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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-9725
AURORA ELECTRONICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-1539534
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9477 WAPLES STREET, SUITE 150, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 552-1213.
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months ( or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicated below is the number of shares outstanding of each class of the
registrant's common stock, as of August 14, 1997:
Title of Each Class of Common Stock Number Outstanding
Common Stock, $0.03 par value 6,072,389 shares
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INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 29, 1997 and September 30, 1996 3
Consolidated Statements of Operations for the Three Months and the Nine Months
Ended June 29, 1997 and June 30, 1996 4
Consolidated Statements of Cash Flows for the Nine Months
Ended June 29, 1997 and June 30, 1996 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. OTHER INFORMATION 9
Signatures 10
Index to Exhibits 11
</TABLE>
2
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AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
June 29, September 30,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 831 $ 1,537
Trade receivables, less allowance for doubtful
accounts of $1,131 and $1,209 7,308 8,629
Inventories 4,703 4,098
Deferred income taxes 500 500
Other current assets 464 716
------------ ------------
Total current assets 13,806 15,480
Property, plant and equipment, net 6,078 4,811
Intangible and other assets 31,957 32,497
------------ ------------
Total assets $ 51,841 $ 52,788
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,220 $ 1,974
Accounts payable 9,610 8,465
Accrued compensation 1,292 1,912
Accrued interest 555 433
Current portion of reserve for discontinued operations 702 702
Other current liabilities 1,106 1,384
------------ ------------
Total current liabilities 14,485 14,870
Reserve for discontinued operations 1,936 2,366
Long-term debt 34,695 25,842
Redeemable convertible preferred stock 43,500 41,400
Stockholders' equity:
Preferred stock, 1,000 shares authorized, none issued --
Common stock, 10,486 shares issued 325 315
Additional paid-in capital 62,461 61,679
Accumulated deficit (88,922) (77,045)
Treasury stock, at cost, 4,743 shares (16,639) (16,639)
------------ ------------
Total stockholders' equity (42,775) (31,690)
------------ ------------
Total Liabilities and Stockholders' Equity $ 51,841 $ 52,788
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues $ 17,209 $ 20,767 $ 52,391 $ 78,938
Cost of sales 13,978 16,141 41,475 59,010
------------- ------------- ------------- -------------
Gross profit 3,231 4,626 10,916 19,928
Selling, general and administrative expenses 6,216 7,047 17,065 20,491
Amortization of intangible assets 275 366 776 1,097
------------- ------------- ------------- -------------
Operating loss (3,260) (2,787) (6,925) (1,660)
Interest expense (1,039) (738) (2,989) (5,474)
Other income (expense), net 191 (4) 179 (4)
------------- ------------- ------------- -------------
Loss before provision for income taxes (4,108) (3,529) (9,735) (7,138)
Provision for income taxes (76) 33 3,373
------------- ------------- ------------- -------------
Net loss $( 4,108) $( 3,453) $( 9,768) $( 10,511)
============= ============= ============= =============
Dividends on preferred stock (700) (700) (2,100) (700)
------------- ------------- ------------- -------------
Net loss available for common stockholders $( 4,808) $( 4,153) $( 11,868) $( 11,211)
============= ============= ============= =============
Net loss per share of common stock $ (.71) $ (0.68) $ (1.79) $ (1.50)
============= ============= ============= =============
Weighted average number of common and
common equivalent shares 6,790 6,087 6,644 7,461
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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AURORA ELECTRONICS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 29, 1997 June 30, 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss (9,768) (10,511)
Adjustments to reconcile net loss to net cash flows from continuing operations:
Depreciation and amortization 1,203 3,655
Loss (Gain) on disposal of equipment (190) 5
Changes in assets and liabilities, net of acquisitions:
Trade receivables, inventories and other assets 968 6,994
Accounts payable and other liabilities (506) 128
Accrued interest and income taxes deferred, receivable or payable 122 71
------------ ------------
Net cash flows from continuing operations (8,171) 3,042
Net cash flows from discontinued operations (430) (804)
------------ ------------
Net cash flows from operating activities (8,601) 2,238
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other assets (435)
Acquisition of property, plant and equipment (190) (1,518)
------------ ------------
Net cash flows from investing activities (625) (1,518)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (62) (19,382)
Sale of redeemable preferred shares 37,746
Purchases of treasury stock (12,271)
Changes in borrowings under line of credit 8,582 (6,818)
------------ ------------
Net cash flows from financing activities 8,520 (725)
------------ ------------
Net change in cash and cash equivalents (706) (5)
Cash and cash equivalents at beginning of period 1,537 81
------------ ------------
Cash and cash equivalents at end of period 831 76
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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AURORA ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except share data)
NOTE A. BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and related
interim statements of operations and cash flows include all adjustments
(consisting only of normal recurring items) necessary for their fair
presentation. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses. Actual results could differ from those estimates.
Interim results are not necessarily indicative of results for a full year.
Certain information in footnote disclosure normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. The information included
in this Form 10-Q should be read in conjunction with Management's Discussion and
Analysis and financial statements and notes thereto included in the Aurora
Electronics, Inc. 1996 Annual Report on Form 10-K.
NOTE B. EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock is based upon the weighted average number of
common and common equivalent shares outstanding, less cumulative dividends to
holders of the Company's preferred stock. Outstanding stock options and warrants
are treated under the treasury stock method as common stock equivalents when
dilution results from their assumed exercise. The Company's Redeemable,
Convertible Preferred Stock, 7-3/4% Convertible Subordinated Debentures due
April 15, 2001, and 7% Subordinated Convertible Promissory Notes due September
30, 1997 were not common stock equivalents at the time of issuance and are
therefore not included in the calculation of primary earnings per share. Fully
diluted net earnings per share is not presented as it is anti-dilutive.
NOTE C. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 29, 1997 September 30, 1996
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<S> <C> <C>
Spare and repair parts $ 362 $ 395
Work in process 74 59
Finished goods and purchased product 4,267 3,644
----- -----
Total inventories $4,703 $4,098
====== ======
</TABLE>
NOTE D. WARRANTS
The Company's largest shareholder has agreed in principle to a limited guarantee
of $12,000,000 for use as additional collateral to support borrowings under its
Credit Agreement dated March 29, 1996 (the "Credit Agreement") and is currently
in discussions with its lenders to receive a waiver of noncompliance and
amendments to certain covenants related to its lending facilities. In return,
the Company granted this shareholder and its affiliates warrants that if fully
vested would give the shareholder and its affiliates the right to buy a number
of shares equal to the indebtedness guaranteed divided by the lower of the
Common Stock price on the date the guarantees were initially issued or on
certain anniversary dates. The warrants vest 20% on issuance, 20% on June 1,
1997, 20% on March 1, 1998 and 100% if at any time the bank calls the
guarantees. The guarantees will be released, and unvested warrants will expire,
if and when the Company returns to full compliance with the original financial
covenants under the Credit Agreement.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(In thousands)
OVERVIEW
Aurora Electronics, Inc. (the "Company" or "Aurora") operates in one business
segment providing spare parts distribution and asset recovery services to major
personal computer manufacturers and field service organizations. Aurora operates
facilities in the United States, Canada, United Kingdom and the Netherlands.
OUTLOOK AND UNCERTAINTIES
Certain information in this Quarterly Report on Form 10-Q may contain
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact are "forward-looking statements" for purposes of the provisions,
including any projections of earnings, revenues, cash flows, capital
requirements or other financial items, any statements of the plans and
objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions underlying any of
the foregoing. Although the Company believes that the expectations reflected in
any forward-looking statements are reasonable, it can give no assurance that
such expectations or any of its forward-looking statements will prove to be
correct, and actual results could differ materially from those projected or
assumed in the Company's forward looking statements. The Company's future
financial condition and results, as well as any forward-looking statements, are
subject to inherent risks and uncertainties, including, without limitation,
potential limitations on the Company's ability to pursue its business strategy,
significant competition, limitations arising from the Company's substantial
indebtedness and operating losses, cyclicality and dependence on key personnel.
Additional information concerning these and other issues is contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996, a copy of which may be obtained from the Company upon request.
COMPARATIVE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 29, 1997 AND
JUNE 30, 1996
Net revenues for the third quarter of fiscal 1997 were down 17.1% at $17,209 as
compared to $20,767 for the corresponding quarter of the prior fiscal year. The
Company's decline in revenues was due to the significant decline in revenues
from asset recovery services ($1,026 or 17.1%) and spare parts distribution
($2,456 or 18.0%). The decline of revenues in asset recovery services is due
primarily to a substantial industry wide decline in selling prices in dynamic
random access memory ("DRAM") and other integrated circuits. The decline in
revenues from spare parts distribution was due primarily to the decrease in
orders from a major customer.
Gross profit for the third quarter of fiscal 1997 was $3,231 (18.8% of net
revenues) as compared to $4,626 in gross profit (22.3% of net revenues) for the
third quarter of fiscal 1996. The decrease in gross profit was due primarily to
the decline in revenues from asset recovery service and spare parts distribution
mentioned above.
Selling, general and administrative ("SG&A") expenses for the third quarter of
fiscal 1997 were $6,216 (36.1% of net revenues) as compared to $7,047 (33.9% of
net revenues) for the third quarter of fiscal 1996. The decrease in the amount
of these expenses was primarily due to efficiencies obtained in the merging of
the Company's formerly separate divisions and the Company's cost reduction
programs. The increase as a percent of revenues was due to the decline in
revenues noted above.
Amortization expense for the third quarter of fiscal 1997 was $275 as compared
to $366 for the third quarter of fiscal 1996. The decrease was due to the
write-off in the fourth quarter of fiscal 1996 of goodwill related to the
acquisition of Micro-C Corporation.
Net interest expense for the third quarter of fiscal 1997 was $1,039 (6.0% of
net revenues) as compared to $738 (3.6% of net revenues) for the third quarter
of fiscal 1996. The increase in interest expense is due to the higher debt
levels .
There was no provision for income taxes for the third quarter of fiscal 1997 as
compared to a credit of $76 for the third quarter of fiscal 1996.
Net loss available for common stockholders for the quarter was $4,808 as
compared to net loss of $4,153 for the third quarter of fiscal 1996. The losses
in the current quarter and for the same quarter of the prior year are the result
of operating losses from asset recovery services and spare parts distribution.
COMPARATIVE RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 29, 1997 AND
JUNE 30, 1996
Net revenues for the first three quarters of fiscal 1997 were $52,391 as
compared to $78,938 for the first three quarters of fiscal 1996. The Company's
decline in revenues was due to the significant decline in revenues from asset
recovery services ($11,989 or 44.6%) and spare parts distribution ($14,913 or
30.6%). The decline of revenues in asset recovery services is due primarily to a
substantial industry wide decline in selling prices in dynamic random access
memory and other integrated circuits. The decline in revenues from spare parts
distribution was due primarily to the decrease in orders from a major customer.
Gross profit for the first three quarters of fiscal 1997 was $10,916 (20.8% of
net revenues) as compared to $19,928 (25.2% of net revenues) for the comparable
fiscal 1996 period. The decrease in gross profit was due primarily to the
decrease in asset recovery services of approximately $3,050 in gross profit as
compared to the same period a year ago due to the decline in the DRAM prices as
discussed above and $6,405 due to the decline in revenue from the spare parts
distribution business.
SG&A expenses for the first three quarters of fiscal 1997 were $17,065 (32.6% of
net revenues) as compared to $20,491 (26.0% of net revenues) for the comparable
fiscal 1996 period. The decrease in the amount of these expenses was primarily
due to efficiencies obtained in the merging of the Company's formerly separate
divisions and the Company's cost reduction programs. The increase of the SG&A
expenses as a percentage of revenue was due to the decline in revenue as
discussed above.
Amortization expense for the first three quarters of fiscal 1997 was $776 (1.5%
of net revenues) as compared to $1,097 (1.4% of net revenues) for the comparable
fiscal 1996 period. The decrease was due to the write-off in the fourth quarter
of fiscal 1996 of goodwill related to the acquisition of Micro-C Corporation.
Net interest expense for the first three quarters of fiscal 1997 was $2,989
(5.7% of net revenues) as compared to $5,474 (6.9% of net revenues) for the
comparable fiscal 1996 period. The decrease in interest expense is due to the
reduced debt levels which resulted from the Recapitalization of the Company
completed in the second quarter of the 1996 fiscal year. The interest expense
for fiscal 1996 includes approximately $2,242 of one-time charges related to
the early payment of indebtedness in connection with the Recapitalization.
7
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Provision for income taxes for the first three quarters of fiscal 1997 was $33
(0.1% of net revenues) as compared to $3,373 (4.3% of net revenues) for the
comparable fiscal 1996 period. The fiscal 1996 provision includes the increase
of the deferred income tax valuation allowance in the amount of $3,652 due to
management's determination that the deferred tax asset will not be fully
realized. Management reached this conclusion as a result of the limitation in
the utilization of the Company's net operating loss carryforwards caused by the
change of ownership pursuant to the Recapitalization.
Net loss for the first three quarters of fiscal 1997 was $9,768 as compared to
net loss of $10,511 for the comparable fiscal 1996 period. The loss in the first
three quarters are the result of operating losses from asset recovery services
and spare parts distribution. The loss in fiscal 1996 was partly attributable to
approximately $6,620 of one-time charges incurred in the second quarter of
fiscal 1996 due to the Recapitalization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary requirements for capital are directly related to its
levels of accounts receivable, inventories, additions to its property and
equipment and required debt principal payments. The Company's working capital
deficit was $579 as of June 29, 1997 compared to working capital of $610 as of
September 30, 1996. The primary reason for the working capital deficit is the
negative cash flow from operating losses.
As of June 29, 1997, the Company was not in compliance with certain financial
covenants under the Credit Agreement with its banks. Management is currently in
discussions with its lenders to amend the financial covenants of the Credit
Agreement and to allow the Company to continue to use its credit facilities.
Based upon the anticipated capital infusion from its major shareholder
discussed below, the Company believes that the default will be waived and that
the financial covenants will be amended so that the Company will be in
compliance and that the credit facilities will continue to be available.
The major shareholder of the Company has provided $12 million of additional
collateral for the credit facilities in the form of a limited guarantee. In
consideration for the guarantee the Company issued warrants to the shareholder
to buy additional shares of Common Stock of the Company. The guarantees would be
released if and when the Company returns to full compliance with the original
financial covenants under the Credit Agreement (see Note D to the Consolidated
Financial Statements).
The major shareholder has agreed to invest an additional $2.5 million in
convertible preferred stock. Definitive documents are being drafted and the
transaction is expected to close in the current month (August 1997). Management
believes existing cash on hand, funds generated from operations, funds available
under its credit facilities and anticipated additional capital investment will
be sufficient to meet the operating requirements for the next twelve months.
Other than the funds for the remaining discontinued operations, the Company had
no material capital commitments at June 29, 1997.
8
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Inapplicable.
ITEM 2. CHANGES IN SECURITIES
Inapplicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Inapplicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable.
ITEM 5. OTHER INFORMATION
Inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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Item Page
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(a)(1) Exhibit 11 - Computation of Per Share Loss 12
(a)(2) Exhibit 27 - Financial Data Schedule 13
</TABLE>
9
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
AURORA ELECTRONICS, INC.
(Registrant)
Date August 14, 1997 By: /s/ F. Wayne Withers,
--------------- ---------------------
Senior Vice President and
Chief Financial Officer
(Principal Accounting and Financial Officer)
10
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INDEX TO EXHIBITS
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<CAPTION>
Item Description of Exhibits Page
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Exhibit 11 Computation of Per Share Earnings 12
Exhibit 27 Financial Data Schedule - Article 5 of Regulation S-X 13
</TABLE>
11
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Exhibit 11
AURORA ELECTRONICS, INC. AND SUBSIDIARIES
COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------ -----------------
June 29, 1997 June 30, 1996 June 29, 1997 June 30, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss available to common stockholders $ (4,808) $ (4,153) $ (11,868) $ (11,211)
============= ============= ============= =============
ADJUSTED NUMBER OF COMMON SHARES
Weighted average shares outstanding 6,072 5,702 5,926 7,552
Incremental shares for exercise of stock
options and warrants and common stock
issuable 718 595 718 595
------------- ------------- ------------- -------------
Adjusted number of common shares 6,690 6,297 6,644 8,147
============= ============= ============= =============
Net loss per common share $ (0.61) $ (1.14) $ (1.79) $ (0.87)
============= ============= ============= =============
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-29-1997
<CASH> 831
<SECURITIES> 0
<RECEIVABLES> 8,439
<ALLOWANCES> 1,131
<INVENTORY> 4,703
<CURRENT-ASSETS> 13,806
<PP&E> 10,759
<DEPRECIATION> 4,681
<TOTAL-ASSETS> 51,841
<CURRENT-LIABILITIES> 14,485
<BONDS> 0
43,850
0
<COMMON> 325
<OTHER-SE> (43,100)
<TOTAL-LIABILITY-AND-EQUITY> 51,841
<SALES> 17,209
<TOTAL-REVENUES> 17,209
<CGS> 13,978
<TOTAL-COSTS> 20,469
<OTHER-EXPENSES> 191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,039
<INCOME-PRETAX> (4,108)
<INCOME-TAX> (41)
<INCOME-CONTINUING> (4,108)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,108)
<EPS-PRIMARY> (0.79)
<EPS-DILUTED> (.71)
</TABLE>
