________________________________________________________________________________
________________________________________________________________________________
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 DECEMBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO_______________
COMMISSION FILE 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 32,376,500 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on January 27, 1995.
________________________________________________________________________________
________________________________________________________________________________
AST RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
at December 31, 1994 (Unaudited)
and July 2, 1994 3
Consolidated Statements of Operations
(Unaudited) for the three months and six months ended
December 31, 1994 and January 1, 1994 4
Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
December 31, 1994 and January 1, 1994 5-6
Notes to Consolidated Financial
Statements (Unaudited) 7-9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
</TABLE>
AST RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
December 31, July 2,
1994 1994
(In thousands, except share amounts) (Unaudited)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 68,654 $ 153,118
Accounts receivable, net of allowance for
doubtful accounts of $17,920 at December 31, 1994
and $17,564 at July 2, 1994 375,087 326,057
Inventories 351,362 333,729
Deferred income taxes 49,690 43,266
Other current assets 14,780 9,797
- -----------------------------------------------------------------------------------------------------
Total current assets 859,573 865,967
Property and equipment 166,227 159,530
Accumulated depreciation and amortization (62,259) (56,089)
- -----------------------------------------------------------------------------------------------------
Net property and equipment 103,968 103,441
Goodwill, net of accumulated amortization of $7,656
at December 31, 1994 and $4,387 at July 2, 1994 58,412 61,912
Other assets 9,495 6,992
- -----------------------------------------------------------------------------------------------------
$ 1,031,448 $ 1,038,312
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 75,000 $ 50,000
Accounts payable 252,579 209,579
Accrued salaries, wages and employee benefits 19,952 21,465
Other accrued liabilities 113,351 112,096
Income taxes payable 23,540 37,955
Current portion of long-term debt 398 398
- -----------------------------------------------------------------------------------------------------
Total current liabilities 484,820 431,493
Long-term debt 218,158 215,294
Deferred income taxes and other non-current liabilities 6,328 7,571
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares
authorized, 32,374,200 shares issued and
outstanding at December 31, 1994 and 32,333,750
shares at July 2, 1994 324 323
Additional capital 141,814 141,424
Retained earnings 180,004 242,207
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 322,142 383,954
- -----------------------------------------------------------------------------------------------------
$ 1,031,448 $ 1,038,312
=====================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------ ----------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
(In thousands, except per share amounts) 1994 1994 1994 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 640,159 $ 677,011 $ 1,135,605 $ 1,191,420
Cost of sales 573,841 562,445 1,031,988 990,954
- -----------------------------------------------------------------------------------------------
Gross profit 66,318 114,566 103,617 200,466
Selling and marketing expenses 58,548 53,022 110,413 95,093
General and administrative expenses 22,475 19,698 44,752 37,288
Engineering and development expenses 8,648 10,403 18,550 20,647
- -----------------------------------------------------------------------------------------------
Total operating expenses 89,671 83,123 173,715 153,028
- -----------------------------------------------------------------------------------------------
Operating income (loss) (23,353) 31,443 (70,098) 47,438
Interest income 523 373 1,007 627
Interest expense (3,603) (2,581) (6,892) (4,186)
Other expense, net (1,461) (2,064) (1,771) (4,235)
- ------------------------------------------------------------------------------------------------
Income (loss) before income taxes (27,894) 27,171 (77,754) 39,644
Provision (benefit) for income taxes (5,579) 9,238 (15,551) 13,479
- ------------------------------------------------------------------------------------------------
Net income (loss) $ (22,315) $ 17,933 $ (62,203) $ 26,165
================================================================================================
Net income (loss) per share:
Primary $ (.69) $ .55 $ (1.92) $ .81
Fully diluted $ (.69) $ .54 $ (1.92) $ .79
================================================================================================
Shares used in computing net
income (loss) per share:
Primary 32,369 32,454 32,358 32,228
Fully diluted 32,369 33,404 32,358 33,195
================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Six Months Ended
-----------------------------------
December 31, January 1,
(In thousands) 1994 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,088,368 $ 1,055,099
Cash paid to suppliers and employees (1,175,936) (1,091,042)
Interest received 1,122 614
Interest paid (4,697) (2,166)
Income tax refunds received 3,322 1,130
Income taxes paid (9,435) (8,706)
Other cash received (paid) 2,784 (5,137)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (94,472) (50,208)
Cash flows from investing activities:
Payment related to Tandy/GRiD acquisition - (15,000)
Purchases of capital equipment (15,220) (11,186)
Proceeds from disposition of capital equipment 2,029 530
Sales (purchases) of other assets (1,559) 470
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,750) (25,186)
Cash flows from financing activities:
Short-term borrowings, net 25,000 (9,195)
Repayment of long-term debt (226) (121)
Proceeds from issuance of long-term debt, net - 108,733
Proceeds from issuance of common stock 391 1,410
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,165 100,827
Effect of exchange rate changes on cash and cash equivalents (407) (1,606)
- --------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (84,464) 23,827
Cash and cash equivalents at beginning of period 153,118 121,600
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 68,654 $ 145,427
==============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES:
<CAPTION>
- --------------------------------------------------------------------------------------------------
Six Months Ended
-------------------------------
December 31, January 1,
(In thousands) 1994 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (62,203) $ 26,165
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 14,314 11,154
Provision (benefit) for deferred income taxes (7,101) 979
Gain on sale of capital equipment (435) -
Change in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable (45,975) (127,863)
Inventories (17,633) 38,205
Other current assets (8,151) 1,119
Accounts payable and accrued expenses 52,952 41,631
Income taxes payable (14,415) (1,010)
Other current liabilities (2,941) (44,933)
Exchange loss (gain) (2,884) 4,345
- -------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (94,472) $ (50,208)
=================================================================================================
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
=================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 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 2,
1994) in accordance with generally accepted accounting principles for interim
financial information and with the 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 1994 Annual Report on
Form 10-K. The results of operations for the three and six month periods ended
December 31, 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 2, 1994.
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 six-
month period ended December 31, 1994, the estimated tax benefit rate is less
than the U.S. statutory rate primarily due to estimates of the proportion of the
Company's fiscal 1995 consolidated income/loss which will be realized in lower
rate foreign tax jurisdictions, as well as the Company's inability to benefit
all of its deferred tax assets. Differences between the estimated effective tax
rate and the Company's actual effective tax rate could result from changes in
the Company's ability to recognize its deferred tax assets and from changes in
the mix of income/loss in the various tax jurisdictions within which the Company
operates. Such differences are recognized when known.
The provision (benefit) for income taxes is computed on the pretax income
(loss) of the consolidated entities located within each taxing country based on
the current tax law. Deferred taxes result from the future tax consequences
associated with temporary differences between the amount of assets and
liabilities recorded for tax and financial accounting purposes. A valuation
allowance for deferred tax assets is recorded to the extent the Company cannot
determine, in accordance with the provisions of Statement of Financial
Accounting Standards No. 109 "Accounting for Income Taxes," that the ultimate
realization of net deferred tax assets is more likely than not.
Acquisitions and Restructuring
In the fourth quarter of fiscal 1993, the Company acquired certain assets and
assumed certain liabilities relating to Tandy Corporation's ("Tandy") personal
computer manufacturing operations and the GRiD North American and European sales
divisions. On September 1, 1993, the Company also purchased certain assets and
assumed certain liabilities of Tandy/GRiD France. The total purchase price
(including Tandy/GRiD France) was $111.7 million and included a cash payment of
$15 million and a three-year promissory note in the principal amount of $96.7
million. Restructuring charges of $125 million were recorded in the fourth
quarter of fiscal 1993 in connection with the Company's acquisition of Tandy's
personal computer manufacturing and engineering operations and GRiD's North
American and European sales and marketing operations.
During fiscal 1994, the Company completed most of its previously identified
restructuring activities and incurred asset write-downs of $50 million and cash
expenditures of $47 million related directly to its fiscal 1994 restructuring
activities. The Company recorded a $12.5 million credit in the fourth quarter
of fiscal 1994 after concluding that most of its restructuring activities had
been completed or were adequately provided for within the
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1994
remaining restructuring accrual. At July 2, 1994, $15.2 million of the
restructuring accrual remained on the Company's consolidated balance sheet. In
October 1994, the Company announced plans to consolidate its worldwide mobile
computing manufacturing in Taiwan and the concurrent closure of its Fountain
Valley, California manufacturing facility February 1, 1995. During the first
six months of fiscal 1995, the Company incurred cash expenditures of
approximately $.7 million related primarily to the closure of its Fountain
Valley, California manufacturing facility. At December 31, 1994, approximately
$14.5 million of restructuring accruals remained for final restructuring
activities, which the Company expects to be completed by the end of the fourth
quarter of fiscal 1995. The Company expects these costs to represent a
combination of future cash expenditures and asset write-downs necessary to
combine and restructure existing worldwide manufacturing and distribution
capacity, including the closure of its Fountain Valley facility.
The Company believes that its restructuring activities were necessary in order
to redeploy and reorganize its worldwide operations after the June 1993
acquisition of Tandy's personal computer operations. However, no assurances can
be given that these restructuring actions will be successful or that similar
actions will not be required in the future.
Contingencies
In June 1989, Texas Instruments Inc. ("TI") advised the Company that it
believed certain AST(R) computer products infringe certain TI patents. On
January 4, 1994, the Company initiated litigation (the "California action") 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 AST patents and that certain TI patents are invalid or
inapplicable. TI has alleged in the California action that the Company is
infringing patents owned by TI. On August 26, 1994, TI filed a lawsuit in the
U.S. District Court for the Eastern District of Texas against the Company
alleging infringement of patents in addition to those asserted by TI in the
California action. These litigations with TI were settled on February 7, 1995
and a Settlement Agreement and Release was entered into by the parties. The
Settlement Agreement and Release includes, in part, a patent cross-license
agreement between AST and TI for the calendar years 1995 through 2000, and
requires periodic royalty payments from AST to TI.
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 laws 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 September 12, 1994, a complaint was filed by
a shareholder against the Company and certain of its officers and directors
requesting certification of a class action, asserting claims under state and
federal securities laws based on allegations that the Company made inadequate
and false disclosures and seeking unspecified compensatory damages and related
fees and costs. The September 12, 1994 complaint was filed in the United States
District Court for the Central District of California under the case name Steven
A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was
filed by a shareholder in the United States District Court for the Central
District of California. The October 6, 1994 complaint names the Company and
certain of its officers and directors as defendants, asserts claims under the
state and federal securities laws based on allegations that the Company made
inadequate and false disclosures, and seeks unspecified compensatory damages and
related fees and costs. The cases with complaints filed on March 3, 1994, March
14, 1994 and October 6, 1994 have been consolidated under the case name In re
AST Securities Litigation. The AST Securities Litigation and Kornfeld cases are
being treated as related cases by the court. Management has reviewed the
allegations and the complaints and believes such allegations are without merit.
Management intends to vigorously defend these litigations. Management does not
believe that the outcome of these matters will have a material adverse impact on
the Company's consolidated financial position or results of operations.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DECEMBER 31, 1994
The Internal Revenue Service ("IRS") is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and 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 subsidiaries. Management believes that the Company's
position has substantial merit and intends to vigorously contest these proposed
adjustments. Management further believes that any liability that may result
upon the final resolution of the proposed adjustments or the current
examinations will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company has been named as a defendant or co-defendant, generally with
other personal computer manufacturers, including IBM, AT&T, Unisys, Digital
Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in twelve
similar lawsuits, each of which alleges as a factual basis the occurrence of
carpal tunnel syndrome or repetitive stress injuries. The suits naming the
Company are just a few of the many lawsuits of this type which have been filed,
often naming IBM and other computer companies. The claims total in excess of
$100 million in compensatory and punitive damages and additional unspecified
amounts. The Company has denied or is in the process of denying the claims and
intends to vigorously defend the suits. The Company is unable at this time to
predict the ultimate outcome of these suits. Ultimate resolution of the
litigation against the Company may depend on progress in resolving this type of
litigation overall. The Company believes that the claims in the suits filed
against it will not have a material impact on the Company's consolidated
financial position or results of operations. The Company has maintained various
liability insurance policies during the period covering the claims filed above.
While such policies may limit coverage under certain circumstances, the Company
believes that it is adequately insured against potential losses that may result
from these claims. Should the Company not be successful in defending against
such lawsuits or not be entitled to claim compensation under its liability
insurance policies, the Company's profitability and financial condition may be
adversely affected.
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 (loss) per common share for fiscal 1995 and 1994 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. In fiscal 1994, 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.
In fiscal 1995, fully diluted earnings (loss) per share were antidilutive.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
December 31, July 2,
(In thousands) 1994 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 93,762 $ 99,959
Work in process 51,136 53,765
Finished goods 206,464 180,005
- -----------------------------------------------------------------------------------------------------------
$ 351,362 $ 333,729
===========================================================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DECEMBER 31, 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 Six Months Ended
-----------------------------------------------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1994 1994 1994 1994
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.6 83.1 90.9 83.2
- ----------------------------------------------------------------------------------------------------------
Gross profit 10.4 16.9 9.1 16.8
- ----------------------------------------------------------------------------------------------------------
Selling and marketing expenses 9.1 7.9 9.7 8.0
General and administrative expenses 3.5 2.9 4.0 3.1
Engineering and development expenses 1.4 1.5 1.6 1.7
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) (3.6) 4.6 (6.2) 4.0
Other expense, net (0.8) (0.6) (0.6) (0.7)
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (4.4) 4.0 (6.8) 3.3
Provision (benefit) for income taxes (0.9) 1.4 (1.3) 1.1
- ----------------------------------------------------------------------------------------------------------
Net income (loss) (3.5%) 2.6% (5.5%) 2.2%
==========================================================================================================
</TABLE>
Sales
Net sales for the six-month period ended December 31, 1994 decreased 5% to
$1.136 billion from $1.191 billion in the six-month period ended January 1,
1994. This decline in revenues was primarily due to lower 386 and 486 desktop
systems sales and decreased shipments of the Company's notebook system products.
The Company has experienced unanticipated product development and production
delays over the prior two quarters which have contributed to lower systems
sales. In addition, continued industrywide competitive pricing pressures have
prompted aggressive pricing and promotional activities which have further
reduced total revenues. The Company anticipates that additional pricing actions
will be necessary as it attempts to maintain its competitive price and
performance product profile; however, there can be no assurance that future
pricing actions will be effective in stimulating sales growth. The Company
shipped 707,000 computer systems in the first six months of fiscal 1995, a
decrease of 6% from the 752,000 units shipped in the same prior year period.
Revenues from desktop system products decreased 2% to $765 million for the
six-month period ended December 31, 1994 from $780 million in the comparable
prior year period. Increased sales of the Advantage!(R) 486DX and the BravoTM
486DX were offset by declines in revenues from the Advantage! and Bravo
486SX, PremmiaTM 486DX and Tandy(R) desktop systems sales. Decreased sales
of the Company's 486-based desktop systems reflected the shift in demand
toward the PentiumTM desktop systems which accounted for 16% of total
desktop systems sales for the six-month period ended December 31, 1994 versus
3% in the comparable fiscal 1994 period. Included within total desktop
revenues were sales of the Company's 80386 systems which declined to $3
million in the six-month period ended December 31, 1994, compared to $41
million in the first six months of fiscal 1994.
The Company's notebook computer product revenues declined 7% to $235 million
in the six-month period ended December 31, 1994 from $252 million in the
comparable prior year period. This decrease reflects a 8% reduction in unit
shipments to 115,000 for the six-month period ended December 31, 1994 from
125,000 in the same prior year period. Increased AscentiaTM 486SLE notebook
systems sales were offset by declines in revenues from the Bravo and Advantage!
486SX lines of notebook computers and the PowerExecTM notebook product line.
North American revenues (including Canada) decreased by 16% to $675 million
during the first six months of fiscal 1995 from the comparable prior year
period. Revenue from the consumer retail channel decreased 20% from the
comparable prior year period and accounted for 37% of total North American
revenues. Revenues related to Tandy branded systems sales are primarily
responsible for year-over-year decreased sales in the consumer retail channel.
Sales to the independent reseller/dealer channel for the six-month period ended
December 31, 1994 decreased 5% over the same prior year period and accounted for
48% of total North American revenues versus 42% in the comparable fiscal 1994
period. Revenue from the original equipment manufacturers ("OEM") channel
declined significantly during the first six months of fiscal 1995 due to the
completion of two large OEM contracts in the fourth quarter of fiscal 1994. The
Company expects revenues from the OEM channel to represent a smaller portion of
its revenue base in fiscal year 1995 compared to fiscal year 1994 as the Company
focuses on AST(R) branded products. Within the overall decrease in
North American revenues, sales to the national distributor channel grew
slightly, increasing 3% over the same prior year period. The national
distributor channel and the OEM channel accounted for 13% and 2%,
respectively, of total North American revenues during the six-month period
ended December 31, 1994.
Six month fiscal 1995 international revenues rose 20% to $461 million from
$385 million in the comparable prior year period and accounted for 41% of total
fiscal 1995 revenues. The European region provided 66% of total international
revenues for the six-month period ended December 31, 1994, a 30% increase over
the same period last year. The United Kingdom and Sweden continued to be major
contributors to total European revenues with significant fiscal 1995 revenue
growth also occurring in Italy and Switzerland. Increased demand for the
Company's Advantage and Bravo 486-based desktop systems, Pentium desktops and
the Ascentia notebook systems contributed to the European revenue growth. In
January 1994, the Company established a centralized European manufacturing,
distribution and service operation in Limerick, Ireland. During the second
quarter of fiscal 1995, the new Ireland facility manufactured nearly all of the
desktop production requirements for the European region.
Pacific Rim revenues totaled $128 million in the six-month period ended
December 31, 1994, up 3% from the prior year total of $125 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. The
current trade dispute between the United States and China may result in trade
sanctions which could have an adverse impact on the Company's future sales
and/or operations. Economic factors such as competitive pricing, short-term
fluctuations in foreign currency exchange rates and changes in the PRC tax
structure could also have a corresponding impact on future sales and operating
results. Although Pacific Rim revenues rose during the six-month period ended
December 31, 1994, revenues to the PRC declined 32% compared to the same prior
year period. This decline was attributable to significantly increased
competition and to lower first quarter sales to one of the Company's major
customers within this region. The Company anticipates that these competitive
pressures will continue and may adversely impact the Company's net sales and
profitability. Revenues from the Company's Australian subsidiary increased 94%
in the first six months of fiscal 1995 over the same prior year period.
In the Company's Rest of World region, revenues increased 9% to $29 million in
the six-month period ended December 31, 1994 compared to the same prior year
period. This increase is primarily due to a 15% growth rate in the Company's
Middle East operations and a 19% growth rate in Latin America. However,
economic risks in Mexico as well as in other less developed countries, such as
the recent Mexican currency devaluation, could have a corresponding impact on
future sales and operating results in various less developed regions of the
world.
Revenues for the quarter ended December 31, 1994 decreased 5% to $640 million
from $677 million in the quarter ended January 1, 1994 due primarily to lower
notebook systems sales. Second quarter fiscal 1995 international revenues of
$290 million were 28% higher than the comparable prior year quarter, while North
American revenues decreased 22% to $350 million. During the second quarter of
fiscal 1995, the Company began shipments of the Bravo MS-T minitower and the
Bravo MS-L low-profile desktop. The Company also shipped new models of the
ManhattanTM V and P series of Pentium-based servers, as well as the Ascentia
810N value notebook.
Gross Profit
Gross profit margins decreased to 9.1% in the six-month period ended December
31, 1994 from 16.8% in the six-month period ended January 1, 1994. This decline
in margins resulted primarily from unanticipated product development and
production delays, manufacturing related costs associated with product
transitions and continued intense industrywide competitive pricing pressures.
The Company believes that the industry will continue to be characterized by
rapid technological advances and short product life-cycles resulting in
continued risk of product obsolescence.
The personal computer industry continues to experience significant pricing
pressures and the Company believes that industry consolidation and restructuring
will result in an aggressive pricing environment and continued pressure on the
Company's gross profit margins during fiscal 1995. During the first six months
of fiscal 1995, the Company and the majority of its competitors continued to
introduce new, lower-priced, higher performance personal computers resulting in
continued pricing pressures on both new and older technology products. Future
pricing actions by the Company and its competitors may continue to adversely
impact the Company's gross margins or profitability, which could also result in
decreased liquidity and adversely affect the Company's financial position.
The results of the Company's international operations are subject to currency
fluctuations. As the value of the U.S. dollar weakens relative to other
currencies, revenues from sales in those currencies convert to more 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 six-month period ended December 31, 1994 to the six-month period
ended January 1, 1994, the U.S. dollar declined against nearly all European
currencies. This year-to-year currency fluctuation resulted in approximately a
two percentage point gross margin increase in fiscal year-to-date 1995 results
compared to the same prior year period. Currency fluctuations also resulted in
increased second quarter fiscal 1995 gross margins by approximately two
percentage points when compared to results of currency fluctuations in the prior
year second quarter.
Operating Expenses
Total operating expenses increased 13.5% to $173.7 million for the six-month
period ended December 31, 1994 from $153.0 million for the six-month period
ended January 1, 1994. As a percentage of sales, operating expenses increased
to 15.3% from 12.8% in the comparable prior year period. The increase in
operating expenses in the aggregate and as a percentage of sales was primarily
due to continued worldwide expansion in anticipation of higher than realized
sales.
Selling and marketing expenses increased 16.1% to $110.4 million for the six
months ended December 31, 1994 from $95.1 million in the prior year period.
Selling and marketing expenses increased due to higher payroll costs consistent
with increases in worldwide sales and marketing staff. Enhanced product
marketing and dealer promotional activities resulted in higher expenses for
other promotions and sales literature related to new product introductions.
Additionally, the Company's continued focus on increasing brand name awareness
led to an increase in media advertising expenses. As a percentage of sales,
selling and marketing expenses increased to 9.7% for the six-month period ended
December 31, 1994 from 8.0% in the comparable prior year period.
General and administrative expenses increased by 20.0% to $44.8 million for
the six-month period ended December 31, 1994 from $37.3 million in the same
fiscal 1994 period. Worldwide expansion, including operations in China,
Ireland, Korea and the Netherlands, resulted in increased payroll and
administrative costs. The Company also incurred higher legal fees due to
increased litigation activity and additional patent/trademark expenses primarily
resulting from an expanded patent/trademark portfolio. Depreciation and
amortization expense rose due to a larger fixed asset base and increased
goodwill amortization resulting from the acquisition of Tandy Corporation's
personal computer manufacturing operations. As a percentage of sales, general
and administrative expenses increased to 4.0% in the first six months of fiscal
1995 from 3.1% in the comparable prior year period.
Engineering and development costs declined by 10.2% to $18.6 million for the
six-month period ended December 31, 1994 from $20.6 million in the comparable
prior fiscal period. Lower payroll and employee benefit costs were partially
offset by increased engineering material expenses and other professional fees
relating to new product development activities. Products introduced in the
first six months of fiscal 1995 included the Advantage! Adventure 4000 and
Advantage! 6000 multimedia desktops, Advantage! 8000 minitower, the Bravo MS and
Premmia MX desktops, the Bravo MS-T minitower and the Bravo MS-L low-profile
desktop, the Manhattan V, P and G series of Pentium-based servers and the
Ascentia 800N and 810N value notebooks. As a percentage of sales, engineering
and development expenses declined to 1.6% for the period ended December 31, 1994
from 1.7% in the comparable prior year period.
Total operating expenses for the quarter ended December 31, 1994 increased
7.9% to $89.7 million from $83.1 million in the same fiscal 1994 quarter. As a
percentage of sales, operating expenses increased to 14.0% from 12.3% in the
prior year quarter. The overall increase in spending is primarily due to
increased payroll costs consistent with the Company's worldwide expansion and
expanded sales and marketing activities.
Other Income and Expense
For the six-month period ended December 31, 1994, the Company had net interest
expense of $5.9 million compared to $3.6 million in the corresponding fiscal
1994 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 six months of fiscal 1995, the Company recognized net other
expenses of $1.8 million compared to $4.2 million for the same fiscal 1994
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 (Benefit) for Income Taxes
The Company recorded an effective tax benefit of 20% for the six-month period
ended December 31, 1994. This compares to an effective income tax provision of
34% for the same prior year period. The decrease in the fiscal 1995 effective
tax rate is attributable to changes in the proportion of income earned or losses
sustained within various taxing jurisdictions and the tax rates in the location
in which those earnings or losses were generated, as well as the Company's
inability to benefit certain deferred tax assets that include loss
carryforwards. The realization of deferred tax assets is in large part
dependent on future taxable income. To the extent that the Company does not
ultimately realize future taxable income, the Company's effective tax rate may
be negatively impacted.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $374.8 million at December 31, 1994 included cash and cash
equivalents of $68.7 million compared to working capital of $434.5 million and
cash and cash equivalents of $153.1 million at July 2, 1994. The Company had
short-term borrowings of $75.0 million and $50.0 million at December 31, 1994
and July 2, 1994, respectively. During the first six months of fiscal 1995, the
Company used $94.5 million of cash to fund its operating loss for the period, as
well as increased levels of accounts receivable consistent with increased
international sales levels.
Net cash used in investing activities decreased during fiscal 1995 compared
with fiscal 1994, primarily due to a one-time cash payment of $15 million
related to the Tandy/GRiD acquisition recorded during the first quarter of
fiscal 1994, partially offset by an increase in capital expenditures and
increased purchases of other assets in fiscal 1995. Capital expenditures
totaled $15.2 million in the first six months of fiscal 1995 compared to $11.2
million in the prior year period and consisted primarily of additions to plant
and engineering equipment in the Far East and Ireland.
The Company intends to fund its fiscal 1995 cash requirements through a
combination of cash on hand, cash provided by operations, available borrowings
under its committed revolving credit facilities, and possible future public or
private debt and/or equity offerings. On December 23, 1994, the Company amended
its $300 million unsecured committed revolving credit agreement by reducing the
total amount of the facility to $225 million and securing the credit facility
with a pledge of all of the Company's domestic United States assets. The
amended agreement also changed certain financial covenants, thereby preventing a
possible event of default under the prior agreement due to the Company's net
loss for the quarter ended December 31, 1994. The amended revolving credit
agreement retains the original maturity date of September 30, 1996 and allows
the Company to borrow, subject to certain leverage and borrowing base
restrictions, at rates based upon the bank's reference rate, or a spread over
the LIBOR rate, the domestic certificate of deposit rate, or at a rate bid by a
bank, as selected by the Company. At December 31, 1994, there was $70 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. Under the terms of the amended credit agreement, the
Company had the ability at December 31, 1994, to utilize a total of $152 million
under the agreement. The Company also had $5 million outstanding under an
uncommitted money market line of credit at December 31, 1994. The Company also
has various letter of credit facilities available for use by the Company and its
subsidiaries.
On February 9, 1995, the Company and four of its subsidiaries entered into a
$50 million committed revolving credit agreement provided by one bank. This
credit facility is guaranteed by the Company and is available for use by certain
subsidiaries of the Company. Drawings by subsidiaries of the Company can be
made available to the Company for use in its operations. Under the terms of the
agreement the Company has the ability to initially utilize $25 million of the
new facility. The second $25 million will be available upon completion of
certain conditions, which include, among others, the granting of certain
security interests to the bank which the Company expects to complete within 60
days. This new credit facility may only be utilized after the borrowing
availability under the amended $225 million revolving credit agreement is fully
utilized. The financial covenants of the new $50 million credit agreement are
similar to those of the amended $225 million credit agreement. This new
facility has an expiration date of August 9, 1995.
The Company will continue to incur short-term borrowings in order to finance
working capital and capital expenditure requirements. The Company's ability to
fund its activities from operations is directly dependent upon its rate of
growth, ability to effectively manage its inventory, the terms under which it
extends credit to its customers and its ability to collect under such terms, the
manner in which it finances any capital expansion, and the Company's ability to
access external sources of financing. The Company is actively pursuing
additional sources of financing which it believes are necessary for the
continued growth of the Company. Efforts include the structuring of a non-U.S.
based trade receivables securitization financing as well as potential equity
investments in the Company. On February 9, 1995, the Company announced that it
is in discussions with certain parties, including Samsung Electronics Co., Ltd.,
regarding a potentially significant minority investment in the Company and
possible strategic business arrangements. While the Company has been able to
maintain access to external financing sources, no assurance can be given that
such access will continue or that the Company will be successful in obtaining
additional sources of financing or reach any agreements with certain parties
regarding any potential equity investments in the Company. If the Company is
unable to maintain access to its existing financing sources or is unable to
obtain new sources, the Company's ongoing operations would be adversely
impacted. In addition, continued financial losses by the Company will likely
make it more difficult for the Company to access external financing sources,
which would also adversely impact the Company's ongoing operations.
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. The interest
rate has been adjusted to 4.94% per annum, effective July 11, 1994, and will be
adjusted once more on July 11, 1995 to the lower of either 5% or the "lowest
three month rate" within the meaning of Section 1274(d)(2) of the Internal
Revenue Code of 1986 as of July 11, 1995. Interest is paid once a year on July
11th and 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 from
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 LYON 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. The
total accreted value of the LYONs at December 31, 1994 is $117.7 million.
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
availability and cost of components, the Company's ability to timely develop and
produce commercially viable products, the Company's ability to manage expense
levels in response to lower gross profit margins, the Company's ability to
maintain access to external financing sources and its financial liquidity, the
continued financial strength of the Company's dealers and distributors, the
Company's ability to accurately anticipate customer demand, and the Company's
ability to successfully complete the integration of the acquired Tandy/GRiD
operations into the Company's business model.
The Company's future success is highly dependent upon its ability to produce
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 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. The success
of new product introductions is dependent on a number of factors, including
market acceptance, the Company's ability to manage risks associated with product
transitions, the effective management of inventory levels in line with
anticipated product demand and the timely manufacturing of products in
appropriate quantities to meet anticipated demand. The Company regularly
introduces new products designed to replace existing products. While the
Company closely monitors new product introductions and product obsolescence,
there can be no assurance that such transitions will occur without adversely
affecting the Company's net sales, cash flow and profitability as it did in the
first quarter of fiscal 1995. In addition, if the Company is unable to
accurately anticipate the customer demand shift from 486-based systems to
systems utilizing Pentium processors, the product life cycles of the Company's
486-based systems could be shortened, which may require additional inventory
valuation reserves and may have a material adverse effect on the Company's net
sales, cash flow and profitability.
Increases in demand for personal computers have created industrywide
shortages, which at times have resulted in premium prices being 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. Reliance on suppliers generally involves several risks,
including the possibility of defective parts, a shortage of components, an
increase in component costs and disruptions in delivery of components. Should
delays, defects or shortages occur or component costs significantly increase,
the Company's net sales and profitability could be adversely affected.
The Company participates in a highly volatile industry that is characterized
by dynamic customer demand patterns, rapid introduction of new products, rapid
technological advances, and industrywide competition resulting in an extremely
competitive pricing environment with downward pressure on gross margins. The
Company anticipates that the personal computer industry will continue to
experience intense price competition and dramatic price reductions during fiscal
1995. There can be no assurance that future pricing actions by the Company and
its competitors will not adversely impact the Company's net sales and
profitability.
Consistent with industry practice, the Company provides certain of its larger
distributors, consumer retailers and dealers with stock balancing and price
protection rights that 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. There can be no assurance that the Company will not experience
rates of return or price protection adjustments that could have a material
adverse impact on the Company's net sales and profitability in the future.
The Company believes that, with the acquisition of additional manufacturing
facilities from Tandy Corporation and the acquisition of manufacturing
facilities both in the PRC and Ireland, production capacity should be sufficient
to support anticipated increases in unit volumes. The Company also expects that
gross inventory levels will increase 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 bring its Texas manufacturing operation into full production, this
could adversely impact the Company's net sales, gross profit and profitability.
General economic conditions have an impact on the Company's business and
financial results. From time to time the markets in which the Company sells its
products experience weak economic conditions that may negatively affect sales of
the Company's products. Although the Company does not consider its business to
be highly seasonal, it has experienced seasonally higher sales in the second
quarter of the fiscal year due to holiday demand for some of its products in the
consumer retail channel. The continued expansion of the consumer retail
business is likely to result in the increased seasonality of the Company's
business and its financial results being more dependent on retail business
fluctuations.
The Company's overall operating income varies within each geographic region.
Historically, the Company's Americas and Pacific Rim regions have made the
primary contributions to the Company's profitability. Therefore, should the
Company continue to experience significant revenue and/or profitability declines
in either region, this could significantly impact the Company's overall net
sales and profitability.
The Company's international operations are 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 also be affected by changes in
United States trade relationships, increased competition and the economic
stability of the locations in which sales occur. The Company operates in
foreign locations, such as the PRC, where future sales may be dependent upon
continuing favorable trade relations. Additionally, foreign locations such as
the PRC may experience changes in their general economic stability due to such
factors as increased inflation and political turmoil. Any significant change in
United States trade relations or the economic stability of foreign locations in
which the Company sells its products could have an adverse effect on the
Company's net sales and profitability.
The personal computer industry presents risks for claims of infringement of
patents, trademarks and copyrights. From time to time, the Company may be
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. The Company
believes that the actions it takes to avoid or minimize the impact to the
Company of such claims are prudent; however, there can be no assurance that such
claims will not occur or, if successful, would not have a material adverse
effect on the Company's business operations and profitability.
The Company's ability to compete is largely dependent upon its financial
strength and its ability to adequately fund its operations. The Company's
sources of financing include cash on hand, cash provided by operations,
available borrowings under its committed revolving credit facilities and
possible future public or private debt and/or equity offerings. The Company's
future success is dependent upon its continued access to sources of financing.
The Company is actively pursuing additional sources of financing which it
believes are necessary for the continued growth of the Company. While the
Company is pursuing various alternatives, there can be no assurance that such
efforts will be successful. In the event the Company is unable to maintain
access to its existing financing sources or is unable to obtain new sources,
there would be a material adverse effect on the Company's business operations.
The Company's primary means of distribution remains third-party computer
resellers and consumer channels. While the Company continuously monitors and
manages the credit it extends to resellers to limit its credit risk, the
Company's business could be adversely affected in the event that the financial
condition of third-party computer resellers weakens. In the event of the
financial failure of a major reseller, the Company would experience disruptions
in its distribution as well as the loss of the unsecured portion of any
outstanding accounts receivable.
The Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, and certain manufacturing
operations are located near major earthquake faults which have experienced
earthquakes in the past. While the Company does carry insurance at levels
management believes is prudent, in the event of a major earthquake affecting one
or more of the Company's facilities, it is likely that insurance proceeds would
not cover all of the costs incurred and, therefore, the operations and operating
results of the Company could be adversely affected.
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. In addition, the Company's participation
in the highly dynamic personal computer industry often results in significant
volatility in the Company's common stock price.
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 (the "California action") 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 AST patents and that certain TI patents are invalid or inapplicable.
TI has alleged in the California action that the Company is infringing patents
owned by TI. On August 26, 1994, TI filed a lawsuit in the U.S. District Court
for the Eastern District of Texas against the Company alleging infringement of
patents in addition to those asserted by TI in the California action. These
litigations with TI were settled on February 7, 1995 and a Settlement Agreement
and Release was entered into by the parties. The Settlement Agreement and
Release includes, in part, a patent cross-license agreement between AST and TI
for the calendar years 1995 through 2000, and requires periodic royalty payments
from AST to TI.
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 laws 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 September 12, 1994, a complaint was filed by
a shareholder against the Company and certain of its officers and directors
requesting certification of a class action, asserting claims under state and
federal securities laws based on allegations that the Company made inadequate
and false disclosures and seeking unspecified compensatory damages and related
fees and costs. The September 12, 1994 complaint was filed in the United States
District Court for the Central District of California under the case name Steven
A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was
filed by a shareholder in the United States District Court for the Central
District of California. The October 6, 1994 complaint names the Company and
certain of its officers and directors as defendants, asserts claims under the
state and federal securities laws based on allegations that the Company made
inadequate and false disclosures, and seeks unspecified compensatory damages and
related fees and costs. The cases with complaints filed on March 3, 1994,
March 14, 1994 and October 6, 1994 have been consolidated under the case name In
re AST Securities Litigation. The AST Securities Litigation and Kornfeld cases
are being treated as related cases by the court. Management has reviewed the
allegations and the complaints and believes such allegations are without merit.
Management intends to vigorously defend these litigations. Management does not
believe that the outcome of these matters will have a material adverse impact on
the Company's consolidated financial position or results of operations.
The Company received an inquiry letter dated December 20, 1994 from the Office
of Consumer Affairs of the Securities and Exchange Commission ("SEC"). The
letter asked for a report and documentation concerning a September 1, 1994
newspaper article on the Company's August 31, 1994 announcement that it
anticipated lower first quarter performance. The Company is cooperating with
the SEC in this inquiry.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1994 Annual Meeting of Stockholders was held on October 27,
1994 in Newport Beach, California. Matters submitted to a vote of security
holders included:
(1) The election of the following seven directors to hold office until
the next annual meeting and until their successors are elected and duly
qualified:
Safi U. Qureshey Carmelo J. Santoro
Bruce C. Edwards James T. Schraith
Richard J. Goeglein Delbert W. Yocam
Jack W. Peltason
(2) The approval of the amendment of the Company's Certificate
of Incorporation to increase the authorized number of shares of common
stock.
In Favor 19,649,633
Opposed 10,244,512
Abstentions 129,685
(3) The approval of the amendment of the Company's Certificate
of Incorporation to establish the size of the Board.
In Favor 24,459,727
Opposed 4,171,920
Abstentions 139,327
Broker Non-Votes 1,252,856
(4) The approval of the AST Research, Inc. Performance Based Annual
Management Incentive Plan.
In Favor 23,080,615
Opposed 4,858,255
Abstentions 175,314
Broker Non-Votes 1,909,646
(5) The approval of the amendment of the 1989 Long-Term
Incentive Program to increase the number of shares reserved for issuance
under the Program.
In Favor 9,227,120
Opposed 11,723,034
Abstentions 169,199
Broker Non-Votes 8,904,477
(6) The approval of the AST Research, Inc. 1994 One-Time Grant
Stock Option Plan for Non-Employee Directors.
In Favor 13,382,120
Opposed 7,149,264
Abstentions 207,166
Broker Non-Votes 9,285,280
(7) The approval of the appointment of Ernst & Young as
independent auditors for the fiscal year ending July 1, 1995.
In Favor 29,741,856
Opposed 184,617
Abstentions 97,157
Broker Non-Votes 200
ITEM 5. OTHER INFORMATION
On February 9, 1995, the Company announced that it is in discussions with
certain parties, including Samsung Electronics Co., Ltd., regarding a
potentially significant minority investment in the Company and possible
strategic business arrangements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<C> <S>
10.131 Third Amendment dated December 23, 1994 to
Credit Agreement dated September 30, 1993 among AST Research, Inc.,
Bank of America NT & SA, as administrative agent, co-agent and
issuing bank, National Westminster Bank Plc, CIBC, Inc. and Shawmut
Bank, N.A., as co-agents.
11. Computation of Net Income (Loss) Per Share.
(b) Reports on Form 8-K
On October 18, 1994, the Company filed a report on Form 8-K
reporting under Item 5 thereof the announcement of fiscal first quarter
revenue of approximately $495 million and the consolidation of its
worldwide mobile computing manufacturing in Taiwan and the concurrent
closure of its Fountain Valley, California manufacturing facility
February 1, 1995.
</TABLE>
AST and Advantage! are registered trademarks of AST Research, Inc. Ascentia,
Bravo, Premmia, PowerExec and Manhattan are trademarks of AST Research, Inc.
Pentium is a trademark of Intel Corporation. Tandy is a registered trademark of
Tandy Corporation. All other product or service names mentioned herein may be
trademarks or registered trademarks of their respective owners.
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: February 13, 1995 Bruce C. Edwards
Executive Vice President
and Chief Financial Officer
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (the "Amendment"), dated as of
December 23, 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, CIBC INC. and SHAWMUT BANK, N.A.,
as Co-Agents (collectively, the "Co-Agents"), and the several financial
institutions party to the Credit Agreement (collectively, the "Banks").
RECITALS
A. The Company, the Banks, the Issuing Bank, the Co-Agents and the
Administrative Agent are parties to a Credit Agreement dated as of September 30,
1993, as amended by a First Amendment to Credit Agreement dated as of March 30,
1994 and a Second Amendment to Credit Agreement dated as of April 27, 1994 (as
so amended, the "Credit Agreement"), pursuant to which the Banks have extended
certain credit facilities to the Company. The Company, the Banks, the Issuing
Bank, the Co-Agents and the Administrative Agent also are parties to a Waiver to
Credit Agreement dated as of September 28, 1994.
B. The Company has told the Banks, the Issuing Bank, the Co-Agents and the
Administrative Agent that, unless the Credit Agreement is amended as provided in
Section 2 hereof, it may be unable to comply with certain of the financial
covenants contained in the Credit Agreement as of the end of the fiscal quarter
ending on December 31, 1994.
C. The Company has requested that the Administrative Agent, the Co-Agents,
the Issuing Bank and the Banks agree to certain amendments of the Credit
Agreement as provided in Section 2 hereof.
D. The Administrative Agent, the Co-Agents, the Issuing Bank 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) Section 1.1 of the Credit Agreement shall be amended by deleting the
following defined terms contained therein: "Consolidated Interest Expense",
"EBIT" and "Senior Funded Debt".
(b) Section 1.1 of the Credit Agreement shall be amended by inserting the
following defined terms therein, in appropriate alphabetical order:
"`Borrowing Base' means, as of the last day of each calendar month and
on any other day on which the Company requests a Borrowing if the Company
so elects in order to support such proposed Borrowing, 80% of the
outstanding amount of the Company's Receivables, provided, that such
Receivables shall not include more than $5,000,000 of accounts receivable
representing obligations of account debtors formed under the laws of a
state, territory, country, republic or other governing body outside of the
United States of America, net of any allowance for doubtful accounts and
sales returns, as of such date."
"`Borrowing Base Certificate' means a certificate, executed by a
Responsible Officer, in the form of Exhibit P hereto."
"`Collateral' means all property and interests in property and
proceeds thereof now owned or hereafter acquired by the Company in or upon
which a Lien now or hereafter exists in favor of the Banks, or the Adminis
trative Agent on behalf of the Banks, whether under this Agreement or under
any other documents executed by the Company and delivered to the
Administrative Agent or the Banks."
"`Collateral Documents' means, collectively, (i) the Security
Agreement, the Pledge Agreement, the Deeds of Trust and all other security
agreements, deeds of trust, mortgages, pledge agreements, assignments and
other similar agreements between the Company and the Banks or the
Administrative Agent for the benefit of the Banks now or hereafter entered
into in connection herewith, and all financing statements (or comparable
documents now or hereafter filed in accordance with the Uniform Commercial
Code or comparable law) by or against the Company as debtor for the benefit
of the Administrative Agent or the Banks as secured party, and (ii) any
amendments, supplements, modifications, renewals, replacements,
consolidations, substitutions and extensions of any of the foregoing."
"`Deeds of Trust' means, collectively, the Deeds of Trust dated as of
December 23, 1994 by the Company, as trustor, to the Administrative Agent,
as beneficiary, pursuant to which the Company has granted to the Adminis
trative Agent for the benefit of the Banks a Lien on the real property
described therein."
"`Pledge Agreement' means the Pledge Agreement dated as of
December 23, 1994 between the Company and the Administrative Agent,
pursuant to which the Company granted to the Administrative Agent for the
benefit of the Banks a Lien on the collateral described therein."
"`Security Agreement' means the Security Agreement dated as of
December 23, 1994 between the Company and the Administrative Agent,
pursuant to which the Company granted to the Administrative Agent for the
benefit of the Banks a Lien on the collateral described therein."
"`Third Amendment to Credit Agreement' means the Third Amendment to
Credit Agreement dated as of December 23, 1994 among the Company, the
Banks, the Issuing Bank, the Co-Agents and the Administrative Agent."
"`Utilization Amount' means the daily amount as determined with
respect to the credit facilities set forth in Articles II and III on each
day by adding the Effective Amount of all outstanding Loans and the
Effective Amount of the Letter of Credit (if outstanding) on such day."
(c) The definition of the term "Applicable Margin" set forth in Section
1.1 of the Credit Agreement shall be amended and restated in its entirety so
that, as amended and restated, it reads as follows:
"`Applicable Margin' means, for any day, with respect to any
Reference Rate Loan, CD Rate Loan or Offshore Committed Loan, the
applicable margin (on a per annum basis) set forth below opposite the
Utilization Amount for such date:
Reference CD Rate Offshore
Rate Loan Loan Committed
Applicable Applicable Loan
Utilization Amount Margin Margin Applicable Margin
Less than or equal to $125,000,000 0.000% 1.375% 1.250%
Greater than $125,000,000 but less
than or equal to $200,000,000 0.000% 1.625% 1.500%
Greater than $200,000,000 0.000% 1.875% 1.750%
(d) The definition of the term "Cash Collateral" set forth in Section 1.1
of the Credit Agreement shall be amended and restated in its entirety so that,
as amended and restated, it reads as follows:
"`Cash Collateralize' 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."
(e) The definition of the term "Loan Documents" set forth in Section 1.1
of the Credit Agreement shall be amended and restated in its entirety so that,
as amended and restated, it reads as follows:
"`Loan Documents' means this Agreement, the Bid Notes, the L/C-
Related Documents, the Collateral Documents and all other documents
delivered to the Administrative Agent or any Bank in connection
herewith or therewith."
(f) The definition of the term "Material Adverse Effect" set forth in
Section 1.1 of the Credit Agreement shall be amended and restated in its
entirety so that, as amended and restated, it reads as follows:
"`Material Adverse Effect' means a material adverse effect upon
any of (a) the operations, business, properties, condition (financial
or otherwise) of the Company or the Company and its Subsidiaries taken
as a whole; (b) the ability of the Company to perform its obligations
under any Loan Document without default; or (c) the legality,
validity, binding effect or enforceability of any Loan Document or,
subject to Permitted Liens, the perfection or the priority of any Lien
granted under any of the Collateral Documents."
(g) [Reserved]
(h) Section 2.1 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"2.1 Amounts and Terms of Commitments. 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 the outstanding 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, (a) 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, and
(b) the Effective Amount of all outstanding Loans shall not exceed the
Borrowing Base. Within the limits of each Bank's Commitment, and
subject to the other terms and conditions hereof, the Company may
borrow under this Section 2.1, prepay pursuant to Section 2.7 and
reborrow pursuant to this Section 2.1."
(i) Section 2.4 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"2.4 Bid Borrowings. In addition to Committed Borrowings
pursuant to Section 2.3, each Bank severally agrees that the Company
may, as set forth in Section 2.5, from time to time request the Banks
prior to the Termination Date to submit offers to make Bid Loans to
the Company; provided, however, that the Banks may, but shall have no
obligation to, submit such offers and the Company may, but shall have
no obligation to, accept any such offers; and provided, further, that
after giving effect to any Bid Loan (a) at no time shall (i) the
Effective Amount of all outstanding Loans together with the Effective
Amount of the Letter of Credit (if outstanding) exceed the Aggregate
Commitment, or (ii) the Effective Amount of all outstanding Loans
exceed the Borrowing Base; (b) at no time shall the outstanding
aggregate principal amount of all Bid Loans made by all Banks exceed
50% of the Aggregate Commitment; and (c) at no time shall the number
of different Interest Periods for Bid Loans then outstanding plus the
number of different Interest Periods for Committed Loans then
outstanding exceed ten."
(j) Subsections 2.5(c)(ii)(C) and (D) of the Credit Agreement shall be
amended and restated in their entirety so that, as amended and restated, they
read as follows:
"(C) in case the Company elects a LIBOR Auction, the margin above
or below LIBOR (the "LIBOR Bid Margin") offered for each such Bid
Loan, expressed as a percentage to be added to or subtracted from the
applicable LIBOR and the Interest Period applicable thereto;
(D) in case the Company elects an Absolute Rate Auction, the
rate of interest per annum (the "Absolute Rate") offered for each such
Bid Loan; and"
(k) Section 2.7 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"2.7 Prepayments.
(a) Optional Prepayments. Subject to Section 4.4, the Company
may, at any time or from time to time, upon notice to the
Administrative Agent by 9:00 a.m. (San Francisco time) at least three
Business Days prior with respect to Offshore Committed Loans and CD
Rate Loans or the same Business Day with respect to Reference Rate
Loans, ratably prepay Committed Loans in whole or in part, in
multiples of $1,000,000 with respect to Reference Rate Loans and in
multiples of $5,000,000 and in whole multiples of $1,000,000 in excess
thereof with respect to other Committed Loans. Such notice of
prepayment shall specify the date and amount of such prepayment and
whether such prepayment is of Reference Rate Loans, CD Rate Loans or
Offshore Committed Loans, or any combination thereof. Such notice
shall not thereafter be revocable by the Company and the
Administrative Agent will promptly notify each Bank thereof. If such
notice is given, the Company shall make such prepayment and the
payment amount specified in such notice shall be due and payable on
the date specified therein.
(b) Mandatory Prepayments - Borrowing Base. Subject to Section
4.4, in the event that any Borrowing Base Certificate delivered
pursuant to Section 7.2(d) shall indicate as of the date of such
Borrowing Base Certificate that the Effective Amount of all
outstanding Loans exceeds the Borrowing Base, the Company shall
immediately prepay Loans in an aggregate amount equal to the amount of
such excess.
(c) General. Any prepayments pursuant to this Section 2.7 shall
be applied first to any Reference Rate Loans then outstanding and then
to CD Rate Loans and Offshore Committed Loans with the shortest
Interest Periods remaining. The Company shall pay, together with each
prepayment under this Section 2.7, any amounts required pursuant to
Section 4.4 and, in the case of Offshore Committed Loans and CD Rate
Loans, accrued interest to each such date on the amount prepaid.
Accrued interest to the date of any Reference Rate Loan prepaid
pursuant to this Section 2.7 shall be paid on the last day of the
calendar quarter in which such prepayment occurs.
(d) Bid Loans. The Company may not repay all or any portion of
the principal amount of any Bid Loan prior to the maturity thereof."
(l) Section 2.9(a) of the Credit Agreement shall be amended and restated
in its entirety so that, as amended and restated, it reads as follows:
"(a) Subject to subsection 2.9(d), each Committed Loan shall
bear interest on the outstanding principal amount thereof from the
date when made until it becomes due at a rate per annum equal to the
CD Rate, LIBOR or the Reference Rate, as the case may be, plus the
Applicable Margin. Any change in the interest rate on a Committed
Loan resulting from a change in the Applicable Margin shall become
effective as of the opening of business on the day on which such
change in the Applicable Margin becomes effective."
(m) Subsections 2.10(b), 2.10(c) and 2.10(d) of the Credit Agreement shall
be amended and restated in their entirety so that, as amended and restated, they
read as follows:
"(b) Facility Fee. The Company shall pay to the Administrative
Agent, for the ratable account of each Bank in accordance with its
Commitment Percentage, a facility fee ("Facility Fee") equal to
0.4375% per annum of the Aggregate Commitment. Such Facility Fee
shall accrue from the Effective Date of the Third Amendment to Credit
Agreement and shall be paid quarterly in arrears on the last day of
each calendar quarter, commencing on December 31, 1994, and on the
Termination Date.
(c) Upfront Fee. The Company shall pay to the Administrative
Agent, for the ratable account of each Bank, an upfront fee as set
forth in Section 4(h) of the Third Amendment to Credit Agreement.
(d) Arrangement Fees. The Company shall pay to each of BA
Securities, Inc. and National Westminster Plc, for their own
respective accounts, such arrangement fees as are set forth in the
separate Arrangement Fee Letters dated on or about the date of Third
Amendment to Credit Agreement in favor of each such Person."
(n) Article 2 of the Credit Agreement shall be amended by inserting the
following Section 2.16 at the end thereof:
"2.16 Security. All Obligations of the Company under this
Agreement and all other Loan Documents shall be secured in accordance
with the Collateral Documents."
(o) Section 3.1 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"3.1 The Letter of Credit. Subject to the terms and conditions
set forth herein (a) the Issuing Bank agrees to honor drafts under the
Letter of Credit, as the Letter of Credit may be amended from time to
time, up to the maximum amount of $75,000,000, provided, however,
that, after giving effect to any amendment to the Letter of Credit,
the Effective Amount of all outstanding Loans together with the
Effective Amount of the Letter of Credit shall not exceed the
Aggregate Commitment; and (b) the Banks severally agree to participate
in the Letter of Credit. The Issuing Bank's agreement under this
Section is an agreement to honor drafts only under the Letter of
Credit, rather than an agreement to provide a revolving letter of
credit subfacility."
(p) Subsection 3.8(a) of the Credit Agreement shall be amended by deleting
the phrase "0.625% (62.5 basis points)" contained therein and replacing it with
the phrase "1.250% (one hundred twenty five basis points)".
(q) Section 4.3 of the Credit Agreement shall be amended by inserting the
following subsection 4.3(c) at the end thereof:
"(c) The agreements and obligations of the Company contained in
this Section 4.3 shall survive the payment in full of all other
Obligations and termination of the Commitments."
(r) Subsection 5.2(b) of the Credit Agreement shall be amended and
restated in its entirety so that, as amended and restated, it reads as follows:
"(b) Continuation of Representations and Warranties. The
representations and warranties made by the Company contained in
Article 4 hereof and in the Collateral Documents shall be true and
correct on and as of such Borrowing date with the same effect as if
made on and as of such borrowing date (except to the extent such
representations and warranties specifically relate to an earlier date,
in which case they shall be true, accurate and complete in all
material respects as of such earlier date);"
(s) Section 5.2 of the Credit Agreement shall be amended by (i) replacing
the period at the end of subsection (c) therein with "; and", and (ii) inserting
the following subsection (d) at the end thereof:
"(d) Borrowing Base Compliance. After giving effect to such
Borrowing, (i) 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, and (ii) the Effective
Amount of all outstanding Loans shall not exceed the Borrowing Base."
(t) Subsection 6.11(b) of the Credit Agreement shall be amended by
replacing the date "April 2, 1993" therein with "October 1, 1994."
(u) Section 7.1 of the Credit Agreement shall be amended by (i) deleting
the word "and" at the end of subsection (c) therein, (ii) replacing the period
at the end of subsection (d) therein with "; and", and (iii) inserting the
following subsection (e) at the end thereof:
"(e) as soon as available, but not later than 30 days after the
end of each month, an unaudited consolidated balance sheet of the
Company and its Consolidated Subsidiaries for such month and the
related unaudited consolidated statement of income for such month,
provided, however, that the foregoing obligation to deliver monthly
financial statements shall cease at such time as the Company has had
two consecutive profitable quarters."
(v) Section 7.2 of the Credit Agreement shall be amended by (i) deleting
the word "and" at the end of subsection (b) therein, (ii) replacing the period
at the end of subsection (c) therein with "; and", and (iii) inserting the
following subsection (d) at the end thereof:
"(d) within 20 Business Days after the last day of each calendar
month and on any other day on which the Company requests a Borrowing
if the Company so elects in order to support such proposed Borrowing,
a Borrowing Base Certificate."
(w) Section 7.6 of the Credit Agreement shall be amended by inserting the
following at the end thereof:
"The amounts of such insurance may not materially be reduced by
the Company in the absence of 30 days' prior notice to the
Administrative Agent. All such insurance shall name the
Administrative Agent as loss payee/mortgagee and as additional
insured, for the benefit of the Banks, as their interests may appear.
All casualty insurance maintained by the Company shall name the
Administrative Agent as loss payee and all liability insurance shall
name the Administrative Agent as additional insured for the benefit of
the Banks, as their interests may appear. Upon request of the
Administrative Agent, the Company shall furnish the Administrative
Agent, with sufficient copies for each Bank, at reasonable intervals
(but not more than once per calendar year) a certificate of a
Responsible Officer of the Company (and, if requested by the Admin
istrative Agent, any insurance broker of the Company) setting forth
the nature and extent of all insurance maintained by the Company and
its Subsidiaries in accordance with this Section or any Collateral
Documents (and which, in the case of a certificate of a broker, were
placed through such broker). For purposes of this Section 7.6, the
self-insurance programs of the Company for California state disability
insurance to be in effect as of January 1, 1995, as disclosed to the
Banks prior to the Effective Date of the Third Amendment to Credit
Agreement, are approved."
(x) Subsection 8.1(j) of the Credit Agreement shall be amended by deleting
the text of such subsection in its entirety and replacing it with the word
"Reserved;".
(y) Subsection 8.2(f) of the Credit Agreement shall be amended and
restated in its entirety so that, as amended and restated, it reads as follows:
"(f) the sale or discounting of accounts receivable: (i) by any
Subsidiary, without restriction; and (ii) by the Company, (A) up to a
cumulative aggregate of $2,500,000 face amount of accounts receivable
per year for which the account debtor is a resident of the United
States and is in arrears on other obligations owed to the Company or
its Subsidiaries or in the reasonable judgment of the Company such
debtor will default on its obligations, or (B) which are at least
90 days past due, all in the ordinary course of business in connection
with the compromise or collection thereof, provided, however, the
aggregate amount of any recourse to the Company for all such sales or
discounting during a fiscal year of the Company under either
clause (A) or (B) above shall not exceed $1,000,000 for such fiscal
year, and provided, further, that the Company shall pay all reasonable
costs and expenses, including attorneys' fees and expenses (including
the allocated cost of internal counsel), incurred by the
Administrative Agent in connection with the release of the Lien
created by the Security Agreement with respect to any such sold or
discounted accounts receivable of the Company and shall deliver to the
Administrative Agent a certificate of a Responsible Officer certifying
that any such release is in compliance with this subsection 8.2(f);
and"
(z) Subsections 8.4(e), 8.4(f) and 8.4(g) of the Credit Agreement shall be
amended and restated in their entirety so that, as amended and restated, they
read as follows:
"(e) additional loans or capital contributions to Subsidiaries
which are not Wholly-Owned Subsidiaries for which the aggregate amount
extended from the Effective Date of the Third Amendment to Credit
Agreement does not exceed $15,000,000; provided, however, that this
paragraph shall not be deemed to prohibit intercompany account
settlements made in the ordinary course of business;
(f) Investments in connection with Acquisitions in the capital
stock, assets, obligations or other securities of or interest in other
Persons, provided, in each case, (i) the amount of consideration
payable (including by assumption of liabilities) by the Company or its
Subsidiary, when added to similar amounts for all transactions entered
into after the Effective Date of the Third Amendment to Credit
Agreement by the Company or any of its Subsidiaries, does not exceed
$10,000,000; and (ii) (x) if any Acquiree is subject to Section 12 of
the Exchange Act or subject to the requirements of Section 15(d) of
such Act, the prior, effective written consent of the board of
directors or equivalent governing body of the Acquiree is obtained and
delivered to the Administrative Agent, or (y) if the Acquiree does not
meet the qualifications set forth in clause (x) of this subclause
(ii) of subsection 8.4(f), the prior effective written consent of the
board of directors or equivalent governing body and the percent of any
and all classes of stock or other equity of such Acquiree the consent
of which, notwithstanding any provisions in the charter or by-laws of
the Acquiree to the contrary, is required by applicable statute to
consummate the Acquisition, is obtained and delivered to the
Administrative Agent;
(g) purchases or redemptions of debt obligations of the Company
or its Subsidiaries by such Persons solely from the proceeds of the
Company's issuance of Subordinated Debt or the Net Proceeds of the
sale of the capital stock of the Company, so long as no Default or
Event of Default exists and is continuing or would occur as a result
thereof;"
(aa) Section 8.7 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"8.7 Restricted Payments. The Company shall not declare or make
any dividend payment or other distribution of assets, properties,
cash, rights, obligations or securities on account of any shares of
any class of its capital stock or purchase, redeem or otherwise
acquire for value (or permit any of its Material Subsidiaries, other
than Wholly-Owned Subsidiaries, to do so) any shares of its capital
stock or any warrants, rights or options to acquire such shares, now
or hereafter outstanding; except that the Company and its Subsidiaries
may:
(a) declare and make dividend payments or other distributions
payable solely in its common stock; and
(b) purchase, redeem or otherwise acquire shares of its common
stock or warrants or options to acquire any such shares from employees
terminating employment with the Company, pursuant to the Company's
customary policies and procedures relating to such matters, up to a
maximum aggregate amount of $2,000,000 in any fiscal year of the
Company."
(bb) Section 8.8 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"8.8 Modified Quick Ratio. The Company shall not, as
of the last day of any fiscal quarter, suffer or permit its ratio
(determined according to GAAP on a consolidated basis in respect of
the Company and its Subsidiaries) of (a) the sum of cash, Liquid
Assets, and Receivables, net of any allowance for doubtful accounts
and sales returns, to (b) Consolidated Current Liabilities, to be less
than 0.80 to 1.00."
(cc) Each of Sections 8.9 and 8.14 of the Credit Agreement shall be
amended by deleting the text of such Section in its entirety and replacing it
with the word "Reserved".
(dd) Section 8.10 of the Credit Agreement shall be 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 amount equal to (a) the sum of (i) $275,000,000,
plus (ii) 75% of cumulative net income for the Company and its
Subsidiaries determined on a consolidated basis beginning with the
fiscal quarter ended December 31, 1994, determined quarterly and not
reduced by any quarterly loss (except as specifically hereinafter
provided), plus (iii) 75% of the Net Proceeds of any sale of capital
stock of the Company by and for the account of the Company beginning
with the fiscal quarter ended December 31, 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
beginning with the fiscal quarter ended December 31, 1994, less (b)
for the fiscal quarter ended December 31, 1994 only, any quarterly
loss for such fiscal quarter up to a maximum amount of $30,000,000,
and for the fiscal quarter ended April 1, 1995 only, any quarterly
loss up to a maximum amount of $15,000,000."
(ee) Section 8.11 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"8.11 Profitability. The Company, on a consolidated basis,
shall not incur or suffer or permit to be incurred, as of the last day
of any fiscal quarter, commencing with the fiscal quarter ended July
1, 1995, a net loss for such fiscal quarter."
(ff) Section 8.12 of the Credit Agreement shall be amended and restated in
its entirety so that, as amended and restated, it reads as follows:
"8.12 Losses in Specific Quarters. The Company, on a consoli
dated basis, shall not incur or suffer or permit to be incurred, as of
the last day of (a) the fiscal quarter ended December 31, 1994, a net
loss for such fiscal quarter in excess of $30,000,000, and (b) the
fiscal quarter ended April 1, 1995, a net loss for such fiscal quarter
in excess of $15,000,000."
(gg) Section 8.13 of the Credit Agreement shall be 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
December 31, 1994 through September 29, 1995 2.70:1.00
September 30, 1995 through March 29, 1996 2.50:1.00
March 30, 1996 and thereafter 2.15:1.00
(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
December 31, 1994 through September 29, 1995 3.15:1.00
September 30, 1995 through March 29, 1996 2.90:1.00
March 30, 1996 and thereafter 2.60:1.00"
(hh) Article 8 of the Credit Agreement shall be amended by inserting the
following Sections 8.19 and 8.20 at the end thereof:
"8.19 Certain Other Debt. The Company shall not prepay, redeem,
defease (whether actually or in substance) or purchase in any manner
(or deposit or set aside funds or securities for the purpose of the
foregoing), or make any payment (other than for scheduled payments of
principal and interest due on the date of payment thereof, if such
payment is permitted to be made pursuant to the terms thereof) in
respect of, or establish any sinking fund, reserve or like set aside
of funds or other property for the redemption, retirement or repayment
of, any Subordinated Indebtedness or the Tandy Note, or transfer any
property in payment of or as security for the payment of, or violate
the subordination terms of, any Subordinated Indebtedness or the Tandy
Note, or amend, modify or change in any manner the terms of any
Subordinated Indebtedness or the Tandy Note or any instrument,
indenture or other document evidencing, governing or affecting the
terms thereof, if any such amendment, modification or change has or
would have an adverse effect on the Administrative Agent's or any
Bank's rights or remedies under any of the Loan Documents, or cause or
permit any of its Subsidiaries to do any of the foregoing; except that
the Company may prepay, redeem, defease or purchase the Notes,
pursuant to the Indenture, to the extent that the payment therefore is
made solely in the Company's common stock as permitted under
subsection 8.4(g).
8.20 Additional Banks. The Company shall not agree to any
increase in the Commitment of an Affected Bank pursuant to clause
(iii) of the second paragraph of Section 11.1 without the prior
written consent of the Majority Banks."
(ii) Subsection 9.1(c) shall be amended by deleting the text of such
subsection in its entirety and replacing it with the word "Reserved".
(jj) Subsections 9.1(d), 9.1(e) and 9.1(f) of the Credit Agreement shall
be amended and restated in their entirety so as to read as follows:
"(d) Specific Defaults. The Company fails to perform or observe
any term, covenant or agreement contained in Section 7.3, 7.9, 7.11,
8.1 (with respect to Voluntary Liens only), 8.2, 8.3, 8.4, 8.5, 8.7,
8.8, 8.10, 8.11, 8.12, 8.13, 8.15, 8.17, 8.18, 8.19 or 8.20; or
(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 10 days; and Section 8.1 (only with respect to
any Liens other than Voluntary Liens), Section 8.6 and Section 8.16
for 15 days; or
(f) Other Defaults. The Company fails to perform or observe
any other term or covenant contained in this Agreement or any Loan
Document, and such default shall continue unremedied for a period of
15 days after the earlier of (i) the date upon which a Responsible
Officer or the general counsel of the Company or any person holding a
similar position within the Company knew or should have known of such
failure or (ii) the date upon which written notice thereof has been
given to the Company by the Administrative Agent or any Bank; or"
(kk) Section 9.1 of the Credit Agreement shall be amended by (i) replacing
the period at the end of subsection (n) therein with "; and (ii) inserting the
following subsections (o) and (p) at the end thereof:
"(o) Collateral.
(i) Any provision of any Collateral Document shall for any
reason cease to be valid and binding on or enforceable against the
Company or the Company shall so state in writing or bring an action to
limit its obligations or liabilities thereunder;
(ii) Any Collateral Document shall for any reason (other
than pursuant to the terms thereof) cease to create a valid security
interest in the Collateral purported to be covered thereby or such
security interest shall for any reason cease to be a perfected and
first priority security interest subject only to Permitted Liens; or
(p) any of the unsatisfied conditions precedent to the
effectiveness of the Third Amendment to Credit Agreement, as listed in
Schedule 4 thereto, shall fail to be satisfied by January 20, 1995."
(ll) Article 9 of the Credit Agreement shall be amended by inserting the
following Section 9.4 at the end thereof:
"9.4 Certain Financial Covenant Defaults. In the event that,
after taking into account any extraordinary charge to earnings taken
or to be taken as of the end of any fiscal period of the Company (a
"Charge"), and if solely by virtue of such Charge, there would exist
an Event of Default due to the breach of any of Sections 8.8, 8.10,
8.11, 8.12 or 8.13 as of such fiscal period end date, such Event of
Default shall be deemed to arise upon the earlier of (a) the date
after such fiscal period end date on which the Company announces
publicly it will take, is taking or has taken such Charge (including
an announcement in the form of a statement in a report filed with the
SEC) or, if such announcement is made prior to such fiscal period end
date, the date that is such fiscal period end date, and (b) the date
the Company delivers to the Administrative Agent its audited annual or
unaudited quarterly financial statements in respect of such fiscal
period reflecting such Charge as taken."
(mm) Article 10 of the Credit Agreement shall be amended by inserting the
following Section 10.12 at the end thereof:
"10.12 Collateral Matters.
(a) The Administrative Agent is authorized on behalf of all the
Banks, without the necessity of any notice to or further consent from
the Banks, from time to time to take any action with respect to any
Collateral or the Collateral Documents which may be necessary to
perfect and maintain perfected the security interest in and Liens upon
the Collateral granted pursuant to the Collateral Documents.
(b) The Banks irrevocably authorize the Administrative Agent, at
its option and in its discretion, to release any Lien granted to or
held by the Administrative Agent upon any Collateral (i) upon
termination of the Commitments and payment in full of all Loans and
all other Obligations known to the Administrative Agent and payable
under this Agreement or any other Loan Document; (ii) constituting
property sold or to be sold or disposed of as part of or in connection
with any disposition permitted hereunder; (iii) constituting property
in which the Company owned no interest at the time the Lien was
granted or at any time thereafter; (iv) constituting property leased
to the Company under a lease which has expired or been terminated in a
transaction permitted under this Agreement or is about to expire and
which has not been, and is not intended by the Company to be, renewed
or extended; (v) consisting of an instrument evidencing Indebtedness
or other debt instrument, if the Indebtedness evidenced thereby has
been paid in full; or (vi) if approved, authorized or ratified in
writing by the Majority Banks or all the Banks, as the case may be, as
provided in the relevant Collateral Document. Upon request by the
Administrative Agent at any time, the Banks will confirm in writing
the Administrative Agent's authority to release particular types or
items of Collateral pursuant to this subsection 10.12(b).
(c) None of the Administrative Agent-Related Persons shall be
responsible in any manner to any of the Banks for the value of or
title to any Collateral. Each Bank represents to the Administrative
Agent that it has, independently and without reliance upon any
Administrative Agent-Related Person and based on such documents and
information as it has deemed appropriate, made its own appraisal of
and investigation into the value of and title to any Collateral.
(d) Each Bank agrees with and in favor of each other (which
agreement shall not be for the benefit of the Company or any
Subsidiary) that the Company's obligation to such Bank under this
Agreement and the other Loan Documents is not and shall not be secured
by any real property collateral now or hereafter acquired by such
Bank, other than the real property described in the Deeds of Trust."
(nn) Subsection 11.7(a) of the Credit Agreement shall be amended and
restated in its entirety so that, as amended and restated, it reads as follows:
"(a) Any Bank may, with the written consent of the
Company and the Administrative Agent, which consent of the Company
shall not be unreasonably withheld, at any time assign and delegate to
one or more Eligible Assignees and, with notice to the Administrative
Agent and the Company but without the consent of the Company or the
Administrative Agent, may assign to any of its wholly-owned Affiliates
(each an "Assignee") all or any ratable part of all of the Loans, L/C
Obligations and the Commitments (including the L/C Commitment
contained therein) or any other rights or obligations of such Bank
hereunder and under the other Loan Documents; provided, however, that
the Company, the Issuing Bank and the Administrative Agent may
continue to deal solely and directly with such Bank in connection with
the interests so assigned to an Assignee until (i) written notice of
such assignment, together with payment instructions, addresses and
related information with respect to the Assignee, shall have been
given to the Company and the Administrative Agent by such Bank and the
Assignee; (ii) such Bank and its Assignee shall have delivered to the
Company and the Administrative Agent an Assignment and Acceptance in
the form of Exhibit N ("Assignment and Acceptance") together with any
Bid Note subject to such assignment; and (iii) the processing fees of
$2,500 shall have been paid to the Administrative Agent; provided,
further, that the aggregate amount of the Commitment, Loans and
participation in L/C Obligations of the assigning Bank being assigned
pursuant to any Assignment and Acceptance (determined as of the date
of the Assignment and Acceptance with respect to such assignment)
shall in no event be less than $5,000,000.
(oo) Section 11.8 of the Credit Agreement shall be amended by inserting
the following sentence at the end thereof:
"NOTWITHSTANDING THE FOREGOING, NO BANK SHALL EXERCISE, OR ATTEMPT TO
EXERCISE, ANY RIGHT OF SET-OFF, BANKER'S LIEN, OR THE LIKE, AGAINST
ANY DEPOSIT ACCOUNT OR PROPERTY OF THE COMPANY OR ANY SUBSIDIARY OF
THE COMPANY HELD OR MAINTAINED BY THE BANK WITHOUT THE PRIOR WRITTEN
CONSENT OF THE MAJORITY BANKS."
(pp) Section 11.14 of the Credit Agreement shall be amended and restated
in its entirety so as to read as follows:
"11.14 Entire Agreement. This Agreement, together with the other
Loan Documents, embodies the entire Agreement and understanding among
the Company, the Banks, the Issuing Bank, the Administrative Agent and
the Co-Agents and supersedes all prior or contemporaneous agreements
and understandings of such persons, verbal or written, relating to the
subject matter hereof and thereof except for the fee letters
referenced in Section 2.10 and 3.8(b)(ii), the letter agreements
between the Company and each of BA Securities, Inc. and National
Westminster Bank Plc relating hereto and any prior arrangements made
with respect to the payment by the Company of (or any indemnification
for) any fees, costs or expenses payable to or incurred (or to be
incurred) by or on behalf of the Administrative Agent, the Issuing
Bank or the Banks."
(qq) Article 11 of the Credit Agreement shall be amended by inserting the
following Section 11.15 at the end thereof:
"11.15 Marshalling; Payments Set Aside. Neither the
Administrative Agent nor the Banks shall be under any obligation to
marshall any assets in favor of the Company or any other Person or
against or in payment of any or all of the Obligations. To the extent
that the Company makes a payment to the Administrative Agent or the
Banks, or the Administrative Agent or the Banks exercise their right
of set-off, and such payment or the proceeds of such set-off or any
part thereof are subsequently invalidated, declared to be fraudulent
or preferential, set aside or required (including pursuant to any
settlement entered into by the Administrative Agent or such Bank in
its discretion) to be repaid to a trustee, receiver or any other
party, in connection with any Insolvency Proceeding or otherwise, then
(a) to the extent of such recovery the obligation or part thereof
originally intended to be satisfied shall be revived and continued in
full force and effect as if such payment had not been made or such set-
off had not occurred, and (b) each Bank severally agrees to pay to the
Administrative Agent upon demand its pro rata share of any amount so
recovered from or repaid by the Administrative Agent."
(rr) Schedule 2.1 to the Credit Agreement shall be superseded and replaced
by Schedule 2.1 attached to this Amendment.
(ss) Exhibits D and F to the Credit Agreement shall be superseded and
replaced by Exhibits D and F attached to this Amendment, respectively.
(tt) Exhibit P attached to this Amendment shall be added to the Credit
Agreement as Exhibit P thereto.
3. Representations and Warranties. The Company hereby represents and
warrants to the Administrative Agent, the Co-Agents, the Issuing Bank and the
Banks as follows:
(a) The execution, delivery and performance by the Company of this
Amendment and the Collateral Documents have been duly authorized by all
necessary corporate action and do not and will not (i) contravene the terms of
the Company's certificate of incorporation, bylaws or other organizational
document, (ii) conflict with or result in any breach or contravention of, or the
creation of any Lien under, any indenture, agreement, lease, instrument,
Contractual Obligation, injunction, order, decree or undertaking to which the
Company is a party, or (iii) violate any Requirement of Law.
(b) The execution, delivery and performance by the Company of this
Amendment and the Collateral Documents 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,
except for recordings or filings in connection with the Liens granted to the
Administrative Agent under the Collateral Documents.
(c) The Credit Agreement, as amended by this Amendment, and each
Collateral Document constitute the legal, valid and binding obligations of the
Company, enforceable against the Company in accordance with their respective
terms, without defense, counterclaim or offset.
(d) The representations and warranties of the Company set forth in
Article 6 in the Credit Agreement and in the Collateral Documents are true and
correct on and as of the date hereof with the same effect as if made on and as
of the date hereof (except to the extent such representations and warranties
specifically relate to an earlier date, in which case they are true, accurate
and complete in all material respects as of such earlier date).
(e) No Default or Event of Default has occurred and is continuing.
(f) The Company is in the process of ceasing all operations at its
manufacturing facility in Fountain Valley, California and will have no
manufacturing operations at such location as of February 1, 1995.
(g) 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, the Co-Agents, the Issuing Bank, the Banks or any other Person.
4. Effective Date. This Amendment will become effective as of
December 23, 1994 (the "Effective Date"), provided that each of the following
conditions precedent has been satisfied:
(a) The Administrative Agent has received from the Company, each of the
Co-Agents, the Issuing Bank and the Majority Banks a duly executed original
of this Amendment.
(b) The Administrative Agent has received from the Company duly executed
original replacement Bid Notes.
(c) The Administrative Agent has received each of the following, duly
executed by the Company and in appropriate form for recording where applicable:
(i) the Security Agreement;
(ii) the Pledge Agreement;
(iii) the Deeds of Trust;
(iv) telephonic acknowledgment of all UCC-1 financing statements
filed, registered or recorded to perfect the security interests of the
Administrative Agent for the benefit of the Banks, or other evidence
satisfactory to the Administrative Agent and the Majority Banks that there
has been filed, registered or recorded all financing statements and other
filings, registrations and recordings necessary and advisable to perfect
the Liens of the Administrative Agent for the benefit of the Banks in
accordance with applicable law;
(v) written advice relating to such Lien and judgment searches as the
Administrative Agent or the Majority Banks shall have requested, and such
termination statements or other documents as may be necessary to confirm
that the Collateral is subject to no other Liens in favor of any Persons
(other than Permitted Liens);
(vi) all certificates and instruments representing the Collateral
pledged pursuant to the Pledge Agreement, and stock transfer powers
executed in blank with signatures guaranteed as the Administrative Agent or
the Majority Banks may specify;
(vii) with respect to each of the mortgaged properties described in
the Deeds of Trust, an A.L.T.A. Form B (or other form acceptable to the
Administrative Agent and the Majority Banks), a mortgagee policy of title
insurance or binder issued by a title insurance company satisfactory to the
Administrative Agent and the Majority Banks insuring (or undertaking to
insure, in the case of a binder) that such Deed of Trust creates and
constitutes a valid first Lien against the mortgaged property described
therein in favor of the Administrative Agent, subject only to exceptions
acceptable to the Administrative Agent and the Majority Banks, with such
endorsements and affirmative insurance as the Administrative Agent or the
Majority Banks may reasonably request;
(viii) funds sufficient to pay any filing or recording tax or fee in
connection with any and all UCC-1 financing statements and the Deeds of
Trust, and proof of payment of all title insurance premiums, documentary
stamp or intangible taxes, recording fees and mortgage taxes payable in
connection with the recording of the Deeds of Trust or the issuance of the
title insurance policies (whether due on the date hereof or in the future)
including sums due in connection with any future advances;
(ix) evidence that the Administrative Agent has been named as loss
payee under all policies of casualty insurance, and as additional insured
under all policies of liability insurance, required under the Credit
Agreement and the Collateral Documents, on terms satisfactory to the
Administrative Agent and the Majority Banks;
(x) such consents, estoppels, subordination agreements and other
documents and instruments executed by landlords, tenants and other Persons
party to material contracts relating to any Collateral as to which the
Administrative Agent shall be granted a Lien for the benefit of the Banks,
as requested by the Administrative Agent or the Majority Banks; and
(xi) evidence that all other actions necessary or, in the opinion of
the Administrative Agent or the Majority Banks, desirable to perfect and
protect the first priority Lien created by the Collateral Documents, and to
enhance the Administrative Agent's ability to preserve and protect its
interests in and access to the Collateral, have been taken.
(d) The Administrative Agent has received from the Company:
(i) copies of the resolutions of the board of directors of the
Company authorizing the transactions contemplated hereby, certified as of
the dated hereof by the Secretary or an Assistant Secretary of the Company;
(ii) a certificate of the Secretary or Assistant Secretary of the
Company certifying the names and true signatures of the officers of the
Company authorized to execute, deliver and perform, as applicable, this
Amendment and the Collateral Documents to be delivered by it hereunder;
(iii) the articles or certificate of incorporation and the bylaws of
the Company as in effect on the date hereof, certified by the Secretary or
Assistant Secretary of the Company as of the date hereof; and
(iv) a good standing and tax good standing certificate for the
Company from the Secretary of State of its state of incorporation and each
state where the Company is qualified to do business as a foreign
corporation as of a recent date, together with a bring-down certificate by
facsimile, dated the date hereof.
(e) An opinion of Stradling, Yocca, Carlson & Rauth, counsel to the
Company, addressed to the Administrative Agent, the Co-Agents, the Issuing Bank
and the Banks, in form and substance satisfactory to the Administrative Agent
and the Majority Banks.
(f) An opinion of Akin, Gump, Strauss, Hauer & Feld, Texas counsel to the
Company, addressed to the Administrative Agent, the Co-Agents, the Issuing Bank
and the Banks, regarding the Texas Deed of Trust, in form and substance
satisfactory to the Administrative Agent and the Majority Banks.
(g) Opinions of foreign counsel to the Company, addressed to the
Administrative Agent, the Co-Agents, the Issuing Bank and the Banks, regarding
such matters as the Administrative Agent may request with respect to the pledge
of the stock of foreign subsidiaries under the Pledge Agreement, in form and
substance satisfactory to the Administrative Agent and the Majority Banks.
(h) The Administrative Agent has received from the Company an upfront fee
in an amount equal to 0.25% of the Aggregate Commitment on the Effective Date,
which fee shall be for the ratable account of each Bank, and which fee the
Company hereby covenants to pay to the Administrative Agent on demand on or
prior to the Effective Date.
(i) BA Securities, Inc. and National Westminster Bank Plc each has
received from the Company the arrangement fee set forth in the separate
"Arrangement Fee Letter" dated on or about the date hereof in favor of such
Person, which fees shall be for their own respective accounts, and which fees
the Company hereby covenants to pay to each of BA Securities, Inc. and National
Westminster Bank Plc, respectively, on demand on or prior to the Effective Date.
(j) The Administrative Agent has received from the Company payment of all
accrued and unpaid fees, costs and expenses to the extent due and payable on the
date hereof, together with attorneys' fees and expenses (including the allocated
cost of internal counsel) invoiced on or prior to the date hereof, plus such
additional amounts of attorneys' fees and expenses (including the allocated cost
of internal counsel) as shall constitute the Administrative Agent's reasonable
estimate of such fees and expenses incurred or to be incurred by it through the
closing proceedings (provided that such estimate shall not thereafter preclude
final settling of accounts between the Company and the Administrative Agent);
including any such costs, fees and expenses arising under or referenced in
Sections 2.10 and 11.4 of the Credit Agreement, as amended hereby, or subsection
6(g) hereof.
(k) The Administrative Agent has received such other approvals, opinions,
documents or materials as the Administrative Agent or the Majority Banks may
reasonably request;
and further provided that the parties hereto acknowledge that this Agreement
will become effective as of December 23, 1994 notwithstanding the noncompletion
by such date of such of the foregoing conditions as are listed in Schedule 4
hereto.
For purposes of determining compliance with the conditions specified above, each
Bank that has executed this Amendment shall be deemed to have consented to,
approved or accepted or to be satisfied with, each document or other matter
either sent by the Administrative Agent to such Bank for consent, approval,
acceptance or satisfaction, or required thereunder to be consented to or
approved by or acceptable or satisfactory to such Bank.
5. Reservation of Rights. The Company acknowledges and agrees that the
execution and delivery by the Administrative Agent, the Co-Agents, the Issuing
Bank and the Banks of this Amendment shall not be deemed to create a course of
dealing or otherwise obligate the Administrative Agent, the Co-Agents, the
Issuing Bank or the Banks to execute similar amendments under the same or
similar circumstances in the future.
6. 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. Each of the parties hereto
understands and agrees that, if elected by the Administrative Agent, this
document (and any other document required herein) may be delivered by any party
thereto in the form of an executed original sent by facsimile transmission to be
followed promptly by mailing of a hard copy original, and that receipt by the
Administrative Agent of such a facsimile transmitted document purportedly
bearing the signature of a party hereto shall bind such party with the same
force and effect as the delivery of a hard copy original. Any failure by the
Administrative Agent to receive the hard copy executed original of such document
shall not diminish the binding effect of receipt of the facsimile transmitted
executed original of such document of the party whose hard copy page was not
received by the Administrative Agent.
(e) This Amendment, together with the Credit Agreement and the Collateral
Documents, 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, the Credit
Agreement or the Collateral Documents, respectively.
(g) Company covenants to pay to or reimburse the Administrative Agent,
upon demand, for all reasonable costs and expenses, including attorneys' fees
and expenses (including the 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, including without
limitation appraisal, audit, search and filing fees incurred in connection
herewith.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Amendment as of the date first above written.
AST RESEARCH, INC.
By: BRUCE C. EDWARDS
Title: Executive Vice President and
Chief Financial Officer
By: DENNIS R. LEIBEL
Title: Vice President, Legal & Treasury
Operations
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Administrative Agent and Co-Agent
By: WENDY M. YOUNG
Title: Vice President
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Issuing Bank and a Bank
By: KEVIN MC MAHON
Title: Vice President
NATIONAL WESTMINSTER BANK PLC, as Co-Agent and a
Bank
By: MICHAEL E. KEATING
Title: Vice President
CIBC INC., as Co-Agent and a Bank
By: JAMES E. ANDERSON
Title: Managing Director
SHAWMUT BANK, N.A., as Co-Agent and
a Bank
By: FRANK BENESH
Title: Director
BANQUE NATIONALE DE PARIS
By:_____________________________
Title: Senior Vice President and Manager
By:_____________________________
Title: Vice President
SANWA BANK CALIFORNIA
By:_____________________________
Title:
CITICORP USA, INC.
By: JAMES J. SHERIDAN
Title: Vice President
COMMONWEALTH BANK OF AUSTRALIA
By:_____________________________
Title: Executive Vice President and
General Manager
THE INDUSTRIAL BANK OF JAPAN,
LIMITED, LOS ANGELES AGENCY
By: KAZUTAKA KIYOTO
Title: Senior Vice President
THE LONG-TERM CREDIT BANK OF
JAPAN, LTD., LOS ANGELES AGENCY
By:_______________________________
Title: Deputy General Manager
ROYAL BANK OF CANADA
By:_______________________________
Title:
ABN AMRO BANK N.V., LOS ANGELES
BRANCH
By: JOHN A. MILLER
Title: Vice President
By: PAUL K. STIMPFL
Title: Vice President
THE NIPPON CREDIT BANK LTD., LOS
ANGELES AGENCY
By: KIYOTUMI ICHIKAWA
Title: Vice President
SCHEDULE 2.1
COMMITMENTS
Commitment Commitment
Bank Amount Percentage
Bank of America National Trust $33,750,000 15.000000000%
and Savings Association
National Westminster Bank Plc $26,250,000 11.666666666%
CIBC Inc. $30,000,000 13.333333333%
Shawmut Bank, N.A. $30,000,000 13.333333333%
Banque Nationale de Paris $15,000,000 6.666666666%
Sanwa Bank California $15,000,000 6.666666666%
Citicorp USA, Inc. $15,000,000 6.666666666%
Commonwealth Bank of Australia $11,250,000 5.000000000%
The Industrial Bank of Japan, $11,250,000 5.000000000%
Limited, Los Angeles Agency
The Long-Term Credit Bank $11,250,000 5.000000000%
of Japan, Ltd.,
Los Angeles Agency
Royal Bank of Canada $9,375,000 4.166666666%
ABN Amro Bank N.V., $9,375.000 4.166666666%
Los Angeles Branch
The Nippon Credit Bank Ltd., $7,500,000 3.333333333%
Los Angeles Agency
_____________ ______________
Total $225,000,000 100.000000000%
SCHEDULE 4
CONDITIONS TO BE SATISFIED BY JANUARY 20, 1994
1. Receipt by the Administrative Agent of required landlord waivers.
2. Receipt by the Administrative Agent of a satisfactory opinion of French
counsel to the Company regarding AST Research France S.A.R.L.
3. Receipt by the Administrative Agent of certificates representing all stock
pledged pursuant to the Pledge Agreement.
4. Recording of Deeds of Trust as a first-priority lien, issuance of
appropriate title insurance policies and receipt by the Administrative
Agent of a satisfactory opinion of Texas counsel to the Company.
EXHIBIT D
COMPLIANCE CERTIFICATE
Pursuant to that certain Credit Agreement dated as of September 30, 1993 (as
amended from time to time, the "Credit Agreement," the terms defined therein
being used herein as therein defined) among AST Research, Inc., a Delaware cor
poration (the "Company"), Bank of America National Trust and Savings
Association, as Administrative Agent, Co-Agent and Issuing Bank, National
Westminster Bank Plc, CIBC, Inc. and Shawmut Bank, N.A., each as Co-Agent, and
the several financial institutions party thereto, the undersigned
___________________________, certifies that he is the ___________________ of the
Company, and that, as such, he is authorized to execute and deliver this
Certificate, and that:
[Use this paragraph if this Certificate is delivered in connection with the
financial statements required by subsection 7.1(a) of the Credit Agreement]
(a)Attached as Exhibit 1 hereto are the audited consolidated balance sheet
of the Company as of _________, 199__ and the related consolidated statements of
income, shareholders' equity and cash flows for such fiscal year, setting forth
in each case in comparative form the figures for the previous year.
or
[Use this paragraph if this Certificate is delivered in connection with the
financial statements required by subsection 7.1(c) of the Credit Agreement]
1. Attached as Exhibit 1 hereto are the unaudited consolidated balance
sheet of the Company and its Consolidated Subsidiaries and the related
consolidated statements of income, shareholders' equity and cash flows, all for
the quarter ended __________, 199_. The financial statements attached as
Exhibit 1 are complete and correct and fairly present, in accordance with GAAP,
the financial position and results of operations of the Company and the
Company's Subsidiaries; provided, however, footnotes and other financial
presentations customarily presented only for audited year-end statements under
GAAP are not included.
2. Attached as Exhibit 2 hereto are the unaudited consolidating balance
sheets of the Company and its Subsidiaries as of ____________, 199_ and the
related consolidating statements of income for such period which were used
together with the financial statements attached hereto as Exhibit 1.
3. The Company has reviewed the terms of the Credit Agreement and the
undersigned has made, or has caused to be made under his supervision, a review
of the transactions entered into by the Company and its Subsidiaries during the
accounting period covered by the attached financial statements which could
affect the Company's compliance with such terms.
4. To the best of the undersigned's knowledge, the Company, during such
period, has observed, performed or satisfied all of the covenants and other
agreements contained in the Credit Agreement to be observed, performed or
satisfied by the Company.
5. The examinations described in paragraph 3 above did not disclose, and
the undersigned has obtained no knowledge of any Default or Event of Default.
6. All representations and warranties of the Company set forth in
Article VI of the Credit Agreement and in the Collateral Documents are true and
correct on and as of the date hereof with the same effect as if made on and as
of the date hereof (except to the extent such representations and warranties
specifically relate to an earlier date, in which case they are true, accurate
and complete in all material respects as of such earlier date).
7. The financial analysis and information contained in this certificate are
true and accurate on and as of the date of this certificate.
8. Set forth below are the calculations used to determine compliance with
the covenants of the Credit Agreement. All amounts set forth below refer to the
Company's consolidated financial statements for the period ended ____________,
199_.
A. Modified Quick Ratio (Section 8.8) (Thousands)
(i) Cash and Liquid Assets
of the Company and
Consolidated Subsidiaries $_________
(ii) Receivables $_________
Allowance for doubtful accounts
and sales returns ($________)
TOTAL RECEIVABLES $_________
TOTAL ((i) PLUS (ii)) $_________
(iii) Consolidated Current Liabilities $_________
Modified Quick Ratio is ___ to 1.00 ((i) plus (ii) to (iii)).
The required Modified Quick Ratio is not less than 0.80:1.00.
B. Tangible Net Worth (Section 8.10) (Thousands)
(i) Total Net Worth $__________
Intangibles ($_________)
TOTAL ACTUAL TANGIBLE NET WORTH $__________
(ii) Base Amount $275,000
75% of cumulative consolidated net
income (excluding net loss) earned
for each fiscal quarter beginning
with the fiscal quarter ended
December 31, 1994 $__________
75% of Net Proceeds of sale of capital
stock of the Company by and for
the account of the Company beginning
with the fiscal quarter ended
December 31, 1994 $__________
75% of increase in Tangible Net Worth
due to conversion of debt to common
stock beginning with the fiscal quarter
ended December 31, 1994 $__________
[For the fiscal quarter ended
December 31, 1994 only:
Any quarterly loss for the fiscal
quarter, up to a maximum amount
of $30,000,000 ($_________)]
[For the fiscal quarter ended
April 1, 1995 only:
Any quarterly loss for the fiscal
quarter, up to a maximum amount
of $15,000,000 ($_________)]
TOTAL REQUIRED TANGIBLE NET WORTH $__________
Total Actual Tangible Net Worth may not be less than Total Required
Tangible Net Worth set forth above.
C. Profitability (Section 8.11) (Thousands)
Consolidated net loss (if any) ($__________)
Profitability must be positive, commencing with the fiscal quarter ended
July 1, 1995.
D. Losses in Specific Quarters (Section 8.12) (Thousands)
Consolidated net loss (if any) ($__________)
Net loss (if any) for the fiscal quarter ended December 31, 1994 shall not
exceed $30,000,000, and net loss (if any) for the fiscal quarter ended April 1,
1995 shall not $15,000,000.
E. Leverage Ratios (Section 8.13) (Thousands)
(i) Total Liabilities $__________
(ii) Total Liabilities plus
Subordinated Debt $__________
(iii) Tangible Net Worth (from B(i) above) $__________
Leverage Ratio is ___ to 1.00 ((i) to (iii)).
Adjusted Leverage Ratio is ___ to 1.00 ((ii) to (iii)).
The required Leverage Ratios may not exceed the ratios set forth in Section
8.13 of the Agreement for the applicable periods.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
__________, 199_.
_______________________________
(signature)
Title: ________________________
EXHIBIT F
NOTICE OF BORROWING
To: Bank of America National Trust and
Savings Association, as Administrative
Agent under the Credit Agreement dated
as of September 30, 1993 (as amended
from time to time, the "Credit Agreement")
among AST Research, Inc., Bank of America
National Trust and Savings Association,
as Administrative Agent, Co-Agent and
Issuing Bank, National Westminster Bank Plc,
CIBC, Inc. and Shawmut Bank, N.A., each as
Co-Agent, and the several financial
institutions party thereto (the "Banks").
Date: _____________, 199_
Ladies and Gentlemen:
The undersigned AST Research, Inc. (the "Company") refers to the Credit
Agreement, and hereby gives you notice irrevocably, pursuant to Section 2.3 of
the Credit Agreement, of the Borrowing specified herein:
1. The aggregate amount of the proposed Borrowing is
$______________________.
2. The Business Day of the proposed Borrowing is
______________, 199_.
3. The Borrowing is to be comprised of $_______ of [Offshore
Committed] [CD Rate] [Reference Rate] Loans.
4. The duration of the Interest Period for the [Offshore
Committed] [CD Rate] Loans included in the Borrowing shall be _____
months.
The undersigned hereby certifies that the following statements are true on
the date hereof, and will be true on the date of the proposed Borrowing, before
and after giving effect thereto and to the application of the proceeds
therefrom:
(a) the representations and warranties of the Company contained in
Article VI of the Credit Agreement and in the Collateral Documents are true
and correct as though made on and as of the date hereof (except to the
extent such representations and warranties specifically relate to an
earlier date, in which case they are true, accurate and complete in all
material respects as of such earlier date);
(b) no Default or Event of Default has occurred and is continuing,
or would result from the proposed Borrowing;
(c) the Effective Amount of all outstanding Loans together with the
Effective Amount of the Letter of Credit (if outstanding) does not exceed
the Aggregate Commitment; and
(d) the Effective Amount of all outstanding Loans does not exceed
the Borrowing Base.
The Company represents and warrants to the Administrative Agent and the
Banks that the Borrowing requested herewith (check one of each):
[ ] is, partially or in its entirety;
[ ] is not, to any extent,
a Purpose Credit, and
[ ] is, partially or in its entirety;
[ ] is not, to any extent,
an Acquisition Credit.
If such Borrowing is to any extent either a Purpose Credit or an
Acquisition Credit, the Company acknowledges and agrees that such Borrowing is
further subject to satisfaction of the conditions set forth in Section 5.3 of
the Credit Agreement.
Capitalized terms used herein and not defined shall have the meanings
assigned to them in the Credit Agreement.
AST RESEARCH, INC.
By: ____________________________
Title: _________________________
EXHIBIT P
BORROWING BASE CERTIFICATE
Pursuant to that certain Credit Agreement dated as of September 30, 1993 (as
amended from time to time, the "Credit Agreement," the terms defined therein
being used herein as therein defined) among AST Research, Inc., a Delaware cor
poration (the "Company"), Bank of America National Trust and Savings
Association, as Administrative Agent, Co-Agent and Issuing Bank, National
Westminster Bank Plc, CIBC, Inc. and Shawmut Bank, N.A., each as Co-Agent, and
the several financial institutions party thereto, the undersigned
___________________________, certifies that he is the ___________________ of the
Company, and that, as such, he is authorized to execute and deliver this
Certificate, and that:
1. The Borrowing Base as of _________, 199__ is $________________.
2. Attached as Exhibit 1 hereto are the calculations used to determine the
foregoing Borrowing Base.
3. Attached as Exhibit 2 hereto is an aging of all Receivables, net of any
allowance for doubtful accounts and sales returns, as of such date, showing all
such Receivables outstanding 30, 60, 90, 120 and over 120 days from their
respective due dates.
4 The financial analysis and information contained in this certificate are
true and accurate on and as of the date of this Certificate.
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of
__________, 199_.
_______________________________
(signature)
Title: ________________________
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
(In thousands, except per share amounts) 1994 1994 1994 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings (loss) per share
Shares used in computing primary
earnings (loss) per share:
Weighted average shares of
common stock outstanding 32,369 31,659 32,358 31,625
Effect of stock options treated as
equivalents under the treasury
stock method - 795 - 603
---------- ---------- ---------- ----------
Weighted average common
and common equivalent
shares outstanding 32,369 32,454 32,358 32,228
---------- ---------- ---------- ----------
Net income (loss) $ (22,315) $ 17,933 $ (62,203) $ 26,165
---------- ---------- ---------- ----------
Earnings (loss) per share - primary $ (.69) $ .55 $ (1.92) $ .81
========== ========== ========== ==========
Fully diluted earnings (loss) per share
Shares used in computing fully diluted
earnings (loss) per share:
Weighted average shares of
common stock outstanding 32,369 31,659 32,358 31,625
Effect of stock options treated as
equivalents under the treasury
stock method - 890 - 715
Shares assumed issued on conversion
of Liquid Yield Option Notes - 855 - 855
--------- ---------- --------- ----------
Total fully diluted shares outstanding 32,369 33,404 32,358 33,195
--------- ---------- --------- ----------
Net income (loss) - fully diluted earnings per share:
Net income (loss) - primary earnings
per share $ (22,315) $ 17,933 $ (62,203) $ 26,165
Adjustment for interest on LYONs,
net of tax - 176 - 176
--------- ---------- --------- ----------
Adjusted net income (loss) - fully diluted
earnings per share (22,315) 18,109 (62,203) 26,341
--------- ---------- --------- ----------
Earnings (loss) per share - fully diluted $ (.69) $ .54 $ (1.92) $ .79
========= ========== ========= ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-END> DEC-31-1994
<CASH> 68,654
<SECURITIES> 0
<RECEIVABLES> 393,007
<ALLOWANCES> 17,920
<INVENTORY> 351,362
<CURRENT-ASSETS> 859,573
<PP&E> 166,227
<DEPRECIATION> 62,259
<TOTAL-ASSETS> 1,031,448
<CURRENT-LIABILITIES> 484,820
<BONDS> 218,158
<COMMON> 324
0
0
<OTHER-SE> 321,818
<TOTAL-LIABILITY-AND-EQUITY> 1,031,448
<SALES> 1,135,605
<TOTAL-REVENUES> 1,135,605
<CGS> 1,031,988
<TOTAL-COSTS> 1,031,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,193
<INTEREST-EXPENSE> 6,892
<INCOME-PRETAX> (77,754)
<INCOME-TAX> (15,551)
<INCOME-CONTINUING> (62,203)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (62,203)
<EPS-PRIMARY> (1.92)
<EPS-DILUTED> (1.92)
</TABLE>
