SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-18753
ADVANCED LOGIC RESEARCH, INC.
A Delaware Corporation IRS Employer ID No. 33-0084573
9401 Jeronimo Road
Irvine, California 92718
(714) 581-6770
__________________________
Indicate by check mark whether the Registrant (l) 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 12,245,021 shares of the Registrant's Common Stock, par value
$.01 per share, outstanding on July 31, 1996.
<PAGE>
Advanced Logic Research, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1996
and September 30, 1995 3
Consolidated Statements of Operations for the three
and nine months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
nine months ended June 30, 1996 and 1995 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADVANCED LOGIC RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
(unaudited)
June 30, September 30,
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $53,651 $46,580
Trade accounts receivable, less allowance for doubtful accounts
of $2,060 and $1,999 at June 30, 1996 and
September 30, 1995, respectively 27,963 26,524
Inventories 28,167 27,088
Prepaid expenses and other assets 1,444 1,692
Deferred income taxes 3,134 1,858
Total current assets 114,359 103,742
Equipment, furniture and fixtures, net 2,777 2,764
Other assets 470 714
$117,606 $107,220
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $8,759 $11,607
Accrued expenses 14,273 10,528
Payable to affiliates 213 330
Income taxes 1,709 1,506
Total current liabilities 24,954 23,971
Stockholders' equity:
Preferred stock, $.01 par value; 2,500,000
shares authorized; none issued
Common stock, $.01 par value; 25,000,000 shares
authorized; 12,244,369 and 11,668,871 issued and outstanding
at June 30, 1996 and September 30, 1995, respectively 122 117
Additional paid-in capital 57,871 54,675
Retained earnings 33,373 26,803
Adjustments for foreign currency translation 1,286 1,654
Total stockholders' equity 92,652 83,249
$117,606 $107,220
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED LOGIC RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales $50,230 $45,951 $162,416 $139,028
Cost of sales 38,868 36,792 127,575 113,387
Gross profit 11,362 9,159 34,841 25,641
Operating expenses:
Selling, general and administrative 5,903 5,764 18,843 16,256
Engineering, research and development 1,451 1,314 4,094 3,558
Royalty expense, net 1,725 1,239 5,056 3,903
Total operating expenses 9,079 8,317 27,993 23,717
Operating income 2,283 842 6,848 1,924
Interest income 664 728 1,966 1,926
Interest expense (18) (2) (53) (5)
Income before taxes 2,929 1,568 8,761 3,845
Provision for income taxes 733 391 2,191 961
Net income $2,196 $1,177 $6,570 $2,884
Net income per common and common equivalent share $0.18 $0.10 $0.54 $0.25
Common and common equivalent shares
used in per share calculation 12,377 11,736 12,175 11,629
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ADVANCED LOGIC RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Nine Months Ended
June 30,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $6,570 $2,884
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,058 1,397
Gain on disposal of equipment (87) (50)
Provision for losses on accounts receivables 166 221
Deferred income tax benefit (1,276) (272)
Change in assets and liabilities:
Trade accounts receivable (1,819) 2,687
Inventories (1,303) (11,336)
Prepaid expenses and other assets 459 2,507
Accounts payable (2,843) 8,222
Accrued expenses 3,748 1,536
Payable to affiliates (117) (2,348)
Income taxes 203 1,479
Net cash provided by operating activities 4,759 6,927
Cash flows from investing activities -
Purchase of equipment, furniture and fixtures (993) (846)
Cash flows from financing activities -
Issuance of stock under stock option plan 3,201 150
Effect of foreign exchange rate change on cash 104 (75)
Net increase in cash and cash equivalents 7,071 6,156
Cash and cash equivalents at beginning of period 46,580 40,836
Cash and cash equivalents at end of period $53,651 $46,992
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest $53 $2
Income taxes $422 ($2,498)
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
Advanced Logic Research, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by Advanced Logic Research, Inc., (the "Company") pursuant to
Securities and Exchange Commission regulations. In the opinion of management,
the unaudited financial statements include all adjustments, consisting of only
normal recurring accruals, necessary for a fair presentation.
The results of operations for the interim period are not necessarily
indicative of results to be expected for the full year.
These consolidated financial statements should be read in conjunction with the
financial statements included in the Company's 1995 Form 10-K as filed with
the Securities and Exchange Commission on December 27, 1995.
Net Income Per Share Information
Net income per share is computed using the weighted average number of common
shares and dilutive common stock options outstanding, at the average market
price for the period, which are considered common stock equivalents. Fully
diluted income per share amounts are not presented because they approximate
primary net income per share.
Cash Equivalents
Cash equivalents are highly liquid investments with an original maturity of
three months or less, consisting primarily of commercial paper, variable-rate
demand notes, short-term government obligations and other money market
instruments.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
(net realizable value) and consist of the following (in thousands):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
March 31, September 30,
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
Raw materials and component parts $9,080 $10,944
Work in process 5,630 3,647
Finished goods 13,457 12,497
---------- ----------
$28,167 $27,088
====== ======
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations
Results of Operations:
The following table presents the results of operations for the Company for the
period indicated as a percentage of net sales.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended,
June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 77.4% 80.1% 78.6% 81.6%
Gross profit 22.6% 19.9% 21.4% 18.4%
Operating expenses:
Selling, general and administrative 11.8% 12.5% 11.6% 11.7%
Engineering, research and development 2.9% 2.9% 2.5% 2.5%
Royalty expense, net 3.4% 2.7% 3.1% 2.8%
Total operating expenses 18.1% 18.1% 17.2% 17.0%
Operating income 4.5% 1.8% 4.2% 1.4%
Interest income, net 1.3% 1.6% 1.2% 1.4%
Income before taxes 5.8% 3.4% 5.4% 2.8%
Provision for income taxes 1.4% 0.8% 1.4% 0.7%
Net income 4.4% 2.6% 4.0% 2.1%
</TABLE>
<PAGE>
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations
This report contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might
cause such differences include, but are not limited to, those discussed under
"Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations -- Factors That May Affect Future
Results."
Net Sales
Three Months Ended June 30, Nine Months Ended June 30,
1996 1995 % Inc. 1996 1995 % Inc.
(In thousands)
Net sales by distribution channel
VARs and dealers $30,278 $31,653 (4%) $100,657 $94,372 7%
Direct 10,454 8,889 18% 32,786 24,436 34%
OEM 4,794 3,234 48% 15,525 11,179 39%
Distributors and others 4,704 2,175 116% 13,448 9,041 49%
Total 50,230 $45,951 9% $162,416 $139,028 17%
Net sales by geographic location
U.S. $32,955 $27,056 22% $102,132 $78,539 30%
International 17,275 18,895 (9%) 60,284 60,489 0%
Total $50,230 $45,951 9% $162,416 $139,028 17%
Net sales for the nine months ended June 30, 1996 increased by 17% to $162.4
million from $139.0 million for the nine months ended June 30, 1995. For this
period, sales to U.S. customers increased by 30% to $102.1 million with growth
occurring in all domestic sales channels while flat international sales
reflected a softness in European sales.
For the nine months ended June 30, 1996, the 49% increase in net sales through
the distributors and others sales channel represented the addition of a new
distributor in April 1996 coupled with increased sales to the Company's
existing distributors. Increased sales to all the Company's OEM customers
contributed to the 39% sales growth through this channel. Sales growth in the
direct channel was driven by increased sales to government entities which more
than tripled from the similar prior year period. The 7% growth in sales
through the value added reseller ("VAR") channel was due to a 26% increase in
sales to U.S. VARs mitigated by a 6% decline in sales to international VARs.
The flat sales to international customers for the nine months ended June 30,
1996 reflected a 21% decline in sales through the Company's European
subsidiaries offset by a 19% growth in sales to Asia-Pacific customers through
the Company's subsidiary in Singapore. There was a 1% increase in export
sales made from the U.S.
<PAGE>
For the nine months ended June 30, 1996, system unit sales were flat at
approximately 62,000 systems compared to the similar prior year period.
However, due to the Company's continued focus on servers and high-end desktop
systems and the demand for system configurations which include more memory,
larger disk drives and additional peripherals in general, the average system
selling price increased by 13% to $2,169 per system for the nine months
ended June 30, 1996 from $1,920 per system for the nine months ended June 30,
1995.
For the three months ended June 30, 1996, net sales increased by 9% compared
to the similar prior year period. Sales growth occurred in all U.S. sales
channels while sales to international customers declined by 9%. Sales
through the Company's European subsidiaries declined by 32%, partially due to
a strong U.S. dollar and weakness in the German economy, while sales through
the Company's subsidiary in Singapore increased by 30%. Export sales from the
U.S. declined by 32% due to a softness in sales to the Company's customers in
Russia and Latin America.
Gross Profit
Three Months Ended June 30, Nine Months Ended June 30,
1996 1995 1996 1995
(In thousands)
Net sales $50,230 $45,951 $162,416 $139,028
Gross profit 11,362 9,159 34,841 25,641
Percentage of net sales 22.6% 19.9% 21.4% 18.4%
Gross profit margins for the nine months ended June 30, 1996 improved to 21.4%
from 18.4% for the corresponding period in fiscal 1995. Contributing to the
improvement were lower component costs from both effective component sourcing
and engineering design changes, and the introduction of new higher margin
products such as the Revolution Quad6.
For the three months ended June 30, 1996, gross profit margins improved to
22.6% from 19.9% for the comparable period of fiscal 1995 and the improvement
was attributable to the factors previously discussed.
Operating Expenses
Selling, General and Administrative.
Three Months Ended June 30, Nine Months Ended June 30
1996 1995 1996 1995
(In thousands)
Net sales $50,230 $45,951 $162,416 $139,028
Selling, general and
administrative expenses 5,903 5,764 18,843 16,256
Percentage of net sales 11.8% 12.5% 11.6% 11.7%
<PAGE>
Selling, general and administrative expenses increased by 16% to $18.8 million
for the nine months ended June 30, 1996 compared to $16.3 million for the
corresponding prior fiscal period. Expanded product advertising related to
new product introductions and specific channels of distribution, and special
product promotional incentives principally accounted for the increase in
expenses. Also contributing to the increase were higher payroll and payroll-
related costs associated with the addition of sales personnel.
For the three months ended June 30, 1996, selling, general and administrative
expenses increased by 2% compared to the corresponding prior fiscal period. A
foreign exchange gain and other income of $0.2 million partially offset a
growth in payroll and advertising expenses which increased compared to the
similar prior year period due to the factors previously discussed.
Engineering, Research and Development.
Three Months Ended June 30, Nine Months Ended June 30
1996 1995 1996 1995
(In thousands)
Net sales $50,230 $45,951 $162,416 139,028
Engineering, research and
development expenses 1,451 1,314 4,094 3,558
Percentage of net sales 2.9% 2.9% 2.5% 2.5%
Engineering, research and development expenses increased by 15% to $4.1
million for the nine months ended June 30, 1996 from $3.6 million for the
comparable prior fiscal period. Increases in payroll and payroll-related
costs associated with increased personnel and higher engineering material and
product certification expenses from ongoing product development and
enhancement principally accounted for the increase. Because of the 17%
growth in revenue, engineering and development costs as a percentage of sales
remained unchanged at 2.5% for the nine months ended June 30, 1996 from the
comparable prior year period.
For the three months ended June 30, 1996, engineering, research and
development expenses increased by 10% to $1.5 million compared to the
comparable prior fiscal period. The growth was principally due to increases
in payroll, payroll-related costs and engineering material expenses associated
with increased personnel and ongoing product development.
Royalty Expense, Net
Net royalty expense for the nine months ended June 30, 1996 increased to 3.1%
of net sales, compared to 2.8% for the corresponding period of fiscal 1995.
This increase was principally related to an increase in the royalty rate to
its maximum on the Company's products covered by the license agreement with
IBM.
For the three months ended June 30, 1996, net royalty expense increased to
3.4% of net sales compared to 2.7% for the corresponding period of fiscal
1995.
Interest Income, Net
For the nine months ended June 30, 1996 and June 30, 1995, the Company had net
interest income of $1.9 million. A higher average cash and cash equivalent
balance during the first nine months of fiscal 1996 was offset by lower
rates of return on short-term investments compared to the similar period of
fiscal 1995.
<PAGE>
Income Taxes
The Company's tax expense for the first nine months of fiscal 1996 was based
on estimated effective annual rates. The effective tax rate for the three and
nine months ended June 30, 1996 was 25% which was unchanged from the tax rate
for the comparable prior year periods.
Liquidity and Capital Resources
June 30, 1996 September 30, 1995
(In thousands)
Cash and cash equivalents $53,651 $46,580
Working capital 89,405 79,771
Current ratio 4.6 4.3
Debt --- ---
Stockholders' equity 92,652 83,249
The Company's cash and cash equivalents increased by $7.1 million to $53.7
million at June 30, 1996 compared to $46.6 million at September 30, 1995.
Operating activities generated $4.8 million while the exercise of stock
options generated $3.2 million and the purchase of equipment, furniture and
fixtures used $1.0 million.
The Company generated $6.6 million from net income and $3.7 million from an
increase in accrued expenses. However, increases in accounts receivable and
inventories used $1.8 million and $1.3 million, respectively, while a
decrease in accounts payable used $2.8 million. The increase in accrued
expenses was principally related to increases in royalties payable,
cooperative advertising and other promotional marketing accruals. Average
sales days outstanding increased to 50 days at June 30, 1996 from 45 days at
September 30, 1995. The increase in inventories was related to the stocking
of components associated with the release of new products. The decline in
accounts payable stemmed from the timing of inventory purchases during the
quarter and the Company's payment cycle.
The Company's primary credit facility continues to be a $15.0 million
revolving line with Heller Financial, Inc. which expires in August 1998. The
line is secured by the Company's assets and availability is subject to a
borrowing base requirement. The facility contains certain net worth,
profitability, financial ratio and other covenants with which the Company was
in compliance during the first nine months of fiscal 1996. The Company
has not borrowed against this credit line. In addition, to meet short-term
working capital needs ALR International, the Company's subsidiary in
Singapore, has an uncommitted revolving credit line of approximately $4.4
million. At June 30, 1996, ALR International had no borrowings against this
credit line.
The Company believes that its existing cash resources, combined with
anticipated cash flows from future operating activities, supplemented as
necessary with funds available under existing credit agreements, will provide
it with sufficient resources to meet present and reasonably foreseeable
working capital requirements and other cash needs. Nonetheless, the Company
may, at its discretion, draw upon its credit facilities in any amount up to
the credit limit at any time.
<PAGE>
Factors That May Affect Future Results
The personal computer industry is intensely competitive. The principal
elements of competition among personal computer manufacturers are pricing,
product quality and reliability, compatibility, price/performance
characteristics, marketing and distribution capability, service and support,
reputation and the capability to deliver products in large volumes. ALR
competes with a large number of manufacturers most of which have significantly
greater financial, marketing and technological resources than ALR. There can
be no assurance that ALR will be able to continue to compete effectively.
The Company does business worldwide. Global and/or regional economic factors
and potential changes in laws and regulations affecting the Company's
business, including without limitation, currency fluctuations, changes in
monetary policy and tariffs, and federal, state and international laws
regulating the environment, could impact the Company's future results of
operations.
The microcomputer market is characterized by rapid technological change and
product obsolescence, often resulting in short product life cycles and rapid
price declines. The Company's success will continue to depend primarily on
its ability to continue to reduce costs through manufacturing efficiencies,
the continued market acceptance of its existing products and its ability to
develop and introduce similarly acceptable new products. There can be no
assurance that ALR will successfully develop new products or that the new
products it develops will be introduced in a timely manner and receive
substantial market acceptance. There also can be no assurance that new
products will be introduced in a way that will not adversely affect sales of
the Company's existing products. The Company's operating results could be
adversely affected if ALR is unable to manage its product transitions
successfully.
The Company generally utilizes standard parts and components available from
multiple vendors. However, certain parts and components used in the Company's
systems are available from a single source. If, contrary to its expectations,
the Company is unable to obtain sufficient quantities of any single-sourced
components, the Company will experience delays in product shipments.
The Company offers its products directly and through indirect channels of
distribution. Changes in the financial condition of, or in the Company's
relationship with, OEM customers, distributors and other indirect channel
partners could cause actual operating results to vary from those expected.
Also, the Company's customers generally order products on an as-needed basis.
Therefore, virtually all product shipments in a given fiscal quarter result
from orders received in that quarter. The Company anticipates that the rate
of new orders will vary significantly from month to month. Because ALR
operates with a limited backlog, the Company's manufacturing plans and
expenditure levels are based primarily on sales forecasts. Consequently, if
anticipated sales and shipments in any quarter do not occur when expected,
expenditure and inventory levels could be disproportionately high and the
Company's operating results for that quarter, and potentially future quarters,
would be adversely affected.
<PAGE>
From time to time, certain companies have asserted exclusive patent, copyright
and other intellectual property rights to technologies that are important to
the microcomputer industry. ALR evaluates each claim relating to its products
and, if appropriate, seeks a license to use the protected technology. There
can be no assurance that the Company would be able to obtain licenses to use
such technology or that such licenses could be obtained on terms that would
not have a material adverse effect on the Company. If the Company or its
suppliers are unable to license protected technology used in ALR's products,
ALR could be prohibited from marketing such products. The Company could also
incur substantial costs to redesign its products or to defend any legal action
taken against it. If the Company's products should be found to infringe
protected technology, ALR could be required to pay damages to the infringed
party.
The market price of the Company's securities could be subject to fluctuations
in response to quarter to quarter variations in operating results, changes in
analysts' earnings estimates, market conditions in the information technology
industry, as well as general economic conditions and other factors external to
the Company.
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11. Statement Regarding Computation of Per Share Earnings.
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADVANCED LOGIC RESEARCH, INC.
(Registrant)
Date: August 14, 1996 \s\ Gene Lu
-----------------------------------------------
Gene Lu
Chairman, President and Chief
Executive Officer
Date: August 14, 1996 \s\ Ron Sipkovich
-----------------------------------------------
Ronald J. Sipkovich
Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
(principal financial officer)
<PAGE>
<TABLE>
Exhibit 11
Advanced Logic Research, Inc. and Subsidiaries
Statement Regarding Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
<CAPTION>
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Primary earnings per share:-
Shares used in computing earnings per share:
Weighted average number of shares outstanding 12,110 11,490 11,877 11,483
Incremental shares attributed to outstanding options 267 246 298 146
12,377 11,736 12,175 11,629
Earnings:
Net income $2,196 $1,177 $6,570 $2,884
Earnings per common and common equivalent share $0.18 $0.10 $0.54 $0.25
Earnings per share - assuming full dilution:-
Shares used in computing earnings per share:
Weighted average number of shares outstanding 12,110 11,490 11,877 11,483
Incremental shares attributed to outstanding options 278 290 345 279
12,388 11,780 12,222 11,762
Earnings:
Net income $2,196 $1,177 $6,570 $2,884
Earnings per common and common equivalent share $0.18 $0.10 $0.54 $0.25
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<FISCAL-YEAR-END> Sep-30-1996
<PERIOD-START> Oct-01-1995
<PERIOD-END> Jun-30-1996
<PERIOD-TYPE> 9-MOS
<CASH> 53,651
<SECURITIES> 0
<RECEIVABLES> 30,023
<ALLOWANCES> 2,066
<INVENTORY> 28,167
<CURRENT-ASSETS> 114,359
<PP&E> 10,643
<DEPRECIATION> 7,866
<TOTAL-ASSETS> 117,606
<CURRENT-LIABILITIES> 24,954
<BONDS> 0
0
0
<COMMON> 122
<OTHER-SE> 92,530
<TOTAL-LIABILITY-AND-EQUITY> 117,606
<SALES> 162,416
<TOTAL-REVENUES> 162,416
<CGS> 127,575
<TOTAL-COSTS> 127,575
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 166
<INTEREST-EXPENSE> (1,913)
<INCOME-PRETAX> 8,761
<INCOME-TAX> 2,191
<INCOME-CONTINUING> 6,570
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,570
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
