-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, LuAQgylU/8/gSYcIh4TvmJ8ww3LujMEmObkvSd2toVjXHCKjekGQuYkXzXiozazI sUk39h3anurSfRWQWQH+eQ== 0000725182-94-000044.txt : 19940928 0000725182-94-000044.hdr.sgml : 19940928 ACCESSION NUMBER: 0000725182-94-000044 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19940702 FILED AS OF DATE: 19940926 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AST RESEARCH INC /DE/ CENTRAL INDEX KEY: 0000725182 STANDARD INDUSTRIAL CLASSIFICATION: 3571 IRS NUMBER: 953525565 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13941 FILM NUMBER: 94550256 BUSINESS ADDRESS: STREET 1: 16215 ALTON PKWY CITY: IRVINE STATE: CA ZIP: 92713 BUSINESS PHONE: 7147274141 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 2, 1994 [ ] 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 0-13941 __________________________ 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 __________________________ SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF EACH CLASS COMMON STOCK, PAR VALUE $.01 __________________________ 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the registrant's voting Common Stock held by non-affiliates of the registrant was approximately $504,528,525 (computed using the closing price of $16.94 per share of Common Stock on August 26, 1994 as reported by NASDAQ). There were 32,352,000 shares of the registrant's Common Stock, par value $.01 per share, outstanding on August 26, 1994. __________________________ Portions of the registrant's definitive Proxy Statement for the Annual Meeting of Stockholders scheduled to be held on October 27, 1994, which Proxy Statement will be filed no later than 120 days after the close of the registrant's fiscal year ended July 2, 1994, are incorporated by reference in Part III of this Annual Report on Form 10-K. PART I ITEM 1. BUSINESS GENERAL AST Research, Inc. ("AST" or the "Company") was incorporated in California on July 25, 1980 and reincorporated as a Delaware corporation effective July 1, 1987. The Company designs, manufactures, markets, services and supports a broad line of personal computers including desktop, server and notebook computer systems marketed under the Advantage!(R), AscentiaTM, BravoTM, PremmiaTM, ManhattanTM SMP and PowerExecTM brand names. The Company's products feature advanced design characteristics while remaining compatible with established industry standards. The Company currently markets its products through an extensive worldwide distribution network of retail computer dealers, consumer retailers, international and regional distributors, value added dealers ("VADs"), value added resellers ("VARs"), original equipment manufacturers ("OEMs") and U.S. Government ("GSA") approved dealers. See further discussions under Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition and "Additional Factors That May Affect Future Results" included therein. SIGNIFICANT BUSINESS DEVELOPMENTS IN FISCAL 1994 Effective September 1, 1993, the Company completed the purchase of certain assets and assumption of certain liabilities of Tandy/GRiD France. Assets acquired consist primarily of inventory, equipment and leased real property in France. In addition, the Company purchased additional Tandy/GRiD inventory in Europe and other certain assets in the United States. The purchase price for the Tandy/GRiD France acquisition and the additional European inventory and U.S. assets was $6.7 million and was paid through an increase of the principal amount in the three-year promissory note payable to Tandy Corporation from $90 million to $96.7 million. 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. 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. In May 1994, the Company amended its $225 million unsecured revolving credit facility to increase the amount to $300 million while keeping the termination date of September 30, 1996. On August 31, 1994, the Company announced that it expects its first quarter fiscal 1995 revenues to be flat relative to the first quarter of fiscal 1994 and down from the previous fiscal 1994 fourth quarter resulting in a net loss for the first quarter of fiscal 1995. Depending on the size of the projected loss for the first quarter of fiscal 1995, the Company then could be in default of specific covenants in its committed $300 million revolving credit facility. See further discussion included in "Liquidity and Capital Resources" under Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition. In June 1994, the Company completed an agreement for the sale and leaseback of its Hong Kong manufacturing facility. The Company realized a pretax gain of $6.0 million of which $4.3 million was recognized and included in "Other income (expense), net" in the accompanying Consolidated Statement of Operations for the year ended July 2, 1994. The leaseback period is for one year fixed plus one additional year at the option of the Company. During fiscal 1994, the Company increased its international presence by forming wholly-owned subsidiaries in Norway, Denmark, Ireland, Korea and Malaysia. As part of the Company's worldwide manufacturing restructuring plan, the Company opened a new European manufacturing facility in Limerick, Ireland. The Company's Scotland facility, which was acquired as part of the Company's purchase of Tandy Corporation's personal computer operations, terminated operations during the fourth fiscal 1994 quarter. The Company also established a new sales and manufacturing subsidiary in Tianjin, China through a joint venture with a corporation affiliated with the Chinese government. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION AST operates in one industry segment: the manufacture and sale of personal computers, including desktop, server, and notebook computer systems. A summary of the Company's operations by geographic area including net sales, operating income (loss) and identifiable assets is incorporated herein by reference from Note 11 of Notes to Consolidated Financial Statements. BUSINESS STRATEGY AND MARKET The Company's business strategy is to utilize its technological expertise, worldwide manufacturing capabilities, brand name recognition and distribution channels to offer its customers a broad range of personal computers to meet a variety of user needs. The Company believes that its success depends upon the ability to identify products and product features required by customers and to design and produce high quality, innovative products compatible with industry standards on a timely basis and at competitive prices. As new technology and faster, more powerful microprocessors have become available, the Company has concentrated its efforts in the higher performance end of the personal computer market. In pursuing this strategy, the Company has developed a multi-channel and multi-brand distribution approach which targets a variety of price points and user requirements. These include the Advantage! computer product line which is designed for the consumer retail market, the value oriented Bravo computer product line, the high performance Premmia and Manhattan SMP computer product lines, and the PowerExec and Ascentia lines of notebook computers. Within the various brands, the Company offers a full range of products, including desktop systems from the entry level 80386SX-based systems to high-end PentiumTM systems and servers, monochrome and color notebooks and the fully symmetric multiprocessor line. The Company's personal computers incorporate either Industry Standard Architecture ("ISA"), Extended Industry Standard Architecture ("EISA"), or Peripheral Component Interconnect ("PCI") Bus Architecture and are compatible with major industry standard operating systems including MS-DOS(R), UNIX/XENIX, SCO UNIX, Novell NetWare(R) and OS/2(R). The Company pursues a strategy whereby its products retain their compatibility with new major industry standards as they are developed. The personal computer industry is characterized by intense price competition and the Company believes that the price and performance features of its products are key factors in the purchase decisions of its customers and, as a result, has developed a series of product lines each specifically targeted at certain market segments that are served through various channels of the Company's distribution network. Price reductions are often determined with reference to then existing competitive factors, including the prevailing pricing strategy of other major computer manufacturers. The Company's business strategy includes the introduction of new products that are priced aggressively to highlight the price and performance advantages of AST products. The Company intends for its products to remain competitively priced and will adjust its prices as needed to maintain or grow its market share. These adjustments may negatively impact the Company's profitability. The Company believes that its strategy of establishing a worldwide presence in countries with developing markets for computer products and providing products that meet local needs, such as customized systems and local language documentation, has provided significant opportunity for revenue growth. International market expansion has been a factor in the Company's growth during fiscal 1994. Overseas revenues increased 46% in fiscal 1994 over the prior year and contributed 36% of total worldwide revenues. International revenues contributed 41% and 44% of total revenues in fiscal 1993 and 1992, respectively. During fiscal 1995, the Company intends to continue pursuing developing markets in both Russia and India while concurrently focusing on its Northern Europe and Pacific Rim markets. PRODUCTS The Company's products range from portable systems to superservers under the Advantage!, Ascentia, Bravo, PowerExec, Premmia and Manhattan brand names. The Company also manufactures certain custom desktop system and board-level products for OEM customers. The Company offers a complete family of personal computer systems products designed to meet various performance levels and price points. During fiscal year 1995, the Company intends to enhance its desktop computer product lines with faster processing power and deluxe features to satisfy the complex needs of the home, small-business and corporate user. The Company also plans to expand its mobile computing solutions under the Ascentia brand name with high-performance, value-oriented and subnotebook models. In addition, the Company intends to expand its server products under its Manhattan brand name and will continue to introduce new products, technologies and computing solutions for the network environment. Advantage! AST's Advantage! family, sold primarily through the consumer retail market, offers low-cost, ready-to-use desktop and notebook systems designed for educational, entertainment, home office or business applications. The Advantage! line is designed to offer a total solution-based package with pre- installed software, to enhance the system's "ease of use." The Advantage! family is highlighted by the Adventure multimedia system that features AST WorksTM software, considered one of the industry's most comprehensive and easy-to-use interfaces that combines video help, numerous productivity tools and telephony capabilities. The numerous pre-installed software titles and features available on Advantage! models include Microsoft's EncartaTM, an electronic encyclopedia; a built-in fax/modem; PRODIGY(R), America Online(R) and CompuServe(R) on-line information service software starter kits; and personal finance, home management and graphics programs. Other models in the pre-configured product line include Advantage! Pro desktop, Advantage! Plus mini-tower and Advantage! Explorer notebook computers. The Advantage! line supports a wide range of processing power including 486SX/33, 486SX2/50, 486DX2/66, 486DX4/100 and 60MHz Pentium processors. In addition, these products are covered by a one year on-site service program and a 24 hour hotline. Ascentia The Ascentia family consists of high performance notebook computers which encompass mobile computing solutions with extensive pre-loaded business and communications software. These notebook computers also have high performance processing capabilities with Intel DX2 50MHz and DX4 75MHz CPUs/processors. In addition to the connectivity and communication solutions provided through compatibility with more than 150 PCMCIA cards, the Ascentia notebook computer has among the industry's largest color displays and up to eight hours of battery life with intelligent power management. The Ascentia 900N high performance model is the successor to the PowerExec notebook computer. Other models include the Ascentia 500S subnotebook and Ascentia 800N value notebook. These products include a three year worldwide warranty with a one year ExeCareSM service program and a 48 hour rapid repair service. Bravo The Bravo family is AST's value desktop line that provides both small businesses and large corporate users with a range of computing options. As the Company's price leader, the value line offers a wide range of processing speeds focused on business-oriented applications, such as word processing, electronic mail, graphics and animation programs. The Bravo line was the first AST brand to offer energy-efficient computers that meet the EPA's "Energy Star" requirements and now also comply with the Video Electronic Standards Association ("VESA") standard for power management. The family has multiple lines of computers to satisfy the diverse needs of the home office and business user. They include the mid-size Bravo LC desktop, which offers a multimedia model; the Bravo LP low-profile desktop, winner of PC/Computing's 1993 Most Valuable Product Award; the Bravo NB notebook, which includes color and color plus local bus enhanced graphics for fast video performance; the Bravo MT high-performance mini-tower desktop; and the recently introduced Bravo MS desktop, which incorporates the latest advances in bus architecture and cache along with the `plug-and-play'/PCI configuration and Pentium Overdrive(R) Technology. The new Bravo models, which offer enhanced video performance, accelerated graphics capabilities and greater expandability than previous Bravo systems, utilize processors ranging from the 486/25 through the 60MHz Pentium. In addition, all Bravo systems are covered with a three year warranty, which includes a one year on-site service program. Premmia Desktops The Premmia high-performance desktop line, which includes Pentium and 486- based models, incorporates advanced technologies to suit complex computing needs. The systems utilize the highest performing standard PCI local bus I/O architecture and support the `plug-and-play' configuration. In addition, the Premmia line offers high-performance multimedia systems which combine accelerated full-motion video, support for 32-bit operating systems, 8MB of memory expandable to 128MB, up to 512KB of secondary cache, five EISA bus master expansion slots and five drive bays. The Premmia desktop models include the 4/66d, LX P/60, GX and MX and support Pentium processors up to 90 and 100MHz. Premmia 486 models also feature high-end video, expandability and upgradeability. These products include a three year warranty which includes a one year on-site and two year depot service program. Premmia Servers AST's Premmia server line is designed to meet a diverse level of price and performance requirements in the growing server marketplace. The new line includes the Premmia MTE, a full-featured, cost-effective server in a mini-tower enclosure, highly suitable for work groups and small to mid-sized networks. Also included is the Premmia SE, a high-powered, highly expandable, full-size system ideal for large departments or client/server computing. Both models are EISA-based servers with stringent security and upgradeability features which utilize 486DX/33, 486DX2/66 and 60MHz Pentium processors. During fiscal year 1995, the Company intends to introduce all server products under the Manhattan brand name. Manhattan SMP The Manhattan SMP computer is AST's fully symmetric multiprocessor, highly effective as a mini-computer alternative or application server. It also can be used to consolidate large LAN environments. It was designed to be run with the Pentium processor and is the Company's most powerful system to date. It can run up to five Pentium processors and its fully symmetric design allows the system to scale easily with the simple addition of processors. The Manhattan SMP computer provides high-availability through features important in today's mission critical environments: ECC memory that corrects memory while the system is running; optional redundant power supplies to provide continued system operation and a hardware disk array subsystem for redundancy. PowerExec The PowerExec notebook family gives users maximum levels of computing flexibility and enhanceability. The PowerExec incorporates a 9 1/2" active matrix screen and allows up to 6 3/4 hours of battery life for non-stop computing. Corporate professionals and business travelers alike benefit from the PowerExecs 386SL, 486/25SL and 486/33SL microprocessor, PCMCIA support, removable and upgradeable hard drive, DOS 6.0, Windows 3.1 and upgradeable display and memory. These products also include the ExeCare Plus one year warranty. During fiscal year 1995, the Company intends to have the Ascentia notebook computer line supersede the PowerExec notebook computer line. GRiD/Victor During fiscal year 1994, as part of the Company's acquisition of Tandy's personal computer operations, the Company acquired the GRiD ConvertibleTM, GRiD PalmPAD(R) and PalmPAD SL, and GRiDPAD(R) 2390 pen-based systems. These GRiD products utilized the pen-based technology which was also acquired from Tandy Corporation. During the first and second quarters of fiscal 1994, the Company focused its efforts on integrating its existing product lines with the acquired Tandy/GRiD and Victor product lines. Beginning in the third quarter of fiscal 1994, the Company commenced a reassessment of the GRiD product line and product capabilities, the current and future customer prospects for GRiD products and the costs involved in continuing the GRiD brand name. Based upon this review, the Company decided in the fourth quarter of fiscal 1994, to alter its product line integration strategy to eventually discontinue all manufacturing, marketing and sales efforts related to the acquired GRiD product line. The Company's current strategy is to continue to market the Victor(R) product line, also acquired from Tandy Corporation, in various European countries. Other Markets The Company's monitor line includes the ASTVisionTM 4N, 4L, 5L, 7L, 4I and 4V models. These monitors consist of low-radiation, multi-sync color and are designed to VESA DPMS (Display Power Management Signaling) standards. ASTVision offers personal computer users who operate with graphic-intensive Windows-based applications a choice of high quality displays available in 17, 15 and 14 inch formats. In addition to the ergonomic design, their multi-synchronous operation delivers enhanced flexibility in graphics resolutions and refresh rates, along with user-controlled definition of the horizontal and vertical image size and positioning. AST's enhancement product line provides various combinations of increased memory, additional input/output ports and other features. AST memory/multifunction products include the SixPak and Rampage Plus lines for both ISA and MCA-based computers. Graphics products include AST-VGA Plus (16-bit). AST micro-to-mini communications products allow personal computers to function as terminals for minicomputers or mainframes, while at the same time retaining the PC's ability to act as a stand alone desktop computer. In addition, the AST FourPort AT Plus offers multi-user connectivity for attaching up to four additional ports. PRODUCT DEVELOPMENT Due to the rapid pace of advances in personal computer technology, the Company's continued success depends on the timely introduction of new products that are accepted in the marketplace. Accordingly, the Company is actively engaged in the design and development of new products and the enhancement of existing products. During the fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992, the Company's engineering and development expenses were $38,858,000, $31,969,000 and $30,461,000, respectively. The Company's long standing relationships with major software and hardware developers such as Banyan Systems Inc., IBM, Intel Corporation, Microsoft Corporation, Novell Inc. and SCO Inc. assist the Company in bringing new technologies to the marketplace. Working with these developers in both compatibility testing and software support programs allows the Company to introduce products incorporating the latest hardware technology and the capability to operate the most current software available in the marketplace. AST is firmly committed to the establishment of industry standards and actively participates in their development. The Company was one of the nine original high technology companies which participated in the development of EISA. In addition, AST's Bravo product line complies with the VESA and Energy Star programs for power management and energy efficient systems. AST has also incorporated two of the industries latest technologies, the Pentium processor and PCI bus, within the Premmia, Bravo and Advantage! product lines. The Company believes that its technical expertise is a key factor in its development of new and innovative products. The Company's engineering staff uses computer-aided design techniques which assist in the development of new products and enable faster adaptation of printed circuit board layouts for the manufacturing process. In addition to keeping with AST's philosophy of providing its customers with the latest technology, the new line of business desktop computers contain AST FlashBIOS, which is firmware/software written by AST engineers. The use of AST FlashBIOS simplifies the upgrade process when required. AST Works software is also a new package developed by AST, included in both the Advantage! and Ascentia product lines, which encompasses instant video help, telephony and productivity tools. In addition, these business desktop computers contain the `plug-and-play' peripheral standard which is a new means for automatic card configurations. Fiscal year 1994 product development efforts resulted in the introduction of numerous new products, including the high performance Ascentia notebook computer line and new generations and enhancements within the Advantage!, Bravo and Premmia product lines. These new generations and enhancements included the Pentium processor, PCI local bus, energy-efficiency, and multi-media strategies that appeal to the wide range of computer users. MANUFACTURING AST's manufacturing operations include procurement and inspection of components, assembly and testing of printed circuit boards ("PCB") and assembly, testing and packaging of finished products. The Company's manufacturing and warehouse facilities include over 1.5 million square feet of capacity and are located in Fountain Valley, California; Fort Worth, Texas; Hong Kong; People's Republic of China ("PRC"); Taiwan and Limerick, Ireland. In its goal to achieve increased operating efficiencies and improve worldwide product delivery and customer response, the Company has initiated significant changes in its demand fulfillment strategies. Manufacturing centers for mobile computers, a high-growth segment of the personal computer market, have been established in Fountain Valley, California and in Taiwan. Fort Worth, Texas is the Company's worldwide production center for multiprocessor products. To better serve the Pacific Rim, American, European and the Rest of the World's desktop and server product demand with lower costs and expedited time-to-market, desktop and server products are manufactured in facilities located in Hong Kong and the PRC, Texas, and Ireland, respectively. In support of its worldwide systems manufacturing, the Company manufactures PCB assemblies in Hong Kong and the PRC. As a result of the Tandy/GRiD acquisition, AST acquired four manufacturing facilities, including three in Fort Worth, Texas and one in East Kilbride, Scotland. The physical integration of the acquisition, including the transfer of capital and labor, was substantially completed in fiscal year 1994. As a result, the Company closed both a Texas facility and the Scotland facility and has announced the closure of the Texas PCB assembly facility, to be completed in the first half of fiscal year 1995. The Company has added system and PCB assembly capacity through its two new facilities in the PRC. The Company continues to assess its worldwide manufacturing capacity in an effort to increase efficiencies and improve product deliveries. The Company currently procures all of its components from outside suppliers. AST factory sites are in close proximity to many key international vendors. Source inspections are conducted at the plants of selected strategic suppliers, while other parts are sampled for inspection upon receipt at the Company's manufacturing facilities. The Company has generally been able to obtain parts from multiple sources without difficulty. However, increases in demand for personal computers have created industrywide shortages at times resulting in significant price increases 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 the future, there can be no assurance that such shortages will not re-occur and significantly increase the cost or delay the shipment of AST's products, thereby having an adverse impact on the revenues and profitability of the Company. Nearly all parts used in AST products are available from multiple sources. To achieve improvements in cost, the Company negotiates with its suppliers to develop multiple sources for existing sole-source components. Nevertheless, some key components are still only available through sole-source suppliers due to technology, availability, price, quality or other considerations. Key components currently obtained from single sources include active-matrix displays, CD-ROMs, application specific integrated circuits, and microprocessors. AST purchases components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with sole-source suppliers. In the event that a supply of a key single-sourced component were delayed or curtailed, the Company's ability to ship the related product in needed quantities and in a timely manner could be adversely affected. The Company attempts to mitigate these potential risks by working closely with major suppliers on product plans and coordinated product introductions. The Company has also made a capital investment in the PRC, which has a history of political instability. The Company attempts to mitigate this potential risk by maintenance of both primary inventory custody and a management center in Hong Kong and by alternative sourcing arrangements. Quality and reliability are emphasized in the development, design and manufacture of the Company's products. AST continues to focus on successful new product introductions through a process of concurrent product and process design efforts which attempt to simplify and streamline the manufacturing process in the earliest stages of product design. Products undergo quality inspection and testing throughout the manufacturing process. This is evidenced through programs which have been implemented for process measurement and improvement, reduction of the cost structure, maintenance of on-time delivery, increase of in-process yields and improvement in product field reliability. Additional manufacturing verification and testing programs include failure analysis, as well as out-of-box audit programs that consist of extended diagnostic and software testing and extended early life reliability testing of products taken from finished goods. The Company employs a flexible manufacturing line which serves a customer base that orders non-standard product configurations. This flexible manufacturing area provides various software/hardware configurations to these customers. The Company's strategy is to continuously enhance its manufacturing procedures to include comprehensive quality management processes. In fiscal 1994, the Company successfully obtained and/or maintained International Standards Organization ("ISO") 9000 certification at a majority of its sites. The Company is currently pursuing ISO certification at its remaining non- certified locations in Texas, Australia, Ireland and the PRC. MARKETING AND SALES The Company employs a worldwide multi-channel distribution strategy which allows it to reach a variety of customers. While each channel provides AST with access to a specific target market, the Company's strategy is to differentiate itself from others in the industry by continuing to realize significant revenues through its established network of authorized dealers and resellers. The Company believes that its success in building its network of dealers and resellers is largely due to the Company's product line breadth, the quality and reliability of its products and the high level of service and support provided by the Company. Despite AST's past success within these channels, the Company continues to focus on broadening its product distribution channels. In fiscal 1994, the Company realigned its sales organization into four major geographical groups: The Americas, which includes the U.S., Canada and Latin America; Europe; Asia/Pacific Rim; and the Rest of the World, which includes the Middle East, Africa and the Indian subcontinent. North American Distribution The Company's North American distribution channels include authorized independent resellers, dealers, national and regional distributors, OEMs, consumer retailers and government sales through GSA approved dealers. The Company sells directly to large VADs and VARs who typically purchase personal computers from the manufacturer and add enhancement products and software to assemble a turn-key system which is sold in selected vertical markets. The Company's VADs and VARs include customers such as CompuCom Systems, MicroAge, ENTEX Information Services, Inc. and Intelligent Electronics, Inc. The Company also sells its products to smaller dealers and resellers through major national distributors including Gates/FA Distributing, Ingram Micro, Merisel and Tech Data Corporation. In addition, the Company sells to computer store chains such as Computerland and Inacom Corporation. The Company's Advantage! line is designed for small office and home use and is marketed primarily by consumer retail chains including Computer City Supercenters; Costco Wholesale Club Stores; Circuit City Stores Inc.; Sam's Wholesale Club, a division of Wal-Mart Stores; CompUSA and Radio Shack(R) Canada. The Federal Systems Division of AST focuses on the approximately $3.5 billion federal government personal computer market and supports large government suppliers such as Electronic Data Systems and Digital Equipment Corporation. The Federal Systems Division also supports integrators on proposals requiring customized hardware and software platforms. Fiscal 1994 North American revenues rose 83% to $1.5 billion from $830 million for fiscal 1993. Sales through the Company's VAD/VAR and consumer retail channels constituted 45% and 32%, respectively, of total North American revenues in fiscal year 1994. Fiscal 1994 sales to distributors and through the OEM channels contributed 12% and 11% of North American revenues, respectively. International Distribution The Company operates internationally through subsidiaries and sales offices in 43 locations worldwide. In countries where the Company does not have subsidiary operations, products are sold to retail dealers and distributors. The Company plans to continue to focus on the international arena including Europe, the Pacific Rim and the Rest of the World during fiscal 1995. In addition, the Company intends to pursue opportunities within other developing countries as they arise. Success and profitability of international operations could be adversely affected by conditions that differ from conditions in North America, including local economic conditions, political instability, tax laws and changes in the value of the U.S. dollar relative to other currencies in which products are sold. See Item 7. "Management's Discussion and Analysis of Results of Operations and Financial Condition-Gross Profit." In fiscal 1994, international revenues rose 46% over the prior year, from $582 million to $850 million. European revenues were up 79% to $533 million from $297 million in fiscal 1993 and represented 23% and 21% of total fiscal 1994 and 1993 revenues, respectively. The Company continued to expand its European business through the establishment of new subsidiaries within the Nordic region as well as in Limerick, Ireland. Sales in the Company's Pacific Rim region grew 9% to $261 million and accounted for 11% of total fiscal 1994 worldwide revenue compared to 17% of total fiscal 1993 revenue. This decline in the fiscal 1994 growth rate was attributable to significantly increased competition within this region of the world. The Company anticipates that these competitive pressures will continue. The Company's Rest of World revenues increased 22% to $56 million in fiscal 1994 and represented 2% of total fiscal 1994 revenue. Customer Support and Training AST believes that customer support, service and training are crucial to maintaining strong relationships with its customers and that the high level of its service and support helps differentiate it from other manufacturers in the personal computer industry. The Company has an AST Customer Care program which is a comprehensive collection of services for its line of file server, desktop and notebook computers. AST Customer Care offers technical support to resellers, dealers and end-users through 24-hour access toll-free telephone lines; AST On-Line!, a 24-hour electronic bulletin board system; AST Info-Fax which allows access to a broad selection of technical support documentation via facsimile 24-hours a day; and a technical support alliance with leading network and operating system suppliers for one-stop support in multi-vendor networked environments. In addition, the AST On-Line! service has been expanded to be available through the CompuServe 24 hour on-line information service, Prodigy interactive network and the bulletin board system which includes Remote Imaging Protocol (RIPscrip). Parts and labor warranties on AST computers range from one to three years in length, depending on product type. Service is provided by AST authorized dealers, third party maintenance organizations and the Company's in-house service and support organization. Trained service technicians are available in more than 1,500 AST authorized service centers. Included among these service centers, from which on-site service is also available, are more than 800 Authorized Service Centers (ASC), over 100 Advanced System Support Centers (ASSC) and at least 400 third party maintenance locations. In addition, international customers can be serviced on a carry-in basis by any of the authorized AST Service Providers located in more than 30 countries around the world. AST Customer Care also provides comprehensive protection for notebook users through the ExeCare Plus service program. Expedited repair or replacement of any AST notebook product anywhere in the United States is available under the ExeCare Plus service program. In addition, for ExeCare Plus members traveling abroad, ExeCare Plus service is honored by all AST international subsidiaries. In addition, the Company offers AST Premium and Premium Plus Support programs to end-users who have a large installed base of AST computers and internal information centers providing service and support within the organization. The Premium Support program features priority toll-free technical support, a video- based core service training program, subscription to AST Technical Publications and the ability to purchase spare parts directly from AST. Premium Plus Support program subscribers also receive labor reimbursements for warranty repair work performed on AST systems, discounts on spare parts, expedited spare part cross- shipments, spare parts inventory balancing and a quarterly newsletter. Advertising AST advertises its product domestically and internationally in selected computer, business and consumer publications. Through the AST cooperative advertising program, the Company encourages its channel partners to advertise AST products by funding a portion of joint advertising and promotion efforts. The Company also participates in major computer and business trade shows around the world. The Company's advertising targets a wide range of buyers and influencers including MIS and PC professionals, department managers, corporate executives, and individual purchasers. Major Customers During fiscal 1994, no AST customer accounted for more than 10% of net sales. BACKLOG The Company orders raw materials and components to manufacture products according to its forecast of near-term demand and maintains inventories of finished products in advance of receipt of orders from its customers. Orders from retail accounts are usually placed by the customer on an as-needed basis and are usually shipped by the Company shortly after receipt. OEMs may place orders for scheduled deliveries; however, the amount and quantities thereof are not significant at the present time. Unfilled orders can be, and often are, canceled or rescheduled with little or no penalty. For these reasons, the Company's backlog at any particular time is generally not indicative of the future level of sales. In addition, cancellations and rescheduling can adversely impact the Company's revenue and profitability. PATENTS AND LICENSES The Company relies on a combination of contract, patent, copyright, trademark and trade secret laws to protect its proprietary interests in its products. The Company owns several U.S. federal registrations for trademarks, including "AST", the AST logo, "AST PREMIUM", "AST RESEARCH", "ADVANTAGE!", "GRiD" and "VICTOR". At July 2, 1994, the Company had acquired through application and purchase over 200 patents and patent applications throughout the world relating to various aspects of its products. AST has license agreements for various products, including operating system software for its personal computer systems with Microsoft Corporation and IBM Corporation, for which the Company makes payments. In addition, the Company has a patent cross-licensing agreement with IBM Corporation dated January 1, 1990, which expires January 1, 1995, for which the Company makes payments. AST also has various license agreements for application software which it distributes with its products, many of which require the Company to make payments to the licensor. COMPETITION The intense competition in the personal computer industry continued during the past year and was characterized by frequent product introductions and an aggressive pricing environment. While some personal computer manufacturers refocused their channel strategies, the Company broadened its product lines and channels to further its core strategy of being a price and performance leader. The Company also expanded its customer service and support programs. The Company's primary competitors are other computer companies which all offer a full range of personal computing solutions, including IBM, Compaq Computer Corporation, Dell Computer Corporation, Gateway 2000, Inc. and Packard Bell. The Company believes that its main competitive advantage has been and continues to be the Company's commitment to its channel partners. This channel focus, in addition to product branding, product line breadth and service and support, has enabled the Company to enhance its market position in the extremely competitive personal computer marketplace. The personal computer market has continued to be highly price competitive. As a result, price reductions were again made across product lines during fiscal 1994, resulting in a decline in gross profit margins. Characteristic of the past few years, the Company anticipates significant competitive pricing pressure to continue. The ongoing introduction of new technologies and full-featured systems across all of the Company's product lines is intended to enable AST to keep pace with rapid market changes and to minimize the effect of continued pricing pressure. However, there can be no assurance that the Company will have the financial resources, marketing and distribution capability, or technological knowledge to continue to compete successfully. In addition, the Company's results of operations could be adversely impacted if it is unable to effectively implement its technological and marketing alliances with other companies, such as Microsoft and Intel, and manage the competitive risks associated with these relationships. REGULATORY COMPLIANCE FCC Regulations The Federal Communications Commission ("FCC") in October 1979 and April 1980 adopted regulations imposing radio frequency emanation standards for computing equipment. The regulations distinguish between computing devices marketed for use primarily in a commercial, industrial or business environment (designated class A) and computing devices marketed for use primarily in a residential environment (designated class B). All of the Company's products are designed to comply with applicable FCC standards. International Standards Organization The ISO 9000 standard is a quality guideline around which AST has designed its quality system. This system is designed to help ensure that customer needs and product specifications are of ongoing quality and consistency. The Company has achieved and maintained certification and registration under ISO 9000, section 9002 for the quality systems used in manufacturing operations at its subsidiary in Taiwan, its Distribution Center in the United Kingdom and for its Fountain Valley facility in California. In addition, the AST Hong Kong manufacturing operations have been certified and registered under ISO 9000, section 9001. In fiscal year 1995, the Company's Australian subsidiary and its Texas, Ireland and PRC manufacturing operations plan to pursue ISO 9000, section 9002 certification and registration. Effects of Environmental Laws Compliance with laws enacted for the protection of the environment to date has had no material effect upon the Company's capital expenditures, earnings or competitive position. The Company has successfully been involved in such programs as the EPA's Energy Star program and a member of the Portable Rechargeable Battery Association (PRBA) which identifies new regulations in various areas with regard to labeling, transportation issues and proper disposal. Although the Company does not anticipate any material adverse effects in the future based on the nature of its operations, there can be no assurance that such laws will not have a material adverse effect on the Company. To its knowledge, the Company was not named as a defendant in any environmental lawsuits during fiscal 1994. EMPLOYEES As of August 26, 1994, the Company had 6,977 employees, 4,085 of whom were employed in manufacturing, 363 in engineering and 2,529 in the areas of general management, sales, marketing and administration. Of the total, 3,477 were employed in North America, 2,603 were employed in the Pacific Rim, 44 were employed in the Rest of World (Middle East) and 853 were employed by the Company's European subsidiaries. The Company believes that it has been successful to date in attracting and retaining qualified personnel, but believes its future success will depend in part on its continued ability to attract and retain highly qualified engineers, technicians, marketing and management personnel. To assist in attracting qualified employees at all levels, the Company has adopted stock option, performance based incentive compensation, profit sharing and other benefit plans. The Company considers its employee relations to be good. No employee of the Company is represented by a union. BUSINESS SEASONALITY Although the Company does not consider its business to be highly seasonal, the Company experienced seasonally higher sales in the second quarter of fiscal 1994 due to the holiday demand for some of its products, as it expanded the consumer retail channel, and anticipates that this trend will continue. ITEM 2. PROPERTIES The Company owns and occupies its worldwide headquarters facility in Irvine, California. The 232,000 square foot facility accommodates the Company's executive, finance and administrative, sales, marketing, customer support and engineering functions. The Company also leases a 246,000 square foot manufacturing facility in Fountain Valley, California under a ten year lease agreement, which expires in 1999. As a result of the Tandy/GRiD acquisition, the Company owns and occupies a 93,000 square foot manufacturing facility in Fort Worth, Texas and leases an additional 43,000 square feet of manufacturing space. The Company leases approximately 240,000 square feet for regional sales offices and 322,000 square feet for warehouse/distribution space for its North American sales operations. The Company entered into an agreement for the sale and leaseback of its 68,000 square foot manufacturing facility in Hong Kong effective June 1994. The leaseback period is for one year fixed plus one additional year at the Company's option. The Company leases an additional 82,000 and 25,000 square feet for warehouse/production activities and office space, respectively, in Hong Kong. The Company's Taiwanese manufacturing facility includes 54,000 square feet of leased property. During fiscal 1994, the Company leased an aggregate of 389,000 square feet of manufacturing space in the PRC to service the domestic Chinese and other Pacific Rim markets. The plant is expected to be in full operation by the end of fiscal 1995. In addition, the Company leases approximately 73,000 square feet for sales, marketing and administration offices and warehouse facilities in the Pacific Rim. During fiscal 1994, the Company shifted its European production from the acquired 113,000 square foot East Kilbride, Scotland manufacturing facility to a 340,000 square foot plant in Limerick, Ireland. The Company began the centralization of its European, African and Middle Eastern distribution and European service and support operations in Limerick, Ireland during the third fiscal 1994 quarter. In addition, the Company has approximately 252,000 square feet of sales, marketing, administration and warehouse facilities in other countries in Europe. The Company also leases an additional 32,000 square feet for warehouse and office space in the Middle East. An additional 182,000 square feet is leased in the Middle East for planned expansion. ITEM 3. 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 an AST patent 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 are proceeding. 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. 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 class action, asserting claims under state and federal securities law based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court of the Central District of California. On May 9, 1994, the Court consolidated the two cases under the case name In re AST Securities Litigation. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of class action, asserting claims under state and federal securities law based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaint was filed in the United States District Court of the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. Management has reviewed the allegations contained in 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 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 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, frequently with other personal computer manufacturers, including IBM, AT&T, Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in thirteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. Such claims are being alleged with increasing frequency as a result of the use of various computer products. The claims total approximately $15 million in compensatory damages, $130 million in 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 suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. 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 periods covering the claims filed above. While such policies may limit coverage under certain circumstances, the Company believes that it is adequately protected. Should the Company not be successful in defending against such lawsuits or not be able 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 also 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the three months ended July 2, 1994. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AST's Common Stock is traded on the over-the-counter market (NASDAQ National Market System) under the symbol ASTA. The following tables set forth, for the fiscal 1994 and 1993 periods indicated, the range of high and low prices for the Company's Common Stock. 1994: High Low 1st Quarter $18 - 1/2 $13 - 3/4 2nd Quarter 25 - 1/2 16 - 3/4 3rd Quarter 33 20 - 1/4 4th Quarter 22 - 1/2 12 - 1/2 1993: 1st Quarter $17 - 3/8 $11 - 1/4 2nd Quarter 23 12 - 3/4 3rd Quarter 24 - 1/4 13 4th Quarter 17 - 1/4 12 - 3/4 There were approximately 1,113 security holders of record as of August 26, 1994. The Company has not paid dividends to date and intends to retain earnings for use in the business for the foreseeable future. ITEM 6. SELECTED FINANCIAL DATA The following data has been derived from consolidated financial statements that have been audited by Ernst & Young, independent auditors. The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K.
- - --------------------------------------------------------------------------------------------------------------- (In thousands, except per share amounts) 1994 1993 1992 1991 1990 - - --------------------------------------------------------------------------------------------------------------- Net sales $2,367,274 $1,412,150 $ 944,079 $ 688,477 $ 533,814 Gross profit 381,333 285,698 293,260 248,347 173,375 Operating income (loss) 86,681 (2) (64,578) (1) 97,526 94,083 54,427 Net income (loss) 53,501 (53,738) 68,504 64,724 35,067 Net income (loss) per share: Primary $ 1.64 $ (1.72) $ 2.16 $ 2.13 $ 1.43 Fully diluted $ 1.59 $ * $ * $ * $ 1.21 Shares used in computing net income (loss) per share: Primary 32,548 31,289 31,758 30,413 24,530 Fully diluted 34,866 * * * 30,960 - - --------------------------------------------------------------------------------------------------------------- Cash and short-term investments $ 153,118 $ 121,600 $ 140,705 $ 153,305 $ 92,252 Working capital 434,474 301,046 (3) 332,793 282,678 185,243 Total assets 1,038,312 886,159 (3) 580,613 485,431 324,175 Long-term debt 215,294 92,258 (3) 2,431 30,110 30,126 Total shareholders' equity $ 383,954 $ 318,806 $ 363,267 $ 282,162 $ 193,286 Shares outstanding at end of period 32,334 31,579 30,787 30,228 15,255 - - ---------------------------------------------------------------------------------------------------------------
* Fully diluted earnings (loss) per share were anti-dilutive or not materially different from primary earnings (loss) per share. (1) Includes a $125 million pretax restructuring charge. See Note 2 of Notes to Consolidated Financial Statements. (2) Includes a $12.5 million pretax credit from the reversal of excess restructuring charge amounts not used. See Note 2 of Notes to Consolidated Financial Statements. (3) Effective June 30, 1993, the Company purchased certain net assets of Tandy Corporation's personal computer business. The Company's Consolidated Statements of Operations do not include the revenues and expenses of the acquired business until fiscal 1994. See Note 2 of Notes to Consolidated Financial Statements. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION The following discussion should be read in conjunction with the consolidated financial statements.
(In thousands, except per share amounts) RESULTS OF OPERATIONS 1994 CHANGE 1993 CHANGE 1992 - - ------------------------------------------------------------------------------------------------------------------ Net sales $ 2,367,274 68% $ 1,412,150 50% $944,079 Gross profit $ 381,333 33% $ 285,698 (3%) $293,260 Percentage of net sales 16.1% 20.2% 31.1% Operating expenses (excluding restructuring costs) $ 307,152 36% $ 225,276 15% $195,734 Percentage of net sales 13.0% 16.0% 20.7% Restructuring charges (credit) $ (12,500) $ 125,000 $ - Percentage of net sales (0.5%) 8.9% - Net income (loss) $ 53,501 200% $ (53,738) (178%) $ 68,504 Net income (loss) per share, fully diluted $ 1.59 192% $ (1.72) (180%) $ 2.16
NET SALES Net sales increased to $2.367 billion in fiscal year 1994 from $1.412 billion in fiscal year 1993 and $944 million in fiscal year 1992. These increases in revenues were due to strong worldwide demand for the Company's desktop and notebook computer systems. In fiscal 1994, the Company's worldwide unit shipments increased 78% to 1.432 million, compared with a 69% increase in unit volume for fiscal 1993. The Company's unit volume growth rate exceeded its sales growth rate as a result of pricing actions undertaken by the Company due to continuing industrywide competitive pricing pressures. Price competition continues to have a significant impact on prices of the Company's products, especially those aimed at the consumer market, and additional pricing actions may occur as the Company attempts to maintain its competitive mix of price and performance characteristics. Going forward, the Company anticipates continued industrywide competitive pricing and promotional actions. The Company's net sales (expressed in U.S. dollars) were also reduced by 2.7%, 1.3% and .7% in fiscal 1994, 1993 and 1992, respectively, due to fluctuations in the average value of the U.S. dollar relative to its average value in the comparable periods of the prior years. Revenues from desktop system products increased 56% to $1.5 billion in fiscal 1994 from $967 million in fiscal 1993, compared with an increase of 60% in fiscal 1993. Major contributors to the improved year-over-year revenue performance were the Company's 486-based desktop systems including the Advantage! 486SX, 486/66, the Bravo 486SX/25, 486/33, 486/66D, and the entire Premmia 486 product line. Revenues from sales to Tandy's retail operations and the acquired GRiD and Victor product lines also contributed to the Company's fiscal 1994 desktop revenue growth. Sales of the Company's 80386 systems, reflecting the continuing shift in demand toward higher performance 486-based systems, declined 58% to $90 million in fiscal 1994, compared to a decline of 42% in fiscal 1993. Revenues from the Company's notebook computer products increased and represented 22%, 21% and 24% of net sales for fiscal 1994, 1993 and 1992, respectively. The Company's notebook computer product revenues rose 79% to $519 million in fiscal 1994 from $290 million in fiscal 1993, compared to an increase of 28% in fiscal 1993 over fiscal 1992. The increase in net sales of notebook computers reflects a 74% increase in unit shipments to 268,000 in fiscal 1994 over 154,000 in the same prior year period and a 52% unit volume increase in fiscal 1993 over fiscal 1992. Fiscal 1994 notebook systems sales growth occurred in all key notebook product lines including the Bravo, the Advantage! Explorer, and the PowerExec notebook computer lines. In addition, revenues from sales to the Company's OEM customers contributed to the Company's fiscal 1994 notebook revenue growth. North American revenues (including Canada) increased 83% to $1.517 billion in fiscal year 1994 compared with an increase of 56% in fiscal 1993 over 1992. The continued revenue growth was the result of strong unit sales of the Company's desktop and portable computer systems within each of the Company's North American distribution channels, including independent resellers, dealers, national distributors, original equipment manufacturers ("OEMs"), U.S. Government approved dealers and consumer retailers. While revenue growth occurred in each channel, fiscal 1994 sales to the consumer retail channel, which includes fiscal 1994 sales made to Tandy's retail operations, rose 218% over the prior year. Fiscal 1993 consumer retail channel sales rose 436% above fiscal 1992 as fiscal 1993 represented the first complete year of Company sales into this new channel. The consumer retail channel, including consumer electronics, office and computer superstores, increased to 32% of total fiscal 1994 North American revenues versus 19% in fiscal 1993 and 5% in fiscal 1992. The substantial fiscal 1994 revenue growth within this channel was due largely to the growing popularity of computer superstores. Sales into this channel, however, are cyclical with the strongest demand occurring in third and fourth calendar quarters. As this channel continues to grow, the Company anticipates a corresponding seasonal impact on the Company's net sales. International revenues grew 46% to $850 million in fiscal 1994 from $582 million in fiscal 1993, compared to a 42% growth rate in fiscal 1993 over fiscal 1992. International revenues represented 36%, 41%, and 44% of net sales in fiscal 1994, 1993 and 1992, respectively. European revenues increased 79% over the prior year, compared with 45% in fiscal 1993 over 1992. The United Kingdom and Sweden continued to be major contributors of total European revenues with significant fiscal 1994 revenue growth also occurring in France, Italy and Switzerland. During fiscal 1994, the Company further expanded its presence within Europe by establishing new subsidiaries in Denmark, Ireland and Norway. The Company's Scotland facility, which was acquired as part of AST's purchase of Tandy Corporation's personal computer operations, terminated operations in the fourth quarter of fiscal 1994. Revenues from the Company's Pacific Rim region, which includes Australia, the People's Republic of China ("PRC"), Hong Kong, Japan, Malaysia, New Zealand, Singapore and Taiwan, combined to contribute to a 9% increase in fiscal 1994 sales, compared with a 34% increase in fiscal 1993 sales over 1992. The decline in fiscal 1994 growth rate was attributable to significantly increased competition within this region of the world. The Company anticipates that these competitive pressures will continue. During the third quarter of fiscal 1994, the Company established a new sales and manufacturing subsidiary in Tianjin, China through a joint venture with a corporation affiliated with the Chinese government. 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 PRC. Sales into the PRC accounted for approximately 6% of the Company's total fiscal 1994 revenues, compared with approximately 11% and 13% in fiscal 1993 and 1992, respectively. Although the PRC has historically provided the Company with significant revenues and profitability, future sales of the Company's products into the PRC are highly dependent upon continuing favorable trade relations between the United States and the PRC and the general economic and political stability of the region. Economic factors such as short-term fluctuations in foreign currency exchange rates, monetary controls, and changes in the PRC tax structure may also have a negative impact on the region's future sales and operating results. In the Company's Rest of World region, revenues increased 22% in fiscal 1994 over the prior year, compared with an increase of 60% in fiscal 1993 over 1992. These increases were due primarily to continuing growth within the Company's Middle East operations. GROSS PROFIT The Company's 1994 gross profit margins of 16.1% represent a continued decline from 20.2% in fiscal 1993 and 31.1% in fiscal 1992. The downward trend in gross profit margins was primarily due to continued intense industrywide competitive pressures which have required pricing reductions at a rate faster than the Company was able to reduce costs. Also contributing to reduced gross profit margins was the increased percentage of revenues generated by the consumer retail (including sales to Tandy's retail operations) and OEM channels, which typically yield lower gross margins. Selected inventory valuation adjustments, taken in anticipation of shortening product life cycles, have also contributed to the fiscal 1994 decline in gross profit margins. The Company believes that the industry will continue to be characterized by rapid introduction of new products, rapid technological advances and product obsolescence. If the Company's products become technically obsolete, the Company's net sales and profitability may be adversely affected. Lower gross margins could result in decreased liquidity and adversely affect the Company's financial position. In addition, there can be no assurance that additional inventory valuation adjustments will not be required, which, if required, would have an adverse impact on the Company's gross profit margins. The results of the Company's international operations are subject to currency fluctuations. As the value of the U.S. dollar strengthens relative to other currencies, revenues from sales in those currencies converts into fewer U.S. dollars. This effect on revenue has a corresponding impact on gross profit, as the Company's production costs are incurred primarily in U.S. dollars. When comparing fiscal 1994 to fiscal 1993, the U.S. dollar rose substantially against nearly all European currencies. This year-to-year currency fluctuation resulted in an approximate two percentage point gross margin reduction in fiscal 1994 compared to fiscal 1993, compared to an approximate one percentage point decline in fiscal 1993 compared to fiscal 1992. The personal computer industry continues to experience significant pricing pressures and the Company believes that industry consolidation and restructuring will continue to result in an aggressive pricing environment and continued pressure on the Company's gross profit margins during fiscal 1995. During fiscal 1994, 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. There can be no assurance that future pricing actions by the Company and its competitors will not adversely impact the Company's gross margins or profitability.
OPERATING EXPENSES 1994 CHANGE 1993 CHANGE 1992 - - ------------------------------------------------------------------------------------------------------------------ Selling and marketing $ 193,053 36% $ 141,752 18% $120,072 Percentage of net sales 8.2% 10.0% 12.7%
While total fiscal 1994 selling and marketing spending rose by $51.3 million, it represented only 8.2% of sales compared to 10.0% in fiscal 1993 and 12.7% in fiscal 1992. Expanded worldwide sales and marketing efforts in both new and existing subsidiary locations resulted in higher payroll related expenses while increased sales levels resulted in higher sales commissions. Entry into new domestic and international markets, new product introductions, expansion of the Company's distribution channels and a greater emphasis on advertising, sales and marketing programs contributed to increased marketing promotion and cooperative advertising expenses. Additionally, the Company's continued focus on increasing brand name awareness led to an increase in media advertising expense. Part of the Company's increased fiscal 1994 selling and marketing expenses, however, was mitigated by reduced performance-based employee benefits which were accrued during fiscal 1994 and adjusted in the fourth quarter of fiscal 1994 due to reduced corporate profitability. The Company anticipates that fiscal 1995 selling and marketing expenses may increase in absolute dollars as the Company continues to expand its marketing and sales programs and focuses on continued growth in its international markets. 1994 Change 1993 Change 1992 - - ------------------------------------------------------------------------------------------------------------------ General and administrative $ 75,241 46% $ 51,555 14% $ 45,201 Percentage of net sales 3.2% 3.7% 4.8%
In fiscal 1994, general and administrative expenses increased in absolute dollars but declined as a percentage of net sales to 3.2% from 3.7% in fiscal 1993 and 4.8% in fiscal 1992. During fiscal 1994, the Company expanded its domestic and international operations, including those acquired through the purchase of Tandy's computer operations in Norway, Scotland and Texas, and the Company established new subsidiaries in China, Malaysia, Denmark and Ireland. Costs associated with these new facilities resulted in increased expenses for staffing, occupancy, insurance, and outside professional services. Depreciation and amortization expenses increased in fiscal 1994 due primarily to the expanded fixed asset base resulting from the acquisition and integration of Tandy's personal computer business. Part of the Company's increased fiscal 1994 general and administrative expenses, however, was mitigated by reduced performance-based employee benefits which were accrued during fiscal 1994 and adjusted in the fourth quarter of fiscal 1994 due to reduced corporate profitability. The Company anticipates that fiscal 1995 general and administrative costs may increase in absolute dollars due to possible growth and expansion into new global markets. 1994 Change 1993 Change 1992 - - ------------------------------------------------------------------------------------------------------------------ Engineering and development $ 38,858 22% $ 31,969 5% $ 30,461 Percentage of net sales 1.6% 2.3% 3.2%
Engineering and development costs increased in absolute dollars due to net additions to the Company's engineering staff and higher costs for engineering materials as the Company continues to invest in the development of new products and in enhancements to existing products. Engineering and development expenditures as a percentage of sales have continued to decrease since fiscal 1992 as a result of revenue growth during fiscal 1993 and 1994. Products introduced in fiscal 1994 included additions to the Advantage!, Bravo, Premmia, PowerExec, and Manhattan SMP product lines and the Ascentia 900N notebook computer. The personal computer industry is characterized by increasingly rapid product life cycles. Accordingly, timely development of new and enhanced products with favorable price/performance features are critical to the Company's future growth and competitive position in the marketplace. Therefore, the Company remains committed to continue its investment in research and development activities and anticipates that fiscal 1995 engineering and development spending may increase in absolute dollars. There can be no assurance that the Company's products will continue to be commercially successful or technically advanced, or that it will be able to deliver commercial quantities of new products in a timely manner. 1994 Change 1993 Change 1992 - - ------------------------------------------------------------------------------------------------------------------ Restructuring charges (credits) $ (12,500) - $ 125,000 - - Percentage of net sales (0.5%) 8.9% -
In the fourth quarter of fiscal 1993 and 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, the Company recorded a pretax restructuring charge of $125 million. The estimated restructuring costs included $68 million in asset write-downs and $57 million in estimated future cash expenditures. The charge reflected estimated expenses to combine and restructure the Company's existing worldwide manufacturing capacity ($34 million), as well as its marketing, engineering, distribution, sales, and service operations ($41 million). Also included within the restructuring charge were selected inventory valuation adjustments ($33 million) necessary to realign existing AST product lines in relation to the acquired Tandy/GRiD and Victor products and to curtail production of certain AST product offerings as a result of competing Tandy/GRiD product lines. These estimated restructuring costs represented the Company's best assessment of the proposed restructuring plans; however, the Company expected that some of these original plans would be revised as the Company continued to identify the best means of achieving reductions in its cost structure. 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's manufacturing operations were realigned to integrate the combined operations along product and geographic boundaries and included the shift of nearly all the Americas desktop production to Texas and the establishment of a new European manufacturing, distribution and service operation in Limerick, Ireland. During fiscal 1994, the Company realigned and centralized its European distribution and service operations in connection with establishing the new Ireland facilities. The Company also realigned its engineering and marketing organizations into strategic business units in order to improve the Company's ability to provide dedicated focus on each of its key product groups: desktops, servers and notebooks. During the first and second fiscal quarters, the Company focused its efforts on integrating its existing product lines with those of the acquired Tandy/GRiD operations, resulting in price realignments of existing AST products as well as the acceleration of certain AST end-of-life product cycles caused primarily by the introduction of the newly acquired Tandy/GRiD products. The Company established the restructuring reserve as a result of the Tandy acquisitions and incurred costs related to the impact of the acquisitions on AST's existing operations and the resulting requirement to realign the new and larger combined Company's operations. These costs included asset write-downs, provisions and cash expenditures. Furthermore, the Company used its restructuring provisions for activities that were either identifiable with the restructuring plan or that could be reasonably estimated in accordance with provisions of Financial Accounting Standards Board Statement No. 5, "Accounting for Contingencies." 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 remaining restructuring accrual, the Company determined that the total restructuring cost estimate could be lowered. As a result, the Company took a fourth quarter restructuring credit in the amount of $12.5 million, or ten percent of the original $125 million charge taken in the comparable prior year fourth quarter. At July 2, 1994, the Company continues to hold approximately $15 million in accrued restructuring provisions for the final restructuring activities, which the Company expects to be completed during the first half of fiscal 1995. The Company expects most of these costs to represent future cash expenditures to be incurred to further combine and restructure existing worldwide manufacturing and distribution capacity. The Company believes that its fiscal 1994 restructuring activities were necessary in order to redeploy and reorganize its worldwide operations after the June 1993 acquisition of Tandy Corporation's personal computer operations. No assurances can be given that the restructuring actions will be successful or that similar actions will not be required in the future.
OTHER INCOME AND EXPENSE 1994 CHANGE 1993 CHANGE 1992 - - ------------------------------------------------------------------------------------------------------------------ Interest and other income (expense), net $(7,677) (1,063%) $(660) (124%) $2,758
In fiscal 1994, the Company had net interest expense of $7.8 million compared to net interest income of $2.1 million in fiscal 1993 and $4.6 million in fiscal 1992. Interest expense increased as a result of the note payable to Tandy Corporation issued in July 1993, the Liquid Yield Option Notes issued in December 1993, and increased utilization of the Company's bank credit facilities during the first six months of fiscal 1994. In fiscal 1994, the Company recognized net other income of $.1 million compared to net other expense of $2.7 million in fiscal 1993 and $1.8 million in fiscal 1992. The fiscal 1994 reversal was attributable to the one-time revenues received from the completion of the sale of the Company's Hong Kong manufacturing facility in June 1994, which resulted in a pretax gain of $4.3 million. This amount was partially offset by an increase in the cost of hedging certain foreign currency exposures due to increases in the outstanding dollar amounts of forward exchange contracts. Other expenses 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 limited hedging strategy which is designed to minimize the effect of remeasuring the local currency balance sheets of its foreign subsidiaries on the Company's consolidated financial position and results of operations. See further discussion included under "Liquidity and Capital Resources."
PROVISION (BENEFIT) FOR INCOME TAXES 1994 CHANGE 1993 CHANGE 1992 - - ------------------------------------------------------------------------------------------------------------------ Provision (benefit) for income taxes $25,503 322% $(11,500) (136%) $31,780 Effective tax rate 32.3% (17.6%) 31.7%
In fiscal 1994, 1993 and 1992, the Company recorded an effective income tax provision (benefit) of 32.3%, (17.6%) and 31.7%, respectively. The decrease in the 1993 effective tax rate was due primarily to the Company's inability to provide tax benefit on a portion of the Company's fiscal 1993 restructure charge. The increase in the 1994 tax rate is attributable to the one percent increase in the federal income tax rate and changes in the proportion of income earned within various taxing jurisdictions. During fiscal 1993, the Company adopted Financial Accounting Standards Board Statement No. 109 "Accounting for Income Taxes" ("SFAS 109"). The adoption did not have a material effect on the net loss that was previously reported for fiscal 1993. In accordance with SFAS 109, the Company recorded total deferred tax assets of $78 million and $83 million, and total deferred tax liabilities of $4 million and $2 million at July 2, 1994 and July 3, 1993, respectively. Realization of the deferred tax assets, which primarily relate to inventory reserves, restructuring reserves, other accrued liabilities and foreign net operating loss carryforwards, is in part dependent on future earnings from new and existing products. The timing and amount of these future earnings may be impacted by a number of factors, including those discussed below under "Additional Factors That May Affect Future Results." In recognition thereof, the Company has established a deferred tax asset valuation reserve of $35 million and $33 million at July 2, 1994 and July 3, 1993, respectively. ACQUISITIONS In the fourth quarter of fiscal 1993, the Company acquired certain assets and assumed certain liabilities relating to Tandy Corporation's 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. Assets acquired in the fiscal 1993 fourth quarter purchase included four manufacturing facilities, three of which were located in Fort Worth, Texas and one in East Kilbride, Scotland. Other tangible assets acquired consisted primarily of inventory and property, plant and equipment. As part of the purchase agreement, the Company also received the right to supply personal computers to Tandy's Radio Shack, Computer City and Incredible Universe retail operations under a three-year supply agreement. 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. The preliminary estimate of the excess of the purchase price over the fair value of the net assets acquired (goodwill) was $20 million relating to valuation adjustments to inventory ($15 million) and certain accrued liabilities ($5 million). During fiscal 1994, the Company refined the fair value estimates of the assets acquired and liabilities assumed and, as a result, increased the recorded goodwill by $45 million to $65 million. The increase in goodwill is comprised of valuation adjustments to inventory, other assets and certain accrued liabilities of $33.6 million, $5 million and $6.4 million, respectively. The Company's original assessment of fair value was predicated on integrating the acquired Tandy/GRiD and Victor product lines within the Company's existing product offerings. During the first and second quarters of fiscal 1994, the Company focused its efforts on integrating its existing product lines with the acquired Tandy/GRiD and Victor product lines. Beginning in the third quarter of fiscal 1994, the Company commenced a reassessment of the GRiD product line and product capabilities, the current and future customer prospects for GRiD products and the costs involved in continuing the GRiD brand name. Based upon this review, the Company decided in the fourth quarter of fiscal 1994, to alter its product line integration strategy to eventually discontinue all manufacturing, marketing and sales efforts related to the acquired GRiD product line. As a result of terminating this product line, the Company reassessed the fair value of the related inventory originally acquired from Tandy. The acquisitions have been accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired have been included in the Company's consolidated balance sheets based upon their estimated fair values at the transactions' effective dates. The Company's consolidated statements of operations include the revenues and expenses of the acquired businesses after the effective dates of the respective transactions.
LIQUIDITY AND CAPITAL RESOURCES 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 153,118 $ 121,600 $ 87,874 Short-term investments - - $ 52,831 Working capital $ 434,474 $ 301,046 $ 332,793 Cash provided by (used in): Operating activities $ (40,260) $ (68,418) $ 32,193 Investing activities $ (35,856) $ 32,523 $ (69,100) Financing activities $ 107,798 $ 63,010 $ (25,653)
Increased July 2, 1994 cash and cash equivalents were due primarily to the December 1993 Liquid Yield Option Note issuance in which the Company raised $111.7 million. The increase in working capital is due primarily to increased accounts receivable levels which were consistent with the higher sales levels achieved in fiscal 1994. In fiscal 1994, net cash used in operating activities declined to $40.3 million from $68.4 million in fiscal 1993. This decline was due primarily to increased operating profit and lower inventory levels. Improvement in cash flow from operations in fiscal 1995 will depend on the Company's ability to improve profit levels and further reduce inventory levels. Net cash used in investing activities increased during fiscal 1994 compared with fiscal 1993, primarily due to increases in capital expenditures. Capital expenditures totaled $30.0 million in fiscal 1994 and consisted of additions to plant and engineering equipment, office furniture and fixtures, and worldwide information systems. Included in total fiscal 1994 capital additions are land and an existing manufacturing plant purchased for $4.6 million and machinery and equipment purchased for $3.0 million in Limerick, Ireland. The Company expects its fiscal 1995 capital expenditures to be consistent with those incurred in fiscal 1994. 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, the manner in which it finances any capital expansion, and the Company's ability to access external sources of financing. 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 uncommitted money market lines, and possible future public or private debt and/or equity offerings. At July 2, 1994, the Company had available a $300 million unsecured committed revolving credit facility with a final maturity date of September 30, 1996. This revolving credit agreement allows the Company to borrow, subject to certain leverage and total debt restrictions, at rates based upon the bank's reference rate, or a spread of .625% over the LIBOR rate, .75% over the domestic certificate of deposit rate, or at a rate bid by a bank, as selected by the Company. At July 2, 1994, there was $45 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. The Company also had $5 million outstanding under an uncommitted money market line of credit. The Company expects that it will continue to incur short-term borrowings from time to time in order to finance working capital and capital expenditure requirements. The Company also has various additional letter of credit facilities and uncommitted money market credit facilities available for use by the Company and its subsidiaries. On August 31, 1994, the Company announced that it expects its first quarter fiscal 1995 revenues to be flat relative to the first quarter of fiscal 1994, which was $514 million, and down from the previous fourth quarter fiscal 1994 revenue of $585 million. This shortfall in expected sales volume and lower gross margins will result in a net loss for the first quarter of fiscal 1995. Depending on the size of the projected loss for the first quarter of fiscal 1995, the Company then could be in default of specific financial covenants in its committed $300 million revolving credit facility. The Company is currently in negotiations with the bank participants in the revolving credit facility and expects to have a waiver of certain financial covenants in place prior to any event of default occurring. The Company currently has no reason to believe that it will not be able to negotiate waivers to cure any potential defaults under its revolving credit facility due to the expected loss for the first quarter of fiscal 1995; however, no assurance can be given that such waivers will be obtained. In connection with the Tandy acquisition, the Company issued a $96.7 million promissory note to Tandy Corporation which is due on July 11, 1996. Interest due the first year was paid on July 11, 1994 at an initial rate of 3.75% per annum. 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. 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. Net cash provided by financing activities increased during fiscal 1994 compared with fiscal 1993 and 1992, mainly because of proceeds received in connection with the issuance of the Liquid Yield Option Notes ("LYONs"). On December 14, 1993, the Company issued $315 million par value of 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 LYONs on December 14, 1998, December 14, 2003 and December 14, 2008 (the "Purchase Dates"), and such payments may reduce the liquidity of the Company. However, the Company may, subject to certain exceptions, elect to pay the purchase price on any of the three Purchase Dates in cash or shares of common stock or any combination thereof. The Company has made no decision as to whether it will meet future purchase obligations in cash, common stock, or any combination thereof. Such decision will be based on market conditions at the time a decision is required, as well as management's view of the liquidity of the Company at such time. The Company attempts to minimize its exposure to foreign currency transaction and remeasurement gains and losses due to the effect of remeasuring the local currency balance sheets of its foreign subsidiaries on the Company's consolidated financial position and results of operations. The Company utilizes a limited hedging strategy which includes the use of foreign currency borrowings, netting of foreign currency assets and liabilities as well as forward exchange contracts to hedge its exposure to exchange rate fluctuations in connection with its subsidiaries' monetary assets and liabilities held in foreign currencies. The carrying amounts of the forward exchange contracts equal their fair value and are adjusted at each balance sheet date for changes in exchange rates. Realized and unrealized gains and losses on the forward contracts are recognized currently in the consolidated statements of operations. The Company held forward exchange contracts with a face value of approximately $143.0 million at July 2, 1994 and $57.5 million at July 3, 1993, which approximates the Company's net monetary asset exposure to foreign currency fluctuations at those respective dates. Unrealized losses associated with these forward contracts totaling $4.8 million at July 2, 1994 and unrealized gains totaling $1.1 million at July 3, 1993, are included in the Company's consolidated statements of operations for those periods. Foreign currency borrowings totaled $3.8 million at July 2, 1994 and $9.1 million at July 3, 1993. 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 decreasing gross profit margins, 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 continue to timely develop and market products that incorporate new technology, are priced competitively and achieve significant market acceptance. There can be no assurance that the Company's products will continue to be commercially successful or technically advanced due to the rapid improvements in computer technology and resulting product obsolescence. There is also no assurance that the Company will be able to deliver commercial quantities of new products in a timely manner, or that such products will receive favorable market acceptance. The Company regularly introduces new products designed to replace existing products. While the Company closely monitors new product introductions and product obsolescence, there can be no assurance that such transitions will occur without adversely affecting the Company's net sales and profitability. In addition, if the Company is unable to accurately anticipate the customer demand shift from 486-based systems to systems utilizing Pentium processors, the life cycles of the Company's 486-based systems could be shortened which may result in inventory valuation reserves and could have a material adverse effect on the Company's net sales 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. While the Company is working with its suppliers to minimize component part shortages, there can be no assurance that future disruptions in delivery of components will not occur. Should delays 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 to increase inventory levels to support higher production volumes. However, if the Company is unable to obtain certain key components, or to effectively forecast customer demand or manage its inventory, these higher inventory levels may result in increased obsolescence and adversely impact the Company's gross margins and results of operations. Additionally, if the Company is unable to timely ramp up its manufacturing operations in Texas and Ireland, it could adversely impact the Company's net sales, gross profit and profitability. The Company's overall operating income varies within each geographic region. Historically, the Company's North/Latin Americas and Pacific Rim regions have made the primary contributions to the Company's profitability. Therefore, should the Company 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 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 and, if successful, would not have a material adverse effect on the Company's business operations and profitability. The Company continued to broaden its product distribution into new geographic locations and new sales channels. Certain of the Company's sales were to newly appointed resellers and new locations for sale of the Company's products. Offering its products in an increasing number of geographic locations and through a variety of distribution channels, including distributors, electronics superstores, and other mass merchandise stores, requires the Company to increase its geographic presence and to provide direct sales and support interface with customers. There can be no assurance, however, that this distribution strategy will be effective, or that the requisite service and support to ensure the success of the Company's operations in new locations or through new channels can be achieved without significantly increasing overall expenses. While the Company anticipates that its geographic expansion will continue and the number of outlets for its products will increase in fiscal 1995, a reduction in this growth could affect sales and profitability. 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 generally weak financial condition of third-party computer resellers worsens. 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements: Report of Independent Auditors. Consolidated Balance Sheets at July 2, 1994 and July 3, 1993. Consolidated Statements of Operations for the years ended July 2, 1994, July 3, 1993 and June 27, 1992. Consolidated Statements of Shareholders' Equity for the years ended July 2, 1994, July 3, 1993 and June 27, 1992. Consolidated Statements of Cash Flows for the years ended July 2, 1994, July 3, 1993 and June 27, 1992. Notes to Consolidated Financial Statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders AST Research, Inc. We have audited the accompanying consolidated balance sheets of AST Research, Inc. as of July 2, 1994 and July 3, 1993, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended July 2, 1994. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of AST Research, Inc. at July 2, 1994 and July 3, 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 2, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. Ernst & Young LLP Orange County, California July 26, 1994 AST RESEARCH, INC. CONSOLIDATED BALANCE SHEETS
- - ---------------------------------------------------------------------------------------------------------- July 2, July 3, (In thousands, except share amounts) 1994 1993 - - ---------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 153,118 $ 121,600 Accounts receivable, net of allowance for doubtful accounts of $17,564 ($11,671 in 1993) 326,057 236,020 Inventories 333,729 342,307 Deferred income taxes 43,266 46,058 Other current assets 9,797 15,230 - - ---------------------------------------------------------------------------------------------------------- Total current assets 865,967 761,215 Property and equipment 159,530 134,422 Accumulated depreciation and amortization (56,089) (39,500) - - ---------------------------------------------------------------------------------------------------------- Net property and equipment 103,441 94,922 Goodwill, net of accumulated amortization of $4,387 ($606 in 1993) 61,912 20,693 Other assets 6,992 9,329 - - ---------------------------------------------------------------------------------------------------------- $ 1,038,312 $ 886,159 ========================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 50,000 $ 59,217 Accounts payable 209,579 157,996 Accrued salaries, wages and employee benefits 21,465 19,042 Other accrued liabilities 112,096 178,835 Income taxes payable 37,955 44,832 Current portion of long-term debt 398 247 - - ---------------------------------------------------------------------------------------------------------- Total current liabilities 431,493 460,169 Long-term debt 215,294 92,258 Deferred income taxes and other non-current liabilities 7,571 14,926 Commitments and contingencies Shareholders' equity: Common stock, par value $.01; 70,000,000 shares authorized, 32,333,750 shares issued and outstanding in 1994 (31,579,115 in 1993) 323 316 Additional capital 141,424 129,784 Retained earnings 242,207 188,706 - - ---------------------------------------------------------------------------------------------------------- Total shareholders' equity 383,954 318,806 - - ---------------------------------------------------------------------------------------------------------- $ 1,038,312 $ 886,159 ==========================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
- - -------------------------------------------------------------------------------------------------------------- Fiscal Year ---------------------------------------- (In thousands, except per share amounts) 1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------- Net sales $ 2,367,274 $ 1,412,150 $ 944,079 Cost of sales 1,985,941 1,126,452 650,819 - - -------------------------------------------------------------------------------------------------------------- Gross profit 381,333 285,698 293,260 Selling and marketing expenses 193,053 141,752 120,072 General and administrative expenses 75,241 51,555 45,201 Engineering and development expenses 38,858 31,969 30,461 Restructuring charge (credit) (12,500) 125,000 - - - -------------------------------------------------------------------------------------------------------------- Total operating expenses 294,652 350,276 195,734 - - -------------------------------------------------------------------------------------------------------------- Operating income (loss) 86,681 (64,578) 97,526 Interest income 2,125 3,341 7,009 Interest expense (9,937) (1,269) (2,439) Other income (expense), net 135 (2,732) (1,812) - - -------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes 79,004 (65,238) 100,284 Provision (benefit) for income taxes 25,503 (11,500) 31,780 - - -------------------------------------------------------------------------------------------------------------- Net income (loss) $ 53,501 $ (53,738) $ 68,504 ============================================================================================================== Net income (loss) per share: Primary $ 1.64 $ (1.72) $ 2.16 Fully diluted $ 1.59 $ (1.72) $ 2.16 ============================================================================================================== Shares used in computing net income (loss) per share: Primary 32,548 31,289 31,758 Fully diluted 34,866 31,289 31,774 ==============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - ------------------------------------------------------------------------------------------------------------- Common Stock Additional Retained (In thousands) Shares Amount Capital Earnings - - ------------------------------------------------------------------------------------------------------------- Balance at June 28, 1991 30,228 $302 $107,920 $173,940 Exercise of stock options 607 6 2,771 - Tax benefit related to employee stock options - - 9,042 - Vesting of restricted stock - - 782 - Cancellation of restricted stock (48) - - - Net income - - - 68,504 - - ------------------------------------------------------------------------------------------------------------- Balance at June 27, 1992 30,787 308 120,515 242,444 Exercise of stock options 867 9 4,939 - Tax benefit related to employee stock options - - 3,980 - Vesting of restricted stock - - 450 - Cancellation of restricted stock (75) (1) (100) - Net loss - - - (53,738) - - -------------------------------------------------------------------------------------------------------------- Balance at July 3, 1993 31,579 316 129,784 188,706 Exercise of stock options and warrants 755 7 9,554 - Tax benefit related to employee stock options - - 1,823 - Vesting of restricted stock - - 263 - Net income - - - 53,501 - - ------------------------------------------------------------------------------------------------------------- Balance at July 2, 1994 32,334 $323 $141,424 $242,207 =============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year - - ------------------------------------------------------------------------------------------------------------- (In thousands) 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $ 2,274,978 $ 1,322,831 $ 906,319 Cash paid to suppliers and employees (2,294,380) (1,373,528) (846,023) Interest received 2,052 4,583 6,388 Interest paid (3,149) (1,373) (2,610) Income tax refunds received 1,989 - - Income taxes paid (22,210) (13,008) (29,405) Other cash received (paid) 460 (7,923) (2,476) - - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities (40,260) (68,418) 32,193 Cash flows from investing activities: Purchases of short-term investments - (35,155) (120,566) Proceeds from short-term investments - 87,986 67,735 Payment related to Tandy/GRiD acquisition (15,000) - - Purchases of capital equipment (30,045) (20,894) (17,811) Proceeds from disposition of capital equipment 10,673 1,146 1,923 Purchases of other assets (1,484) (560) (381) - - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (35,856) 32,523 (69,100) Cash flows from financing activities: Short-term borrowings, net (9,217) 58,417 - Repayment of long-term debt (520) (355) (28,430) Proceeds from issuance of long-term debt 107,974 - - Proceeds from issuance of common stock 9,561 4,948 2,777 - - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 107,798 63,010 (25,653) Effect of exchange rate changes on cash and cash equivalents (164) 6,611 (2,871) - - ------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 31,518 33,726 (65,431) Cash and cash equivalents at beginning of year 121,600 87,874 153,305 - - ------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 153,118 $ 121,600 $ 87,874 =============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Fiscal Year - - ------------------------------------------------------------------------------------------------------------- (In thousands) 1994 1993 1992 - - ------------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income (loss) $ 53,501 $ (53,738) $ 68,504 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 26,769 13,222 11,793 Provision (benefit) for deferred income taxes 8,983 (55,438) 1,499 Gain on sale of capital equipment (4,286) - - Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable (86,290) (97,059) (37,164) Inventories (19,808) (59,809) (54,367) Other current assets 3,317 (552) (4,985) Accounts payable and accrued expenses (14,093) 137,496 42,862 Income taxes payable (6,877) 28,230 (7,757) Other current liabilities (3,573) 19,785 9,850 Exchange (gains) losses 2,097 (555) 1,958 - - ------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ (40,260) $ (68,418) $ 32,193 ============================================================================================================= SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: The Company purchased certain assets relating to Tandy Corporation's personal computer operations effective June 30, 1993. In addition, the Company purchased certain assets relating to Tandy/GRiD France's personal computer operations effective September 1, 1993. In conjunction with the acquisitions, liabilities were assumed as follows: Fair value of assets acquired $ 16,571 $ 151,000 Note payable and cash due Tandy (6,720) (105,000) - - ------------------------------------------------------------------------------------------------------------- Liabilities assumed $ 9,851 $ 46,000 ============================================================================================================= Tax benefit of employee stock options $ 1,823 $ 3,980 $ 9,042 =============================================================================================================
See accompanying notes. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of AST Research, Inc. (the "Company") and its wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Fiscal Year The Company operates within a conventional 52/53 week accounting fiscal year. The Company's fiscal year ends on the Saturday closest to June 30th, with the exception of certain foreign subsidiaries which operate on a June 30th fiscal year end. The fiscal years ended July 2, 1994, July 3, 1993 and June 27, 1992 included 52, 53 and 52 weeks, respectively. Business The Company designs, manufactures, markets, services and supports a broad line of personal computers, including desktop, server, and notebook systems marketed under the Advantage!, Ascentia, Bravo, Premmia and Manhattan SMP brand names. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash, certificates of deposit, time deposits, commercial paper, money market preferred stocks, short- term government obligations and other money market instruments. The Company invests its excess cash in deposits with major international banks, in government securities and money market securities of investment grade companies from a variety of industries and, therefore, bears minimal risk. These securities have original maturity dates not exceeding three months. Such investments are stated at cost, which approximates fair value, and are considered cash equivalents for purposes of reporting cash flows. Inventories Inventories are stated at the lower of cost, determined on a first-in first-out basis, or market. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided on the straight-line method over the following estimated useful lives: - - ------------------------------------------------------------------------------------------------ Buildings 40 years Machinery and equipment 3-5 years Furniture and fixtures 3-5 years Leasehold improvements Shorter of 5 years or remaining term of the lease - - ------------------------------------------------------------------------------------------------
Goodwill Goodwill, representing the excess of the purchase price over the fair value of the net assets of the acquired entities, is being amortized on a straight- line basis over the period of expected benefit of ten years. Total amortization of goodwill recorded for fiscal years 1994, 1993 and 1992 was $3.8 million, $.1 million and $.1 million, respectively. The carrying value of goodwill will be reviewed periodically based on the undiscounted cash flows of the entity acquired over the remaining amortization period. Should this review indicate that goodwill will not be recoverable, the Company's carrying value of the goodwill will be reduced by the estimated shortfall of undiscounted cash flows. Revenue Recognition The Company recognizes revenue from product sales at the time of shipment. The Company has established programs which, under specified conditions, provide price protection rights and/or enable its customers to return product. The effect of these programs is estimated and current period sales and cost of sales are reduced accordingly. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Warranty Costs The Company provides, by a current charge to income, an amount it estimates will be needed to cover future warranty obligations for products sold during the year. The accrued liability for warranty costs is included in the caption "Other accrued liabilities" in the accompanying consolidated balance sheets. Engineering and Development Engineering and development costs are expensed as incurred. Substantially all engineering and development expenses are related to developing new products and designing significant improvements to existing products. Deferred Grants During fiscal 1994, the Company secured various grants from the Industrial Development Authority of the Republic of Ireland. These grants include employment, training and capital grants and extend through December 1996. Employment grants are amortized into income over a period of one year. Employee training grants are recognized in income in the period in which the training costs are incurred by the Company. Grants for the acquisition of property and equipment are deferred and recognized in income on the same basis as the related property and equipment is depreciated. During fiscal 1994, the Company recorded approximately $5.1 million in grant funds received or receivable and at July 2, 1994, $4.5 million of this amount remains as a deferred credit and is included in "Other accrued liabilities" in the accompanying consolidated balance sheet. The Company has a ten year contingent liability to repay, in whole or in part, grants received under certain circumstances pursuant to the Capital and Employment Grant Agreements which began February 1994. In addition, the Company has a five year contingent liability under the Employment Grant Agreement from date of first payment to repay employment grants paid in respect to any job if such job remains vacant for a period in excess of six calendar months. At July 2, 1994, the Company also has a one million Irish pounds (U.S. $1.5 million) ten year contingent liability related to the purchase of the manufacturing facility which began in November 1993 and is payable in the event that the Company terminates operations in Ireland. Foreign Currency The financial statements of the Company's foreign subsidiaries are remeasured into the U.S. dollar functional currency for consolidation and reporting purposes. Current rates of exchange are used to remeasure monetary assets and liabilities and historical rates of exchange are used for nonmonetary assets and related elements of expense. Revenue and other expense elements are remeasured at rates which approximate the rates in effect on the transaction dates. Gains and losses resulting from this remeasurement process are recognized currently in the consolidated statements of operations. The Company utilizes forward exchange contracts and local currency borrowings to hedge its exposure to exchange rate fluctuations in connection with monetary assets and liabilities held in foreign currencies. The carrying amounts of the forward exchange contracts equal their fair value and are adjusted at each balance sheet date for changes in exchange rates. Realized and unrealized gains and losses on the forward contracts are recognized currently in income, and any premium or discount is recognized over the life of the contract. The Company held forward exchange contracts maturing at various dates through January 1995 with a face value of approximately $143.0 million at July 2, 1994 and $57.5 million at July 3, 1993. Unrealized losses associated with these forward contracts aggregating $4.8 million at July 2, 1994 and unrealized gains aggregating $1.1 million at July 3, 1993 are included in the Company's consolidated statements of operations for those periods. For the years ended July 2, 1994, July 3, 1993 and June 27, 1992, a net foreign currency transaction loss of $2,097,000, gain of $555,000 and loss of $1,958,000, respectively, is included in the caption "Other expense, net" in the accompanying consolidated statements of operations. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes 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. Incremental United States income taxes have not been provided on $198 million of cumulative undistributed earnings of the Company's foreign subsidiaries. These earnings, which reflect full provision for non-U.S. income taxes, are expected to be reinvested indefinitely in non-U.S. operations or to be remitted substantially free of additional tax. Accordingly, no material provision has been made for taxes that might be payable upon remittance of such earnings nor is it practicable to determine the amount of this liability. During fiscal 1993, the Company elected the early adoption of the asset and liability method of accounting for income taxes pursuant to Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS 109"). This change had no material effect on the net loss previously reported in fiscal 1993. Per Share Information Primary earnings (loss) per common share have been computed based upon the weighted average number of common and common equivalent shares outstanding. Common equivalent shares result from the assumed exercise of outstanding stock options that have a dilutive effect when applying the treasury stock method. The fully diluted per share calculation assumes, in addition to the above, (i) that the Company's Liquid Yield Option Notes were converted from the date of issuance with earnings being increased for interest expense, net of taxes, that would not have been incurred had conversion taken place, and (ii) the potential additional dilutive effect of stock options. Capital Stock The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. No charges are reflected in the consolidated statements of operations as a result of the grant or exercise of stock options. The Company realizes an income tax benefit from the exercise or early disposition of certain stock options. This benefit results in a decrease in current income taxes payable and an increase in additional capital. Reclassification Certain previously reported amounts have been reclassified to conform with the current period presentation. NOTE 2. ACQUISITIONS AND RESTRUCTURING Acquisitions In the fourth quarter of fiscal 1993, the Company acquired certain assets and assumed certain liabilities relating to Tandy Corporation's 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. Assets acquired in the fiscal 1993 fourth quarter purchase included four manufacturing facilities, three of which were located in Fort Worth, Texas and one in East Kilbride, Scotland. Other tangible assets acquired consisted primarily of inventory and property, plant and equipment. As part of the purchase agreement, the Company also received the right to supply personal computers to Tandy's Radio Shack, Computer City and Incredible Universe retail operations under a three-year supply agreement. 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. The preliminary estimate of the excess of the purchase price over the fair value of the net assets acquired (goodwill) was $20 million relating to valuation adjustments to inventory ($15 million) and certain accrued liabilities ($5 million). During fiscal 1994, the Company refined the fair value estimates of the assets acquired and liabilities assumed and, as a result, increased the recorded goodwill by $45 million to $65 million. The increase in goodwill is comprised of valuation adjustments to inventory, other assets and certain accrued liabilities of $33.6 million, $5 NOTE 2. ACQUISITIONS AND RESTRUCTURING (CONTINUED) million and $6.4 million, respectively. The Company's original assessment of fair value was predicated on integrating the acquired Tandy/GRiD and Victor product lines within the Company's existing product offerings. During the first and second quarters of fiscal 1994, the Company focused its efforts on integrating its existing product lines with the acquired Tandy/GRiD and Victor product lines. Beginning in the third quarter of fiscal 1994, the Company commenced a reassessment of the GRiD product line and product capabilities, the current and future customer prospects for GRiD products and the costs involved in continuing the GRiD brand name. Based upon this review, the Company decided in the fourth quarter of fiscal 1994, to alter its product line integration strategy to eventually discontinue all manufacturing, marketing and sales efforts related to the acquired GRiD product line. As a result of terminating this product line, the Company reassessed the fair value of the related inventory originally acquired from Tandy. The acquisitions have been accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired have been included in the Company's consolidated balance sheets based upon their estimated fair values at the transactions' effective dates. The Company's consolidated statements of operations include the revenues and expenses of the acquired businesses after the effective dates of the respective transactions. Supplemental Pro Forma Results of Operations (Unaudited) The following unaudited pro forma summary presents the consolidated results of operations as if the acquisitions had occurred at the beginning of the period presented and does not purport to be indicative of what would have occurred had the acquisitions been made as of such date or of results which may occur in the future. - - ----------------------------------------------------------------------------------------------------------------- 1993 - - ----------------------------------------------------------------------------------------------------------------- Net sales $ 1,982,511 Net loss $ (41,440) Net loss per share $ (1.32) - - -----------------------------------------------------------------------------------------------------------------
Adjustments made in arriving at pro forma unaudited results of operations include the elimination of sales transactions between the Company and acquired operations, reduction of payroll expenses, increased interest expense on acquisition debt, amortization of goodwill and related tax adjustments. Pro forma 1993 net loss excludes restructuring charges and a loss recognized by Tandy associated with the sale of assets to AST. However, no effect has been given in the pro forma information for synergistic benefits that are expected to be realized. The pro forma results for fiscal 1994, assuming Tandy/GRiD France had been acquired at the beginning of the fiscal year, would not differ significantly from the financial information presented in the consolidated statement of operations. Restructuring In the fourth quarter of fiscal 1993 and 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, the Company recorded a pretax restructuring charge of $125 million. The estimated restructuring costs included $68 million in asset write-downs and $57 million in estimated future cash expenditures. The charge reflected estimated expenses to combine and restructure the Company's existing worldwide manufacturing capacity ($34 million), as well as its marketing, engineering, distribution, sales, and service operations ($41 million). Also included within the restructuring charge were selected inventory valuation adjustments ($33 million) necessary to realign existing AST product lines in relation to the acquired Tandy/GRiD and Victor products and to curtail production of certain AST product offerings as a result of competing Tandy/GRiD product lines. These estimated restructuring costs represented the Company's best assessment of the proposed restructuring plans; however, the Company expected that some of these original plans would be revised as the Company continued to identify the best means of achieving reductions in its cost structure. NOTE 2. ACQUISITIONS AND RESTRUCTURING (CONTINUED) 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's manufacturing operations were realigned to integrate the combined operations along product and geographic boundaries and included the shift of nearly all the Americas desktop production to Texas and the establishment of a new European manufacturing, distribution and service operation in Limerick, Ireland. During fiscal 1994, the Company realigned and centralized its European distribution and service operations in connection with establishing the new Ireland facilities. The Company also realigned its engineering and marketing organizations into strategic business units in order to improve the Company's ability to provide dedicated focus on each of its key product groups: desktops, servers and notebooks. During the first and second fiscal quarters, the Company focused its efforts on integrating its existing product lines with those of the acquired Tandy/GRiD operations, resulting in price realignments of existing AST products as well as the acceleration of certain AST end-of-life product cycles caused primarily by the introduction of the newly acquired Tandy/GRiD products. The Company established the restructuring reserve as a result of the Tandy acquisitions and incurred costs related to the impact of the acquisitions on AST's existing operations and the resulting requirement to realign the new and larger combined Company's operations. These costs included asset write-downs, provisions and cash expenditures. Furthermore, the Company used its restructuring provisions for activities that were either identifiable with the restructuring plan or that could be reasonably estimated in accordance with provisions of Financial Accounting Standards Board Statement No. 5, "Accounting for Contingencies." 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 remaining restructuring accrual, the Company determined that the total restructuring cost estimate could be lowered. As a result, the Company took a fourth quarter restructuring credit in the amount of $12.5 million, or ten percent of the original $125 million charge taken in the comparable prior year fourth quarter. At July 2, 1994, the Company continues to hold approximately $15 million in accrued restructuring provisions for the final restructuring activities, which the Company expects to be completed during the first half of fiscal 1995. The Company expects most of these costs to represent future cash expenditures to be incurred to further combine and restructure existing worldwide manufacturing and distribution capacity. The Company believes that its fiscal 1994 restructuring activities were necessary in order to redeploy and reorganize its worldwide operations after the June 1993 acquisition of Tandy Corporation's personal computer operations. No assurances can be given that the restructuring actions will be successful or that similar actions will not be required in the future. NOTE 3. INVENTORIES Inventories consist of the following: - - --------------------------------------------------------------------------------------------------------------- July 2, July 3, (In thousands) 1994 1993 - - --------------------------------------------------------------------------------------------------------------- Purchased parts $ 99,959 $ 146,565 Work in process 53,765 30,890 Finished goods 180,005 164,852 - - --------------------------------------------------------------------------------------------------------------- Total $ 333,729 $ 342,307 ===============================================================================================================
NOTE 4. PROPERTY AND EQUIPMENT Property and equipment consists of the following: - - --------------------------------------------------------------------------------------------------------------- July 2, July 3, (In thousands) 1994 1993 - - --------------------------------------------------------------------------------------------------------------- Land $ 15,729 $ 12,786 Buildings 35,547 31,382 Machinery and equipment 84,004 69,869 Furniture and fixtures 11,926 10,790 Leasehold improvements 12,324 9,595 - - --------------------------------------------------------------------------------------------------------------- Total $ 159,530 $ 134,422 ===============================================================================================================
NOTE 5. FINANCING ARRANGEMENTS At July 2, 1994, the Company had available a $300 million unsecured committed revolving credit facility with a final maturity date of September 30, 1996. This revolving credit agreement is provided by 13 major domestic and international banks and allows the Company to borrow, subject to certain leverage and total debt restrictions, at rates based upon the bank's reference rate, or a spread of .625% over the LIBOR rate, .75% over the domestic certificate of deposit rate, or at a rate bid by a bank, as selected by the Company. The Company is required to pay a facility fee equal to .375% per annum based on the total committed amount available under the facility. The fee is payable quarterly in arrears. At July 2, 1994, there was $45.0 million outstanding as drawings under this credit facility at an interest rate of 7.25% and $67.7 million outstanding in the form of a letter of credit issued to Tandy Corporation in support of the acquisition note payable (Note 6). In addition, there was $5 million outstanding at July 2, 1994 as borrowings under an uncommitted money market line of credit available to the Company. The interest rate on this borrowing was 4.875% and there are no other fees required under this agreement. The Company also has various additional letter of credit and money market facilities available for use by the Company and its subsidiaries. The Company's Taiwan subsidiary has separate letter of credit facilities aggregating $2 million with a major Taiwanese bank expiring June 22, 1995. At July 2, 1994, there were no letters of credit outstanding under these facilities. Certain of the Company's credit facilities require that the Company maintain a minimum level of tangible net worth and certain financial ratios. At July 2, 1994, the Company was in compliance with the covenants and conditions of these credit facilities. NOTE 6. LONG-TERM DEBT Long-term debt consists of the following: - - --------------------------------------------------------------------------------------------------------------- July 2, July 3, (In thousands) 1994 1993 - - --------------------------------------------------------------------------------------------------------------- Liquid Yield Option Notes (zero coupon convertible subordinated notes) due 2013, less original issue discount of $200,334, 5.25% yield to maturity $ 114,666 $ - Promissory note payable, interest due annually at current rate of 4.94%, principal due July 1996 96,720 90,000 Other notes payable due in various installments through April 2002 4,306 2,505 - - --------------------------------------------------------------------------------------------------------------- 215,692 92,505 Less current portion of long-term debt (398) (247) - - --------------------------------------------------------------------------------------------------------------- Long-term debt $ 215,294 $ 92,258 ===============================================================================================================
NOTE 6. LONG-TERM DEBT (CONTINUED) 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 LYONs on December 14, 1998, December 14, 2003 and December 14, 2008 (the "Purchase Dates"), and such payments may reduce the liquidity of the Company. However, the Company may, subject to certain exceptions, elect to pay the purchase price on any of the three Purchase Dates in cash or shares of common stock or any combination thereof. In connection with the Tandy acquisition, the Company issued a $96.7 million promissory note to Tandy Corporation which is due on July 11, 1996. Interest due the first year was paid on July 11, 1994 at an initial rate of 3.75% per annum. 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. 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. This standby letter of credit was issued under the terms of the Company's revolving credit agreement. Principal repayments on long-term debt required in fiscal years 1995, 1996, 1997, 1998 and 1999 are $398,000, $2,260,000, $97,167,000, $324,000 and $272,000, respectively. Based upon the borrowing rates currently available to the Company for loans with similar terms or maturity, the fair value of long-term debt is not significantly different from the carrying value. NOTE 7. INCOME TAXES The provision (benefit) for income taxes consists of the following: - - ---------------------------------------------------------------------------------------------------------------- (In thousands) 1994 1993 1992 - - ---------------------------------------------------------------------------------------------------------------- Deferred Liability Method Method ---------------- -------- Current: Federal $ 6,092 $ 36,461 $ 14,700 State 1,426 1,116 3,950 Foreign 9,002 6,361 11,631 - - ---------------------------------------------------------------------------------------------------------------- 16,520 43,938 30,281 - - ---------------------------------------------------------------------------------------------------------------- Deferred: Federal 8,532 (54,424) 2,413 State 105 (3,108) 349 Foreign 346 2,094 (1,263) - - ---------------------------------------------------------------------------------------------------------------- 8,983 (55,438) 1,499 - - ---------------------------------------------------------------------------------------------------------------- $ 25,503 $ (11,500) $ 31,780 ================================================================================================================
NOTE 7. INCOME TAXES (CONTINUED) As discussed in Note 1, the Company adopted SFAS No. 109 in fiscal 1993. This change had no material effect on the previously reported fiscal 1993 net loss. Deferred taxes in 1994 and 1993 reflect the impact of future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. These temporary differences are determined in accordance with SFAS No. 109 and are more inclusive in nature than "timing differences" as determined under previously applicable accounting principles. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities as of July 2, 1994 and July 3, 1993 are as follows: - - --------------------------------------------------------------------------------------------------------------- 1994 1993 (In thousands) Assets Liabilities Assets Liabilities - - --------------------------------------------------------------------------------------------------------------- Inventory reserves $ 16,968 $ - $ 4,109 $ - Returns and allowances 3,679 - 3,481 - Other accrued liabilities 7,176 - 3,199 - Restructuring charge 5,365 - 49,541 - Warranty reserves 5,201 - - - State income taxes - (914) - - Depreciation - - - (1,522) Goodwill - (2,524) - - Deferred intercompany profit 1,985 - 2,659 - Net operating loss carryforwards 27,366 - 14,719 - Other 10,736 (274) 5,001 (100) - - --------------------------------------------------------------------------------------------------------------- Total deferreds 78,476 (3,712) 82,709 (1,622) Valuation allowance (34,524) - (32,889) - - - --------------------------------------------------------------------------------------------------------------- $ 43,952 $ (3,712) $ 49,820 $ (1,622) ===============================================================================================================
During 1992, deferred income taxes were provided for significant timing differences in the recognition of revenue and expenses for tax and financial accounting purposes. Principally, these items consisted of the following: $2,774,000 for earnings not currently taxable in the U.S., ($1,015,000) for accrued liabilities, ($757,000) for reserves for returns and allowances, $198,000 for inventory reserves, ($159,000) for bad debt reserves, and $458,000 for all other. The provision (benefit) for income taxes differs from the amounts computed by applying the statutory federal income tax rate as follows: - - --------------------------------------------------------------------------------------------------------------- (In thousands) 1994 1993 1992 - - --------------------------------------------------------------------------------------------------------------- Statutory federal income tax provision (benefit) $ 27,651 $(22,181) $ 34,097 Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit 921 (1,312) 3,531 Foreign income taxed at different rates (10,037) (7,635) (9,973) Losses producing no current tax benefit 7,539 8,307 4,590 Adjustment to deferred assets and liabilities for change in tax rate (1,266) - - Restructuring charge producing no current tax benefit - 12,748 - Other, net 695 (1,427) (465) - - --------------------------------------------------------------------------------------------------------------- $ 25,503 $(11,500) $ 31,780 ===============================================================================================================
NOTE 7. INCOME TAXES (CONTINUED) The Company's manufacturing operations in Taiwan and the PRC operate under complete or partial tax holidays which expire in 1997 and 1999, respectively. The aggregate dollar amount and per share effect of these tax holidays were immaterial for 1994, 1993 and 1992. Pretax earnings from foreign operations were approximately $2,057,000, $29,738,000 and $50,287,000 in 1994, 1993 and 1992, respectively. The Company has $85 million of net operating loss carryforwards in various foreign countries which can be utilized to offset the Company's future taxable income. Approximately $34 million of such carryforwards expire from 1995 through 2001. The remaining carryforwards of $51 million have no expiration date. 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. NOTE 8. BENEFIT PLANS Profit Sharing Plan During 1983, the Company established the Profit Sharing Plan for all employees. The plan is a noncontributory, defined contribution plan that provides for contributions from the Company based on eligible compensation. The Company's contributions are determined at the discretion of the Board of Directors and are not to exceed income before provision for income taxes and profit sharing expense. The Company did not contribute to the plan for the years ended July 2, 1994 and July 3, 1993. The Company's contribution for the year ended June 27, 1992 was $1,621,000. In 1987, the Company approved a modification to the profit sharing plan that added a 401(k) employee savings program. Under the 401(k) plan, the Company is obligated to contribute matching amounts for employee contributions equal to 100% on the first 2% of employee salary contributions and 50% on the next 4% of employee salary contributions. Company contributions generally vest over five years from the date of the employee's eligibility to participate. The Company contributed approximately $2,064,000 to the plan for the year ended July 2, 1994, of which approximately $175,000 is included in accrued salaries, wages and employee benefits in the accompanying July 2, 1994 consolidated balance sheet. The Company's contributions for the years ended July 3, 1993 and June 27, 1992 amounted to $1,679,000 and $1,322,000, respectively. Employee Bonus Plans Pursuant to the Employee Bonus Plan, all employees of the Company are eligible to receive, on a quarterly basis, a percentage of their base compensation as a cash bonus. The percentage paid is at the discretion of management and is limited to a maximum of 15% of the respective employees' base quarterly compensation. For fiscal 1994, the Company paid bonuses aggregating $1,954,000 under the plan, of which $679,000 is included in accrued salaries, wages and employee benefits in the accompanying July 2, 1994 consolidated balance sheet. Bonuses paid for the years ended July 3, 1993 and June 27, 1992 were $1,568,000 and $2,528,000, respectively. The Company also has a performance-based management incentive plan for officers and key employees. Bonuses under the plan are distributed to officers and key employees of the Company based upon performance related criteria determined at the discretion of the Compensation Committee of the Board of Directors. For fiscal 1994, the Company paid bonuses aggregating $1,920,000 under this plan that is included in accrued salaries, wages and employee benefits in the accompanying consolidated balance sheet at July 2, 1994. Bonuses paid for the years ended July 3, 1993 and June 27, 1992 were $3,928,000 and $5,084,000, respectively. NOTE 8. BENEFIT PLANS (CONTINUED) Stock Plans The Company has three employee stock plans, adopted in 1983, 1985 and 1989. The Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan - 1983 (the "1983 Plan"), as amended in 1984, 1985 and 1987, provides for the granting of options or rights to purchase up to an aggregate of 3,600,000 shares of the Company's common stock to officers, directors, employees and others. The Plan also provides for the granting of stock appreciation rights. Under the Plan, options granted become exercisable subject to the discretion of the Board of Directors or Compensation Committee and generally expire five years from the date of grant. For the year ended July 2, 1994, 86,799 shares were exercised under the 1983 Plan at prices ranging from $3.44 to $21.50 per share. In 1985, the Company adopted the Chief Executives' Plan (the "CE Plan"). The CE Plan, as amended in 1987, provides for an aggregate of 1,200,000 shares of the Company's common stock to be available to the chief executive officers, which include the president and executive vice presidents of the Company, and such other officers that the Board of Directors might specifically designate as a "chief executive officer" for purposes of the CE Plan. At July 2, 1994, non- statutory options covering 800,000 shares have been granted to certain officers at exercise prices of $3.50 per share of which 350,000 shares remain outstanding. No shares were exercised under the CE Plan for the year ended July 2, 1994. The 1989 Long-Term Incentive Program (the "1989 Program"), as amended in 1992, provides for the granting of stock options, stock appreciation rights, restricted stock and performance units. The amendment, as adopted by the Board and approved by a shareholder vote, annually increases shares authorized to be issued by 2% of the number of common shares outstanding at each fiscal year end. At July 2, 1994, an aggregate of 5,893,993 shares of common stock is authorized to be issued under the 1989 Program. Under the 1989 Program, options granted become exercisable subject to the discretion of the Board of Directors or Compensation Committee and expire ten years from the date of grant. During fiscal 1994, an aggregate of 609,336 shares were exercised at prices ranging from $4.06 to $22.75 per share. No stock appreciation rights or performance units have been granted under this program. The Company's 1991 Stock Option Plan for Non-Employee Directors (the "Non-Employee Option Plan") provides for an initial grant of options to purchase 20,000 shares of the Company's common stock to each newly appointed non-employee director. In addition, on January 1 each year, each participant will receive an option to purchase 12,000 shares of common stock. The aggregate number of shares that may be issued under the plan is 250,000. Options vest and become exercisable at the rate of 25% per year commencing on the first anniversary of the date of grant. Each option is exercisable at 100% of the common stock's fair market value on the date of grant. During fiscal 1994, 6,000 shares were exercised at $16.75 per share. In January 1994, the Company adopted, subject to shareholder approval, the AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee Directors. The plan provides that each member of the Company's Board of Directors on July 1, 1994 who is not an employee of the Company be granted an option covering 50,000 shares of common stock. All such option grants are subject to the limitation that not more than 250,000 shares of common stock be issued under the Plan and that no participant may receive options covering more than 50,000 shares of common stock in any calendar year. Options are exercisable at 100% of the fair market value on the date of grant of the option, and vest over a period of eight years from the date of grant, with acceleration of vesting possible in the event of certain stock performance. At July 2, 1994, 50,000 shares had been granted to each of the Company's four non-employee directors at an exercise price of $14.25 per share. NOTE 8. BENEFIT PLANS (CONTINUED) The following table summarizes 1994 stock option activity under all of the stock plans: - - ---------------------------------------------------------------------------------------------------------------- Number Available for of options future grant - - ---------------------------------------------------------------------------------------------------------------- Outstanding at July 3, 1993 3,504,380 2,052,143 Authorized - 896,675 Granted 1,624,400 (1,624,400) Exercised (702,135) - Canceled (380,425) 380,425 Plan shares expired - (99,275) - - --------------------------------------------------------------------------------------------------------------- Outstanding at July 2, 1994 4,046,220 1,605,568 ===============================================================================================================
Options exercised during fiscal 1994 were at prices ranging from $3.44 to $22.75 per share. Outstanding options at July 2, 1994 were at prices ranging from $3.50 to $31.63 per share and options for 1,351,661 shares were exercisable. At July 2, 1994, 5,651,788 shares of the Company's common stock were reserved for issuance under the Plans. In December 1990, the Board of Directors authorized the issuance of warrants to purchase an aggregate of 80,000 shares of the Company's common stock to certain non-employee directors. The warrants carry an exercise price of $13.875 per share and vested over a three year period. During fiscal 1994, 40,000 of these warrants were exercised and at July 2, 1994, 40,000 of these warrants were exercisable. On July 27, 1992, the Board of Directors authorized the issuance of warrants to purchase 50,000 shares of the Company's common stock to the Company's then Chairman of the Board. These warrants carry an exercise price of $13.50 per share and vest over a four year period. During fiscal 1994, 12,500 of these warrants were exercised and at July 2, 1994, none of the remaining warrants were exercisable. Post Employment Benefits The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 112 "Employers Accounting for Postemployment Benefits" ("SFAS 112") requiring accrual basis accounting for post employment benefits. The Company does not offer post employment benefits subject to guidelines established by SFAS 112. Accordingly, no provisions have been reflected in the Company's consolidated financial statements at July 2, 1994. NOTE 9. SHAREHOLDER RIGHTS PLAN On June 30, 1989, the Board of Directors adopted a Shareholder Rights Plan which is intended to protect stockholders from unfair takeover practices. Under the Plan, each share of common stock carries one right to obtain additional stock or other property according to terms provided in the Plan. The rights, as amended, will not be exercisable or separable from the common stock until another party acquires at least 15% of the Company's then outstanding common stock or commences a tender offer for at least 15% of the Company's then outstanding common stock. In the event the Company is acquired in a merger or other business combination transaction in which the Company is not the surviving corporation or 50% or more of its consolidated assets or earning power are sold or transferred, each right will entitle its holder to receive, at the then current exercise price, common stock of the acquiring company having a market value equal to two times the exercise price of the right. If a person or entity were to acquire 15% or more of the outstanding shares of the Company's common stock, or if the Company is the surviving corporation in a merger and its common stock is not changed or exchanged, each right will entitle the holder to receive, at the then current exercise price, common stock having a market value equal to two times the exercise price of the right. Until a right is exercised, the holder of a right, as such, will have no rights as a stockholder of the Company, including, without limitation, the rights to vote as a stockholder or receive dividends. NOTE 9. SHAREHOLDER RIGHTS PLAN (CONTINUED) The rights, which expire on June 30, 1999, may be redeemed by the Company at a price of $0.01 per right. At July 2, 1994, 500,000 of the 1,000,000 authorized but unissued preferred shares of the Company are reserved for issuance upon exercise of these rights. NOTE 10. COMMITMENTS AND CONTINGENCIES Lease Commitments The Company leases its field offices, certain equipment, automobiles and most of its operating facilities under operating lease agreements. The Company also has capital leases for certain equipment. Future minimum lease payments under these leases approximate the following amounts: - - --------------------------------------------------------------------------------------------------------------- (In thousands) Lease Obligations ----------------- Fiscal Year Capital Operating - - --------------------------------------------------------------------------------------------------------------- 1995 $ 531 $ 13,310 1996 484 10,417 1997 470 6,613 1998 323 5,822 1999 265 4,738 Thereafter 739 14,711 - - --------------------------------------------------------------------------------------------------------------- Total minimum lease payments $ 2,812 $ 55,611 ===============================================================================================================
At July 2, 1994, the net present value of obligations under capital leases total $2,467,000 and are included in long-term and current portion of long-term debt in the accompanying consolidated balance sheet. At July 2, 1994, the assets held under capital leases total $4,114,000, net of $1,250,000 in accumulated depreciation, and are included in buildings and machinery and equipment in the accompanying consolidated balance sheet. Rent expense was approximately $10,588,000, $9,215,000 and $8,958,000 for the years ended July 2, 1994, July 3, 1993 and June 27, 1992, respectively. Royalty Commitments The Company has commitments for minimum guaranteed royalties under various licensing agreements which are payable over periods ranging from one to four years. The Company has been notified that certain of its products may also require licenses under patents held by others. The Company evaluates these licensing proposals on a case-by-case basis to determine whether licenses are necessary or desirable. Although these evaluations continue, management is accruing amounts that, in its judgment, represent the potential royalties and/or legal costs of resolving these claims. Concentrations of Credit Risk The Company distributes its products through various distribution channels, including independent resellers, dealers, national distributors, OEMs, U.S. Government approved dealers and consumer retailers. Concentrations of credit risk are generally limited due to the Company's broad range of distribution channels and the Company's geographically diverse customer base. However, sales into the PRC are to a limited customer base comprised primarily of larger entitities which are affected by the economic conditions or political occurrences within the PRC. No single customer accounted for more than 10% of the Company's net sales for fiscal years 1994, 1993 and 1992. In addition, the Company's sales are primarily to customers whose activities are related to the retail, consumer electronics or personal computer industries. Therefore, the Company's ability to collect trade receivables may be adversely impacted by changes in these industries. Credit limits, ongoing credit evaluations and account monitoring procedures are utilized to minimize the risk of loss. NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) Employment Contracts The Company has entered into Severance Compensation Agreements with each of its executive officers. Such agreements provide for severance compensation equal to two years' salary and bonus and certain other benefits upon a "change in control" of the Company and termination of the officer for reasons specified in the contract. In addition, effective July 27, 1993, the Company entered into a separate employment contract ("Founder's Agreement") with founder, Chairman and Chief Executive Officer, Safi U. Qureshey. The Founder's Agreement provides for five years of salary, health and welfare benefits, two years of bonus and certain other benefits if active employment is terminated by the Company or by Mr. Qureshey under specified conditions. The Company has a severance policy for its executive officers which, in the event of an involuntary termination, other than in connection with a "change in control", requires the Company to pay its President severance equal to two years salary and its other executive officers severance equal to six months salary plus an additional month of salary for each year of employment with the Company, up to a maximum of 12 months. Benefits are also continued during this period. Other Contingencies 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 an AST patent 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 are proceeding. 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. 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 class action, asserting claims under state and federal securities law based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court of the Central District of California. On May 9, 1994, the Court consolidated the two cases under the case name In re AST Securities Litigation. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of class action, asserting claims under state and federal securities law based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaint was filed in the United States District Court of the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. Management has reviewed the allegations contained in 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 has been named as a defendant or co-defendant, frequently with other personal computer manufacturers, including IBM, AT&T, Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in thirteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. Such claims are being alleged with increasing frequency as a result of the use of various computer products. The claims total approximately $15 million in compensatory damages, $130 million in 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 suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. The Company is unable at this time to predict the ultimate outcome of these suits. Ultimate resolution of the litigation against the NOTE 10. COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 periods covering the claims filed above. While such policies may limit coverage under certain circumstances, the Company believes that it is adequately protected. Should the Company not be successful in defending against such lawsuits or not be able 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 also 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. NOTE 11. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one industry segment: the manufacture and sale of personal computers, including desktop, server, and notebook computer systems. A summary of the Company's operations by geographic area is as follows:
Fiscal year ended July 2, 1994 - - ---------------------------------------------------------------------------------------------------------------- North/Latin Pacific Rest of (In thousands) America Europe Rim World Eliminated Consolidated - - ---------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 1,546,010 $ 532,921 $ 260,700 $ 27,643 $ - $ 2,367,274 Transfers between geographic areas 404,582 251,605 901,106 3,098 (1,560,391) - - - ---------------------------------------------------------------------------------------------------------------- Net sales $ 1,950,592 $ 784,526 $ 1,161,806 $ 30,741 $(1,560,391) $ 2,367,274 ================================================================================================================ Operating income (loss) $ 83,199 $ (41,596) $ 36,577 $ 1,296 $ 7,205 $ 86,681 ================================================================================================================ Identifiable assets $ 574,161 $ 257,098 $ 191,976 $ 15,077 $ - $ 1,038,312 ================================================================================================================ Fiscal year ended July 3, 1993 - - ---------------------------------------------------------------------------------------------------------------- North/Latin Pacific Rest of (In thousands) America Europe Rim World Eliminated Consolidated - - ---------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 854,929 $ 297,312 $ 238,974 $ 20,935 $ - $ 1,412,150 Transfers between geographic areas 234,815 55,690 751,511 897 (1,042,913) - - - ---------------------------------------------------------------------------------------------------------------- Net sales $ 1,089,744 $ 353,002 $ 990,485 $ 21,832 $(1,042,913) $ 1,412,150 ================================================================================================================ Operating income (loss) $ (101,398) $ (20,000) $ 47,772 $ 838 $ 8,210 $ (64,578) ================================================================================================================ Identifiable assets $ 574,801 $ 173,028 $ 122,165 $ 16,165 $ - $ 886,159 ================================================================================================================
NOTE 11. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Fiscal year ended June 27, 1992 - - ---------------------------------------------------------------------------------------------------------------- North/Latin Pacific Rest of (In thousands) America Europe Rim World Eliminated Consolidated - - ---------------------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 550,887 $ 204,623 $ 177,796 $ 10,773 $ - $ 944,079 Transfers between geographic areas 168,346 61,409 432,563 647 (662,965) - - - ----------------------------------------------------------------------------------------------------------------- Net sales $ 719,233 $ 266,032 $ 610,359 $ 11,420 $ (662,965) $ 944,079 ================================================================================================================= Operating income (loss) $ 40,090 $ (10,632) $ 59,087 $ 781 $ 8,200 $ 97,526 ================================================================================================================= Identifiable assets $ 359,550 $ 124,332 $ 91,380 $ 5,351 $ - $ 580,613 =================================================================================================================
In determining operating income (loss) for each geographic area, sales and purchases between geographic areas have been accounted for on the basis of internal transfer prices set by the Company. Identifiable assets are those tangible and intangible assets used in operations in each geographic area. The fiscal 1993 restructuring charge of $125 million and the fiscal 1994 restructure credit of $12.5 million are included in North/Latin America operating income (loss) in the respective periods. In addition, the reversals of the restructure reserve to offset actual restructure costs incurred on a worldwide basis, aggregating approximately $97.5 million, are included in North/Latin America operating income (loss). However, the actual restructuring costs incurred are included in operating income (loss) in the geographic areas in which they occurred. NOTE 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The tables below set forth selected quarterly financial information for fiscal years 1994 and 1993 (in thousands, except per share amounts). - - --------------------------------------------------------------------------------------------------------------- 1994 First Quarter Second Quarter Third Quarter Fourth Quarter - - --------------------------------------------------------------------------------------------------------------- Net sales $ 514,409 $ 677,011 $ 591,349 $ 584,505 Gross profit 85,900 114,566 101,106 79,761 Net income 8,232 17,933 13,214 14,122 Net income per share: Primary $ .26 $ .55 $ .40 $ .43 Fully diluted $ .26 $ .54 $ .38 $ .41 - - --------------------------------------------------------------------------------------------------------------- - - --------------------------------------------------------------------------------------------------------------- 1993 First Quarter Second Quarter Third Quarter Fourth Quarter - - --------------------------------------------------------------------------------------------------------------- Net sales $ 286,353 $ 346,338 $ 370,251 $ 409,208 Gross profit 65,015 76,185 71,821 72,677 Net income (loss) 7,641 14,581 11,045 (87,005) Net income (loss) per share: Primary $ .24 $ .46 $ .35 $ (2.76) - - ---------------------------------------------------------------------------------------------------------------
In the fourth quarter of fiscal 1993, the Company recorded a pretax restructuring charge of $125 million which is reflected in the fiscal 1993 fourth quarter net loss. In the fourth quarter of fiscal 1994, the Company recorded a pretax restructuring credit of $12.5 million which is reflected in the fiscal 1994 fourth quarter net income (Note 2). NOTE 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED) In fiscal 1993, fully diluted per share information is anti-dilutive or does not differ materially from primary net income (loss) per share in any quarterly period. In fiscal 1993, the quarterly primary net income (loss) per share amounts do not sum to the primary net loss for the year due to the dilutive effect of common stock equivalents used in computing income per share in the first three quarters. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth on pages 2 through 3 and 5 through 6 of the 1994 Proxy Statement under the captions "Election of Directors" and "Executive Officers", respectively, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION To the extent required, the information set forth on pages 6 through 12 of the 1994 Proxy Statement under the captions "Compensation of Directors", "Compensation Committee Interlocks and Insider Participation", "Executive Compensation" and "Employment Contracts and Termination of Employment and Change-in-Control Arrangements" is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth on page 4 of the 1994 Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management" is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth on page 12 of the 1994 Proxy Statement under the caption "Certain Transactions" is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) Financial Statements See Index to Consolidated Financial Statements at Item 8 on Page 25 of this report. (2) Financial Statement Schedules II - Amounts Receivable from Related Parties and Underwriters, Promoters, and Employees Other than Related Parties VIII - Consolidated Valuation and Qualifying Accounts and Reserves IX - Consolidated Short-Term Borrowings X - Consolidated Supplementary Income Statement Information Financial statement schedules other than those listed above have been omitted since they are either not required, not applicable, or the information is otherwise included. (3) Exhibits Exhibit Number Description 2.1 Agreement for Purchase and Sale of Assets dated June 30, 1993 between AST Research, Inc. and Tandy Corporation, TE Electronics, Inc. and GRiD Systems Corporation. The Schedules have been omitted and are as described in the Agreement (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 2.1.1 Agreement of Sale of Going Business (English translation) between AST Research France and Tandy GRiD France, effective September 1, 1993 (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 3.1 Restated Certificate of Incorporation of AST Research, Inc., a Delaware corporation (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 3.2 Bylaws of AST Research, Inc., a Delaware corporation, as amended to date. 4.1 Form of Amended and Restated Rights Agreement dated as of January 28, 1994 between the Company and American Stock Transfer & Trust Co., as Successor Rights Agent (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended January 1, 1994), and Certificate of Designation of Preferred Stock and Rights Certificate and Summary of Terms of the Company's Shareholder Rights Plan which were included as exhibits to the original Rights Agreement dated as of August 15, 1989 (incorporated by reference to Exhibit 1 to the Company's registration statement on Form 8-A, No. 0- 13941, dated August 14, 1989). 10.2* Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 (the "Plan") (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 2-91089). 10.3* Form of Nonqualified Stock Option Agreement pertaining to the Plan (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 2-91089). 10.4* Form of Incentive Stock Option Agreement pertaining to the Plan (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 2-91089). 10.5* Form of Restricted Stock Purchase Agreement pertaining to the Plan (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 2-91089). 10.6* AST Research, Inc. Profit Sharing Plan (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 2-91089). Exhibit Number Description 10.26* Chief Executives' Plan (comprised of resolutions adopted by the Board of Directors on July 30, 1985) (incorporated by reference to Exhibit 4.1 to the Company's registration statement on Form S-8, No. 33-1111). 10.27* Form of Nonstatutory Option Agreement pertaining to the Chief Executives' Plan (incorporated by reference to Exhibit 4.2 to the Company's registration statement on Form S-8, No. 33-1111). 10.28* 1987 Employee Bonus Plan (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1986). 10.29 Lease Agreement dated November 1, 1985 pertaining to AST Europe Limited premises at Goat Wharf, Brentford in the London Borough of Hounslow (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1986). 10.34 Lease commencing September 29, 1986 pertaining to AST Europe Limited's premises in Brentford, Middlesex (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.35* First Amendment to the AST Research, Inc. Profit Sharing Plan, effective October 1, 1986 (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.36* Amendments to Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 related to Internal Revenue Code of 1986 (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.37* Amendments to Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 related to Stock Appreciation Rights (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.38* Amendments to Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 related to the exercise of options by delivery of promissory notes (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.39* Amendment to Chief Executives' Plan (comprised of resolutions adopted by the Board of Directors on January 5, 1987) (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-1, No. 33-14131). 10.41* Form of Indemnification Agreement, as amended to date. 10.42* Form of Indemnification Trust Agreement (incorporated by reference to referenced exhibit number of the Company's Registration of Securities of Certain Successor Issuers on Form 8-B, No. 0-13941). 10.48 Agreement dated September 5, 1987 for the purchase of AST Research (Far East) Limited's premises in Hong Kong and Mortgage of such premises to Bank of China, Hong Kong Branch, dated September 11, 1987 (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-2, No. 33-21729). 10.52 License Agreement dated November 23, 1987 with Microsoft Corporation, as amended January 1, 1988 (incorporated by reference to referenced exhibit number of the Company's registration statement on Form S-2, No. 33- 21729). 10.59* 1989 Long-Term Incentive Program (incorporated by reference to exhibit number S 4.1, 4.2, 4.3 and 4.4 of the Company's registration statement on Form S-8, No. 33-29345). 10.60* Supplemental Medical Plan for Executives of AST Research, Inc. (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.61 Amendment to License Agreement with Microsoft Corporation dated April 5, 1989 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.62 Lease dated August 11, 1989, pertaining to premises located in Fountain Valley, California (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.63 Credit Agreement dated as of November 16, 1988 with Bank of America NT & SA, Sanwa Bank California, Shawmut Bank, N.A., Manufacturers Hanover Trust Company and National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). Exhibit Number Description 10.66 First Amendment to Credit Agreement dated February 28, 1989 with Bank of America NT & SA, Sanwa Bank California, Shawmut Bank, N.A., Manufacturers Hanover Trust Company and National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.68 Second Amendment to Credit Agreement dated May 30, 1989 with Bank of America NT & SA, Sanwa Bank California, Shawmut Bank, N.A., Manufacturers Hanover Trust Company and National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.69 Construction Loan Agreement dated November 28, 1988 between Aetna Life Insurance Company and Birtcher Campbell AST Partners for the AST Research Corporate Headquarters in Irvine, California (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.70 Option to Purchase General Partnership Interest dated July 25, 1989 with Birtcher Campbell DDA, Ltd. (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989.) 10.71 Multicurrency Line of Credit dated December 1, 1988 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.72 Waiver of Multicurrency Line of Credit dated February 28, 1989 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.73 Waiver of Multicurrency Line of Credit dated May 10, 1989 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.74 Reduction of Credit Agreement dated February 28, 1989 with Bank of America NT & SA as Agent (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.75 Reduction in Multicurrency Agreement dated February 28, 1989 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.76 Amendment to Multicurrency Agreement dated June 30, 1989 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.77 Facility Letter Agreement dated July 10, 1989 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1989). 10.78 Press release dated June 12, 1990 pertaining to redemption of 8 1/2 percent convertible subordinate debentures (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0- 13941). 10.79 Notice of redemption dated June 13, 1990 of 8 1/2 percent convertible subordinate debentures (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 10.80 Amendment VI to License Agreement with Microsoft Corporation dated April 20, 1990 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.81 License Agreement with Tomcat Computer Corporation, dated October 16, 1989 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.82 Cross-License Agreement with International Business Machines (IBM) Corp., dated January 1, 1990 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). Exhibit Number Description 10.83 Third Amendment dated November 8, 1989 to the Credit Agreement dated November 16, 1988 between the Company and Bank of America NT & SA, Manufacturers Hanover Trust Company, National Westminster Bank PLC and Sanwa Bank California (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.84 Credit Agreement dated as of June 27, 1990 between the Company and Bank of America NT & SA, National Westminster Bank PLC and Sanwa Bank California (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.85 First Amendment dated July 30, 1990 to the Credit Agreement dated June 27, 1990 between the Company and Bank of America NT & SA, National Westminster Bank PLC and Sanwa Bank California (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.86 Multicurrency Agreement dated December 22, 1989 with Bank of America NT & SA (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.87 Amendment to Facility Letter Agreement dated December 18, 1989 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.88 Renewal to Facility Letter Agreement dated July 10, 1990 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.89 Agreement for Purchase and Sale of Partnership Interest in Birtcher Campbell AST Partners dated February 21, 1990 with Birtcher Campbell DDA, Ltd. (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.90 Assignment and Assumption of Agreement for Purchase and Sale of Partnership Interest dated February 21, 1990 between AST Realty, Inc. and AST Research, Inc. (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.91 Letter of Agreement dated February 21, 1990 between the Company, AST Realty, Inc. and Birtcher Campbell DDA, Ltd. (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1990). 10.92 License Agreement dated January 1, 1991 with Microsoft Corporation (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.93 Amendment to Facility Letter Agreement dated September 10, 1990 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.94 Renewal of Facility Letter Agreement dated June 28, 1991 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.95* Form of Warrant Certificate issued to Non-employee directors in December 1990 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.96* 1991 Stock Option Plan for Non-employee Directors (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.97* Form of Nonqualified Stock Option agreement under 1991 Stock Option Plan for Non-employee Directors (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 28, 1991). 10.98 Amendment to Facility Letter Agreement dated June 27, 1992 with National Westminster Bank PLC (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.99 Amendment to License Agreement with Microsoft Corporation dated September 18, 1991 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). Exhibit Number Description 10.100 Credit Agreement dated April 2, 1992, among AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank PLC as co- agent (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.101*Form of Warrant Certificate issued to Non-employee Director in July 1992 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.102*Amendment to 1989 Long-Term Incentive Program related to increase in number shares (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.103*Form of Nonqualified Common Stock Option Agreement for officers under the 1989 Long-Term Incentive Program, approved by Compensation Committee January 23, 1992 pursuant to administrative authority under such plan (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.104*Form of Amendment to Officers Nonqualified Common Stock Option Agreement, approved by Compensation Committee January 23, 1992 pursuant to administrative authority under such plan (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.105*Amendment of Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 approved by the Board of Directors April 23, 1992 pursuant to administrative authority under such plan (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.106*Amended form of Nonqualified Common Stock Option Agreement under the Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan - 1983 with amended provisions approved by the Compensation Committee January 23, 1992 and by the Board of Directors April 23, 1992 pursuant to administrative authority under such plan (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992). 10.107 Amendment to License Agreement with Microsoft Corporation dated February 15, 1993 (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended April 3, 1993). 10.108 Promissory Note dated as of July 12, 1993 between AST Research, Inc. and Tandy Corporation (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 10.108.1 First Amendment dated September 22, 1993 to Promissory Note dated July 12, 1993 between AST Research, Inc. and Tandy Corporation (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.108.2 Second Amendment dated October 14, 1993 to Promissory Note dated July 12, 1993 between AST Research, Inc. and Tandy Corporation (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 10.108.3 Third Amendment dated December 30, 1993 to Promissory Note dated July 12, 1993 between AST Research, Inc. and Tandy Corporation (incorporated by reference to referenced exhibit number of the Company's report on Form 8-K, No. 0-13941). 10.109*Amendment to Officer's Restricted Common Stock Grant Agreement approved by the Board of Directors October 29, 1992 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.110 First Amendment dated April 20, 1993 to Credit Agreement dated April 2, 1992 among AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank PLC as co-agent (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.111 Second Amendment dated June 30, 1993 to Credit Agreement dated April 2, 1992 among AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank PLC as co-agent (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). Exhibit Number Description 10.112*First Amendment to the AST Research, Inc. Profit Sharing Plus Plan, effective June 27, 1992 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.113*Second Amendment to the AST Research, Inc. Profit Sharing Plus Plan, effective June 30, 1993 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.114 Licensing Agreement with International Business Machines (IBM) Corp. re: OS/2, dated July 28, 1993 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.115*Employment Agreement dated July 27, 1993 between Safi U. Qureshey and AST Research, Inc. (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.116 Sales Agreement dated July 13, 1993 between AST Research, Inc. and Tandy Corporation pursuant to the Agreement for the Purchase and Sale of Assets dated June 30, 1993 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.117 Circuit Board Purchase Agreement dated July 13, 1993 between AST Research, Inc. and TE Electronics Inc. pursuant to the Agreement for the Purchase and Sale of Assets dated June 30, 1993 (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.118*Form of Severance Compensation Agreement (incorporated by reference to referenced exhibit number in the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993). 10.119 Credit Agreement dated September 30, 1993, among AST Research, Inc., Bank of America NT & SA as co-agent (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended October 2, 1993). 10.120*AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non- Employee Directors (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended January 1, 1994). 10.121*Form of Option Agreement Under 1994 One-Time Grant Stock Option Plan for Non-Employee Directors of AST Research, Inc. (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended January 1, 1994). 10.122*Amendment to AST Research, Inc. 1989 Long-Term Incentive Program (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended January 1, 1994). 10.123*Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-Employee Directors (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended January 1, 1994). 10.124 First Amendment dated March 30, 1994 to Credit Agreement dated September 30, 1993 among AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank Plc as co-agent (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended April 2, 1994). 10.125 Second Amendment dated April 27, 1994 to Credit Agreement dated September 30, 1993 among AST Research, Inc., Bank of America NT & SA as co-agent and National Westminster Bank Plc as co-agent (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended April 2, 1994). 10.126 Joint Venture Contract dated September 7, 1993 between Tianjin Economic - Technological Development Area Business Development Co. and AST Research (Far East) Limited (incorporated by reference to referenced exhibit number of the Company's report on Form 10-Q for the fiscal quarter ended April 2, 1994). 10.127*Involuntary Termination Policy dated September 2, 1994. 10.128*Performance Based Annual Management Incentive Plan. 10.129 Employment Grant Agreement dated November 9, 1993 between the Industrial Development Authority, AST Ireland Limited and AST Research, Inc. (Confidential treatment is requested with respect to portions of this exhibit). Exhibit Number Description 10.130 Capital Grant Agreement dated November 9, 1993 between the Industrial Development Authority, AST Ireland Limited and AST Research, Inc. (Confidential treatment is requested with respect to portions of this exhibit). 11. Statement re computation of per share earnings. 21. Subsidiaries of the registrant. 23. Consent of Independent Auditors. 24. Power of Attorney (included on the signature pages of this Annual Report on Form 10-K). 27. Financial Data Schedule. *Indicates a management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 14 (c). (b) Reports on Form 8-K AST Research, Inc. was not required to file any reports on Form 8-K for the quarter ended July 2, 1994. AST, Advantage!, GRiDPAD, GRiD, Victor and PalmPad are registered trademarks of AST Research, Inc. The AST Computer logo, AST Works, Ascentia, ASTVision, Bravo, Convertible, ExeCare, Manhattan, PowerExec, and Premmia are trademarks of AST Research, Inc. OverDrive is a registered trademark and Pentium is a trademark of Intel Corporation. OS/2 is a registered trademark of International Business Machines Corporation. NetWare is a registered trademark of Novell, Inc. MS-DOS is a registered trademark and Encarta is a trademark of Microsoft Corporation. Radio Shack is a registered service mark of Tandy Corporation. Prodigy is a registered trademark of the Prodigy Services Corporation. America Online is a registered service mark of America Online, Inc. CompuServe is a registered service mark of CompuServe, Inc. All other product or service names mentioned herein may be trademarks or registered trademarks of their respective owners. Reference to the "Energy Star" program does not represent EPA endorsement of any product or service. Copyright (C)1994 AST Research, Inc. All Rights Reserved. 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, in the City of Irvine, State of California, on September 22, 1994. AST RESEARCH, INC. Date: September 22, 1994 By: /s/Safi U.Qureshey Safi U. Qureshey Chief Executive Officer and Chairman of the Board POWER OF ATTORNEY We, the undersigned directors and officers of AST Research, Inc., do hereby constitute and appoint Safi U. Qureshey our true and lawful attorney and agent, with full power of substitution to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorney and agent may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney and agent, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature Title Date Safi U. Qureshey Chief Executive Officer and September 22, 1994 Chairman of the Board (Principal Executive Officer) Chief Financial Officer, Bruce C. Edwards Executive Vice President and Director September 22, 1994 (Principal Financial and Accounting Officer) Chief Operating Officer, James T. Schraith President and Director September 22, 1994 Richard J. Goeglein Director September 22, 1994 Carmelo J. Santoro,Ph.D. Director September 22, 1994 Delbert W. Yocam Director September 22, 1994 Jack W. Peltason Director September 22, 1994
S-1 SCHEDULE II AST RESEARCH, INC. AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES FOR THE YEARS ENDED JULY 2, 1994, JULY 3, 1993 AND JUNE 27, 1992 (IN THOUSANDS) - - -------------------------------------------------------------------------------------------------------------- Balance at Amounts Balance at Name of Debtor Beginning of Period Additions Collected End of Period - - -------------------------------------------------------------------------------------------------------------- YEAR ENDED JULY 2, 1994 Scott A. Smith (1) $ - $ 100 $ - $ 100 YEAR ENDED JULY 3, 1993 None - - - - YEAR ENDED JUNE 27, 1992 Wai S. Szeto (2) $ 304 $ - $ 304 $ -
(1)On September 21, 1993, the Company loaned Vice President Scott A. Smith $100,000 for the purchase of a primary residence, evidenced by a promissory note secured by a deed of trust. The loan was issued interest free and is payable in full on September 21, 1996. (2)On December 3, 1990, Vice President Wai S. Szeto exercised stock options issued under the 1983 and 1989 Plans to purchase 50,000 shares of common stock and issued promissory notes to the Company in the aggregate of $177,813. The notes included interest at 10% per annum and were due and payable on December 1, 1991. The notes were paid in full with interest on August 8, 1991. On April 24, 1991, the Company loaned Mr. Szeto $125,000 for a six month period to purchase a primary residence. The loan was evidenced by a promissory note secured by a pledge agreement covering his restricted stock and bore interest at 10% per annum. The note was paid in full with interest on August 8, 1991. SCHEDULE VIII AST RESEARCH, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED JULY 2, 1994 JULY 3, 1993 AND JUNE 27, 1992 (IN THOUSANDS) - - -------------------------------------------------------------------------------------------------------- 1994 1993 1992 - - -------------------------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance, beginning of period $ 11,671 $ 9,831 $ 6,132 Additions charged to expense 13,219 6,089 5,253 Reductions (7,326) (4,249) (1,554) Balance, end of period $ 17,564 $ 11,671 $ 9,831 - - -------------------------------------------------------------------------------------------------------- ALLOWANCE FOR SALES RETURNS Balance, beginning of period $ 9,120 $ 10,109 $ 7,038 Net additions (reductions) charged to sales 6,017 (989) 3,071 Balance, end of period $ 15,137 $ 9,120 $ 10,109 - - -------------------------------------------------------------------------------------------------------- RESERVE FOR EXCESS OR OBSOLETE INVENTORY Balance, beginning of period $ 35,595 $ 14,529 $ 13,775 Inventory acquired in the Tandy acquisition 14,171 20,535 - Allocation of restructure reserves to identified inventory exposure 693 - - Net additions charged to expense 14,809 531 754 Balance, end of period $ 65,268 $ 35,595 $ 14,529
SCHEDULE IX AST RESEARCH, INC. CONSOLIDATED SHORT-TERM BORROWINGS FOR THE YEARS ENDED JULY 2, 1994 JULY 3, 1993 AND JUNE 27, 1992 (DOLLARS IN THOUSANDS) - - -------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - - -------------------------------------------------------------------------------------------------------------- Amount outstanding at end of period Short-term bank borrowings $ 50,000 $ 59,217 $ 1,374 Interest rate on amount outstanding Short-term bank borrowings 7.01% 6.13% 10.43% Maximum amount outstanding during the period Short-term bank borrowings $ 108,781 $ 59,572 $ 1,399 Average amount outstanding during the period Short-term bank borrowings $ 29,714 $ 5,243 $ 1,281 Average interest rate on borrowings during the period Short-term bank borrowings 4.40% 6.95% 9.87%
The average amount of short-term borrowings outstanding during the period and the average interest rate on such borrowings during the period were calculated using the daily balances outstanding and the interest rates in effect on those dates. SCHEDULE X AST RESEARCH, INC. CONSOLIDATED SUPPLEMENTARY INCOME STATEMENT INFORMATION FOR THE YEARS ENDED JULY 2, 1994 JULY 3, 1993 AND JUNE 27, 1992 (IN THOUSANDS) - - -------------------------------------------------------------------------------------------------------- 1994 1993 1992 - - -------------------------------------------------------------------------------------------------------- Royalty Expense $56,987 $28,209 $18,059 Advertising $41,138 $28,582 $21,398
All other expenses required by this Schedule either are not applicable, or are disclosed in the consolidated financial statements or notes thereto included elsewhere in this Annual Report on Form 10-K. EX-3.(II) 2 BYLAWS OF AST RESEARCH, INC. A Delaware Corporation (as amended, through August 1, 1994) TABLE OF CONTENTS Page ARTICLE I. OFFICES 1 Section 1. Registered Office 1 Section 2. Other Offices 1 Section 3. Books 1 ARTICLE II. MEETINGS OF STOCKHOLDERS 1 Section 1. Place of Meetings 1 Section 2. Annual Meetings 1 Section 3. Special Meetings 1 Section 4. Notification of Business to be Transacted at Meeting 1 Section 5. Notice; Waiver of Notice 2 Section 6. Quorum; Adjournment 2 Section 7. Voting 2 Section 8. Stockholder Action by Written Consent Without a Meeting 2 Section 9. List of Stockholders Entitled to Vote 3 Section 10. Stock Ledger 3 Section 11. Inspectors of Election 3 Section 12. Organization 3 Section 13. Order of Business 3 ARTICLE III. DIRECTORS 3 Section 1. Powers 3 Section 2. Number and Election of Directors 4 Section 3. Vacancies 4 Section 4. Time and Place of Meetings 4 Section 5. Annual Meeting 4 Section 6. Regular Meetings 5 Section 7. Special Meetings 5 Section 8. Quorum; Vote Required for Action; Adjournment 5 Section 9. Action by Written Consent 5 Section 10. Telephone Meetings 5 Section 11. Committees 5 Section 12. Compensation 6 Section 13. Interested Directors 6 ARTICLE IV. OFFICERS 6 Section 1. Executive Officers 6 Section 2. Election; Term of Office and Remuneration 7 Section 3. Subordinate Officers 7 Section 4. Removal 7 Section 5. Resignations 7 Section 6. Powers and Duties 7 ARTICLE V. STOCK 7 Section 1. Form of Certificates 7 Section 2. Signatures 7 Section 3. Lost Certificates 8 Section 4. Transfers 8 Section 5. Registered Owners 8 ARTICLE VI. LIMITATION OF LIABILITY 8 ARTICLE VII. INDEMNIFICATION 8 Section 1. Action Other Than by or in the Right of the Corporation 8 Section 2. Action by or in the Right of the Corporation 9 Section 3. Determination of Right of Indemnification 9 Section 4. Indemnification Against Expenses of Successful Party 9 Section 5. Advances of Expenses 9 Section 6. Right of Agent to Indemnification upon Application; Procedure Upon Application 10 Section 7. Other Rights and Remedies 10 Section 8. Insurance 10 Section 9. Indemnity Fund 11 Section 10. Constituent Corporations 11 Section 11. Other Enterprises, Fines, and Serving at Corporation's Request 11 Section 12. Indemnification of Other Persons 11 Section 13. Savings Clause 11 ARTICLE VIII. RECORDS 12 Section 1. Maintenance and Inspection of Share Register 12 Section 2. Maintenance and Inspection of Bylaws 12 ARTICLE IX. GENERAL PROVISIONS 12 Section 1. Dividends 12 Section 2. Disbursements 12 Section 3. Fiscal Year 13 Section 4. Corporate Seal 13 Section 5. Record Date 13 Section 6. Voting of Stock Owned by the Corporation 13 Section 7. Construction and Definitions 13 Section 8. Amendments 13
BYLAWS OF AST RESEARCH, INC. A Delaware Corporation ARTICLE I OFFICES Section 1. Registered Office. The address of the registered office of the Corporation in the State of Delaware shall be 1209 Orange Street, Wilmington, New Castle County, Delaware, 19801, and the name of its registered agent at such address is The Corporation Trust Company. Section 2. Other Offices. The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. Section 3. Books. The books of the Corporation may be kept within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 1. Place of Meetings. All meetings of the stockholders shall be held at such place either within or without the State of Delaware and on such date and at such time as may be designated from time to time by the Board of Directors. If the Board of Directors shall fail to fix such place, the meetings shall be held at the principal executive office of the Corporation. Section 2. Annual Meetings. Annual meetings of stockholders shall be held at a time and date designated by the Board of Directors for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 3. Special Meetings. Special meetings of stockholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board of Directors, the President, or the holders of shares entitled to cast not less than a majority of the votes at such meeting. Special meetings may not be called by any other person. Section 4. Notification of Business to be Transacted at Meeting. To be properly brought before a meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a stockholder entitled to vote at the meeting. Section 5. Notice; Waiver of Notice. Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called. Unless otherwise required by law, such notice shall be given not less than ten nor more than 60 days before the date of the meeting to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the Corporation. A written waiver of any such notice signed by the person entitled thereto, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 6. Quorum; Adjournment. Except as otherwise required by law or provided by the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of the stockholders. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. If after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. Section 7. Voting. Except as otherwise required by law, or provided by the Certificate of Incorporation or these Bylaws, any question brought before any meeting of stockholders shall be decided by the vote of the holders of a majority of the stock represented and entitled to vote thereat. Unless otherwise provided in the Certificate of Incorporation, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote thereat held by such stockholder. Such votes may be cast in person or by proxy, but no proxy shall be voted on or after three years from its date, unless such proxy provides for a longer period. Elections of directors need not be by ballot unless the Chairman of the meeting so directs or unless a stockholder demands election by ballot at the meeting and before the voting begins. Section 8. Stockholder Action by Written Consent Without a Meeting. Any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of all of the outstanding shares of the Corporation. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Any stockholder giving a written consent, or the stockholder's proxy holders, or a transferee of the shares or a personal representative of the stockholder or their respective proxy holders, may revoke the consent by a writing received by the Secretary of the Corporation before written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. Section 9. List of Stockholders Entitled to Vote. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder of the Corporation who is present. Section 10. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 9 of this Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. Section 11. Inspectors of Election. In advance of any meeting of stockholders, the Board of Directors may appoint one or more persons (who shall not be candidates for office) as inspectors of election to act at the meeting. If inspectors are not so appointed, or if an appointed inspector fails to appear or fails or refuses to act at a meeting, the Chairman of any meeting of stockholders may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. In the event of any dispute between or among the inspectors, the determination of the majority of the inspectors shall be binding. Section 12. Organization. At each meeting of stockholders the Chairman of the Board of Directors, if one shall have been elected, (or in his absence or if one shall not have been elected, the President) shall act as Chairman of the meeting. The Secretary (or in his absence or inability to act, the person whom the Chairman of the meeting shall appoint secretary of the meeting) shall act as secretary of the meeting and keep the minutes thereof. Section 13. Order of Business. The order and manner of transacting business at all meetings of stockholders shall be determined by the Chairman of the meeting. ARTICLE III DIRECTORS Section 1. Powers. Except as otherwise required by law or provided by the Certificate of Incorporation, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Section 2. Number and Election of Directors. Unless otherwise provided by the Certificate of Incorporation, the Board of Directors shall consist of not less than 5 nor more than 9 members. The exact number of authorized directors shall initially be 7 and, thereafter, shall be fixed from time to time, within the foregoing limits, by resolution of the Board of Directors. Directors shall be elected at each annual meeting of stockholders and each director so elected shall hold office until his successor is duly elected and qualified, or until his earlier death, resignation or removal. Any director may resign at any time effective upon giving written notice to the Board of Directors, unless the notice specifies a later time for such resignation to become effective. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. If the resignation of a director is effective at a future time, the Board of Directors may elect a successor prior to such effective time to take office when such resignation becomes effective. Directors need not be stockholders. Section 3. Vacancies. Vacancies in the Board of Directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the stockholders may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. A vacancy or vacancies in the Board of Directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the authorized number of directors is increased, or if the stockholders fail, at any meeting of stockholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 4. Time and Place of Meetings. The Board of Directors shall hold its meetings at such place, either within or without the State of Delaware, and at such time as may be determined from time to time by the Board of Directors. Section 5. Annual Meeting. The Board of Directors shall meet for the purpose of organization, the election of officers and the transaction of other business, as soon as practicable after each annual meeting of stockholders, on the same day and at the same place where such annual meeting shall be held. Notice of such meeting need not be given. In the event such annual meeting is not so held, the annual meeting of the Board of Directors may be held at such place, either within or without the State of Delaware, on such date and at such time as shall be specified in a notice thereof given as hereinafter provided in Section 7 of this Article III or in a waiver of notice thereof. Section 6. Regular Meetings. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware at such date and time as the Board of Directors may from time to time determine and, if so determined by the Board of Directors, notices thereof need not be given. Section 7. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, the President, by any Vice President, the Secretary or by any two directors. Notice of the date, time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at the director's address as it is shown on the records of the Corporation. In case the notice is mailed, it shall be deposited in the United States mail at least five days before the time of the holding of the meeting. In case the notice is delivered personally or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least 48 hours before the time of the holding of the meeting. The notice need not specify the purpose of the meeting. Section 8. Quorum; Vote Required for Action; Adjournment. Except as otherwise required by law, or provided in the Certificate of Incorporation or these Bylaws, a majority of the directors shall constitute a quorum for the transaction of business at all meetings of the Board of Directors and the affirmative vote of not less than a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting, from time to time, without notice other than announcement at the meeting, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business, notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum to conduct that meeting. When a meeting is adjourned to another time or place (whether or not a quorum is present), notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Board of Directors may transact any business which might have been transacted at the original meeting. Section 9. Action by Written Consent. Unless otherwise restricted by the Certificate of Incorporation, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. Section 10. Telephone Meetings. Unless otherwise restricted by the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or such committee, as the case may be, by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this Section 10 shall constitute presence in person at such meeting. Section 11. Committees. The Board of Directors may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent or disqualified member at any meeting of the committee. In the event of absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the committee member or members present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of the absent or disqualified member. Any committee, to the extent allowed by law and as provided in the resolution establishing such committee, shall have and may exercise all the power and authority of the Board of Directors in the management of the business and affairs of the Corporation. Each committee shall report to the Board of Directors when required. Section 12. Compensation. The directors may be paid such compensation for their services as the Board of Directors shall from time to time determine. Section 13. Interested Directors. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or the committee thereof which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose if: (i) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or their relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified, by the Board of Directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee which authorizes the contract or transaction. ARTICLE IV OFFICERS Section 1. Executive Officers. The executive officers of the Corporation shall be a President, a Chief Executive Officer, a Chief Financial Officer and a Secretary. The Secretary shall have the duty, among other things, to record the proceedings of the meetings of stockholders and directors in a book kept for that purpose. The Corporation may also have such other executive officers, including one or more Vice Presidents, as the Board may in its discretion appoint. The Board of Directors, if it so determines, may appoint a Chairman of the Board and a Vice Chairman of the Board from among its members, but such titles shall not confer upon such Board members executive officer status. Any number of offices may be held by the same person. Section 2. Election, Term of Office and Remuneration. The executive officers of the Corporation shall be elected annually by the Board of Directors at the annual meeting or a regular meeting thereof. Each such officer shall hold office at the discretion of the Board of Directors until his successor is elected and qualified, or until his earlier death, resignation or removal. The remuneration of all officers of the Corporation shall be fixed by the Board of Directors. Any vacancy in any office shall be filled in such manner as the Board of Directors shall determine. Section 3. Subordinate Officers. In addition to the executive officers enumerated in Section 1 of this Article IV, the Corporation may have one more assistant treasurers and assistant secretaries and such other subordinate officers, agents and employees as the Board of Directors may deem necessary, each of whom shall hold office for such period as the Board of Directors may from time to time determine. The Board of Directors may delegate to any executive officer the power to appoint and to remove any such subordinate officers, agents or employees. Section 4. Removal. Except as otherwise delegated to an executive officer with respect to subordinate officers, any officer may be removed, with or without cause, at any time, by resolution adopted by the Board of Directors. Such removal shall be without prejudice to the contractual rights of such officer, if any, with the Corporation. Section 5. Resignations. Any officer may resign at any time by giving written notice to the Board of Directors (or to a principal officer if the Board of Directors has delegated to such principal officer the power to appoint and to remove such officer). The resignation of any officer shall take effect upon receipt of notice thereof or at such later time as shall be specified in such notice; unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 6. Powers and Duties. The Board of Directors may designate an officer as the Chief Executive Officer. The Chief Executive Officer shall, subject to the direction and control of the Board of Directors, be the general manager of, and supervise and direct, the business and affairs of the Corporation and the conduct of the officers of the Corporation. The other officers of the Corporation shall have such powers and perform such duties incident to each of their respective offices and such other duties as may from time to time be conferred upon or assigned to them by the Board of Directors or the Chief Executive Officer. ARTICLE V STOCK Section 1. Form of Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by him in the Corporation. Section 2. Signatures. Any, or all, of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Section 3. Lost Certificates. The Corporation may issue a new certificate to be issued in place of any certificate theretofore issued by the Corporation, alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. The Corporation may, in its discretion and as a condition precedent to the issuance of such new certificate, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond (or other security) sufficient to indemnify it against any claim that may be made against the Corporation (including any expense or liability) on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 4. Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws or in any agreement with the stockholder making the transfer. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by his attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. Section 5. Registered Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise required by law. ARTICLE VI LIMITATION OF LIABILITY No person shall be liable to the Corporation for any loss or damage suffered by it on account of any action taken or omitted to be taken by him as a director or officer of the Corporation if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal matter, had no reasonable cause to believe that his conduct was unlawful. ARTICLE VII INDEMNIFICATION Section 1. Action Other Than by or in the Right of the Corporation. Subject to Section 3 of this Article VII, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether external or internal to the Corporation, (other than a judicial action or suit brought by or in the right of the Corporation) by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to hereafter as an "Agent"), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 2. Action by or in the Right of the Corporation. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed judicial action or suit brought by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was an Agent (as defined in Section 1) against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or other such court shall deem proper. Section 3. Determination of Right of Indemnification. Any indemnification under Sections 1 or 2 (unless ordered by a court) shall be made by the Corporation unless a determination is reasonably and promptly made (i) by the Board by a majority vote of a quorum consisting of directors who are or were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, if a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders, that such person acted in bad faith and in a manner that such person did not believe to be in or not opposed to the best interests of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe that his conduct was unlawful. Section 4. Indemnification Against Expenses of Successful Party. Notwithstanding the other provisions of this Article, to the extent that an Agent has been successful on the merits or otherwise, including the dismissal of an action without prejudice or the settlement of an action without admission of liability, in defense of any proceeding or in defense of any claim, issue or matter therein, such Agent shall be indemnified against all expenses incurred in connection therewith. Section 5. Advances of Expenses. Except as limited by Section 6 of this Article VII, expenses incurred in defending or investigating any action, suit, proceeding or investigation shall be paid by the Corporation in advance of the final disposition of such matter, if the Agent shall undertake to repay such amount in the event that it is ultimately determined, as provided herein, that such person is not entitled to indemnification. However, no advance shall be made by the Corporation if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel in a written opinion, that, based upon the facts known to the Board or counsel at the time such determination is made, such person acted in bad faith and in a manner that such person did not believe to be in or not opposed to the best interest of the Corporation, or, with respect to any criminal proceeding, that such person believed or had reasonable cause to believe his conduct was unlawful. In no event shall any advance be made in instances where the Board or independent legal counsel reasonably determines that such person deliberately breached his duty to the Corporation or its stockholders. Section 6. Right of Agent to Indemnification Upon Application; Procedure Upon Application. Any indemnification under Sections 2, 3, and 4, or advance under Section 5 of this Article VII, shall be made promptly and in any event within 45 days, upon the written request of the Agent, unless with respect to applications under Sections 2, 3, or 5, a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors that such Agent acted in a manner set forth in such Sections as to justify the Corporation's not indemnifying or making an advance to the Agent. In the event no quorum of disinterested directors is obtainable, the Board of Directors shall promptly direct that independent legal counsel shall decide whether the Agent acted in the manner set forth in such Sections as to justify the Corporation's not indemnifying or making an advance to the Agent. The right to indemnification or advances as granted by this Article VII shall be enforceable by the Agent in any court of competent jurisdiction if the Board or independent legal counsel denies the claim, in whole or in part, or if no disposition of such claim is made within 45 days. The Agent's expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. Section 7. Other Rights and Remedies. The indemnification provided by this Article VII shall not be deemed exclusive of any other rights to which an Agent seeking indemnification may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors, court order or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, since it is the policy of the Corporation that indemnification of Agents shall be made to the fullest extent permitted by law. The indemnification provided by this Article shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors and administrators of such a person. All rights to indemnification under this Article shall be deemed to be provided by a contract between the Corporation and the Agent who serves in such capacity at any time while these Bylaws and other relevant provisions of the General Corporation Law of the State of Delaware and other applicable law, if any, are in effect. Any repeal or modification thereof shall not affect any rights or obligations then existing. Section 8. Insurance. The Corporation may purchase and maintain insurance on behalf of any person who is or was an Agent against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 9. Indemnity Fund. Upon resolution passed by the Board, the Corporation may establish a trust or other designated account, grant a security interest or use other means (including, without limitation, a letter of credit), to ensure the payment of certain of its obligations arising under this Article and/or agreements which may be entered into between the Company and its officers and directors from time to time. Section 10. Constituent Corporations. For the purposes of this Article, references to "the Corporation" include all constituent corporations absorbed in a consolidation or merger as well as the resulting or surviving corporation, so that any person who is or was a director or officer of such a constituent corporation or is or was serving at the request of such constituent corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as he would had he served such constituent corporation in the same capacity. Section 11. Other Enterprises, Fines, and Serving at Corporation's Request. For purposes of this Article, references to "other enterprise" in Sections 1 and 10 shall include employee benefit plans; references to "fines" shall include any excise taxes assessed a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director or officer of the Corporation which imposes duties on, or involves services by, such director or officer with respect to any employee benefit plan, its participants, or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article. Section 12. Indemnification of Other Persons. The provisions of this Article VII shall not be deemed to preclude the indemnification of any person who is not an Agent (as defined in Section 1), but whom the Corporation has the power or obligation to indemnify under the provisions of the General Corporation Law of the State of Delaware or otherwise. The Corporation may, in its sole discretion, indemnify an employee, trustee or other agent as permitted by the General Corporation Law of the State of Delaware. The Corporation shall indemnify an employee, trustee or other agent where required by law. Section 13. Savings Clause. If this Article or any portion thereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Agent against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, and whether internal or external, including a grand jury proceeding and an action or suit brought by or in the right of the Corporation, to the full extent permitted by any applicable portion of this Article that shall not have been invalidated, or by any other applicable law. ARTICLE VIII RECORDS Section 1. Maintenance and Inspection of Share Register. The Corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board of Directors, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of shares held by each stockholder. A stockholder or stockholders of the Corporation holding at least 5% in the aggregate of the outstanding voting shares of the Corporation or who hold at least 1% of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the Corporation may (i) inspect and copy the records of stockholders' names and addresses and stockholdings during usual business hours on 5 days' prior written demand on the Corporation, or (ii) obtain from the transfer agent of the Corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the stockholders' names and addresses, who are entitled to vote for the election of directors, and their stockholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the stockholder after the date of demand. This list shall be made available to any such stockholder by the transfer agent on or before the later of 5 days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of stockholders shall also be open to inspection on the written demand of any stockholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a stockholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 1 may be made in person or by an agent or attorney of the stockholder or holder of a voting trust certificate making the demand. Section 2. Maintenance and Inspection of Bylaws. The Corporation shall keep at its principal executive office, the original or a copy of these Bylaws, as amended, to date, which shall be open to inspection by the stockholders at all reasonable times during office hours. ARTICLE IX GENERAL PROVISIONS Section 1. Dividends. Subject to limitations contained in the General Corporation Law of the State of Delaware and the Certificate of Incorporation, the Board of Directors may declare and pay dividends upon the shares of capital stock of the Corporation, which dividends may be paid either in cash, securities of the Corporation or other property. Section 2. Disbursements. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Section 3. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board of Directors. Section 4. Corporate Seal. The Corporation shall have a corporate seal in such form as shall be prescribed by the Board of Directors. Section 5. Record Date. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than 60 days nor less than ten days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. Stockholders on the record date are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as otherwise provided by agreement or by applicable law. Section 6. Voting of Stock Owned by the Corporation. The Board of Directors may authorize any person, on behalf of the Corporation, to attend, vote and grant proxies to be used at any meeting of stockholders of any corporation (except this Corporation) in which the Corporation may hold stock. Section 7. Construction and Definitions. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the General Corporation Law of the State of Delaware shall govern the construction of these Bylaws. Section 8. Amendments. Subject to the General Corporation Law of the State of Delaware, the Certificate of Incorporation and these Bylaws, the Board of Directors may by majority vote of those present at any meeting at which a quorum is present amend or repeal these Bylaws, or enact other Bylaws as in their judgment may be advisable for the regulation of the conduct of the affairs of the Corporation. Unless otherwise restricted by the Certificate of Incorporation, these Bylaws may be altered, amended or repealed at any annual meeting of the stockholders (or at any special meeting thereof duly called for that purpose) by a majority of the combined voting power of the then outstanding shares of capital stock of all classes and series of the Corporation entitled to vote generally in the election of directors, voting as a single class, provided that, in the notice of any such special meeting, notice of such purpose shall be given. EX-10.127 3 INVOLUNTARY TERMINATION POLICY AST OFFICERS POLICY: AST provides a defined severance benefit for the involuntary termination of Corporate Officers. PURPOSE: The main purpose of severance pay is to provide economic help to certain terminated employees while they seek other employment. ELIGIBILITY: Officers will be eligible for this benefit at termination because of reduction in force, job elimination, insufficient aptitude (not attributable to willful cause), acceptance of company initiated early retirement program. Officers will not be eligible for severance because of voluntary resignation, termination due to gross misconduct, retirement, death, nor change of control which is covered under separate contracts. This policy may be superseded by a specific employment contract BENEFITS: CEO/COO incumbents will receive 24 months salary continuance of current pay and allowances. Other officers will receive 6 months of salary/allowances continuance plus 1 additional month for each year of service up to a total maximum of 12 months. Benefit coverage will continue for the continuance period as long as required contributions are made. No vacation will accrue during the continuance period. The salary continuance period will not be considered for any bonus eligibility. Any options that vest during the continuance period may be exercised. All other programs (401K, options, annual bonus, quarterly bonus, etc.) will be governed by plan documents. Should new employment be started, benefits will be stopped in coordination with benefits start-up of new employer. REVISED 9/2/94 EX-10.128 4 AST RESEARCH, INC. PERFORMANCE BASED ANNUAL MANAGEMENT INCENTIVE PLAN Section 1. Purpose The purpose of the Performance Based Annual Management Incentive Plan is to promote the interests of AST Research, Inc., by attracting, motivating, rewarding, and retaining an outstanding management staff. Under the Plan, incumbents in stipulated positions may receive Awards that vary with the success of the Company, and/or the Business Unit as appropriate, and individual performance. Section 2. Definitions (a) "Award" refers to a contingent right to receive cash at the end of a Plan Year. (b) "Base Salary" refers to a Participant's Plan Year June 30 monthly salary times twelve. (c) "Committee" refers to the Compensation Committee of the Board of the Directors. (d) "Company" refers to AST Research, Inc. (e) "Business Unit" refers to any profit center so designated by the Committee. (f) "Participant" refers to a Company officer who has been designated by the Committee as eligible to participate in the Plan or a Key Manager who has been designated by the Chief Executive Officer as eligible to participate in the Plan. (g) "Plan" refers to the AST Research, Inc. Performance Based Annual Management Incentive Plan. - Base Formula refers to the primary incentive which has both a specified stated minimum level of performance before any incentive is paid and a stated maximum level of performance at which the maximum incentive opportunity is earned. - Top Hat Formula refers to that portion of an Award earned by a Participant based on performance achievement above the maximum of the Base Formula. Such formula is set by the Committee each year. (h) "Plan Year" refers to each fiscal year of the Company. (i) "Key Manager" refers to a full-time non-officer employee of the Company or any subsidiary of the Company, determined by the Chief Executive Officer to have a direct, significant, and measurable impact on the attainment of the Company's or Business Unit's annual performance goals. (j) "Performance Measure" refers to the revenue growth and financial earnings measures established by the Committee. Section 3. Administration Overall responsibility for Plan administration will be retained by the Committee. The Committee will: approve the Participants eligible to receive Awards under the Plan with respect to each Plan Year; approve the performance measures; and approve the amount of Awards subject to the terms and conditions set forth in the Plan and to other terms and conditions consistent with the purpose and provision of the Plan. The Committee, at its discretion, may delegate certain administrative responsibilities to the Chief Executive Officer of the Company including selection of Participants below the level of company officer, determination of Award levels to such Key Managers and evaluation of Key Manager performance under the Plan. The Committee may prescribe, amend, or rescind such rules, regulations, policies, interpretations, and guides as deemed appropriate for proper and effective administration of the Plan. In addition, only the Board of Directors may suspend or terminate the Plan - if such action is taken by the Board of Directors it will affect future Plan Years only. No member of the Committee, Board of Directors, or employee of the Company will be personally liable for any action, failure to act, determination, or interpretation made in good faith with respect to the Plan or any transaction under the Plan. All decisions, determinations, and interpretations of the Committee will be final and binding. Section 4. Eligibility and Participation The employees eligible to participate in the Plan will be designated by the Committee (with respect to Company officers) and the Chief Executive Officer (with respect to Key Managers) who, through their position and performance, have a significant impact on the performance of the Company and/or its Business Units. The Committee and the Chief Executive Officer will designate Participants who are to be granted Awards for an Award year and, at their discretion, may designate additional Participants during any Award year as deemed appropriate. The Committee and the Chief Executive Officer, through a designee, will notify Participants of their eligibility. The Committee or the Chief Executive Officer will not be bound by selections made for prior Plan years. Section 5. Determination and Allocation of Awards For each Plan Year, the Committee and the Chief Executive Officer will approve each Participant's Award potential. Such Award potentials will not exceed 50% of the Participant's Base Salary for goal achievement (the "target" incentive level) and 200% of the target incentive amount for maximum achievement under the Base Formula in any Plan Year. The maximum under the Top Hat Formula inclusive of the Base Formula maximum can not exceed $3,000,000 for the Chief Executive Officer and $1,500,000 for any other Participant in any Plan Year. Awards earned pursuant to the Plan will be based on achievement of preestablished annual performance objectives inclusive of incentive payments. Upon establishing the performance objectives (Base Formula and Top Hat Formula) for a specific Plan Year, which will be documented in writing before commencement of services (as defined in applicable I.R.S. regulations), the Committee and the Chief Executive Officer will notify each Officer in writing, through a designee, of the established objectives. The objective formula awards may be limited based upon the overall assessment of the individuals contribution. If the Committee determines the established performance measures are no longer suitable to Company objectives due to change in the Company's business, operations, organization structure, capital structure, or other conditions deemed by the Committee to be material, the Committee will have sole discretion during the Plan Year to modify the performance objectives as considered appropriate and equitable. However, no adjustment will be inconsistent with Section 10. Section 6. Payment of Awards Earned All payments referenced under Section 6 are subject to contingencies set forth in Sections 8. The basis of Awards for a given Plan Year will be linked to the achievement of the performance objectives. If the minimum performance objective, as deemed by the Committee each year, is not attained for a Plan Year, no payment will be made to Participants and all contingent rights under the Plan will cease for such participants. If the minimum performance objective is achieved, the Award earned by each Participant will be paid in cash, as soon as administratively possible following the close of the applicable Plan Year and annual audit. The Committee will document in writing whether the performance objectives were met before the payment of awards. The Committee may reduce an individual's award otherwise payable under this plan at its sole discretion. Section 7. Termination of Employment In the event of a Participant's death, disability, or retirement (defined as a minimum age of 62 and five years of Company employment) during a Plan Year, payment of the Award earned will be prorated unless otherwise determined by the Committee. Such Awards will then be paid to the Participant, the Participant's estate, or legal representative as determined by the Committee. In the event of a Participant's death, disability, or retirement after the end of a Plan Year but before payment of an Award to which the Participant is entitled, such Award will be paid to the Participant, the Participant's estate, or legal representative. In the event of termination of employment of a Participant, voluntarily or by the Company, with or without cause, for reasons other than those specified above at any time before payment for the applicable fiscal year, the Participant will forfeit all rights to any Award. Section 8. Adjustments Upon Changes in Capitalization In the event of a reorganization, merger, or consolidation of which the Company is not the surviving corporation, or upon the sale of substantially all the assets of the Company to another corporation, or upon the dissolution or liquidation of the Company, the Plan will terminate on the effective date of such transaction. Provision will be made for determining the amount of cash payable for all Awards for a Plan Year that will end after such event unless provisions are made for the continuance of the Plan and the assumption or substitution for such Awards of an equivalent value by the successor corporation. Adjustments under this section will be made by the Committee whose determination as to what adjustments will be made and the extent will be final, binding, and conclusive. Section 9. General Provisions (a) No Right to Participate: Nothing in the Plan will be deemed to give a Participant or a Participant's legal representative or any other person or entity claiming under or through a Participant any contract or right to participate in the benefits of the Plan. (b) No Employment Right: Participation in the Plan will not be construed as constituting a commitment, guarantee, contract, or understanding of any kind that the Company will continue to employ any individual. (c) Nontransferability: A Participant or any designated beneficiary has no right to assign, transfer, attach, or hypothecate any benefits or payments of the Plan. (d) Withholding: The Company has the right to deduct any taxes required to be withheld with respect to the payment of any Award. (e) Restricted Liability: Payments held by the Company before distribution are not liable for the debts, contracts, or obligations of any Participant or beneficiary, and are not to be taken in execution by attachment or garnishment, or by any other legal or equitable proceeding. Section 10. Amendment, Suspension, or Termination of Plan The Board of Directors may amend, suspend, or terminate the Plan at any time. Such amendment, suspension, or termination will not adversely alter or affect any right or obligation to any award made before this action. The Committee will determine the effect on any Awards that may be effected by such event and make adjustments and/or payments as it, in it sole discretion, determines appropriate. Section 11. Effective Date This Plan is effective upon approval of the Committee. EX-10.129 5 GRANT AGREEMENT made the 9th day of November, 1993 BETWEEN THE INDUSTRIAL DEVELOPMENT AUTHORITY having its principal place of business at Wilton Park House, Wilton Place, Dublin 2 ("the Authority") of the first part, AST IRELAND LIMITED having its registered office at 1 Earlsfort Centre, Hatch Street, Dublin 2 ("the Company") of the second part and AST RESEARCH, INC. having its principal place of business at 16215 Alton Parkway, Irvine, California 92718 ("the Promoters") of the third part. WHEREAS: (a) The Company which is indirectly controlled by the Promoters has been incorporated with the principal object of establishing in two phases (the commencement of Phase 2 being entirely at the option of the Company), and carrying on at Castletroy, Co. Limerick an industrial undertaking for the production, sale, distribution, and/or repair of personal computers including support services ("the Undertaking"), in accordance with proposals furnished to the Authority by the Promoters and has applied to the Authority for financial assistance towards the cost of establishing the Undertaking in two Phases which is intended to give employment to XXXXX persons; (b) The Company and the Promoters having made all necessary inquiries are satisfied and represent to the Authority that to the best of their belief there will be available to the Undertaking the raw materials, business and technical personnel, knowledge, and facilities required for its proper commercial establishment and efficient operation; (c) The Promoters have represented to the Authority that the Undertaking will contribute to the regional development of Ireland; IT IS HEREBY AGREED that in consideration of the Company implementing the said proposals and carrying on Phase 1 of the Undertaking substantially in accordance with this Agreement the Authority agrees to grant to the Company the sum of PoundsXXXXXXXXX Irish Pounds in respect of Phase 1 for the employment of XXX people or the aggregate of XXXXXX Irish Pounds for each job created in Phase 1 of the Undertaking in accordance with Paragraph 1 of the Schedule hereto whichever is the lesser and if the Company at its option proceeds to Phase 2 of the Undertaking in consideration of the Company carrying on such Phase the sum of XXXXXXXXX Irish Pounds in respect of Phase 2 for the employment of XXX people or the aggregate of XXXXXX Irish Pounds for each job created in Phase 2 of the Undertaking in accordance with Paragraph 1 of the Schedule hereto whichever is the lesser ("the Grant") on the following terms and conditions. For the purpose of this Agreement, "job" shall mean a full-time permanent position in the Undertaking created in accordance with Paragraph 1 of the Schedule hereto. 1. DEVELOPMENT OF THE UNDERTAKING: The development of the Undertaking and in particular the provision of employment shall be substantially in accordance with the particulars given in the said proposals it being understood and agreed by the parties hereto that the decision to proceed with Phase 2 of the Undertaking shall be entirely at the option of the Company and any failure on its part to exercise such option shall not be regarded as a breach of this Agreement or in any way entitle the Authority to repayment of any grants paid or to withhold any grant payable hereunder. 2. CONTROL OF THE COMPANY: The controlling interest in the Company shall be held directly or indirectly by the Promoters unless otherwise agreed to in writing by the Authority. 3. PROMOTERS INVESTMENT: The Company shall provide or procure finance for Phase 1 (and if the Company decides at its option to proceed with Phase 2) for Phase 2 as specified in the Schedule for the purposes of the Undertaking. 4. PLANNING PERMISSION AND PREVENTION OF POLLUTION: The Company shall: 4-1 Obtain all necessary permissions prescribed by Local and/or National Authorities and shall comply with all requirements of such permissions and with all Building Regulations and Statutory requirements (if any) required for the Undertaking; 4-2 Comply with all Statutory, Local, and/or National Authority requirements in relation to environmental controls and the prevention of pollution. 5. INSURANCE: The Company shall: 5-1 Keep all the fixed assets insured in accordance with good and customary commercial practice to their full cost of re-instatement against loss or damage by fire and explosion; 5-2 Obtain on commencement of production and in accordance with good commercial practice Consequential Loss Insurance to adequately indemnify the Company against losses and costs resulting from fire and explosion, and 5-3 Make arrangements to ensure that the Authority will be notified of any failure to renew the insurance specified at clauses (5-1) and (5-2) hereof and also of any substantial change in such insurance. 6. RESTORATION OF FIXED ASSETS: If there should be damage to or loss of fixed assets including buildings under construction through fire or explosion or any other cause the insurance as maintained under Clause 5 or other compensation received by the Company shall be used forthwith to restore to the reasonable satisfaction of the Authority the property so damaged or lost and in the event of such compensation being insufficient for that purpose the Company shall make good the deficiency out of its own funds. 7. GUARANTEES: The Company shall not give a guarantee in respect of any borrowings other than borrowings for the purposes of the Undertaking without the prior written consent of the Authority. 8. NON-DISTRIBUTION OF THE GRANT: The Company shall not distribute by way of dividend on the share capital of the Company or otherwise any sum received in respect of the grant. 9. ROYALTIES OR SIMILAR PAYMENTS: The Company may only make royalty or similar payments on the following terms and conditions:- 9-1 That to the extent that the said royalty and/or similar payments exceed XXX of the Company's net annual sales, such excess shall not be payable except out of the profits of the Company which would otherwise be available for dividend, and 9-2 That in the event of the winding up of the Company the amount of any such excess accrued or accruing for payment but unpaid shall be subordinated to the claims of the unsecured creditors, including the Authority, of the Company. 10. PAYMENT OF GRANT: 10-1 The grant for Phase 1 shall be paid subject to the following terms and conditions and the Company shall provide evidence satisfactory to the Authority:- 10-1-1 That the Company has been properly incorporated and that its Memorandum and Articles of Association empower the Company to implement this Agreement; 10-1-2 That the Company has title acceptable to the Authority to all land and buildings required for the Undertaking including the buildings purchased from Wang Laboratories Ireland B.V.; 10-1-3 That the necessary arrangements have been made for the provision of all capital required for Phase 1 of the Undertaking as specified at Paragraph 2 of the Schedule; 10-1-4 That all Planning Permissions as aforesaid have been obtained and complied with; 10-1-5 That all requirements for the control of the environment and prevention of pollution as aforesaid have been complied with; 10-1-6 That insurance arrangements in respect of Phase 1 eligible assets as aforesaid have been made; 10-1-7 That the Company has obtained a tax number in the relevant tax district; that it is up to date in its tax affairs with the Revenue Commissioners and prior to total payments from the grant exceeding IRPoundsXXXXX and to each subsequent payment from the grant it shall submit an up to date tax clearance certificate from the Revenue Commissioners; 10-1-8 That the fixed assets in respect of Phase 1 have been provided in accordance with the proposals; 10-1-9 That the jobs in Phase 1 of the Undertaking in respect of which the grant is payable are occupied by Irish nationals; 10-1-10 That the Company has substantially complied up to date with all the provisions of this Agreement; 10-2 The grant for Phase 2 shall be paid subject to the following terms and conditions:- 10-2-1 That the Authority has formerly reviewed Phase 1 of the Undertaking and is satisfied with same; 10-2-2 That the Company has indicated in writing to the Authority that it wishes to exercise its option to commence Phase 2 of the Undertaking; 10-2-3 That the Company shall provide evidence satisfactory to the Authority that the necessary arrangements have been made for the provision of all capital required for Phase 2 of the Undertaking as specified at Paragraph 2 of the Schedule; 10-2-4 That all Planning Permissions as aforesaid have been obtained and complied with; 10-2-5 That all requirements for the control of the environment and prevention of pollution as aforesaid have been complied with; 10-2-6 That insurance arrangements in respect of Phase 2 eligible assets as aforesaid have been made; 10-2-7 That the Company has obtained a tax number in the relevant tax district; that it is up to date in its tax affairs with the Revenue Commissioners and prior to total payments from the grant exceeding IRPoundsXXXXX and to each subsequent payment from the grant it shall submit an up to date tax clearance certificate from the Revenue Commissioners; 10-2-8 That the fixed assets in respect of Phase 2 have been provided in accordance with the proposals; 10-2-9 That the jobs in Phase 2 of the Undertaking in respect of which the grant is payable are occupied by Irish nationals; 10-2-10 That the Company has substantially complied up to date with all the provisions of this Agreement; 10-2-11 That the Company shall provide evidence satisfactory to the Authority that it has complied up to date with all the provisions of this Agreement. 10-3 Subject to 10-1 and 10-2 and in particular to Paragraph 2-3 of the Schedule the grant in respect of each Phase shall be paid to the Company in two moieties. The first moiety shall be payable when the job has been created (a job shall be deemed to be created when a contract of employment has been signed and payment has been made to an employee in respect of work done in the job) and the second moiety shall be payable when permanent full-time employment in the job for a twelve-month period has been completed. Claims for payment of the employment grant may be submitted monthly and shall be certified by the Company's auditors in a satisfactory format. 11. FURNISHING OF INFORMATION: 11-1 The Company shall if required by the Authority, submit an Auditor's Certificate giving such details as the Authority may require in relation to the employment history of the Company and shall permit the officers and agents of the Authority to inspect the fixed assets and to inspect employment and other records of the Company at all reasonable times during the term of this Agreement and shall furnish to the Authority whenever requested in writing all such information and documentary evidence as the Authority may from time to time reasonably require to vouch compliance by the Company with any of the terms and conditions of this Agreement. 11-2 The Company acknowledges the right of the Authority to consult with relevant third parties to obtain any information it requires relating to the affairs of the Company and/or the Promoters prior to any payment from the grant and to withhold grant payments in the event of such information being unsatisfactory to the Authority. The Authority undertakes to inform the Company of the source and nature of any such unsatisfactory information. The Company and/or the Promoters hereby undertake to instruct such third parties to furnish any such information to the Authority on request. 11-3 The Company shall submit Annual Audited Accounts satisfactory to the Authority in all material respects in connection with the Undertaking and the Company's obligations under this Agreement for the duration of this Agreement within six months from the end of the relevant financial year. 12. NOTICES: 12-1 The Certificate of an Officer of the Authority certifying any decision of the Authority taken or made hereunder shall be conclusive evidence of any such decision save in the case of manifest error; 12-2 Any notice by the Authority to the Company or to the Promoters under this Agreement shall be sent by registered post to the Registered Office of the Company and the last notified registered office of the Promoters. 13. CONSENTS: 13-1 Circumstances requiring the consent, approval, or permission of any party hereto shall be interpreted to mean that such consents, approvals, or permissions shall not be unreasonably withheld. This provision shall not apply to the provisions of Clause 2 hereof. 13-2 Any variation or modification of any of the terms or conditions herein made at the request of or with the agreement of the Company and with the consent of the Authority shall not in any way determine or prejudice the Promoters' liability hereunder PROVIDED ALWAYS that such a variation or modification involving an amount in excess of XXXXXXXXXX Irish Pounds shall not be made without the express consent of the Promoters and PROVIDED FURTHER that the financial amount of the Promoters' said liability shall not be increased without their express agreement in writing. 14. ACHIEVEMENT OF PROJECTED PERFORMANCE: The Authority may at any time within XXXX years from the date of payment of the first moiety of the Employment Grant in respect of any job revoke the Employment Grant paid in respect of that job if the job should become vacant and remain vacant for a period in excess of XXX calendar months. 15. TERMINATION OF AGREEMENT: This Agreement shall terminate on the date being ten years from the date of the first claim from the grant PROVIDED ALWAYS that if the Company should request and the Authority should consent to an extension of a period specified herein or in the Capital Grant Agreement of even date entered into between the parties hereto in relation to fulfillment by the Company of a condition in either Agreement the duration of this Agreement shall be extended correspondingly. 16. CANCELLATION AND REVOCATION OF GRANT: The Authority may stop payment of the grant and/or revoke and cancel or reduce the grant or so much thereof as shall not then have been actually paid to the Company if any one or more of the following events should occur:- 16-1 If there be any breach of the terms or conditions of Clause 2 hereof; 16-2 If the Company should to a material extent be in breach of any of the terms and conditions of this Agreement other than those specified in Clause 16-1 hereof and having failed to establish to the reasonable satisfaction of the Authority that such breach was due to force majeure and shall not have rectified such breach within 30 days after written notice thereof has been served on the Company; 16-3 If an order is made or an effective resolution is passed for the winding up of the Company except in the case of a bona fide amalgamation or reconstruction; 16-4 If a Receiver is appointed over any of the property of the Company or if a distress or execution is levied or served upon any of the property of the Company and is not paid off within 30 days; 16-5 If the Company should cease to carry on the Undertaking. If the grant be revoked, the Company and/or the Promoters shall repay to the Authority on demand all sums received in respect of the grant and if the grant be reduced the Company and/or the Promoters shall repay to the Authority on demand all sums received in excess of the amount of the reduced grant and in either case in default of such repayment such sums shall be recoverable by the Authority from the Company and/or the Promoters as a joint and several simple contract debt PROVIDED ALWAYS that if the Company at its option commences Phase 2 of the Undertaking, any failure by it to comply with its obligations in respect of that Phase shall not be construed as or considered to be a breach of its obligations under Phase 1 of this Agreement and PROVIDED FURTHER that it is understood by and between the parties hereto that any failure by the Company to commence Phase 2 shall not entitle the Authority to stop payment of the Grant and/or revoke or cancel or reduce the Grant or so much thereof as shall not then have actually been paid to the Company in respect of Phase 1. 17. GOVERNING LAW: This Agreement shall be governed by and be construed in accordance with the Laws of Ireland and the parties hereto expressly and irrevocably submit to the jurisdiction of the Irish courts and the Promoters hereby irrevocably appoint the Company to be its attorney for the purpose of accepting service on its behalf of any notice, document, or legal process with respect to the Promoters' obligations pursuant to the provisions of Clause 14 or 16 hereof and service of any such document on such attorney shall be deemed for all purposes to be good service. SCHEDULE 1. CUMULATIVE PROVISION OF EMPLOYMENT PHASE 1 PHASE 2 Job Description Year 1 Year 2 Year 3 Year 4 Year 5 Administration XX XX XX XX XX Distribution XX XX XX XX XX Repair/Technical XX XX XX XX XXX Services Indirects XX XX XX XXX XXX Direct Labor Manufacturing XXX XXX XXX XXX XXX TOTAL: XXX XXX XXX XXX XXXXX 2. PROMOTERS INVESTMENT: 2-1 The Company shall procure or provide for the purposes of Phase 1 of the Undertaking:- Equity Equivalent of IRPoundsXXXXXXXXX; For the purposes of this Agreement, "Equity Equivalent" shall mean the total monies obtained by the Company as follows:- 2-1-1 Cash received directly or indirectly by the Company from the Promoters in consideration for the issue at par of fully paid-up Ordinary Shares in the Company or for the issue at a premium of fully paid up Ordinary Shares in the Company PROVIDED ALWAYS that notwithstanding the provisions of Section 62 of the Companies Act 1963 no part of the funds standing to the credit of the Company's Share Premium Account (arising from the issue of Shares at a premium) shall be distributed or otherwise dealt with during the term of this Agreement other than in paying up at par unissued shares in the capital of the Company; and/or 2-1-2 Retained earnings of the Company capitalized at par as fully paid-up Ordinary Shares in the Company; and/or 2-1-3 Retained earnings of the Company transferred to a special non- distributable reserve account which shall be maintained at the appropriate level for the duration of this Agreement; and/or 2-1-4 Loans from the Promoters or wholly owned subsidiaries thereof or agreed third parties on the following terms and conditions ("Subordinated Loans"):- 2-1-4-1 That no interest on such loans shall be payable by the Company except out of profits which would otherwise be available for dividend; 2-1-4-2 That no such loans shall be repaid except out of profits of the Company which would otherwise be available for dividend or out of a new loan obtained on the same terms for this purpose, or out of the proceeds of a new issue at par of fully paid-up Ordinary Shares in the Company made for this purpose; 2-1-4-3 That where any such loans are repaid out of profits, there shall be transferred out of profits which would otherwise have been available for dividend to a special non-distributable reserve account a sum equal to the amount of the loan repaid, and that there shall be no reduction in the amount of such special non- distributable reserve account during the term of this Agreement; 2-1-4-4 That where any such loans are repaid out of a new loan obtained for this purpose, the new loan shall be subject to these conditions as if it were the original loan; 2-1-4-5 That in the event of the winding up of the Company the amount of any such loans still outstanding shall be subordinated to the claims of the unsecured creditors of the Company; PROVIDED ALWAYS that not less than 25% of the Equity Equivalent shall be Ordinary Shares in the Company as specified at sub-paragraphs 2-1-1 and/or 2-1-2 above and PROVIDED FURTHER that retained earnings utilized as Equity Equivalent as aforesaid shall not include any sum received in respect of the grant or derived from a revaluation of the fixed assets of the Company. 2-2 The Company shall procure or provide for the purposes of Phase 2 of the Undertaking:- Equity Equivalent of IRPoundsXXXXXXXXX; For the purposes of this Agreement, "Equity Equivalent" shall mean the total monies obtained by the Company as follows:- 2-2-1 Cash received directly or indirectly by the Company from the Promoters in consideration for the issue at par of fully paid-up Ordinary Shares in the Company or for the issue at a premium of fully paid up Ordinary Shares in the Company PROVIDED ALWAYS that notwithstanding the provisions of Section 62 of the Companies Act 1963 no part of the funds standing to the credit of the Company's Share Premium Account (arising from the issue of Shares at a premium) shall be distributed or otherwise dealt with during the term of this Agreement other than in paying up at par unissued shares in the capital of the Company; and/or 2-2-2 Retained earnings of the Company capitalized at par as fully paid-up Ordinary Shares in the Company; and/or 2-2-3 Retained earnings of the Company transferred to a special non- distributable reserve account which shall be maintained at the appropriate level for the duration of this Agreement; and/or 2-2-4 Loans from the Promoters or wholly owned subsidiaries thereof or agreed third parties on the following terms and conditions ("Subordinated Loans"):- 2-2-4-1 That no interest on such loans shall be payable by the Company except out of profits which would otherwise be available for dividend; 2-2-4-2 That no such loans shall be repaid except out of profits of the Company which would otherwise be available for dividend or out of a new loan obtained on the same terms for this purpose, or out of the proceeds of a new issue at par of fully paid-up Ordinary Shares in the Company made for this purpose; 2-2-4-3 That where any such loans are repaid out of profits, there shall be transferred out of profits which would otherwise have been available for dividend to a special non-distributable reserve account a sum equal to the amount of the loan repaid, and that there shall be no reduction in the amount of such special non- distributable reserve account during the term of this Agreement; 2-2-4-4 That where any such loans are repaid out of a new loan obtained for this purpose, the new loan shall be subject to these conditions as if it were the original loan; 2-2-4-5 That in the event of the winding up of the Company the amount of any such loans still outstanding shall be subordinated to the claims of the unsecured creditors of the Company; PROVIDED ALWAYS that not less than 25% of the Equity Equivalent shall be Ordinary Shares in the Company as specified at sub-paragraphs 2-1-1 and/or 2-1-2 above and PROVIDED FURTHER that retained earnings utilized as Equity Equivalent as aforesaid shall not include any sum received in respect of the grant or derived from a revaluation of the fixed assets of the Company. 2-3 The total amount paid from the grant shall at no time exceed the total amount of Equity Equivalent of which at all times not less than 25% shall comprise an amount for issued Ordinary Shares in the Company as aforesaid PROVIDED ALWAYS that the Company may substitute one form of Equity Equivalent for another. IN WITNESS whereof the parties hereto have caused their respective Seals to be affixed hereto the day and year first herein written. PRESENT when the Seal of THE INDUSTRIAL DEVELOPMENT AUTHORITY was affixed hereto:- _______________________ Authorized Officer _______________________ Authorized Officer PRESENT when the Seal of AST IRELAND LIMITED was affixed hereto:- ________________________ ________________________ SIGNED for and on behalf of AST RESEARCH, INC. by:- James S. Forquer Senior Vice President, Worldwide Operations Dated 9th day of November, 1993 INDUSTRIAL DEVELOPMENT AUTHORITY First Part AST IRELAND LIMITED Second Part - and - AST RESEARCH, INC. Third Part __________________________________________ EMPLOYMENT GRANT AGREEMENT __________________________________________ INDUSTRIAL DEVELOPMENT AUTHORITY Wilton Park House Wilton Place Dublin 2 EX-10.130 6 GRANT AGREEMENT made the 9th day of November, 1993 BETWEEN the INDUSTRIAL DEVELOPMENT AUTHORITY having its principal place of business at Wilton Park House, Wilton Place, Dublin 2 ("the Authority") of the first part, AST IRELAND LIMITED having its registered office at 1 Earlsfort Centre, Hatch Street, Dublin 2 ("the Company") of the second part and AST RESEARCH, INC. having its principal place of business at 16215 Alton Parkway, Irvine, California 92718 ("the Promoters") of the third part. WHEREAS: a) The Company which is indirectly controlled by the Promoters has been incorporated with the principal object of establishing, in two Phases, (the commencement of Phase 2 being entirely at the option of the Company) and carrying on at Castletroy, Co Limerick an industrial undertaking for the production, sale, distribution, and/or repair of personal computers including support services ("the Undertaking"), in accordance with proposals furnished to the Authority by the Promoters and has applied to the Authority for financial assistance towards the cost of the fixed assets required for each Phase of the Undertaking; b) The Company and the Promoters having made all necessary inquiries are satisfied and represent to the Authority that to the best of their belief there will be available to the Undertaking the raw materials, business and technical personnel, knowledge and facilities required for its proper commercial establishment and efficient operation; c) The Promoters have represented to the Authority that the Undertaking will contribute to the regional development of Ireland. IT IS HEREBY AGREED that in consideration of the Company implementing the said proposals and carrying on Phase 1 of the Undertaking substantially in accordance with this Agreement, the Authority agrees to grant to the Company the sum of XXXXXXXXX Irish Pounds in respect of Phase 1 and if the Company at its option proceeds to Phase 2 of the Undertaking in consideration of the Company carrying on such phase the sum of XXXXXXX Irish Pounds in respect of Phase 2 or XXX of the actual expenditure on the provision of lands, factory buildings, building modifications, building services and facilities and new machinery and equipment in two separate phases for the Undertaking ("the eligible assets"), whichever is the lesser, (such sum being hereinafter called "the grant") on the following terms and conditions including those contained in the Schedule hereto ("the Schedule"); 1. DEVELOPMENT OF THE UNDERTAKING: The development of the Undertaking and in particular the provision of employment shall be substantially in accordance with the particulars given in the said proposals it being understood and agreed by the parties hereto that the decision to proceed with Phase 2 of the Undertaking shall be entirely at the option of the Company and any failure on its part to exercise such option shall not be regarded as a breach of this Agreement or in any way entitle the Authority to repayment of any grants paid or to withhold any grant payable hereunder. 2. CONTROL OF THE COMPANY: The controlling interest in the Company shall be held directly or indirectly by the Promoters unless otherwise agreed to in writing by the Authority. 3. PROMOTERS INVESTMENT: The Company shall provide or procure finance for Phase 1 (and if the Company decides at its option to proceed with Phase 2) for Phase 2 as specified in the Schedule for the purposes of the Undertaking. 4. ELIGIBLE EXPENDITURE AND PROVISION OF ELIGIBLE ASSETS: Unless otherwise agreed to in writing by the Authority, the expenditure in each phase eligible for the grant and the provision of the eligible assets shall be substantially as set forth in the Schedule. 5. PLANNING PERMISSION AND PREVENTION OF POLLUTION: The Company shall: 5-1 Obtain all necessary permissions prescribed by Local and/or National Authorities and shall comply with all requirements of such permissions and with all Building Regulations and Statutory requirements (if any) required for the Undertaking; 5-2 Comply with all Statutory, Local, and/or National Authority requirements in relation to environmental controls and the prevention of pollution. 6. PLACING OF CONTRACTS: 6-1 Subject to the specialized requirements of the Undertaking which shall have been notified to and approved in writing by the Authority, the Company shall ensure in relation to the placing of contracts for the eligible assets that:- 6-1-1 Prior to appointment of Architects and/or Consultants, the Company will obtain the approval of the Authority on the proposed composition of the Design Team for the implementation of the Undertaking; 6-1-2 Before tenders are invited on building works and building services, the Company will consult with the Construction Advisory Unit of the Authority; 6-1-3 A minimum of three competitive quotations is sought for any contract for eligible assets having a value of XXXXXX Irish Pounds or more and that none but the lowest is accepted without the prior written consent of the Authority; 6-1-4 No arrangements are made for the direct hire of labor in the construction of the said factory buildings, building services, and facilities except with the prior written consent of the Authority. 6-2 In the placing of contracts for the construction of the said factory buildings, building services, and facilities, any contractors appointed by the Company in the aforesaid construction shall at the date of such appointments possess an up to date tax clearance certificate or a current C2 certificate from the Revenue Commissioners. The Company shall retain copies of such certificates for inspection by the Authority as evidence of compliance with this sub-Clause. 7. INSURANCE: The Company shall:- 7-1 Keep all the eligible assets insured in accordance with good and customary commercial practice to their full cost of re-instatement against loss or damage by fire and explosion; 7-2 Obtain on commencement of production and in accordance with good commercial practice Consequential Loss Insurance to adequately indemnify the Company against losses and costs resulting from fire and explosion, and 7-3 Make arrangements to ensure that the Authority will be notified of any failure to renew the insurance specified at clauses (7-1) and (7-2) hereof and also of any substantial change in such insurance. 8. RESTORATION OF ELIGIBLE ASSETS: If there should be damage to or loss of eligible assets including buildings under construction through fire or explosion or any other cause the insurance as maintained under Clause 7 or other compensation received by the Company shall be used forthwith to restore to the reasonable satisfaction of the Authority the property so damaged or lost and in the event of such compensation being insufficient for that purpose the Company shall make good the deficiency out of its own funds. 9. ALIENATION OF ASSETS: The Company shall not alienate, assign, part with the possession of or otherwise dispose of or remove (save for the purpose of normal repair, renewal, replacement, substitution or alienation due to obsolescence) or mortgage or charge (except for the purpose of securing finance for the Undertaking) the eligible assets or any part thereof without the prior written consent of the Authority. The provisions of this Agreement shall apply also to assets which are substituted for eligible assets. 10. USE OF ELIGIBLE ASSETS: The Company shall not without the prior written consent of the Authority use or permit the use of the eligible assets or any part thereof except for the purposes of the Undertaking. 11. GUARANTEES: The Company shall not give a guarantee in respect of any borrowings other than borrowings for the purposes of the Undertaking without the prior written consent of the Authority. 12. NON-DISTRIBUTION OF THE GRANT: The Company shall not distribute by way of dividend on the share capital of the Company or otherwise any sum received in respect of the grant. 13. ROYALTIES OR SIMILAR PAYMENTS: The Company may only make royalty of similar payments on the following terms and conditions:- 13-1 That to the extent that the said royalty and/or similar payments exceed 10% of the Company's net annual sales, such excess shall not be payable except out of the profits of the Company which would otherwise be available for dividend, and 13-2 That in the event of the winding up of the Company the amount of any such excess accrued or accruing for payment but unpaid shall be subordinated to the claims of the unsecured creditors, including the Authority, of the Company. 14. PAYMENT OF GRANT: 14-1 The grant for Phase 1 shall be paid subject to the following terms and conditions and the Company shall provide evidence satisfactory to the Authority:- 14-1-1 That the Company has been properly incorporated and that its Memorandum and Articles of Association empower the Company to implement this Agreement; 14-1-2 That the Company has title acceptable to the Authority to all land and buildings required for the Undertaking including the buildings purchased from Wang Laboratories Ireland B.V.; 14-1-3 That the necessary arrangements have been made for the provision of all capital required for Phase 1 of the Undertaking as specified at Paragraph 3 of the Schedule; 14-1-4 That all Planning Permissions as aforesaid have been obtained and complied with; 14-1-5 That all requirements for the control of the environment and prevention of pollution as aforesaid have been complied with; 14-1-6 That insurance arrangements in respect of Phase 1 eligible assets as aforesaid have been made; 14-1-7 That the Company has obtained a tax number in the relevant tax district; that it is up to date in its tax affairs with the Revenue Commissioners and prior to total payments from the grant exceeding IRPoundsXXXXX and to each subsequent payment from the grant it shall submit an up to date tax clearance certificate from the Revenue Commissioners; 14-1-8 That all expenditure on the eligible assets in respect of Phase 1 has been necessarily incurred, save where the specialized requirements of the Undertaking have already been approved in accordance with the provisions of Clause 6 hereof; 14-1-9 That all expenditure on the eligible assets for Phase 1 has been paid and that value has been obtained therefore; 14-1-10 That the Company has substantially complied up to date with all the provisions of this Agreement 14-2 The grant for Phase 2 shall be paid subject to the following conditions:- 14-2-1 That the Authority has formally reviewed Phase 1 of the Undertaking and is satisfied with same; 14-2-2 That the Company has indicated in writing to the Authority that it wishes to exercise its option to commence Phase 2 of the Undertaking. 14-2-3 That the Company shall provide evidence satisfactory to the Authority that the necessary arrangements have been made for the provision of all capital required for Phase 2 of the Undertaking as specified at Paragraph 3 of the Schedule; 14-2-4 That all Planning Permissions as aforesaid have been obtained and complied with; 14-2-5 That all requirements for the control of the environment and prevention of pollution as aforesaid have been complied with; 14-2-6 That insurance arrangements in respect of Phase 2 eligible assets as aforesaid have been made; 14-2-7 That the Company has obtained a tax number in the relevant tax district; that it is up to date in its tax affairs with the Revenue Commissioners and prior to total payments from the grant exceeding IRPoundsXXXXX and to each subsequent payment from the grant it shall submit an up to date tax clearance certificate from the Revenue Commissioners; 14-2-8 That all expenditure on the eligible assets in respect of Phase 2 has been necessarily incurred, save where the specialized requirements of the Undertaking have already been approved in accordance with the provisions of the Clause 6 hereof; 14-2-9 That all expenditure on the eligible assets for Phase 2 has been paid and that value has been obtained therefor; 14-2-10 That the Company has substantially complied up to date with all the provisions of this Agreement. 14-2-11 That the Company shall provide evidence satisfactory to the Authority that it has complied up to date with all the provisions of this Agreement; 14-3 Subject to 14-1 and to 14-2 and in particular to Paragraph 3-3 of the Schedule, the grant shall be paid to the Company for each Phase in instalments of XXX of each sum of not less than XXXXXXX Irish Pounds expended by the Company as set forth in the Schedule on the eligible assets when installed and commissioned PROVIDED ALWAYS that all such expenditure shall be vouched and examined in such manner as the Authority may reasonably require. 15. FURNISHING OF INFORMATION: 15-1 The Company shall permit the officers and agents of the Authority to inspect the eligible assets at all reasonable times during the term of this Agreement and shall promptly furnish to the Authority whenever requested in writing, all such information and documentary evidence as the Authority may from time to time reasonably require to vouch compliance by the Company with any of the terms and conditions of this Agreement. 15-2 The Company acknowledges the right of the Authority to consult with relevant third parties to obtain any information it requires relating to the affairs of the Company and/or the Promoters prior to any payment from the grant and to withhold grant payments in the event of such information being unsatisfactory to the Authority. The Authority undertakes to inform the Company of the source and nature of any such unsatisfactory information. The Company and/or the Promoters hereby undertake to instruct such third parties to furnish any such information to the Authority on request. 15-3 The Company shall submit Annual Audited Accounts satisfactory to the Authority in all material respects in connection with the Undertaking and the Company's obligations under this Agreement for the duration of this Agreement within six months from the end of the relevant financial year. 16. NOTICES: 16-1 The Certificate of an Officer of the Authority certifying any decision of the Authority taken or made hereunder shall be conclusive evidence of any such decision, save in the case of manifest error; 16-2 Any notice by the Authority to the Company or to the Promoters under this Agreement shall be sent by registered post to the registered office of the Company and to the last notified registered office of the Promoters. 17. CONSENTS: 17-1 Circumstances requiring the consent, approval, or permission of any party hereto shall be interpreted to mean that such consents, approvals, or permissions shall not be unreasonably withheld. This provision shall not apply to the provisions of Clause 2 and Clause 9 hereof. 17-2 Any variation or modification of any of the terms or conditions herein made at the request of or with the agreement of the Company and with the consent of the Authority shall not in any way determine or prejudice the Promoters' liability hereunder PROVIDED ALWAYS that such a variation or modification involving an amount in excess of XXXXXXXXX Irish Pounds shall not be made without the express consent of the Promoters and PROVIDED FURTHER that the financial amount of the Promoters' said liability shall not be increased without their express agreement in writing. 18. TERMINATION OF AGREEMENT: This Agreement shall terminate on the date being XXX years from the date of the first claim from the grant PROVIDED ALWAYS that if the Company should request and the Authority should consent to an extension of a period specified herein or in the Employment Grant Agreement of even date entered into between the parties hereto in relation to fulfillment by the Company of a condition in either Agreement the duration of this Agreement shall be extended correspondingly. 19. CANCELLATION AND REVOCATION OF GRANT: The Authority may stop payment of the grant and/or revoke and cancel or reduce the grant or so much thereof as shall not then have been actually paid to the Company if any one or more of the following events should occur:- 19-1 If there be any breach of the terms or conditions of Clause 2 and/or 9 hereof; 19-2 If the Company should to a material extent be in breach of any of the terms and conditions of this Agreement other than those specified in Clause 19-1 hereof and having failed to establish to the reasonable satisfaction of the Authority that such breach was due to force majeure and shall not have rectified such breach within 30 days after written notice thereof has been served on the Company; 19-3 If an order is made or an effective resolution is passed for the winding up of the Company except in the case of a bona fide amalgamation or reconstruction; 19-4 If a Receiver is appointed over any of the property of the Company or if a distress or execution is levied or served upon any of the property of the Company and is not paid off within 30 days; 19-5 If the Company should cease to carry on the Undertaking. If the grant be revoked, the Company and/or the Promoters shall repay to the Authority on demand all sums received in respect of the grant and if the grant be reduced in accordance with Paragraph 6 of the Schedule hereto the Company and/or the Promoters shall repay to the Authority on demand all sums received in excess of the amount of the reduced grant and in either case in default of such repayment such sums shall be recoverable by the Authority from the Company and/or the Promoters as a joint and several simple contract debt PROVIDED ALWAYS that if the Company at its option commences Phase 2 of the Undertaking, any failure by it to comply with its obligations in respect of that Phase should not be construed as, or considered to be a breach of its obligations under Phase 1 of this Agreement and PROVIDED FURTHER that it is understood by and between the parties hereto that any failure by the Company to commence Phase 2 shall not entitle the Authority to stop payment of the grant and or revoke or cancel or reduce the grant or so much thereof as shall not then have actually been paid to the Company in respect of Phase 1. 20. UNDERTAKING OF ADDITIONAL LIABILITY: If the Grant be revoked in accordance with Clause 19 hereof, the Company and the Promoters undertake to repay to the Authority on demand the sum of PoundsXXXXXXXX in addition to the sum to be repaid in accordance with Clause 19 hereof and in default of such repayment such sums shall be recoverable by the Authority from the Company and/or the Promoters as a joint and several simple contract debt. 21. GOVERNING LAW: This Agreement shall be governed by and be construed in accordance with the Laws of Ireland and the parties hereto expressly and irrevocably submit to the jurisdiction of the Irish courts and the Promoters hereby irrevocably appoint the Company to be its attorney for the purpose of accepting service on its behalf of any notice, document, or legal process with respect to the Promoters' obligations pursuant to the provisions of Clause 19 and 20 hereof (and/or Paragraph 5 of the Schedule hereto) and service of any such document on such attorney shall be deemed for all purposes to be good service. SCHEDULE 1. ELIGIBLE ASSETS & EXPENDITURE
PHASE 1 PHASE 2 1-1 Land, factory buildings building modifications and building services and facilities XXXXXXXXX XXXXXXXXX 1-2 New machinery and equipment XXXXXXXXX XXXXXXXXX Total PoundsXXXXXXXXXX PoundsXXXXXXXXX
2. THE PROVISION OF FIXED ASSETS FOR THE UNDERTAKING: The Company shall:- 2-1 Have purchased the said factory buildings for the Undertaking and have the building modifications for Phase 1 commenced to the satisfaction of the Authority not later than 1 April, 1994 and completed in a proper and satisfactory manner not later than 31 December 1996; 2-2 Purchase and have installed in a proper and workmanlike manner ready for operation in the said factory buildings all machinery and equipment suitable in all respects required for Phase 1 of the Undertaking by 31 December 1996; 2-3 Should the Company at its option decide to proceed to Phase 2 have the building modifications for Phase 2 of the Undertaking completed in a satisfactory manner not later than five years from the date hereof; 2-4 Should the Company at its option decide to proceed to Phase 2 purchase and have installed in a proper and workmanlike manner ready for operation in the said factory buildings all machinery and equipment suitable in all respects required for Phase 2 of the Undertaking not later than five years from the date hereof; 2-5 Have commenced production in the Undertaking by 1 July 1994; 3. PROMOTERS INVESTMENT: 3-1 The Company shall procure or provide for the purposes of Phase 1 of the Undertaking Equity Equivalent of IRPoundsXXXXXXXXX; For the purposes of this Agreement "Equity Equivalent" shall mean the total monies obtained by the Company as follows; 3-1-1 Cash received directly or indirectly by the Company from the Promoters in consideration for the issue at par of fully paid-up Ordinary Shares in the Company or for the issue at a premium of fully paid up Ordinary Shares in the Company PROVIDED ALWAYS that notwithstanding the provisions of Section 62 of the Companies Act 1963 no part of the funds standing to the credit of the Company's Share Premium Account (arising from the issue of shares at a premium) shall be distributed or otherwise dealt with during the term of this Agreement other than in paying up at par unissued shares in the Capital of the Company; and/or 3-1-2 Retained earnings of the Company capitalized at par as fully paid-up Ordinary Shares in the Company; and/or 3-1-3 Retained earnings of the Company transferred to a special non-distributable reserve account which shall be maintained at the appropriate level for the duration of this Agreement; and/or 3-1-4 Loans from the Promoters or wholly owned subsidiaries thereof or agreed third parties on the following terms and conditions ("Subordinated Loans"):- 3-1-4-1 That no interest on such loans shall be payable by the Company except out of profits which would otherwise be available for dividend; 3-1-4-2 That no such loans shall be repaid except out of profits of the Company which would otherwise be available for dividend or out of a new loan obtained on the same terms for this purpose, or out of the proceeds of a new issue at par of fully paid-up Ordinary Shares in the Company made for this purpose; 3-1-4-3 That where any such loans are repaid out of profits, there shall be transferred out of profits which would otherwise have been available for dividend to a special non-distributable reserve account a sum equal to the amount of the loan repaid, and that there shall be no reduction in the amount of such special non-distributable reserve account during the term of this Agreement; 3-1-4-4 That where any such loans are repaid out of a new loan obtained for this purpose, the new loan shall be subject to these conditions as if it were the original loan; 3-1-4-5 That in the event of the winding up of the Company the amount of any such loans still outstanding shall be subordinated to the claims of the unsecured creditors of the Company; PROVIDED ALWAYS that not less than 25% of the Equity Equivalent shall be Ordinary Shares in the Company as specified at sub-paragraphs 3-1-1 and/or 3-1-2 above and PROVIDED FURTHER that retained earnings utilized as Equity Equivalent as aforesaid shall not include any sum received in respect of the grant or derived from a revaluation of the fixed assets of the Company. 3-2 The Company shall procure or provide for the purposes of Phase 2 of the Undertaking Equity Equivalent of IRPoundsXXXXXXXXX; For the purposes of this Agreement "Equity Equivalent" shall mean the total monies obtained by the Company as follows: 3-2-1 Cash received directly or indirectly by the Company from the Promoters in consideration for the issue at par of fully paid-up Ordinary Shares in the Company or for the issue at a premium of fully paid up Ordinary Shares in the Company PROVIDED ALWAYS that notwithstanding the provisions of Section 62 of the Companies Act 1963 no part of the funds standing to the credit of the Company's Share Premium Account (arising from the issue of shares at a premium) shall be distributed or otherwise dealt with during the term of this Agreement other than in paying up at par unissued shares in the Capital of the Company; and/or 3-2-2 Retained earnings of the Company capitalized at par as fully paid-up Ordinary Shares in the Company; and/or 3-2-3 Retained earnings of the Company transferred to a special non- distributable reserve account which shall be maintained at the appropriate level for the duration of this Agreement; and/or 3-2-4 Loans from the Promoters or wholly owned subsidiaries thereof or agreed third parties on the following terms and conditions ("Subordinated Loans"):- 3-2-4-1 That no interest on such loans shall be payable by the Company except out of profits which would otherwise be available for divided; 3-2-4-2 That no such loans shall be repaid except out of profits of the Company which would otherwise be available for dividend or out of a new loan obtained on the same terms for this purpose, or out of the proceeds of a new issue at par of fully paid-up Ordinary Shares in the Company made for this purpose; 3-2-4-3 That where any such loans are repaid out of profits, there shall be transferred out of profits which would otherwise have been available for dividend to a special non-distributable reserve account a sum equal to the amount of the loan repaid, and that there shall be no reduction in the amount of such special non-distributable reserve account during the term of this Agreement; 3-2-4-4 That where any such loans are repaid out of a new loan obtained for this purpose, the new loan shall be subject to these conditions as if it were the original loan; 3-2-4-5 That in the event of the winding up of the Company the amount of any such loans still outstanding shall be subordinated to the claims of the unsecured creditors of the Company; PROVIDED ALWAYS that not less than 25% of the Equity Equivalent shall be Ordinary Shares in the Company as specified at sub-paragraphs 3-2-1 and/or 3-2-2 above and PROVIDED FURTHER that retained earnings utilized as Equity Equivalent as aforesaid shall not include any sum received in respect of the grant or derived from a revaluation of the fixed assets of the Company. 3-3 Such further sums, including working capital, as may be required for the Undertaking. 3-4 The total amount paid from the grant shall at no time exceed the total amount of Equity Equivalent of which at all times not less than 25% shall comprise an amount for issued Ordinary Shares in the Company as aforesaid PROVIDED ALWAYS that the Company may substitute one form of Equity Equivalent for another. 4. VARIATIONS IN CURRENCY EXCHANGE RATES: 4-1 The amounts shown in this Agreement for grant and for eligible expenditure on new machinery and equipment are based on a currency exchange rate of US$XXXX to the Irish Pound and the grant in respect of new machinery and equipment shall be adjusted upwards or downwards to take account of the actual rates prevailing on the dates of payment for the machinery and equipment PROVIDED that in the event of any eligible expenditure on such new machinery and equipment occurring after the date specified in Paragraph 2-2 and 2-4 of this Schedule no adjustment therein or in the portion of the grant applicable thereto will be made or allowed for grant purposes on account of any decrease in the value of the Irish Pound against the value of the US Dollar below that determined by the currency exchange rate prevailing on the said date specified in Paragraph 2-2 and 2-4 of this Schedule; 4-2 When the actual amount of any additional grant payable pursuant to Paragraph 4-1 above has been determined, the additional grant shall be the subject of a Supplemental Agreement between the Authority and the Company upon the same terms and conditions as those contained in this Agreement PROVIDED ALWAYS that the liability of the Authority with regard to the payment of additional grant on foot of the above shall not exceed XXX of the approved grant amount. 5. ACHIEVEMENT OF PROJECTED PERFORMANCE: Schedule of Grant Drawdown for the Undertaking PHASE 1 Period 31 Dec 1994 31 Dec 1995 31 Dec 1996 End of Yr 1 End of Yr 2 End of Yr 3 Cumulative Relevant Jobs to be Created XXX XXX XXX Maximum Cumulative Grant Drawdown XXXXXXXXX XXXXXXXXX XXXXXXXXX PHASE 2 Period 31 Dec 1997 31 Dec 1998 End of Yr 4 End of Yr 5 Cumulative Relevant Jobs to be Created XXX XXXXX Maximum Cumulative Grant Drawdown XXXXXXXXX XXXXXXXXXX
Unless otherwise agreed to be the Authority and notwithstanding any other provision in this Agreement: 5-1 The aggregate amount payable from the grant in each period set out above shall not exceed the maximum amounts specified for that period. 5-2 The maximum grant drawdown in the period to the End of Year 1 shall be available subject to compliance with the provisions of this Agreement. 5-3 Subject to compliance as aforesaid, payment from the maximum cumulative grant drawdowns in the periods to the End of Years 2, 3, 4, and 5 respectively, shall be conditional upon the cumulative number of relevant jobs (as set out above) being created by the immediately preceding End of Year; in the event of such number of relevant jobs not having been created by the relevant date no part of the grant drawdown for the following year will be paid to the Company until such number of relevant jobs has been created. 5-4 On or after 1 January, 1997, the Company and the Authority shall review the development of Phase 1 of the Undertaking to that date with particular reference to the creation of relevant jobs in the Company. Should the total number of relevant jobs existing in the Company at the date of review be less than XXX, unless otherwise agreed to by the Authority and notwithstanding any other provision in this Agreement, all grant monies paid on foot of this Agreement in excess of IRPoundsXXXXX per relevant job multiplied by the number of relevant jobs existing in the Company at the date of review shall be repayable to the Authority by the Company (and in the event of default by the Company in making repayment shall be repayable by the Promoters) by not later than three months from the date of review. 5-5 In the event that the Company has implemented Phase 2 of the Undertaking, on or after 1 January, 1999 the Company and the Authority shall review the development of the Undertaking to that date with particular reference to the creation of relevant jobs in the Company. Should the total number of relevant jobs existing in the Company at the date of review be less than XXXXX, unless otherwise agreed to by the Authority and notwithstanding any other provision in this Agreement, all grant monies paid on foot of this Agreement in excess of IRPoundsXXXXX per relevant job multiplied by the number of relevant jobs existing in the Company at the date of review shall be repayable to the Authority by the Company (and in the event of default by the Company in making repayment shall be repayable by the Promoters) by not later than three months from the date of review. For the purposes of this Paragraph, "relevant jobs" shall mean full-time permanent jobs existing in the Company at the relevant date. 6. REDUCTION OF CONTINGENT LIABILITY FOR REPAYMENT OF CAPITAL GRANT: The Company's liability for repayment of grant monies paid in respect of new machinery and equipment shall be reduced by XXX XXXXX on the date which is XXXX years from the end of the year in which the relevant payment was made and by further XXX XXXXX on each anniversary of that date PROVIDED ALWAYS that the aforesaid reduction in the Company's contingent liability for repayment of the grant in respect of new machinery and equipment shall not operate: 1. After the Company's contingent liability for grants paid in respect of new machinery and equipment has been reduced by XXX; or 2. In the event of a Receiver of Liquidator being appointed over any of the property of the Company. PROVIDED FURTHER that nothing herein shall be construed as extending the liability of the Company or the Promoters beyond the period specified in Clause 18 hereof unless the prior approval of the Company is obtained thereto. IN WITNESS whereof the parties hereto have caused their respective Seals to be affixed hereto the day and year first herein written. PRESENT when the Seal of THE INDUSTRIAL DEVELOPMENT AUTHORITY was affixed hereto:- ___________________________ Authorized Officer ___________________________ Authorized Officer PRESENT when the Seal of AST IRELAND LIMITED was affixed hereto:- ____________________________ ___________________________ SIGNED for and on behalf of AST RESEARCH, INC. by:- James L. Forquer Senior Vice President, Worldwide Operations Dated 9th day of November, 1993 INDUSTRIAL DEVELOPMENT AUTHORITY First Part AST IRELAND LIMITED Second Part - and - AST RESEARCH, INC. Third Part __________________________________________ CAPITAL GRANT AGREEMENT __________________________________________ INDUSTRIAL DEVELOPMENT AUTHORITY Wilton Park House Wilton Place Dublin 2 EX-11 7 EXHIBIT 11 AST RESEARCH, INC. COMPUTATION OF PER SHARE EARNINGS FOR THE YEARS ENDED JULY 2, 1994, JULY 3, 1993 AND JUNE 27, 1992
(In thousands, except per share amounts) 1994 1993 1992 Primary earnings (loss) per share Shares used in computing primary earnings (loss) per share: Weighted average shares of common stock outstanding 31,921 31,289 30,622 Effect of stock options treated as equivalents under the treasury stock method 627 - 1,136 Weighted average common and common equivalent shares outstanding 32,548 31,289 31,758 Net income (loss) $ 53,501 $ (53,738) $ 68,504 Earnings (loss) per share - primary $ 1.64 $ (1.72) $ 2.16 Fully diluted earnings (loss) per share Shares used in computing fully diluted earnings(loss)per share: Weighted average shares of common stock outstanding 31,921 31,289 30,622 Effect of stock options treated as equivalents under the treasury stock method 685 - 1,152 Shares assumed issued on conversion of Liquid Yield Option Notes 2,260 - - Total fully diluted shares outstanding 34,866 31,289 31,774 Net income (loss) - fully diluted earnings per share: Net income (loss) - primary earnings per share $ 53,501 $ (53,738) $ 68,504 Adjustment for interest on LYONs, net of tax 1,950 - - Adjusted net income (loss) - fully diluted earnings per share $ 55,451 $ (53,738) $ 68,504 Earnings (loss) per share - fully diluted $ 1.59 $ (1.72) $ 2.16
EX-21 8 EXHIBIT 21 LIST OF SUBSIDIARIES Jurisdiction of Name Organization AST Europe Limited United Kingdom AST Research (Far East) Limited Hong Kong AST Computer China Limited People's Republic of China AST Research France S.A.R.L. France AST Research Deutschland GmbH Germany AST Taiwan Ltd. Taiwan AST Research (Japan) K.K. Japan AST Research (Switzerland) S.A. Switzerland AST Australia Pty. Limited Australia AST Research Italia S.p.A. Italy AST Canada Inc. Canada AST Middle East Limited United Arab Emirates (Dubai) AST de Mexico S.A. de C.V. Mexico AST Benelux N.V. Belgium AST Research Spain, S.L. Spain AST Singapore Pte. Ltd. Singapore AST Sweden AB Sweden AST Denmark A/S Denmark AST Finland OY Finland AST Holdings Ireland Limited Ireland AST New Zealand Limited New Zealand AST Norway AS Norway AST Computer (BVI) Limited British Virgin Islands AST Computer (Barbados) Fsc, Inc. Barbados AST Korea Ltd. Korea AST Computer and Services (M) Sdn. Bhd. Malaysia EX-23 9 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8 Nos. 2-96552 and 33-1112) pertaining to the AST Research, Inc. Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan-1983 (As Amended) and in the related Prospectuses, in the Registration Statements (Form S-8 Nos. 33-1111 and 33-30666) pertaining to the Chief Executives' Plan (As Amended) and in the related Prospectuses, in the Registration Statements (Form S-8 Nos. 33-29345 and 33-57234) pertaining to the 1989 Long-Term Incentive Program (As Amended) and in the related Prospectuses, in the Registration Statement (Form S-8 No. 33-52482) pertaining to the Non-Employee Directors' Common Stock Purchase Warrants and 1991 Stock Option Plan for Non-Employee Directors and in the related Prospectuses, and in the Registration Statement (Form S-8 No. 33-55241) pertaining to the AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee Directors and in the related Prospectuses of our report dated July 26, 1994, with respect to the consolidated financial statements and schedules of AST Research, Inc. included in this Annual Report (Form 10-K) for the year ended July 2, 1994. Ernst & Young LLP Orange County, California September 22, 1994 EX-27 10
5 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. 1,000 YEAR JUL-02-1994 JUL-02-1994 153,118 0 343,621 17,564 333,729 865,967 159,530 56,089 1,038,312 431,493 215,294 323 0 0 383,631 1,038,312 2,367,274 2,367,274 1,985,941 1,985,941 0 9,080 9,937 79,004 25,503 53,501 0 0 0 53,501 1.64 1.59
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