (e) of Section
6.5 is hereby deleted in its entirety and replaced with the following:
"(e) For so long as no Event of Default shall exist, Borrower may pay
dividends to Parent at any time prior to June 30, 1996, not to exceed
$150,000 in the aggregate amount, in respect of the McGurk helmet
liability litigation involving Parent, but only to the extent
otherwise permitted under Section 6.17."
j. CAPITAL EXPENDITURES. Section 6.6 is hereby deleted
in its entirety and replaced with the following:
"6.6 CAPITAL EXPENDITURES. Borrower shall not, and shall not
permit Parent or any of Borrower's Subsidiaries to, make or incur,
Capital Expenditures during the fiscal years set forth below in excess
of $1,000,000 in any fiscal year. The unused portion of the permitted
Capital Expenditures for the previous fiscal year may not be carried
forward to increase the amount of permitted Capital Expenditures in
any other fiscal year"
k. CAPITAL LEASES. The figure in Section 6.7 is reduced
to $250,000.
l. TRANSACTIONS WITH AFFILIATES. Subsection (e) of
Section 6.9 is deleted in its entirety and is replaced with the following:
"(e) In the ordinary course of and pursuant to the reasonable
requirements of Parent's, Borrower's or Borrower's Subsidiaries'
businesses, provided that any
6.
<PAGE> 7
such agreement or transaction shall be approved by Requisite Lenders
in their sole and absolute discretion."
m. NO PAYMENT OR MODIFICATION OF SUBORDINATED DEBT.
Section 6.13 is deleted in its entirety and replaced with the following:
"6.13 NO PAYMENT OR MODIFICATION OF SUBORDINATED DEBT. Borrower
shall not, and shall not permit Parent or any of Borrower's
Subsidiaries to, without the prior written consent of Requisite
Lenders, such consent to be given in Requisite Lenders' sole and
absolute discretion, (a) make any mandatory, voluntary or optional
payment or prepayment on or redemption or acquisition for value of
(including, without limitation, by way of depositing with the trustee
with respect thereto money or securities before due for the purpose of
paying when due) any Subordinated Debt whether at the maturity thereof
or otherwise, except for regularly scheduled interest payments on
Subordinated Debt through the Second Scheduled Recapitalization Date
and except a prepayment of the 7% Subordinated Debt from the proceeds
of new equity or new subordinated debt as contemplated in Section
5.12(c), (b) make any payment in respect of the Subordinated Debt
after the occurrence and during the continuance of an Event of Default
or Potential Event of Default or make any such payment which would
result in an Event of Default or Potential Event of Default, or
(c) modify or amend, or agree to any modification or amendment of, the
terms of any agreement or instrument evidencing Subordinated Debt
except (i) as expressly contemplated in Section 5.12(a) and (ii) that
at any time prior to the occurrence of an Event of Default which shall
not have been waived or cured, Parent may reduce the conversion Price
of the 7% Subordinated Debt."
n. PAYMENT OF SETTLEMENTS. Section 6.17 is deleted in
its entirety and replaced with the following:
"6.17 PAYMENT OF SETTLEMENTS. Borrower shall not after the date of
the Third Amendment Closing Date, directly or indirectly, make
payments in respect of claims, actions, suits, proceedings or
investigations involving Parent, Borrower or any of Borrower's
Subsidiaries in aggregate cumulative amount (including any amounts
paid by Parent or any of Borrower's Subsidiaries) in excess of
(i) $150,000 in the case of the McGurk helmet liability litigation
or (ii) $25,000 with respect to any other claim, action, suit,
proceeding or investigation, except in each case with the written
approval of Requisite Lenders, which approval may be given or
withheld in their sole and absolute discretion."
7.
<PAGE> 8
o. AMENDMENT FINANCIAL COVENANTS AND DEFINITIONS
RELATING THERETO.
i. The definitions of "Debt Service Coverage
Ratio," "Total Interest Coverage Ratio," "Senior Interest Coverage Ratio," and
"Consolidated Leverage Ratio" are each amended to delete the phrase "or if such
measurement date occurs prior to September 30, 1995, for the period from
October 1, 1994" and replace such phrase with the following phrase:
"of if such measurement date occurs prior to June 30, 1996, for the period from
July 1, 1995"
ii. Section 7.1 of the Credit Agreement is
deleted in its entirety and replaced with the following:
"7.1 MINIMUM CURRENT RATIO. Maintain at the Closing Date and
thereafter a Current Ratio of not less than the following:
Closing Date through 9/29/95 1.00:1
9/30/95 through 3/30/96 1.00:1
3/31/96 through 6/29/96 1.00:1
6/30/96 through 9/29/96 1.00:1
9/30/96 through 12/30/96 1.00:1
12/31/96 and thereafter 1.50:1
iii. Section 7.2 of the Credit Agreement is
deleted in its entirety and replaced with the following:
"7.2 MINIMUM DEBT SERVICE COVERAGE RATIO. Maintain a Debt Service
Coverage Ratio of not less than the following:
Closing Date through 9/29/95 1.00:1
9/30/95 through 3/30/96 1.00:1
3/31/96 through 6/29/96 1.00:1
6/30/96 through 9/29/96 1.10:1
9/30/96 through 12/30/96 1.15:1
12/31/96 and thereafter 2.00:1
iv. Section 7.3 of the Credit Agreement is
deleted in its entirety and replaced with the following:
8.
<PAGE> 9
"7.3 MINIMUM TOTAL INTEREST COVERAGE RATIO. Maintain a Total
Interest Coverage Ratio of not less than the following:
Closing Date through 9/29/95 1:50:1
9/30/95 through 3/30/96 1.50:1
3/31/96 through 6/29/96 1.70:1
6/30/96 through 9/29/96 1.90:1
9/30/96 through 12/30/96 2.20:1
12/31/96 and thereafter 3.00:1
v. Section 7.4 of the Credit Agreement is
deleted in its entirety and replaced with the following:
"7.4 MINIMUM SENIOR INTEREST COVERAGE RATIO. Maintain a Senior
Interest Coverage Ratio of not less than the following:
Closing Date through 9/29/95 2.50:1
9/30/95 through 3/30/96 2.70:1
3/31/96 through 6/29/96 2.90:1
6/30/96 through 9/29/96 3.10:1
9/30/96 through 12/30/96 3.30:1
12/31/96 and thereafter 5.00:1
vi. Section 7.5 of the Credit Agreement is
deleted in its entirety and replaced with the following:
"7.5 MAXIMUM CONSOLIDATED LEVERAGE RATIO. Maintain a Consolidated
Leverage Ratio not greater than the following:
Closing Date through 9/29/95 3.00:1
9/30/95 through 3/30/96 3.00:1
3/31/96 through 6/29/96 2.90 1
6/30/96 through 9/29/96 2.75:1
9/30/96 through 12/30/96 2.50:1
12/31/96 and thereafter 1.00:1
vii. Section 7.6 of the Credit Agreement is
deleted in its entirety and replaced with the following:
"7.6 DOMESTIC/FOREIGN ASSETS RATIO. Maintain a ratio of Domestic
Assets to Foreign Assets not less than 10:1.0.
viii. Section 7.7 of the Credit Agreement is
deleted in its entirety and replaced with the following:
9.
<PAGE> 10
"7.7 NET PROFITABILITY COVENANT. Maintain a Consolidated Net Income
For Profitability of at least the following:
QUARTERS ENDING LEVEL
9/30/95 $125,000
12/31/95 150,000
3/31/96 250,000
6/30/96 350,000
9/30/96 500,000
12/31/96 and thereafter 750,000
p. LOCKBOX ACCOUNT. Section 8.7 of the Credit Agreement
is added as follows:
"8.7 ACCOUNTS COLLECTION. Upon the occurrence of an Event of
Default, Borrower shall enter into a lockbox agreement with such
Lender (the "DEPOSITORY LENDER") as Requisite Lenders shall specify
and in form and substance satisfactory to Requisite Lenders, pursuant
to which all funds received by Borrower from any account debtors shall
immediately be deposited into a deposit account established at
Depository Lender pursuant to such agreement for such purpose (the
"LOCKBOX ACCOUNT"). Upon the occurrence of an Event of Default,
Borrower shall direct all account debtors to mail or deliver all
checks or other forms of payment for amounts owing to Borrower in the
ordinary course of Borrower's business to the Lockbox Account. In
addition, Borrower shall hold in trust for Agent and Lenders as
Collateral for Bank all amounts that Borrower receives despite the
directions to make payment to the Lockbox Account, and immediately
deliver such payments to Depository Lender in their original form as
received from the accounts debtor, with proper endorsements for
deposit into the Lockbox Account."
q. AMENDMENT TO COMPLIANCE CERTIFICATE. The form of
Compliance Certificate attached as Exhibit F to the Credit Agreement is
replaced with a new form of Compliance Certificate attached hereto as Annex A.
r. REPRICING OF FACILITIES. The parties have agreed to
reprice the Facilities as follows:
i. Borrower and Parent will perform all
obligations arising in accordance with the Third Amendment Side Letter.
ii. The interest rate applicable to the
Facilities will automatically adjust based on the passage of time, whether or
not there shall exist an Event of Default, as specified in the definition of
"Rate Spread" as modified by this Amendment.
10.
<PAGE> 11
iii. In addition to the amendment fees specified
in Section 8.c. of this Amendment, (A) on the earlier of the Recapitalization
and the First Scheduled Recapitalization Date, Borrower and Parent shall pay to
Agent for the benefit of Lenders a deferred amendment fee of $100,000, and
(B) unless the Recapitalization shall have occurred prior to the First Scheduled
Recapitalization Date, on the earlier of the Recapitalization and the Second
Scheduled Recapitalization Date, Borrower and Parent shall pay to Agent for the
benefit of Lenders an additional deferred amendment fee of $150,000, (all such
amounts in clause (A) and clause (B) above being referred to as the "DEFERRED
AMENDMENT FEE"), such fee to be for the account of each Lender accordance with
its Pro Rata Share. The obligation of Borrower and Parent to pay the Deferred
Amendment Fee shall be joint and several.
s. NO CURE PERIOD FOR ADDITIONAL COVENANTS. Subsection
8.1(d) of the Credit Agreement is hereby amended to add to the sections
referenced therein, reference to Sections 5.18 and 5.19 of the Credit
Agreement.
3. AMENDMENTS TO PARENT GUARANTY.
a. RECAPITALIZATION. In connection with the
Recapitalization, Section 6.14 is added to the Parent Guaranty as follows:
"6.14 RECAPITALIZATION. Parent shall cause the Recapitalization to
occur prior to the Second Scheduled Recapitalization Date."
b. INVESTMENTS AND ACQUISITIONS. Section 7.2(a) is
deleted in its entirety and is replaced as follows:
"(a) Investments in Borrower and Investments in Subsidiaries
existing on the Third Amendment Closing Date."
The figure in Section 7.2(c) is reduced to $50,000. Section 7.2(e) is hereby
deleted. The figure in Section 7.2(f) is reduced to $25,000.
c. EXECUTIVE COMPENSATION. Section 7.4(b) is deleted in
its entirety and replaced with the following:
"(b) Except for the provision of equity incentives described on
Schedule 6.4(b) of the Senior Secured Credit Agreement, Guarantor
shall not, and shall not permit Borrower or any of Borrower's
Subsidiaries to, in any fiscal year pay bonus or other incentive
compensation to its officers which in the aggregate over any fiscal
year exceeds five percent (5%) of the sum of (i) Borrower's EBITDA
and (ii) Borrower's accrued incentive compensation for such officers,
each for the preceding fiscal year. For purposes of the preceding
sentence Borrower's EBITDA shall have the meaning set forth in the
clause (a) of the definition of Senior Interest Coverage Ratio herein."
11.
<PAGE> 12
d. CAPITAL EXPENDITURES. Section 7.5 is hereby deleted
in its entirety and replaced with the following:
"7.5 CAPITAL EXPENDITURES. Borrower shall not, and shall not
permit Parent or any of Borrower's Subsidiaries to, make or incur,
Capital Expenditures during the fiscal years set forth below in excess
of $1,000,000 in any fiscal year. The unused portion of the permitted
Capital Expenditures for the previous fiscal year may not be carried
forward to increase the amount of permitted Capital Expenditures in
any other fiscal year."
e. CAPITAL LEASES. The figure in Section 7.6 is reduced
to $250,000.
f. TRANSACTIONS WITH AFFILIATES. Subsection (e) of
Section 7.8 is deleted in its entirety and is replaced with the following:
"(e) In the ordinary course of and pursuant to the reasonable
requirements of Guarantor's, Borrower's or Borrower's Subsidiaries'
businesses, provided that any such agreement or transaction shall be
approved by Requisite Lenders in their sole and absolute discretion."
g. PAYMENT OF SETTLEMENTS. Section 7.16 is deleted in
its entirety and replaced with the following:
"7.16 PAYMENT OF SETTLEMENTS. Guarantor shall not after the date of
the Third Amendment Closing Date, directly or indirectly, make
payments in respect of claims, actions, suits, proceedings or
investigations involving Guarantor, Borrower or any of Borrower's
Subsidiaries in aggregate amount (including any amounts paid by
Borrower or any of Borrower's Subsidiaries) exceeding (i) $150,000 in
the case of the McGurk helmet liability litigation or (ii) $25,000
with respect to any other claim, action, suit, proceeding or
investigation, except in each case with the written approval of
Requisite Lenders, which approval may be given or withheld in their
sole and absolute discretion."
h. NO CURE PERIOD FOR ADDITIONAL COVENANTS. Subsection
9.1(c) of the Guaranty is hereby amended to add to the sections referenced
therein, reference to Sections 6.13 and 6.14 of the Parent Guaranty. No
reference is made to Section 6.13 in Section 9.1(d) of the Guaranty.
4. AMENDMENTS RELATING TO WARRANTS. The following amendments are
made as of the Third Amendment Closing Date:
a. REDUCTION OF EXERCISE PRICE OF WARRANTS. The Initial
Paribas Warrant, the Initial Indosuez Warrant, the Second Paribas Warrant and
the Second Indosuez Warrant are each amended such that the definition of Stock
Purchase Price is $2.18125, the average closing
12.
<PAGE> 13
price of Parent's Common Stock over the ten trading days preceding and
including the Third Amendment Closing Date, which price shall remain subject to
reduction due to certain issuances of Additional Shares of Common Stock (as
defined therein) and otherwise on the terms set forth therein.
b. CANCELLATION OF LENDER WARRANTS. The Warrants are
cancelled. Each Lender shall return to Parent the originally executed Warrant
issued in its favor on the Closing Date within a reasonable period following
the Third Amendment Closing Date. Each Lender hereby acknowledges that at no
time did the conditions permitting exercise of the Warrants occur and no Lender
claims any rights in connection therewith.
5. LIMITED WAIVER; FULL FORCE AND EFFECT. Subject to the terms
and conditions set forth herein and in reliance upon the representations and
warranties of Borrower and Parent set forth herein and in the Loan Documents,
Agent and Lenders hereby waive compliance with the financial covenants set
forth in Section 7 of the Credit Agreement for any period ending prior to the
date hereof, and the Events of Default under the Credit Agreement and the
Parent Guaranty occurring as a result of Borrower's violations to the extent,
but only to the extent, that Borrower was in violation of such financial
covenants during any period ending September 30, 1995 or earlier. The
amendments and waivers set forth in this Amendment shall be limited precisely
as written and shall not be deemed (a) to be an amendment or waiver of any
other term or condition of the Credit Agreement or the Parent Guaranty, to
prejudice any right or remedy which Agent or Lenders may now have or may have
in the future under or in connection with the Credit Agreement or the Parent
Guaranty or (b) to be a consent to any future amendment or waiver. Except as
expressly amended hereby, the Credit Agreement and Parent Guaranty shall
continue in full force and effect.
6. BORROWER'S AND PARENT'S REPRESENTATIONS AND WARRANTIES. In
order to induce Agent and Lenders to enter into this Amendment and to amend the
Credit Agreement, Borrower and Guarantor each represent and warrant to each
Lender and Agent as follows. Each such representation and warranty shall be
deemed to survive until the full, complete and indefeasible payment and
performance of the Obligations and shall apply anew to each borrowing and each
issuance of a Letter of Credit.
a. CORPORATE POWER AND AUTHORITY. Borrower and Parent
have all requisite corporate power and authority to enter into this Amendment
and to carry out the transactions contemplated by, and perform their respective
obligations under the Credit Agreement and the Parent Guaranty, the Initial
Paribas Warrant, the Second Paribas Warrant, the Initial Indosuez Warrant, and
the Second Indosuez Warrant, each as amended by this Amendment (the "AMENDED
AGREEMENTS"). The Certificate of Incorporation of Parent and the Articles of
Incorporation of Borrower and Bylaws of each of Borrower and Parent have not
been amended since May 29, 1995.
13.
<PAGE> 14
b. AUTHORIZATION OF AGREEMENTS. The execution and
delivery of this Amendment and the performance of the Amended Agreements have
been duly authorized by all necessary corporate action on the part of the
Borrower and Parent, as applicable.
c. NO CONFLICT. The execution and delivery by the
Borrower and Parent of this Amendment and the performance by the Borrower and
Parent of the Amended Agreements do not and will not contravene (i) any law or
regulation binding on or affecting Borrower, Parent or any of their respective
Subsidiaries, (ii) the Certificate of Incorporation of Parent or Articles of
Incorporation of Borrower or Bylaws of any of either of them, (iii) any order,
judgment or decree of any court of other agency of government binding on either
of Borrower, Parent, or any of their respective Subsidiaries or (iv) any
contractual restriction binding on or affecting Borrower, Parent or any of
their respective Subsidiaries.
d. GOVERNMENTAL CONSENTS. The execution and delivery by
Borrower and Parent of this Amendment and the performance by Borrower and
Parent of the Amended Agreements, as applicable, do not and will not require
any authorization or approval of, or other action by, or notice to or filing
with any governmental authority or regulatory body.
e. BINDING OBLIGATION. This Amendment and the Amended
Agreements have been duly executed and delivered by Borrower and Parent and are
the binding obligations of Borrower and Parent, enforceable against them in
accordance with their respective terms, except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, liquidation, moratorium or
other similar laws of general application and equitable principles relating to
or affecting creditors' rights generally.
f. ABSENCE OF DEFAULT AND MODIFICATION OF AGREEMENTS
WITH OTHER CREDITORS. No event has occurred and is continuing or will result
from the consummation of the transactions contemplated by this Amendment that
would constitute an Event of Default as defined in either the Credit Agreement
or the Parent Guaranty. Neither Borrower nor Parent has modified any agreement
with any creditor of Borrower or Parent, other than (i) by this Amendment and
(ii) modifications of agreements with trade creditors, made in the ordinary
course of business.
g. RESTATEMENT OF REPRESENTATIONS AND WARRANTIES IN
AMENDED AGREEMENTS. Borrower with respect to the representations and
warranties set forth in Section 4 of the Credit Agreement and Parent with
respect to the representations and warranties set forth in Section 5 of the
Parent Guaranty each represents and warrants that each of such representations
and warranties are true, correct and complete in all material respects as of
the date of this Amendment and as of the Third Amendment Closing Date (except
to the extent such representations and warranties specifically relate to
another date or as specifically described therein and expressly approved by
Requisite Lenders).
14.
<PAGE> 15
7. LENDERS' REPRESENTATIONS AND WARRANTIES. Each Lender hereby
represents to Borrower, Parent, each other Lender and Agent that it has the
full right and power to amend each of the Amended Documents.
8. CONDITIONS PRECEDENT. This Amendment shall be deemed
effective as of September 30, 1995 (the "THIRD AMENDMENT EFFECTIVE DATE") upon
satisfaction of all of the following conditions precedent (the "THIRD AMENDMENT
CLOSING DATE") prior to January 15, 1996:
a. CORPORATE DOCUMENTS OF BORROWER. Agent and Lenders
shall each have received a certificate of a responsible officer of Borrower as
to the effectiveness of resolutions of the Board of Directors of Borrower
authorizing Borrower to enter into this Amendment and such other corporate
documents as Agent shall reasonably request, all in form and substance
satisfactory to Agent.
b. CORPORATE DOCUMENTS OF PARENT. Agent and Lenders
shall each have received a certificate of a responsible officer of Parent as to
the effectiveness of resolutions of the Board of Directors of Parent
authorizing Parent to enter into this Amendment and such other corporate
documents as Lender shall reasonably request.
c. AMENDMENT FEE. Agent shall have received on behalf
of Lender an amendment fee in the aggregate amount of $50,000.00 such amount to
be for the account of each Lender according to its Pro Rata Share.
d. COST REIMBURSEMENT. All costs incurred by Agent in
connection with the negotiation of this Agreement, Agent and Lender's review of
Borrower, Parent and Borrower's Subsidiaries in connection with the resetting
of the financial and other covenants set forth herein and Borrower's
satisfaction of the conditions precedent to the effectiveness hereof shall have
been paid in full, including, without limitation, the fees and costs of Cooley
Godward Castro Huddleson & Tatum and Lenders' Consultants.
e. UPDATE OF REPRESENTATIONS AND WARRANTIES. Agent and
Lenders shall each have received a certificate of responsible officers of
Borrowers and Parent certifying that the representations and warranties in
Section 4 of the Credit Agreement and Section 5 of the Parent Guaranty continue
to be true and complete in all material respects as of the date hereof after
giving effect to this Amendment (except to the extent such representations and
warranties specifically relate to another date or as specifically described
therein and expressly approved by Requisite Lenders).
f. ENVIRONMENTAL ASSESSMENT. Borrower and Parent shall
have provided to Agent and each Lender such certificates, studies, reports and
plans regarding the environmental status, and plans in respect, of those
premises located in Chicago, Illinois which are the subject of dated as of July
14, 1988 between American National Bank and Trust
15.
<PAGE> 16
Company of Chicago and Parent (previously known as BSN Corp.), all as Agent or
any Lender may request and find satisfactory.
g. HELMET LIABILITY ASSESSMENT. Borrower and Parent
shall have provided to Agent and each Lender such certificates, summaries and
copies of complaints and other documents relating to the possible liabilities
of Parent or any of its existing or prior Subsidiaries in respect of their sale
or refurbishing of sports equipment or otherwise, all as Agent or any Lender
may request and find satisfactory.
h. THIRD AMENDMENT SIDE LETTER. Agent and each Lender
shall have received fully executed originals of the Third Amendment Side Letter
and all agreements and documents contemplated thereby.
i. ADDITIONAL MANAGEMENT INCENTIVES. Incentives shall
have been established whereby key management personnel of Borrower and Parent
receive additional performance based equity compensation and an adjustment of
exercise price and other appropriate terms in existing management stock options
whereby the equity compensation package for all such key personnel provides
appropriate and substantial incentives to cause Borrower and Parent to meet
their operating and financial goals.
j. OTHER DOCUMENTS. Agent and Lenders shall have
received such other documents, information and items from Borrower and Parent
as they shall reasonably request and the same shall be satisfactory to Agent
and Lenders in their sole and absolute discretion.
9. LANDLORD WAIVER AND LANDLORD ESTOPPEL. Borrower shall use its
best efforts to provide to Agent on behalf of Lenders a Landlord Waiver and
Landlord Estoppel in respect of Borrower's facilities in Marina del Rey,
California, within thirty (30) days after the Third Amendment Closing Date.
10. RELEASE AND WAIVER.
a. Each of Borrower and Parent hereby acknowledge and
agree that: (i) it has no claim or cause of action against Agent or any Lender
or any parent, subsidiary or affiliate of Agent or any Lender, or any of their
officers, directors, employees, attorneys or other representatives or agents
(all of which parties being, collectively, "Lenders' Agents") in connection
with the Loan Documents, the loans thereunder or the transactions contemplated
therein and herein; (ii) it has no offset or defense against any of its
respective obligations, indebtedness or contracts in favor of Agent and
Lenders; and (iii) it recognizes that each of Agent and Lenders has heretofore
properly performed and satisfied in a timely manner all of its obligations to
and contracts with Borrower and Parent.
b. Although Agent and Lenders regard their conduct as
proper and do not believe Borrower or Parent to have any claim, cause of
action, offset or defense against Agent
16.
<PAGE> 17
and Lender or any of Lenders' Agents in connection with the Loan Documents, the
loans thereunder or the transactions contemplated therein, Agent and Lenders
wish and Borrower and Parent agree to eliminate any possibility that any past
conditions, acts, omissions, events, circumstances or matters could impair or
otherwise affect any rights, interests, contracts or remedies of Agent and
Lenders. Therefore, Borrower and Parent unconditionally release and waive
(1) any and all liabilities, indebtedness and obligations, whether known or
unknown, of any kind Agent or Lenders or of any of Lenders' Agents to Borrower,
except the obligations remaining to be performed by Agent and Lenders as
expressly stated in the Loan Documents executed by Agent or Lenders; (2) any
legal, equitable or other obligations or duties, whether known or unknown, of
Agent or Lenders or of any of Lenders' Agents to Borrower (and any rights of
Borrower or Parent against Agent or Lenders) besides those expressly stated in
the Credit Agreement and the other Loan Documents; (3) any and all claims under
any oral or implied agreement, obligation or understanding with Agent or any
Lender or any of Lenders' Agents, whether known or unknown, which is different
from or in addition to the express terms of the Credit Agreement or any of the
other Loan Documents; and (4) all other claims, causes of action or defenses of
any kind whatsoever (if any), whether known or unknown, which Borrower might
otherwise have against Agent or Lenders or any of Lenders' Agents, on account
of any condition, act, omission, event, contract, liability, obligation,
indebtedness, claim, cause of action, defense, circumstance or matter of any
kind whatsoever which existed, arose or occurred at any time prior to the
execution and delivery of this Amendment or which could arise concurrently with
the effectiveness of this Amendment.
c. Each of Borrower and Parent agree that it understands
the meaning and effect of Section 1542 of the California Civil Code, which
provides:
Section 1542. Certain Claims Not Affected by General Release. A
general release does not extend to claims which the creditor does not
know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected his
settlement with the debtor.
EACH OF BORROWER AND PARENT AGREE TO ASSUME THE RISK OF ANY AND ALL UNKNOWN,
UNANTICIPATED OR MISUNDERSTOOD DEFENSES, CLAIMS, CAUSES OF ACTION, CONTRACTS,
LIABILITIES, INDEBTEDNESS AND OBLIGATIONS WHICH ARE RELEASED BY THIS AMENDMENT
IN FAVOR OF AGENT, LENDERS AND LENDERS' AGENTS, AND EACH OF BORROWER AND PARENT
HEREBY WAIVE AND RELEASE ALL RIGHTS AND BENEFITS WHICH IT MIGHT OTHERWISE HAVE
UNDER THE AFOREMENTIONED SECTION 1542 OF THE CALIFORNIA CIVIL CODE WITH REGARD
TO THE RELEASE OF SUCH UNKNOWN, UNANTICIPATED OR MISUNDERSTOOD DEFENSES,
CLAIMS, CAUSES OF ACTION, CONTRACTS, LIABILITIES, INDEBTEDNESS AND OBLIGATIONS.
TO THE EXTENT (IF ANY) WHICH ANY SUCH LAWS MAY BE APPLICABLE, EACH OF BORROWER
AND PARENT WAIVE AND RELEASE (TO THE MAXIMUM EXTENT PERMITTED BY LAW) ANY RIGHT
OR DEFENSE WHICH IT MIGHT OTHERWISE HAVE UNDER ANY OTHER LAW OF ANY APPLICABLE
JURISDICTION WHICH MIGHT LIMIT OR
17.
<PAGE> 18
RESTRICT THE EFFECTIVENESS OR SCOPE OF ANY OF ITS WAIVERS OR RELEASES UNDER
THIS AMENDMENT.
11. GUARANTOR CONSENT AND ACKNOWLEDGEMENT. Each party listed on
the signature pages hereto as a "Guarantor" hereby consents to this Amendment
and agrees that its guarantee of the Obligations of the Borrower under the
Credit Agreement shall continue in full force and effect, shall be valid and
enforceable and shall not be impaired or otherwise affected by the execution of
this Amendment or any other document or instrument delivered in connection
herewith.
12. FULL FORCE AND EFFECT; ENTIRE AGREEMENT. Except to the extent
expressly provided in this Amendment, the terms and conditions of the Credit
Agreement and the Parent Guaranty shall remain in full force and effect. This
Amendment, the documents referenced herein, the documents contemplated in the
Third Amendment Side Letter and the other Loan Documents constitute and contain
the entire agreement of the parties hereto and supersede any and all prior
agreements, negotiations, correspondence, understandings and communications
between the parties, whether written or oral, respecting the subject matter
hereof. The parties hereto further agree that the aforementioned documents
comprise the entire agreement of the parties thereto and supersede any and all
prior agreements, negotiations, correspondence, understandings and other
communications between the parties thereto, whether written or oral respecting
the extension of credit by Lender to Borrower and/or its Affiliates.
13. MISCELLANEOUS.
a. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER LOAN DOCUMENTS. On and after the Third Amendment Effective Date,
each reference in the Credit Agreement, the Parent Guaranty, the Initial
Paribas Warrant, the Initial Indosuez Warrant, or the Second Paribas Warrant or
the Second Indosuez Warrant to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import referring to the Credit Agreement, the Parent
Guaranty or any of such warrants and each reference in the Loan Documents to
the "Credit Agreement," the "Parent Guaranty," the "Initial Paribas Warrant,"
the "Initial Indosuez Warrant," or the "Second Paribas Warrant" or the "Second
Indosuez Warrant," "thereunder," "thereof" or words of like import referring to
the Credit Agreement, the Parent Guaranty or any of such warrants shall mean
and be a reference to the Amended Agreements.
b. FEES AND EXPENSES. Borrower acknowledges that all
costs, fees and expenses as described in Section 10.1 of the Credit Agreement
incurred by the Agent, its counsel and Lenders' Consultants with respect to
this Amendment and the documents and transactions contemplated hereby shall be
for the account of the Borrower.
c. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
18.
<PAGE> 19
d. APPLICABLE LAW. THIS AMENDMENT SHALL BE GOVERNED BY,
AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF
THE STATE OF CALIFORNIA, WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES.
e. COUNTERPARTS. This Amendment may be executed in
counterparts, each of which when so executed shall be deemed an original, but
all such counterparts together shall constitute but one and the same
instrument; signature pages may be detached from multiple separate counterparts
and attached to a single counterpart so that all signature pages are physically
attached to the same document.
[INTENTIONALLY BLANK]
19.
<PAGE> 20
WITNESS the due execution hereof by the respective duly authorized
officer of the undersigned as of the date first written above.
BORROWER AURORA ELECTRONICS GROUP, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
PARENT AURORA ELECTRONICS, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
AGENT BANQUE PARIBAS
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
GUARANTOR AURORA ELECTRONICS, INC.
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
AURORA ELECTRONICS LIMITED
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
20.
<PAGE> 1
AURORA ELECTRONICS, INC. AND SUBSIDIARIES Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1995 September 30, 1994
------------------------ ------------------------
Primary Fully Diluted Primary Fully Diluted
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Net income (loss) $(15,030) $(15,030) $(6,518) $(6,518)
Add: Interest expense, net of
income tax, on debenture due
2001 and Promissory Notes
due 1997 -- -- -- --
-------- -------- ------- -------
Adjusted net earnings (loss) $(15,030) $(15,030) $(6,518) $(6,518)
======== ======== ======= =======
Adjusted Number of Common Shares
Weighted average shares
outstanding 7,445 7,445 7,110 7,110
Incremental shares for exercise
of stock options and warrants
and common stock issuable 934 934 381 381
Weighted average shares issuable
upon conversion of Debenture due
2001 and Promissory Notes due
1997 -- -- -- --
-------- ------ ------- --------
Adjusted number of common
shares 8,379 8,379 7,491 7,491
======== ======= ======= ========
Net earnings (loss) per common
shares $ (1.79) $ (1.79) $(0.87) $ (0.87)
======== ======== ====== ========
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8 File No. 33-62102,
Form S-8 File No. 33-62104, Form S-8 File No. 33-79426 and Form S-3 File
No. 33-73758.
Orange County, California
January 12, 1996
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 15,828
<ALLOWANCES> 1,414
<INVENTORY> 4,021
<CURRENT-ASSETS> 21,978
<PP&E> 5,752
<DEPRECIATION> 2,756
<TOTAL-ASSETS> 80,716
<CURRENT-LIABILITIES> 21,782
<BONDS> 44,092
0
0
<COMMON> 242
<OTHER-SE> 12,096
<TOTAL-LIABILITY-AND-EQUITY> 80,716
<SALES> 141,852
<TOTAL-REVENUES> 141,852
<CGS> 107,270
<TOTAL-COSTS> 107,270
<OTHER-EXPENSES> 42,770
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,522
<INCOME-PRETAX> (13,710)
<INCOME-TAX> 1,320
<INCOME-CONTINUING> (15,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,030)
<EPS-PRIMARY> (1.79)
<EPS-DILUTED> (1.79)
</TABLE>
