SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-18753
ADVANCED LOGIC RESEARCH, INC.
A Delaware Corporation IRS Employer ID No. 33-0084573
9401 Jeronimo Road
Irvine, California 92618
(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 12,491,952 shares of the Registrant's Common Stock, par value $.01
per share, outstanding on January 31, 1997.
<PAGE>
Advanced Logic Research, Inc.
Index
Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1996
and September 30, 1996 3
Consolidated Statements of Operations for the three
months ended December 31, 1996 and 1995 4
Consolidated Statements of Cash Flows for the
three months ended December 31, 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 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Page 2
<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)
December 31, September 30,
ASSETS 1996 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $61,167 $60,272
Trade accounts receivable, less allowance for doubtful accounts
of $2,177 and $2,027 at December 31, 1996 and
September 30, 1996, respectively 28,151 25,849
Inventories 30,183 23,437
Prepaid expenses and other assets 1,521 1,868
Deferred income taxes 4,236 3,989
-----------------------------
Total current assets 125,258 115,415
Equipment, furniture and fixtures, net 2,915 2,760
Other assets 2,678 465
-----------------------------
$130,851 $118,640
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $13,987 $7,198
Payable to affiliates 192 237
Accrued expenses 12,823 11,558
Income taxes 2,257 2,869
-----------------------------
Total current liabilities 29,259 21,862
-----------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 2,500,000
shares authorized; none issued - -
Common stock, $.01 par value; 25,000,000 shares
authorized; 12,454,270 and 12,250,480 issued and outstanding
at December 31, 1996 and September 30, 1996, respectively 125 123
Additional paid-in capital 59,377 57,924
Retained earnings 40,613 37,406
Adjustments for foreign currency translation 1,477 1,325
-----------------------------
Total stockholders' equity 101,592 96,778
-----------------------------
$130,851 $118,640
=============================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
Page 3
<PAGE>
<TABLE>
ADVANCED LOGIC RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share data)
(unaudited)
<CAPTION>
Three Months Ended
December 31,
1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net sales $56,416 $57,139
Cost of sales 43,128 45,218
---------------------------
Gross profit 13,288 11,921
Operating expenses:
Selling, general and administrative 6,622 6,712
Engineering, research and development 1,503 1,270
Royalty expense, net 1,291 1,429
---------------------------
Total operating expenses 9,416 9,411
---------------------------
Operating income 3,872 2,510
Interest income 859 650
Interest expense (15) (13)
---------------------------
Income before taxes 4,716 3,147
Provision for income taxes 1,509 787
---------------------------
Net income $3,207 $2,360
===========================
Net income per common and common equivalent share $0.25 $0.20
===========================
Common and common equivalent shares
used in per share calculation 12,768 12,027
===========================
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
Page 4
<PAGE>
<TABLE>
ADVANCED LOGIC RESEARCH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
<CAPTION>
Three Months Ended
December 31,
<S> <C> <C>
1996 1995
Cash flows from operating activities:
Net income $3,207 $2,360
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 306 413
Provision for losses on accounts receivables 164 61
Deferred income tax benefit (247) (112)
Change in assets and liabilities:
Trade accounts receivable (2,327) (1,506)
Inventories (6,622) (6,694)
Prepaid expenses and other assets 398 459
Accounts payable 6,741 3,155
Accrued expenses 1,232 704
Payable to affiliates (45) (15)
Income taxes (612) 310
-----------------------------
Net cash provided by (used in) operating activities 2,195 (865)
-----------------------------
Cash flows from investing activities -
Purchase of equipment, furniture and fixtures (456) (547)
-----------------------------
Cash flows from financing activities -
Minority investment in RouterWare, Inc. (2,250) -
Net borrowings from banks - 1,405
Issuance of stock under stock option plan 1,455 272
-----------------------------
Net cash (used in) provided by financing activities (795) 1,677
-----------------------------
Effect of foreign exchange rate change on cash (49) 11
-----------------------------
Net increase in cash and cash equivalents 895 276
Cash and cash equivalents at beginning of period 60,272 46,580
-----------------------------
Cash and cash equivalents at end of period $61,167 $46,856
=============================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest $15 $ -
Income taxes $1,836 $348
- --------------------------------------------------------------------------------------------------------------
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
Page 5
<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 1996 Form 10-K as filed with the
Securities and Exchange Commission on December 26, 1996.
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>
December 31, September 30,
<S> <C> <C>
1996 1996
Raw materials and component parts $11,172 $6,281
Work in process 8,211 5,745
Finished goods 10,800 11,411
--------- ----------
$30,183 $23,437
======= =======
</TABLE>
Page 6
<PAGE>
Page 16 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
December 31,
1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 76.4% 79.1%
---------------------------
Gross profit 23.6% 20.9%
Operating expenses:
Selling, general and administrative 11.7% 11.8%
Engineering, research and development 2.7% 2.2%
Royalty expense, net 2.3% 2.5%
---------------------------
Total operating expenses 16.7% 16.5%
---------------------------
Operating income 6.9% 4.4%
Interest income, net 1.5% 1.1%
---------------------------
Income before taxes 8.4% 5.5%
Provision for income taxes 2.7% 1.4%
---------------------------
Net income 5.7% 4.1%
===========================
</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
<TABLE>
<CAPTION>
Three Months Ended December 31
<S> <C> <C>
1996 1995 % Inc./(Dec.)
(In thousands)
Net sales by distribution channel
VARs and dealers $33,822 $35,982 (6%)
Direct 10,145 10,678 (5%)
OEM 9,154 5,656 62%
Distributors and others 3,295 4,823 (32%)
--------- --------- -----
Total $56,416 $57,139 (1%)
======= ======= ======
Net sales by geographic location
U.S. $35,101 $35,297 (1%)
International 21,315 21,842 (2%)
-------- -------- ------
Total $56,416 $57,139 (1%)
======= ======= ======
</TABLE>
Net sales for first quarter fiscal 1997 decreased by 1% to $56.4 million from
$57.1 million for first quarter fiscal 1996. For this period, sales to U.S.
customers decreased by 1% to $35.1 million and sales to international customers
decreased by 2% to $21.3 million. An industry-wide shortage of Intel's Pentium
Pro processors and a transition in the Company's high-end desk-top product line
were the predominant reasons for the slight decline in net sales for first
quarter fiscal 1997 compared to first quarter fiscal 1996.
The 62% increase in sales to OEM customers for first quarter fiscal 1997
compared to first quarter fiscal 1996 was principally driven by the addition of
Data General in September 1996 as a customer for the Company's high-end servers
complementing the Company's existing relationship with Unisys. Sales to OEM
customers represented 16% of net sales for first quarter fiscal 1997 compared to
10% of net sales in the comparable year-ago quarter.
The decline in sales to the Company's other principal channels of distribution
for first quarter fiscal 1997 compared to first quarter fiscal 1996, was
principally due to a product transition occurring in the Company's high-end
Pentium Pro-based desk-top systems. The decline in sales of the Company's
high-end desk-top systems negated the continued growth in sales of the Company's
servers. The Company's continued focus on servers and a demand for system
configurations which include more memory, larger disk drives and additional
peripherals resulted in an increase in the average system selling price for
first quarter fiscal 1997 to $2,536 compared to $2,183 for first quarter fiscal
1996.
Gross Profit
<TABLE>
<CAPTION>
Three Months Ended December 31,
1996 1995
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Net sales $56,416 $57,139
Gross profit 13,288 11,921
Percentage of net sales 23.6% 20.9%
</TABLE>
Gross profit margins for the three months ended December 31, 1996 improved to
23.6% from 20.9% for the corresponding period in fiscal 1996. The continued
shift in sales to servers favorably impacted gross profit margins since these
systems typically generate greater gross profit margins than the Company's other
systems. Lower component costs, particularly on memory, disk drives and
motherboards, from effective component sourcing and engineering design changes
also contributed to improving gross profit margins.
Operating Expenses
Selling, General and Administrative.
<TABLE>
<CAPTION>
Three Months Ended December 31,
<S> <C> <C>
1996 1995
(In thousands)
Net sales $56,416 $57,139
Selling, general and
administrative expenses 6,622 6,712
Percentage of net sales 11.7% 11.8%
</TABLE>
The $90,000 decline in selling, general and administrative expenses for first
quarter fiscal 1997 compared to first quarter fiscal 1996 was principally the
result of a $77,000 foreign exchange gain for first quarter fiscal 1997 compared
to a foreign exchange loss of $161,000 for first quarter fiscal 1996. The
foreign exchange gain for fiscal 1997 was primarily due to a strengthening of
the Pound Sterling against the U.S. Dollar during the period. In addition,
product advertising and trade show expenses declined by $184,000 in first
quarter fiscal 1997 compared to the similar prior year period. Partially
offsetting these declines were higher payroll and personnel-related expenses
associated with a 5% increase in sales and administrative personnel. As a
percentage of net sales selling, general and administrative expenses declined to
11.7% for first quarter fiscal 1997 compared to 11.8% for first quarter fiscal
1996.
Engineering, Research and Development.
<TABLE>
<CAPTION>
Three Months Ended December 31,
<S> <C> <C>
1996 1995
(In thousands)
Net sales $56,416 $57,139
Engineering, research and
development expenses 1,503 1,270
Percentage of net sales 2.7% 2.2%
</TABLE>
Engineering, research and development expenses increased by 18% to $1.5 million
for the three months ended December 31, 1996 from $1.3 million for the
comparable prior fiscal period. Increases in payroll and payroll-related costs
associated with a 13% increase in personnel and higher engineering material
expense from ongoing product development and enhancement principally accounted
for the increase. The 18% increase in engineering, research and development
expenses coupled with the 1% decline in sales resulted in increasing
engineering, research and development expenses to 2.7% of net sales for first
quarter fiscal 1997 compared to 2.2% of net sales for the similar year-ago
period.
Royalty Expense, Net
Net royalty expense for the first quarter fiscal 1997 decreased to $1.3 million
or 2.3% of net sales from $1.4 million or 2.5% of net sales for the comparable
year-ago period. The decline was primarily the result of the modified three year
fixed fee agreement with IBM Corporation completed in the fourth quarter of
fiscal 1996.
Interest Income, Net
For the three months ended December 31, 1996, the Company had net interest
income of $0.8 million compared to $0.6 million for the three months ended
December 31, 1995. The increase in net interest income was principally the
result of a higher cash and cash equivalent balance during the first quarter
fiscal 1997.
Income Taxes
For first quarter fiscal 1997, the Company recorded an effective income tax rate
of 32% of pretax income compared to 25% for first quarter fiscal 1996. The
change in the effective tax rates between fiscal 1997 and 1996 was principally
attributable to utilization of certain net operating loss carryforwards in
fiscal 1996 and changes in the earnings mix among the Company's subsidiaries
located in various taxing jurisdictions.
Liquidity and Capital Resources
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1996
----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Cash and cash equivalents $61,167 $60,272
Working capital 95,999 93,553
Current ratio 4.3 5.3
Stockholders' equity 101,592 96,778
</TABLE>
The Company's cash and cash equivalents increased by $0.9 million to $61.2
million at December 31, 1996 compared to $60.3 million at September 30, 1996.
Operating activities generated $2.2 million while the exercise of stock options
generated $1.5 million. Disbursements for the three month period included the
purchase of equipment, furniture and fixtures totaling $0.5 million and a $2.25
million cash investment for a 20% minority interest in RouterWare, Inc.
Operating cash flows for the first three months of fiscal 1997 benefited from an
increase in accounts payable which was related to the timing of inventory
purchases and subsequent payments. Offsetting this was an increase in
inventories and a slight deterioration in collection efficiency. An increase in
safety stock of key parts, components and certain finished systems along with
the purchase of components associated with new products accounted for the growth
in inventories.
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 three months of fiscal 1997. The Company has not borrowed against this
credit line.
In addition, ALR International, the Company's subsidiary in Singapore, has
unsecured, uncommitted revolving credit lines of approximately $4.3 million
which are used to supplement its working capital requirements. At December 31,
1996, ALR International had no borrowings against these lines of credit.
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.
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 can also be no assurance that product transitions will be managed in such
a way to minimize inventory levels and product obsolescence of discontinued
products. The Company's operating results could be adversely affected if ALR is
unable to manage all aspects of 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 the Company is unable to obtain
sufficient quantities of Pentium Pro processors or any other single-sourced
components, the Company will experience delays in product shipments.
Although vendor component costs have generally decreased a change in market
conditions brought about by increased demand for these components could result
in price increases which would adversely affect the Company's gross profit
margins and profitability.
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.
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 common stock 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 5. Other Information
Effective February 3, 1997, David Kirkey resigned his position as Vice
President, Sales and Director of European Operations to pursue other interests.
The Company has commenced a search for a replacement.
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: February 14, 1997 \s\ Eugene Lu
------------------------------------------
Eugene Lu
Chairman, President and Chief
Executive Officer
Date: February 14, 1997 \s\ Ron Sipkovich
------------------------------------------
Ronald J. Sipkovich
Vice President, Finance and
Administration, Chief Financial
Officer and Secretary
(principal financial officer)
<TABLE>
Exhibit 11
Advanced Logic Research, Inc. and Subsidiaries
Statement Regarding Computation of Per Share Earnings
(Amounts in thousands, except per share amounts)
<CAPTION>
Three Months Ended
December 31,
1996 1995
---- ----
<S> <C> <C> <C> <C> <C> <C>
Primary income per share:-
Shares used in computing income per share:
Weighted average number of shares outstanding 12,364 11,693
Incremental shares attributed to outstanding options 404 334
---------------------
12,768 12,027
Earnings:
Net income $3,207 $2,360
Income per common and common equivalent share $0.25 $0.20
- -----------------------------------------------------------------------------------
Income per share - assuming full dilution:-
Shares used in computing income per share:
Weighted average number of shares outstanding 12,364 11,693
Incremental shares attributed to outstanding options 450 334
---------------------
12,814 12,027
Earnings:
Net income $3,207 $2,360
- -----------------------------------------------------------------------------------
Income per common and common equivalent share $0.25 $0.20
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 61,167
<SECURITIES> 0
<RECEIVABLES> 30,328
<ALLOWANCES> 2,177
<INVENTORY> 30,183
<CURRENT-ASSETS> 125,258
<PP&E> 11,391
<DEPRECIATION> 8,476
<TOTAL-ASSETS> 130,851
<CURRENT-LIABILITIES> 29,259
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 101,467
<TOTAL-LIABILITY-AND-EQUITY> 130,851
<SALES> 56,416
<TOTAL-REVENUES> 56,416
<CGS> 13,288
<TOTAL-COSTS> 13,288
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 164
<INTEREST-EXPENSE> (844)
<INCOME-PRETAX> 4,716
<INCOME-TAX> 1,509
<INCOME-CONTINUING> 3,207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,207
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
