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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 April 2, 1994
---------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-13941
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3525565
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16215 Alton Parkway
Irvine, California 92718
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (714) 727-4141
_________________
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 _
There were 32,327,750 shares of the registrant's Common Stock, par
value $.01 per share, outstanding on April 29, 1994.
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<PAGE>
AST RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at April 2, 1994 (Unaudited)
and July 3, 1993 3
Consolidated Statements of Income
(Unaudited) for the three months and
nine months ended April 2, 1994 and
April 3, 1993 4
Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
April 2, 1994 and April 3, 1993 5-6
Notes to Consolidated Financial
Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
</TABLE>
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
April 2, July 3,
1994 1993
(In thousands, except share amounts) (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 151,880 $ 121,600
Accounts receivable, net of allowance
for doubtful accounts of $18,743 at
April 2, 1994 and $11,671 at July 3, 1993 342,209 236,020
Inventories 341,878 342,307
Deferred income taxes 41,273 46,058
Other current assets 10,811 15,230
- -----------------------------------------------------------------------------------------------------------------
Total current assets 888,051 761,215
Property and equipment 157,407 134,422
Accumulated depreciation and amortization (52,712) (39,500)
- -----------------------------------------------------------------------------------------------------------------
Net property and equipment 104,695 94,922
Other assets 42,342 30,022
- -----------------------------------------------------------------------------------------------------------------
$ 1,035,088 $ 886,159
=================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 50,000 $ 59,217
Accounts payable 215,460 157,996
Accrued salaries, wages and employee benefits 30,292 19,042
Other accrued liabilities 97,176 178,835
Income taxes payable 43,004 44,832
Current portion of long-term debt 362 247
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 436,294 460,169
Long-term debt 212,522 92,258
Other non-current liabilities 17,006 14,926
Contingencies
Shareholders' equity:
Common stock, par value $.01; 70,000,000
shares authorized, 32,294,000 shares
issued and outstanding at April 2, 1994,
and 31,579,115 shares at July 3, 1993 323 316
Additional capital 140,858 129,784
Retained earnings 228,085 188,706
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 369,266 318,806
- ----------------------------------------------------------------------------------------------------------------
$ 1,035,088 $ 886,159
================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
--------------------- -----------------------
April 2, April 3, April 2, April 3,
(In thousands, except per share amounts) 1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 591,349 $ 370,251 $1,782,769 $1,002,941
Cost of sales 490,243 298,430 1,481,197 789,921
- -----------------------------------------------------------------------------------------------------------------------
Gross profit 101,106 71,821 301,572 213,020
Selling and marketing expenses 50,031 35,200 145,124 103,494
General and administrative expenses 19,968 12,435 57,256 36,922
Engineering and development expenses 9,579 8,368 30,226 24,487
- -----------------------------------------------------------------------------------------------------------------------
Total operating expenses 79,578 56,003 232,606 164,903
- -----------------------------------------------------------------------------------------------------------------------
Operating income 21,528 15,818 68,966 48,117
Interest income 625 688 1,252 3,002
Interest expense (2,881) (361) (7,067) (813)
Other income (expense), net 750 (94) (3,485) (1,815)
- -----------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 20,022 16,051 59,666 48,491
Provision for income taxes 6,808 5,006 20,287 15,224
- -----------------------------------------------------------------------------------------------------------------------
Net income $ 13,214 $ 11,045 $ 39,379 $ 33,267
=======================================================================================================================
Net income per share:
Primary $ .40 $ .35 $ 1.21 $ 1.05
Fully diluted $ .38 $ .35 $ 1.18 $ 1.04
======================================================================================================================
Weighted average common and common
equivalent shares outstanding:
Primary 33,080 32,010 32,512 31,820
Fully diluted 37,179 32,011 34,238 31,856
======================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended
---------------------------
April 2, April 3,
(In thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $1,666,651 $ 942,266
Cash paid to suppliers and employees (1,697,421) (985,382)
Interest received 1,358 3,982
Interest paid (2,668) (860)
Income tax refunds received 1,192 -
Income taxes paid (13,305) (12,070)
Other cash received (paid) 888 (6,652)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (43,305) (58,716)
Cash flows from investing activities:
Purchases of short-term investments - (35,155)
Proceeds from short-term investments - 87,986
Payment related to Tandy/GRiD acquisition (15,000) -
Purchases of capital equipment (20,902) (14,724)
Proceeds from disposition of capital equipment 1,169 655
Purchases of other assets (758) (336)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (35,491) 38,426
Cash flows from financing activities:
Short-term borrowings, net (9,203) 47,990
Repayment of long-term debt (136) (551)
Proceeds from issuance of long-term debt, net 107,974 -
Proceeds from issuance of common stock 8,991 4,200
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 107,626 51,639
Effect of exchange rate changes on cash and cash equivalents 1,450 2,536
- ----------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 30,280 33,885
Cash and cash equivalents at beginning of period 121,600 87,874
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 151,880 $ 121,759
======================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
RECONCILIATION OF NET INCOME TO NET CASH USED IN OPERATING ACTIVITIES:
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Nine Months Ended
---------------------------
April 2, April 3,
(In thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 39,379 $ 33,267
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 17,818 9,274
Provision for deferred income taxes 104 4,005
Change in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable (108,440) (60,675)
Inventories 5,643 (70,373)
Other current assets 8,349 312
Accounts payable and accrued expenses 32,831 30,245
Income taxes payable (1,741) (4,990)
Other current liabilities (40,578) 4,748
Exchange loss 3,330 (4,529)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $(43,305) $(58,716)
======================================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
The Company purchased certain assets relating to Tandy/GRiD
France's personal computer operations effective September 1, 1993.
In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $ 10,171 -
Note payable (6,720) -
- ---------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ 3,451 -
=====================================================================================================================
Tax benefit of employee stock options $ 1,823 $ 3,927
=====================================================================================================================
</TABLE>
See accompanying notes.
<PAGE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
April 2, 1994
Basis of Presentation
The accompanying consolidated financial statements have been prepared by
the Company without audit (except for the balance sheet information as of July
3, 1993) in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation have been included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's 1993 Annual
Report. The results of operations for the three and nine month periods ended
April 2, 1994 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended July 3, 1993.
Fiscal Quarter
The Company operates within a conventional 52/53 week accounting fiscal
year. Fiscal 1994 represents a 52 week fiscal year, while fiscal 1993
represented a 53 week fiscal year and, as a result, the first nine months of
fiscal 1994 included 39 weeks compared to 40 weeks for the comparable prior
year period. However, the third quarter of fiscal 1994 and 1993 both
included 13 weeks.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. For the
nine-month period ended April 2, 1994, the estimated rate is less than the
U.S. statutory rate primarily due to estimates of the proportion of the
Company's fiscal 1994 consolidated income which will be earned in lower rate
foreign tax jurisdictions. Differences between the estimated effective tax
rate and the Company's actual effective tax rate could result from changes in
the mix of earnings in the various tax jurisdictions and are recognized when
known.
Acquisitions and Restructuring
Effective June 30, 1993, the Company purchased certain assets and assumed
certain liabilities utilized in connection with Tandy Corporation's ("Tandy")
personal computer manufacturing operations and the GRiD North American and
European sales divisions, excluding Tandy/GRiD France. Effective September 1,
1993, the Company purchased certain assets and assumed certain liabilities of
Tandy/GRiD France. The combined purchase price included $15 million in cash
and a three-year promissory note in the principal amount of $96.7 million.
The acquisitions have been accounted for by the purchase method of
accounting, and the net assets are included in the Company's consolidated
balance sheets based upon their estimated fair values at the transactions'
effective dates. The Company's consolidated statements of income include
the revenues and expenses of the acquired businesses subsequent to the
transactions' effective dates. The excess of the purchase price over the
estimated fair value of the net assets acquired of $20.5 million is being
amortized on a straight line basis over 10 years. The purchase price
allocations are based on preliminary estimates of the fair value of the
net assets acquired and are subject to adjustment as additional information
becomes available during fiscal 1994. The Company expects to conclude this
assessment in the fourth quarter which could result in an increase in the
$20.5 million.
<PAGE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
APRIL 2, 1994
In connection with the Company's acquisition of Tandy Corporation's
personal computer manufacturing and engineering operations and GRiD North
American and European sales and marketing operations, the Company recorded a
pretax restructuring charge of $125 million in the fourth quarter of fiscal
1993. The charge was comprised of asset write-downs of $68 million and
accruals of estimated future cash expenditures of $57 million. The charge,
which was incurred as a result of the Tandy/GRiD acquisition and restructuring
plan, reflects estimated expenses to combine and restructure the Company's
existing manufacturing capacity, as well as its marketing, engineering,
distribution, sales, and service operations. Also included within the
restructuring charge were inventory valuation adjustments necessary to
realign existing AST product lines and to curtail production of certain
AST product offerings as a result of the newly acquired Tandy/GRiD product
offerings.
During the first nine months of fiscal 1994, the Company substantially
completed its product realignment strategy and in November 1993, the Company
announced its plans regarding realignment of its worldwide manufacturing,
engineering and service operations and restructuring of its European
operations which is expected to be completed within the next six months. In
the third fiscal quarter, the Company began limited product reconfiguration
activities within its new Limerick, Ireland manufacturing facility. Also,
as part of the Company's previously announced restructuring plan, the Company
began the centralization of its European, African and Middle Eastern
distribution and European service and support operations in Limerick,
Ireland. The Company's Scotland facility, which was acquired as part of the
Company's purchase of Tandy Corporation's personal computer operations, is
scheduled to terminate operations during the fourth fiscal 1994 quarter.
The Company intends to complete the shift of a majority of its USA desktop
computer production from Fountain Valley, California to Fort Worth, Texas
by the end of the fiscal year. At April 2, 1994, $43.4 million of the
original $125 million restructuring charge remains on the Company's
consolidated balance sheet which the Company believes should be adequate to
allow for the completion of its restructuring plan. The Company anticipates
that the majority of the remaining restructuring related expenses will be
incurred during the fourth quarter of fiscal 1994.
Deferred Grants
During fiscal 1994, the Company secured various grants from the Industrial
Development Authority of the Republic of Ireland. These grants include
employment, training, and capital grants and extend through December 1996. At
April 2, 1994, approximately $2.1 million in grant funds have been received
and are reflected as deferred credits on the Company's consolidated balance
sheet. The Company has a ten year contingent liability to repay, in whole or
in part, grants received under certain circumstances pursuant to the Capital
and Employment Grant Agreements which began February 1994. In addition, the
Company has a $1.4 million ten year contingent liability which began November
1993 and is payable in the event that the Company should terminate operations
in Ireland.
Contingencies
The Internal Revenue Service (IRS) has completed its examination of the
Company's federal income tax returns for the years ended June 30, 1987 and
1988. As a result of this examination, the IRS has proposed adjustments to
the Company's federal tax liabilities for such years of approximately $8.3
million, excluding interest. The majority of such proposed adjustments relate
to the allocation of income between the Company and its foreign manufacturing
and sales subsidiaries. Management believes that its position has substantial
merit and intends to vigorously contest these proposed adjustments.
Furthermore, management believes that any liability that may result upon the
final resolution of this matter will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
<PAGE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
April 2, 1994
The Company was named as defendant or co-defendant, in most cases, along
with other personal computer manufacturers, including IBM, AT&T, Unisys,
Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita,
in eleven similar lawsuits each of which alleges as a factual basis the
occurrence of carpal tunnel syndrome or repetitive stress injuries, which are
being alleged with increasing frequency as a result of the use of various
computer products. The Company may be named in additional suits, but it is
impossible to predict how many may be filed.
The Company is also subject to other legal proceedings and claims which
arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
Per Share Information
Primary earnings per common share have been computed based upon the
weighted average number of common and common equivalent shares outstanding.
Common equivalent shares result from the assumed exercise of outstanding stock
options that have a dilutive effect when applying the treasury stock method.
The fully diluted per share calculation assumes, in addition to the above, (i)
that the Company's Liquid Yield Option Notes were converted from the date of
issuance with earnings being increased for interest expense, net of taxes,
that would not have been incurred had conversion taken place, and (ii) the
potential additional dilutive effect of stock options.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
April 2, July 3,
(In thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 121,666 $ 146,565
Work in process 46,784 30,890
Finished goods 173,428 164,852
- ----------------------------------------------------------------------------------------------------
$ 341,878 $ 342,307
====================================================================================================
</TABLE>
Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
April 2, July 3,
(In thousands) 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Liquid Yield Option Notes (zero coupon convertible
subordinated notes) due 2013, less original issue
discount of $203,266, 5.25% yield to maturity $ 111,734 $ -
Promissory note payable, interest due annually
at initial rate of 3.75%, principal due July 1996 96,720 90,000
Other notes payable due in various installments
through April 2002 4,430 2,505
- ----------------------------------------------------------------------------------------------------
212,884 92,505
Less current portion of long-term debt (362) (247)
- ----------------------------------------------------------------------------------------------------
Long-term debt $ 212,522 $ 92,258
====================================================================================================
</TABLE>
<PAGE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
April 2, 1994
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield Option Notes (LYONs) due December 14, 2013. The LYONS are zero coupon
convertible subordinated notes which were sold at a significant discount to
par value with a yield to maturity of 5.25% and a total value at maturity of
$315 million. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. The holder of a LYON may require the Company to
purchase its LYONs on December 14, 1998, December 14, 2003 and December 14,
2008 (the "Purchase Dates"), and such payments may reduce the liquidity of the
Company. However, the Company may, subject to certain exceptions, elect to
pay the purchase price on any of the three Purchase Dates in cash or shares of
common stock or any combination thereof.
Total proceeds received from the sale of the LYONs were $111.7 million and
have been utilized for working capital, repayment of bank borrowings under its
revolving credit facilities, new product development, and other general
corporate purposes.
In connection with the Tandy acquisition, the Company issued a $96.7
million promissory note to Tandy Corporation which is due on July 11, 1996.
Upon maturity of the note, up to fifty percent of the initial principal amount
of the promissory note may be converted, at the option of the Company, into
common stock of the Company based upon its then fair market value, as defined
in the note. Interest is payable annually at an initial rate of 3.75% per
annum, adjusted once each year to the lower of either 5% or the three month
rate within the meaning of Section 1274(d)(2) of the Internal Revenue Code of
1986. There are no sinking fund requirements. The note also requires the
Company to maintain a standby letter of credit payable to Tandy Corporation in
the amount of 70% of the face value of the note or $67.7 million. This
standby letter of credit was issued under the terms of the Company's revolving
credit agreement.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 2, 1994
RESULTS OF OPERATIONS
The following table shows the results of operations for the periods
indicated as a percentage of net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales Percentage of Net Sales
Three Months Ended Nine Months Ended
----------------------- -----------------------
April 2, April 3, April 2, April 3,
1994 1993 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 82.9 80.6 83.1 78.8
- --------------------------------------------------------------------------------------------------------
Gross profit 17.1 19.4 16.9 21.2
- --------------------------------------------------------------------------------------------------------
Selling and marketing expenses 8.5 9.5 8.1 10.3
General and administrative expenses 3.4 3.4 3.2 3.7
Engineering and development expenses 1.6 2.3 1.7 2.4
- --------------------------------------------------------------------------------------------------------
Operating income 3.6 4.2 3.9 4.8
Other income (expense), net (0.2) 0.1 (0.6) -
- --------------------------------------------------------------------------------------------------------
Income before provision for income taxes 3.4 4.3 3.3 4.8
Provision for income taxes 1.2 1.3 1.1 1.5
- --------------------------------------------------------------------------------------------------------
Net income 2.2% 3.0% 2.2% 3.3%
========================================================================================================
</TABLE>
Sales
Net sales for the nine-month period ended April 2, 1994 increased 78% to
$1.783 billion from $1.003 billion in the nine-month period ended April 3,
1993. This improvement in revenues was primarily due to increased demand for
the Company's desktop and notebook computer system products. The Company
shipped 1,084,000 computer systems in the first nine months of fiscal 1994, an
increase of 93% over the 562,000 units shipped in the same prior year period.
Revenues from desktop system products increased 64% to $1.109 billion for
the nine-month period ended April 2, 1994 from $676 million in the comparable
prior year period. Strong demand for the Advantage! 486SX, 486/66, Bravo
486SX/25, 486/33, 486/66D, and the Premmia 486 product lines all contributed
to the record level of computer system revenues. Revenues from Tandy's retail
operations and the recently acquired GRiD and Victor product families combined
to contribute to the significant desktop revenue growth. Included within
total desktop revenues were sales of the Company's 80386 systems which
declined to $49.5 million in the nine-month period ended April 2, 1994,
compared to $187.3 million in the first nine months of fiscal 1993.
The Company's notebook computer product revenues rose 110% to $422 million
in the nine-month period ended April 2, 1994 from $201 million in the
comparable prior year period. This increase reflects a 95% increase in unit
shipments to 213,000 for the nine-month period ended April 2, 1994 from
109,000 in the same prior year period. Notebook systems sales growth occurred
in all key notebook product line offerings including the Bravo notebooks, the
Advantage! Explorer, and the PowerExec.
North American revenues (including Canada) increased by 97% to $1.164
billion during the first nine months of fiscal 1994 over the comparable prior
year period, primarily due to growth in both desktop systems and notebook
computer sales. While revenue growth occurred in each of the Company's North
American distribution channels, sales to the consumer retail channel, which
includes sales made to Tandy Corporation, increased 223% and accounted for 33%
of North American revenues for the first nine months of fiscal 1994 compared
to 20% in the same fiscal 1993 period. The Company believes that the
substantial growth in this channel is partially due to the seasonal nature of
the retail channel in which sales are historically strongest during the third
and fourth calendar quarters. Sales to the independent reseller/dealer
channel for the nine-month period ended April 2, 1994 also rose substantially,
increasing 79% over the same prior year period and accounted for 44% of total
North American revenues. The national distributor channel and the original
equipment manufacturers (OEM) channel accounted for 11% and 12%, respectively,
of total North American revenues during the nine-month period ended April 2,
1994.
Nine month fiscal 1994 international revenues rose 50% to $619 million from
$411 million in the comparable prior year period and accounted for 35% of
total year-to-date fiscal 1994 revenues. New European subsidiaries in
Denmark, Finland, Norway, and Scotland, as well as significant revenue growth
in France, Sweden, Switzerland, and the United Kingdom, resulted in total
European revenues rising 84% to $395 million in the nine-month period ended
April 2, 1994 from $214 million in the prior year period. Increased demand
for the Company's Bravo desktop systems and the Bravo and PowerExec notebook
systems contributed to the European revenue growth. Also, during the second
quarter of fiscal 1994 and consistent with the Company's realignment of its
European operations, a new subsidiary was established in Limerick, Ireland.
In the third quarter of fiscal 1994, the subsidiary began limited European
distribution of AST products and by the fourth fiscal quarter, the Company
expects it to begin limited desktop production. The Company's Scotland
facility, which was acquired as part of AST's purchase of Tandy Corporation's
personal computer operations, is scheduled to terminate operations during the
fourth fiscal 1994 quarter.
Pacific Rim revenues totaled $182 million in the nine-month period ended
April 2, 1994, up 8% from the prior year total of $168 million. A significant
portion of the Company's Pacific Rim revenues are derived from sales to the
Hong Kong government and to Hong Kong based dealers who ultimately market the
Company's products within the People's Republic of China (PRC). Although the
PRC has historically provided the Company with significant revenues and
profitability, future sales of the Company's products into the PRC are highly
dependent upon continuing favorable trade relations between the United States
and the PRC and the general economic and political stability of the region.
Economic factors such as short-term fluctuations in foreign currency exchange
rates and changes in the PRC tax structure could have a corresponding impact
on future sales and operating results. Despite these uncertainties, in March
1994, as part of the Company's commitment to the Pacific Rim, the Company
established a new sales and manufacturing subsidiary in Tianjin, China through
a joint venture with a corporation affiliated with the Chinese government.
In the Company's Rest of World region, revenues increased 47% to $42
million in the nine-month period ended April 2, 1994 compared to the same
prior year period. This increase is primarily due to an 86% growth rate in
the Company's Middle East operations.
Revenues for the quarter ended April 2, 1994 increased 60% to $591 million
from $370 million in the quarter ended April 3, 1993 due to strong demand for
the Company's desktop and notebook system sales. During the third quarter of
fiscal 1994, the Company introduced the AST Advantage! EXP/60 and the Premmia
GX desktop system based on Intel's Pentium processor; the Bravo LC 4/100t,
supporting the new IntelDX4 processor; the Bravo NB 4/33s notebook; and the
GRIDPAD 2390, a hand held PC companion currently available in North America
only. In addition, the Company began shipments of its new line of Pentium-
based Premmia mini-tower and full-size servers.
The Company's future success is highly dependent upon its ability to
continue to develop and market products that incorporate new technology, are
priced competitively and achieve significant market acceptance. There can be
no assurance that the Company's products will continue to be commercially
successful or technically advanced due to the rapid improvements in computer
technology and resulting product obsolescence. There is also no assurance
that the Company will be able to deliver commercial quantities of new products
in a timely manner, or that such products will receive favorable market
acceptance. The Company regularly introduces new products designed to replace
existing products. While the Company closely monitors such new product
introductions, there can be no assurance that such transitions will occur
without adversely affecting the Company's net sales and profitability. In
addition, the personal computer industry is characterized by an extremely
competitive pricing environment which continues to experience frequent
dramatic price reductions at all levels of competition and the Company expects
these pricing pressures on its products to continue. There can be no
assurance that future pricing actions by the Company's competitors will not
adversely impact the Company's net sales and effect the Company's revenue
growth.
Gross Profit
Gross profit margins decreased to 16.9% in the nine-month period ended
April 2, 1994 from 21.2% in the nine-month period ended April 3, 1993. This
decline in margins is primarily due to price reductions prompted by
competitive market conditions which have occurred throughout the past year
impacting all of the Company's computer system products. Also contributing to
the lower gross profit margins was the increased percentage of revenues
generated by sales to the Company's consumer retail (including sales to
Tandy's retail operations) and OEM channels, which typically yield lower gross
margins.
The results of the Company's international operations are subject to
currency fluctuations. As the value of the U.S. dollar strengthens relative
to other currencies, revenues from sales in those currencies convert to fewer
U.S. dollars. This effect on revenue has a corresponding impact on gross
profit, as the Company's production costs are incurred primarily in U.S.
dollars. When comparing the nine-month period ended April 2, 1994 to the
nine-month period ended April 3, 1993, the U.S. dollar rose substantially
against nearly all European currencies. This year-to-year currency
fluctuation resulted in a 2.3 percentage point gross margin reduction in
fiscal year-to-date 1994 results compared to the comparable prior year period.
The Company has generally been able to obtain parts from multiple sources
without significant difficulty. However, increases in demand for personal
computers have created industry-wide shortages at times resulting in premium
prices paid for key components, such as Dynamic Random Access Memories and
high quality liquid crystal display screens. These shortages have
occasionally resulted in the Company's inability to procure these components
in sufficient quantities to meet demand for its products. In addition, a
number of the Company's products include certain components, such as active-
matrix displays, CD-ROMs, application specific integrated circuits, and
microprocessors, that are currently purchased from single sources due to
availability, price, quality or other considerations. The Company purchases
components pursuant to purchase orders placed in the ordinary course of
business and has no guaranteed supply arrangements with single source
suppliers. While the Company is working with its suppliers to minimize
component part shortages, there can be no assurance that future disruptions in
delivery of components will not occur. Should such shortages occur or
component costs significantly increase, the Company's net sales and
profitability may be adversely affected.
The personal computer industry continues to experience dramatic price
reductions and the Company anticipates that pricing pressures will continue to
be significant and is prepared to adjust its pricing as required by the
marketplace. During the nine-month period ended April 2, 1994, the Company
and the majority of its competitors have introduced new, lower-priced models
of personal computers and have significantly reduced prices on their existing
products. Major competitors have priced some personal computers competitively
with some of the Company's products that have similar hardware configurations.
There can be no assurance that future pricing actions by the Company and its
competitors will not adversely impact the Company's gross margin or
profitability.
Gross profit margins declined to 17.1% in the quarter ended April 2, 1994
from 19.4% in the comparable prior year quarter. This decline is related to
price reductions prompted by competitive market conditions, a shift into the
lower yielding consumer retail channel and an .8 percentage point decline due
to the negative impact of currency fluctuations. Gross margins have improved
slightly each quarter throughout fiscal 1994. However, due to continuing
industry pricing pressures and the potential significant impact of shifts
within the Company's channel mix, the Company is unable to determine whether
this trend will continue.
The personal computer industry is characterized by rapid technological
change and product obsolescence. Accordingly, the Company's product designs
generally have short commercial lives. If the Company's products become
technically obsolete, the Company's net sales and profitability may be
adversely affected. Lower gross margins could also result in decreased
liquidity and adversely affect the Company's financial position.
Operating Expenses
Total operating expenses increased 41.1% to $232.6 million in the nine-
month period ended April 2, 1994 from $164.9 million in the nine-month period
ended April 3, 1993. However, as a percentage of sales, operating expenses
decreased to 13.0% from 16.4% in the comparable prior year period. The
increase in actual operating expenses was primarily due to the increased level
of sales compared to the same prior year period.
Selling and marketing expenses increased 40.2% to $145.1 million in the
nine months ended April 2, 1994 from $103.5 million in the prior year period.
Selling and marketing expenses increased due to higher payroll and related
costs consistent with increases in sales and marketing staff throughout the
world. In addition, the Company's continued focus on increasing brand name
awareness led to an increase in media advertising expenses. Also, product
marketing and dealer activities including co-op advertising and other
promotion expenses increased as a result of increased sales levels. As a
percentage of sales, selling and marketing expenses declined to 8.1% for the
period ended April 2, 1994 from 10.3% in the prior year period.
General and administrative expenses increased by 55.1% to $57.3 million in
the nine-month period ended April 2, 1994 from $36.9 million in the same
fiscal 1993 period. Depreciation and amortization expenses increased
primarily due to the expanded fixed asset base resulting from the acquisition
of Tandy's personal computer business. In addition, continued expansion of
the Company's domestic and international operations including France, Ireland,
Sweden and the United Kingdom resulted in increased costs for payroll, payroll
related expenses, insurance, rent, and professional fees. As a percentage of
sales, general and administrative expenses decreased to 3.2% from 3.7% in the
comparable prior year period.
Engineering and development costs rose by 23.4% to $30.2 million for the
nine-month period ended April 2, 1994 from $24.5 million in the comparable
prior fiscal period. The Company's new product development programs have
resulted in increased expenses for payroll and payroll-related costs and
engineering materials. Significant new notebook product introductions have
been made during the first three quarters of fiscal 1994, including the Power
Exec 4/33SL and 4/25SL Special Edition, the Bravo Notebook, and the Advantage!
Explorer. Other new product introductions during the period included desktop
additions to the Advantage!, Bravo, and Premmia product lines as well as the
new Pentium-based Premium SE server and Premmia MTE P/60 and SE P/60 servers,
and the hand held GRiD PalmPad SL and GRIDPAD 2390. As a percentage of sales,
engineering and development costs declined to 1.7% for the period ended April
2, 1994 from 2.4% in the comparable prior year period.
Total operating expenses for the quarter ended April 2, 1994 increased
42.1% to $79.6 million from $56.0 million in the same fiscal 1993 quarter. As
a percentage of sales, operating expenses decreased to 13.5% from 15.1% in the
prior year quarter. The overall increased spending is primarily due to
increased payroll and employee benefit costs related to worldwide expansion
and expanded sales and marketing activities consistent with increased sales
levels.
Other Income and Expense
For the nine-month period ended April 2, 1994, the Company had net interest
expense of $5.8 million compared to net interest income of $2.2 million in the
corresponding fiscal 1993 period. Interest expense increased as a result of
the additional interest expense related to the note payable to Tandy, the debt
associated with the Company's December 1993 issuance of Liquid Yield Option
Notes and increased utilization of the Company's bank credit facilities.
In the first nine months of fiscal 1994, the Company recognized net other
expenses of $3.5 million compared to $1.8 million for the same fiscal 1993
period. These amounts relate primarily to foreign currency transaction and
remeasurement gains and losses and the costs associated with the Company's
foreign currency hedging activities. The Company adheres to a hedging
strategy which is designed to minimize the effect of remeasuring local
currency balance sheets of its foreign subsidiaries on the Company's
consolidated financial position and results of operations.
Provision for Income Taxes
The Company's effective tax rate increased to 34% in the nine-month period
ended April 2, 1994 from 31% in the comparable prior year period. The
increased tax rate is attributable to changes in the proportion of income
earned within various taxing jurisdictions and the tax rates in the locations
in which those earnings were generated.
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased to $452 million at April 2, 1994 from $301
million at July 3, 1993. During the first nine months of fiscal 1994, the
Company used $43.3 million of cash principally to fund increased levels of
accounts receivable consistent with increased worldwide sales levels. The
Company's cash and cash equivalents totaled $151.9 million at April 2, 1994
compared to $121.6 million at July 3, 1993. Completion of the December 1993
public debt offering (partially offset by increases in accounts receivable)
accounted for the higher cash level.
Capital expenditures totaled $20.9 million in the first nine months of
fiscal 1994 and consisted of additions to plant and engineering equipment,
office furniture and fixtures, and worldwide information systems. Included in
total capital expenditures are land and an existing manufacturing plant
purchased for $4.2 million and machinery and equipment for $1.5 million in
Limerick, Ireland.
The Company intends to fund its fiscal 1994 cash requirements through a
combination of cash on hand, cash provided by operations, available borrowings
under its revolving credit facilities and possible future public or private
debt and/or equity offerings. At April 2, 1994, the Company had available a
$225 million unsecured revolving credit facility with a final maturity date of
September 30, 1996. This revolving credit agreement allows the Company to
borrow, subject to certain leverage and total debt restrictions, at rates
based upon the bank's reference rate, or a spread of 5/8% over the LIBOR rate,
3/4% over the domestic certificate of deposit rate, or at a rate bid by a
bank, as selected by the Company. On March 30, 1994, the Company amended its
$225 million unsecured credit facility to redefine certain covenants pursuant
to the agreement. At April 2, 1994, there was $50 million outstanding as
drawings under this credit facility and $67.7 million outstanding in the form
of a letter of credit issued to Tandy Corporation in support of the
acquisition note payable. On April 27, 1994, the Company amended its $225
million unsecured credit facility to increase the total amount available to
$275 million and to allow the Company to increase the facility to $300 million
with additional bank commitments. On May 13, 1994, the Company added three
banks to the facility and increased the total amount available to $300
million. All other terms remained the same. The Company also has various
additional letter of credit facilities available for use by the Company and
its subsidiaries.
In connection with the Tandy acquisition, the Company issued a $96.7
million promissory note to Tandy Corporation which is due on July 11, 1996.
Interest is payable annually at an initial rate of 3.75% per annum, adjusted
once each year to the lower of either 5% or the three month rate within the
meaning of Section 1274(d)(2) of the Internal Revenue Code of 1986. There are
no sinking fund requirements. The note also requires the Company to maintain
a standby letter of credit payable to Tandy in the amount of 70% of the face
value of the note or $67.7 million. Upon maturity of the note, up to 50% of
the initial principal amount of the promissory note may be converted, at the
option of the Company, into common stock of the Company based upon its then
fair market value, as defined in the promissory note.
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield Option Notes (LYONs) due December 14, 2013. The LYONs are zero coupon
convertible subordinated notes which were sold at a significant discount to
par value with a yield to maturity of 5.25% and a total value at maturity of
$315 million. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. Total proceeds received from the sale of the LYONs
were approximately $111.7 million, which have been utilized for working
capital, including the financing of expected increases in accounts receivable
and inventories, repayment of bank borrowings under the Company's revolving
credit facilities, new product development, and other general corporate
purposes. The holder of a LYON may require the Company to purchase its LYONs
on December 14, 1998, December 14, 2003 and December 14, 2008 (the "Purchase
Dates"), and such payments may reduce the liquidity of the Company. However,
the Company may, subject to certain exceptions, elect to pay the purchase
price on any of the three Purchase Dates in cash or shares of common stock or
any combination thereof. The Company has made no decision as to whether it
will meet future purchase obligations in cash, common stock, or any
combination thereof. Such decision will be based on market conditions at the
time a decision is required, as well as management's view of the liquidity of
the Company at such time.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Future operating results may be impacted by a number of factors, including
worldwide economic and political conditions, industry specific factors, the
Company's ability to develop and produce commercially viable products, the
Company's ability to manage expense levels in response to decreasing gross
profit margins, the continued financial strength of the Company's dealers and
distributors and the Company's ability to successfully integrate the acquired
Tandy/GRiD operations into the Company's business model.
The Company anticipates that the personal computer industry will continue
to experience intense price competition, dramatic price reductions, rapid
technological change and product obsolescence. There can be no assurance that
future pricing actions by the Company and its competitors will not adversely
impact the Company's gross margins or that the Company will be able to deliver
commercial quantities of new, technically advanced products in a timely
manner, or that its new products will receive favorable market acceptance.
Consistent with industry practice, the Company provides certain of its
larger distributors, consumer retailers and dealers with stock balancing and
price protection rights which permit these distributors, retailers and dealers
to return slow-moving products to the Company for credit or to receive price
adjustments if the Company lowers the price of selected products within
certain time periods. To date, the Company has not experienced any material
adverse impact from stock balancing returns or price protection adjustments;
however, there can be no assurance that the Company will not experience
increased rates of return or price protection adjustments in the future. Any
significant returns or adjustments could adversely effect the Company's net
sales, gross profit and profitability.
The Company believes that, with the acquisition of additional manufacturing
facilities from Tandy Corporation and the purchase of manufacturing facilities
both in China and Ireland, production capacity should be sufficient to support
anticipated increases in unit volumes. The Company also expects to increase
inventory levels to support higher production volumes. However, if the
Company is unable to obtain certain key components, or to effectively forecast
customer demand or manage its inventory, these higher inventory levels may
result in increased obsolescence and adversely impact the Company's gross
margins and results of operations. Additionally, if the Company is unable to
timely ramp up its manufacturing operations in Texas and Ireland it could
adversely impact the Company's net sales, gross profit and profitability.
The Company's international operations may be affected by foreign currency
fluctuations. The financial statements of the Company's foreign subsidiaries
are remeasured into the United States dollar functional currency for
consolidated reporting purposes. Gains and losses resulting from this
remeasurement process are recognized currently in the consolidated results of
operations. The Company attempts to minimize the impact of these
remeasurement gains and losses by adhering to a hedging strategy utilizing
forward exchange contracts and, to a lesser extent, foreign currency
borrowings. The Company's exposure to currency fluctuations will continue to
increase as a result of the expansion of its international operations.
Significant fluctuations in currency values could have an adverse effect on
the Company's net sales, gross margins and profitability.
The Company's international operations may be affected by changes in United
States trade relationships and the economic stability of the locations in
which sales occur. The Company operates in foreign locations, such as the
People's Republic of China, where future sales may be dependent upon
continuing favorable trade relations. Additionally, foreign locations such as
the People's Republic of China may experience changes in their general
economic stability due to such factors as increased inflation. Any
significant change in United States trade relations or the economic stability
of foreign locations in which the Company sells its products could adversely
affect the Company's net sales and profitability.
From time to time the Company is notified that certain of its products may
infringe upon the intellectual property rights of others. The Company
generally evaluates all such notices on a case-by-case basis to determine
whether licenses are necessary or desirable. If such claims are made, there
can be no assurance that licenses will be available on commercially reasonable
terms or that retroactive royalty payments on sales of the Company's computers
will not be required. In addition, substantial costs may be incurred in
disputing such claims. Should this occur, the Company's profitability may be
adversely affected.
The Company's corporate headquarters and certain manufacturing operations
are located near major earthquake faults which have experienced earthquakes in
the past. While the Company does carry insurance, operating results could be
adversely affected in the event of a major earthquake.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical
trends to anticipate results or trends in future periods.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 1989, Texas Instruments Inc. (TI) advised the Company that it
believed certain AST computer products infringe certain TI patents. On
January 4, 1994, the Company initiated litigation in the U.S. District Court
for the Central District of California against TI alleging certain violations
of licensing agreements, federal antitrust laws and the California Unfair
Practices Act. In addition, the Company alleged that TI is infringing an AST
patent and that certain TI patents are invalid or inapplicable. TI has
alleged that the Company is infringing patents owned by TI. This litigation
with TI is proceeding. Management does not believe that the outcome of this
matter will have a material adverse impact on the Company's consolidated
financial position or results of operations.
On March 3 and March 14, 1994, complaints were filed by two shareholders
against the Company and certain of its officers and directors requesting
certification of a class action, asserting claims under state and federal
securities law based on allegations that the Company made inadequate and false
disclosures and seeking unspecified compensatory damages and related fees and
costs. The complaints were filed in the United States District Court for the
Central District of California. On May 9, 1994, the Court consolidated the
two cases under the case name Frank E. Marschall and Saul Jones, on Behalf of
Himself and All Others Similarly Situated v. Bruce C. Edwards, Wai S. Szeto,
Safi U. Qureshey, Richard P. Ottaviano, James T. Schraith, Carmelo J. Santoro,
AST Research, Inc. Management has reviewed the allegations and the complaints
and believes such allegations are without merit and intends to vigorously
defend the complaints.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1993 Annual Meeting of Shareholders was held on January 28,
1994 in Newport Beach, California. Matters submitted to a vote of security
holders included:
(1) The election of the following five directors to hold office until the
next annual meeting and until their successors are elected and duly
qualified:
Safi U. Qureshey
Richard J. Goeglein
Jack W. Peltason
Carmelo J. Santoro
Delbert W. Yocam
(2) The approval of the amendment of the 1989 Long-Term Incentive Program
and 1991 Non-Employee Option Plans to establish limits on the number
of options and restricted shares that may be granted to any one
individual in a calendar year.
In Favor 24,488,523
Opposed 943,744
Abstentions 98,257
Broker Non-Votes 723,385
(3) The approval of the appointment of Ernst & Young as independent
auditors for the fiscal year ending July 2, 1994.
In Favor 26,139,149
Opposed 61,965
Abstentions 52,795
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<C> <S>
10.124 First Amendment dated March 30, 1994 to Credit Agreement dated September 30, 1993 among
AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank Plc
as co-agent.
10.125 Second Amendment dated April 27, 1994 to Credit Agreement dated September 30, 1993 among
AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank Plc
as co-agent.
10.126 Joint Venture Contract dated September 7, 1993 between Tianjin Economic - Technological
Development Area Business Development Co. and AST Research (Far East) Limited.
11. Computation of Net Income Per Share.
</TABLE>
(b) Reports on Form 8-K
On January 10, 1994, the Company filed a report on Form
8-K/A to provide "Other Information" under Item 5 of said Form
regarding the agreement with Tandy Corporation concerning the
completion of the purchase of certain assets and assumption of
certain liabilities relating to Tandy/GRiD France, effective
September 1, 1993.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AST RESEARCH, INC.
--------------------
(Registrant)
Date: May 16, 1994 /s/ BRUCE C. EDWARDS
--------------------
Bruce C. Edwards
Senior Vice President,
Finance and Chief
Financial Officer
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
March 30, 1994, is entered into by and among AST RESEARCH INC., a
Delaware corporation (the "Company"), BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION, as Administrative Agent, Co-Agent and Issuing
Bank (the "Administrative Agent"), NATIONAL WESTMINSTER BANK PLC, as Co-
Agent, and the several financial institutions party to the
Credit Agreement (collectively, the "Banks").
RECITALS
A. The Company, the Banks and the Administrative Agent are
parties to a Credit Agreement dated as of September 30, 1993 (the
"Credit Agreement"), pursuant to which the Administrative Agent and the
Banks have extended certain credit facilities to the Company.
B. The Company has requested that the Banks agree to certain
amendments of the Credit Agreement.
C. The Banks are willing to amend the Credit Agreement, subject
to the terms and conditions of this Amendment.
NOW, THEREFORE, for the valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized
terms used herein shall have the meanings, if any, assigned to them in
the Credit Agreement.
2. Amendments to Credit Agreement.
(a) Section 8.10 of the Credit Agreement shall be and
hereby is amended and restated in its entirety so that, as amended and
restated, it reads as follows:
"8.10 Tangible Net Worth. The Company shall not suffer or
permit its Tangible Net Worth as of the last day of any fiscal quarter
to be less than the greater of: (a) the sum of (i) $280,000, plus (ii)
75% of cumulative net income for the Company and its Subsidiaries
determined on a consolidated basis beginning with the fiscal quarter
ended April 2, 1994, determined quarterly and not reduced by any
quarterly loss, plus (iii) 75% of the Net Proceeds of any sale of
capital stock of the Company by and for the account of the Company from
January 1, 1994, plus (iv) 75% of the amount by which the Tangible Net
Worth of the Company is increased, in accordance with GAAP, due to
conversion of debt to common stock from January 1, 1994, less (v) the
amount and value of cash or other property paid or transferred in
connection with stock repurchases or redemptions made by the Company not
to exceed in the aggregate $50,000,000 since the Closing Date; provided,
however, that such amount shall not include any payments made pursuant
to any redemption, conversion or repurchases of any of the Notes or any
similar debt issues; and (b) $280,000,000."
(b) Section 8.13 of the Credit Agreement shall be and
hereby is amended and restated in its entirety so that, as amended and
restated, it reads as follows:
"8.13 Leverage Ratio(s). (a) The Company shall not suffer
or permit its ratio of Total Liabilities to Tangible Net Worth at any
time to be greater than the amount set forth opposite the applicable
period below:
PERIOD RATIO
Closing Date through March 31, 1995 2.15:1.00
April 1, 1995 through September 29, 1995 1.90:1.00
September 30, 1995 through March 29, 1996 1.75:1.00
March 30, 1996 and thereafter 1.50:1.00
(b) The Company shall not suffer or permit its ratio of
Total Liabilities, plus Subordinated Indebtedness, to Tangible Net Worth
(the "Adjusted Leverage Ratio") at any time to be greater than the
amount set forth opposite the applicable period below:
PERIOD RATIO
Closing Date through March 31, 1995 2.40:1.00
April 1, 1995 through September 29, 1995 2.30:1.00
September 30, 1995 thrrough December 29, 1995 2.10:1.00
December 30, 1995 and thereafter 1.90:1.00
(c) Subsection 9.1(e) of the Credit Agreement shall be and
hereby is amended and restated in its entirety so that, as amended and
restated, it reads as follows:
"(e) Other Specified Defaults. The Company fails to
perform or observe any term, covenant or agreement contained in the
following Sections and such failure continues for the amount of time
specified: Sections 7.1 or 7.2 for 15 days; and Section 8.1 (only with
respect to any Liens other than Voluntary Liens), Section 8.6 and
Section 8.16 for 30 days; or"
3. Representations and Warranties. The Company hereby
represents and warrants to the Administrative Agent and the Banks as
follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) The execution, delivery and performance by the Company
of this Amendment have been duly authorized by all necessary corporate
and other action and do not and will not require any registration with,
consent or approval of, notice to or action by, any Person (including
any Governmental Authority) in order to be effective and enforceable.
The Credit Agreement as amended by this Amendment constitutes the legal,
valid and binding obligations of the Company, enforceable against it in
accordance with its respective terms, without defense, counterclaim or
offset.
(c) All representations and warranties of the Company
contained in the Credit Agreement are true and correct.
(d) The Company is entering into this Amendment on the
basis of its own investigation and for its own reasons, without reliance
upon the Administrative Agent and the Banks or any other person.
4. Effective Date. This Amendment will become effective as of
March 30, 1994 (the "Effective Date"), provided that each of the
following conditions precedent has been satisfied:
(a) The Administrative Agent has received from the Company
and the Majority Banks a duly executed original of this Amendment.
(b) The Administrative Agent has received from the Company
a copy of a resolution passed by the board of directors of the Company,
certified by the Secretary or an Assistant Secretary of the Company as
being in full force and effect on the date hereof, authorizing the
execution, delivery and performance of this Amendment.
(c) The Administrative Agent has received from the
Company, for the ratable account of the Banks in accordance with their
respective Commitment Percentages, the amount of $112,500, representing
payment in full of a non-refundable amendment fee, which amount the
Company hereby covenants to pay to the Administrative Agent, for the
ratable account of the Banks in accordance with their respective
Commitment Percentages, on demand.
5. Miscellaneous
(a) Except as herein expressly amended, all terms,
covenants and provisions of the Credit Agreement are and shall remain in
full force and effect and all references therein to such Credit
Agreement shall henceforth refer to the Credit Agreement as amended by
this Amendment. This Amendment shall be deemed incorporated into, and a
part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective
successors and assigns. No third party beneficiaries are intended in
connection with this Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterparts together shall constitute but one and the same instrument.
(e) This Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto with
reference to the matters discussed herein and therein. This Amendment
supersedes all prior drafts and communications with respect thereto.
This Amendment may not be amended except in accordance with the
provisions of Section 11.1 of the Credit Agreement.
(f) If any term or provision of this Amendment shall be
deemed prohibited by or invalid under any applicable law, such provision
shall be invalidated without affecting the remaining provisions of this
Amendment or the Credit Agreement, respectively.
(g) Company covenants to pay to or reimburse the
Administrative Agent, upon demand, for all reasonable costs and expenses
(including allocated costs of in-house counsel) incurred in connection
with the development, preparation, execution and delivery of this
Amendment.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
AST RESEARCH, INC.
By: /s/BRUCE C. EDWARDS
Title: Senior Vice President and
Chief Financial Officer
By: /s/DENNIS R. LEIBEL
Title: Vice President, Legal &
Treasury Operations
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as Co-Agent and
Administrative Agent
By: /s/JUDITH L. KRAMER
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as a Bank and
Issuing Bank
By: /s/KEVIN McMAHON
Title: Vice President
NATIONAL WESTMINSTER BANK, PLC, as a
Bank and as Co-Agent
By: /s/MICHAEL E. KEATING
Title: Vice President
CIBC INC.
By: /s/JAMES E. ANDERSON
Title: Manager Director
BANQUE NATIONAL DE PARIS
By: /s/CHRISTIAN MORIO
Title: Senior Vice President
and Manager
By: /s/TJALLING TERPSTRA
Title: Vice President
Sanwa Bank California
By: /s/NICOLE GARNIER
Title: Vice President
Citicorp USA, Inc.
By: /s/JAMES J. SHERIDAN
Title: Vice President
Managing Director
Commonwealth Bank of Australia
By: /s/CHRISTINE A. RENARD
Title: Vice President and
Senior Manager
The Industrial Bank of Japan,
Ltd, Los Angeles Agency
By: /s/CARL-ERIC BENZINGER
Title: Vice President
The Long Term Credit Bank of Japan
Ltd., Los Angeles Agency
By: /s/CURT M. BIREN
Title: Vice President
Shawmut Bank,N.A.
By: /s/FRANK H. BENESH III
Title: Vice President
<PAGE>
SECOND AMENDMENT TO CREDIT AGREEMENT
THIS SECOND AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
April 27, 1994, is entered into by and among AST RESEARCH, INC., a Delaware
corporation (the "Company"), BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent (the "Administrative Agent"), Co-Agent
and Issuing Bank, NATIONAL WESTMINSTER BANK PLC, as Co-Agent, and the several
financial institutions party to the Credit Agreement (collectively, the
"Banks").
RECITALS
A. The Company, the Banks, the Co-Agents and the Administrative Agent
are parties to a Credit Agreement dated as of September 30, 1993, as amended
by the First Amendment to Credit Agreement dated as of March 30, 1994 (as so
amended, the "Credit Agreement"), pursuant to which the Banks have extended
certain credit facilities to the Company.
B. The Company has requested that the Administrative Agent, the Co-
Agents and the Banks agree to certain amendments of the Credit Agreement.
C. The Administrative Agent, the Co-Agents and the Banks are willing to
amend the Credit Agreement, subject to the terms and conditions of this
Amendment.
NOW, THEREFORE, for valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms
used herein shall have the meanings, if any, assigned to them in the Credit
Agreement.
2. Amendments to Credit Agreement.
(a) The following definitions of the terms "Addendum" and
"Additional Bank" shall be and hereby are added to Section 1.1 of the Credit
Agreement, in appropriate alphabetical order:
"`Addendum' has the meaning specified in Section 2.15.
`Additional Bank' shall mean each commercial bank acceptable
to the Administrative Agent and the Company which hereafter
becomes a party to this Agreement in accordance with the
provisions of Section 2.15."
(b) The definition of the term "Agreement" contained in Section
1.1 of the Credit Agreement shall be and hereby is amended and restated in its
entirety so that, as amended and restated, it reads as follows:
"`Agreement' means this Credit Agreement, including all
Schedules and Exhibits hereto, as amended, supplemented or
modified from time to time, including by each Addendum."
(c) The definition of the term "Aggregate Commitment" contained
in Section 1.1 of the Credit Agreement shall be and hereby is amended and
restated in its entirety so that, as amended and restated, it reads as
follows:
"`Aggregate Commitment' means at any time an amount equal to
the aggregate amount set forth opposite the Banks' names in
Schedule 2.1 under the heading "Commitments" at such time plus, in
the case of each Additional Bank, the Commitment amount set forth
in the Addendum at such time with respect to such Additional Bank;
as such amount may be reduced from time to time pursuant to this
Agreement."
(d) The first sentence of the definition of the term "Banks"
contained in Section 1.1 of the Credit Agreement shall be and hereby is
amended and restated in its entirety so that, as amended and restated, such
sentence reads as follows:
"`Banks' means the several financial institutions from time
to time parties to this Agreement, including pursuant to an
Addendum."
(e) The definition of the term "Cash Collateral" contained in
Section 1.1 of the Credit Agreement shall be and hereby is amended and
restated in its entirety so that, as amended and restated, it reads as
follows:
"'Cash Collateral' means to pledge and deposit with or deliver
to the Administrative Agent, for the benefit of the Administrative Agent,
the Co-Agents, the Issuing Bank and the Banks, as collateral for the L/C
Obligations, cash or deposit account balances pursuant to documentation
in form and substance satisfactory to the Administrative Agent and the
Issuing Bank (which documents are hereby consented to by the Banks).
Derivatives of such term shall have corresponding meaning."
(f) The definition of the term "Co-Agent" contained in Section
1.1 of the Credit Agreement shall be and hereby is amended and restated in its
entirety so that, as amended and restated, it reads as follows:
"`Co-Agent' means each of BofA, National Westminster Bank
Plc, CIBC Inc. and Shawmut Bank, N.A., in their capacity as co-
agents for the Banks."
(g) The definition of the term "Commitment Percentage"
contained in Section 1.1 of the Credit Agreement shall be and hereby is amended
and restated in its entirety so that, as amended and restated, it reads as
follows:
"`Commitment Percentage' means, as to any Bank at any time,
the percentage equivalent of such Bank's Commitment divided by the
Aggregate Commitment at such time. The initial Commitment
Percentage of each Bank is set forth opposite such Bank's name in
Schedule 2.1 under the heading "Commitment Percentage" and, in the
case of each Additional Bank, the Commitment amount set forth in
the Addendum with respect to such Additional Bank."
(h) The first sentence of Section 2.1 of the Credit Agreement
shall be and hereby is amended and restated in its entirety so that, as
amended and restated, it reads as follows:
"Each Bank severally agrees, on the terms and conditions
hereinafter set forth, to make Committed Loans to the Company from
time to time on any Business Day during the period from the
Closing Date to the Termination Date, in an aggregate amount not
to exceed at any time outstanding the amount set forth opposite
the Bank's name in Schedule 2.1 under the heading "Commitments"
and, in the case of each Additional Bank, the Commitment amount
set forth in the Addendum with respect to such Additional Bank
(such amount as the same may be reduced pursuant to Section 2.6 or
as a result of one or more assignments pursuant to subsection
11.7(a), the Bank's "Commitment"); provided, however, that, after
giving effect to any Borrowing of Committed Loans, the Effective
Amount of all outstanding Loans together with the Effective Amount
of the Letter of Credit (if outstanding) shall not exceed the
Aggregate Commitment."
(i) Section 2.10 shall be amended by adding the following to
the end thereof:
"(d) Second Amendment Arrangement Fee. The Company shall
pay to BA Securities, Inc. and National Westminster Bank Plc fees as
set forth in letter agreements dated the date of the Second Amendment
to Credit Agreement relating to this Agreement."
(j) The following Section 2.15 shall be and hereby is added
to Article 2 of the Credit Agreement, immediately after Section 2.14 thereof:
"2.15 Additional Banks. Additional Banks may become
parties to this Agreement by means of the execution and delivery
by each such Additional Bank, the Company and the Administrative
Agent of a duly completed addendum (each, an "Addendum")
substantially in the form of Exhibit O hereto; provided, however,
that with respect to each such Addendum (a) the Aggregate
Commitment shall not exceed three hundred million dollars
($300,000,000), taking into account the Commitment of the
Additional Bank executing such Addendum, and (b) on the Effective
Date (as that term is defined in the Addendum) of such Addendum,
no Default or Event of Default shall exist or shall result from
the execution and delivery of such Addendum."
(k) The following subsection (d) shall be and hereby is added
to Section 4.4 of the Credit Agreement, immediately after subsection (c)
thereof:
"(d) upon (i) any Additional Bank becoming a party hereto
pursuant to an Addendum, or (ii) any Bank increasing its Commitment
pursuant to Section 11.1 hereof, the Company agrees to reimburse each
Bank on demand for any loss, cost or expense which such Bank may sustain
or incur, including any such loss, cost or expense arising from the
liquidation or reemployment of funds obtained by it to maintain its
Offshore Committed Loans or CD Rate Loans hereunder or from fees payable
to terminate the deposits from which such funds were obtained."
(l) The introductory clause to Section 7.1 of the Credit
Agreement shall be and hereby is amended and restated in its entirety so that,
as amended and restated, such introductory clause reads as follows:
"7.1 Financial Statements. The Company shall deliver to the
Administrative Agent and each Bank in form and detail satisfactory to
the Majority Banks:"
(m) Section 8.15 of the Credit Agreement shall be and hereby
is amended and restated in its entirety so that, as amended and restated, it
reads as follows:
"8.15 Sale and Leaseback Agreement. The Company shall not,
and shall not suffer or permit any of its Subsidiaries to, enter
into any sale and leaseback agreement covering any of its fixed or
capital assets. The Company covenants and agrees that the real
property located at the northeast corner of Alton Parkway and
Laguna Canyon Road in Irvine, California, together with all
improvements erected thereon, and all personal property now or
hereafter located on such property shall remain owned by the
Company or by any other entity in which the Company maintains at
least a 70% ownership interest and which is a Subsidiary of the
Company. This Section 8.15 shall not be deemed to prohibit the
sale and leaseback of such property so long as the lessee is the
Company or any other entity in which the Company maintains at
least a 70% ownership interest and which is a Subsidiary of the
Company or the sale and leaseback of the real property located at
11/F Floor, Vanta Industrial Centre, Kwai Chung, N.T., Hong Kong,
together with all improvements erected thereon."
(n) Section 10.10 of the Credit Agreement shall be and hereby
is amended and restated in its entirety so that, as amended and restated, it
reads as follows:
"10.10 Co-Agents. None of the Co-Agents shall, as such,
have any right or power (except as otherwise expressly provided
herein), nor any obligation, liability, responsibility or duty
(express or implied, including any fiduciary duty) under this
Agreement other than those applicable to all Banks as such. Each
Bank acknowledges that it has not relied, and will not rely, on
any of the Co-Agents so identified in deciding to enter into this
Agreement or in taking or not taking action hereunder."
(o) Section 11.1 of the Credit Agreement shall be and hereby is
amended and restated in its entirety so that, as amended and restated, it
reads as follows:
"11.1 Amendments and Waivers. Subject to the final
paragraph of this Section 11.1, no amendment or waiver of any
provision of this Agreement or any other Loan Document and no
consent with respect to any departure by the Company therefrom,
shall be effective unless the same shall be in writing and signed
by the Majority Banks, and then such waiver shall be effective
only in the specific instance and for the specific purpose for
which given; provided, however, that no such waiver, amendment or
consent shall, unless in writing and signed by all the Banks, do
any of the following:
(a) subject to the final paragraph of this Section
11.1, increase or extend the Commitment (and/or the L/C
Commitment) of any Bank or subject any Bank to any additional
obligations;
(b) postpone or delay any date fixed for any payment
of principal, interest, fees or other amounts due hereunder or
under any Loan Document;
(c) reduce the principal of, or the rate of interest
specified herein on any Loan, or of any fees or other amounts
payable hereunder or under any Loan Document;
(d) change the percentage of the Commitments or of
the aggregate unpaid principal amount of the Loans which shall be
required for the Banks or any of them to take any action
hereunder; or
(e) amend this Section 11.1 or Section 2.14;
and, provided, further, that (A) no amendment, waiver or consent
shall, unless in writing and signed by the Issuing Bank in
addition to the Majority Banks or all the Banks, as the case may
be, affect the rights or duties of the Issuing Bank under this
Agreement or any L/C-Related Document, and (B) no amendment,
waiver or consent shall, unless in writing and signed by the
Administrative Agent or the affected Co-Agent, in addition to the
Majority Banks, affect the rights or duties of the Administrative
Agent or such Co-Agent under this Agreement.
Notwithstanding the foregoing, (i) each Bid Loan Lender may,
in its sole discretion, if there exists no Default or Event of
Default, and without the consent or signature of the
Administrative Agent or any other Bank (provided, however, that
prompt notice thereof is provided by such Bid Loan Lender to the
Administrative Agent), accept any prepayment on account of any
such Bid Loan Lender's Bid Loans, (ii) the Issuing Bank and the
Company may, from time to time, if there exists no Default or
Event of Default, and without the consent or signature of the Co-
Agents or any other Bank, amend the Letter of Credit to increase
or decrease the face amount thereof or extend the expiry date
thereof; provided, however, that the face amount thereof shall at
no time exceed $75,000,000, nor shall the expiry date thereof be
later than September 30, 1996, without the consent of all of the
Banks, and (iii) the Administrative Agent, the Company and any
Bank (the "Affected Bank") may, from time to time, if there exists
no Default or Event of Default, and without the consent or
signature of the Co-Agents or any other Bank (provided, however,
that prompt notice thereof is provided by the Administrative Agent
to the Co-Agents and such other Banks), increase the Commitment of
the Affected Bank by amending Schedule 2.1, provided, however,
that with respect to each such increase, the Aggregate Commitment
shall not exceed three hundred million dollars ($300,000,000),
taking into account such increase, and provided, further, that the
Affected Bank shall, as of the date of the increase of the
Affected Bank's Commitment (A) make available to the
Administrative Agent in immediately available funds, for the
account of the other Banks, the amount necessary to purchase from
the other Banks such participations in the Committed Loans made by
them and outstanding as shall be necessary to cause the Affected
Bank to share the Committed Loans ratably with each of them after
taking into account the increase in the Affected Bank's
Commitment, and (B) be deemed to, and hereby irrevocably and
unconditionally agrees to, purchase from the Issuing Bank a
participation in the Letter of Credit and each drawing thereunder
in an amount equal to the product of (I) its Commitment
Percentage, times (II) the maximum amount available to be drawn
under the Letter of Credit and the amount of such drawing,
respectively, and, as of the date of the increase of the Affected
Bank's Commitment, make available to the Administrative Agent in
immediately available funds, for the account of the Issuing Bank,
the amount necessary to purchase from the Issuing Bank such
participation in any drawing under the Letter or Credit (the
Administrative Agent will keep records, which shall be conclusive
and binding in the absence of manifest error, of participations
purchased by an Affected Bank and will in each case notify the
other Banks following any such purchases)."
(p) Section 11.14 of the Credit Agreement shall be and hereby is
amended by inserting after the phrase "subsections 2.10(a)," the following:
"2.10(d),".
(q) Schedule 2.1 to the Credit Agreement shall be and hereby is
superseded and replaced by Schedule 2.1 attached to this Amendment.
(r) Exhibit O attached to this Amendment shall be and hereby is
added to the Credit Agreement as Exhibit O thereto.
(s) CIBC Inc. and Shawmut Bank, N.A. are hereby added as Co-
Agents for the Banks under the Credit Agreement, and all references to the Co-
Agents in the Credit Agreement shall refer to them, as well as Bank of America
National Trust and Savings Association and National Westminster Bank Plc, in
their capacity as Co-Agents.
3. Representations and Warranties. The Company hereby represents and
warrants to the Administrative Agent and the Banks as follows:
(a) No Default or Event of Default has occurred and is
continuing.
(b) The execution, delivery and performance by the Company of
this Amendment have been duly authorized by all necessary corporate and other
action and do not and will not require any registration with, consent or
approval of, notice to or action by, any Person (including any Governmental
Authority) in order to be effective and enforceable. The Credit Agreement as
amended by this Amendment constitutes the legal, valid and binding obligations
of the Company, enforceable against it in accordance with its respective
terms, without defense, counterclaim or offset.
(c) All representations and warranties of the Company contained
in the Credit Agreement are true and correct.
(d) The Company is entering into this Amendment on the basis of
its own investigation and for its own reasons, without reliance upon the
Administrative Agent and the Banks or any other person.
4. Effective Date. This Amendment will become effective as of April
27, 1994 (the "Effective Date"), provided that each of the following
conditions precedent has been satisfied:
(a) The Administrative Agent has received from the Company and
each of the Banks a duly executed original of this Amendment.
(b) The Administrative Agent has received from the Company a
copy of a resolution passed by the board of directors of the Company, certified
by the Secretary or an Assistant Secretary of the Company as being in full force
and effect on the date hereof, authorizing the execution, delivery and
performance of this Amendment.
(c) The Administrative Agent has received from the Company the
fees set forth in the separate "Second Amendment Fee Letter Agreement" dated
on or about the date hereof, which fees are payable to the Banks that
increased their Commitments pursuant hereto and are a percentage of such
increased amount, and which fees the Company hereby covenants to pay to the
Administrative Agent on demand.
(d) The Administrative Agent has received from the Company
executed copies of additional separate letter agreements dated on or about the
date hereof, pursuant to which the Company covenants to pay to BA Securities,
Inc. and National Westminster Bank Plc, as arrangers, certain other fees, as
provided therein.
For purposes of this Section 4, the Administrative Agent may receive and rely
upon, in lieu of originals, legible telefacsimile copies of any and all
documents required to be delivered hereunder. For purposes hereof, the
transmission of any such executed document by telefacsimile shall constitute
the delivery of an original thereof.
5. Miscellaneous.
(a) Except as herein expressly amended, all terms, covenants
and provisions of the Credit Agreement are and shall remain in full force and
effect and all references therein to such Credit Agreement shall henceforth
refer to the Credit Agreement as amended by this Amendment. This Amendment
shall be deemed incorporated into, and a part of, the Credit Agreement.
(b) This Amendment shall be binding upon and inure to the
benefit of the parties hereto and thereto and their respective successors and
assigns. No third party beneficiaries are intended in connection with this
Amendment.
(c) This Amendment shall be governed by and construed in
accordance with the law of the State of California.
(d) This Amendment may be executed in any number of
counterparts, each of which shall be deemed an original, but all such
counterpartstogether shall constitute but one and the same instrument.
(e) This Amendment, together with the Credit Agreement,
contains the entire and exclusive agreement of the parties hereto with reference
to the matters discussed herein and therein. This prior drafts and
communications with respect thereto. This Amendment may not be amended except
in accordance with the provisions of Section 11.1 of
Agreement.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or
the Credit Agreement, respectively.
(g) Company covenants to pay to or reimburse the Administrative
Agent, upon demand, for all reasonable costs and expenses (including allocated
costs of in-house counsel) incurred in connection with the development,
preparation, execution and delivery of this Amendment and the other documents
contemplated hereby.
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Amendment as of the date first above written.
AST RESEARCH, INC.
By:_____________________________
Title: Senior Vice President and
Chief Financial Officer
By:_____________________________
Title: Vice President, Legal &
Treasury Operations
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent and
Co-Agent
By:_____________________________
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Bank and Issuing Bank
By:_____________________________
Title: Vice President
NATIONAL WESTMINSTER BANK PLC, as a Bank
and as Co-Agent
By:_____________________________
Title:
SHAWMUT BANK, N.A., as a Bank
and as Co-Agent
By:_______________________________
Title:
CIBC INC., as a Bank and as
Co-Agent
By:______________________________
Title:
BANQUE NATIONALE DE PARIS
By:_____________________________
Title:
By:_____________________________
Title:
SANWA BANK CALIFORNIA
By:_____________________________
Title:
CITICORP USA, INC.
By:_______________________________
Title:
COMMONWEALTH BANK OF AUSTRALIA
By:_____________________________
Title:
THE INDUSTRIAL BANK OF JAPAN,
LTD., LOS ANGELES AGENCY
By:_______________________________
Title:
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By:_______________________________
Title:
SCHEDULE 2.1
COMMITMENTS
<TABLE>
<CAPTION>
Commitment Commitment
Banks Amount Percentage
<S> <C> <C>
Bank of America National Trust and $45,000,000 16.363636363
Savings Association
National Westminster Bank Plc $45,000,000 16.363636363
CIBC Inc. $40,000,000 14.545454545
Shawmut Bank, N.A. $40,000,000 14.545454545
Banque Nationale de Paris $20,000,000 7.272727273
Sanwa Bank California $20,000,000 7.272727273
Citicorp USA, Inc. $20,000,000 7.272727273
Commonwealth Bank of Australia $15,000,000 5.454545455
The Industrial Bank of Japan, Ltd., $15,000,000 5.454545455
Los Angeles Agency
The Long-Term Credit Bank $15,000,000 5.454545455
of Japan, Ltd., Los Angeles Agency
Total $275,000,000 100.000000000%2
</TABLE>
EXHIBIT O
ADDENDUM
The undersigned __________________________________ (the "Additional
Bank") is executing and delivering this Addendum pursuant to Section 2.15 of
the Credit Agreement dated as of September 30, 1993 (as amended from time to
time, the "Credit Agreement"), among AST Research Inc. (the "Company"), the
Banks party thereto (the "Banks"), Bank of America National Trust and Savings
Association, as Administrative Agent (in such capacity, the "Administrative
Agent"), Co-Agent and Issuing Bank and National Westminster Bank Plc, CIBC
Inc. and Shawmut Bank, N.A., as Co-Agents. Capitalized terms not otherwise
defined herein shall have the meanings ascribed to such terms as set forth in
the Credit Agreement.
1. On the Effective Date (as defined below), the Additional Bank hereby
agrees to, and hereby does, become and shall be a Bank under and a party to
the Credit Agreement. The Additional Bank shall be entitled to the rights and
benefits of the Credit Agreement and the other Loan Documents and, to the
extent of its percentage interest, have the obligations of a Bank under the
Credit Agreement as if it had been named therein as a Bank and was originally
a party thereto. The Additional Bank's Commitment and Commitment Percentage
shall be as follows:
Commitment $_____________
Commitment Percentage _____________%
The Additional Bank shall purchase from the other Banks such participations in
the Committed Loans made by them and outstanding on and as of the Effective
Date as shall be necessary to cause the Additional Bank to share the Committed
Loans ratably with each of them as of the Effective Date. The Additional Bank
shall be deemed to, and hereby irrevocably and unconditionally agrees to,
purchase from the Issuing Bank a participation in the Letter of Credit and
each drawing thereunder in an amount equal to the product of (i) its
Commitment Percentage, times (ii) the maximum amount available to be drawn
under the Letter of Credit and the amount of such drawing, respectively. The
Administrative Agent will keep records (which shall be conclusive and binding
in the absence of manifest error) of participations purchased pursuant hereto
and will in each case notify the Banks following any such purchases.
2. This Addendum will become effective as of _____________, 199__ (the
"Effective Date"); provided, that each of the following conditions precedent
has been satisfied:
(a) Following the execution of this Addendum by the Additional
Bank, it will be delivered to the Administrative Agent and the Company for
acceptance and, in the case of the Administrative Agent, recording; provided,
however, that this Addendum shall not be effective until accepted by the
Administrative Agent and the Company.
(b) The Additional Bank shall make available to the Administrative
Agent in immediately available funds, for the account of the Banks, the amount
necessary to fund the purchase of participations set forth in Paragraph 1
above.
(c) The Company shall execute and deliver to the Additional Bank a
Bid Note in the stated principal amount of the Additional Bank's Commitment.
(d) The Administrative Agent has received from the Company, for the
account of the Additional Bank, such fee as may be set forth in a separate
letter agreement dated on or about the Effective Date, which fee (if any) the
Company hereby covenants to pay to the Administrative Agent on demand.
3. From and after the Effective Date, except to the extent otherwise
provided in the Credit Agreement, the Administrative Agent will make all
payments under the Credit Agreement which are payable to the Administrative
Agent for the account of the Banks to the appropriate Banks severally in
proportion to their respective percentages determined after giving effect to
this Addendum, pro rated as appropriate, when payment is due.
4. The Additional Bank (a) confirms that it has received a copy of the
Credit Agreement, the First Amendment thereto dated March 30, 1994, the Second
Amendment thereto dated April 27, 1994 and all subsequent amendments, and all
other Loan Documents, together with copies of such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter this Addendum; (b) agrees that it will, independently and
without reliance upon Administrative Agent, any Co-Agent or any Bank and based
on such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Credit Agreement and the other Loan Documents; (c) appoints and authorizes
Administrative Agent to take such action as agent on its behalf and to
exercise such powers under the Credit Agreement and the other Loan Documents
as are delegated to Administrative Agent by the terms thereof, together with
such powers as are reasonably incidental thereto; (d) agrees to indemnify the
Agent-Related Persons and the Co-Agent-Related Persons pursuant to Section
10.7 of the Credit Agreement, regardless of whether the action, omission to
act, occurrence or event giving rise to such indemnification occurred prior to
or after the Effective Date, and (e) agrees that it will perform in accordance
with their terms all of the obligations which by the terms of the Credit
Agreement and the other Loan Documents are required to be performed by a Bank
thereunder.
5. The following administrative details apply to the Additional Bank:
(a) Offshore Lending Office:
Additional Bank name: ________________
Address: _____________________________
_____________________________
_____________________________
Attention: ___________________________
Telephone: ( ) _____________________
Fax: ( ) _____________________
Telex: _______________________________
(b) Domestic Lending Office:
Additional Bank name: ________________
Address: _____________________________
_____________________________
_____________________________
Attention: ___________________________
Telephone: ( ) _____________________
Fax: ( ) _____________________
Telex: _______________________________
(c) Notice Address:
Additional Bank name: ________________
Address: _____________________________
_____________________________
_____________________________
Attention: ___________________________
Telephone: ( ) _____________________
Fax: ( ) _____________________
Telex: _______________________________
(d) Payment Instructions:
Account No.: ________________________
At: __________________________________
__________________________________
___________________________________
Reference: ___________________________
Attention: ___________________________
6. This Addendum shall be governed by, and construed in accordance with,
the laws of the State of California.
IN WITNESS WHEREOF, the Additional Bank has executed and delivered this
Addendum as of the ___ day of ___________, 199__.
[NAME OF ADDITIONAL BANK]
By:________________________
Title: ____________________
Accepted this __ day Accepted this __ day
of ___________, 199_ of ___________, 199_
BANK OF AMERICA NATIONAL TRUST AST RESEARCH, INC.
AND SAVINGS ASSOCIATION
as Administrative Agent
By: _______________________ By: _______________________
Vice President Title:_____________________
By: _______________________
Title:_____________________
#4078678.07
#4078678.07
<PAGE>
JOINT VENTURE CONTRACT
THIS CONTRACT is made in _____________, the People's Republic of
China on this ___ day of ____________, 1993 by and between Tianjin
Economic-Technological Development Area Business Development Co.(Party
A), an enterprise legal person duly organized and registered under the
laws of the People's Republic of China, and AST Research (Far East)
Limited, (Party B) a corporation incorporated under the laws of Hong
Kong.
CHAPTER I GENERAL PROVISIONS AND DEFINITIONS
In accordance with the "Law of the People's Republic of China on
Chinese-Foreign Equity Joint Ventures Using Chinese and Foreign
Investment" (the "Joint Venture Law") and other relevant Chinese laws
and regulations and the provisions of this Contract, TIANJIN ECONOMIC-
TECHNOLOGICAL DEVELOPMENT AREA BUSINESS DEVELOPMENT COMPANY and AST
RESEARCH (FAR EAST) LIMITED adhering to the principle of equity and
mutual benefit and through friendly consultations, both agree to
jointly invest to establish a joint venture enterprise in Tianjin
Economic-Technological Area, the People's Republic of China. The
contract hereunder is concluded and is agreed as follows:
Unless the terms or context of this Contract otherwise
specifically provide, the following terms shall have the meanings set
out below:
A. "Articles of Association" shall mean the Articles of
Association of the Company.
B. "Board" shall mean the Board of Directors of the
Company.
C. "Company" shall mean "AST Computers China Limited",
the joint venture limited liability company formed by
Party A and Party B pursuant to the Joint Venture Law, the
Joint Venture Regulations, other relevant Chinese laws and
this Contract.
D. "Effective Date" shall mean the date on which the
Examination and Approval authority issues an approval
document approving all of the terms and conditions of this
Contract and its appendices.
E. "Establishment Date" shall mean the date on which the
business license for the Company is issued by the relevant
office of the State Administration for Industry and
Commerce.
F. "Examination and Approval Authority" shall mean the
authority empowered by the Chinese government to approve
this Contract.
G. "Feasibility Study Report" shall mean the written
analysis approved May 10, 1992, Approval Case Number
1992543 regarding the feasibility of the joint venture and
the establishment of the Company.
H. "Senior Management Personnel" shall mean the General
Manager, Deputy General Manager, financial controller of
the Company and such other personnel designated as Senior
Management Personnel by the Board of directors of the
Company.
I. "Site" shall mean that parcel of land consisting of
46866.271 square meters located at the northwest corner of
the Beijing Tianjin Highway and Bohai Road, immediately to
the west of the parcel occupied by Motorola China in 1993
as described in the Site Map attached to this Contract As
Appendix A.
J. "Technology License Contract" shall mean the contract
for the license of technology to the Company.
K. "Trademark License Contract" shall mean the contract
for the license of certain valuable trademarks to the
Company.
L. "Joint Venture Products" shall mean the computer parts
assembled produced or processed by the Company and
associated support services.
CHAPTER II PARTIES TO THE CONTRACT
Article 1
1.1 The parties to this Contract are as follows:
PARTY A: TIANJIN ECONOMIC-TECHNOLOGICAL AREA BUSINESS
DEVELOPMENT CO.,
PLACE OF REGISTRATION: Tianjin Economic-Technological Development Area,
LEGAL ADDRESS: The Fifth Street, Dongting Lu, Tianjin Economic-
Technological Development Area, Tianjin, People's
Republic of China.
LEGAL REPRESENTATIVE: Name: Gao Tianjin
Position: General Manager
Nationality: Chinese
PARTY B: AST Research (Far East) Limited
PLACE OF REGISTRATION: Hong Kong
LEGAL ADDRESS: 27/F, Alexandra House, 16-20 Chater Road,
Central, Hong Kong
LEGAL REPRESENTATIVE: Name: Philip Wong
Position: Vice President
Nationality: British
1.2 Representations and Warranties
Each of the Parties represents and warrants that:
(a) it possesses full power and authority to enter into
this Contract and to perform its obligations hereunder;
(b) its representative whose signature is affixed hereto
has been fully authorized to sign this Contract pursuant
to a valid power of attorney or equivalent legal document;
and
(c) upon the Effective Date, the provisions of this
Contract shall constitute its legal, valid and binding
obligations.
CHAPTER III PURPOSE AND SCOPE OF JOINT VENTURE COMPANY
Article 2
2.1 The purpose and aims of the Company are to manufacture,
process and sell Joint Venture Products and, in conformity with the
wish of enhancing the economic cooperation and technical exchanges, to
adopt advanced and practical technology and scientific methods for
business management, to upgrade existing products, to substitute
import products, to expand the network of importation, to increase
income in foreign currency, to raise economic results and efficiency
and to ensure satisfactory economic benefits for both investors and to
make contributions to the prosperity and development of the Tianjin
Economic-Technological Development Area.
2.2 The business scope of the Company includes processing,
manufacturing, assembling, producing, distributing and servicing
computer related products and parts thereof and to provide associated
after sale maintenance and support service for all AST products.
CHAPTER IV THE JOINT VENTURE COMPANY
Article 3
3.1 The name of the Company in English is "AST Computers China
Limited". The name of the Company in Chinese is ____________________.
3.2 Party A and Party B agree that the names "AST" and "AST
Computers China Limited" may be used only by the Company, except that
Party B may use the name "AST" at any and all times. Party A and
Party B also agree that the Company must cease use of the names "AST
Computers China Limited" and "AST" immediately if, at any time,
a. Party B has less than a fifty percent (50%) ownership
interest in the equity of the Company, or
b. Party B no longer has the right to appoint a majority
of the voting Directors on the Company's Board of
Directors.
3.3 Neither Party A nor Party B may use the name "AST Computers
China Limited" for its own commercial use without the consent of the
majority of the Directors of the Company. Under no circumstances may
Party A use the name "AST" for any purpose without the prior written
consent of Party B.
Article 4
4.1 The organization form of the Company is a limited liability
Company. Party A and Party B are liable to the Company only within
the respective limits of their contributions to the registered capital
of the Company. Except as otherwise provided herein, once a Party has
paid in full its contribution to the registered capital of the
Company, it shall not be required to provide any further funds to or
on behalf of the Company by way of capital contribution, loan, advance
guarantee or otherwise. Creditors of the Company shall have recourse
only to the assets of the Company and shall not seek repayment from
any of the Parties. The Company shall indemnify, defend and hold the
Parties harmless against any and all losses, damages or liability
suffered by the Parties in respect of third-party claims arising out
of the operation of the Company. Subject to the foregoing, the
profits, and losses of the Company shall be shared respectively by the
parties in proportion to and limited by their contributions to the
registered capital of the Company. Both parties shall contribute to
the registered capital in cash through remittance.
4.2 The Parties hereby agree to cause the Company immediately
after its Establishment Date, (or as soon thereafter as the Company
Directors may decide), by acting through the individual Directors of
the Company nominated by the Parties pursuant to this Contract, to
approve the entering into and execution of a technology License
Contract, and the Trademark License Contract.
4.3 The Parties hereby agree to cause the Company, immediately
after its Establishment Date (or as soon thereafter as the Company
directors may decide), by acting through the individual directors of
the Company nominated by the Parties, to open a bank account at a bank
located in China which is acceptable to Party B.
CHAPTER V INVESTMENT AND REGISTERED CAPITAL
Article 5
5.1 The total amount of investment required by the Company is
sixteen million U.S. Dollars (US$16,000,000).
Article 6
6.1 The total amount of the Company's registered capital shall
be six million four hundred thousand U.S. Dollars (US$6,400,000).
Article 7
7.1 Party A's contribution to the registered capital of the
Company shall be six hundred forty thousand U.S. Dollars (US$640,000),
representing ten per cent (10%) of the registered capital of the
Company.
7.2 Party A's contribution shall consist of the following:
Cash (in US$): US$ 640,000
7.3 Party B's contribution to the registered capital of the
Company shall consist of cash in the total amount of five million,
seven hundred sixty thousand U.S. Dollars (US$5,760,000), representing
ninety percent (90%) of the registered capital of the Company.
7.4 Party B's contribution shall consist of the following:
Cash (in US$): US$ 5,760,000
7.5 A portion of Party B's cash contribution to the registered
capital may, upon the direction of the General Manager or the
Directors of the Company, be used for the purchase from Party B of
production equipment, vehicles, office equipment, telecommunication
equipment and other machinery or equipment or services necessary for
initiating operation of the Company.
7.6 The Parties' obligations to make their respective
contributions to the Company's registered capital shall not arise
until each of the following conditions has been fulfilled or waived by
mutual agreement of the Parties:
a. Issuance by the Examination and Approval Authority of
an unconditional approval of this Contract and its
Appendices;
b. Issuance to the Company of a Business License with a
scope of business as set forth in this Contract;
c. Issuance to the Company of a Land Use Certificate over
the Site in accordance with the provisions of this
Contract.
All of the above documents must be in a form reasonably
acceptable to both Parties. If any of the above conditions precedent
is not fulfilled within ninety (90) days after the Effective Date, the
Parties may agree in writing either to waive all or part of such
conditions or to extend the deadline for their partial or complete
fulfillment to a specified date agreed by the Parties.
Article 8
8.1 Subject to the fulfillment of the conditions specified
above, the registered capital shall be paid in two installments. Each
installment shall be as follows:
a. The first installment shall be paid within one (1)
month after the Establishment Date for the Company. At
that time, Party A shall pay one half of its total
registered capital contribution, which is three hundred
twenty thousand US Dollars (US$320,000). At that time,
Party B shall pay one half of its total registered capital
contribution, which is two million eight hundred eighty
thousand US Dollars (US$2,880,000).
b. The second installment shall be paid twelve months
after the Establishment Date. At that time, Party A shall
pay the remaining one half of its total registered capital
contribution, three hundred twenty thousand US Dollars
(US$320,000). At that time, Party B shall pay the
remaining one half of its total registered capital
contribution, which is two million eight hundred eighty
thousand US Dollars (US$2,880,000).
8.2 The registered capital subscribed by both parties must, as
stipulated in above paragraphs, be contributed in two installments
through remittance to the bank account opened for the Company pursuant
to Paragraph 4.3.
8.3 If a Party fails to pay in its respective share of the
registered capital as described above, the failing Party shall be
liable to pay to the Company interest on the amount overdue from the
time due until the time paid at two percent (2%) above the annual
interest rate published by the Bank of China at that time for loans in
U.S. Dollars granted to Chinese-foreign joint ventures. The interest
shall be payable monthly in arrears to the Company until the overdue
amount is paid in full.
Article 9
9.1 After each Party's payment of its contribution to the
registered capital has been made in full, an international accounting
firm registered in China, recommended by Party B and approved by the
Board, shall verify the contribution and issue a contribution
verification report. Thereupon, the Company shall issue within sixty
(60) days after the payment of the contribution an Investment
Certificate to each Party signed by the Chairman and the Vice Chairman
of the Board.
Article 10
10.1 In addition to the registered capital, the Company's
operations may be financed with bank loans or other sources negotiated
by a Financial Representative recommended by Party B and approved by a
majority of the Company's Board of Directors. Neither Party A nor
Party B may negotiate financing on behalf of the Company without prior
written authorization of the Board. The Company shall not use or
pledge its assets as security for any loan or other financing without
the prior approval of the majority of the Board of Directors. Neither
Party A nor Party B shall be obligated to act as guarantor or provide
security for any financing for the Company without its prior written
consent.
10.2 If additional financing is obtained by the Company from
either Party, its affiliate or subsidiary, the terms of such financing
shall be in accordance with prevailing market rates or as negotiated
on an arm's length basis.
10.3 Neither Party A nor Party B may transfer, assign, sell or
otherwise dispose of all or any part of its interest in the Company or
its capital contribution without the prior written consent of the
other Party and approvals from all required Chinese authorities. The
Party desiring such transfer, assignment, sale or disposition (the
"disposing Party") shall notify the other Party in writing of all
salient terms of the proposed disposition, and such other Party shall
have a period of at least 30 days in which to consent or reject the
proposed disposition through written notice to the disposing Party.
If the other Party consents to the disposition, the disposing Party
will then afford the other Party the preemptive rights prescribed in
this Contract. Upon receipt of approvals from required Chinese
authorities, the Company shall register the change in ownership with
the relevant Chinese authorities.
10.4 If one Party is to assign, sell or otherwise dispose of all
or any part of its interest in the Company or its capital contribution
pursuant to paragraph 10.3 above, and if the other Party consents to
such disposition, such other Party has a preemptive right of purchase
at a price equal to that offered by a third party or, in the absence
of a third party offer, at a fair market value as determined by an
international accounting firm registered in China recommended by Party
B and approved by the majority of the Board of Directors of the
Company. The disposing Party shall notify the other Party in writing
of the terms and conditions of any such offers by third parties
("offer terms"). The Party with the preemptive right of purchase must
exercise such right within 30 days of its receipt of the offer terms
or within thirty days after receipt of the valuation from the
international accounting firm. The preemptive right may be exercised
by providing written notice of exercise to the disposing Party and
providing full payment to the disposing Party within thirty days
thereafter.
10.5 Party A hereby consents to the transfer by Party B of all
or a portion of Party B's interest in the Company or contribution to
the Company's registered capital to any subsidiary or affiliated
company of Party B, and in particular to a transfer of Party B's
registered capital in the Company to a wholly foreign owned enterprise
established in China by Party B or any of its affiliates or
subsidiaries for the purpose of holding the investments in China of
Party B and its affiliated companies. Party A hereby waives any pre-
emptive right to purchase Party B's interest in the company or
registered capital in respect of such a transfer and agrees that it
shall cause its appointed Directors of the Company to approve any such
transfer.
10.6 If either Party transfers all or any part of its interest
in the Company or its registered capital in accordance with this
Contract, it shall deliver up to the Company for cancellation the
Investment Certificate issued to it by the Company. The Company
shall, in accordance with the circumstances, promptly issue a new
Investment Certificate to the transferee.
10.7 Neither the business of the Company nor the performance of
its contracts shall be interrupted nor its organizational structure
affected by any such sale, transfer, assignment or other disposal of
any Party's interest in the Company or any amount of its capital
contribution.
10.8 Party A and Party B agree that the disposing Party shall
continue to comply with the obligations imposed by Chapter XVII of
this contract, "Intellectual Property and Confidentiality" for a
period of twenty (20) years after the transfer, sale, assignment or
other disposal of the disposing Party's interest in the Company or
capital contribution.
10.9 Party A and Party B agree that any liability of the
disposing Party to the Company or the other Party for breach of any
material term of this Contract shall not be affected by the sale,
transfer, assignment or other disposal of the disposing Party's
interest in the Company or its capital contribution.
10.10 Any increase in the registered capital of the Company must
be approved by a unanimous vote of the Directors in a duly constituted
meeting and, if required under applicable law, be submitted to the
Examination and Approval Authority for examination and approval. Upon
receipt of the approval by such Authority, the Company shall register
the increase in the registered capital with the relevant office of the
Chinese government. Each Party will pay its respective share of the
increase within thirty (30) days of the approval for such increase or
such additional time as a majority of the Board may deem reasonable.
In the event that payment in full is not made by the end of such
period, or any extension authorized by the Board, interest shall be
charged to the Party failing to pay as provided in Provision 8.3.
CHAPTER VI RESPONSIBILITIES OF EACH PARTY TO THE JOINT VENTURE
COMPANY
Article 11
11.1 In addition to its other obligations under this Contract,
Party A shall have the following responsibilities to be performed only
upon request by the Company:
(a) Contributing its investment in the manner stipulated
in this Contract.
(b) Assisting the Company in applying for and obtaining
approvals, registrations, licenses, permits and other
matters concerning the establishment and operation of the
Company from relevant Chinese authorities.
(c) Assisting the Company to organize the design and
construction of the premises and other engineering
facilities necessary for the project as may be directed by
the Company, including but not limited to assistance in
placement of contracts or agreements with third parties.
(d) Assisting the Company in applying for and obtaining
the most favorable tax or duty reductions, deductions and
exemptions and other investment incentives available for
the Company under the laws of China and relevant local
laws and as may be stipulated elsewhere in this Contract
or Appendices.
(e) Assisting the Company in liaising with the relevant
authorities to effectively procure the external water
supply, fuel supply, power supply, transportation,
communications and other services, materials or utilities
necessary for the implementation of this Contract or as
may be required by the Company or its facilities.
(f) Assisting the Company in selecting and procuring the
site necessary for the operation of the Company.
(g) Assisting the Company in preparation of the site for
construction, establishing construction offices and
recruiting qualified Chinese working personnel and
arranging for the transport of imported equipment,
services or material necessary for construction of the
Company's facilities.
(h) Assisting with the procedures of applying for and
procuring licenses for the import of equipment, raw
materials, products and supplies as required by the
Company, including the processing of any import customs
declarations.
(i) Assisting the Company in purchasing or leasing of
equipment, raw materials office articles, transportation,
communication facilities or other goods or services needed
in China.
(j) Assisting any expatriate employees and work force of
the Company to obtain all entry visas and work permits
necessary and arrange boarding, lodging, office space,
transportation and medical facilities for such persons in
China during the operation of the Company as may be
required by the Company.
(k) Assisting the Company in securing preferential
purchasing status of purchases of raw material or services
in China, including the necessary official allocations of
all raw materials the Company may require.
(l) Assisting the Company in processing the remittance of
foreign currency earned by Party B and the Company.
(m) Assisting the Company in applying for and obtaining
approvals for the sales of increasing amounts of Joint
Venture Products in the domestic market.
(n) Assisting the Company in handling of all other
matters as may be specifically entrusted by the Company
from time to time.
Article 12
12.1 In addition to its other obligations under this Contract,
Party B shall have the following responsibilities to be performed only
upon request by the Company:
(a) Contributing its investment in the manner stipulated
in this Contract.
(b) Execution of contracts for licensing of such
technical information, marketing and management
information and assistance by Party B to the Company as
deemed necessary or appropriate by Party B or the Board of
Directors by majority vote.
(c) Assisting the Company to obtain equipment, supplies,
services and raw materials not otherwise available on
commercially competitive terms in China.
(d) Assisting the Company to select and obtain management
and technical personnel to participate in the management
and operation of the Company as may be requested by the
Company, including assisting in training of personnel
selected by the Company in accordance with training plans
developed or adopted by the Company and assistance in visa
processing for such training as may occur outside China.
(e) Assisting the Company in obtaining additional
financing from the Bank of China, other financial
institutions in or outside China or from any Party or an
affiliate of any Party provided however, to the extent a
lender requires security for financing, and subject to
each Party's prior written approval, each Party shall
provide such security to the lender in proportion to its
respective registered capital contribution. Under no
circumstances will either Party be required to to provide
any security, pledge or guarantee for or on behalf of the
Company without such Party's prior written consent.
(f) Assisting in the selection of technical and
managerial consultants to provide expertise as may be
required by the Company.
(g) Assisting the Company in handling of all other matters
as may be entrusted by the Company from time to time.
CHAPTER VII THE BOARD OF DIRECTORS AND BUSINESS MANAGEMENT OFFICE
Article 13
13.1 The Board of Directors shall consist of five (5) Directors,
one (1) of whom shall be appointed by Party A and four (4) of whom
will be appointed by Party B. At the time this Contract is executed
and each time Directors are appointed, each Party shall notify the
other in writing of the names of its appointees.
13.2 Each Director shall be appointed for a term of four (4)
years and may serve consecutive terms if reappointed by the Party
originally appointing him. Each term shall be four years from the
time of appointment. Either Party may remove any of its appointed
Directors upon prior written notice to the other Party. If a seat on
the Board is vacated before expiration of a term, the Party which
originally appointed such Director shall appoint a successor to serve
out its unexpired term.
13.3 A Director appointed by Party B shall serve as Chairman of
the Board and a Director appointed by Party A shall serve as Vice
Chairman of the Board. The Chairman of the Board shall be the legal
representative of the Company. The Vice Chairman shall have such
responsibilities and authority as may be delegated by the Chairman and
approved by the Board.
13.4 The General Manager and the financial controller of the
Company shall be selected and appointed by the Chairman. The Deputy
General Manager of the Company may be selected by the Vice Chairman,
subject to approval by the Board. The Deputy General Manager shall
have such responsibilities and authority as may be delegated by the
General Manager.
13.5 Each party shall be responsible for the expenses incurred
by its appointed directors in attending Board meetings. This
provision shall not apply to any payment due to a director arising out
of his status as an employee of the Company.
13.6 The first meeting of the Board of Directors shall be held
within three (3) months after the date of issuance of the Company's
Business License; thereafter, except as authorized elsewhere in this
contract or as may be provided in applicable law or regulation, the
Board shall meet at least once each year. Board meetings will be held
in Tianjin, Hong Kong or such other places as the Board may determine.
13.7 Meetings of the Board of Directors shall be held on thirty
(30) days notice to the Directors, (or such other notice period as may
be authorized under applicable law or regulation) provided that any
Director may waive his right to such notice by written consent. A
notice of a Board meeting shall include the time and place of the
meeting as well as a summary agenda prepared by the Chairman.
Meetings may be held by telephone or other electronic means as well as
in person. Any action required or permitted to be taken at any board
meeting may be taken without a meeting if the Directors consent to
such action in writing. The Chairman shall be responsible for
convening and presiding over Board meetings; if the Chairman is unable
to attend a Board meeting, the Chairman may delegate such tasks to the
Vice Chairman.
13.8 If a Board member is unable to participate personally in a
Board meeting, such Director may participate by telephone or issue a a
proxy or may entrust another person to participate in the meeting on
his behalf. The representative so entrusted shall have the same
rights and powers as the absent Board member. If a Board member fails
to participate or to entrust another to participate, such Board member
will be deemed as having waived such right.
13.9 Each Director present in person or by proxy or
representative or by telephone at a meeting of the Board of Directors
shall have one vote.
13.10 Resolutions involving the following matters may only be
adopted upon unanimous affirmative vote of each and every director of
the Board present in person or by proxy or by telephone at such
meeting:
(i) the amendment of the Articles of Association,
(ii) the merger of the Company with another organization
which is not a subsidiary or affiliate of Party B,
(iii) dissolution or liquidation of the Company except as
either Party may be authorized to terminate this Contract
pursuant to Article 21,
(iv) the increase or transfer of the registered capital of the
Company other than pursuant to Provision 10.4 of this Contract.
13.11 Resolutions involving matters other than those set forth
in Paragraph 13.10 above may be adopted by the affirmative vote of a
majority of the Directors present at a convened meeting in person or
by proxy or by telephone.
13.12 The Board shall be the highest authority of the Company.
The Board shall discuss and determine all important issues regarding
the Company in accordance with the relevant national and local laws of
China, this Contract and the Articles of Association for the Company.
13.13 The Company shall not initiate negotiations for additional
financing for the Company or acquire interests in realty without the
affirmative vote of a majority of the Board of Directors.
13.14 The Board may, by majority vote, remove from office any
member of Company senior management who was originally selected or
appointed by the Board.
Article 14
14.1 The Company shall adopt a management system under which the
management organization shall be responsible to and under the
leadership of the Board of Directors. The Company will establish a
management office which shall be responsible for the Company's daily
management. The Company shall have a General Manager, Financial
Controller and Deputy General Manager who shall be responsible for
executing the policies and decisions issued by the Board of Directors.
The General Manager, Financial Controller and Deputy General Manager
shall serve terms of three years.
14.2 The General Manager shall organize and conduct the daily
management of the Company and shall, within the scope of powers and
authority empowered him by the Board, represent the Company to third
parties, appoint and dismiss subordinates and exercise other functions
as authorized by the Board. The General Manager shall be authorized
to utilize outside consultants or experts for specific assignments on
a temporary basis at his discretion for the Company's account and hire
and dismiss employees. In addition, the General Manager shall have
final decision making authority in executing the resolutions of the
Board. The General Manager shall consult with the Deputy General
Manager regarding issues of importance to the Company, but the General
Manager shall have final decision making authority. Except as may be
specifically authorized by the Board, the General Manager or his
designee shall sign all contracts for the Company. The General
Manager shall not execute any contracts for loans, additional
financing for the Company, or any contracts which pledge the assets of
the Company without the prior written authorization of the Board.
14.3 The General Manager may appoint several department managers
who shall be responsible for assuring execution of the directions
issued by the General Manager or his designee.
14.4 Party A and Party B shall, upon request by the Board or the
General Manager, assist the General Manager and other members of the
Company's management in all matters pertaining to entry or exit of
Chinese territory, including assistance for arranging transportation
of personal belongings in accordance with the Customs Law and the Tax
Laws of China. Such assistance shall include but not be limited to
assistance in obtaining entry visas and application to customs offices
for tax exemptions or reductions and for any other preferential
treatment available to the Company or its managers.
14.5 Senior management personnel shall be employed by the
Company in accordance with the terms of individual employment
contracts. The salaries and benefits paid by the Company to the
senior management personnel shall be determined by the Board in
accordance with domestic and international standards and recognizing
differing needs of expatriate personnel.
14.6 Senior management personnel must be full time personnel of
the Company and may not concurrently hold any position in another
economic organization which is in commercial competition with the
Company. If a member of the Company's senior management wishes to
resign for any reason, a written notice of such resignation must be
submitted to the Board of Directors ninety (90) days prior to the
effectivity of resignation.
14.7 Subject to the provisions of this Contract, applicable laws
and the Articles of Association of the Company, senior management
personnel of the Company may be appointed and removed by the General
Manager. Any vacancies among the Company's senior management shall be
filled by the Party having the right to nominate such office and in
the event neither Party has such right of nomination or fails to
exercise such right, the General Manager may appoint a candidate to
fill the vacancy.
14.8 Party A and Party B agree that through a consultancy
contract between the Company and Party B, Party B may provide to the
Company management and technical advice as may be determined by the
Board of Directors of the Company by majority vote.
CHAPTER VIII FINANCIAL AFFAIRS
Article 15
15.1 Except as may be authorized by the Board, the financial
controller shall be responsible for the financial affairs of the joint
venture and shall report to the General Manager and the Board of
Directors. The financial controller shall be responsible to submit to
the Board reports on the financial condition of the Company at such
intervals as the Board may determine.
15.2 The accounting system of the Company shall adopt a fiscal
year which shall begin on January 1 of each year and shall end on the
following December 31. The first fiscal year will begin on the
Establishment Date of the Company and end on the following December 31
and the last fiscal year shall end on the date of the dissolution of
the Company. Party B shall be provided with a financial report of the
Company after the conclusion of each fiscal year.
15.3 The General Manager and the Financial Controller shall
prepare and submit to the Board for approval the accounting system and
procedures in accordance with the Accounting System of the People's
Republic of China for Foreign Investment Enterprises and other
mandatory regulations. Subsequent to Board approval, the accounting
system and procedures will be filed or submitted to appropriate
Chinese government authorities. The debit and credit method as well
the accrual basis of accounting shall be adopted as the methods and
principles for keep accounts. Any changes to the accounting system and
procedures shall require the approval of a majority of the Board of
Directors.
15.4 The Company's gains and losses of RMB and gains and losses
of foreign currency shall be kept in separate accounts. The Company
shall use RMB as the standard currency for keeping accounts. The
exchange rates between RMB and foreign currencies shall be handled in
accordance with the applicable laws and regulations of China.
15.5 All accounting records, vouchers, books and statements of
the Company shall be made and kept in Chinese and English. All
important financial and accounting documents, records and statements
shall require the approval and signature of the Financial Controller.
All financial statements shall require the approval and signature of
the General Manager.
15.6 The Company shall separately open a foreign exchange
account and RMB account at banks selected by the Board of Directors
through a majority vote and approved by the Chinese Government. all
expenses of the Company shall be paid from such accounts. The
Company's foreign exchange transactions shall be handled in accordance
with the laws and regulations of China.
15.7 The Company shall, to the extent required by applicable law
or as may be determined by the board of Directors, maintain a balance
in its foreign exchange receipts and expenditures from the sale of its
Joint Venture Products. However, if despite the reasonable efforts of
the Parties in performing their obligations under this Contract, the
Company is unable to maintain a balance of foreign exchange, the Board
may consider and by majority vote approve other legal means of
achieving such balance, including but not limited to the following:
(i) conversion of its RMB denominated sales to US Dollars
through legal channels.
(ii) establishing and maintaining US Dollar, RMB or
other currency bank accounts in China and, if deemed
necessary by the Company, abroad.
(iii) requiring Chinese companies, foreign trade
corporations or other foreign enterprises in China to pay
foreign exchange for purchases of Joint Venture Products.
(iv) paying all taxes, duties or other fees in China owed
by the Company or its staff or employees in RMB.
Prior to implementing any such method of achieving foreign
exchange balance, the Company shall obtain all approvals or permits
required by relevant Chinese authorities. If such means fails to
achieve a satisfactory resolution, the Company, through the Board, may
seek further assistance from relevant Chinese authorities or either
party may terminate this Contract in accordance with Article 19.
15.8 Prior to the start of commercial activity of the Company,
foreign exchange held in capital accounts by the Company or to which
it is entitled shall be applied in payment of the following in
descending order of priority, or such order as the Board by majority
vote may approve:
(i) payment of all suppliers of imported materials,
equipment or services imported from outside of China.
(ii) payment of the Company's expatriate staff salaries,
(iii) payment of living and travel expenses of company
employees on training programs outside China.
15.9 Following the start of commercial activities, foreign
exchange earned by the Company or to which it is entitled shall be
applied in payment of the following in descending order of priority or
such order as the Board by majority vote may approve:
(i) payment of foreign currency loan interest/principal
as due.
(ii) distribution of profits to Party B
(iii) payment of imported raw materials, supplies, spare
and replacement parts,
(iv) payment of technology license obligations
(v) payment of the Company's expatriate staff salaries
(vi) living and traveling expenses of employees of the
Company incurred while traveling and living abroad for
training and other business purposes and
(vii) payment for imported services.
15.10 After payment of income taxes by the Company, the Board
will determine the amount of the reserve fund and expansion fund of
the company, and the bonus and welfare fund for the workers and staff
members which shall be deducted from the after-tax net profits. The
total allocation of these funds withdrawn each year shall not exceed
ten percent (10%) of the after-tax profit in such year unless
authorized by the Board of Directors.
15.11 The after-tax net profit of the Company shall be
distributed between Party A and Party B in proportion to their
respective shares in the registered capital after deductions therefrom
for various funds as stipulated in Paragraph 15.10, above. The Board
shall determine when the profit shall be distributed. If the Company
carries losses from the previous years, the profit of the current year
shall be first used to cover such losses. No profit shall be
distributed unless the deficit from the previous years is made up.
The profit retained by the Company and carried over from the previous
years may be distributed together with the distributable profit of the
current year of after the deficit of the current year is made up.
15.12 All payments to be distributed under this Article 15
shall, at the request of the receiving Party, be transmitted
electronically to an account at a bank located in China or abroad,
specified in advance by such Party.
15.13 In the event that there is not sufficient foreign exchange
to pay Party B's share of distributed profits, the Company shall, to
the extent of the unpaid portion, hold distributed RMB profits in
trust for Party B in a special interest bearing account established
for that purpose, when such account is available, in satisfaction of
the Company's obligation to distribute such share of the Company's
profit to Party B. From and after the date on which such account is
established, the Company will not withdraw or use the funds therein
except upon Party B's prior written instructions. When the Company
obtains sufficient foreign exchange, the Company shall, at Party B's
option, replace the RMB in such account (including any interest earned
therefrom) with its US Dollar equivalent in accordance with the
average of the buying and selling rates published by the Bank of China
(the "Official Rate") at the time of transaction, provided, however,
that should Party B require the Company to convert available Renminbi
for foreign exchange at any rate other than the Official Rate in
order to pay Party B's profits in foreign exchange, then the Company
will replace the Renminbi in such account (including interest
thereon) with the US Dollar equivalent in accordance with the
actual exchange rate of the conversion transaction. The Company
then shall immediately pay such US Dollars to Party B.
Article 16
16.1 An independent accountant registered in China and otherwise
qualified to render opinions on the compliance by the Company with the
accounting standards provided herein, shall be engaged by the Company
as its auditor to examine and verify the annual report on the final
accounts ("Independent Auditor"). The Company shall submit to the
Parties the annual financial statements (including the audited Profit
and Loss Account, the Balance Sheet and Cash Flow Balance and Foreign
Exchange Balance for the fiscal year) within three months after the
end of the fiscal year, together with the audit report of the Chinese
registered accountant. The annual financial statements, the audit
report and the monthly reports shall be prepared in both Chinese and
English.
16.2 The Board shall review and approve the periodic audits of
the accounts. In the event that the Board determines that the audits
submitted by the Independent Auditor are unable to properly meet the
standards set forth above, the Board may, upon majority vote, replace
the Independent Auditor, or retain another auditor at Company expense,
to supplement or adjust the work of the Independent Auditor or to
perform specific accounting and auditing tasks.
16.3 Each Party may, at its own expense, employ an auditor to
undertake financial examination on behalf of such Party. The Company
shall provide reasonable assistance to such auditor. The auditor
shall be obligated to keep confidential all documents under his
auditing.
CHAPTER IX LABOR MANAGEMENT AND WAGES
Article 17
17.1 The Board shall establish policies for the employment,
dismissal, wages, labor insurance, welfare, rewards, penalties and
other matters concerning the staff and workers of the Company. Such
policy shall be formulated in accordance with the principle of
employee compensation in accordance with performance and shall conform
to the Regulations of the People's Republic of China on Labor
Management in Joint Ventures Using Chinese and Foreign Investment.
The Company shall execute labor contracts incorporating such policies
with the Company's trade union or with each individual employee, as
may be determined by the majority vote of the Board. After execution,
the labor contracts will be filed with the appropriate labor
management department. Employment, salaries, labor insurance, welfare
and travel allowance for high-ranking officers shall be decided upon
by the Board. Expatriate personnel will receive benefits and
remuneration commensurate with those commonly provided in expatriate
employment packages.
17.2 The Company will conform to applicable rules and
regulations of the Chinese government concerning health, safety,
environmental protection, and labor insurance.
CHAPTER X TAXATION AND FOREIGN CURRENCY
Article 18
18.1 The Company shall pay taxes according to the Income Tax Law
Concerning Chinese-Foreign Joint Ventures and other applicable laws
and regulations of China.
18.2 Foreign and Chinese high-ranking officers, management,
staff and workers of the Company shall respectively pay their
individual income tax and individual income adjustment tax in
accordance with the applicable tax laws of China.
18.3 The Company will use its best endeavors to apply for and
obtain preferential tax treatment, reductions and exemptions to which
the Company is entitled. The Company may apply to the relevant
Chinese government departments for examination and confirmation that
the Company is an export enterprise and technologically advanced
enterprise and apply for any preferential treatment granted to such
enterprises by the Chinese government.
18.4 The Company shall apply for a drawback of the duties paid
on any imported materials which are used for export products.
18.5 The Company shall seek all tax exemptions, reductions and
preferences to which it is entitled for materials, equipment,
transportation vehicles and office equipment for the purpose of
production and management of the joint venture.
18.6 The customs duties, tariffs, or fees for all raw materials
imported by the Company shall be processed in accordance with the
applicable Chinese regulations on import customs duties issued at the
time of importation. The Company shall apply and proceed for tax
exemptions on such materials as are exempted from customs duty in
accordance with relevant regulations.
CHAPTER XI ALTERATION OF TERMS AND TERMINATION OF THE CONTRACT
Article 19
19.1 No change or alteration to this Contract or its appendices
shall be effective unless reduced to writing and signed by both
parties to this contract. Neither party has any authority to alter
the Contract unilaterally. Changes and alterations to this Contract
will be governed by the laws of the People's Republic of China and
shall not contravene the public interest.
19.2 The Joint Venture Term of the Company shall commence on the
issuance of the business license and shall expire on the date which is
thirty years after the issuance of the business license. The term of
the Joint Venture may be terminated before the expiration in
accordance with this Contract. If both parties agree, an application
for extension shall be submitted to the Examination and Approval
Authority for approval no less than six (6) months prior to the
expiration date of the term of the Joint Venture.
19.3 This Contract shall terminate upon the expiration of the
Joint Venture Term unless extended pursuant to this Contract. Either
Party may terminate this Contract prior to expiration of the Joint
Venture Term of the Company upon written notice to the other Party if:
a. the other party materially breaches this Contract an
such breach is not cured within three months of written
notice to the breaching party;
b. the Company or the other Party becomes bankrupt or is
the subject of proceedings for liquidation or dissolution
or ceases to carry on business or becomes unable to pay
its debts when due;
c. either Party transfers its equity participation in the
Company without the prior consent of the other Party or in
violation of the provisions of this Contract;
d. all or any part of the assets of the Company are
expropriated by any government authority;
e. any government authority having authority over either
Party requires any provision of this Contract to be
revised in such a way as to cause significant adverse
consequences to the Company or any of the Parties;
f. other unforeseen circumstances arise making it
impossible or commercially infeasible for the Company to
operate effectively;
g. conditions or consequences of Force Majeure prevail
for a period in excess of six (6) months and the Parties
have been unable to find an equitable solution;
h. despite all reasonable efforts by Party A, Party B and
the Company, the Company is unable, for sixty (60)
consecutive months, to balance its foreign exchange
requirements or its cumulative foreign exchange
obligations exceed six million, nine hundred thousand U.S.
Dollars (US$ 6,900,000);
i. if any ancillary agreements are terminated and such
termination prevents or severely inhibits the operation of
the Company in accordance with the expectations of the
Parties;
j. either Party's economic benefits are adversely and
significantly affected by any new laws, rules or
regulations of China or the amendment or interpretation of
any existing laws, rules or regulations or China after the
date of execution of this Contract, the Parties will
promptly consult with each other and use their best
endeavors to implement any adjustments necessary to
maintain each Party's economic benefits derived from this
Contract on a basis no less favorable than the economic
benefits it would have derived if such laws, rules or
regulations had not been enacted or amended or
interpreted. If the Parties cannot reach an agreement
regarding the economic adjustment within sixty (60) days
after discussions begin; or
k. for any other reason provided for in this Contract or
in relevant laws and regulations.
19.4 Termination for any other reason not specified herein shall
require unanimous approval of the Board of Directors.
19.5 If either Party gives notice pursuant to the foregoing of a
desire to terminate this Contract, the Parties will promptly negotiate
a resolution to the problem for which termination is sought. If the
problem cannot be resolved within six (6) months after commencement of
negotiations, or if one party refuses to negotiate, the Contract may
be terminated.
19.6 Notwithstanding any other provision of this Contract, the
Company shall automatically be dissolved upon bankruptcy or
dissolution of either Party. Upon the occurrence of either of
these events, the Parties shall take any and all actions
necessary to effect the dissolution of the Company. Without
limiting the foregoing, upon the occurrence of either of these
events, a meeting of the Board of Directors shall be convened
at which the Parties shall cause their respective representatives
to adopt a resolution to dissolve the Company.
19.7 If the Contract is terminated for any reason, the physical
assets of the Company shall be valued by and liquidated under the
direction of a Liquidation Committee formed in compliance with
applicable regulation. In valuing and selling the physical assets,
the Liquidation Committee will use every responsible effort to obtain
the highest possible price for such assets. After liquidation and
settlement of outstanding debts of the Company and subject o the
payment of any applicable taxes, the joint venture account shall be paid
over to Party A and Party B in proportion to their respective contributions
to the Registered Capital of the Company. Party A agrees that, to the
extent possible, it will ensure that amounts payable to Party B will
be paid in U.S. Dollars and shall be freely remittable by Party B out
of China in accordance with the applicable Chinese foreign exchange
regulations. In the liquidation of the assets of the Company, the
Party which originally contributed assets or the cash to purchase such
assets of the Company shall have priority to purchase such assets if
the price offered is reasonable. To the extent reasonably possible,
sales of the Company's assets will be in U.S. Dollars.
CHAPTER XII LIABILITIES FOR BREACH OF CONTRACT AND CLAIMS FOR DAMAGES
Article 20
20.1 If either Party fails to pay on schedule the contributions
to the Registered Capital in accordance with the provisions of this
Contract, and such failure is not excused, following the one month
period referred to in Article 8.3 above, the breaching Party will
pay the other Party liquidated damages each month beginning the second
month after the contribution is due. The liquidated damage payments
will be five percent (5%) of the amount of the delinquent contribution
and shall be payable in cash and in US Dollars. If the breaching
Party fails to pay the contribution for three consecutive months, and
such failure is not excused, the failure will be deemed a material
breach to the Contract and the other Party may immediately terminate
pursuant to Article 19 of this Contract and may pursue such other
damages or compensation for economic loss as may be provided under
Chinese law.
20.2 If the Company cannot continue its operations or achieve
the business purpose stipulated in the Contract due to the fact that
one of the parties fails to fulfill or seriously violates the
obligations prescribed in the Contract, such Party will be deemed to
be breaching the Contract. The non-breaching Party may elect to
terminate the contract in accordance with Article 19 of this Contract
and may recover compensation from the breaching Party commensurate
with the economic loss caused by the breach. The Parties may elect to
continue the operation of the Company; in such case, the Party who
fails to fulfill the obligations shall be liable to the other for the
economic loss sustained by the Company or the other Party as a result
of such breach.
20.3 Notwithstanding any other provision of this Contract, if a
breach is committed by a Party and such breach results in the non-
performance of or inability to fully perform this Contract including
any annexes, the liabilities arising from such breach will be borne by
the Party in breach. If a breach is committed by both Parties, each
will bear its individual share of the liabilities arising from its
breach of contract.
20.4. If either Party fails to perform its obligations under
this Contract it shall promptly inform the other Party in writing,
specifying the nature of the failure. If such failure is a breach of
this Contract, the non-performing Party will be liable to the other
Party and the Company for economic losses sustained as a result of
such breach.
20.5 Each Party to the Contract learning through any means
whatever that the other Party is unable or will fail to perform its
obligations under the Contract, shall promptly verify the failure or
inability to perform and shall take measures of remedy or measures to
prevent or mitigate any loss. If loss is increased due to failure to
take such measures, or failure to take measures promptly, the party
failing to take such measures shall have no right to compensation for
the increased part of the loss.
CHAPTER XIIV FORCE MAJEURE
Article 21
21.1 "Force Majeure" shall mean all events which are beyond the
control of the parties to this Contract and which are unforeseen or if
foreseen are unavoidable and which arise after the Contract Date and
which prevent total or partial performance by either Party. Force
Majeure may include but is not limited to strikes, labor disturbances,
explosions, fires, flood, earthquake and other natural disasters, acts
of war or civil disturbances, acts of any government in its sovereign
capacity, sabotage, condemnation or expropriation, or inability to
obtain materials or transportation.
21.2 If an event of Force Majeure occurs, the party whose
performance is prevented shall notify the other party by most
expedient means without delay and within fifteen (15) days thereafter
provide to other Party written report detailing the events and
providing certification from the local Chamber of Commerce
substantiating such occurrences. The Party experiencing the Force
Majeure event will exercise all reasonable endeavors to terminate the
Force Majeure condition and to minimize all loss to the Company and to
the other Party.
21.3 If the Company is unable to operate or the Contract
impossible to perform due to an event of Force Majeure, the
contractual obligations of the Parties (except obligations pertaining
to confidentiality) shall be suspended during the period of delay
caused by the Force Majeure and shall automatically be extended,
without penalty, for a period equal to such suspension.
21.4 In the event a Force Majeure event exists for such period
that the economic success of the Company is irreparably damaged, the
Board of Directors of the Company may dissolve the Company and
terminate this Contract.
CHAPTER XIV SELLING OF JOINT VENTURE PRODUCTS
Article 22
22.1 In accordance with the relevant laws, regulations and rules
of China, the Company may advertise, promote sell and distribute its
products in and outside China for its wholesale and retail objectives.
The objective of the Company shall be to sell up to seventy percent
(70%) of the Joint Venture Products outside China, if such Joint
Venture Products are competitive in price and quality to other similar
products on the international market, and to sell not less than thirty
percent (30%) of the Joint Venture Products within China. Upon
approval by the majority of the Board, and subject to the approval of
Party B, the Company may execute an Export Distribution Contract with
Party B or its affiliates establishing the terms for international
distribution of the Joint Venture Products for the Company.
22.2 The prices of the products of the Company sold outside
China will be determined by the Board of Directors in accordance with
international competitive marketing. The prices of products sold in
China shall be determined by the Board of Directors in accordance with
principles of achieving competitive advantages.
22.3 The Joint Venture Products sold in China may be sold either
by the Company directly or though other relevant Chinese sales and
distribution organizations pursuant to agency contracts entered into
between the Company and such organizations.
22.4 The Company may establish branch sales or service offices
within or outside China upon the approval of the relevant Chinese
authorities with a view to sell its products and perform after sales
maintenance service within or outside China.
CHAPTER XV TRADEMARK
Article 23
23.1 Party B or its parent shall license to the Company appropriate
trademarks owned by Party B or its parent or affiliates in accordance
with the terms of the trademark license contract to be executed after
the Establishment Date or at such time as may be determined by the Board
of Directors. The licensed trademarks will be used by the Company
only in connection with the manufacture, processing and sales of
designated Joint Venture Products. Party B will cause the registration
of the trademark with the relevant Chinese authorities in accordance with
the Trademark Law of the People's Republic of China and its detailed rules
for implementation. The trademarks registered in China shall be
protected by the Chinese laws. All licensed trademarks shall at all
times remain the property of Party B or its affiliates or licensor.
After the expiration of or the termination of this Contract, and upon
its dissolution, the Company will have no right to use the trademarks.
Party A shall have no right of use of the trademark except with the
prior written consent of Party B or its parent.
CHAPTER XVI INTELLECTUAL PROPERTY AND CONFIDENTIALITY
Article 24
24.1 The Parties shall, during the term of this Contract and the
existence of the Company, and thereafter until the information
properly comes into the public domain or until twenty (20) years
following the expiration or termination of this Contact, whichever
occurs first, maintain the secrecy and confidentiality of and not
disclose to any third person or party any proprietary information or
any information considered secret or confidential by either Party
which is disclosed, directly or indirectly to the Company or the other
Party.
24.2 The Parties will cause their directors, senior staff and
other employees and those of their subsidiaries or affiliates also to
comply with the confidentiality obligations set forth above.
24.3 The Company shall not disclose proprietary information
concerning its sales or finances or products to any persons or
entities except, where circumstances warrant, to Party A and Party B
during the valid term of this Contract (excluding information which is
required to be reported to officials or departments of the Chinese
Government), unless such information is already in the public domain.
24.4 This Article and the obligations and benefits hereunder
shall survive for twenty (20) years after the termination of this
Contract and the termination or dissolution of the Company.
24.5 Both parties to this Contract shall require their appointed
Directors to the Company to require Company personnel to execute
appropriate contracts or agreements to maintain the secrecy of
proprietary and confidential information of the Company.
24.6 The Party breaching the obligations of confidentiality
under this Contract will be liable for damages accrued to the non-
breaching Party.
CHAPTER XVII INSURANCE
Article 25
25.1 The Company shall, at its own cost and expense, take out
and maintain full and adequate insurance of the Company against loss
or damage by fire and such other risks as may be decided by the Board
through a majority vote of the Directors. The property,
transportation, product liability and other items of insurance of the
Company shall be obtained within or outside China, subject to any
legal restrictions which may apply, and such insurance policies will
be denominated in Chinese and foreign currencies, as appropriate. The
types and amounts of insurance coverage shall be determined by the
Board in accordance with applicable Chinese laws, if any.
CHAPTER XVIII APPLICABLE LAW
Article 26
26.1 The validity, interpretation and implementation of this
Contract will be governed by the law of the People's Republic of China
which are published and publicly available, but if there is no
published and publicly available law in China pertaining to any
particular matters relating to this Contract, reference shall be made
to general international commercial practices.
CHAPTER XIX SETTLEMENT OF DISPUTES
Article 27
27.1 In the event a dispute arises in connection with the
interpretation or implementation of this Contract, the Parties shall
attempt in the first instance to resolve such dispute through friendly
consultations.
27.2 If the dispute is not resolved through friendly
consultations within sixty (60) days after the commencement of
discussions, or such longer period as the Parties agree in writing at
that time, then notwithstanding any other provision of this Contract,
the Parties shall resolve the dispute in Geneva, Switzerland according
to the arbitration rules of the International Chamber of Commerce
("ICC"). Arbitration shall be conducted as follows:
(i) All proceedings in any such arbitration shall be
conducted in English and a daily transcript in English of
such proceeding shall be prepared. All decisions of the
arbitrators will be reduced to writing and such decisions
will be supported by rationale. Arbitrators may not award
any monetary compensation to either Party which is
speculative, punitive or was not a direct result of a
breach of the other Party's obligations under this
Contract.
(ii) There shall be three (3) arbitrators, fluent in
English, appointed in accordance with the ICC rules.
(iii) The arbitration award shall be final and binding on
the Parties and the Parties agree to be bound thereby and
act accordingly.
(iv) When any dispute occurs and when any dispute is
under arbitration, except for the matters under dispute,
the Parties shall continue to exercise their remaining
respective rights and fulfill their remaining respective
obligations under this Contract.
(v) In any arbitration proceeding, any legal proceeding
to enforce the arbitration award or any legal action
between the Parties relating to this Contract, each Party
expressly waives the defense of sovereign immunity and any
other defense based upon the fact or allegation that it is
an agency or instrumentality of a sovereign state. Any
award of the arbitrators shall be enforceable by any court
having jurisdiction over the Party against whom the award
has been rendered and shall be enforceable in accordance
with the "United Nations Convention on the Reciprocal
Enforcement of Arbitral Awards (1958).
CHAPTER XX LANGUAGE
Article 28
28.1 This Contract shall be written in Chinese and English
versions. Both languages are equally authentic and shall have the
same effect.
CHAPTER XXI ASSIGNMENT OF THE CONTRACT
Article 29
29.1 Neither party may transfer or assign any obligation or
right under this Contract without the prior written consent of the
other party, except that Party A consents to any transfer or
assignment of Party B's interests to any other affiliate or subsidiary
of Party B. Party B agrees to provide Party A with prior written
notice of any such transfer or assignment.
CHAPTER XXII EFFECTIVENESS OF THE CONTRACT AND MISCELLANEOUS
PROVISIONS
Article 30
30.1 Any appendices of this Contract are an integral part of the
Contract and have the same legal effect as the text of the Contract.
30.2 Notices between the Parties may be sent by mail or
telegram, facsimile, or telex. Any notice in connection with any
party's rights and obligations shall require a written letter notice,
return receipt. The legal addresses of both parties listed in this
Contract shall be the posting addresses. Notices shall be deemed
effective upon receipt.
30.3 The Contract and its appendices shall be approved by the
appropriate Chinese government offices.
30.4 Failure or delay on the part of either Party hereto to
exercise any right, power or privilege under this Contract or under
any other contract or agreement relating hereto shall not operate as a
waiver thereof, nor shall any single or partial exercises of any
right, power or privilege preclude any future exercise thereof.
30.5 Nothing in this contract is intended to interfere with or
restrict Party B, its parent or affiliates from independently engaging
in or pursuing lawful business activity in China.
30.6 This Contract and any appendices hereto attached to this
Contract constitute the entire agreement between Party A and Party B with
respect to the subject matter and supersede all other discussions,
negotiations and agreements, written or oral. In the event of a conflict
in the terms of this Contract and the Articles of Association, the term of
this Contract will prevail.
Executed by Party A Executed by Party B
__________________________ __________________________
Signature Signature
__________________________ __________________________
Name Name
__________________________ __________________________
Title Title
__________________________ __________________________
Date Date
Witness for Party A Witness for Party B
__________________________ __________________________
Signature Signature
__________________________ __________________________
Name Name
__________________________ __________________________
Title Title
__________________________ __________________________
Date Date
<PAGE>
EXHIBIT 11
AST RESEARCH, INC.
Computation of Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- -------------------------
April 2, April 3, April 2, April 3,
(In thousands, except per share amounts) 1994 1993 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings per share
Shares used in computing primary
earnings per share:
Weighted average shares of
common stock outstanding 32,103 31,472 31,784 31,206
Effect of stock options treated as
equivalents under the treasury
stock method 977 538 728 614
-------- -------- -------- --------
Weighted average common
and common equivalent
shares outstanding 33,080 32,010 32,512 31,820
-------- -------- -------- --------
Net income $ 13,214 $ 11,045 $ 39,379 $ 33,267
-------- -------- -------- --------
Earnings per share - primary $ .40 $ .35 $ 1.21 $ 1.05
======== ======== ======== ========
Fully diluted earnings per share
Shares used in computing fully diluted
earnings per share:
Weighted average shares of
common stock outstanding 32,103 31,472 31,784 31,206
Effect of stock options treated as
equivalents under the treasury
stock method 983 539 805 650
Shares assumed issued on conversion
of Liquid Yield Option Notes 4,093 - 1,649 -
-------- -------- -------- --------
Total fully diluted shares outstanding 37,179 32,011 34,238 31,856
-------- -------- -------- --------
Net income - fully diluted earnings per share:
Net income - primary earnings per share $ 13,214 $ 11,045 $ 39,379 $ 33,267
Adjustment for interest on LYONs,
net of tax 890 - 1,066 -
-------- -------- -------- --------
Adjusted net income - fully diluted
earnings per share 14,104 11,045 40,445 33,267
-------- -------- -------- --------
Net income per share - fully diluted $ .38 $ .35 $ 1.18 $ 1.04
======== ======== ======== ========
</TABLE>
<PAGE>
