-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, E2AYkbhlf+0qCGHJPiSSfqPBUmDjFTp5q5TYbwvxlxb5ysyBnp3Pq88TSrMi6Mxz zIRJz6QDDBWI7+ELS2xt/g== 0000725182-96-000014.txt : 19960624 0000725182-96-000014.hdr.sgml : 19960624 ACCESSION NUMBER: 0000725182-96-000014 CONFORMED SUBMISSION TYPE: 10-KT PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960328 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: 1231 FILING VALUES: FORM TYPE: 10-KT SEC ACT: 1934 Act SEC FILE NUMBER: 000-13941 FILM NUMBER: 96539488 BUSINESS ADDRESS: STREET 1: 16215 ALTON PKWY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7147274141 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED [X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM JULY 2, 1995 TO DECEMBER 30, 1995 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 $159,890,926 (computed using the closing price of $6.50 per share of Common Stock on March 1, 1996 as reported by NASDAQ, based on the assumption that directors and officers and more than 10% shareholders are affiliates). There were 44,685,900 shares of the registrant's Common Stock, par value $.01 per share, outstanding on March 1, 1996. __________________________ This Transition Report on Form 10-K includes certain forward-looking statements, the realization of which may be impacted by certain important factors discussed in "Additional Factors That May Affect Future Results." under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." PART I ITEM 1.BUSINESS GENERAL AST Research, Inc. ("AST" or "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, notebook and server computer systems marketed under the Advantage!(R), BravoTM, PremmiaTM, AscentiaTM, and ManhattanTM 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") and value added resellers ("VARs"). See further discussions under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Additional Factors That May Affect Future Results" therein. SIGNIFICANT BUSINESS DEVELOPMENTS IN TRANSITION PERIOD 1995 Pursuant to a Stock Purchase Agreement ("Purchase Agreement") between the Company and Samsung Electronics Co. Ltd. ("Samsung"), dated February 27, 1995, as amended, Samsung purchased 6.44 million newly issued shares of common stock from the Company, representing 19.9% of the then outstanding shares of common stock, at $19.50 per share and commenced a cash tender offer to purchase 5.82 million shares of common stock from the Company's shareholders, representing 18% of the then outstanding shares of common stock, at $22 per share. Concurrently with the acceptance of the shares for purchase under the tender offer, Samsung also purchased 5.63 million additional newly issued shares of common stock from the Company at $22 per share so that its aggregate ownership interest in the Company, after completion of all of the purchases, was approximately 40%. On July 31, 1995, the transaction was completed and the Company received net proceeds of approximately $240 million. On October 26, 1995, the Company changed its fiscal year-end from the Saturday closest to June 30 to the Saturday closest to December 31. The change was made in order to align the Company's year-end with that of its largest shareholder, Samsung. The change in fiscal year-end was effective for the six months ended December 30, 1995 ("transition period" or "transition period 1995"). On December 21, 1995, the Company signed an Additional Support Agreement with Samsung that provides additional financial support to the Company, principally including a guaranty by Samsung of a line of credit of up to $200 million through December 1997 and a vendor line of credit with Samsung of $100 million through November 1997 for component purchases. In exchange for the additional financial support, the Company issued a five-year option to Samsung to purchase 4.4 million shares of the Company's common stock at an exercise price of $.01 per share, and allowed Samsung to add a sixth member to the Company's eleven member Board of Directors. The issuance of the option, which could be exercised as early as July 1996, would increase Samsung's ownership in the Company to approximately 45%. On December 27, 1995, the Company entered into a $100 million revolving credit agreement, guaranteed by Samsung as part of the Additional Support Agreement, with a final maturity date of December 25, 1996. On March 6, 1996, the total amount available for borrowings under the facility and guaranteed by Samsung was increased to $200 million. See further discussion included in "Liquidity and Capital Resources" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In the second quarter of transition period 1995, the Company implemented a restructuring plan designed to increase its utilization of third-party board manufacturing and design and to realign its Asia Pacific manufacturing operations. In connection with this plan, the Company recorded a restructuring charge of $13.0 million. INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION The Company operates in one industry segment: the manufacture and sale of personal computers, including desktop, notebook, and server computer systems. The Company currently markets its products through retail computer dealers, consumer retailers, international and regional distributors, VADs and VARs. 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 13 of the Notes to Consolidated Financial Statements. BUSINESS STRATEGY AND MARKET The Company has recently revised its business strategy to focus on being first to bring leading-edge personal computer technology to market within the indirect sales channel, thereby positioning the Company's products to gain a competitive advantage. By concentrating its efforts on bringing new products to market first, the Company will also utilize its technological expertise, worldwide manufacturing capabilities, brand name recognition and distribution channels to offer its customers a variety of personal computers to meet diverse user needs. In support of this goal, the Company is also focusing its efforts on creating and maintaining short and flexible supply lines to become the most reliable supplier to the indirect sales channel. The Company believes that the success of this strategy depends upon the ability to identify products and product features required by customers and to design and bring to market ahead of its competitors high quality, innovative products compatible with industry standards at competitive prices. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." As new technology and faster, more powerful microprocessors have become available, the Company is concentrating its efforts on working closely with various industry leading component suppliers, including Samsung, to enable it to achieve its goal of being first to deliver new products to the indirect channel. These efforts include working together on technology issues as well as working to shorten the supply lines and making supply arrangements more flexible. In addition to its goal of becoming the most reliable supplier to the indirect sales channel, the Company is also attempting to leverage its worldwide distribution activities such that it can become the supplier of choice for the world's multinational corporations, delivering consistently high quality products worldwide. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's business strategy is focused on serving the indirect sales channel worldwide, since the Company believes that the indirect sales channel is the method by which the most users choose to purchase personal computers. The Company also believes that the indirect sales channel offers the highest level of service and support to the purchaser and will continue to play the key role in expanding the use of computers throughout the world. The foregoing forward- looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's business strategy focuses on the continued introduction of new products that are aggressively priced to highlight the price and performance advantages of the Company's products. 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. The Company intends for its products to maintain their price/performance advantage and therefore generally adjusts its prices as needed to maintain its advantage. In pursuing its business strategy, the Company has maintained its multi- channel and multi-brand distribution approach to target a variety of price points and user requirements, including the Advantage! computer product lines, which are designed for the consumer retail market; the value oriented Bravo and high performance Premmia business desktop lines; the Manhattan server line; and the Ascentia line of notebook computers. Within these multiple brands, the Company offers a variety of products, including 486-based desktop systems, high- end Pentium(R) and Pentium(R) Pro processor-based desktop systems and servers, and color notebooks. 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), OS/2(R) and Windows NTTM. The Company continues to pursue a strategy whereby its products retain their compatibility with new major industry standards as they are developed. The Company believes that its strategy of establishing a worldwide presence in countries with established markets and those with developing markets for computer products and of providing products that meet local needs, such as customized systems and local language documentation, has provided significant opportunity for revenue growth in these international markets. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In transition period 1995, international revenues increased 26% over the comparable prior year period and contributed 55% of total revenues. International revenues contributed 44%, 35% and 39% of total revenues in the fiscal years ended July 1, 1995 ("fiscal year 1995"), July 2, 1994 ("fiscal year 1994") and July 3, 1993 ("fiscal year 1993"), respectively. PRODUCTS The Company's business strategy is to be first to market with leading-edge technologies, which allows the Company's computer reseller and dealer customers to provide attractive, profitable alternatives to the Company's indirect channel competitors, as well as direct market competitors including mail order companies. The Company's products range from mobile systems to file servers under the Advantage!, Bravo, Premmia, Ascentia and Manhattan brand names. Products within these families are designed to meet multiple performance levels and price points. During fiscal year 1996, the Company intends to continue to enhance its desktop computer product lines with faster processing power and enhanced features to satisfy the complex needs of the home, small-business and corporate user. The Company also plans to expand its mobile computing solutions with high-performance, leading-edge notebook solutions and value-based consumer oriented models. In addition, the Company intends to continue to introduce new server products, technologies and computing solutions for the network environment. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Advantage! Designed for the consumer retail market, the Company's Advantage! PCs include the industry's leading educational and entertainment multimedia software titles with the latest in hardware technologies, including Intel Pentium(R) processors up to 166 MHz. Systems are configured for ease of use, complete with CD stereo, full-motion video, telephone answering and voice mail systems, high-speed fax/data modems and a selection of pre-installed software titles, which include on-line services. These enhanced information and communications systems also feature AST Works II, one of the industry's most comprehensive and easy-to-use software interfaces that combines on-screen video help, numerous productivity tools, and telephony capabilities. Bravo The Bravo desktop line is the Company's value-based price/performance leader providing entry-level to high-performance systems which are designed to handle today's business applications including word processing, electronic mail, database management, spreadsheet calculations, Computer Aided Design ("CAD"), graphics, and financial/statistical analysis. The mid-size Bravo MS series offers users both minitower and low-profile configurations which the Company believes are competitively priced with traditional desktop systems. The Bravo MS-T 6150 was the first desktop system based on Intel's Pentium(R) Pro processor to ship to the indirect channel. The Bravo LC line of business desktops features powerful Pentium(R) processors, local-bus accelerated graphics, and greater cache memory expandability. Premmia The Premmia family of personal computer systems, which are competitively priced against traditional workstations, provides customers with versatile, solution-oriented platforms to run complex applications, such as Computer Aided Design/Computer Aided Manufacturing ("CAD/CAM"), graphics and engineering programs. Supporting dual processing, 64-bit accelerated graphics, on-board accelerated 3D hardware, integrated Fast-SCSI-2 and integrated Ethernet, these systems are designated for advanced 32-bit operating system environments such as Windows NTTM and SCO UNIX. Ascentia The Company's line of Ascentia notebook computers provides traveling professionals with a wide variety of total mobile computing solutions that include the latest technologies such as full-size keyboards, large screens and long-lasting lithium ion batteries. The Ascentia 950N combines Intel's powerful 75 MHz, 90 MHz and 120 MHz Pentium(R) processors with high resolution displays, full 16-bit audio support, and up to 1.2 GB hard drives. In February 1996, the Company announced its new line of notebook products, the Ascentia P Series and Ascentia J Series notebooks. These new notebook systems incorporate leading-edge technologies, including Intel's 100-MHz and 133-MHz Pentium(R) processors and 82430MX chipset, PCI bus, high-resolution SVGA displays, 256KB of level 2 cache and CD-ROM drives on selected models, and are expected to be released in spring 1996. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Manhattan Servers The Company's Manhattan server products support a range of local area network and enterprise applications. The Company surrounds its hardware offerings with easy-to-use software management tools, specialized service programs and peripherals that are tested and optimized for the Company's systems. The Company's Manhattan P and Manhattan V mid-range multiprocessor servers meet the needs of the fast-growing client/server market with features such as Pentium(R) dual processing capability, PCI and EISA bus, FastSCSI disk controllers, RAID support options and fault tolerant features. Other Markets The Company's monitor line includes the ASTVisionTM 4I, 5L, 5M, 5V, 7L and 20H 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(R) software applications a choice of high quality displays available in various popular sizes. PRODUCT DEVELOPMENT Due to the rapid pace of advances in personal computer technology, the Company's success depends on, among other things, 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 transition period 1995, the Company's engineering and development expenses were $19,608,000. During fiscal year 1995, fiscal year 1994 and fiscal year 1993, the Company's engineering and development expenses were $36,383,000, $38,858,000 and $31,969,000, respectively. The Company's long standing relationships with major hardware and software developers such as Intel Corporation, Microsoft Corporation and Novell Inc. assist the Company in quickly bringing new technologies to the marketplace. The Company has recently placed an increased focus on working with these developers to test the compatibility of new hardware and software and to design software support programs enabling the Company to introduce products incorporating the latest hardware technology that are capable of operating the most current software available in the marketplace. The Company maintains its firm commitment 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 and also played a key role as a steering committee member in the development of the Desktop Management Interface (DMI) specification. The Company has also incorporated some of industry's latest technologies, including the Pentium(R) and Pentium(R) Pro processors and PCI bus, across all 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 the latest tools to assist in the development of new products and enable faster adaptation of the latest technologies within the manufacturing process. In addition, the Company has begun to utilize third-party printed circuit boards in the majority of its product lines in order to support its quick-to-market business strategy. MANUFACTURING The Company'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 1.30 million square feet of capacity and are located in Fort Worth, Texas, the People's Republic of China ("PRC"), Taiwan and Limerick, Ireland. During transition period 1995, the Company continued to alter its demand fulfillment strategies in an effort to realize additional manufacturing efficiencies. The Company completed the closure of its Fountain Valley, California facility in fiscal year 1995 and consolidated its manufacturing for mobile computers, a high-growth segment of the personal computer market, in the Company's Taiwan facility as part of a restructuring plan. Desktop and server products are manufactured in facilities located in Texas, Ireland, and the PRC to better serve the Americas, Europe and Asia Pacific regions' desktop and server product demand with lower costs and expedited time-to-market. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." In support of its worldwide systems manufacturing, the Company completed the closure of its Texas PCB assembly facility in fiscal year 1995 and consolidated the manufacture of PCB assemblies in Hong Kong and the PRC. In transition period 1995, the Company implemented a new restructuring plan designed to significantly increase its utilization of third-party board manufacturing and design and to realign its Asia Pacific manufacturing operations. In connection with this plan, the Company will close its Hong Kong PCB assembly operation and transfer its function to the PRC. The Company will continue to perform limited PCB assembly in the PRC and expects the realignment to be completed in the second quarter of fiscal year 1996. Despite these recent changes, the Company will continue to assess its worldwide manufacturing facilities and their capacity in an effort to continue to increase efficiencies, reduce costs and improve product deliveries. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company currently procures all of its components from outside suppliers including Samsung and its related companies. The Company's factory sites are in close proximity to many key international vendors. Source inspections are conducted at the plants of selected strategic suppliers, while some other parts are sampled for inspection upon receipt at the Company's manufacturing facilities. 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 flat panel video display screens, Dynamic Random Access Memory chips ("DRAMs"), Static Random Access Memory chips, CD-ROM drives and monitors. 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 microprocessors, video chips, core logic, lithium ion batteries, modems, Static Random Access Memory chips and Application Specific Integrated Circuits, that are currently purchased from single sources due to availability, price, quality or other considerations. Component suppliers and single source suppliers vary over time. The Company purchases components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with single source suppliers. Reliance on suppliers generally involves risks, including the possibility of defective parts, a shortage of components, an increase in component costs and disruptions in delivery of components. Should delays, defects or shortages re-occur or component costs significantly increase, the Company's net sales and profitability 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. Although no assurances can be given, the strategic relationship formed with Samsung could further reduce the risk associated with the procurement of some of these components. The Company has manufacturing capacity within the PRC which has a history of political instability. The Company attempts to reduce this potential risk through a centralized management organization coordinated within its Hong Kong operation. The Company also has manufacturing capacity in Taiwan and utilizes various notebook subcontractors in Taiwan. Political tensions between the PRC and Taiwan could adversely affect the Company's operations, particularly its notebook production. Quality and reliability are emphasized in the development, design and manufacture of the Company's products. The Company continues to focus on 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. Additional manufacturing verification and testing programs include root cause analysis, as well as customer audit programs that consist of extended diagnostic, software and early life reliability testing of products randomly taken from finished goods. The Company's goal is to continuously enhance its manufacturing procedures to include comprehensive quality management processes. In transition period 1995, the Company achieved and/or maintained certification and registration under ISO 9000, section 9002, for the quality systems used in manufacturing operations at its subsidiary in Taiwan, its service center in the United Kingdom and its manufacturing facility in Limerick, Ireland. In addition, the Company's Hong Kong manufacturing operations, which are being closed as part of a restructuring plan, have been certified and registered under ISO 9000, section 9001. The Company is currently pursuing ISO certification at its remaining non-certified locations in the PRC and at its Fort Worth, Texas facility. MARKETING AND SALES The Company employs a worldwide multi-channel indirect distribution strategy which allows it to reach a variety of customers in most major market segments. Each channel provides the Company with access to specific market and customer segments. The Company's strategy is to differentiate itself from others by being the first to bring leading-edge products to market 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, its dedication to the channel, the responsiveness of its employees, and the high level of service and support provided by the Company. Building on the Company's past success within these channels, the Company continues to focus on broadening its distribution channels to further its growth objectives. If the Company is unable to deliver leading edge products to its channel on a timely basis, its net sales and profitability will be adversely affected. The Company's worldwide sales organization is organized into three major geographical groups: the Americas, which includes the United States and Canada; Europe; and Asia Pacific, which includes Asia, the Pacific Rim and the Middle East. Americas Distribution The Company's Americas indirect distribution channels include authorized independent resellers and dealers, national reseller organizations, national and regional distributors and aggregators, systems integrators and consumer retailers. The Company sells directly and indirectly to large VADs and VARs that typically purchase personal computers and add enhancement hardware, software and service to provide the total system solution, which are then sold in a variety of vertical and horizontal markets. The Company's national reseller organization accounts 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 Ingram Micro, Merisel and Tech Data 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; Price/Costco Wholesale Club Stores; Sam's Wholesale Club and Wal- Mart Stores. Transition period 1995 Americas revenues declined 34% to $453 million from $688 million for the comparable prior year period. This overall decline occurred primarily in the Company's consumer retail channel and was the result of the Company's decision to temporarily de-emphasize this channel. Sales through the Company's VAD/VAR and consumer retail channels represented 73% and 27%, respectively, of total Americas revenues in transition period 1995. International Distribution The Company operates internationally through subsidiaries and sales offices in 48 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 expand its international business within the Europe and the Asia Pacific regions during fiscal year 1996. The Company may also pursue limited expansion plans within certain developing countries as opportunities arise. Success and profitability of international operations could be adversely affected by conditions that may not impact the Americas region, including local economic conditions, political instability, tax laws and changes in the value of the U.S. dollar. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Additional Factors That May Affect Future Results" therein. In transition period 1995, international revenues rose 26% over the comparable prior year period, from $448 million to $563 million. This increase in international revenues was attributable to the Company's broad product selection and its ability to deliver product from regionalized facilities located in Ireland, Hong Kong, Taiwan and the PRC. Europe region revenues in transition period 1995 were up 26% to $383 million from $304 million in the comparable prior year period and represented 38% and 27% of total revenues for each of the two periods, respectively. Sales in the Company's Asia Pacific region grew 25% to $180 million and accounted for 18% of total transition period 1995 worldwide revenue compared to $144 million and 13% of total revenue in the comparable prior year period. Service and Support The Company 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 provides a comprehensive collection of services for its products through its "Customer Care" program. AST Customer Care offers technical support to resellers, dealers and end-users through access to toll-free telephone lines; AST-Lifeline, an interactive technical support system that incorporates Radish Communications Systems VoiceView(R) TALK SHOPTM integrated voice and data protocol with custom AST technical support software; 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; AST Pronto! Pro, a CD-ROM based reference utility program; 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(R) 24 hour on-line information service, Prodigy(R) interactive network, America OnLine(R) service, and the bulletin board system which includes Remote Imaging Protocol (RIPscrip). The Company's support services are further augmented by the new AST InfoLINE, an interactive voice response system which includes automated problem diagnostics as well as automated fax-response diagnostics. Finally, corporate customers seeking additional software support for their systems can contact Stream International, a fee-based third-party software support organization. Parts and labor warranties on the Company's 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 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 PlusSM service program. Expedited repair of any AST notebook product anywhere in the continental United States is available under the ExeCare PlusSM service program. The Company offers the AST Premium Plus Support program 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 Plus support program features priority toll-free technical support and a video-based core service training program. Many of the Customer Care services provided in the U.S. are open to and used by the Company's customers from around the world. In addition, the Company's international subsidiaries have developed service and support programs adapted to the specific needs of local markets. With a significant installed base of system products and growth in sales throughout the Europe region, the Company has supplemented these local initiatives by establishing a centralized service and support capability within its European Operations Center in Limerick, Ireland. The European Call Center provides multi-lingual help line services and technical support to resellers, service providers and end-users throughout the region. The Company's network of over 500 ASCs and Independent Service Providers in Europe provides warranty repair and enhanced systems support services for end-users. Spare parts and repairs for the Company's Service Channel are provided by the European Logistics Center in Limerick, which utilizes express courier and freight handling companies to ensure prompt delivery of replacement parts throughout the region. Within the Asia Pacific region, 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 throughout the Asia Pacific region in more than 150 ASCs and AST authorized dealers, over 30 of which are inside the PRC. Express courier and freight handling companies are also utilized in the Asia Pacific region to ensure prompt delivery of replacement parts throughout the region. In addition, Asia Pacific 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 in the Asia Pacific region also provides comprehensive protection for notebook users through the ExeCare service program. European Resellers and Authorized Service Providers are required to participate in Training and Certification programs delivered through local subsidiaries and can also take advantage of the high level product and customer support resources of Systems and Field Engineers based in the subsidiaries. The Company maintains AST On-Line! bulletin boards in many countries in both the Europe region and the Asia Pacific region ensuring ease of access to software drivers and technical bulletins as well as providing a forum for distributing more localized information. Advertising The Company advertises its product domestically and internationally in selected computer trade, business and consumer publications and via selected broadcast and display mediums throughout the world. Through the Company's cooperative advertising programs, the Company encourages its channel partners to advertise and promote the Company's products by funding a portion of joint advertising and promotion efforts. The Company also participates in major computer and business trade shows and field seminars around the world. Beginning in fiscal year 1996, the Company is embarking on aggressive new marketing initiatives to increase demand for the Company's products including a new U.S. television advertising campaign that will be airing on selected domestic cable networks, and an outdoor advertising campaign in major U.S. cities and airports. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Major Customers During transition period 1995, no single customer accounted for more than 10% of the Company's 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. Unfilled orders can be, and often are, canceled or rescheduled to an earlier or later date 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 trademark registrations in the United States and other countries for many of its trademarks. The Company owns numerous patents and patent applications throughout the world relating to various aspects of its products. The Company 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, that extends over the life of the covered patents, which is prepaid and is being amortized over the life of the patents. The Company has a patent cross-licensing agreement with Texas Instruments Inc., that expires December 31, 2000, for which the Company makes periodic royalty payments. The Company 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. Pursuant to the Strategic Alliance Agreement with Samsung, the Company entered into a patent cross-license agreement with Samsung that expires on July 31, 2005, for which no payments are required. COMPETITION Intense competition in the personal computer industry continued during transition period 1995 and was characterized by frequent product introductions and an aggressive pricing environment. The Company's primary competitors are other computer companies that offer a full range of personal computing solutions, including IBM, Compaq Computer Corporation, Hewlett-Packard Company, Digital Equipment Corporation, Dell Computer Corporation, Gateway 2000, Inc. and Packard Bell. The Company believes that one of its competitive advantages has been and continues to be the Company's commitment to its indirect channel partners. This indirect channel focus, in addition to product branding, product line breadth and service and support, has enabled the Company's products to remain competitive within the highly competitive personal computer marketplace. The Company's new focus on being the first to bring leading-edge products to the indirect channel should further strengthen its competitive position and improve its relationship with the indirect sales channel. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The personal computer market continues to be intensely competitive. As a result, significant price reductions were required across all product lines during transition period 1995, contributing to a decline in gross profit margins. Characteristic of the past few years, the Company expects these pricing pressures to continue. The ongoing introduction of new technologies across all of the Company's product lines is intended to enable the Company to keep pace with rapid market changes and to minimize the effect of continued competitive pricing. However, there can be no assurance that the Company will have the financial resources, marketing and distribution capability, or the technological knowledge 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. European Regulations Effective December 31, 1995, all products entering the European Union ("EU") or European Economic Area ("EEA") are required to bear the CE marking. This marking signifies compliance with the harmonized Euro-Norm ("EN") standards that are required for trade within the EU/EEA as adopted by CENELEC, the European Committee for Electrotechnical Standardization. On December 31, 1995, the Electro-Magnetic Capability ("EMC") directive for Information Technology Equipment ("ITE") became a mandatory standard and all other conflicting national standards were withdrawn. The Company tests all products sold into the European community to verify compliance. The regulations also require the maintenance of a technical construction file, which generally consists of a collection of information describing the products and how they conform to the European requirements. The Company maintains this file in its Ireland manufacturing facility. All required testing for the CE mark program is performed in-house using a recently enhanced test chamber and testing site. 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 Environmental Protection Agency's Energy Star program. 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 transition period 1995. EMPLOYEES As of December 30, 1995, the Company had 6,006 employees, 3,136 of whom were employed in manufacturing, 293 in engineering and 2,577 in the areas of general management, sales, marketing and administration. Of the total, 2,372 were employed in the Company's Americas region, 2,277 were employed in the Asia Pacific region and 1,357 were employed in the Europe region. 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 and 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. There can be no assurance that this strategy will not require significant new grants or be effective in any case, particularly in the event of a prolonged decline in the price of the Company's common stock. 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, it has historically experienced seasonally higher sales in the consumer retail channel in the quarter ended in December, compared to other quarters, due to strong holiday demand for some of its products. 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 functions, the Americas region sales organization, and the product divisions. The Company owns and occupies a 212,000 square foot manufacturing facility in Fort Worth, Texas, with an adjacent 202 acres of undeveloped land. The Company leases an additional 291,000 square feet of manufacturing, engineering, and customer support and warehouse space in the Fort Worth area. The Company also leases approximately 72,000 square feet for regional sales offices and 138,000 square feet for warehouse and distribution space for its Americas sales operations. The Company is currently obligated under a ten-year lease agreement for a 246,000 square foot facility in Fountain Valley, California, which expires in 1999. This facility was closed in February 1995 as part of a restructuring plan; 101,000 square feet of the facility are being subleased with the remainder being marketed for sublease. The Company owns a 340,000 square foot manufacturing facility in Limerick, Ireland, which supplies nearly all the desktop requirements for the Europe region. In addition, the Company also leases approximately 281,000 square feet of sales, marketing, administration and warehouse facilities in various other countries throughout Europe. The Company leases an aggregate of 390,000 square feet of manufacturing space in the PRC to service the domestic PRC and other Asia Pacific region markets. The Company's Taiwanese manufacturing operations include 72,000 square feet of leased property, which includes manufacturing, warehouse and office space. In addition, the Company leases approximately 114,000 square feet for sales, marketing and administration offices and warehouse facilities in the Asia Pacific region. The Company entered into a two-year agreement for the sale and leaseback of its 68,000 square foot manufacturing facility in Hong Kong that expires in June 1996, and the Company leases an additional 67,000 and 31,000 square feet for warehouse and manufacturing activities and office space, respectively, in Hong Kong. In transition period 1995, the Company implemented a new restructuring plan designed to increase its utilization of third-party board manufacturing and design and to realign its Asia Pacific manufacturing operations. In connection with this restructuring, the Company will close its Hong Kong PCB assembly operation. The 68,000 square foot facility in Hong Kong will be closed, along with an additional 73,000 square feet of manufacturing, warehouse and office space. The Company also leases 32,000 square feet for warehouse and office space in the Middle East with an additional 182,000 square feet available for possible expansion. ITEM 3.LEGAL PROCEEDINGS 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 laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court for the Central District of California. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The September 12, 1994 complaint was filed in the United States District Court for the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was filed by a shareholder in the United States District Court for the Central District of California. The October 6, 1994 complaint named the Company and certain of its officers and directors as defendants, asserted claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures, and sought unspecified compensatory damages and related fees and costs. The cases with complaints filed on March 3, 1994, March 14, 1994 and October 6, 1994 were consolidated under the case name In re AST Research Securities Litigation. The In re AST Research Securities Litigation and Kornfeld cases were treated as related cases by the court. A settlement agreement dated August 28, 1995 was signed to end the In re AST Research Securities Litigation and Kornfeld cases, and was preliminarily approved by the court. It required the payment of $12.5 million by the defendants to the plaintiffs. Such amounts were paid in November 1995. Of the settlement amount of $12.5 million, approximately $10.4 million was funded by three insurance carriers. Final approval of the settlement was ordered by the court, but further proceedings are occurring to determine the portion of the settlement amount that will be distributed to class members. 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, relating 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 for 1987 and 1988 or current examinations of 1989, 1990 and 1991 will not have a material adverse effect on the Company's consolidated financial position or results of operations. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company has been named as a defendant or co-defendant, generally with other personal computer manufacturers, including such companies as IBM, AT&T, Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in eighteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. The claims against the Company total in excess of $100 million in compensatory damages and punitive damages and additional unspecified amounts. The Company has denied or is in the process of denying the claims and intends to vigorously defend the suits. The Company is unable at this time to predict the ultimate outcome of these suits. Ultimate resolution of the litigation against the Company may depend on progress in resolving this type of litigation overall. Before consideration of any potential insurance recoveries, 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; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. 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 insured. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 was named, along with twelve other personal computer companies, as a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the County of Merced, California. The case name for this March 27, 1995 filing is People v. Acer, et al., and the complaint alleges that the Company has engaged in deceptive advertising and unlawful business practices in relation to computer monitor screen measurements. The People v. Acer lawsuit was resolved by a Stipulated Judgment that the Company signed along with representatives of all other defendants. The Company was named, along with three other personal computer or monitor companies, as a defendant in a class action lawsuit filed on May 2, 1995 in the Superior Court for the County of Marin, California. The case name for this May 2, 1995 filing is Kaplan, et al. v. Viewsonic, et al., and alleges that the defendants have engaged in unfair business practices, false advertising and breach of implied warranty concerning the advertisement of the size of computer monitor screens. The Company was named, along with 37 other defendants, in a class action lawsuit, Long v. Packard Bell, et al., filed on August 21, 1995 in the Superior Court for the County of Orange, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with nine other defendants, in a class action lawsuit, Randy Davis, Ph.D., Inc. v. AST Research, et al., filed on August 23, 1995 in Superior Court for the County of Orange, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 35 other defendants, in a class action lawsuit, Sutter v. Acer, et al., filed on September 7, 1995 in the Superior Court for the County of Sacramento, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 41 other defendants, in a class action lawsuit, Shapiro v. ADI Systems, Inc., et al, filed on August 14, 1995 in Santa Clara County, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 29 other defendants, in a class action lawsuit, Maizes & Maizes, et al, v. Apple Computer Inc., et al, filed on December 15, 1995 in Essex County, New Jersey, which alleges certain claims concerning the advertising of the sizes of computer monitors. Management does not believe that the outcome of these disputes will have a material adverse impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company is also subject to other legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" under Item 7, "Management's Discussion and Analysis of Financial Condition and 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 December 30, 1995. 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. Set forth below are the high and low closing sales prices for the Company's common stock for the periods indicated. On October 26, 1995, the Company changed its fiscal year-end from the Saturday closest to June 30 to the Saturday closest to December 31. The change was made in order to align the Company's year-end with that of its largest shareholder, Samsung. The change in fiscal year-end was effective for the six months ended December 30, 1995. - - - -------------------------------------------------------------------------------- HIGH LOW Six months ended December 30, 1995: 1st Quarter $16 - 3/8 $10 2nd Quarter 10 - 1/16 7 - 7/8 Fiscal year ended July 1, 1995: 1st Quarter $19 - 1/4 $12 2nd Quarter 16 - 1/4 10 - 3/8 3rd Quarter 17 13 - 1/8 4th Quarter 19 - 1/8 13 - 1/2 Fiscal year ended July 2, 1994: 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 - - - -------------------------------------------------------------------------------- There were approximately 995 security holders of record as of March 1, 1996. 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 LLP, 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.
- - - --------------------------------------------------------------------------------------------------------------------------------- As of or for the As of or for the Fiscal Year Ended Six Months Ended ------------------------------------------------------------------------------ (In thousands, except December 30, July 1, July 2, July 3, June 27, June 28, per share amounts) 1995 1995 1994 1993 1992 1991 - - - --------------------------------------------------------------------------------------------------------------------------------- Net sales $ 1,016,283 $ 2,467,783 $ 2,367,274 $ 1,412,150 $ 944,079 $ 688,477 Gross profit (loss) (16,875) 245,675 347,733 285,698 293,260 248,347 Operating income (loss) (215,196) (3) (105,690) 53,989 (2) (64,578) (1) 97,526 94,083 Net income (loss) (225,006) (99,309) 31,309 (53,738) (4) 68,504 64,724 Net income (loss) per share (5) $ (5.27) $ (3.07) $ 0.96 $ (1.72) $ 2.16 $ 2.13 Shares used in computing net income (loss) per share (5) 42,721 32,371 32,548 31,289 31,758 30,413 - - - --------------------------------------------------------------------------------------------------------------------------------- Cash and short-term investments $ 125,387 $ 95,825 $ 153,118 $ 121,600 $ 140,705 $ 153,305 Working capital 223,546 306,872 444,974 301,046 (4) 332,793 282,678 Total assets 1,056,042 1,021,501 1,005,620 886,159 (4) 580,613 485,431 Long-term debt 125,540 219,224 215,294 92,258 (4) 2,431 30,110 Total shareholders' equity $ 310,882 $ 263,238 $ 361,762 $ 318,806 $ 363,267 $ 282,162 Shares outstanding at end of period 44,679 32,413 32,334 31,579 30,787 30,228 - - - ---------------------------------------------------------------------------------------------------------------------------------
(1) Includes a $125 million pretax restructuring charge. See Note 3 of Notes to Consolidated Financial Statements. (2) Includes a $12.5 million pretax credit from the reversal of excess restructuring charge amounts not utilized. See Note 3 of Notes to Consolidated Financial Statements. (3) Includes a $13 million pretax restructuring charge. See Note 3 of Notes to Consolidated Financial Statements. (4) 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 year 1994. See Note 3 of Notes to Consolidated Financial Statements. (5) Fully diluted earnings (loss) per share and shares used in computing fully diluted earnings (loss) per share were not materially different from primary earnings (loss) per share and shares used in computing primary earnings (loss) per share, except in fiscal year 1994 when such amounts were $0.95 and 34,866 shares, respectively. ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in tables in thousands, except per share amounts) The following discussion should be read in conjunction with the consolidated financial statements and notes thereto.
- - - ------------------------------------------------------------------------------------------------------------ (UNAUDITED) SIX MONTHS SIX MONTHS ENDED ENDED DECEMBER 30, DECEMBER 31, RESULTS OF OPERATIONS 1995 CHANGE 1994 - - - ------------------------------------------------------------------------------------------------------------ Net sales $ 1,016,283 (11%) $ 1,135,605 Gross profit (loss) $ (16,875) (116%) $ 103,617 Percentage of net sales (1.7%) 9.1% Operating expenses (excluding restructuring charges) $ 185,354 8% $ 171,899 Percentage of net sales 18.2% 15.1% Restructuring charges $ 12,967 100% $ - Percentage of net sales 1.3% -% Net loss $ (225,006) 268% $ (61,130) Net loss per share, fully diluted $ (5.27) 179% $ (1.89) - - - ------------------------------------------------------------------------------------------------------------
- - - ------------------------------------------------------------------------------------------------------------ FISCAL YEAR ENDED ------------------------------------------------------------------------ JULY 1, JULY 2, JULY 3, RESULTS OF OPERATIONS 1995 CHANGE 1994 CHANGE 1993 - - - ------------------------------------------------------------------------------------------------------------ Net sales $ 2,467,783 4% $ 2,367,274 68% $ 1,412,150 Gross profit $ 245,675 (29%) $ 347,733 22% $ 285,698 Percentage of net sales 10.0% 14.7% 20.2% Operating expenses (excluding restructuring charges (credits)) $ 351,365 15% $ 306,244 36% $ 225,276 Percentage of net sales 14.2% 12.9% 16.0% Restructuring charges (credits) $ - (100%) $ (12,500) (110%) $ 125,000 Percentage of net sales - (0.5%) 8.9% Net income (loss) $ (99,309) (417%) $ 31,309 158% $ (53,738) Net income (loss) per share, fully diluted $ (3.07) (423%) $ 0.95 155% $ (1.72) - - - ------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994 Net Sales Net sales for the six months ended December 30, 1995 ("transition period 1995") decreased 11% to $1.016 billion from $1.136 billion for the six months ended December 31, 1994 ("comparable prior year period"). The decrease in transition period 1995 revenues was primarily due to lower 486-based desktop and notebook system sales, partially offset by higher Pentium(R) processor-based desktop systems sales. In transition period 1995, the Company's worldwide unit shipments decreased 17% to 584,000 from 707,000 in the comparable prior year period. The decrease in revenues resulting from decreased unit shipments was partially offset by increased shipments of Pentium(R) processor-based desktop systems, which generally sell at a higher value per unit. Revenues from desktop system products decreased 2% to $753 million in transition period 1995 from $765 million in the comparable prior year period. The decrease can primarily be attributed to lower 486-based desktop system sales including the Advantage! and Bravo 486DX and 486SX systems. Also contributing to the decline was lower revenue per unit on older products as the Company sought to aggressively sell these products. These declines were partially offset by higher revenue per unit on Pentium(R) processor-based Advantage! and Bravo desktop systems. Decreased sales of the Company's 486-based desktop systems in transition period 1995 are consistent with the shift in demand toward the Pentium(R) processor-based desktop systems, which accounted for 78% of total desktop systems sales dollars and 68% of total desktop system units in transition period 1995 versus 18% and 9%, respectively, in the comparable prior year period. The Company's notebook computer product revenues decreased 28% to $168 million in transition period 1995 from $235 million in the comparable prior year period. The decrease in net sales of notebook computers reflects a 39% decrease in unit shipments to 70,000 in transition period 1995 from 115,000 in the comparable prior year period. The decline in notebook systems sales occurred in the Advantage! and Bravo notebook product lines. Declines in sales in the Company's 486-based Ascentia notebook computer line were generally offset by increased sales of Pentium(R) processor-based Ascentia notebook computers, which have higher revenue per unit. The 39% decrease in unit shipments was partially offset by higher revenue per unit on the Pentium(R) processor-based based Ascentia notebook computer line, leading to the overall notebook revenue decline of 28%. Revenues from the Company's notebook computer products represented 17% and 21% of net sales for transition period 1995 and the comparable prior year period, respectively. Americas revenues, which include the United States and Canada, decreased 34% to $453 million in transition period 1995, compared to $688 million in the comparable prior year period. Sales to the independent reseller/dealer channel for transition period 1995 decreased 24% compared to the comparable prior year period, and accounted for 73% of total Americas revenues. Sales to the consumer retail channel decreased 51% compared with the comparable prior year period due to lower Tandy branded system sales and the Company's decision to temporarily re-assess its position within the consumer retail channel. International revenues increased 26% to $563 million in transition period 1995 from $448 million in the comparable prior year period. International revenues represented 55% and 39% of net sales in transition period 1995 and the comparable prior year period, respectively. Europe region revenues increased 26% over the comparable prior year period. The United Kingdom and Sweden continued to be major contributors of total Europe region revenues with significant transition period 1995 revenue growth also occurring in France, Norway and Denmark. The Company's Ireland manufacturing facility supplied nearly all of the desktop product requirements for the Europe region. The Company believes that its localized manufacturing, centralized distribution and service operation in Limerick, Ireland has continued to contribute to its European regional growth. Revenues from the Company's Asia Pacific region, which includes Asia, the Pacific Rim, and the Middle East, combined to contribute to a 25% increase in transition period 1995 sales over the comparable prior year period. The increase in transition period 1995 sales was attributable to revenue growth in the People's Republic of China ("PRC"), Australia and Singapore. Sales into the PRC accounted for approximately 7% of the Company's total transition period 1995 revenues, compared with approximately 5% in the comparable prior year period. Although the PRC has historically provided the Company with significant revenues, 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 and political risks in the countries in this geographical area could have a corresponding impact on future sales and operating results. Economic factors such as competitive pricing, a lower margin customer mix and changes in manufacturing strategies have all impacted sales and operating results. The Company believes that these factors will continue to impact future sales and operating results. The Company experienced product development and production delays throughout transition period 1995, which in part have contributed to lower desktop and notebook systems sales. In addition, continued industrywide competitive pricing pressures have prompted aggressive pricing adjustments that have further reduced desktop and notebook system revenues. The Company anticipates that additional pricing actions will be necessary as it attempts to maintain its competitive price and performance product profile; however, there can be no assurance that future pricing actions will be effective in stimulating sales growth. The results of the Company's international operations are subject to currency fluctuations. As the value of the U.S. dollar weakens relative to other currencies, revenues from sales in those currencies convert to more U.S. dollars; conversely, when the value of the U.S. dollar strengthens relative to other currencies, revenues from sales in those countries convert to fewer U.S. dollars. The Company's net sales were increased by 2.3% in transition period 1995 compared to an increase of 2.0% in the comparable prior year period, due to fluctuations in the average value of the U.S. dollar relative to other currencies. Gross Profit (Loss) The Company's transition period 1995 gross loss was 1.7% compared to a gross profit of 9.1% in the comparable prior year period. The decrease in the Company's gross margin resulted primarily from product development and production delays which led to delays in shipment of the Company's fall product lines in transition period 1995, as well as continued intense industrywide competitive pricing pressures. In addition, gross margins were negatively impacted due to the Company's aggressive inventory reduction efforts which resulted in both lower average selling prices and lower margins. The Company's margins were also negatively impacted by increased warranty and service inventory provisions. Increased levels of service inventory reserves were required due to the continued accelerated rate of product transitions and the resulting reduction in service inventory valuations. The increase in the warranty provision was due to an increase in both the cost and volume of warranty claims compared with the prior year. The Company believes that the industry will continue to be characterized by rapid technological advances and short product life-cycles resulting in continued risk of product obsolescence. If the Company's products become technically obsolete, the Company's net sales and profitability may be adversely affected. 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 year 1996. During transition period 1995, the Company and the majority of its competitors continued to introduce new, lower-priced, higher-performance personal computers resulting in continued pricing pressures on both new and older technology products. Future pricing actions by the Company and its competitors may continue to adversely impact the Company's gross margins and profitability, which could also result in decreased liquidity and adversely affect the Company's financial position. The effect of foreign currency fluctuations on revenue has a corresponding impact on gross profit, as the Company's production costs are incurred primarily in U.S. dollars. When comparing transition period 1995 to the comparable prior year period, the U.S. dollar declined against nearly all European currencies. This period-to-period currency fluctuation resulted in an approximate two percentage point increase in gross margin in transition period 1995 compared to the comparable prior year period. If the value of the U.S. dollar strengthens in the future, gross margins of the Company will be negatively impacted. Operating Expenses
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ Selling and marketing $ 117,560 6% $ 110,413 Percentage of net sales 11.6% 9.7%
Total transition period 1995 selling and marketing expenses rose by $7.1 million and represented 11.6% of net sales, compared to 9.7% in the comparable prior period. Continued expansion into new and existing international markets, new product introductions and a greater emphasis on advertising, sales and marketing programs contributed to increased media advertising, marketing promotion, sales literature, cooperative advertising expenses and technical support costs. Beginning in fiscal year 1996, the Company is embarking on aggressive new marketing initiatives to increase demand for the Company's products including a new U.S. television advertising campaign that will be airing on selected domestic cable networks, and an outdoor advertising campaign in major U.S. cities and airports. The new marketing initiatives are expected to have a corresponding increase in selling and marketing expenses in fiscal year 1996. The foregoing forward-looking statements involve risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" herein.
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ General and administrative $ 48,186 12% $ 42,936 Percentage of net sales 4.7% 3.8%
In transition period 1995, general and administrative expenses increased in absolute dollars and as a percentage of net sales to 4.7% from 3.8% in the comparable prior year period. The increase can primarily be attributed to one- time severance payments of approximately $4.1 million to executive officers pursuant to severance compensation agreements. Also contributing to the higher costs were consulting fees incurred in connection with the preparation of the Company's turnaround plan and professional fees associated with the change in the Company's fiscal year-end.
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ Engineering and development $ 19,608 6% $ 18,550 Percentage of net sales 1.9% 1.6%
Transition period 1995 engineering and development costs increased in absolute dollars and as a percentage of net sales due to higher engineering materials expense related to new product introductions. Products introduced in transition period 1995 included additions to the Advantage!, Bravo, Premmia, Ascentia, and Manhattan product lines. The personal computer industry is characterized by increasingly rapid product life cycles. Accordingly, the Company is committed to continued investment in research and development and believes that the timely introduction of enhanced products with favorable price/performance features is critical to the Company's future growth and competitive position in the marketplace. However, 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.
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ Restructuring charge $ 12,967 100% $ - Percentage of net sales 1.3% -%
In the second quarter of transition period 1995, the Company implemented a restructuring plan designed to increase its utilization of third-party board manufacturing and design and realign its Asia Pacific manufacturing operations. As a result, the Company recorded a restructuring charge of $13.0 million during the second quarter of transition period 1995. Costs included in the restructuring charge consist primarily of employee severance, asset write-downs, vendor cancellation charges and lease write-offs for closed offices. The employee severance includes approximately 1,500 employees primarily in semi- skilled and skilled manufacturing positions. Approximately $7.6 million of the charge is expected to involve cash disbursements with the remaining costs primarily relating to reductions in net asset values. During transition period 1995, the Company incurred cash expenditures of approximately $.8 million related to severance payments to terminated employees. At December 30, 1995, approximately $12.2 million of the original restructuring accrual remained on the Company's consolidated balance sheet. The Company expects that the majority of the restructuring plan will be completed by June 1996. Although the Company believes that the restructuring activities were necessary in order to implement its strategy of increased utilization of third- party board manufacturing and to realign its Asia Pacific manufacturing operations, no assurance can be given that these restructuring actions or its strategy will be successful or that similar actions will not be required in the future. Other Income and Expense
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ Interest and other expense, net $ (9,810) 28% $ (7,656)
In transition period 1995, the Company had net interest expense of $6.0 million compared to $5.9 million in the comparable prior year period. Interest expense increased by $1.7 million as a result of higher short-term borrowings from the Company's bank revolving credit facilities as well as from short-term loans during transition period 1995, which were utilized to fund the Company's transition period 1995 operations. Also contributing to higher interest expense were higher average interest rates on those short-term borrowings as well as amortization of the Samsung credit line guaranty of $.5 million, which was recorded during transition period 1995. The increase in interest expense was partially offset by an increase in interest income of $1.6 million due to higher average cash balances during transition period 1995 due to the Samsung investment. In transition period 1995, the Company recognized net other expense of $3.8 million compared to net other expense of $1.8 million in the comparable prior year period. Other expense relates primarily to net foreign currency transaction and remeasurement gains and losses and the costs associated with the Company's foreign currency hedging activities. The increase in transition period 1995 was primarily due to losses incurred as a result of the unfavorable movement of the U.S. dollar relative to other currencies in transition period 1995 over the comparable prior year period. The Company utilizes 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." Income Tax Provision (Benefit)
- - - ------------------------------------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, 1995 Change 1994 - - - ------------------------------------------------------------------------------------------------------------ Income tax provision (benefit) $ - 100% $ (14,808) Effective tax rate -% (19.5%)
The Company recorded an effective income tax provision (benefit) rate of 0% and (19.5%) in transition period 1995 and for the comparable prior year period, respectively. The decrease in the transition period 1995 effective tax benefit rate was primarily due to the Company's provision of a 100% valuation allowance against additional deferred tax assets (including loss carryforwards) that arose during the transition period. The Company recorded net deferred tax assets of $63.5 million at December 30, 1995. Realization of the deferred tax assets, which primarily relate to net operating loss carryforwards, inventory reserves and other accrued liabilities, is dependent on the Company generating approximately $141 million of future taxable income. Although the Company is primarily relying on certain tax planning strategies to generate such future taxable income, such income could also arise from reversals of existing taxable temporary differences and/or sales of new and existing products. The timing and amount of such future taxable income may be impacted by a number of factors, including those discussed below under "Additional Factors That May Affect Future Results." To the extent that estimates of future taxable income are reduced or not realized, the amount of the deferred tax asset considered realizable could be adversely affected. FISCAL YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993 Net Sales Net sales increased to $2.468 billion in fiscal year 1995 from $2.367 billion in fiscal year 1994 and $1.412 billion in fiscal year 1993. The slight improvement in fiscal year 1995 revenues was due to higher Pentium(R) processor- based desktop systems sales partially offset by lower 386 and 486 desktop systems sales and decreased shipments of the Company's notebook system products. The Company's net sales (expressed in U.S. dollars) were also increased by 2.3% in fiscal year 1995 compared with decreases of 2.7% and 1.3% in fiscal years 1994 and 1993, 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. In fiscal year 1995, the Company's worldwide unit shipments increased 5% to 1,503,000, compared with a 78% increase in unit volume for fiscal year 1994. The Company experienced product development and production delays throughout fiscal year 1995, which in part have contributed to lower desktop and notebook systems sales. In addition, continued industrywide competitive pricing pressures prompted aggressive pricing adjustments that further reduced desktop and notebook system revenues, particularly in the domestic marketplace. Revenues from desktop system products increased 15% to $1.741 billion in fiscal year 1995 from $1.509 billion in fiscal year 1994, compared with an increase of 56% in fiscal year 1994 over fiscal year 1993. Major contributors to the improved year-over-year revenue performance included the Company's Pentium(R) processor-based desktop systems and selected 486-based desktop systems including the Advantage! and Bravo 486DX. Despite the overall increase, a decline in the fiscal year 1995 revenue growth rate compared to the prior year was primarily due to declines in Premmia 486-based and Tandy branded desktop systems sales. Decreased sales of the Company's 486-based desktop systems in fiscal year 1995 are consistent with the shift in demand toward the Pentium(R) processor-based desktop systems, which accounted for 35% of total desktop systems sales in fiscal year 1995 versus 3% in fiscal year 1994. The Company's notebook computer product revenues decreased 11% to $464 million in fiscal year 1995 from $519 million in fiscal year 1994, compared to an increase of 79% in fiscal year 1994 over fiscal year 1993. The decline in notebook revenues is primarily attributable to the expiration of two large OEM notebook agreements and the Company's decision to de-emphasize the OEM channel. The decrease in net sales of notebook computers reflects a 19% decrease in unit shipments to 218,000 in fiscal year 1995 from 268,000 in fiscal year 1994 compared to a 74% unit volume increase in fiscal year 1994 over fiscal year 1993. The fiscal year 1995 decline in notebook systems sales occurred in the Advantage!, Bravo and PowerExecTM notebook product lines, which was partially offset by a significant increase in the Ascentia notebook computer line. Revenues from the Company's notebook computer products represented 19%, 22% and 21% of net sales for fiscal years 1995, 1994 and 1993, respectively. Americas revenues, which includes the United States and Canada, decreased 10% to $1.387 billion in fiscal year 1995, compared with an increase of 81% in fiscal year 1994 over fiscal year 1993. As previously noted, the fiscal year 1995 revenue decline was due primarily to the completion of two large OEM contracts in the fourth quarter of fiscal year 1994. Total OEM channel revenues decreased to one percent of total fiscal year 1995 Americas revenues compared to 11% in fiscal year 1994 and 14% in fiscal year 1993. Sales to the independent reseller/dealer channel for fiscal year 1995 decreased 2% compared to fiscal year 1994 and accounted for 63% of total Americas revenues. Within the overall decrease in Americas revenues, sales to the consumer retail channel grew slightly, increasing 2% over the prior year compared with an increase of 218% in fiscal year 1994 over 1993. The decline in the fiscal year 1995 growth rate was attributable to lower revenues related to Tandy branded systems sales in the United States. International revenues increased 32% to $1.081 billion in fiscal year 1995 from $821 million in fiscal year 1994, compared to a 47% growth rate in fiscal year 1994 over fiscal year 1993. International revenues represented 44%, 35%, and 39% of net sales in fiscal years 1995, 1994 and 1993, respectively. Revenues for the Europe region increased 40% over the prior year, compared with an increase of 79% in fiscal year 1994 over fiscal year 1993. The United Kingdom and Sweden continued to be major contributors of total Europe region revenues with significant fiscal year 1995 revenue growth also occurring in Italy, Norway and Switzerland. Commencing during the second quarter of fiscal year 1995, the Company's Ireland manufacturing facility supplied nearly all of the desktop product requirements for the Europe region. The Company believes that it's localized manufacturing, centralized distribution and service operation in Limerick, Ireland contributed to its Europe region growth. Revenues from the Company's Asia Pacific region, which includes Asia, the Pacific Rim, and the Middle East, combined to contribute to a 17% increase in fiscal year 1995 sales, compared with an 11% increase in fiscal year 1994 sales over 1993. The increase in the fiscal year 1995 growth rate was attributable to higher revenue growth in Australia, Singapore, Taiwan and the Middle East, partially offset by a reduction in revenues into the PRC due to significantly increased competition and lower fiscal year 1995 sales to one of the Company's major customers in the PRC. Sales into the PRC accounted for approximately 5% of the Company's total fiscal year 1995 revenues, compared with approximately 6% and 11% in fiscal year 1994 and 1993, respectively. Gross Profit The Company's fiscal year 1995 gross profit margins of 10.0% declined from 14.7% in fiscal year 1994 and 20.2% in fiscal year 1993. The downward trend in gross profit margins resulted primarily from product development and production delays, manufacturing related costs associated with product transitions and continued intense industrywide competitive pricing pressures, particularly in the consumer retail sector of the market. Further contributing to reduced gross profit margins in fiscal year 1995 was the increased percentage of revenues generated by the consumer retail channel (including sales to Tandy's retail operations) which typically yields lower gross margins. The consumer retail channel increased to 37% of total fiscal year 1995 Americas revenues versus 32% in fiscal year 1994 and 19% in fiscal year 1993. During fiscal year 1995, the Company and the majority of its competitors continued to introduce new, lower-priced, higher-performance personal computers resulting in continued pricing pressures on both new and older technology products. The effect of foreign currency fluctuations 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 year 1995 to fiscal year 1994, the U.S. dollar declined against nearly all European currencies. This year-to-year currency fluctuation resulted in an approximate two percentage point gross margin increase in fiscal year 1995 results compared to fiscal year 1994, versus an approximate two percentage point reduction in fiscal year 1994 results compared to fiscal year 1993. Operating Expenses
- - - ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended ---------------------------------------------------------------- July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - ------------------------------------------------------------------------------------------------------------ Selling and marketing $ 233,524 21% $ 193,053 36% $ 141,752 Percentage of net sales 9.5% 8.2% 10.0%
Total fiscal year 1995 selling and marketing expenses rose by $40.5 million and represented 9.5% of net sales compared to 8.2% in fiscal year 1994 and 10.0% in fiscal year 1993. Expanded worldwide sales and marketing efforts in both new and existing subsidiary locations resulted in higher payroll and payroll-related expenses. Entry into new international markets, new product introductions and a greater emphasis on advertising, sales and marketing programs contributed to increased media advertising, marketing promotion, sales literature and cooperative advertising expenses.
- - - ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended ------------------------------------------------------------ July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - ------------------------------------------------------------------------------------------------------------ General and administrative $ 81,458 10% $ 74,333 44% $ 51,555 Percentage of net sales 3.3% 3.1% 3.7%
In fiscal year 1995, general and administrative expenses increased in absolute dollars and as a percentage of net sales to 3.3% from 3.1% in fiscal year 1994 and 3.7% in fiscal year 1993. During fiscal year 1995, the Company continued to expand its Asia Pacific and Europe region operations. Costs associated with this international expansion resulted in increased expenses for staffing, telephone service, insurance, and outside professional services. The Company also incurred higher legal fees due to increased litigation activity.
- - - ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended ------------------------------------------------------------- July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - ------------------------------------------------------------------------------------------------------------ Engineering and development $ 36,383 (6%) $ 38,858 22% $ 31,969 Percentage of net sales 1.5% 1.6% 2.3%
Fiscal year 1995 engineering and development costs decreased in absolute dollars and as a percentage of net sales due to lower payroll and engineering materials expense as compared to 1994. Products introduced in fiscal year 1995 included additions to the Advantage!, Bravo, Premmia, Ascentia, and Manhattan product lines. Engineering and development costs increased in absolute dollars in fiscal year 1994 as compared to fiscal year 1993 due to net additions to the Company's engineering staff and higher costs for engineering materials as the Company invested in the development of new products and in enhancements to existing products. Such costs declined as a percentage of net sales in fiscal year 1994 compared to fiscal year 1993 due to significant revenue growth in fiscal year 1994 over 1993.
- - - ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended ----------------------------------------------------------------- July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - ------------------------------------------------------------------------------------------------------------ Restructuring charges (credits) $ - (100%) $ (12,500) (110%) $ 125,000 Percentage of net sales -% (0.5%) 8.9%
In June 1993, the Company acquired certain assets and assumed certain liabilities relating to Tandy Corporation's ("Tandy") personal computer manufacturing operations and the GRiD North American and European sales divisions. On September 1, 1993, the Company also purchased certain assets and assumed certain liabilities of Tandy/GRiD France. The total purchase price (including Tandy/GRiD France) was $111.7 million and included a cash payment of $15 million and a three-year promissory note in the principal amount of $96.7 million. Restructuring charges of $125 million were recorded in June 1993 in connection with the Company's acquisition of Tandy's personal computer manufacturing and engineering operations and GRiD's North American and European sales and marketing operations. During fiscal year 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 year 1994 restructuring activities. The Company recorded a $12.5 million credit in the fourth quarter of fiscal year 1994 after concluding that most of its restructuring activities had been completed or were adequately provided for within the remaining restructuring accrual. At July 2, 1994, $15.2 million of the restructuring accrual remained on the Company's consolidated balance sheet. During fiscal year 1995, the Company completed the consolidation of its worldwide mobile computing manufacturing in Taiwan and the concurrent closure of its Fountain Valley, California manufacturing facility. During fiscal year 1995, the Company incurred cash expenditures of approximately $4.7 million related primarily to the closure of its Fountain Valley, California manufacturing facility. At July 1, 1995, approximately $10.5 million of the original restructuring accrual remained, consisting primarily of amounts provided for the net present value of minimum lease payments for facilities that have been closed and the write-down to net realizable value of related leasehold improvements. The Company believes that its restructuring activities were necessary in order to reorganize its worldwide manufacturing, engineering, sales and service operations as well as to reposition its product lines after the June 1993 acquisition of Tandy's personal computer operations. However, no assurance can be given that these restructuring actions will be successful or that similar actions will not be required in the future. Other Income and Expense
- - - ------------------------------------------------------------------------------------------------------------ Fiscal Year Ended ------------------------------------------------------------- July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - ------------------------------------------------------------------------------------------------------------ Interest and other expense, net $ (17,675) 130% $ (7,677) 1,063% $ (660)
In fiscal year 1995, the Company had net interest expense of $15.1 million compared to $7.8 million in fiscal year 1994 and net interest income of $2.1 million in fiscal year 1993. Interest expense increased as a result of the increased utilization of the Company's bank revolving credit facilities during fiscal year 1995, which were utilized to fund the Company's fiscal year 1995 operations. Interest expense for fiscal year 1995 also increased due to a full year's inclusion of interest on the Company's Liquid Yield OptionTM Notes, which were originally issued in December 1993, generating slightly less than seven months of interest expense for fiscal year 1994. Additionally, interest expense for fiscal year 1995 increased due to the increase in the interest rate on the note payable to Tandy Corporation from 3.75% to 4.94%, effective July 1994. In fiscal year 1995, the Company recognized net other expense of $2.6 million compared to net other income of $.1 million in fiscal year 1994 and net other expense of $2.7 million in fiscal year 1993. The fiscal year 1994 other income was attributable to the one-time $4.3 million pretax gain from the sale of the Company's Hong Kong manufacturing facility in June 1994. 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 utilizes 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." Income Tax Provision (Benefit)
- - - -------------------------------------------------------------------------------------------------------------- Fiscal Year Ended ------------------------------------------------------------- July 1, July 2, July 3, 1995 Change 1994 Change 1993 - - - -------------------------------------------------------------------------------------------------------------- Income tax provision (benefit) $ (24,056) (260%) $ 15,003 230% $ (11,500) Effective tax rate (19.5%) 32.4% (17.6%)
In fiscal years 1995, 1994 and 1993, the Company recorded an effective income tax provision (benefit) of (19.5%), 32.4% and (17.6%), respectively. The decrease in the fiscal year 1995 effective tax rate was attributable to changes in the proportion of income earned or losses sustained within various taxing jurisdictions and the tax rates in the locations in which those earnings or losses were generated, as well as the Company's inability to benefit certain deferred tax assets that include loss carryforwards. The increase in the fiscal 1994 effective tax rate was attributable to the one percent increase in the federal income tax rate and changes in the proportion of income earned within various taxing jurisdictions. The Company recorded net deferred tax assets of $65.6 million and $40.2 million at July 1, 1995 and July 2, 1994, respectively.
LIQUIDITY AND CAPITAL RESOURCES - - - ------------------------------------------------------------------------------------------------------------ As of or for the As of or for the Fiscal Year Ended Six Months Ended ----------------------------------------- December 30, July 1, July 2, July 3, 1995 1995 1994 1993 - - - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents $ 125,387 $ 95,825 $ 153,118 $ 121,600 Working capital 223,546 306,872 444,974 301,046 Cash provided by (used in): Operating activities (107,328) (119,774) (40,260) (68,418) Investing activities (11,849) (33,628) (35,856) 32,523 Financing activities 153,728 106,417 107,798 63,010 - - - ------------------------------------------------------------------------------------------------------------
During transition period 1995, the Company's working capital decreased $83.3 million primarily due to increases in current liabilities and a decrease in inventory. Current liabilities increased as a result of a reclassification of the note payable to Tandy Corporation from long-term debt to the current portion of long-term debt, higher accrued warranty balances due to increases in both the cost and volume of warranty claims and an increase in accrued restructuring charges related to the Company's Asia Pacific restructuring plan. These increases in current liabilities were partially offset by lower short-term borrowings. The Company had short-term borrowings of $75.0 million and $156.0 million at December 30, 1995 and July 1, 1995, respectively. In transition period 1995, the net cash used in operating activities of $107.3 million was primarily due to the Company's operating loss, partially offset by lower inventory levels and increases in certain accrued liabilities. Improvement in cash flow from operations in fiscal year 1996 is dependent upon the Company's ability to improve both its operating results and asset management ratios. Net cash used in investing activities of $11.8 million during transition period 1995 was primarily due to capital expenditures. Capital expenditures totaled $10.6 million in transition period 1995 and consisted primarily of additions to plant and production equipment at the Company's Fort Worth, Texas and Ireland manufacturing facilities. The Company expects its fiscal year 1996 capital expenditures to be somewhat greater than those incurred in transition period 1995, annualized for a full year of expenditures. The foregoing forward- looking statement involves risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" herein. Net cash provided by financing activities of $153.7 million was primarily due to the proceeds of approximately $240 million received in connection with the issuance of common stock to Samsung as part of a stock purchase agreement, partially offset by the repayment of short-term borrowings and long-term debt. The Company regularly reviews its cash funding requirements on a consolidated basis and attempts to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under any revolving credit facilities and possible future public or private debt and/or equity offerings. The Company utilizes a centralized approach for its cash management activities and attempts to maximize the use of its consolidated cash resources so as to minimize additional debt requirements while complying with any legal or other restrictions upon the free flow of funds from one segment, division or subsidiary to another. The Company invests its excess cash in investment grade short-term money market instruments. During fiscal year 1995, the Company had a $225 million revolving credit facility secured by a pledge of all of the Company's domestic U.S. assets with a final maturity date of September 30, 1996. At July 1, 1995, $116 million was outstanding as drawings under this credit facility and $67.7 million outstanding in the form of a letter of credit issued to Tandy Corporation in support of the acquisition note payable. On July 21, 1995, the Company amended the $225 million credit facility and reduced the size of the credit facility to $185 million. On August 1, 1995, the Company repaid all amounts outstanding under the $185 million credit facility and reduced the amount of the facility to $68 million. On August 28, 1995, the Company canceled the letter of credit issued to Tandy Corporation under the credit facility and terminated the credit agreement on August 31, 1995. On February 9, 1995, the Company and four of its foreign subsidiaries entered into a $50 million revolving credit agreement provided by one bank with an expiration date of August 9, 1995. As of July 1, 1995, there was $40 million outstanding as drawings under this credit facility. On July 21, 1995, the Company amended the $50 million credit facility and extended the maturity date to August 31, 1995. On August 1, 1995, the Company repaid all amounts outstanding under the $50 million credit facility and terminated the agreement. On February 27, 1995, the Company entered into a Stock Purchase Agreement ("Purchase Agreement") with Samsung providing for a significant minority ownership interest in the Company of approximately 40%. On June 30, 1995, the Company's shareholders approved the strategic investment and all regulatory approval was received as of July 1, 1995. Under the terms of the Purchase Agreement, as amended by Amendment No. 1 thereto dated June 1, 1995, and Amendment No. 2 thereto dated July 29, 1995, Samsung purchased 6.44 million newly issued shares of common stock from the Company, representing 19.9% of the then outstanding shares of common stock, at $19.50 per share and commenced a cash tender offer to purchase 5.82 million shares of common stock from the Company's shareholders, representing 18% of the then outstanding shares of common stock, at $22 per share. Concurrently with the acceptance of the shares for purchase under the tender offer, Samsung also purchased 5.63 million additional newly issued shares of common stock from the Company at $22 per share so that its aggregate ownership interest in the Company, after completion of all of the purchases, was approximately 40%. On July 31, 1995, the transaction was completed and the Company received net proceeds of approximately $240 million. The proceeds received from the Samsung investment were utilized to repay the amounts outstanding under both the $185 million and $50 million revolving credit facilities. The remaining proceeds were utilized for working capital and capital expenditure requirements. On November 22, 1995, Samsung provided a $50 million short-term loan to the Company at an interest rate of 7.3125% per annum. The Company repaid this loan on December 28, 1995 with proceeds from the credit agreement guaranteed by Samsung as part of the Additional Support Agreement, discussed below. On December 21, 1995, the Company signed an Additional Support Agreement with Samsung that provides additional financial support to the Company, principally including a guaranty by Samsung of a line of credit of up to $200 million through December 1997 and a vendor line of credit with Samsung of $100 million through November 1997 for component purchases. In exchange for the additional financial support, the Company issued an option to Samsung to purchase 4.4 million shares of the Company's common stock at an exercise price of $.01 per share, exercisable between July 1, 1996 and June 30, 2001, and allowed Samsung to add an additional member to the Company's Board of Directors. The issuance of the option increases Samsung's potential ownership in the Company to approximately 45%. The benefits received in exchange for the option were recorded in "Other assets" based on the fair value of the option at the date of issuance, or $31 million. In connection with this agreement, the Company incurred professional fees of approximately $2 million, which were also capitalized. This other asset will be amortized on a straight-line basis to interest expense over the benefit period ending December 1997. On December 27, 1995, the Company entered into a $100 million revolving credit agreement, guaranteed by Samsung as part of the Additional Support Agreement, with a final maturity date of December 25, 1996. The revolving credit agreement allows the Company to borrow at a rate of LIBOR plus .25% per annum, or the bank's reference rate, at the Company's option. The Company is required to pay a commitment fee equal to .125% per annum based on the average daily unused portion of the facility. The fee is payable quarterly in arrears. At December 30, 1995, there was $75 million outstanding as borrowings under this credit facility at an interest rate of 8.50% per annum. On March 6, 1996, the total amount available for borrowings under the facility and guaranteed by Samsung was increased to $200 million. All other terms of the credit agreement remained unchanged. 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 related to fiscal year 1995 was paid on July 11, 1995 at a rate of 4.94% per annum. The interest rate was adjusted to 5.00%, effective July 11, 1995, based on the lower of either 5% or the "lowest three month rate" within the meaning of Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995. Interest is paid once per year on July 11th and there are no sinking fund requirements. The note also required 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 was convertible, 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. Under the terms of the Stock Purchase Agreement, Samsung agreed to provide a letter of credit to support the promissory note due to Tandy Corporation replacing the Company's letter of credit and to provide funds to satisfy $75 million of the note obligation upon maturity of the note. On August 23, 1995, the Company and Tandy Corporation amended the terms of the $96.7 million promissory note. Pursuant to such amendments, the Company paid $6.7 million on August 25, 1995, thereby reducing the note balance to $90 million. Tandy allowed the substitution of a letter of guarantee from both Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. for the letter of credit previously required from the Company. Additionally, the maximum principal amount of the note that may be converted, at the option of the Company, into common stock of the Company upon maturity of the note, based upon its then fair market value as defined in the note, was reduced to $30 million. All other terms of the promissory note remained unchanged. Although the Company has made no decision as to the source of funds to be used to repay this note, or whether it will exercise its option to repay a portion of the note through the issuance of common stock, the Company currently expects to fund the repayment through cash from operations and/or through a borrowing from Samsung of up to $75 million that is available to the Company upon maturity of the note pursuant to the Stock Purchase Agreement with Samsung. On December 14, 1993, the Company issued $315 million par value of Liquid Yield Option Notes ("LYONs") due December 14, 2013 and received total proceeds of approximately $111.7 million. 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 payable in cash. There are no periodic payments of interest on the LYONs. Each $1,000 principal amount at maturity of LYONs is convertible into 12.993 shares of the Company's common stock at any time. Upon conversion of a LYON, the Company may elect to deliver shares of common stock at the conversion rate or cash equal to the market value of the shares of common stock into which the LYONs are convertible. The holder of a LYON may require the Company to purchase all or a portion of 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 based upon its then fair market value as defined in the indenture, or any combination thereof. The Company has made no decision as to whether it will meet these 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. In addition, as of 35 business days after the occurrence of any change in control of the Company occurring on or prior to December 14, 1998, each LYON will be purchased for cash by the Company, at the option of the holder, for a change in control purchase price equal to the issue price of the LYONs plus accrued original issue discount through the date set for such purchase. A change in control of the Company is deemed to have occurred under the terms of the LYONs at such time as any person, other than the Company, has become the beneficial owner of 50% or more of the Company's common stock or the Company is not the surviving corporation of any consolidation or merger of the Company. The Stock Purchase Agreement and ownership by Samsung of approximately 40% of the common stock of the Company does not have any impact on the terms of the LYON securities. In addition, the potential increase in ownership by Samsung to 45% assuming exercise of its option on 4.4 million shares of common stock as part of the Additional Support Agreement would not have any impact on the terms of the LYONs. 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 suppliers extend credit to the Company, the terms under which the Company extends credit to its customers and its ability to collect under such terms, the manner in which it finances any capital expansion, and the Company's ability to access external sources of financing. While the Company currently has adequate sources of external financing available to meet its current operating requirements, the majority of these sources of external financing are supported by a guarantee provided to the Company by Samsung. The Company has not determined what steps it will take when the existing additional support agreements terminate in December 1997. The Company believes that it will have adequate time prior to the expiration of the support agreements to arrange for new sources of external financing. The foregoing forward-looking statement involves risks and uncertainties that could cause actual results to differ materially. See "Additional Factors That May Affect Future Results" herein. However, if the Company is unable to arrange for external financing in December 1997, there would be a material adverse effect on the Company's business, financial position and results of operations. Foreign Exchange Hedging In the ordinary course of business and as part of the Company's asset and liability management, the Company enters into various types of transactions that involve contracts and financial instruments with off-balance sheet risk. The Company utilizes foreign exchange contracts and foreign currency borrowings to hedge its exposure to foreign exchange rate fluctuations impacting its U.S. dollar consolidated financial statements. 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 by utilizing a limited hedging strategy which includes the use of foreign currency borrowings, the netting of foreign currency assets and liabilities and forward exchange contracts. The actual gain or loss associated with forward exchange contracts are limited to the contract amount multiplied by the value of the exchange rate differential between the time the contract is entered into and the time it matures. The Company typically holds all of its contracts until maturity and enters forward contracts ranging in maturity dates from one to nine months. Realized and unrealized gains and losses on the forward contracts are recognized currently in the consolidated statement of operations, and any premium or discount is recognized over the life of the contract. Some foreign locations, such as the People's Republic of China ("PRC"), do not allow open market hedging of their currencies and, therefore, the Company is not able to hedge all of its exposure to foreign currency fluctuations. The Company held forward exchange contracts maturing at various dates through April 1996 with a face value of approximately $162.0 million at December 30, 1995, $162.0 million at July 1, 1995 and $143.0 million at July 2, 1994, which approximate the Company's hedgeable net monetary asset exposure to foreign currency fluctuations at those respective dates. For the transition period 1995, and for fiscal years 1995, 1994 and 1993, a net foreign currency transaction loss of $2.9 million, gain of $1.7 million, loss of $2.1 million and gain of $.6 million, respectively, is included in the caption "Other income (expense), net" in the accompanying consolidated statements of operations. Foreign currency borrowings at December 30, 1995, July 1, 1995 and July 2, 1994, totaled $4.0 million, $4.2 million and $3.8 million, respectively. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Future operating results may be impacted by a number of factors that could cause actual results to differ materially from those stated herein, which reflect management's current expectations. These factors include worldwide economic and political conditions, industry specific factors, the Company's ability to maintain access to external financing sources and its financial liquidity, the Company's ability to timely develop and produce commercially viable products at competitive prices, the availability and cost of components, the Company's ability to manage expense levels, the continued financial strength of the Company's dealers and distributors, and the Company's ability to accurately anticipate customer demand. The Company's future success will be highly dependent upon its ability to develop, produce and market products that incorporate new technology, are priced competitively and achieve significant market acceptance. There can be no assurance that the Company's products will be technically advanced or commercially successful due to the rapid improvements in computer technology and resulting product obsolescence. There is also no assurance that the Company will be able to deliver commercial quantities of new products in a timely manner. The success of new product introductions is dependent on a number of factors, including market acceptance, the Company's ability to manage risks associated with product transitions, the effective management of inventory levels in line with anticipated product demand and the timely manufacturing of products in appropriate quantities to meet anticipated demand. The Company regularly introduces new products designed to replace existing products. While the Company attempts to closely monitor new product introductions and product obsolescence, there can be no assurance that such transitions will occur without adversely affecting the Company's net sales, cash flow and profitability, as occurred in transition period 1995. In addition, if the Company is unable to successfully anticipate and manage shifts in personal computer technology, the Company's product life cycles could be negatively impacted and may continue to have a material adverse effect on the Company's net sales, cash flow and profitability. Increases in demand for personal computers have created industrywide shortages, which at times have resulted in premium prices being paid for key components, such as flat panel display screens, Dynamic Random Access Memory chips ("DRAMs"), Static Random Access Memory chips, CD-ROM drives and monitors. 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 microprocessors, video chips, core logic, modems, lithium ion batteries, Static Random Access Memory chips and Application Specific Integrated Circuits, that are currently purchased from single sources due to availability, price, quality or other considerations. The Company purchases components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with single source suppliers. Reliance on suppliers generally involves risks, including the possibility of defective parts, a shortage of components, an increase in component costs and disruptions in delivery of components. Should delays, defects or shortages re-occur or component costs significantly increase, the Company's net sales and profitability could be adversely affected. Effective July 31, 1995, the Company and Samsung entered into strategic agreements covering a broad range of commercial relationships including, among others, component supply agreements for certain critical components manufactured by Samsung and used by the Company in the manufacture of personal computers and a joint procurement agreement providing a mechanism for Samsung and the Company to coordinate their purchases from third parties in order to obtain more favorable pricing. However, as Samsung is a supplier of critical components in a highly competitive marketplace, other suppliers may be less likely to extend attractive terms to or to do business with the Company. In addition, because Samsung has other business involvements typical of large, multi-national companies and is not based in the U.S., it is possible that some additional suppliers, customers, employees and others will not react favorably to Samsung's investment in the Company. In the second quarter of transition period 1995, the Company implemented a restructuring plan designed to increase its utilization of third-party board manufacturing and design and to realign its Asia Pacific manufacturing operations. The Company's increased reliance on third-party board manufacturers involves risks, including the possibility of defective boards, a shortage of boards, an increase in board costs and disruptions in delivery of boards. Should delays, defects or shortages occur or board costs significantly increase, the Company's net sales and profitability could be adversely affected. Although the Company believes that the restructuring activities were necessary, no assurance can be given that the restructuring action will be successful or that similar action will not be required in the future. The ongoing introduction of new technologies across all of the Company's product lines is intended to enable the Company to keep pace with rapid market changes and to minimize the effect of continued competitive pricing. However, there can be no assurance that the Company will have the financial resources, marketing and distribution capability, or the technological knowledge 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. The Company participates in a highly competitive and volatile industry that is characterized by dynamic customer demand patterns, rapid introduction of new products, technological advances and product obsolescence 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 year 1996. 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. On March 21, 1996, the Company announced that it has encountered excess competitor inventory in the channel, overall lower demand for PCs and greater pricing pressures than originally anticipated through the first two months of fiscal year 1996. There can be no assurance that these trends will not continue and will not adversely impact the Company's net sales and profitability. The Company's ability to compete is largely dependent upon its financial strength and its ability to adequately fund its operations. Many of the Company's competitors are significantly larger and have significantly greater financial resources than the Company. The Company's sources of financing include cash on hand, cash provided by operations, available borrowings under its revolving credit facilities and possible future public or private debt and/or equity offerings. The Company's future success is highly dependent upon its continued access to sources of financing which it believes are necessary for the continued growth of the Company. The Company currently has a $200 million revolving credit facility guaranteed by Samsung. However, in the event the Company is unable to maintain access to its existing financing sources, there would be a material adverse effect on the Company's business, financial position and results of operations. Consistent with industry practice, the Company provides certain of its larger distributors, consumer retailers and dealers with stock re-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. Stock re-balancing and price protection credits represented 4.2% of net sales during transition period 1995, compared to 4.0% for fiscal year 1995, 2.1% in fiscal year 1994, and 2.8% in fiscal year 1993. If sales and pricing trends experienced in the current year continue or accelerate, there can be no assurance that the Company will not experience rates of return or price protection adjustments that could adversely impact on the Company's net sales and profitability in the future. The Company believes that its production capacity should be sufficient to support anticipated unit volumes for the foreseeable future. However, if the Company is unable to obtain certain key components, or to effectively forecast customer demand or manage its inventory, increased inventory obsolescence or reduced utilization of production capacity could adversely impact the Company's gross margins and results of operations. General economic conditions have an impact on the Company's business and financial results. From time to time, the markets in which the Company sells its products experience weak economic conditions that may negatively affect sales of the Company's products. Although the Company does not consider its business to be highly seasonal, it has historically experienced seasonally higher sales in the consumer retail channel in the quarter ended in December due to strong holiday demand for some of its products in certain regions. The Company's international operations are also 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 utilizing a limited hedging strategy which includes the use of foreign currency borrowings, the netting of foreign currency assets and liabilities, and forward exchange contracts. The Company's exposure to currency fluctuations will continue to increase as a result of the expansion of its international operations. Significant fluctuations in currency values could have an adverse effect on the Company's net sales, gross margins and profitability. The Company's international operations may also be affected by changes in United States trade relationships, increased competition and the economic stability of the locations in which sales occur. The Company operates in foreign locations, such as the PRC, where future sales may be dependent upon continuing favorable trade relations. Additionally, foreign locations such as the PRC and Taiwan may experience changes in their general economic stability due to such factors as increased inflation and political turmoil. Also, political tensions between the PRC and Taiwan could adversely affect the Company's operations, particularly its notebook production. Any significant change in United States trade relations or the economic or political stability of foreign locations in which the Company operates 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 is notified that certain of its products may infringe upon the intellectual property rights of others. The Company generally evaluates all such notices on a case-by-case basis to determine whether licenses are necessary or desirable. If such claims are made, there can be no assurance that licenses will be available on commercially reasonable terms or that retroactive royalty payments on sales of the Company's computer products will not be required. In addition, substantial costs may be incurred in disputing such claims. The Company believes that the actions it takes to avoid or minimize the impact to the Company of such claims are prudent; however, there can be no assurance that such claims will not occur or, if successful, would not have a material adverse effect on the Company's business operations and profitability. Pursuant to its Strategic Alliance Agreement with Samsung Electronics Co., Ltd. dated February 27, 1995, the Company has a patent cross license agreement with Samsung dated July 31, 1995 that expires on July 31, 2005. The Company's primary means of distribution continues to be third-party computer resellers and consumer retailers. While the Company continuously monitors and manages the credit it extends to its customers to limit its credit risk, the Company's business could be adversely affected in the event that the financial condition of its customers weakens. In the event of the financial failure of a major customer, the Company would experience disruptions in its distribution as well as the loss of the unsecured portion of any outstanding accounts receivable. In determining the amount of the valuation allowance required to be established against deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes", the Company has primarily relied upon its ability to generate future taxable income using certain available tax planning strategies. The amount of taxable income that could actually be generated from such tax planning strategies is dependent upon the Company being able to sell certain appreciated assets at the current estimated fair market value. Although the Company has utilized an outside valuation firm to determine the current estimated fair market value of such assets, changes in market conditions could result in a reduction of the estimated fair market value of these assets that would adversely affect the amount of the valuation allowance and reduce the amount of net deferred tax assets considered realizable. The Company's corporate headquarters facility, at which the majority of its research and development activities are conducted, is located near major earthquake faults which have experienced earthquakes in the past. While the Company does carry insurance at levels management believes to be prudent, in the event of a major earthquake or other disaster 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 competitive personal computer industry often results in significant volatility in the Company's common stock price. This Transition Report on Form 10-K contains certain forward-looking statements that are based on current expectations. In light of the important factors that can materially affect results, including those set forth above and elsewhere in this Form 10-K, the inclusion of forward-looking information herein should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. The Company may encounter competitive, technological, financial and business challenges making it more difficult than expected to continue to develop, market, manufacture and ship new products on a timely basis; competitive conditions within the personal computer industry may change adversely; demand for the Company's products may weaken; the market may not accept the Company's new products; the Company may be unable to retain existing key management personnel; inventory risks may rise due to shifts in market demand; the Company's forecasts may not accurately anticipate market demand; and there may be other material adverse changes in the Company's operations or business. Certain important factors affecting the forward looking statements made herein include, but are not limited to (i) timely identifying, designing, and delivering new products as well as enhancing existing products, (ii) implementing current restructuring plans, (iii) improving efficiencies in world wide distribution activities, (iv) predicting the significance of the indirect sales channel, (v) defending positions with the IRS and in the legal proceedings described above, (vi) accurately forecasting capital expenditures, and (vii) obtaining new sources of external financing prior to the expiration of existing support arrangements entered into with Samsung. Assumptions relating to budgeting, marketing, advertising, product development and other management decisions are subjective in many respects and thus susceptible to interpretations and periodic revisions based on actual experience and business developments, the impact of which may cause the Company to alter its marketing, capital expenditure or other budgets, which may in turn affect the Company's financial position and results of operations. ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial Statements: Report of Independent Auditors. Consolidated Balance Sheets at December 30, 1995, July 1, 1995 and July 2, 1994. Consolidated Statements of Operations for the six months ended December 30, 1995 and for the years ended July 1, 1995, July 2, 1994 and July 3, 1993. Consolidated Statements of Shareholders' Equity for the six months ended December 30, 1995 and for the years ended July 1, 1995, July 2, 1994 and July 3, 1993. Consolidated Statements of Cash Flows for the six months ended December 30, 1995 and for the years ended July 1, 1995, July 2, 1994 and July 3, 1993. 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 December 30, 1995, July 1, 1995 and July 2, 1994, and the related consolidated statements of operations, shareholders' equity, and cash flows for the six months ended December 30, 1995 and for each of the three years in the period ended July 1, 1995. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 December 30, 1995, July 1, 1995 and July 2, 1994, and the consolidated results of its operations and its cash flows for the six months ended December 30, 1995 and for each of the three years in the period ended July 1, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Orange County, California January 23, 1996, except for Note 5, as to which the date is March 6, 1996 AST RESEARCH, INC. CONSOLIDATED BALANCE SHEETS
- - - ------------------------------------------------------------------------------------------------------------ December 30, July 1, July 2, (In thousands, except share amounts) 1995 1995 1994 - - - ------------------------------------------------------------------------------------------------------------ ASSETS Current assets: Cash and cash equivalents $ 125,387 $ 95,825 $ 153,118 Accounts receivable, net of allowance for doubtful accounts of $18,629, $17,452 and $17,564 at December 30, 1995, July 1, 1995 and July 2, 1994, respectively 392,598 394,927 326,057 Inventories 252,339 311,469 333,729 Deferred income taxes 19,495 31,973 43,266 Other current assets 47,802 6,938 9,797 - - - ------------------------------------------------------------------------------------------------------------ Total current assets 837,621 841,132 865,967 Property and equipment 170,897 165,261 159,530 Accumulated depreciation and amortization (72,172) (64,006) (56,089) - - - ------------------------------------------------------------------------------------------------------------ Net property and equipment 98,725 101,255 103,441 Other assets 119,696 79,114 36,212 - - - ------------------------------------------------------------------------------------------------------------ $ 1,056,042 $ 1,021,501 $ 1,005,620 ============================================================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ 75,000 $ 156,000 $ 50,000 Accounts payable, including payable to related party of $31,562 at December 30, 1995 199,346 213,202 209,579 Accrued salaries, wages and employee benefits 19,827 17,760 21,465 Other accrued liabilities 200,639 119,689 112,096 Income taxes payable 26,902 25,189 27,455 Current portion of long-term debt 92,361 2,420 398 - - - ------------------------------------------------------------------------------------------------------------ Total current liabilities 614,075 534,260 420,993 Long-term debt 125,540 219,224 215,294 Other non-current liabilities 5,545 4,779 7,571 Commitments and contingencies Shareholders' equity: Common stock, par value $.01; 200,000,000 shares authorized, 44,679,400, 32,412,500 and 32,333,750 shares issued and outstanding at December 30, 1995, July 1, 1995 and July 2, 1994, respectively 447 324 323 Additional capital 414,735 142,208 141,424 Retained earnings (deficit) (104,300) 120,706 220,015 - - - ----------------------------------------------------------------------------------------------------------- Total shareholders' equity 310,882 263,238 361,762 - - - ----------------------------------------------------------------------------------------------------------- $ 1,056,042 $ 1,021,501 $ 1,005,620 ===========================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
- - - ------------------------------------------------------------------------------------------------------------ Six Months Ended ---------------------------------------------- December 30, July 1, July 2, July 3, (In thousands, except per share amounts) 1995 1995 1994 1993 - - - ------------------------------------------------------------------------------------------------------------ Net sales $ 1,016,283 $ 2,467,783 $ 2,367,274 $ 1,412,150 Cost of sales 1,033,158 2,222,108 2,019,541 1,126,452 - - - ------------------------------------------------------------------------------------------------------------ Gross profit (loss) (16,875) 245,675 347,733 285,698 Selling and marketing expenses 117,560 233,524 193,053 141,752 General and administrative expenses 48,186 81,458 74,333 51,555 Engineering and development expenses 19,608 36,383 38,858 31,969 Restructuring charge (credit) 12,967 - (12,500) 125,000 - - - ------------------------------------------------------------------------------------------------------------ Total operating expenses 198,321 351,365 293,744 350,276 - - - ------------------------------------------------------------------------------------------------------------ Operating income (loss) (215,196) (105,690) 53,989 (64,578) Interest income 2,631 2,362 2,125 3,341 Interest expense (8,634) (17,436) (9,937) (1,269) Other income (expense), net (3,807) (2,601) 135 (2,732) - - - ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes (225,006) (123,365) 46,312 (65,238) Income tax provision (benefit) - (24,056) 15,003 (11,500) - - - ------------------------------------------------------------------------------------------------------------ Net income (loss) $ (225,006) $ (99,309) $ 31,309 $ (53,738) ============================================================================================================ Net income (loss) per share: Primary $ (5.27) $ (3.07) $ 0.96 $ (1.72) Fully diluted $ (5.27) $ (3.07) $ 0.95 $ (1.72) ============================================================================================================ Shares used in computing net income (loss) per share: Primary 42,721 32,371 32,548 31,289 Fully diluted 42,721 32,371 34,866 31,289 ============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- - - ------------------------------------------------------------------------------------------------------------ Common Stock Additional Retained (In thousands) Shares Amount Capital Earnings - - - ------------------------------------------------------------------------------------------------------------ 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 - - - 31,309 - - - ------------------------------------------------------------------------------------------------------------ Balance at July 2, 1994 32,334 323 141,424 220,015 Exercise of stock options 79 1 784 - Net loss - - - (99,309) - - - ------------------------------------------------------------------------------------------------------------ Balance at July 1, 1995 32,413 324 142,208 120,706 Issuance of common stock to related party, net of issuance costs of $8,876 12,070 121 240,443 - Issuance of stock option to related party in exchange for additional support - - 31,045 - Exercise of stock options 196 2 1,039 - Net loss - - - (225,006) - - - ------------------------------------------------------------------------------------------------------------ Balance at December 30, 1995 44,679 $ 447 $ 414,735 $ (104,300) ============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
- - - ------------------------------------------------------------------------------------------------------------ Six Months Fiscal Year Ended Ended --------------------------------------------- December 30, July 1, July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - -------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Cash received from customers $ 1,052,845 $ 2,423,705 $ 2,274,978 $ 1,322,831 Cash paid to suppliers and employees (1,152,385) (2,537,459) (2,294,380) (1,373,528) Interest received 2,441 2,428 2,052 4,583 Interest paid (7,717) (9,937) (3,149) (1,373) Income tax refunds received 210 6,099 1,989 - Income taxes paid (913) (9,895) (22,210) (13,008) Other cash received (paid) (1,809) 5,285 460 (7,923) - - - -------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (107,328) (119,774) (40,260) (68,418) Cash flows from investing activities: Purchases of capital equipment (10,649) (26,080) (30,045) (20,894) Proceeds from disposition of capital equipment 1,611 4,474 10,673 1,146 Purchases of other assets (2,811) (12,022) (1,484) (560) Payment related to Tandy/GRiD acquisition - - (15,000) - Purchases of short-term investments - - - (35,155) Proceeds from short-term investments - - - 87,986 - - - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (11,849) (33,628) (35,856) 32,523 Cash flows from financing activities: Short-term borrowings, net (81,000) 106,000 (9,217) 58,417 Repayment of long-term debt (6,877) (391) (520) (355) Proceeds from issuance of long-term debt - 23 107,974 - Proceeds from issuance of common stock: To related party 240,564 - - - Other 1,041 785 9,561 4,948 - - - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 153,728 106,417 107,798 63,010 Effect of exchange rate changes on cash and cash equivalents (4,989) (10,308) (164) 6,611 - - - -------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 29,562 (57,293) 31,518 33,726 Cash and cash equivalents at beginning of year 95,825 153,118 121,600 87,874 - - - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 125,387 $ 95,825 $ 153,118 $ 121,600 ==========================================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- - - -------------------------------------------------------------------------------------------------------------------------- Six Months Ended ----------------------------------------- December 30, July 1, July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - -------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME (LOSS) TO NET CASH USED IN OPERATING ACTIVITIES: Net income (loss) $ (225,006) $ (99,309) $ 31,309 $ (53,738) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization 15,270 25,311 25,861 13,222 Provision (benefit) for deferred income taxes 2,047 (25,318) 8,983 (55,438) Gain on sale of capital equipment (435) (870) (4,286) - Pen-based inventory write-off - - 33,600 - Change in operating assets and liabilities, net of effects of acquisition: Accounts receivable 4,620 (58,714) (86,290) (97,059) Inventories 59,130 22,260 (19,808) (59,809) Other current assets (17,318) 12,798 3,317 (552) Accounts payable and accrued expenses 22,557 1,446 (14,093) 137,496 Income taxes payable 1,713 (2,266) (17,377) 28,230 Other current liabilities 27,187 6,546 (3,573) 19,785 Exchange (gains) losses 2,907 (1,658) 2,097 (555) - - - -------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities $ (107,328) $ (119,774) $ (40,260) $ (68,418) ==========================================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
- - - -------------------------------------------------------------------------------------------------------------------------- Six Months Fiscal Year Ended Ended -------------------------------------- December 30, July 1, July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - -------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Issuance to related party of a five-year option to purchase 4.4 million shares of common stock at an exercise price of $.01 per share principally in exchange for a guaranty on a two-year $200 million line of credit, and a two-year vendor line of $100 million $ 31,045 $ - $ - $ - ========================================================================================================================== 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 ==========================================================================================================================
See accompanying notes. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements include the accounts of AST Research, Inc. ("Company") and its wholly and majority owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Accounts denominated in foreign currencies have been remeasured into the functional currency in accordance with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," using the U.S. dollar as the functional currency. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Business The Company designs, manufactures, markets, services and supports a variety of personal computers, including desktop, notebook, and server systems marketed under the Advantage!, Bravo, Premmia, Ascentia and Manhattan brand names. Cash and Cash Equivalents Cash and cash equivalents generally consist of cash, certificates of deposit, time deposits, commercial paper, short-term government obligations and other money market instruments. The Company invests its excess cash in deposits with major international banks, 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. Fair Values of Financial Instruments Fair values of cash and cash equivalents, short-term borrowings and the current portion of long-term debt approximate cost due to the short period of time to maturity. Fair values of long-term debt are based on quoted market prices or on borrowing rates currently available to the Company for loans with similar terms or maturity. 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. The estimated fair value amounts disclosed in Note 8 have been determined by the Company using available market information. However, considerable judgment is necessary in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Changes in assumptions could significantly affect the estimates. 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 5 years Leasehold improvements Shorter of 5 years or remaining term of the lease - - - -------------------------------------------------------------------------------------------------
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Intangible Assets 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. Patents are amortized using the straight-line method over the lives of the patents. Licenses are amortized on a straight-line basis over the estimated economic lives of the related assets. During the fiscal year ended July 1, 1995, the Company elected the early adoption of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Prior to the adoption of SFAS No. 121, the carrying value of goodwill was reviewed periodically based on the undiscounted cash flows of the entity acquired over the remaining amortization period. In accordance with SFAS No. 121, long-lived assets and certain identifiable intangibles held and used by the Company will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability test is performed at a consolidated level based on undiscounted net cash flows since the assets being tested do not have identifiable cash flows that are largely independent of other asset groupings. Based upon the Company's analysis under SFAS No. 121, the Company believes that no impairment of the carrying value of its long-lived assets inclusive of goodwill existed at December 30, 1995. The Company's analysis at December 30, 1995 has been based on an estimate of future undiscounted cash flows using forecasts contained in the Company's operating plan. Should the results of the operating plan not be achieved, future analyses may indicate insufficient future undiscounted net cash flows to recover the carrying value of the Company's long-lived assets, in which case SFAS No. 121 would require the carrying value of such assets to be written down to fair value if lower than the carrying value. The Company would then be required to make a determination of the fair value of its long-lived assets. The Company is unable to predict whether any write-down would be required in such circumstances. The Company's historical results of operations and its cash flows in transition period 1995 and in fiscal years 1995, 1994 and 1993 indicate that it is at least reasonably possible that such circumstances could arise in fiscal year 1996. 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. 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. Advertising Costs Advertising costs are expensed as incurred. Advertising expense for the six months ended December 30, 1995, and for the years ended July 1, 1995, July 2, 1994 and July 3, 1993 was $32,795,000, $59,262,000, $41,138,000 and $28,582,000, respectively. 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. Deferred Grants During fiscal year 1994, the Company obtained 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. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) During the six months ended December 30, 1995, fiscal year 1995 and fiscal year 1994, the Company recorded approximately $2.1 million, $8.0 million and $5.1 million, respectively, in grant funds received or receivable. The amount deferred under these grants at December 30, 1995, July 1, 1995 and July 2, 1994 was $6.0 million, $6.7 million and $4.5 million, respectively, and is included in "Other accrued liabilities" in the accompanying consolidated balance sheets. Total grant amounts amortized into income during the six-month period ended December 30, 1995, fiscal year 1995 and fiscal year 1994 were $2.8 million, $5.8 million and $0.6 million, respectively. 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 the 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 months. At December 30, 1995, the Company also has eight years remaining on a one million Irish pounds (U.S. $1.6 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. Income Taxes The income tax provision (benefit) is computed on the pretax income (loss) of the consolidated entities located within each taxing country based on the current tax law. Deferred taxes result from the future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of SFAS No. 109, "Accounting for Income Taxes," that the ultimate realization of net deferred tax assets is more likely than not. In making such determination, the Company considers estimated future reversals of existing taxable temporary differences, estimated future earnings and available tax planning strategies. To the extent that the estimates of these items are reduced or not realized, the amount of the deferred tax assets considered realizable could be adversely affected. Incremental United States income taxes have not been provided on $84.3 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. As a result of the restructuring plan completed in the second quarter of the six- month period ended December 30, 1995 (Note 3), the Company provided for U.S. taxes on $98.9 million of undistributed foreign earnings that management believes will no longer be indefinitely reinvested in non-U.S. operations. During fiscal year 1993, the Company elected the early adoption of the asset and liability method of accounting for income taxes pursuant to SFAS No. 109, "Accounting for Income Taxes." This change had no material effect on the net loss previously reported in fiscal year 1993. Per Share Information Primary and fully diluted loss per share have been computed based upon the weighted average number of common shares outstanding. Primary net income per common share has 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, 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. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Stock Option Plans The Company follows Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"), and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company follows the practice of recording amounts received upon the exercise of options by crediting common stock and additional capital. 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. NOTE 2. CHANGE IN FISCAL YEAR-END The Company operates within a conventional 52/53 week accounting fiscal year. On October 26, 1995, the Company changed its fiscal year-end from the Saturday closest to June 30 to the Saturday closest to December 31, with the exception of certain foreign subsidiaries that will operate on a December 31 fiscal year-end. The change was made in order to align the Company's year-end with that of its largest shareholder, Samsung Electronics Co. Ltd. ("Samsung"). The change in fiscal year is effective for the six months ended December 30, 1995 ("transition period" or "transition period 1995"). Transition period 1995 included 26 weeks. The fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993 included 52, 52 and 53 weeks, respectively. The following sets forth the results of operations for the transition period ended December 30, 1995, and the unaudited results of operations for the six months ended December 31, 1994, the prior period comparable to the transition period:
- - - ------------------------------------------------------------------------------ (Unaudited) Six Months Six Months Ended Ended December 30, December 31, (In thousands, except per share amounts) 1995 1994 - - - ------------------------------------------------------------------------------ Net sales $ 1,016,283 $ 1,135,605 Gross profit (loss) (16,875) 103,617 Operating loss (215,196) (68,282) Loss before income taxes (225,006) (75,938) Income tax benefit - (14,808) Net loss (225,006) (61,130) Net loss per share $ (5.27) $ (1.89) - - - ------------------------------------------------------------------------------
NOTE 3. ACQUISITIONS AND RESTRUCTURING In June 1993, the Company acquired certain assets and assumed certain liabilities relating to Tandy Corporation's ("Tandy") personal computer manufacturing operations and the GRiD North American and European sales divisions. In September 1993, the Company also purchased certain assets and assumed certain liabilities of Tandy/GRiD France. The total purchase price (including Tandy/GRiD France) was $111.7 million and included a cash payment of $15 million and a three-year promissory note in the principal amount of $96.7 million. The acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were 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. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. ACQUISITIONS AND RESTRUCTURING (CONTINUED) Restructuring charges of $125 million were recorded in June 1993 in connection with the Company's acquisition of Tandy's personal computer manufacturing and engineering operations and GRiD's North American and European sales and marketing operations. During fiscal year 1994, the Company completed most of its restructuring activities and incurred asset write-downs of $50 million and cash expenditures of $47 million related directly to its fiscal year 1994 restructuring activities. The Company recorded a $12.5 million credit in the fourth quarter of fiscal year 1994 after concluding that most of its restructuring activities had been completed or were adequately provided for within the remaining restructuring accrual. At July 2, 1994, $15.2 million of restructuring accrual remained on the Company's consolidated balance sheet. During fiscal year 1995, the Company completed the consolidation of its worldwide mobile computing manufacturing in Taiwan and the concurrent closure of its Fountain Valley, California manufacturing facility. During fiscal year 1995, the Company incurred cash expenditures of approximately $4.7 million related primarily to the closure of its Fountain Valley, California manufacturing facility. At July 1, 1995, approximately $10.5 million of the original restructuring accrual remained on the Company's consolidated balance sheet. During transition period 1995, the Company incurred cash expenditures of approximately $1.3 million related primarily to the closure of its Fountain Valley, California manufacturing facility and at December 30, 1995, $9.2 million of the restructuring accrual remained on the Company's consolidated balance sheet. The remaining accrual consists of amounts provided for the net present value of minimum lease payments for facilities that have been closed and the write-down to net realizable value of related leasehold improvements being disposed of. The Company believes that these restructuring activities were necessary in order to reorganize its worldwide manufacturing, engineering, sales and service operations as well as reposition its product lines after the June 1993 acquisition of Tandy's personal computer operations. In the second quarter of transition period 1995, the Company implemented a restructuring plan, separate and apart from the June 1993 charge, designed to increase its utilization of third party board manufacturing and design and to realign its Asia Pacific manufacturing operations. In accordance with this plan, the Company recorded a restructuring charge of $13.0 million. Costs included in the restructuring charge consist primarily of employee severance, asset write-downs, vendor cancellation charges and lease write-offs for closed offices. The employee severance will include approximately 1,500 employees primarily in semi-skilled and skilled manufacturing positions. Approximately $7.6 million of the charge is expected to involve cash disbursements with the remaining costs primarily relating to reductions in net asset values. During transition period 1995, the Company incurred cash expenditures of approximately $.8 million related to severance payments to terminated employees. At December 30, 1995, approximately $12.2 million of the original restructuring accrual remained on the Company's consolidated balance sheet. Although the Company believes that the restructuring activities were necessary, no assurance can be given that these restructuring actions will be successful or that similar actions will not be required in the future. NOTE 4. COMPOSITION OF SELECTED BALANCE SHEET ACCOUNTS Inventories Inventories consist of the following:
- - - -------------------------------------------------------------------------------- December 30, July 1, July 2, (In thousands) 1995 1995 1994 - - - -------------------------------------------------------------------------------- Purchased parts $ 73,012 $ 67,296 $ 99,959 Work in process 33,823 36,686 53,765 Finished goods 145,504 207,487 180,005 - - - -------------------------------------------------------------------------------- Total $ 252,339 $ 311,469 $ 333,729 ================================================================================
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. COMPOSITION OF SELECTED BALANCE SHEET ACCOUNTS (CONTINUED) Property and Equipment Property and equipment consists of the following:
- - - -------------------------------------------------------------------------------- December 30, July 1, July 2, (In thousands) 1995 1995 1994 - - - -------------------------------------------------------------------------------- Land $ 15,961 $ 15,961 $ 15,729 Buildings 34,253 34,824 35,547 Machinery and equipment 93,990 88,476 84,004 Furniture and fixtures 13,519 12,860 11,926 Leasehold improvements 13,174 13,140 12,324 - - - -------------------------------------------------------------------------------- Total $ 170,897 $ 165,261 $ 159,530 ================================================================================
Other Assets Other assets consist of the following:
- - - -------------------------------------------------------------------------------------------------------- December 30, July 1, July 2, (In thousands) 1995 1995 1994 - - - -------------------------------------------------------------------------------------------------------- Deferred income taxes $ 44,016 $ 33,585 $ - Credit line guaranty, less accumulated amortization of $506 at December 30, 1995 32,519 - - Goodwill, less accumulated amortization of $8,218, $6,615 and $3,479 at December 30, 1995, July 1, 1995 and July 2, 1994, respectively 24,250 25,853 29,220 Patents, licenses and other intangibles, less accumulated amortization of $3,672, $2,130 and $436 at December 30, 1995, July 1, 1995 and July 2, 1994, respectively 10,890 11,382 1,179 Other, net 8,021 8,294 5,813 - - - -------------------------------------------------------------------------------------------------------- Total $ 119,696 $ 79,114 $ 36,212 ========================================================================================================
Other Current Accounts Prepaid value added taxes of $22.2 million were included in "Other current assets," and amounts payable for value added taxes of $45.3 million were included in "Other accrued liabilities" at December 30, 1995. NOTE 5. FINANCING ARRANGEMENTS On December 27, 1995, the Company entered into a $100 million revolving credit agreement, guaranteed by Samsung as part of the Additional Support Agreement (Note 7), with a final maturity date of December 25, 1996. The revolving credit agreement allows the Company to borrow at a rate of LIBOR plus .25% per annum, or the bank's reference rate, at the Company's option. The Company is required to pay a commitment fee equal to .125% per annum based on the average daily unused portion of the facility. The fee is payable quarterly in arrears. At December 30, 1995, there was $75 million outstanding as borrowings under this credit facility at an interest rate of 8.50% per annum. The weighted average interest rate on total short-term borrowings as of December 30, 1995, July 1, 1995 and July 2, 1994 was 8.50%, 8.22% and 7.01%, respectively. On March 6, 1996, the total amount available for borrowings under the facility and guaranteed by Samsung was increased to $200 million. All other terms of the credit agreement remained unchanged. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. LONG-TERM DEBT Long-term debt consists of the following:
- - - ----------------------------------------------------------------------------------------------------------------------- December 30, July 1, July 2, (In thousands) 1995 1995 1994 - - - ---------------------------------------------------------------------------------------------------------------------- Liquid Yield Option Notes (zero coupon convertible subordinated notes) due 2013, less original issue discount of $191,063, $194,232 and $200,334, at December 30, 1995, July 1, 1995 and July 2, 1994, respectively, 5.25% yield to maturity $ 123,937 $ 120,768 $ 114,666 Promissory note payable, interest due annually at current rate of 5.00%, principal due July 1996 90,000 96,720 96,720 Other notes payable due in various installments through April 2002 3,964 4,156 4,306 - - - ---------------------------------------------------------------------------------------------------------------------- 217,901 221,644 215,692 Less current portion of long-term debt (92,361) (2,420) (398) - - - ---------------------------------------------------------------------------------------------------------------------- Long-term debt $ 125,540 $ 219,224 $ 215,294 ======================================================================================================================
On December 14, 1993, the Company issued $315 million par value of Liquid Yield Option Notes ("LYONs") due December 14, 2013 and received total proceeds of approximately $111.7 million. 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 payable in cash. There are no periodic payments of interest on the LYONs. Each $1,000 principal amount at maturity of LYONs is convertible into 12.993 shares of the Company's common stock at any time. Upon conversion of a LYON, the Company may elect to deliver shares of common stock at the conversion rate or cash equal to the market value of the shares of common stock into which the LYONs are convertible. The holder of a LYON may require the Company to purchase all or a portion of 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 based upon its then fair market value as defined in the indenture, or any combination thereof. The Company has made no decision as to whether it will meet these 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. In addition, as of 35 business days after the occurrence of any change in control of the Company occurring on or prior to December 14, 1998, each LYON will be purchased for cash by the Company, at the option of the holder, for a change in control purchase price equal to the issue price of the LYONs plus accrued original issue discount through the date set for such purchase. A change in control of the Company is deemed to have occurred under the terms of the LYONs at such time as any person, other than the Company, has become the beneficial owner of 50% or more of the Company's common stock or the Company is not the surviving corporation of any consolidation or merger of the Company. The Stock Purchase Agreement and ownership by Samsung of approximately 40% of the common stock of the Company (Note 7) does not have any impact on the terms of the LYON securities. In addition, the potential increase in ownership by Samsung to 45% assuming exercise of its option on 4.4 million shares of common stock (Note 7) would not have any impact on the terms of the LYONs. 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 related to fiscal year 1995 was paid on July 11, 1995 at a rate of 4.94% per annum. The interest rate was adjusted to 5.00%, effective July 11, 1995, based on the lower of either 5% or the "lowest three month rate" within the meaning of Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995. Interest is paid once per year on July 11th and there are no sinking fund requirements. The note also required 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 was convertible, 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. Under the terms of the Stock Purchase Agreement (Note 7), Samsung agreed to provide a letter of credit to support the promissory note due to Tandy Corporation replacing the Company's letter of credit and to provide funds to satisfy $75 million of the note obligation upon maturity of the note. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. LONG-TERM DEBT (CONTINUED) On August 23, 1995, the Company and Tandy Corporation amended the terms of the $96.7 million promissory note. Pursuant to such amendments, the Company paid $6.7 million on August 25, 1995, thereby reducing the note balance to $90 million. Tandy allowed the substitution of a letter of guarantee from both Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. for the letter of credit previously required from the Company. Additionally, the maximum principal amount of the note that may be converted, at the option of the Company, into common stock of the Company upon maturity of the note, based upon its then fair market value as defined in the note, was reduced to $30 million. All other terms of the promissory note remained unchanged. Principal repayments on long-term debt required in fiscal years 1996, 1997, 1998, 1999 and 2000 are $92,361,000, $307,000, $302,000, $302,000 and $302,000, respectively. NOTE 7. SHAREHOLDERS' EQUITY TRANSACTIONS On February 27, 1995, the Company entered into a Stock Purchase Agreement ("Purchase Agreement") with Samsung providing for a significant minority ownership interest in the Company of approximately 40%. On June 30, 1995, the Company's shareholders approved the strategic investment and all regulatory approval was received as of July 1, 1995. Under the terms of the Purchase Agreement, as amended by Amendment No. 1 thereto dated June 1, 1995, and Amendment No. 2 thereto dated July 29, 1995, Samsung purchased 6.44 million newly issued shares of common stock from the Company, representing 19.9% of the then outstanding shares of common stock, at $19.50 per share and commenced a cash tender offer to purchase 5.82 million shares of common stock from the Company's shareholders, representing 18% of the then outstanding shares of common stock, at $22 per share. Concurrently with the acceptance of the shares for purchase under the tender offer, Samsung also purchased 5.63 million additional newly issued shares of common stock from the Company at $22 per share so that its aggregate ownership interest in the Company, after completion of all of the purchases, was approximately 40%. On July 31, 1995, the transaction was completed and the Company received net proceeds of approximately $240 million. On December 21, 1995, the Company signed an Additional Support Agreement with Samsung that provides additional financial support to the Company, principally including a guaranty by Samsung of a line of credit of up to $200 million through December 1997 and a vendor line of credit with Samsung of $100 million through November 1997 for component purchases. In exchange for the additional financial support, the Company issued an option to Samsung to purchase 4.4 million shares of the Company's common stock at an exercise price of $.01 per share, exercisable between July 1, 1996 and June 30, 2001, and allowed Samsung to add an additional member to the Company's Board of Directors. The issuance of the option increases Samsung's potential ownership in the Company to approximately 45%. The benefits received in exchange for the option were recorded in "Other assets" based on the fair value of the option at the date of issuance, or $31 million. In connection with this agreement, the Company incurred professional fees of approximately $2 million, which were also capitalized. This other asset will be amortized on a straight-line basis to interest expense over the benefit period ending December 1997. During transition period 1995, approximately $.5 million was amortized to interest expense. NOTE 8. FINANCIAL INSTRUMENTS Foreign Currency Contracts In the ordinary course of business and as part of the Company's asset and liability management, the Company enters into various types of transactions that involve contracts and financial instruments with off-balance sheet risk. The Company utilizes foreign exchange contracts and foreign currency borrowings to hedge its exposure to foreign exchange rate fluctuations impacting its U.S. dollar consolidated financial statements. 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 by utilizing a limited hedging strategy which includes the use of foreign currency borrowings, the netting of foreign currency assets and liabilities and forward exchange contracts. The actual gain or loss associated with forward exchange contracts are limited to the contract amount multiplied by the value of the exchange rate differential between the time the contract is entered into and the time it matures. The Company typically holds all of its contracts until maturity and enters forward contracts ranging in maturity dates from one AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. FINANCIAL INSTRUMENTS (CONTINUED) to nine months. Realized and unrealized gains and losses on the forward contracts are recognized currently in the consolidated statement of operations, and any premium or discount is recognized over the life of the contract. Some foreign locations, such as the People's Republic of China ("PRC"), do not allow open market hedging of their currencies and, therefore, the Company is not able to hedge all of its exposure to foreign currency fluctuations. The Company held forward exchange contracts maturing at various dates through April 1996 with a face value of approximately $162.0 million at December 30, 1995, $162.0 million at July 1, 1995 and $143.0 million at July 2, 1994, which approximate the Company's hedgeable net monetary asset exposure to foreign currency fluctuations at those respective dates. For the transition period ended December 30, 1995, and for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993, a net foreign currency transaction loss of $2.9 million, gain of $1.7 million, loss of $2.1 million and gain of $.6 million, respectively, is included in the caption "Other income (expense), net" in the accompanying consolidated statements of operations. Foreign currency borrowings at December 30, 1995, July 1, 1995 and July 2, 1994, totaled $4.0 million, $4.2 million and $3.8 million, respectively. Fair Values of Financial Instruments The estimated fair values of financial instruments are as follows:
- - - ------------------------------------------------------------------------------------------------------------------- December 30, 1995 July 1, 1995 July 2,1994 ------------------------ ----------------------- ---------------------- Carrying Estimated Carrying Estimated Carrying Estimated (In thousands) Amount Fair Value Amount Fair Value Amount Fair Value - - - ------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 125,387 $ 125,387 $ 95,825 $ 95,825 $ 153,118 $ 153,118 Short-term borrowings (75,000) (75,000) (156,000) (156,000) (50,000) (50,000) Current portion of long-term debt (92,361) (92,361) (2,420) (2,420) (398) (398) Long-term debt: Liquid Yield Option Notes (123,937) (107,100)(a) (120,768) (103,950)(a) (114,666) (91,350)(a) Other (1,603) (1,603) (98,456) (98,456) (100,628) (100,628) Forward exchange contract liability (370) (370) (611) (611) (4,830) (4,830) - - - -------------------------------------------------------------------------------------------------------------------
(a) Based on quoted market price as required by SFAS No. 107, "Disclosures about Fair Value of Financial Instruments." While the Company's Liquid Yield Option Notes ("LYONs") are publicly traded debt instruments (NASDAQ symbol "ASTAL"), actual trading volume in the LYONs has been very small and the Company does not believe that prices quoted by the NASDAQ National Market System accurately reflect the true cost of repurchasing the LYONs. The Company also does not believe that a significant number of LYONs would be available for sale at prices quoted on the NASDAQ System. There are a total of 315,000 par value LYONs issued and outstanding at December 30, 1995. Additionally, under the terms of the LYONs, the holder of a LYON may require the Company to purchase its LYONs on the Purchase Dates, as defined, or 35 business days after the occurrence of any change in control of the Company (Note 6), at a price equal to the original issue price plus accrued original issue discount through each such date. Therefore, while the quoted market price of the LYONs can vary due to changes in the Company's common stock price impacting the value assigned to the conversion feature of the LYONs, the Company believes that a better representation of the estimated fair value of the debt associated with the LYONs is equal to the original issue price of the LYONs plus the accrued original issue discount at the stated rate of 5.25%, compounded semi-annually. Thus, the Company believes a better estimate of the fair value of the LYONs at December 30, 1995, July 1, 1995 and July 2, 1994 is $123.9 million, $120.8 million and $114.7 million, respectively. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8. FINANCIAL INSTRUMENTS (CONTINUED) Concentrations of Credit Risk The Company's foreign exchange instruments, along with cash and cash equivalents and accounts receivable, involve elements of market and credit risk. The counterparties to financial instruments consist of a number of major financial institutions. In addition to limiting the amount of agreements and contracts it enters into with any one party, the Company monitors the credit quality of the financial institutions which are counterparties to these financial instruments. The Company does not believe that there is significant risk of nonperformance by the counterparties. The Company distributes its products through various distribution channels, including independent resellers, dealers, national distributors, national reseller organizations, 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 in certain European countries and into the PRC are to a more limited customer base comprised primarily of larger entities which may be affected by, among other things, the economic conditions and/or political occurrences within the region. Sales into the PRC for transition period 1995, fiscal year 1995, fiscal year 1994 and fiscal year 1993 accounted for approximately 7%, 5%, 6% and 11%, respectively, of the Company's total revenues. 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 affected by changes or conditions impacting these industries. Credit limits, credit insurance, ongoing credit evaluations and account monitoring procedures are utilized to various degrees to attempt to reduce the risk of loss on the Company's accounts receivable. No single customer accounted for more than 10% of the Company's net sales for transition period 1995, or for fiscal years 1995, 1994 or 1993. NOTE 9. INCOME TAXES The income tax provision (benefit) is based on income (loss) before income taxes as follows:
- - - ------------------------------------------------------------------------------------- Six Months Fiscal Year Ended Ended -------------------------------------- December 30, July 1, July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - ------------------------------------------------------------------------------------- U.S. $ (139,438) $ (103,930) $ 16,534 $ (63,255) Foreign (85,568) (19,435) 29,778 (1,983) - - - ------------------------------------------------------------------------------------- $ (225,006) $ (123,365) $ 46,312 $ (65,238) =====================================================================================
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) The components of the income tax provision (benefit) are as follows:
- - - --------------------------------------------------------------------------------- Six Months Fiscal Year Ended Ended ------------------------------------ December 30, July 1 , July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - --------------------------------------------------------------------------------- Current: Federal $ 2,033 $ (700) $ (2,781) $ 36,461 State 107 (124) (201) 1,116 Foreign (4,187) 2,086 9,002 6,361 - - - --------------------------------------------------------------------------------- (2,047) 1,262 6,020 43,938 - - - --------------------------------------------------------------------------------- Deferred: Federal (249) (19,971) 8,532 (54,424) State (50) (3,722) 105 (3,108) Foreign 2,346 (1,625) 346 2,094 - - - --------------------------------------------------------------------------------- 2,047 (25,318) 8,983 (55,438) - - - --------------------------------------------------------------------------------- $ - $ (24,056) $ 15,003 $ (11,500) =================================================================================
Deferred taxes 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. Temporary differences and carryforwards which give rise to a significant portion of deferred tax assets and liabilities as of December 30, 1995, July 1, 1995 and July 2, 1994 are as follows:
- - - ----------------------------------------------------------------------------------------------------------------------- December 30, 1995 July 1, 1995 July 2,1994 ---------------------- ----------------------- ----------------------- (In thousands) Assets Liabilities Assets Liabilities Assets Liabilities - - - ----------------------------------------------------------------------------------------------------------------------- Inventory reserves $ 12,726 $ - $ 11,178 $ - $ 16,968 $ - Accrued liabilities 14,367 - 14,834 - 14,224 - Undistributed foreign earnings, net of foreign tax credit - (21,976) - - - - Restructuring charge 3,671 - 4,055 - 5,365 - Warranty reserves 9,868 - 4,857 - 5,201 - State income taxes - (1,031) - (1,750) - (914) Goodwill and intangibles amortization - (1,441) - (1,762) - (2,524) Net operating loss carryforwards 147,684 - 72,362 - 27,366 - Other 14,488 (244) 10,488 (422) 9,352 (274) - - - ----------------------------------------------------------------------------------------------------------------------- Total deferreds 202,804 (24,692) 117,774 (3,934) 78,476 (3,712) Valuation allowance (114,601) - (48,282) - (34,524) - - - - ----------------------------------------------------------------------------------------------------------------------- $ 88,203 $ (24,692) $ 69,492 $ (3,934) $ 43,952 $ (3,712) =======================================================================================================================
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) The Company has established a valuation allowance against its deferred tax assets at December 30, 1995, July 1, 1995 and July 2, 1994 of $114.6 million, $48.3 million and $34.5 million, respectively, in accordance with the provisions of SFAS No. 109. The $66.3 million increase in this valuation allowance is primarily the result of management's determination that it is more likely than not that the increased deferred tax asset resulting from the transition period operating loss will not be realized. In determining the actual amount of the valuation allowance required to be established, the Company has primarily relied upon its ability to generate future taxable income using available tax planning strategies involving the potential sale of certain appreciated assets. Although the Company has utilized an outside valuation firm to determine the current estimated fair market value of such assets, changes in market conditions could result in a reduction of the estimated fair market value of these assets that would adversely affect the amount of the valuation allowance and reduce the amount of net deferred tax assets considered realizable. The income tax provision (benefit) differs from the amounts computed by applying the statutory federal income tax rate as follows:
- - - --------------------------------------------------------------------------------------------------------------- Six Months Fiscal Year Ended Ended -------------------------------------- December 30, July 1, July 2, July 3, (In thousands) 1995 1995 1994 1993 - - - --------------------------------------------------------------------------------------------------------------- Statutory federal income tax provision (benefit) $ (78,752) $ (43,178) $ 16,209 $ (22,181) Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit 43 (2,208) (137) (1,312) Tax on undistributed foreign earnings 34,631 - - - Foreign income taxed at different rates 5,642 5,692 (10,005) (7,635) Losses producing no current tax benefit 38,870 15,916 8,589 8,307 Adjustment to deferred assets and liabilities for change in tax rate - - (1,266) - Restructuring charge producing no current tax benefit - - - 12,748 Other, net (434) (278) 1,613 (1,427) - - - --------------------------------------------------------------------------------------------------------------- $ - $ (24,056) $ 15,003 $ (11,500) ===============================================================================================================
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 transition period 1995 and for fiscal years 1995, 1994 and 1993. In determining the provision (benefit) for income taxes for transition period 1995, the Company has utilized approximately $4 million of prior year net operating loss ("NOL") carryforwards to reduce the amount of taxes otherwise payable for such year. The Company has $389 million of remaining NOL carryforwards which it expects will be available to offset future taxable income. Approximately $158 million of such carryforwards relate to foreign operations in various taxing jurisdictions of which $76 million expire in years 1996 through 2005 and $82 million have no expiration date. The remaining $231 million of such carryforwards relate to U.S. operations and expire in the years 2010 and 2011. Utilization of these U.S. NOL carryforwards to offset future taxable income in any particular year could be limited should the Company undergo a 50% "ownership change," as defined under Section 382 of the Internal Revenue Code of 1986, within a three year measurement period. Any limitation pursuant to these provisions would be effective for all tax years starting with the year of ownership change. As of December 30, 1995, the Company has experienced an ownership change for purposes of this limitation of approximately 40% as a direct result of the investment by Samsung pursuant to the Stock Purchase Agreement (Note 7). AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. INCOME TAXES (CONTINUED) 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, relating 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 for 1987 and 1988 or current examinations of 1989, 1990 and 1991 will not have a material adverse effect on the Company's consolidated financial position or results of operations. NOTE 10. BENEFIT PLANS Profit Sharing Plan During 1983, the Company established a 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 transition period 1995 or for the years ended July 1, 1995, July 2, 1994 and July 3, 1993. 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 $1,061,000 to the plan for the transition period ended December 30, 1995. The Company's contributions for the years ended July 1, 1995, July 2, 1994 and July 3, 1993 amounted to $2,456,000, $2,064,000 and $1,679,000, 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 employee's base quarterly compensation. For transition period 1995 and fiscal year 1995, no bonuses were paid. Bonuses paid for the fiscal years ended July 2, 1994 and July 3, 1993 were $1,954,000 and $1,568,000, 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 transition period 1995 and fiscal year 1995, no bonuses were paid. Bonuses paid for the fiscal years ended July 2, 1994 and July 3, 1993 were $1,920,000 and $3,928,000, respectively. Stock Plans The Company has four employee stock plans, adopted in 1983, 1985, 1989 and 1995, and two non-employee director stock plans adopted in 1991 and 1994 (the "Plans"). The Incentive Stock Option, Non-Qualified Stock Option and Restricted Stock Purchase Plan - 1983 (the "1983 Plan"), as amended in 1984, 1985 and 1987, provided 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 1983 Plan expired in November 1993, except as to options then outstanding. At December 30, 1995, 17,400 options remained outstanding at exercise prices ranging from $18.75 to $21.50 per share. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. BENEFIT PLANS (CONTINUED) Stock Plans (continued) In 1985, the Company adopted the Chief Executives' Plan (the "CE Plan"). The CE Plan, as amended in 1987, provided 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. In 1995, the CE Plan was terminated, except as to options then outstanding. At December 30, 1995, 200,000 options remained outstanding and were exercisable at an exercise price of $3.50 per share. 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. Under the 1989 Program, options granted become exercisable at the discretion of the Board of Directors or Compensation Committee and expire ten years from the date of grant. No stock appreciation rights or performance units have been granted under the 1989 Program. The Company's 1991 Stock Option Plan for Non-Employee Directors (the "Non- Employee Option Plan"), as amended in 1995, 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 500,000. Options vest equally over four years 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. In 1994, the Company adopted the AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee Directors. The Plan, as amended in 1995, provided for the grant of an option to purchase 50,000 shares of common stock to each non-employee member of the Company's Board of Directors on July 1, 1994. At December 30, 1995, 150,000 options remained outstanding and were exercisable at an exercise price of $14.25 per share. In 1995, the Company adopted the President's Plan. The President's Plan provides for an aggregate of 1,000,000 shares of the Company's common stock to be available to the President of the Company. At December 30, 1995, non- statutory options covering 1,000,000 shares have been granted to the President of the Company at the closing market price on the date of grant. Of the options granted, 300,000 vest equally over four years commencing on the first anniversary of the date of grant. The remaining 700,000 options vest equally over eight years commencing on the first anniversary of the date of grant, with acceleration of vesting possible in the event of certain Company stock price performance targets are achieved. The following table summarizes transition period 1995 stock option activity under all of the stock plans:
- - - ------------------------------------------------------------------------------------ Number of Options Price range -------------------------- of shares Under Available for under option grant future grant - - - ------------------------------------------------------------------------------------ Outstanding at July 1, 1995 $ 3.50 - $ 31.63 4,481,975 1,652,631 Authorized - - 2,143,588 Granted 8.38 - 15.88 2,579,425 (2,579,425) Exercised 3.50 - 11.44 (196,900) - Canceled 5.50 - 28.75 (1,345,625) 1,345,625 Plan shares expired - - (794,675) - - - ------------------------------------------------------------------------------------ Outstanding at December 30, 1995 $ 3.50 - $ 31.63 5,518,875 1,767,744 ==================================================================================== Exercisable at December 30, 1995 $ 3.50 - $ 31.63 2,183,574 - ====================================================================================
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. BENEFIT PLANS (CONTINUED) Stock Plans (continued) At December 30, 1995, 7,286,619 shares of the Company's common stock were reserved for issuance under the stock option 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 its then non-employee directors. At December 30, 1995, 40,000 of these warrants remained outstanding and were exercisable at an exercise price of $13.88 per share. 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. At December 30, 1995, 37,500 of these warrants remained outstanding and were exercisable at an exercise price of $13.50 per share. As a result of completing the transaction with Samsung effective July 31, 1995 (Note 7), unvested options granted to executive officers to purchase 754,500 shares of common stock under the 1989 Program at prices ranging from $11.44 to $21.50 became immediately exercisable. In addition, unvested options granted to non-employee directors to purchase 175,000 shares of common stock under the 1994 One-Time Grant Stock Option Plan for Non-Employee Directors at $14.25 per share and warrants issued on July 27, 1992 to purchase 25,000 shares of common stock at $13.50 per share became immediately exercisable. On October 26, 1995, all outstanding stock options held by employees other than corporate officers or Board members were repriced with a new exercise price of $9.38 per share, the closing market price on that date, subject to the condition that the options are not exercised and employment is not terminated prior to October 26, 1996. The number of shares and vesting schedule of the new option grants is the same as that of the old options replaced. The Company initiated this repricing arrangement in order to retain and motivate key employees as part of an effort to successfully implement the Company's turnaround plan. In conjunction with the repricing, all affected options outstanding under the 1983 Plan were made available for cancellation and reissuance under the 1989 Program. A total of 2,108,173 options with exercise prices ranging from $12.75 to $31.63 were repriced. NOTE 11. SHAREHOLDER RIGHTS PLAN On June 30, 1989, the Board of Directors adopted a Shareholder Rights Plan which is intended to protect shareholders 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 are not 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 shareholder of the Company, including, without limitation, the rights to vote as a shareholder or receive dividends. The rights, which expire on June 30, 1999, may be redeemed by the Company at a price of $0.01 per right. At December 30, 1995, 500,000 of the 1,000,000 authorized but unissued preferred shares of the Company are reserved for issuance upon exercise of these rights. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11. SHAREHOLDER RIGHTS PLAN (CONTINUED) As a condition to entering into the Purchase Agreement with Samsung, the Company amended the Shareholder Rights Plan to allow Samsung, in accordance with the terms and conditions of the Stockholder Agreement between the Company and Samsung dated July 31, 1995, to acquire, without additional Board or Stockholder approval and without triggering the Plan, up to 49.9% of the common stock during the first four years of its investment, and after the standstill period, which now ends December 15, 1998, up to 66.67% of the common stock except that such limits shall not apply to any acquisition by Samsung made pursuant to a cash tender offer for all equity securities not owned by Samsung and/or its affiliates. NOTE 12. 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:
- - - -------------------------------------------------------------------------------- Lease Obligations (In thousands) ------------------------- Fiscal Year Capital Operating - - - -------------------------------------------------------------------------------- 1996 $ 302 $ 14,538 1997 302 10,803 1998 302 8,380 1999 302 4,986 2000 302 2,075 Thereafter 390 18,771 - - - -------------------------------------------------------------------------------- Total minimum lease payments $ 1,900 $ 59,553 ================================================================================
At December 30, 1995, the net present value of obligations under capital leases totaled $1,900,000 and are included in long-term and/or current portion of long-term debt in the accompanying consolidated balance sheet. At December 30, 1995, the assets held under capital leases total $3,754,000, net of $134,000 in accumulated depreciation, and are included in land and buildings in the accompanying consolidated balance sheet. Rent expense for transition period 1995, and for the fiscal years ended July 1, 1995, July 2, 1994 and July 3, 1993, was approximately $5,070,000, $11,125,000, $10,588,000 and $9,215,000, respectively. Royalty Commitments The Company has commitments for minimum guaranteed royalties under various licensing agreements which are payable over periods ranging from one to five 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. Employment Contracts Effective July 27, 1993, the Company entered into a separate employment contract (Founder's Agreement) with founder and Chairman of the Board, Safi U. Qureshey, who was then serving as the Company's Chief Executive Officer. The Founder's Agreement provides for five years of salary, health and welfare benefits, two years of bonus, acceleration of stock options and certain other benefits if active employment is terminated by the Company or by Mr. Qureshey under specified conditions. The maximum contingent liability under this agreement is approximately $4 million. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Employment Contracts (continued) The Company maintains Severance Compensation Agreements with its executive officers and its non-officer vice presidents. Such agreements provide for (i) lump sum payments comprised of up to two years of salary and bonus and certain other benefits for executive officers, or one year of salary and bonus and certain other benefits for vice presidents who are not executive officers and (ii) acceleration of the vesting of stock options upon a "change of control" of the Company and termination of the covered employee for reasons specified in the contract. The aggregate commitment under these Severance Compensation Agreements should all covered employees be terminated is approximately $7.8 million. 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," generally requires the Company to pay its President severance equal to two years of salary and its other executive officers' severance equal to six months of 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 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 laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court for the Central District of California. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The September 12, 1994 complaint was filed in the United States District Court for the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was filed by a shareholder in the United States District Court for the Central District of California. The October 6, 1994 complaint named the Company and certain of its officers and directors as defendants, asserted claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures, and sought unspecified compensatory damages and related fees and costs. The cases with complaints filed on March 3, 1994, March 14, 1994 and October 6, 1994 were consolidated under the case name In re AST Research Securities Litigation. The In re AST Research Securities Litigation and Kornfeld cases were treated as related cases by the court. A settlement agreement dated August 28, 1995 was signed to end the In re AST Research Securities Litigation and Kornfeld cases, and was preliminarily approved by the court. It required the payment of $12.5 million by the defendants to the plaintiffs. Such amounts were paid in November 1995. Of the settlement amount of $12.5 million, approximately $10.4 million was funded by three insurance carriers. Final approval of the settlement was ordered by the court, but further proceedings are occurring to determine the portion of the settlement amount that will be distributed to class members. The Company has been named as a defendant or co-defendant, generally with other personal computer manufacturers, including such companies as IBM, AT&T, Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in eighteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. The claims against the Company total in excess of $100 million in compensatory damages and punitive damages and additional unspecified amounts. The Company has denied or is in the process of denying the claims and intends to vigorously defend the suits. The Company is unable at this time to predict the ultimate outcome of these suits. Ultimate resolution of the litigation against the Company may depend on progress in resolving this type of litigation overall. Before consideration of any potential insurance recoveries, 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; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. 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 insured. 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. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 12. COMMITMENTS AND CONTINGENCIES (CONTINUED) Other Contingencies (continued) The Company was named, along with twelve other personal computer companies, as a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the County of Merced, California. The case name for this March 27, 1995 filing is People v. Acer, et al., and the complaint alleges that the Company has engaged in deceptive advertising and unlawful business practices in relation to computer monitor screen measurements. The People v. Acer lawsuit was resolved by a Stipulated Judgment that the Company signed along with representatives of all other defendants. The Company was named, along with three other personal computer or monitor companies, as a defendant in a class action lawsuit filed on May 2, 1995 in the Superior Court for the County of Marin, California. The case name for this May 2, 1995 filing is Kaplan, et al. v. Viewsonic, et al., and alleges that the defendants have engaged in unfair business practices, false advertising and breach of implied warranty concerning the advertisement of the size of computer monitor screens. The Company was named, along with 37 other defendants, in a class action lawsuit, Long v. Packard Bell, et al., filed on August 21, 1995 in the Superior Court for the County of Orange, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with nine other defendants, in a class action lawsuit, Randy Davis, Ph.D., Inc. v. AST Research, et al., filed on August 23, 1995 in Superior Court for the County of Orange, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 35 other defendants, in a class action lawsuit, Sutter v. Acer, et al., filed on September 7, 1995 in the Superior Court for the County of Sacramento, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 41 other defendants, in a class action lawsuit, Shapiro v. ADI Systems, Inc., et al, filed on August 14, 1995 in Santa Clara County, California, which alleges certain claims concerning the advertising of the sizes of computer monitors. The Company was named, along with 29 other defendants, in a class action lawsuit, Maizes & Maizes, et al, v. Apple Computer Inc., et al, filed on December 15, 1995 in Essex County, New Jersey, which alleges certain claims concerning the advertising of the sizes of computer monitors. Management does not believe that the outcome of these disputes will have a material adverse impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. The Company is also subject to other legal proceedings and claims that arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe that 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 13. 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. The Company currently markets its products through retail computer dealers, consumer retailers, international and regional distributors, value added dealers, and value added resellers. At the end of fiscal year 1995, the Company reorganized its worldwide sales organization and internal reporting structure into three major geographical groups: The Americas, which includes the United States and Canada; Europe; and Asia Pacific, which includes Asia, the Pacific Rim and the Middle East. Prior period geographic information has been reclassified in accordance with this new organization. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED) A summary of the Company's operations by geographic area is as follows:
Six months ended December 30, 1995 - - - -------------------------------------------------------------------------------------------------- Asia (In thousands) Americas Europe Pacific Eliminated Consolidated - - - -------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 453,054 $ 383,304 $ 179,925 $ - $ 1,016,283 Transfers between geographic areas 140,797 378,420 419,466 (938,683) - - - - -------------------------------------------------------------------------------------------------- Net sales $ 593,851 $ 761,724 $ 599,391 $ (938,683) $ 1,016,283 ================================================================================================== Operating income (loss) $ (149,180) $ (47,481) $ (18,974) $ 439 $ (215,196) ================================================================================================== Identifiable assets $ 491,243 $ 380,769 $ 184,030 $ - $ 1,056,042 ==================================================================================================
Year ended July 1, 1995 - - - -------------------------------------------------------------------------------------------------- Asia (In thousands) Americas Europe Pacific Eliminated Consolidated - - - -------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 1,387,442 $ 743,561 $ 336,780 $ - $ 2,467,783 Transfers between geographic areas 375,500 628,831 902,319 (1,906,650) - - - - -------------------------------------------------------------------------------------------------- Net sales $ 1,762,942 $ 1,372,392 $ 1,239,099 $ (1,906,650) $ 2,467,783 ================================================================================================== Operating income (loss) $ (91,738) $ (6,362) $ (7,619) $ 29 $ (105,690) ================================================================================================== Identifiable assets $ 508,714 $ 287,218 $ 225,569 $ - $ 1,021,501 ==================================================================================================
Year ended July 2, 1994 - - - -------------------------------------------------------------------------------------------------- Asia (In thousands) Americas Europe Pacific Eliminated Consolidated - - - -------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 1,546,010 $ 532,921 $ 288,343 $ - $ 2,367,274 Transfers between geographic areas 404,582 251,605 904,204 (1,560,391) - - - - -------------------------------------------------------------------------------------------------- Net sales $ 1,950,592 $ 784,526 $ 1,192,547 $ (1,560,391) $ 2,367,274 ================================================================================================== Operating income (loss) $ 22,786 $ (20,027) $ 44,025 $ 7,205 $ 53,989 ================================================================================================== Identifiable assets $ 541,469 $ 257,098 $ 207,053 $ - $ 1,005,620 ==================================================================================================
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
Year ended July 3, 1993 - - - -------------------------------------------------------------------------------------------------- Asia (In thousands) Americas Europe Pacific Eliminated Consolidated - - - -------------------------------------------------------------------------------------------------- Sales to unaffiliated customers $ 854,929 $ 297,312 $ 259,909 $ - $ 1,412,150 Transfers between geographic areas 234,815 55,690 752,408 (1,042,913) - - - - -------------------------------------------------------------------------------------------------- Net sales $ 1,089,744 $ 353,002 $ 1,012,317 $ (1,042,913) $ 1,412,150 ================================================================================================== Operating income (loss) $ (69,677) $ (45,569) $ 42,458 $ 8,210 $ (64,578) ================================================================================================== Identifiable assets $ 574,801 $ 173,028 $ 138,330 $ - $ 886,159 ==================================================================================================
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 year 1993 restructuring charge of $125 million is included in operating income (loss) in the geographic areas in which the actual restructuring costs are expected to be incurred. This amount is comprised of $93.3 million in the Americas segment, $25.6 million in the Europe segment and $6.1 million in the Asia Pacific segment. The fiscal year 1994 restructure credit of $12.5 million relates to and is included in the Americas operating income. The transition period 1995 restructuring charge of $13 million relates to and is included in the Asia Pacific operating loss. NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The tables below set forth selected quarterly financial information for transition period 1995, and for fiscal years 1995 and 1994 (in thousands, except per share amounts).
- - - --------------------------------------------------------------------------------------------------------- Six months ended December 30, 1995 First Quarter Second Quarter - - - --------------------------------------------------------------------------------------------------------- Net sales $ 403,357 $ 612,926 Gross loss (6,769) (10,106) Net loss (96,382) (128,624) Net loss per share $ (2.36) $ (2.88) - - - ---------------------------------------------------------------------------------------------------------
- - - --------------------------------------------------------------------------------------------------------- Year ended July 1, 1995 First Quarter Second Quarter Third Quarter Fourth Quarter - - - --------------------------------------------------------------------------------------------------------- Net sales $ 495,446 $ 640,159 $ 670,176 $ 662,002 Gross profit 37,299 66,318 86,942 55,115 Net loss (39,406) (21,724) (6,548) (31,631) Net loss per share $ (1.22) $ (.67) $ (.20) $ (.98) - - - ---------------------------------------------------------------------------------------------------------
AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
- - - --------------------------------------------------------------------------------------------------------- Year ended July 2, 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 46,161 Net income (loss) 8,232 17,933 13,214 (8,070) Net income (loss) per share: Primary $ .26 $ .55 $ .40 $ (.25) Fully diluted $ .26 $ .54 $ .38 $ (.25) - - - ---------------------------------------------------------------------------------------------------------
In transition period 1995 and fiscal year 1995, fully diluted per share information is anti-dilutive. In transition period 1995, the quarterly per share amounts do not sum to the per share amounts for the six-month period due to differences in the weighted average number of shares outstanding in each quarterly reporting period versus the weighted average number of shares outstanding for the six-month reporting period. In fiscal year 1994, the quarterly per share amounts do not sum to the per share amounts for the annual reporting period due to differences in the weighted average number of shares outstanding determined by applying the treasury stock method to each quarterly reporting period versus applying the treasury stock method to the annual reporting period. In the fourth quarter of fiscal year 1994, the Company recorded a pretax restructuring credit of $12.5 million. NOTE 15. RELATED PARTY TRANSACTIONS On July 31, 1995, the Company completed the sale of 12.07 million shares of the Company's common stock to Samsung, receiving net proceeds of approximately $240 million (Note 7). On November 22, 1995, Samsung provided a $50 million short-term loan to the Company at an interest rate of 7.3125% per annum. The Company repaid this loan on December 28, 1995. On December 21, 1995, the Company issued a five year option to Samsung to purchase 4.4 million shares of the Company's common stock at an exercise price of $.01 per share and allowed Samsung to add an additional member to the Company's Board of Directors, in exchange for additional financial support, principally including a guaranty on a two-year $200 million line of credit and a two-year vendor line of $100 million for component purchases (Note 7). During transition period 1995, the Company purchased $144.7 million of components and products from Samsung. Amounts payable to Samsung at December 30, 1995 were $31.6 million. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS HOON CHOO, 50, was appointed a director in July 1995. Currently, Mr. Choo is a consultant to Samsung Semiconductors Inc., a U.S. subsidiary of Samsung. Most recently, Mr. Choo founded A-Cube Systems, in Cupertino, California in July 1994 and continues to provide consulting services to such company. Prior to A-Cube Systems, Mr. Choo served as an Executive Vice President of Hyundai Electronics America from September 1986 to April 1994. In addition, Mr. Choo was Director of Computer Engineering of the Samsung Electronics Computer Division in Korea from December 1981 to August 1986. IAN W. DIERY, 46, was named President and Chief Executive Officer and was appointed to the Company's Board of Directors in November 1995. Prior to joining the Company, Mr. Diery served at Apple Computer for six years, most recently as the company's Executive Vice President and General Manager for the Personal Computer Division. Mr. Diery also served as Executive Vice President, Worldwide Sales and Marketing at Apple from July 1992 to July 1993, and Senior Vice President and President of Apple Pacific Division from October 1989 to July 1992. Prior to his tenure at Apple, from August 1978 to August 1989, Mr. Diery served in various executive roles at Wang Laboratories, Inc., including Executive Vice President, Worldwide Field Operations, Senior Vice President, USA Sales Operations, and Senior Vice President, Europe. RICHARD J. GOEGLEIN, 61, has served as a director since May 1987. Mr. Goeglein is founder and principal of Gaming Associates, a casino management company which develops and operates hotels/casinos at selected locations in the United States. Mr. Goeglein served as President and Chief Executive Officer of Dakin, Inc. from April 1990 through September 1991. Since January 1988, Mr. Goeglein has also been the Chairman of ConServ International, a consulting and real estate development business. From 1984 to his retirement date of December 31, 1987, Mr. Goeglein was the President and Chief Operating Officer of Holiday Corporation, the holding company of Holiday Inns, Inc. Mr. Goeglein also served on the Board of Directors of Holiday Corporation from 1978 to 1988. Mr. Goeglein currently serves as a director of Boomtown Hotels and Casinos and Platinum Software Corporation. KWANG-HO KIM, 56, was appointed a director in July 1995. Since November 1994, Mr. Kim has served as Vice Chairman, President and Chief Executive Officer of Samsung. Mr. Kim first joined Samsung when Tongyang Broadcasting Co. merged into the Samsung Group in January 1969. In 1978, Mr. Kim was one of the founders of the semiconductor business of Samsung, and was named Vice President in charge of the Research and Development Center for the semiconductor business at Samsung in March 1987. Throughout his career at Samsung, Mr. Kim has held a number of positions in research and development, manufacturing, plant and division management, where he was named President and Chief Executive Officer of the semiconductor business in March 1990, and named President and Chief Executive Officer of Samsung in December 1992. Mr. Kim is currently Chairman of the Korea Semiconductor Industry Association (KSIA). YOUNG SOO KIM, 61, was appointed a director in July 1995. Since January 1993, Mr. Kim has served as Corporate Vice President of Samsung. He joined Samsung in August 1987 as Vice President of the semiconductor business and in June 1989 was named President of the Computer and Systems Business. Before joining Samsung, Mr. Kim was Vice President of Honeywell in charge of its Solid State Electronics Division from December 1974 to August 1987. JACK W. PELTASON, 72, has served as a director since July 1993. Mr. Peltason has served as President of the University of California from 1992 to 1995, following an eight-year tenure as Chancellor of the University of California, Irvine, a seven-year term as President of the American Council on Education, and a ten-year term as Chancellor at the University of Illinois at Urbana-Champaign. Mr. Peltason is currently on the Board of Directors of Irvine Apartment Communities and serves as a member of the Board of Trustees for the FHP Foundation, Irvine Health Foundation, and Teachers Insurance and Annuity Association. SAFI U. QURESHEY, 45, a Company founder, has served as a director since the Company's inception and served as President from the Company's inception through July 1994. In July 1988, Mr. Qureshey was elected Chief Executive Officer and served as such until November 1995. He served as Co-Chairman of the Board from 1988 through June 1992, and was elected Chairman of the Board in November 1993. Mr. Qureshey is currently a member of the President's Export Council (PEC). This premier national committee advises President Clinton on government policies and programs that affect U.S. trade performance and promotes export expansion. In addition, Mr. Qureshey was awarded the 1995 UCI Medal, the University of California, Irvine's highest honor, for his service and commitment to the university. CARMELO J. SANTORO, PH.D., 54, served as Chairman of the Board from June 1992 until November 1993 and has served as a director since September 1990. In November 1993, Dr. Santoro was elected Vice Chairman of the Board and served as such through December 1995. Dr. Santoro is Chairman and Chief Executive Officer of Platinum Software Corporation. Dr. Santoro was President and Chief Executive Officer of Silicon Systems, Inc. from 1982 through 1991 and was Chairman from 1984 through 1989, when Silicon Systems, Inc. was acquired by TDK Corporation of Tokyo, Japan. From 1980 to 1982, Dr. Santoro was Vice President, Integrated Circuits at the Solid State Division of RCA. In addition to Platinum Software Corporation, Dr. Santoro is currently a director of Dallas Semiconductor Corporation, S3, Inc. and Smartflex Systems, Inc. BO-SOON SONG, 48, was appointed a director in January 1996. Since January 1995, Mr. Song has served as President and Chief Executive Officer of Samsung North America, the U.S. headquarters of the Samsung Group. Mr. Song was Chief Executive Officer of Samsung Electronics America Holding Company ("SEA"). Prior to being appointed as Chief Executive Officer in September 1993, Mr. Song had been Chief Finance Officer of SEA from 1991, and earlier served as Finance Director of Samsung from 1988. From 1984 to 1988, Mr. Song was Treasurer of Samsung Trading Co. in London England. Mr. Song joined Samsung in 1980 as an Assistant General Manager for the Samsung Group Chairman Office's International Finance Division. WON SUK YANG, 52, was appointed a director in July 1995. Since April 1995, Mr. Yang has served as Senior Executive Managing Director of Samsung. He joined the Samsung Group through an affiliated company, Cheil Industries, in 1970. He later was named Director of Finance from April 1979 to March 1983 of Samsung Petrochemical Co., Ltd. In April 1983, he was named Executive Vice President of Samsung Semiconductor Inc., a U.S. subsidiary of Samsung. From June 1991 to December 1992, Mr. Yang was General Manager of the Planning and Administrative Office of Samsung and in January 1993 was made General Manager of the Corporate Administrative Office for an affiliated company, Cheil Synthetics Industries. HEE DONG YOO, 50, was appointed a director in July 1995. Since April 1994, Mr. Yoo has served as Executive Vice President and General Manager of the information products business of Samsung. He joined Samsung as manager of Samsung Petrochemicals in July 1974 and later became President of Samsung Tokyo Headquarters in February 1977. In February 1983, he was made Director of the Overseas Operations Division of Samsung and later was named Managing Director of the International Operations Office from March 1987 to January 1991. From January 1991 to April 1994, Mr. Yoo was President of Samsung Electronics Europe. EXECUTIVE OFFICERS The following table sets forth the name and age of each executive officer of the Company at March 1, 1996, his positions and offices with the Company and the period during which he has served as an executive officer of the Company: - - - -------------------------------------------------------------------------------- EXECUTIVE OFFICER NAME AGE POSITION(S) SINCE - - - -------------------------------------------------------------------------------- Ian W. Diery 46 President and 1995 Chief Executive Officer Gerald T. Devlin 50 Senior Vice President, Americas 1995 Dennis R. Leibel 51 Senior Vice President, Legal, 1986 Administration and Secretary Gary D. Weaver 53 Senior Vice President, Worldwide 1995 Manufacturing Operations Michael Willcocks 47 Senior Vice President, 1996 Asia Pacific Region Mark P. de Raad 36 Vice President, Controller, 1995 and Principal Accounting Officer - - - -------------------------------------------------------------------------------- For information on the business background of Mr. Diery see "Directors" above. GERALD T. DEVLIN rejoined the Company in September 1995 as Senior Vice President, Americas. Mr. Devlin was Vice President of Worldwide Sales for Xerox Corporation from July 1994 to September 1995. Mr. Devlin was first employed with the Company as Vice President, U.S. Sales from January 1993 and Vice President, Sales, Americas from August 1993 to July 1994. Prior to joining the Company in January 1993, he was employed for twelve years by Apple Computer where he served most recently as Vice President and General Manager of Sales. DENNIS R. LEIBEL joined the Company in December 1985 as Treasurer and in March 1988 was elected Vice President, Administration and General Counsel. In January 1989, Mr. Leibel was elected Vice President, Legal and Treasury Operations and Secretary and was promoted to Senior Vice President, Legal and Treasury Operations in January 1995 and Senior Vice President, Legal, Administration and Secretary in October 1995. Prior to joining the Company, Mr. Leibel was employed for over seven years by Smith International, Inc., where he served as Director of Taxes, Vice President, Tax and Financial Planning and subsequently as Vice President, Finance. Mr. Leibel currently serves on the Executive Committee of the Board of Directors of the World Trade Center Association of Orange County and the Advisory Board of Directors of Court Appointed Special Advocates of Orange County (CASA). GARY D. WEAVER joined the Company in December 1994 as Vice President, Americas Manufacturing and in September 1995 was elected Senior Vice President, Worldwide Manufacturing Operations. Immediately prior to joining the Company, he served as Vice President Operations at Ioptex Research from May 1990 to November 1994 with responsibility for human resources, engineering, manufacturing, quality and distribution. Mr. Weaver has also held various other positions throughout his career including Worldwide Vice President of Manufacturing at Cipher Data Products, Senior Vice President, Manufacturing at Irwin Magnetics and Managing Director for Atari Far East, where he was responsible for high volume operations in the Company's Taipei facility. MICHAEL WILLCOCKS joined the Company in March 1996 as Senior Vice President, Asia Pacific Middle East Region. Prior to joining the Company, Mr. Willcocks served at Apple Computer from May 1993 to January 1996 where he held positions of Vice President, Global Accounts and Vice President, Worldwide Enterprise and Government Marketing. Mr. Willcocks also held positions as General Manager, Northern Europe Operations and Managing Director, United Kingdom for Interleaf, Inc., a pioneer in the electronic publishing market, from November 1989 to May 1993. From 1975 to 1989, Mr. Willcocks was employed at Wang Laboratories in various sales and marketing positions covering Europe, Africa, Middle East and Asia Pacific. MARK P. DE RAAD joined the Company in May 1987 as Manager, Financial Reporting. In February 1989, Mr. de Raad was promoted to Assistant Controller and to Controller in August 1990. In February 1994, Mr. de Raad was named Vice President, Worldwide Controller, in August 1994 assumed the title Vice President, Financial Operations and in July 1995 was elected Vice President, Controller and Principal Accounting Officer. Prior to joining the Company in May 1987, Mr. de Raad was employed by Tandem Computer, Inc. and KPMG Peat Marwick LLP. ITEM 11. EXECUTIVE COMPENSATION The following tables present information concerning the cash compensation and stock options provided to Mr. Diery, the Company's current Chief Executive Officer, Mr. Qureshey, who served as the Company's Chief Executive Officer until November 2, 1995, the four other most highly compensated executive officers and two additional highly compensated former executive officers (collectively, the "Named Executive Officers") during transition period 1995 ("TP95"), which consists of the six months ended December 30, 1995 by reason of a change in the Company's fiscal year-end, and during the fiscal years ended July 1, 1995, July 2, 1994, and July 3, 1993. The notes to these tables provide more specific information regarding compensation. SUMMARY COMPENSATION TABLE
- - - -------------------------------------------------------------------------------------------------------------------------------- Long-Term Annual Compensation Compensation ------------------------------------------------------ --------------- Awards ------ Transition Securities Period or Other Annual Underlying All Other Name and Fiscal Salary Bonus Compensation Options/SARS Compensation Principal Position Year ($) (S) ($) (a) (#) ($) - - - ------------------------------------------------------------------------------------------------------------------------------- Ian W. Diery (b) TP95 101,323 - - 1,000,000 - President and 1995 - - - - - Chief Executive Officer 1994 - - - - - 1993 - - - - - Safi U. Qureshey (b) TP95 289,313 - 632 25,000 67,434 (c) Chairman of the Board 1995 656,172 - 24,448 50,000 145,107 1994 623,076 236,221 36,465 125,000 148,119 1993 543,700 514,298 93,960 60,000 184,580 Gerald T. Devlin (d) TP95 116,577 116,000 (e) - 100,000 462 (f) Senior Vice President, 1995 - - - - - Americas 1994 279,821 - - 7,500 5,815 1993 97,048 31,315 - 80,000 - Dennis R. Leibel TP95 115,400 - - 10,000 4,060 (f) Senior Vice President, Legal 1995 217,820 - - 16,000 5,339 Administration and Secretary 1994 200,414 30,000 32 6,000 6,454 1993 181,008 79,567 7,320 10,000 5,532 Gary D. Weaver (d) TP95 104,100 - 84,308 (g) 50,000 3,123 (f) Senior Vice President, 1995 - - - - - Worldwide Manufacturing 1994 - - - - - Operations 1993 - - - - - Mark P. de Raad (d) TP95 92,877 - - 4,000 1,278 (f) Vice President, Controller and 1995 - - - - - Principal Accounting Officer 1994 - - - - - 1993 - - - - - James T. Schraith (h) TP95 149,088 - - 25,000 (h) 1,478,150 (h) President and Chief 1995 444,262 - 520 140,000 2,677 Operating Officer 1994 314,009 130,191 - 65,000 9,173 1993 228,256 124,168 1,095 20,000 5,673 Bruce C. Edwards (i) TP95 183,258 - - 15,000 (i) 961,662 (i) Executive Vice President 1995 310,800 - 2,063 30,000 3,577 and Chief Financial Officer 1994 297,337 80,137 3,496 75,000 7,021 1993 251,873 256,454 4,980 30,000 6,283 _________
SUMMARY COMPENSATION TABLE (CONTINUED) Notes to Summary Compensation Table (a) Other Annual Compensation generally includes reimbursement for medical expenses and/or tax and estate planning expenses. Mr. Weaver's Other Annual Compensation also includes amounts denoted in (g) below. The amounts shown for transition period 1995 and for fiscal 1995 represent reimbursement for tax and estate planning only. (b) Mr. Qureshey resigned as Chief Executive Officer effective November 2, 1995, but remains an employee of the Company and Chairman of the Board. Mr. Diery was named President and Chief Executive Officer on November 2, 1995. Mr. Diery's employment agreement is described under "Employment Contracts and Termination of Employment and Change in Control Arrangements." (c) The Company maintains an aggregate of $24,000,000 of split dollar life insurance policies insuring the survivor of Mr. Qureshey and his spouse. The portion of the premium paid for term life insurance coverage in transition period 1995 was $19,004. The portion of the premium paid for non-term coverage, valued in accordance with requirements of the Securities and Exchange Commission as an interest-free loan to Mr. Qureshey, was $61,434. Also included is the Company's 401(k) Plan matching contribution in the amount of $6,000. (d) Mr. Devlin, Mr. Weaver, and Mr. de Raad were named as executive officers during transition period 1995. Only compensation for the full transition period or fiscal year during which they served as an executive officer is included in the above summary compensation table. Mr. Devlin was also an executive officer in fiscal 1994 and 1993, before resigning and re-joining the Company in transition period 1995. (e) Amount represents a signing bonus paid to Mr. Devlin upon rejoining the Company in September 1995. (f) Amount represents the Company's matching contribution to the Company's 401(k) Plan. (g) The Company paid $84,308 for Mr. Weaver's relocation expenses. (h) Mr. Schraith's employment with the Company terminated on September 11, 1995. In connection therewith, the options granted to Mr. Schraith during transition period 1995 expired without being exercised on the date of such termination. Pursuant to a Severance Compensation Agreement with the Company, Mr. Schraith was paid a lump sum payment of $1,472,500, which is included in All Other Compensation. Also included in All Other Compensation is the Company's matching contribution to the Company's 401(k) Plan in the amount of $5,650. (i) Mr. Edwards' employment with the Company terminated on December 28, 1995. In connection therewith, the options granted to Mr. Edwards during transition period 1995 expired without being exercised on the date of such termination. Pursuant to a Severance Compensation Agreement with the Company, Mr. Edwards was paid a lump sum payment of $958,200, which is included in All Other Compensation. Also included in All Other Compensation is the Company's matching contribution to the Company's 401(k) Plan in the amount of $3,462. OPTION/SAR GRANTS IN TRANSITION PERIOD
- - - ----------------------------------------------------------------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term (b) - - - --------------------------------------------------------------------------------- ---------------------------- Number of Securities % of Total Underlying Options/SARs Options/SARs Granted to Exercise or Granted (a) Employees in Base Price Expiration Name (#) Transition Period ($/Share) Date 5% ($) 10% ($) - - - --------------------------------------------------------------------------------------------------------------- Ian W. Diery 300,000 11.63% 9.375 11/02/05 1,768,766 4,482,401 700,000 (c) 27.14% 9.375 11/02/05 4,127,121 10,458,935 Safi U. Qureshey 25,000 0.97% 15.125 08/01/05 237,801 602,634 Gerald T. Devlin 100,000 3.88% 11.500 09/12/05 723,229 1,832,804 Dennis R. Leibel 10,000 0.39% 15.125 08/01/05 95,120 241,054 Gary D. Weaver 50,000 1.94% 10.750 09/19/05 338,031 856,637 Mark P. de Raad 4,000 0.16% 15.125 08/01/05 38,048 96,421 James T. Schraith (d) 25,000 0.97% 15.125 08/01/05 (d) - - Bruce C. Edwards (d) 15,000 0.58% 15.125 08/01/05 (d) - - _________
(a) All option grants were new and not granted in connection with an option repricing transaction. Options expire 10 years from date of grant. (b) The potential gains shown are net of the option exercise price and do not include the effect of any taxes associated with exercise. The amounts shown are for the assumed rates of appreciation only, do not constitute projections of future stock price performance, and may not necessarily be realized. Actual gains, if any, on stock option exercises depend on the future performance of the Company's common stock, continued employment of the optionee through the term of the option, and other factors. (c) Accelerated vesting of these options is possible in the event that certain Company stock price performance targets are achieved. (d) Mr. Schraith's employment with the Company terminated on September 11, 1995, and Mr. Edwards' employment with the Company terminated on December 28, 1995. In connection therewith, the options listed above expired without being exercised on the date of termination of their employment. AGGREGATED OPTION/SAR EXERCISES IN TRANSITION PERIOD AND TRANSITION PERIOD-END OPTION/SAR VALUES
- - - --------------------------------------------------------------------------------------------- Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs at Options/SARs at Shares Value Transition Period-End Transition Period-End Acquired on Realized -------------------------------- -------------------------------- Name Exercise (#) ($) Exercisable / Unexercisable Exercisable / Unexercisable - - - -------------------------------------------------------------------------------------------------------------------------- Ian W. Diery - - - 1,000,000 (a) - - Safi U. Qureshey 150,000 1,781,250 695,000 25,000 1,355,000 - Gerald T. Devlin - - - 100,000 - - Dennis R. Leibel - - 99,000 10,000 88,750 - Gary D. Weaver - - 7,500 72,500 - - Mark P. de Raad - - 20,750 23,250 2,000 - James T. Schraith (b) - - - - - - Bruce C. Edwards (b) - - 50,000 (b) - 221,875 - _________
(a) Accelerated vesting for 700,000 of these options is possible in the event that certain Company stock price performance targets are achieved. (b) Mr. Schraith's employment with the Company terminated on September 11, 1995 and Mr. Edwards' employment with the Company terminated on December 28, 1995. In connection therewith, their outstanding options will generally expire six months from the date of termination of their employment provided, however, that certain of such options expired on the date of termination of employment. See note (d) to the table describing "Option/SAR Grants in Transition Period." COMPENSATION OF DIRECTORS Mr. Qureshey receives an annual salary of $325,000 in his capacities as an employee of the Company and as Chairman of the Board. This represents a voluntary reduction in salary until the Company returns to profitability and was effective November 2, 1995. For purposes of his employment contract, all other terms of Mr. Qureshey's Founders Agreement (as defined below), including his annual base salary of $650,000, are deemed to be in effect and unchanged by this voluntary salary reduction. See "Employment Contracts and Termination of Employment and Change in Control Arrangements." The directors of the Company serve until their successors are elected and duly qualified. Non-employee directors receive annual retainers of $30,000 paid at the rate of $2,500 per month and additional committee meeting fees of $2,000 per meeting for the Chairman and $1,000 per meeting per committee member. Beginning November 1993, Dr. Carmelo J. Santoro, who served as Vice Chairman of the Board through December 1995, received an additional annual retainer of $95,000 for services in such capacity. Except as provided above with respect to Mr. Qureshey, directors who are also employees of the Company do not currently receive fees for service in their capacity as a director. The 1991 Stock Option Plan for Non-Employee Directors, as amended in 1995, provides for an initial grant of options to purchase 20,000 shares of common stock to each newly elected or appointed non-employee director. In addition, on January 1 of each year, each participant will receive an option to purchase an additional 12,000 shares of common stock. The aggregate number of shares that may be issued under the Plan is 500,000. Options vest equally over four years 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. In 1994, the Company adopted the 1994 One-Time Grant Stock Option Plan for Non-Employee Directors. The Plan, as amended in 1995, provided for the grant of an option to purchase 50,000 shares of common stock to each non-employee member of the Company's Board of Directors on July 1, 1994. As a result of completing the initial transactions with Samsung, effective July 31, 1995, unvested options to purchase 175,000 shares of common stock at $14.25 per share became immediately exercisable. At December 30, 1995, 150,000 options remained outstanding and were exercisable at an exercise price of $14.25 per share. 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 its then non-employee directors. At December 30, 1995, 40,000 of these warrants remained outstanding and were exercisable at $13.88 per share. 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 Dr. Santoro, the Company's then Chairman of the Board. At December 30, 1995, 37,500 of these warrants remained outstanding and were exercisable at $13.50 per share. As a result of completing the initial transactions with Samsung, effective July 31, 1995, unvested warrants to purchase 25,000 shares of common stock at $13.50 per share became immediately exercisable. Pursuant to the Stockholder Agreement between the Company and Samsung, those directors appointed by Samsung who are also officers, employees, or consultants of Samsung (the "Samsung Employee Director Designees") are entitled to receive, in their capacities as directors of the Company, only such fees, options and other awards and expense reimbursements, if any, as may be provided to employee directors of the Company generally in their capacity as directors. In Samsung's discretion, any such amounts payable to the Samsung Employee Director Designees will be paid to Samsung rather than to the Samsung Employee Director Designees. Those directors appointed by Samsung who are not officers, employees, or consultants of Samsung are entitled to receive all benefits to which other non- employee directors of the Company are entitled, and no such amounts may be paid or transferred to Samsung. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Goeglein, Mr. Peltason, Mr. Yang and Delbert W. Yocam served on the Compensation Committee during transition period 1995. Mr. Yocam resigned as a member of the Board of Directors on September 21, 1995 and was replaced on the Compensation Committee by Mr. Yang. Mr. Goeglein now serves as Chairman of the Compensation Committee. None of these persons is or has been an officer of the Company or any of its subsidiaries. In addition to serving on the Company's Board of Directors, Mr. Goeglein and Dr. Santoro serve on the Board of Directors of Platinum Software Corporation ("Platinum"), which designs, manufactures and markets accounting software systems. At Platinum, Dr. Santoro is also an executive officer and Mr. Goeglein serves on the Compensation Committee. In such capacities, each of Dr. Santoro and Mr. Goeglein has influence over the fees, equity participation and other compensation paid to others by Platinum. Mr. Goeglein, as a member of the Company's Board of Directors and Compensation Committee, had direct influence over the equity participation awards and compensation paid to Mr. Edwards in his capacity as an executive officer of the Company. Mr. Edwards resigned as Chief Financial Officer and a Board member on December 28, 1995. As continuing Board members, Dr. Santoro and Mr. Goeglein will continue to have influence over the fees, equity participation and compensation paid to others by the Company. Prior to either Dr. Santoro's or Mr. Goeglein's joining the Platinum Board of Directors, the Company purchased certain accounting software systems from Platinum. The Company believes that the terms and conditions of its purchase relationship with Platinum are as favorable to the Company as those that could have been obtained from any other third-party vendor of similar products and services. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS On November 2, 1995, the Company entered into an employment agreement with Ian W. Diery, President and Chief Executive Officer. Under the agreement, Mr. Diery's annual salary is $700,000. In addition, Mr. Diery is eligible to participate in the Company's profit sharing plan, 401(k) plan, management incentive plan and quarterly bonus plan. Under this agreement, Mr. Diery receives annually an automobile allowance of $12,000, a medical allowance of $20,000, and a financial planning allowance of $10,000. Mr. Diery also received a relocation allowance of up to $500,000 and an income tax gross up on such allowance, for moving expenses and to reimburse him for the amount of any loss incurred upon disposal of his prior residence. Mr. Diery received a grant of an option to purchase 300,000 shares of the Company's common stock having an exercise price equal to $9.375 per share, the closing price of the common stock on November 2, 1995. The option vests at the rate of 25% per year, commencing November 2, 1996. Also on November 2, 1995, Mr. Diery received an additional grant of an option to purchase 700,000 shares of common stock having an exercise price equal to $9.375 per share, vesting at the rate of 12.5% per year, with accelerated vesting possible in the event that certain Company stock price performance targets are achieved. If the daily closing price of the common stock averages $21, $30, and $40 over any three- month period within the option term, respectively, one-third of these options not otherwise vested will vest at the end of each such three-month period. On July 27, 1993, the Company entered into a five-year revolving term employment agreement with Mr. Qureshey ("Agreement" or "Founder's Agreement"), which provides in certain circumstances for a possible consulting term and other post-termination benefits. All post-termination benefits are conditioned upon Mr. Qureshey not undertaking competing employment and his not soliciting away Company employees. In addition, Mr. Qureshey agreed that he will vote his shares along with the other shareholders in the election of directors and will not join or participate against the Board of Directors in any proxy solicitation, and will offer the Company a right of first refusal on any 100,000 or more share blocks proposed to be sold by him in any private sale. If Mr. Qureshey should accept non-competing but substantial employment with any other company or firm during any period of active employment, consulting, or post- termination benefits under the Founder's Agreement, the Company may elect that Mr. Qureshey cease to be an employee or consultant and be entitled to receive an aggregate lump sum equal to 50% of the salary and/or bonus, if any, which he is then receiving and which he otherwise would be entitled to receive for the remaining balance of the employment or post-termination benefit or consulting period, as described below; however, all other benefits would cease and Mr. Qureshey would continue to be bound by the restrictions concerning competing employment, non-solicitation of employees, the voting of shares and the right of first refusal. At any time following one year from a date of employment termination, Mr. Qureshey may elect to terminate the foregoing restrictions upon 90 days' written notice, in which event all Company obligations and benefits payable under the Founder's Agreement would cease, all stock option acceleration would be rescinded and any outstanding loans to Mr. Qureshey would have to be repaid to the Company within 90 days. Nevertheless, Mr. Qureshey would continue to be bound by the provisions of the Founder's Agreement pertaining to the Company's confidential and proprietary information. If Mr. Qureshey's employment is terminated for "cause," the Company will be obligated to pay him only such severance compensation as shall have vested and as the Board otherwise deems appropriate, or none at all, and the Company's obligations under the Founder's Agreement will be null and void. If Mr. Qureshey becomes disabled, upon the expiration of six consecutive months of disability, Mr. Qureshey's employment may be terminated by the Company. In such event or in the event of Mr. Qureshey's death, in addition to amounts paid from insurance policies, Mr. Qureshey or his estate will be entitled to receive his base salary and bonus for at least one year, the restriction period on all restricted stock granted to him under Company plans shall lapse and all stock options or other such rights which otherwise would have vested within two years of such event will accelerate and become fully vested and remain exercisable in accordance with their respective terms. During employment, Mr. Qureshey will receive his salary, bonus and all other benefits, including a $25,000 financial planning allowance and a gross-up for income tax on such allowance, consistent with past practices. If Mr. Qureshey's active employment is terminated by him for "good reason" or by the Company without "cause," Mr. Qureshey shall continue to receive his base salary for a benefit period of five years following termination. In either event, (a) Mr. Qureshey shall be entitled to receive his annual bonus for the year in which termination occurs, pro rated to the date of termination, as well as bonuses for the two fiscal years following termination, such bonus amounts being determined by taking the average of the bonuses paid to Mr. Qureshey in the preceding two years; (b) all stock options shall accelerate and become exercisable and all restrictions on restricted stock awards shall lapse; (c) the benefits allowance for death or disability shall continue for a period of five years from the date of termination; and (d) all of his benefits payable under the Company's tax- qualified employee benefit plans or other programs pertaining to deferred compensation, retirement, profit sharing, 401(k), or employee stock ownership (if any) will be paid. In addition, if Mr. Qureshey enters into loan agreements for the purpose of exercising options or other rights to acquire securities, the Company will guarantee such loans (up to $3,000,000) and pay the interest on them for a period ending 13 months after the date of the event causing tax liability to be incurred by reason of such exercise. In the event of Mr. Qureshey's disability or of his termination by the Company without "cause" or termination of employment by Mr. Qureshey for "good reason," Mr. Qureshey will also be entitled to receive additional benefits during the first five-year post-termination benefit period including an office, health and welfare benefits, continued use of a Company automobile followed by transfer of title of such automobile to Mr. Qureshey at the end of the five-year period, and up to $25,000 per year (grossed up for income taxes) for estate, tax and financial planning services. Following such five-year post-termination benefits period, provided Mr. Qureshey has not and does not undertake substantial or competing employment, the Company indefinitely will provide continued health and welfare benefits, with Mr. Qureshey paying or reimbursing the Company the average cost of such coverage, and Mr. Qureshey will have the title Vice Chairman. For a period of up to five years following the first five-year post-termination benefits period, Mr. Qureshey may elect to become a consultant and receive 60% of his former base salary and be entitled to receive the additional benefits described in the foregoing paragraph. If prior to any termination Mr. Qureshey undertakes an "early retirement" from active employment and otherwise is not receiving the post-termination benefits enumerated above, he may at his election become a consultant to the Company and become subject to the restrictions under the Founder's Agreement and also become entitled to receive 80% of his then base salary for a period of five years, as well as the additional benefits listed above. Bonus amounts will not be required during any consulting period. Mr. Qureshey resigned as President and Chief Executive Officer effective November 2, 1995, but remains an employee and Chairman of the Board. Effective November 2, 1995, Mr. Qureshey agreed to a voluntary reduction in salary to $325,000 per year until the Company returns to profitability, and agreed not to currently enforce the terms of the existing agreement with respect to termination for "good reason." However, all other terms, including his annual base salary of $650,000, of the Founder's Agreement are deemed to be in effect and all rights are reserved thereunder by Mr. Qureshey. Mr. Qureshey's benefits under the Founder's Agreement are in addition to and not in lieu of the benefits payable to him under his Severance Compensation Agreement (see below). Following a change in control of the Company, Mr. Qureshey is generally entitled to all of the benefits specified in the Severance Compensation Agreement, whether or not his active employment is terminated, provided, however, that Samsung's stock purchase will not constitute a change in control for purposes of Mr. Qureshey's Severance Compensation Agreement unless Samsung's interest in the Company becomes in excess of 49.9%. Mr. Qureshey will not otherwise participate in the officer involuntary termination policy described below. At the Annual Meeting of Stockholders held in May 1987, the shareholders authorized and approved an indemnification program for corporate officers and directors under which the Company and each corporate officer and director entered into an Indemnification Agreement, substantially in the form approved by the shareholders. The Company has entered into Severance Compensation Agreements with each of its executive officers. Under the agreements, following a "change in control" of the Company, which included the Samsung transaction for then existing officers, if either the Company terminates the officer's employment without cause or the officer terminates his employment for good reason, each as defined in the agreements, then (a) the Company will pay the officer severance compensation equal to two years' salary and bonuses; (b) all stock options held by the officer, to the extent that they would become exercisable within two years of the change in control, will immediately become exercisable for a period of six months following termination; and (c) the officer will receive continued welfare benefits for a period of two years. Under the agreements, the Company will indemnify the officer with respect to payment of excise taxes on excess "parachute payments" imposed under Section 4999 of the Internal Revenue Code. Such an agreement was entered into with Mr. Diery on November 2, 1995, provided that a change in control will be deemed to occur with respect to the Samsung transaction only if Samsung's percentage ownership of the Company should exceed 49.9 percent. Similarly, all agreements entered into after the original Samsung investment have a 49.9% trigger. Similar agreements have also been entered into with thirteen vice presidents, except that the vice presidents' severance benefits include only one year of salary, bonus and welfare benefits continuation, and only options otherwise vesting within one year of the change in control will accelerate. 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," as defined in the Severance Policy, 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 twelve months. Welfare benefits are also continued during this period. Mr. Schraith's employment with the Company terminated on September 11, 1995. Pursuant to a Severance Compensation Agreement with the Company, Mr. Schraith was paid a lump sum payment of $1,472,500. Scott A. Smith's employment as Vice President and General Manager, Desktop Products was terminated on September 11, 1995. Pursuant to a Severance Compensation Agreement with the Company, Mr. Smith was paid a lump sum payment of $477,500. James D. Wittry's employment as Senior Vice President, Americas was terminated on September 11, 1995. Pursuant to a Severance Compensation Agreement with the Company, Mr. Wittry was paid a lump sum payment of $461,600. Richard P. Ottaviano's employment as Senior Vice President, Administration terminated on October 20, 1995. Pursuant to a Severance Compensation Agreement with the Company, Mr. Ottaviano was paid a lump sum payment of $720,100. Mr. Edwards' employment with the Company terminated on December 28, 1995. Pursuant to a Severance Compensation Agreement with the Company, Mr. Edwards was paid a lump sum payment of $958,200 on January 3, 1996. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information, as of March 1, 1996, with respect to all those known by the Company to be the beneficial owners of more than 5% of its outstanding common stock, each director, the Chief Executive Officer and the other Named Executive Officers, and all directors and executive officers of the Company as a group. Unless otherwise noted, each of the shareholders listed owns less than 1% of the outstanding common stock and has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by him, subject to community property laws where applicable, and the information contained in the footnotes to this table. The Company had 44,685,900 shares outstanding at March 1, 1996.
- - - --------------------------------------------------------------------------------------------- NUMBER OF SHARES ---------------------------- PERCENTAGE OF NAME OF BENEFICIAL OWNER OPTIONS (A) TOTAL SHARES OUTSTANDING - - - --------------------------------------------------------------------------------------------- Samsung Electronics Co., Ltd. (b) - 17,890,000 40.03% Richard J. Goeglein 120,000 137,000 - Carmelo J. Santoro, Ph.D. 111,500 111,500 - Jack W. Peltason 69,000 69,300 - Safi U. Qureshey (c) 695,000 2,869,870 6.32% Dennis Leibel 99,000 104,026 - Gary D. Weaver 7,500 7,500 - Mark P. de Raad 20,750 20,850 - James T. Schraith (d) - 5,213 - Bruce C. Edwards (e) 50,000 91,288 - All directors and executive 1,122,750 3,320,046 7.25% officers as a group (f) ____________________
(a) Includes shares which executive officers and directors have the right to acquire within 60 days of March 1, 1996, under stock option and warrant agreements. (b) These shares are beneficially owned by Samsung and its wholly owned subsidiary, Samsung Electronics America, Inc. c/o 105 Challenger Road, Ridgefield Park, New Jersey 07660. (c) Includes 104,812 shares held by Nancy Marshall as custodian for minor children of Mr. Qureshey and 3,289 shares held by Nancy Marshall, Ishrat Qureshey and Iubna Bokhari, co-trustees of Irrevocable Trusts established for the benefit of Mr. Qureshey's minor children, to which Mr. Qureshey claims no beneficial interest. (d) Mr. Schraith's employment with the Company terminated on September 11, 1995. (e) Mr. Edward's employment with the Company terminated on December 28, 1995. Amount includes 803 shares held by Mary Pat DeMayo Buskard as trustee for minor children of Mr. Edwards to which Mr. Edwards disclaims any beneficial interest. (f) None of the following directors and executive officers beneficially own any shares of the Company's common stock or any shares that they have the right to exercise within 60 days: Hoon Choo, Gerald T. Devlin, Ian W. Diery, Kwang-Ho Kim, Young Soo Kim, Bo-Soon Song, Won Suk Yang, and Hee Dong Yoo. Amounts shown for "All directors and executive officers as a group" exclude Messrs. Schraith and Edwards due to their termination prior to March 1, 1996. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In July 1995, the Company loaned Mr. Qureshey $1,156,453 to exercise options to purchase 150,000 shares of the Company's common stock granted under the Chief Executives' Plan, evidenced by a promissory note secured by a stock certificate. The loan was issued interest free and is payable in full on or before April 30, 1996. At December 30, 1995, the entire amount remained outstanding. In September 1993, the Company loaned Vice President and General Manager, Desktop Products, 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 in September 1996. At December 30, 1995, the entire amount remained outstanding. See "Compensation Committee Interlocks and Insider Participation" above. 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 30 of this report. (2) Financial Statement Schedule II - Consolidated Valuation and Qualifying Accounts and Reserves Financial statement schedules other than the schedule 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 Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 28, 1993, Commission File No. 0-13941). 2.1.1 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 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993, Commission File No. 0-13941). 2.1.2 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 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993, Commission File No. 0-13941). 2.1.3 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 Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 29, 1993, Commission File No. 0-13941). 2.2 Agreement of Stock Purchase dated as of February 27, 1995 between AST Research, Inc. and Samsung Electronics Company Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 3, 1995, Commission File No. 0-13941). 2.2.1 Amendment No. 1 to Stock Purchase Agreement dated as of June 1, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Amendment No. 1 to Schedule 14D-9 as filed with the Securities and Exchange Commission on June 8, 1995, SEC File No. 005-44159). 2.2.2 Amendment No. 2 to Stock Purchase Agreement dated as of July 29, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 3.1 Certificate of Incorporation of AST Research, Inc., a Delaware Corporation, as amended (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995 , Commission File No. 0-13941). 3.2 Bylaws of AST Research, Inc., a Delaware corporation, as amended (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 22, 1995, Commission File No. 0-13941). Exhibit Number Description 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 Quarterly 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 of the Company's Registration Statement on Form 8-A as filed with the Securities and Exchange Commission on August 14, 1989, Commission File No. 0-13941). 4.1.1 Amendment to Rights Plan dated as of March 1, 1995 between AST Research, Inc. and American Stock Transfer & Trust Co. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 3, 1995, Commission File No. 0-13941). 10.1 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, Commission File No. 0-13941). 10.2 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, Registration No. 33-14131). 10.3 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, Registration No. 33-21729). 10.4 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, Commission File No. 0-13941). 10.5 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, Commission File No. 0-13941). 10.6 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, Commission File No. 0-13941). 10.7 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 Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 28, 1993, Commission File No. 0-13941). 10.8 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 of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993, Commission File No. 0-13941). 10.9 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 Current Report on Form 8-K as filed with the Securities and Exchange Commission on October 29, 1993, Commission File No. 0-13941). 10.10 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 Current Report on Form 8-K/A as filed with the Securities and Exchange Commission on January 10, 1994, Commission File No. 0-13941). 10.11 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 Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1994, Commission File No. 0-13941). 10.12 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) (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 0-13941). Exhibit Number Description 10.13 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) (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 0-13941). 10.14 Settlement Agreement and Release dated January 1, 1995, between AST Research, Inc. and Texas Instruments Incorporated (confidential treatment is requested with respect to portions of this exhibit) (incorporated by reference to referenced exhibit number of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 1, 1995, Commission File No. 0-13941). 10.15 Strategic Alliance Agreement dated February 27, 1995 between AST Research, Inc., and Samsung Electronics Company, Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 3, 1995, Commission File No. 0-13941). 10.16 Confidentiality Agreement dated December 21, 1994 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.17 Letter of Credit Agreement dated July 31, 1995 between AST Research, Inc., and Samsung Electronics Company, Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.18 Registration Rights Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Company, Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.19 Stockholder Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Company, Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.20 Amendment to Stockholder Agreement dated December 21, 1995 to Stockholder Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Company Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 22, 1995, Commission File No. 0-13941). 10.21 Component Sales Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.22 Cooperative Procurement Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.23 Marketing Cooperation Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.24 AST OEM Supply to SEC Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.25 SEC OEM Supply to AST Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.26 Joint Development and Technical Cooperation Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.27 Patent Cross License Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.28 Employee Exchange Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). Exhibit Number Description 10.29 General Terms Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.30 Letter Agreement dated July 31, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 7, 1995, Commission File No. 0-13941). 10.31 Stipulation of Settlement Agreement dated August 16, 1995 between AST Research, Inc. and class actions (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on September 6, 1995, Commission File No. 0-13941). 10.32 Additional Support Agreement dated December 21, 1995 between AST Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on December 22, 1995, Commission File No. 0-13941). 10.33 # Loan Agreement and Promissory Note dated November 20, 1995 between AST Research, Inc. and Samsung Electronics America, Inc. 10.34 # Credit Agreement dated December 27, 1995 among AST Research, Inc., Bank of America NT & SA as agent and the other financial institutions party hereto. 10.35 # First Amendment to Credit Agreement dated February 29, 1996 among AST Research, Inc., Bank of America NT & SA as agent and the other financial institutions party hereto. Executive Compensation Plans and Arrangements 10.36* 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, Commission File No. 0-13941). 10.37* Form of Indemnification Agreement, as amended to date. 10.38* 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, Commission File No. 0-13941). 10.39* 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, Registration No. 33-29345). 10.40* Amendment to 1989 Long-Term Incentive Program related to increase in number of shares (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992, Commission File No. 0-13941). 10.41* 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, Commission File No. 0-13941). 10.42* 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, Commission File No. 0-13941). 10.43* Amendment to AST Research, Inc. 1989 Long-Term Incentive Program (incorporated by reference to referenced exhibit number of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994, Commission File No. 0-13941). 10.44* 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, Commission File No. 0-13941). 10.45* 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, Commission File No. 0-13941). 10.46* Form of Warrant Certificate issued to Non-Employee Director in July 1992 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended June 27, 1992, Commission File No. 0-13941). 10.47* Form of Amendment to Warrant Certificate dated as of February 27, 1995 (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). Exhibit Number Description 10.48* 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, Commission File No. 0-13941). 10.49* 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, Commission File No. 0-13941). 10.50* Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-Employee Directors (incorporated by reference to referenced exhibit number of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994, Commission File No. 0-13941). 10.51* Amendment to the AST Research, Inc. 1991 Stock Option Plan for Non- Employee Directors dated February 27, 1995 (incorporated by reference to referenced exhibit number of the Company's Solicitation and Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.52* Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-Employee Directors (comprised of resolutions adopted by the Board of Directors on July 27, 1995) (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on January 26, 1996, Registration No. 333-00489). 10.53* Employment Agreement dated as of July 27, 1993 between Safi U. Qureshey 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 July 3, 1993, Commission File No. 0-13941). 10.54* Amendment to and Clarification of Employment Agreement dated as of February 27, 1995 between AST Research Inc. and Safi U. Qureshey (incorporated by reference to referenced exhibit number of the Company's Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 3, 1995, Commission File No. 0-13941). 10.55* Form of Severance Compensation Agreement (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended July 3, 1993, Commission File No. 0-13941). 10.56* Form of Amendment to Executive Officer Severance Compensation Agreement (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.57* Form of Amendment to Vice President Severance Compensation Agreement (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.58* Amendment to Severance Compensation Agreement dated February 27, 1995 between AST Research, Inc. and Safi U. Qureshey (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.59* Involuntary Termination Policy dated September 2, 1994 (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 0- 13941). 10.60* 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 Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994, Commission File No. 0-13941). 10.61* Option Agreement Under 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 Quarterly Report on Form 10-Q for the fiscal quarter ended January 1, 1994, Commission File No. 0-13941). 10.62* Amendment to the AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee Directors dated February 27, 1995 (incorporated by reference to referenced exhibit number of the Company's Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). 10.63* Form of Acknowledgment/Consent to Waiver of Rights under the 1991 Stock Option Plan for Non-Employee Directors and/or 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 Solicitation/Recommendation Statement on Schedule 14D-9 as filed with the Securities and Exchange Commission on March 6, 1995, SEC File No. 005-44159). Exhibit Number Description 10.64* Performance Based Annual Management Incentive Plan (incorporated by reference to referenced exhibit number of the Company's Annual Report on Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 13941). 10.65* President's Plan (comprised of resolutions adopted by the Board of Directors on November 2, 1995) (incorporated by reference to Exhibit 4.1 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on January 26, 1996, Registration No. 333-00487). 10.66* Form of Nonqualified Stock Option Agreement pertaining to the President's Plan (incorporated by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-8 as filed with the Securities and Exchange Commission on January 26, 1996, Registration No. 333-00487). 10.67*# AST Research, Inc. Profit Sharing Plus Plan, amended and restated as of July 1, 1993. 10.68*# First Amendment to the AST Research, Inc. Profit Sharing Plus Plan effective January 1, 1996. 10.69*# Employment Agreement dated as of November 2, 1995 between Ian Diery and AST Research, Inc. 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. # Filed herewith * 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 On November 6, 1995, the Company filed a report on Form 8-K reporting, under Item 8 thereof, the change of the Company's fiscal year-end to the Saturday closest to December 31 from the Saturday closest to June 30. The Company also announced its intention to file a Form 10-K for the transition period covering July 2, 1995 to December 30, 1995. On November 8, 1995, the Company filed a report on Form 8-K reporting, under Item 5 thereof, that it signed a letter of intent with Samsung Electronics Co., Ltd. ("Samsung") pursuant to which Samsung will provide certain additional financial support to the Company as consideration for such number of shares of common stock as would increase its ownership to 49.9 percent, subject to definitive documentation and approvals. The Company also announced the appointment of Ian Diery as President and Chief Executive Officer and as a member of the Board of Directors. In addition, the Company announced the results of operations for the quarter ended September 30, 1995. On November 22, 1995, the Company filed a report on Form 8-K reporting, under Item 5 thereof, the resignation of Bruce C. Edwards, executive vice president, chief financial officer and a board member, effective at the conclusion of the quarter ended December 30, 1995. On December 22, 1995, the Company filed a report on Form 8-K reporting, under Item 5 thereof, that it signed an agreement with Samsung that will provide additional financial support to the Company as consideration for an option to purchase 4.4 million shares of the Company's common stock at an exercise price of $.01 per share, exercisable after June 30, 1996 and expiring June 30, 2001. AST Advantage!, AST Premium, AST Research, GRiDPAD, GRiD, Victor and PalmPad are registered trademarks of AST Research, Inc. AST Computer, the AST Computer logo, AST Works, Ascentia, ASTVision, Pronto!, Pronto! Pro, Percepta, Bravo, Convertible, ExeCare, Manhattan, PowerExec, and Premmia are trademarks of AST Research, Inc. OverDrive and Pentium are registered trademarks of Intel Corporation. Pentium Pro 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. Liquid Yield Option and LYON are trademarks of Merrill Lynch & Co. 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)1996 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 March 27, 1996. AST RESEARCH, INC. Date: March 27, 1996 By: \s\Ian W. Diery Ian W. Diery President and Chief Executive Officer 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-in-fact 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-in-fact 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-in-fact 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 \s\Ian W. Diery President, Chief Executive March 27, 1996 Ian W. Diery Officer and Director (Principal Executive Officer) (Acting Principal Financial Officer) \s\Mark P. de Raad Vice President, Controller and March 27, 1996 Mark P. de Raad Principal Accounting Officer \s\Safi U. Qureshey Chairman of the Board and March 27, 1996 Safi U. Qureshey Director \s\Hoon Choo Director March 27, 1996 Hoon Choo \s\Richard J. Goeglein Director March 27,1996 Richard J. Goeglein \s\Kwang-Ho Kim Director March 27, 1996 Kwang-Ho Kim \s\Young Soo Kim Director March 27, 1996 Young Soo Kim \s\Jack W. Peltason Director March 27, 1996 Jack W. Peltason \s\Carmelo J. Santoro Director March 27, 1996 Carmelo J. Santoro, Ph.D. \s\Won Suk Yang Director March 27, 1996 Won Suk Yang \s\Hee Dong Yoo Director March 27, 1996 Hee Dong Yoo \s\Bo-Soon Song Director March 27, 1996 Bo-Soon Song SCHEDULE II AST RESEARCH, INC. CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES AT AND FOR THE SIX MONTHS ENDED DECEMBER 30, 1995, AND AT AND FOR THE YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993 (IN THOUSANDS)
- - - ---------------------------------------------------------------------------------------- Six Months Fiscal Year Ended Ended ----------------------------------- December 30, July 1, July 2, July 3, 1995 1995 1994 1993 - - - ---------------------------------------------------------------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Balance, beginning of period $ 17,452 $ 17,564 $ 11,671 $ 9,831 Additions charged to expense 2,321 6,091 13,219 6,089 Reductions (1,144) (6,203) (7,326) (4,249) - - - ---------------------------------------------------------------------------------------- Balance, end of period $ 18,629 $ 17,452 $ 17,564 $ 11,671 ======================================================================================== ALLOWANCE FOR SALES RETURNS Balance, beginning of period $ 19,514 $ 15,137 $ 9,120 $ 10,109 Net additions (reductions) charged to sales 6,719 4,377 6,017 (989) - - - ---------------------------------------------------------------------------------------- Balance, end of period $ 26,233 $ 19,514 $ 15,137 $ 9,120 ======================================================================================== RESERVE FOR EXCESS OR OBSOLETE INVENTORY Balance, beginning of period $ 45,536 $ 65,268 $ 35,595 $ 14,529 Inventory acquired in the Tandy acquisition - - - 20,535 Allocation of restructure reserves to identified inventory exposure - - 693 - Net additions (reductions) charged to expense 3,815 (19,732) 28,980 531 - - - ---------------------------------------------------------------------------------------- Balance, end of period $ 49,351 $ 45,536 $ 65,268 $ 35,595 ========================================================================================
EX-10.33 2 EXHIBIT 10.33 November 14, 1995 AST Research, Inc. 16215 Alton Parkway Irvine, California 92718 U.S.A. Dear Sirs: Samsung Electronics America, Inc. (the "Lender") hereby agrees to make a loan to AST Research, Inc. (the "Borrower") in the principal amount of US$50,000,000 (the "Loan") according to the terms of this letter agreement (hereinafter referred to as the "agreement"). The Loan shall be evidenced by a promissory note of the Borrower substantially in the form of Exhibit A hereto (as amended, supplemented or modified from time to time, the "Note"), which shall represent the Borrower's obligation to pay to the Lender the principal amount of US$50,000,000, with interest thereon as prescribed below. The Note shall bear interest at a fluctuating rate per annum equal to the rate (the "Interest Rate") which is the sum of (i) one and a half of one percent (1.5%) and (ii) either (a) the rate per annum determined by the Lender to be the rate equal to the rate quoted on the Telerate Screen Page 3750 (or equivalent successor to such page) for a period of one (1) month at or about 11:00 p.m. (London time) on the day which is one business day prior to the date of the borrowing on which dealings in deposits are carried on in the London interbank market or (b) if no rate appears on such page, such rate per annum determined by the Lender at its sole discretion as representing the cost of the Lender of funding the outstanding principal amount of the Loan calculated on the basis of a 360-day year of twelve 30-day months. Interest shall be calculated on the basis of a 360 day year for actual days elapsed. Any principal amount of the Loan that is not paid when due (whether as stated or otherwise) shall thereafter bear interest at a rate per annum equal to 2% above the Interest Rate until paid in full (both before and after judgment). The Lender shall be authorized to endorse the date and amount of the Loan and all payments of principal on the Note on the Schedule attached thereto and made a part thereof. The Lender's records shall constitute prima facie evidence of the accuracy of the information so recorded, provided however, that the failure to make any such endorsement shall not affect the obligation of the Borrower under the Note. The Note shall be used to record the Loan and all payments of principal under the Note until the Note is surrendered to the Borrower by the Lender and the Note shall continue to be used and to be in full force and effect even though there may be periods prior to surrender when no amount of principal or interest is owing thereunder. The Loan is payable in full on the earlier to occur of (a) December 20, 1995, (b) such date as the Borrower shall make a drawing under a line of credit to be provided or supported by the Lender, (as contemplated by that certain Letter of Intent dated November 2, 1995, between the Borrower and the Lender) or (c) such time as the Lender declares the entire amount of the Loan due and payable in accordance with the provisions of Section 4 of the Note. The Borrower agrees (a) to pay or reimburse the Lender for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this agreement, the Note and any document or instrument executed and delivered in connection therewith, including without limitation, fees and disbursements of counsel to the Lender and (b) to pay, indemnify and hold the Lender harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this agreement and the Note. This agreement shall be governed by and construed in accordance with the laws of the State of California without regard to its conflict-of-laws principals. The Borrower and the Lender agree that (a) any legal action or proceeding arising out of or in connection with this Note or the transactions contemplated hereby shall be brought exclusively in the courts of the State of California or the Federal Courts of the United States of America sitting in California, (ii) each irrevocably submits to the jurisdiction of each such court, and (iii) any summons, pleading, judgment, memorandum of law, or other paper relevant to any such action or proceeding shall be sufficiently served if delivered to the recipient thereof by certified or registered mail (with return receipt) at its address set forth in Section 7 of the Note. Nothing in the preceding sentence shall affect the right of any party to proceed in any jurisdiction for the enforcement or execution of any judgment, decree or order made by a court specified in said sentence. It is the intent of the Borrower and the Lender in the execution of this Note and in all transactions related hereto to comply with the usury laws of the State of California (or the usury laws of any other state that might be determined by a court of competent jurisdiction to be applicable notwithstanding such choice of law, hereinafter collectively referred to as "Usury Laws"). In the event that, for any reason, it should be determined that the Usury Laws apply to the Loan, the Borrower and the Lender stipulate and agree that none of the terms and provisions contained herein shall ever be construed to create a contract for use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the Usury Laws, all such sums or property deemed to constitute interest in excess of such maximum rate shall, at the option of the Lender, be credited to the payment of the principal sum due hereunder. If you agree with the terms of this agreement, please indicate your agreement by signing below. SAMSUNG ELECTRONICS AMERICA, INC. By: /s/Bo Soon Song Name: Bo Soon Song Title: Chief Executive Officer ACCEPTED AND AGREED: AST RESEARCH, INC. By: /s/Bruce C. Edwards Name: Bruce C. Edwards Title: Executive Vice President and Chief Financial Officer By: /s/Dennis R. Leibel Name: Dennis R. Leibel Title: Senior Vice President, Legal and Administration PROMISSORY NOTE November 20, 1995 Irvine, California $50,000,000 FOR VALUE RECEIVED, AST Research, Inc., a Delaware corporation ("Borrower"), hereby unconditionally promises to pay to Samsung Electronics America, Inc., a New York corporation ("Lender"), or assigns, at the address set forth in Section 7 below, or at such other place as the holder hereof may from time to time notify Borrower in writing, the principal sum of Fifty Million DOLLARS ($50,000,000), together with interest from the date hereof, on the outstanding principal amount at the rate set forth herein below, on the Maturity Date as (defined below). Lender has lent to Borrower the sum of Fifty Million DOLLARS ($50,000,000) on the date hereof. 1. The outstanding principal amount of this Note shall bear interest at the rate per annum which is the sum of (i) one and a half of one percent (1.5%) and (ii) either (a) the rate per annum determined by the Lender to be the rate equal to the rate quoted on the Telerate Screen Page 3750 (or the equivalent successor to such page) for a period of one (1) month at or about 11:00 p.m. (London time) on the day which is one business day prior to the date hereof on which dealings in deposits are carried on in the London interbank market or (b) if no rate appears on such page, such rate per annum determined by the Lender at its sole discretion as representing the cost of the Lender of funding the outstanding principal amount hereof calculated on the basis of a 360-day year of twelve 30-day months. 2. The principal sum of this Note, together with all accrued and unpaid interest hereon and all other amounts due hereunder, shall be due and payable in full on the earlier to occur of (a) December 20, 1995, (b) such date as Borrower shall make a drawing under a line of credit to be provided or supported by Lender, (as contemplated by that certain Letter of Intent dated November 2, 1995 between Borrower and Lender) or (c) such time as Lender declares the entire amount of this Note due and payable in accordance with the provisions of Section 4 hereof (such earlier date, the "Maturity Date"). 3. Principal and interest and all other amounts due hereunder shall be payable in lawful money of the United States of America. Payments shall be applied first to interest on past due interest, second to current due interest, third to accrued interest, fourth to all other amounts (other than principal) due hereunder , and fifth to principal. The undersigned may prepay all or part of this Note at any time and from time to time without penalty. 4. An event of default ("Event of Default") hereunder shall occur if: a. Borrower shall fail to pay any amount hereunder as and when due; b. There shall be a default under any evidence of indebtedness for borrowed money of Borrower or any of its subsidiaries having a principal amount in excess of $2 million (i) resulting from the failure to pay principal at maturity or (ii) as a result of which the maturity of such indebtedness has been accelerated prior to its stated maturity; c. Borrower shall admit in writing its inability to pay or shall be unable to pay its debts as they become due, or shall apply for a receiver, trustee or similar officer with respect to all or a substantial part of its property or shall institute by petition, application, answer, consent or otherwise, any bankruptcy, insolvency, reorganization, arrangement, readjustment of debts, dissolution, liquidation or similar proceedings relating to Borrower under the laws of any jurisdiction; or d. Any creditor of Borrower shall apply for a receiver, trustee or similar officer with respect to all or a substantial part of Borrower's property or shall institute by petition, application, answer, consent or otherwise, any bankruptcy, insolvency, reorganization, arrangement, readjustment of debts, dissolution, liquidation or similar proceedings relating to Borrower under the laws of any jurisdiction, and such petition, bankruptcy, or other proceeding shall not be stayed, bonded or discharged within sixty (60) days. Upon the occurrence of any Event of Default, and at such time as any Event of Default is continuing, (i) if such event is an Event of Default specified in clause (c) or (d) above, this Note shall automatically and immediately become due and payable and (ii) if such event is any other Event of Default, the holder hereof, at its option, may declare all sums due hereunder immediately due and payable by sending a notice of default to Borrower. 5. No failure or delay on the part of the holder of this Note or the failure to exercise any power or right under this Note shall operate as a waiver of such power or right or preclude other or further exercise thereof or the exercise of any other power or right. No waiver by the holder of this Note will be effective unless and until it is in writing and signed by such holder. No waiver of any condition or performance will operate as a waiver of any subsequent condition or obligation. Except as provided herein, the undersigned hereby waives diligence, presentment, demand for payment, notice of dishonor or acceleration, protest and notice of protest, and any and all other notices or demands in connection with delivery, acceptance, performance, default or enforcement of this Note. 6. In the event that any action, suit or other proceeding is instituted concerning or arising out of this Note, the prevailing party shall recover all of such party's costs, and reasonable attorneys' fees incurred in each and every such action, suit, or other proceeding, including any and all appeals or petitions therefrom. 7. Notices required or permitted to be given under this Note to any party hereto by any other party shall be in writing and shall be deemed to have been duly delivered and given when personally delivered to the party (including by express courier service) or sent by facsimile transmission at the address or number set forth below, or any such other address or number as shall be given in writing by the respective party to all other parties: Borrower: AST Research, Inc. 16215 Alton Parkway Irvine, California 92718 Attention: Treasurer Fax Number: (714) 727-8584 With a copy to: AST Research, Inc. 16215 Alton Parkway Irvine, California 92718 Attention: General Counsel Lender: Samsung Electronics America Inc. 105 Challenger Road Ridgefield Park New Jersey 07660 Attention: Finance Manager Fax No. (201) 229-7030 With a copy to: Samsung Electronics America Inc. 105 Challenger Road Ridgefield Park New Jersey 07660 Attention: Un Suk Ko Fax No. (201) 229-7030 8. This Note, its validity, construction and effect, shall be governed by, construed under and enforced in accordance with, the laws of the State of California without regard to its conflict-of-laws principals. Borrower and Lender agree that (i) any legal action or proceeding arising out of or in connection with this Note or the transactions contemplated hereby shall be brought exclusively in the courts of the State of California or the Federal Courts of the United States of America sitting in California, (ii) each irrevocably submits to the jurisdiction of each such court, and (iii) any summons, pleading, judgment, memorandum of law, or other paper relevant to any such action or proceeding shall be sufficiently served if delivered to the recipient thereof by certified or registered mail (with return receipt) at its address set forth in Section 7 hereof. Nothing in the preceding sentence shall affect the right of any party to proceed in any jurisdiction for the enforcement or execution of any judgment, decree or order make by a court specified in said sentence. 9. It is the intent of Borrower and Lender in the execution of this Note and in all transactions related hereto to comply with the usury laws of the State of California (or the usury laws of any other state that might be determined by a court of competent jurisdiction to be applicable notwithstanding such choice of law, hereinafter collectively referred to as "Usury Laws"). In the event that, for any reason, it should be determined that the Usury Laws apply to the loan evidenced hereby, Borrower and Lender stipulate and agree that none of the terms and provisions contained herein shall ever be construed to create a contract for use, forbearance or detention of money requiring payment of interest at a rate in excess of the maximum interest rate permitted to be charged by the Usury Laws. In such event, if Lender shall collect monies or other property which are deemed to constitute interest which would otherwise increase the effective interest rate on this Note to a rate in excess of the maximum rate permitted to be charged by the Usury Laws, all such sums or property deemed to constitute interest in excess of such maximum rate shall, at the option of Lender, be credited to the payment of the principal sum due hereunder. 10. This Note shall not be assignable by Borrower. This Note shall be assignable by Lender and all provisions of this Note shall inure to the benefit of Lender and all of its successors and assigns. IN WITNESS WHEREOF, the undersigned has caused this Note to be duly executed and delivered as of the day and year first above written. AST RESEARCH, INC. By: /s/Bruce C. Edwards Name: Bruce C. Edwards Title: Executive Vice President and Chief Financial Officer By: /s/Dennis R. Leibel Name: Dennis R. Leibel Title: Senior Vice President, Legal and Administration EX-10.34 3 EXHIBIT 10.34 CREDIT AGREEMENT DATED AS OF DECEMBER 27, 1995 AMONG AST RESEARCH, INC., BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS AGENT, AND THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO ARRANGED BY BA SECURITIES, INC. TABLE OF CONTENTS Section Page ARTICLE I DEFINITIONS 1 1.01 Certain Defined Terms 1 1.02 Other Interpretive Provisions 15 1.03 Accounting Principles 16 ARTICLE II THE CREDITS 16 2.01 Amounts and Terms of Commitments 16 2.02 Loan Accounts 17 2.03 Procedure for Borrowing 17 2.04 Conversion and Continuation Elections 18 2.05 Voluntary Termination or Reduction of Commitments 19 2.06 Optional Prepayments 20 2.07 Repayment 20 2.08 Interest 20 2.09 Fees 21 (a) Arrangement, Agency Fees 21 (b) Commitment Fees 21 2.10 Computation of Fees and Interest 22 2.11 Payments by the Company 22 2.12 Payments by the Banks to the Agent 22 2.13 Sharing of Payments, Etc. 23 2.14 Extension of Termination Date 24 ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY 24 3.01 Taxes 24 3.02 Illegality 27 3.03 Increased Costs and Reduction of Return 28 3.04 Funding Losses 29 3.05 Inability to Determine Rates 29 3.06 Invoices of Banks 30 3.07 Survival 30 3.08 Replacement Bank 30 ARTICLE IV CONDITIONS PRECEDENT 31 4.01 Conditions of Initial Loans 31 (a) Credit Agreement and Notes 31 (b) Resolutions; Incumbency 31 (c) Organization Documents; Good Standing 32 (d) Legal Opinions 32 (e) Payment of Fees 32 (f) Certificate 32 (g) Guaranty 33 (h) Consents 33 (i) Other Documents 33 4.02 Conditions to All Borrowings 33 (a) Notice of Borrowing 33 (b) Continuation of Representations and Warranties 33 (c) No Existing Default 33 ARTICLE V REPRESENTATIONS AND WARRANTIES 33 5.01 Corporate Existence and Power 33 5.02 Corporate Authorization; No Contravention 34 5.03 Governmental Authorization 34 5.04 Binding Effect 34 5.05 Litigation 35 5.06 No Default 35 5.07 ERISA Compliance 35 5.08 Use of Proceeds; Margin Regulations 37 5.09 Title to Properties 37 5.10 Taxes 37 5.11 Financial Condition; No Material Adverse Change 37 5.12 Environmental Matters 38 5.13 Regulated Entities 38 5.14 No Burdensome Restrictions 39 5.15 Solvency 39 5.16 Copyrights, Patents, Trademarks and Licenses, Etc. 39 5.17 Subsidiaries 39 5.18 Full Disclosure 39 ARTICLE VI AFFIRMATIVE COVENANTS 40 6.01 Financial Statements 40 6.02 Certificates; Other Information 40 6.03 Notices 41 6.04 Preservation of Corporate Existence, Etc. 42 6.05 Maintenance of Property 42 6.06 Insurance 42 6.07 Payment of Obligations 43 6.08 Compliance with Laws 43 6.09 Compliance with ERISA 43 6.10 Inspection of Property and Books and Records 44 6.11 Environmental Laws 44 6.12 Use of Proceeds 44 ARTICLE VII NEGATIVE COVENANTS 44 7.01 Limitation on Liens 44 7.02 Disposition of Assets 46 7.03 Consolidations and Mergers 47 7.04 Loans and Investments 48 7.05 Transactions With Affiliates 49 7.06 Compliance With ERISA 49 7.07 Restricted Payments 50 7.08 Use of Proceeds 50 7.09 Change in Business 50 7.10 Accounting Changes 51 ARTICLE VIII EVENTS OF DEFAULT 51 8.01 Event of Default 51 (a) Non-Payment 51 (b) Representation or Warranty 51 (c) Specific Defaults 51 (d) Other Defaults 51 (e) Cross-Default 51 (f) Insolvency; Voluntary Proceedings 52 (g) Involuntary Proceedings 52 (h) ERISA 52 (i) Monetary Judgments 53 (j) Non-Monetary Judgments 53 (k) Change of Control 53 (l) Guarantor Defaults 53 8.02 Remedies 53 8.03 Rights Not Exclusive 54 ARTICLE IX THE AGENT 54 9.01 Appointment and Authorization; "Agent" 54 9.02 Delegation of Duties 54 9.03 Liability of Agent 55 9.04 Reliance by Agent 55 9.05 Notice of Default 56 9.06 Credit Decision 56 9.07 Indemnification of Agent 56 9.08 Agent in Individual Capacity 57 9.09 Successor Agent 57 9.10 Withholding Tax 58 ARTICLE X MISCELLANEOUS 59 10.01 Amendments and Waivers 59 10.02 Notices 60 10.03 No Waiver; Cumulative Remedies 61 10.04 Costs and Expenses 61 10.05 Company Indemnification 62 10.06 Payments Set Aside 62 10.07 Successors and Assigns 62 10.08 Assignments, Participations, Etc. 62 10.09 Confidentiality 64 10.10 Set-off 65 10.11 Notification of Addresses, Lending Offices, Etc. 65 10.12 Counterparts 65 10.13 Severability 65 10.14 No Third Parties Benefited 66 10.15 Governing Law and Jurisdiction 66 10.16 Waiver of Jury Trial 66 10.17 Entire Agreement 66 SCHEDULES Schedule 2.01 Commitments Schedule 5.05 Litigation Schedule 5.07 ERISA Schedule 5.12 Environmental Matters Schedule 5.17(a) Subsidiaries Schedule 5.17(b) Affiliates Schedule 7.01 Permitted Liens Schedule 7.05 Transactions with Affiliates Schedule 7.09 Permitted Changes in Business Schedule 10.02 Lending Offices; Addresses for Notices EXHIBITS Exhibit A Form of Notice of Borrowing Exhibit B Form of Notice of Conversion/Continuation Exhibit C Form of Compliance Certificate Exhibit D Form of Legal Opinion of Company's California Counsel Exhibit E Form of Legal Opinion of Guarantor's California Counsel Exhibit F Form of Legal Opinion of Guarantor's Korea Counsel Exhibit G Form of Assignment and Acceptance Exhibit H Form of Promissory Note Exhibit I Form of Guaranty Exhibit J Form of Satisfaction of Conditions Certificate CREDIT AGREEMENT This CREDIT AGREEMENT is entered into as of December 20, 1995, among AST Research, Inc., a Delaware corporation (the "Company"), the several financial institutions from time to time party to this Agreement (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as agent for the Banks. WHEREAS, the Banks have agreed to make available to the Company a revolving credit facility upon the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the mutual agreements, provisions and covenants contained herein, the parties agree as follows: DEFINITIONS Certain Defined Terms The following terms have the following meanings: "Acquiree" means any Person, control of which is to be acquired in, or who is the target of, or will or having a division or business that will be acquired in, an Acquisition. "Acquisition" means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock, partnership interests, membership interests or equity of any Person, or otherwise causing any Person to become a Subsidiary, or (c) a merger or consolidation or any other combination with another Person (other than a Person that is a Subsidiary) provided that the Company or the Subsidiary is the surviving entity. "Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise. "Agent" means BofA in its capacity as agent for the Banks hereunder, and any successor agent arising under Section 9.09. "Agent-Related Persons" means BofA and any successor agent arising under Section 9.09, together with their respective Affiliates (including, in the case of BofA, the Arranger), and the officers, directors, employees, agents and attorneys-in-fact of such Persons and Affiliates. "Agent's Payment Office" means the address for payments set forth on Schedule 10.02 or such other address as the Agent may from time to time specify. "Agreement" means this Credit Agreement. "Applicable Margin" means with respect to Base Rate Loans, 0%; and with respect to Offshore Rate Loans, .25%. "Arranger" means BA Securities, Inc., a Delaware corporation. "Assignee" has the meaning specified in subsection 10.08(a). "Attorney Costs" means and includes all reasonable fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel. "Bank" has the meaning specified in the introductory clause hereto. "Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. Section101, et seq.). "Base Rate" means, for any day, the higher of: (a) 0.50% per annum above the latest Federal Funds Rate; and (b) the rate of interest in effect for such day as publicly announced from time to time by BofA in San Francisco, California, as its "reference rate." (The "reference rate" is a rate set by BofA based upon various factors including BofA's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the reference rate announced by BofA shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan that bears interest based on the Base Rate. "BofA" means Bank of America National Trust and Savings Association, a national banking association. "Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Banks under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period. "Borrowing Date" means any date on which a Borrowing occurs under Section 2.03. "Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in New York City or San Francisco are authorized or required by law to close and, if the applicable Business Day relates to any Offshore Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market. "Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank. "Capital Lease Obligations" means all monetary obligations of the Company or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, is classified as a capital lease. "Change of Control" means when (a) the Guarantor and it Subsidiaries shall cease to own directly or indirectly at least 40% of the outstanding capital stock of the Company which is entitled to vote in the election of directors or (b) any Person other than the Guarantor and its Subsidiaries (i) shall own, directly or indirectly, 30% or more of the outstanding capital stock of the Company which is entitled to vote in the election of directors or (ii) shall have the ability to elect a majority of the board of directors of the Company. "Closing Date" means the date on which all conditions precedent set forth in Section 4.01 are satisfied or waived by all Banks (or, in the case of subsection 4.01(e), waived by the Person entitled to receive such payment). "Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder. "Commitment," as to each Bank, has the meaning specified in Section 2.01. "Company," has the meaning specified in the introductory paragraph hereof. "Compliance Certificate" means a certificate substantially in the form of Exhibit C. "Consolidated Subsidiaries" means, at any time, those Subsidiaries of the Company that in accordance with GAAP would be consolidated with the Company for financial reporting purposes. "Consolidated Total Assets" means, as of any date of determination, the aggregate amount of all assets of the Company and its Subsidiaries that would, in accordance with GAAP, be required to be shown as assets on a consolidated balance sheet of the Company and its Subsidiaries as of such date. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability of that Person with respect to any Indebtedness, lease, dividend, letter of credit or other obligation (the "primary obligation") of another Person (the "primary obligor"), including any obligation of that Person, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to main tain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation set forth above of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation outstanding at any point in time in respect of which such Contingent Obligation is made or, if not stated or if indeterminable, the maximum anticipated liability in respect thereof as reasonably determined by the Company in accordance with past practices. "Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound. "Controlled Group" means the Company and all Persons (whether or not incorporated) under common control or treated as a single employer with the Company pursuant to Section 414(b), (c), (m) or (o) of the Code. "Conversion/Continuation Date" means any date on which, under Section 2.04, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date. "Credit" means the Loans and Commitments extended hereunder. "Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default. "Dollars," "dollars" and "$" each mean lawful money of the United States. "Eligible Assignee" means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $1,000,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development (the "OECD"), or a political subdivision of any such country, and having a combined capital and surplus of at least $1,000,000,000, provided that such bank is acting through a branch or agency located in the country in which it is organized or another country which is also a member of the OECD; and (c) a Person that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a Bank, (ii) a Subsidiary of a Person of which a Bank is a Subsidiary, or (iii) a Person of which a Bank is a Subsidiary. "Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment. "Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters. "Environmental Permits" has the meaning specified in subsection 5.12(b). "ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code). "ERISA Event" means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate. "Eurodollar Reserve Percentage" has the meaning specified in the definition of "Offshore Rate". "Event of Default" means any of the events or circumstances specified in Section 8.01. "Exchange Act" means the Securities Exchange Act of 1934, and regulations promulgated thereunder. "FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions. "Federal Funds Rate" means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, "H.15(519)") on the preceding Business Day opposite the caption "Federal Funds (Effective)"; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York City time) on that day by each of three leading brokers of Federal funds transactions in New York City selected by the Agent. "Fee Letter" has the meaning specified in subsection 2.09(a). "FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions. "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession), which are applicable to the circumstances as of the date of determination. "Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "Guarantor" means Samsung Electronics Co., Ltd., a Korean corporation. "Guaranty" means the Guaranty of the Guarantor in substantially the form of Exhibit I. "Hazardous Materials" means all those substances which are regulated by, or which may form the basis of liability under, any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, waste, solid waste, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste. "Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than ordinary course trade payables); (c) all reimbursement obligations with respect to surety bonds, letters of credit, bankers' acceptances and similar instruments (in each case, whether or not matured); (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property; provided, however, in such case the indebtedness shall be limited to the fair market value of such property); (f) all Capital Lease Obligations; (g) all indebtedness referred to in paragraphs (a) through (f) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (h) all direct or indirect guaranties in respect of and obligations (contingent or otherwise) to purchase or otherwise acquire, or otherwise to assure a creditor against loss in respect of, indebtedness or obligations of others of the kinds referred to in paragraphs (a) through (f) above. The amount of any Indebtedness of the kind set forth in paragraph (h) above shall be deemed to be an amount equal to the stated or determinable amount of Indebtedness outstanding at any point in time in respect of which such guarantee is made or, if not stated or if indeterminable, the amount reasonably determined by the Company in accordance with past practices. "Indemnified Liabilities" has the meaning specified in Section 10.05. "Indemnified Person" has the meaning specified in Section 10.05. "Independent Auditor" has the meaning specified in subsection 6.01(a). "Insolvency Proceeding" means, with respect to any Person, (a) any case, action or proceeding with respect to such Person before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code. "Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan. "Interest Period" means, as to any Offshore Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Offshore Rate Loan, and ending on the date one, two, three or six months thereafter or on such other dates as the Agent and the Banks in their sole discretion may agree to; provided that: (i) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of an Offshore Rate Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (ii) any Interest Period pertaining to an Offshore Rate Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (iii) no Interest Period for any Loan shall extend beyond the Revolving Termination Date. "Investments" has the meaning specified in Section 7.04. "IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code. "Joint Venture" means a single-purpose corporation, partnership, limited liability company, joint venture or other similar legal arrangement (whether created by contract or conducted through a separate legal entity) now or hereafter formed by the Company or any of its Subsidiaries with another Person in order to conduct a common venture or enterprise with such Person. "Lending Office" means, as to any Bank, the office or offices of such Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 10.02, or such other office or offices as such Bank may from time to time notify the Company and the Agent. "LIBOR" means the rate of interest per annum determined by the Agent from Telerate page 3750 to be the arithmetic mean (rounded upward to the next 1/16th of 1%) of the rates of interest per annum at which dollar deposits in the approximate amount of the amount of the Loan to be made or continued as, or converted into, an Offshore Rate Loan and having a maturity comparable to such Interest Period would be offered to major banks in the London interbank market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period. If no such quotations are available, LIBOR shall be determined by the Agent to be the arithmetic mean, rounded upward to the nearest 1/16th of one percent of the rates of interest per annum at which deposits in an amount approximately equal to the aggregate amount of such Offshore Loan requested to be borrowed, and having a maturity equal to such Interest Period are offered to the Agent in the London Interbank Market at or about 11:00 a.m. (London time) on the second Business Day before (and for value on) the commencement of such Interest Period. "Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease. "Loan" means an extension of credit by a Bank to the Company under Article II, and may be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Loan). "Loan Documents" means this Agreement, any Notes, the Guaranty, the Fee Letter and all other documents delivered to the Agent or any Bank in connection herewith. "Majority Banks" means at any time Banks then holding at least 66-2/3% of the then aggregate unpaid principal amount of the Loans, or, if no such principal amount is then outstanding, Banks then having at least 66-2/3% of the Commitments. "Margin Stock" means "margin stock" as such term is defined in Regulation G, T, U or X of the FRB. "Marketable Investments" means investments held by the Company or any of its Subsidiaries in the form of cash equivalents or short- term marketable securities. "Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, condition (financial or otherwise) or prospects of the Guarantor, the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Guarantor or the Company to perform under any Loan Document without default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or the Guarantor of any Loan Document. "Material Subsidiary" means any Subsidiary of the Company for which, based upon the Company's most recent annual or quarterly consolidated and consolidating financial statements delivered to the Agent and the Banks pursuant to Section 6.01, the total assets of such Subsidiary exceeds five percent of the consolidated assets of the Company and its Consolidated Subsidiaries. "Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions. "Note" means a promissory note executed by the Company in favor of a Bank pursuant to subsection 2.02(b), in substantially the form of Exhibit H. "Notice of Borrowing" means a notice in substantially the form of Exhibit A. "Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B. "Notice of Lien" means any "notice of lien" or similar document intended to be filed or recorded with any court, registry, recorder's office, central filing office or Governmental Authority for the purpose of evidencing, creating, perfecting or preserving the priority of a Lien securing obligations owing to a Governmental Authority. "Notice of Substitution" has the meaning specified in Section 3.08. "Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to any Bank, the Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising. "Offshore Rate" means, for any Interest Period, with respect to Offshore Rate Loans comprising part of the same Borrowing, the rate of interest per annum determined by the Agent by reference to LIBOR. "Offshore Rate Loan" means a Loan that bears interest based on the Offshore Rate. "Organization Documents" means, for any corporation, the certificate or articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation. "Other Taxes" has the meaning specified in Section 3.01(b). "Participant" has the meaning specified in subsection 10.08(d). "PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA. "Pension Plan" means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA which the Company sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years. "Permitted Liens" has the meaning specified in Section 7.01. "Permitted Waiver" means, in respect of any default or event of default under any instrument or agreement evidencing any Indebtedness or Contingent Obligation, a written waiver (including by amendment), duly executed and delivered by the applicable creditor, permanently waiving such default or event of default. "Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority. "Plan" means an employee benefit plan (as defined in Section 3(3) of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions and includes any Pension Plan. "Pro Rata Share" means, as to any Bank at any time, the percentage equivalent (expressed as a decimal, rounded to the ninth decimal place) at such time of such Bank's Commitment divided by the combined Commitments of all Banks. "Qualified Plan" means a pension plan (as defined in Section 3(2) of ERISA) intended to be tax-qualified under Section 401(a) of the Code and which any member of the Controlled Group sponsors, maintains, or to which it makes, is making or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding period covering at least five (5) plan years, but excluding any Multiemployer Plan. "Removed Bank" has the meaning specified in Section 3.08. "Replacement Bank" has the meaning specified in Section 3.08. "Reportable Event" means, any of the events set forth in Section 4043(c) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC. "Requirement of Law" means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject. "Responsible Officer" means the chief executive officer, chief financial officer, senior vice president, treasurer or the president of the Company. "Revolving Termination Date" means the earlier to occur of: (a) December 31, 1996; (b) 364 days after the Closing Date; and (c) the date on which the Commitments terminate in accordance with the provisions of this Agreement. "Solvent" means, as to any Person at any time, that (a) the fair value of the property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the United States Bankruptcy Code (12 U.S.C. Section 101 et seq.); (b) the present fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) taking into account all of such Person's then-available sources of liquidity, including borrowings, such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; and (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature. "Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company. "Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments. "Tangible Net Worth" means, at any time of determination, in respect of the Company and its Subsidiaries, determined on a consoli dated basis, total assets (exclusive of goodwill, licensing agreements, patents, trademarks, trade names, organization expense, treasury stock, unamortized debt discount and premium, deferred charges and other like intangibles) less total liabilities (including accrued and deferred income taxes), at such time. "Taxes" has the meaning specified in Section 3.01(a). "Type" has the meaning specified in the definition of "Loan." "Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year. "United States" and "U.S." each means the United States of America. "Voluntary Lien" means any security agreement, pledge, assignment, hypothecation, charge or deposit arrangement, grant of mortgage, grant of deed of trust and any and all other Liens intentionally or voluntarily entered into or incurred by the Company or any of its Subsidiaries. "Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both. Other Interpretive Provisions. (a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. The words "hereof," "herein," "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. The term "including" is not limiting and means "including without limitation." In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including." Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. Accounting Principles. (a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company. THE CREDITS Amounts and Terms of Commitments Each Bank severally agrees, on the terms and conditions set forth herein, to make Loans to the Company from time to time on any Business Day during the period from the Closing Date to the Revolving Termination Date, in an aggregate amount not to exceed at any time outstanding the amount set forth on Schedule 2.01 (such amount, as the same may be reduced under Section 2.05 or as a result of one or more assignments under Section 10.08, the Bank's "Commitment"); provided, however, that, after giving effect to any Borrowing, the aggregate principal amount of all outstanding Loans shall not at any time exceed the combined Commitments. Within the limits of each Bank's Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.01, prepay under Section 2.06 and reborrow under this Section 2.01. Loan Accounts (a) The Loans made by each Bank shall be evidenced by one or more loan accounts or records maintained by such Bank in the ordinary course of business. The loan accounts or records maintained by the Agent and each Bank shall be conclusive absent manifest error of the amount of the Loans made by the Banks to the Company and the interest and payments thereon. Any failure so to record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Company hereunder to pay any amount owing with respect to the Loans. Upon the request of any Bank made through the Agent, the Loans made by such Bank may be evidenced by one or more Notes, instead of or in addition to loan accounts. Each such Bank shall endorse on the schedules annexed to its Note(s) the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. Each such Bank is irrevocably authorized by the Company to endorse its Note(s) and each Bank's record shall be conclusive absent manifest error; provided, however, that the failure of a Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under any such Note to such Bank. Procedure for Borrowing. (a) Each Borrowing shall be made upon the Company's irrevocable written (or irrevocable notice via telephone confirmed immediately by a facsimile provided such notice is confirmed with an original written notice sent by mail or courier) notice delivered to the Agent in the form of a Notice of Borrowing (which notice must be received by the Agent prior to 9:00 a.m. (San Francisco time) (i) three Business Days prior to the requested Borrowing Date, in the case of Offshore Rate Loans; and (ii) on the Business Day that is the requested Borrowing Date, in the case of Base Rate Loans, specifying: the amount of the Borrowing, which shall be in an aggregate minimum amount of $1,000,000 or any multiple of $100,000 in excess thereof; the requested Borrowing Date, which shall be a Business Day; the Type of Loans comprising the Borrowing; and the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Offshore Rate Loans, such Interest Period shall be three months. provided, however, that with respect to the Borrowing to be made on the Closing Date, the Notice of Borrowing shall be delivered to the Agent not later than 1:00 p.m. (San Francisco time) one Business Day before the Closing Date and such Borrowing will consist of Base Rate Loans only. The Agent will promptly notify each Bank of its receipt of any Notice of Borrowing and of the amount of such Bank's Pro Rata Share of that Borrowing. Each Bank will make the amount of its Pro Rata Share of each Borrowing available to the Agent for the account of the Company at the Agent's Payment Office by 11:00 a.m. (San Francisco time) on the Borrowing Date requested by the Company in funds immediately available to the Agent. The proceeds of all such Loans will then be made available to the Company by the Agent at such office by crediting the account of the Company on the books of BofA with the aggregate of the amounts made available to the Agent by the Banks and in like funds as received by the Agent. After giving effect to any Borrowing, unless the Agent shall otherwise consent, there may not be more than eight different Interest Periods in effect. Conversion and Continuation Elections (a) The Company may, upon irrevocable written notice (or irrevocable notice via telephone confirmed immediately by a facsimile provided such notice is confirmed with an original written notice sent by mail or courier) to the Agent in accordance with subsection 2.04(b): elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $1,000,000, or that is in an integral multiple of $100,000 in excess thereof) into Loans of any other Type; or elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $1,000,000, or that is in an integral multiple of $100,000 in excess thereof); provided, that if at any time the aggregate amount of Offshore Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $1,000,000, such Offshore Rate Loans shall automatically convert into Base Rate Loans, and on and after such date the right of the Company to continue such Loans as, and convert such Loans into, Offshore Rate Loans shall terminate. The Company shall deliver a Notice of Conversion/Continuation to be received by the Agent not later than 9:00 a.m. (San Francisco time) at least (i) three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Offshore Rate Loans; and (ii) on the Business Day that is the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: the proposed Conversion/Continuation Date; the aggregate amount of Loans to be converted or continued; the Type of Loans resulting from the proposed conversion or continuation; and other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period. If upon the expiration of any Interest Period applicable to Offshore Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Offshore Rate Loans, or, subject to Subsection 2.04(e) wherein the Majority Banks may direct otherwise, if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Offshore Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period. The Agent will promptly notify each Bank of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Agent will promptly notify each Bank of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective outstanding principal amounts of the Loans with respect to which the notice was given held by each Bank. Unless the Majority Banks otherwise consent, during the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Offshore Rate Loan. After giving effect to any conversion or continuation of Loans, unless the Agent shall otherwise consent, there may not be more than eight different Interest Periods in effect. Voluntary Termination or Reduction of Commitments. The Company may, upon not less than five Business Days' prior notice to the Agent, terminate the Commitments, or permanently reduce the Commitments by an aggregate minimum amount of $5,000,000 or any multiple of $1,000,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of the Loans would exceed the amount of the combined Commitments then in effect. Once reduced in accordance with this Section, the Commitments may not be increased. Any reduction of the Commitments shall be applied to each Bank according to its Pro Rata Share. All accrued commitment fees to, but not including the effective date of any termination of Commitments, shall be paid on the effective date of such termination. Optional PrepaymentsSubject to Section 3.04, the Company may, at any time or from time to time, upon not less than (a) three Business Days' (in the case of Offshore Rate Loans) and (b) the same Business Day's (in the case of Base Rate Loans) irrevocable notice to the Agent, ratably prepay Loans in whole or in part, in minimum amounts of $1,000,000 or any multiple of $100,000 in excess thereof. Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid. The Agent will promptly notify each Bank of its receipt of any such notice, and of such Bank's Pro Rata Share of such prepayment. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.04. RepaymentThe Company shall repay to the Banks on the Revolving Termination Date the aggregate principal amount of Loans outstanding on such date. Interest (a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Offshore Rate or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.04), plus the Applicable Margin. Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.06 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Agent at the request or with the consent of the Majority Banks. Notwithstanding subsection (a) of this Section, while any Event of Default exists or after acceleration, the Company shall pay interest (after as well as before entry of judgment thereon to the extent permitted by law) on the principal amount of all outstanding Obligations, at a rate per annum which is determined by adding 1.50% per annum to the Applicable Margin then in effect for such Loans and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 1.50%; provided, however, that, on and after the expiration of any Interest Period applicable to any Offshore Rate Loan outstanding on the date of occurrence of such Event of Default or acceleration, the principal amount of such Loan shall, during the continuation of such Event of Default or after acceleration, bear interest at a rate per annum equal to the Base Rate plus 1.50%. Anything herein to the contrary notwithstanding, the obligations of the Company to any Bank hereunder shall be subject to the limitation that payments of interest shall not be required for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by such Bank would be contrary to the provisions of any law applicable to such Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by such Bank, and in such event the Company shall pay such Bank interest at the highest rate permitted by applicable law. Fees a) Arrangement, Agency Fees. The Company shall pay an arrangement fee to the Arranger for the Arranger's own account, and shall pay an agency fee to the Agent for the Agent's own account, as required by the letter agreement ("Fee Letter") between the Company and the Arranger and Agent dated December 13, 1995. Commitment FeesThe Company shall pay to the Agent for the account of each Bank a commitment fee on the average daily unused portion of such Bank's Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent, equal to .125 percent per annum. Such commitment fee shall accrue from the Closing Date to the Revolving Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing on March 31, 1996 through the Revolving Termination Date, with the final payment to be made on the Revolving Termination Date; provided that, in connection with any reduction or termination of Commitments under Section 2.05, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fees provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met. Computation of Fees and Interest. (a) All computations of fees and interest for Base Rate Loans when the Base Rate is determined by BofA's "reference rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof. Each determination of an interest rate by the Agent shall be conclusive and binding on the Company and the Banks in the absence of manifest error. Payments by the Company (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Agent for the account of the Banks at the Agent's Payment Office, and shall be made in dollars and in immediately available funds, no later than 10:00 a.m. (San Francisco time) on the date specified herein. The Agent will promptly distribute to each Bank its Pro Rata Share (or other applicable share as expressly provided herein) of such payment in like funds as received. Any payment received by the Agent later than 10:00 a.m. (San Francisco time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be. Unless the Agent receives notice from the Company prior to the date on which any payment is due to the Banks that the Company will not make such payment in full as and when required, the Agent may assume that the Company has made such payment in full to the Agent on such date in immediately available funds and the Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Bank on such due date an amount equal to the amount then due such Bank. If and to the extent the Company has not made such payment in full to the Agent, each Bank shall repay to the Agent on demand such amount distributed to such Bank, together with interest thereon at the Federal Funds Rate for each day from the date such amount is distributed to such Bank until the date repaid. Payments by the Banks to the Agent (a) Unless the Agent receives notice from a Bank on or prior to the Closing Date or, with respect to any Borrowing after the Closing Date, at least by 9:30 a.m. (San Francisco time) on the date of such Borrowing, that such Bank will not make available as and when required hereunder to the Agent for the account of the Company the amount of that Bank's Pro Rata Share of the Borrowing, the Agent may assume that each Bank has made such amount available to the Agent in immediately available funds on the Borrowing Date and the Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Bank shall not have made its full amount available to the Agent in immediately available funds and the Agent in such circumstances has made available to the Company such amount, that Bank shall on the Business Day following such Borrowing Date make such amount available to the Agent, together with interest at the Federal Funds Rate for each day during such period. A notice of the Agent submitted to any Bank with respect to amounts owing under this subsection (a) shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Agent shall constitute such Bank's Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Agent on the Business Day following the Borrowing Date, the Agent will notify the Company of such failure to fund and, upon demand by the Agent, the Company shall pay such amount to the Agent for the Agent's account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing. The failure of any Bank to make any Loan on any Borrowing Date shall not relieve any other Bank of any obligation hereunder to make a Loan on such Borrowing Date, but no Bank shall be responsible for the failure of any other Bank to make the Loan to be made by such other Bank on any Borrowing Date. Sharing of Payments, Etc If, other than as expressly provided elsewhere herein, any Bank shall obtain on account of the Loans made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) in excess of its ratable share (or other share contemplated hereunder), such Bank shall immediately (a) notify the Agent of such fact, and (b) purchase from the other Banks such participations in the Loans made by them as shall be necessary to cause such purchasing Bank to share the excess payment pro rata with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Bank, such purchase shall to that extent be rescinded and each other Bank shall repay to the purchasing Bank the purchase price paid therefor, together with an amount equal to such paying Bank's ratable share (according to the proportion of (i) the amount of such paying Bank's required repayment to (ii) the total amount so recovered from the purchasing Bank) of any interest or other amount paid or payable by the purchasing Bank in respect of the total amount so recovered. The Company agrees that any Bank so purchasing a participation from another Bank may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 10.10) with respect to such participation as fully as if such Bank were the direct creditor of the Company in the amount of such participation. The Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Banks following any such purchases or repayments. Extension of Termination Date. Upon (a) the written request of the Company, received by the Agent not sooner than ninety (90) days nor later than sixty (60) days prior to the first anniversary of the Closing Date (and, if extended, thereafter at any time during the third month prior to the then current Revolving Termination Date), and (b) the written concurrence of all the Banks (in the sole discretion of each Bank) which is received by the Agent not later than thirty (30) days prior to the then current Revolving Termination Date, the Revolving Termination Date shall be extended for an additional one- year period commencing on the then current Revolving Termination Date. In the event such written concurrence from each and every one of the Banks is not received by the Agent on or before thirty (30) days prior to the then current Revolving Termination Date (after receipt by the Agent of such request from the Company), the Revolving Termination Date shall not be extended. The Agent will promptly notify each Bank of the receipt by it of a request under this subsection. TAXES, YIELD PROTECTION AND ILLEGALITY Taxes (a) Subject to subsection 3.01(g), any and all payments by the Company to each Bank or the Agent under this Agreement shall be made free and clear of, and without deduction or withholding for, any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Bank and the Agent, such taxes (including income taxes or franchise taxes including any interest or penalties thereon) as are imposed on or measured by each Bank's net income by any jurisdiction (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). In addition, the Company shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents (hereinafter referred to as "Other Taxes"). Subject to subsection 3.01(g), the Company shall indemnify and hold harmless each Bank and the Agent for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 3.01) paid by the Bank or the Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days from the date the Bank or the Agent makes written demand therefor. If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Bank or the Agent, then, subject to subsection 3.01(g): the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 3.01) and giving effect to the tax benefits such Bank or the Agent of such deduction or withholding (to the extent such benefits are reasonably determined without undue effort by the Agent or such Bank) such Bank or the Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions been made; the Company shall make such deductions, and the Company shall pay the full amount deducted to the relevant taxation authority or other authority in accordance with applicable law. Within 30 days after the date of any payment by the Company of Taxes or Other Taxes, the Company shall furnish to the Agent the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Agent. Each Bank which is a foreign Person (i.e., a Person other than a United States Person for United States federal income tax purposes) agrees that: it shall, no later than the Closing Date (or, in the case of a Bank which becomes a party hereto pursuant to Section 10.08 after the Closing Date, the date upon which the Bank becomes a party hereto), deliver to the Company through the Agent two accurate and complete signed originals of Internal Revenue Service Form 4224 or any successor thereto ("Form 4224"), or two accurate and complete signed originals of Internal Revenue Service Form 1001 or any successor thereto ("Form 1001"), as appropriate, in each case indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States federal income tax; if at any time the Bank makes any changes necessitating a new form, it shall with reasonable promptness deliver to the Company through the Agent in replacement for, or in addition to, the forms previously delivered by it hereunder, two accurate and complete signed originals of Form 4224, or two accurate and complete signed originals of Form 1001, as appropriate, in each case indicating that the Bank is on the date of delivery thereof entitled to receive payments of principal, interest and fees under this Agreement free from withholding of United States federal income tax; it shall, before or promptly after the occurrence of any event (including the passing of time but excluding any event mentioned in (ii) above) requiring a change in the most recent Form 4224 or Form 1001 previously delivered by such Bank and if the delivery of the same be lawful, deliver to the Company through the Agent two accurate and complete original signed copies of Form 4224 or Form 1001 in replacement for the forms previously delivered by the Bank; and it shall, promptly upon the Company's reasonable request to that effect, deliver to the Company such other forms or similar documentation as may be required from time to time by any applicable law, treaty, rule or regulation in order to establish such Bank's tax status for withholding purposes. The Company will not be required to pay any additional amounts in respect of United States federal income tax pursuant to subsection 3.01(d) to any Bank for the account of any Lending Office of such Bank: if the obligation to pay such additional amounts would not have arisen but for a failure by such Bank to comply with its obligations under subsection 3.01(f) in respect of such Lending Office; if such Bank shall have delivered to the Company a Form 4224 in respect of such Lending Office pursuant to subsection 3.01(f)(i), and such Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or in the official interpretation of such law or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 4224; or if the Bank shall have delivered to the Company a Form 1001 in respect of such Lending Office pursuant to subsection 3.01(f)(i), and such Bank shall not at any time be entitled to exemption from deduction or withholding of United States federal income tax in respect of payments by the Company hereunder for the account of such Lending Office for any reason other than a change in United States law or regulations or any applicable tax treaty or regulations or in the official interpretation of any such law, treaty or regulations by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) after the date of delivery of such Form 1001. If the Company is required to pay additional amounts to any Bank or the Agent pursuant to subsection 3.01(d), then such Bank shall use its reasonable best efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such addi tional payment by the Company which may thereafter accrue if such change in the judgment of such Bank is not otherwise disadvantageous to such Bank. The agreements and obligations of the Company contained in this Section 3.01 shall survive the payment in full of all other Obligations. Illegality (a) If any Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that it is unlawful, for any Bank or its applicable Lending Office to make Offshore Rate Loans, then, on notice thereof by the Bank to the Company through the Agent, any obligation of that Bank to make Offshore Rate Loans shall be suspended until the Bank notifies the Agent and the Company that the circumstances giving rise to such determination no longer exist. If a Bank determines that it is unlawful to maintain any Offshore Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from such Bank (with a copy to the Agent), prepay in full such Offshore Rate Loans of that Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.04, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Offshore Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Offshore Rate Loan. If the Company is required to so prepay any Offshore Rate Loan, then concurrently with such prepayment, the Company shall borrow from the affected Bank, in the amount of such repayment, a Base Rate Loan. If the obligation of any Bank to make or maintain Offshore Rate Loans has been so terminated or suspended, the Company may elect, by giving notice to the Bank through the Agent that all Loans which would otherwise be made by the Bank as Offshore Rate Loans shall be instead Base Rate Loans. Before giving any notice to the Agent under this Section, the affected Bank shall designate a different Lending Office with respect to its Offshore Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank. Increased Costs and Reduction of (a) If any Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Offshore Rate or in respect of the assessment rate payable by any Bank to the FDIC for insuring U.S. deposits) in or in the interpretation of any law or regulation or (ii) the compliance by that Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Bank of agreeing to make or making, funding or maintaining any Offshore Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Agent), pay to the Agent for the account of such Bank, additional amounts as are sufficient to compensate such Bank for such increased costs. If any Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration such Bank's or such corporation's policies with respect to capital adequacy and such Bank's desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitment, loans, credits or obligations under this Agreement, then, upon written demand of such Bank to the Company through the Agent, the Company shall pay to the Bank, from time to time as specified by the Bank, additional amounts sufficient to compensate the Bank for such increase. Any such Bank shall notify the Company in writing of its intent to demand such compensation under this Section 3.03. Funding LossesThe Company agrees to reimburse each Bank and to hold each Bank harmless from any loss or expense which the Bank may sustain or incur as follows: upon the failure of the Company to borrow (including for purposes of continuing or converting) any Offshore Rate Loan after the Company has given a Notice of Borrowing with respect to Loans for any reason (including the occurrence of a Default or an Event of Default), the Company shall, on demand by each Bank, pay such Bank the amount (if any) by which (i) the interest which would have been payable on such Bank's Pro Rata Share of the amount the Company failed to borrow had such Bank's Pro Rata Share of such amount been borrowed and outstanding for the Interest Period specified in the request for such Borrowing exceeds (ii) the interest which would have been recoverable by such Bank by placing such unborrowed amount on deposit in the LIBOR markets for the Interest Period specified in the request for such Borrowing; upon the failure of the Company to make any prepayment of a Loan after the Company has given notice in accordance with Section 2.06 for any reason, the Company agrees to reimburse each such Bank on demand for any loss, cost or expense which such Bank may sustain or incur, including any such loss, cost or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Offshore Rate Loans hereunder or from fees payable to terminate the deposits from which such funds were obtained; upon the conversion of an Offshore Rate Loan or the prepayment of an Offshore Rate Loan in each case on a day which is not the last day of the Interest Period with respect thereto for any reason (including conversions pursuant to subsection 3.02(b)), the Company shall, on demand by such Bank, pay such Bank the amount (if any) by which (i) the additional interest which would have been payable on the amount so received had it not been received until the last day of such Interest Period exceeds (ii) the interest which would have been recoverable by such Bank by placing the amount so received on deposit in the LIBOR markets for a period starting on the date on which it was so received and ending on the last day of such Interest Period. This covenant shall survive the payment in full of all other Obligations. Inability to Determine Rates If the Majority Banks determine that for any reason adequate and reasonable means do not exist for determining the Offshore Rate for any requested Interest Period with respect to a proposed Offshore Rate Loan, or that the Offshore Rate applicable pursuant to subsection 2.08(a) for any requested Interest Period with respect to a proposed Offshore Rate Loan does not adequately and fairly reflect the cost to the Banks of funding such Loan, the Agent will promptly so notify the Company and each Bank. Thereafter, the obligation of the Banks to make or maintain Offshore Rate Loans, as the case may be, hereunder shall be suspended until the Agent, upon the instruction of the Majority Banks, revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Banks shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Offshore Rate Loans. Invoices of BanksAny Bank claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Agent) a written invoice of all such amounts as may be due together with a reasonably detailed calculation and explanation of the amount payable to the Bank hereunder, which amount shall be paid by the Company within 30 days of the date of invoice provided, however, that the Company shall have no liability for any amounts attributable to a period more than three months prior to invoice date in respect thereof. SurvivalThe agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations. Replacement Bank (a) If any Bank demands compensation under Section 3.01, 3.02 or 3.03, the Company may, subject to the provisions of subsections (b) and (c) of this Section 3.08, remove such Bank ("Removed Bank") and designate another bank acceptable to the Agent, or, if BofA is the Removed Bank, acceptable to the Banks ("Replacement Bank"), to purchase the Removed Bank's share of the Credit, and to assume all of the Removed Bank's obligations under this Agreement. Each substitution under subsection 3.08(a) shall be made upon the irrevocable written notice of the Company received by Agent and Removed Bank at least ten days prior to the date thereof (a "Notice of Substitution"). The Notice of Substitution shall identify the Removed Bank, the Replacement Bank and the effective date of the substitution. The substitution specified in each Notice of Substitution shall take effect as of the date specified in such Notice of Substitution subject to the conditions precedent that the following are complied with or exist on and as of such date: No Loan is to be made on the effective date of the substitution and there is no pending request for a Loan; The Replacement Bank has purchased all of Removed Bank's share of the Credit and interest in this Agreement for a price equal to all principal, interest and commitment fees outstanding on such Removed Bank's share of the Credit on and as of the effective date of the substitution; The Replacement Bank has assumed by an agreement in form and substance satisfactory to Removed Bank and Agent, or, if BofA is the Removed Bank in form and substance satisfactory to the Banks, all of Removed Bank's commitment to extend credit and other obligations under this Agreement; and There exists no Default or Event of Default. CONDITIONS PRECEDENT Conditions of Initial Loans. The obligation of each Bank to make its initial Loan hereunder is subject to the condition that the Agent shall have received on or before the Closing Date all of the following, in form and substance satisfactory to the Agent and its counsel (the existence of which satisfaction will be confirmed to the Company by delivery of a Certificate of the Agent in the form of Exhibit J), and in sufficient copies for each Bank: Credit Agreement and Notes. This Agreement and the Notes executed by each party thereto; Resolutions; Incumbency. Copies of the resolutions of the board of directors of (A) the Company authorizing the transactions contemplated hereby and (B) the Guarantor authorizing the transactions contemplated by the Guaranty, each certified as of the Closing Date by the Secretary or an Assistant Secretary or other duly authorized officer of such Person; and A certificate of the Secretary or Assistant Secretary or other duly authorized officer of each of the Company and the Guarantor certifying the names and true signatures of the officers of the Company and the Guarantor, respectively, authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it, respectively, hereunder; Organization Documents; Good Standing. Each of the following documents: the certificate of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and a good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation and each state where the Company is qualified to do business as a foreign corporation as of a recent date; Legal Opinions an opinion of Stradling, Yocca, Carlson & Rauth, California counsel to the Company and addressed to the Agent and the Banks, substantially in the form of Exhibit D; an opinion of Gibson, Dunn & Crutcher, California counsel to the Guarantor and addressed to the Agent and the Banks, substantially in the form of Exhibit E; an opinion of Shin & Kim, Korea counsel to the Guarantor and addressed to the Agent and the Banks, substantially in the form of Exhibit F; Payment of FeesEvidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on the Closing Date, together with Attorney Costs of BofA to the extent invoiced prior to the Closing Date; including any such costs, fees and expenses arising under or referenced in Sections 2.09 and 10.04; CertificateA certificate signed by a Responsible Officer, dated as of the Closing Date, stating that: the representations and warranties contained in Article V are true and correct on and as of such date, as though made on and as of such date; no Default or Event of Default exists or would result from the initial Borrowing; and there has occurred since September 30, 1995, no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect other than as previously disclosed in writing to the Agent and the Banks; GuarantyThe Guaranty executed and delivered by the Guarantor; ConsentsCopies of all consents of any Governmental Authority required in connection with the Loan Documents; and Other DocumentsSuch other approvals, opinions, documents or materials as the Agent or any Bank may request. Conditions to All Borrowings. The obligation of each Bank to make any Loan to be made by it is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date: Notice of Borrowing. The Agent shall have received a Notice of Borrowing; Continuation of Representations and WarrantiesThe representations and warranties in Article V shall be true and correct on and as of such Borrowing Date with the same effect as if made on and as of such Borrowing Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date); and No Existing DefaultNo Default or Event of Default shall exist or shall result from such Borrowing. Each Notice of Borrowing submitted by the Company hereunder shall constitute a representation and warranty by the Company hereunder, as of the date of each such notice and as of each Borrowing Date, that the conditions in this Section 4.02 are satisfied. REPRESENTATIONS AND WARRANTIES The Company represents and warrants to the Agent and each Bank that: Corporate Existence and PowerThe Company and each of its Material Subsidiaries: is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation; has the power and authority and all governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver and perform its obligations under the Loan Documents; is duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except where the failure to so qualify would not have a Material Adverse Effect; and is in compliance in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it and its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith, as to which a bona fide dispute may exist or which could not reasonably be expected to have a Material Adverse Effect. Corporate Authorization; No ContraventionThe execution and delivery of, and receipt of Loans and payment thereof and thereon and of other fees and expenses as provided for in, this Agreement and any other Loan Document to which the Company is party have been duly authorized by all necessary corporate action and do not and will not: contravene the terms of the Company's certificate of incorporation, bylaws or other organizational document; conflict with or result in any breach or contravention of, or the creation of any Lien under, any indenture, agreement, lease, instrument, Contractual Obligation, injunction, order, decree or undertaking to which the Company is a party; or violate any Requirement of Law. Governmental AuthorizationNo approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery, performance or enforcement against the Company of this Agreement or any other Loan Document or any other instrument or agreement required hereunder to be made by the Company. Binding EffectThis Agreement and each other Loan Document to which the Company or any of its Subsidiaries is a party constitute the legal, valid and binding obligations of the Company, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability. Litigation Except as specifically set forth in Schedule 5.05 hereto, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of any Responsible Officer or the general counsel of the Company or any person holding a similar position within the Company, threatened or contemplated at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties which: (i) purport to affect or pertain to this Agreement, or any Loan Document, or any of the transactions contemplated hereby or thereby; or (ii) if determined adversely to the Company, or its Subsidiaries, could reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery and performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided. No DefaultNo Default or Event of Default exists or would result from the incurring of obligations by the Company under this Agreement or any other Loan Document. Neither the Company, nor any of its Subsidiaries, is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, would have a Material Adverse Effect. ERISA Compliance Schedule 5.07 lists all Plans and separately identifies Plans intended to be Qualified Plans and Multiemployer Plans. Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law, including all requirements under the Code or ERISA for filing reports (which are true and correct in all material respects as of the date filed), and benefits have been paid in accordance with the provisions of the Plan except where failure to comply would not have a Material Adverse Effect. With respect to each Plan intended to qualify under the Code, the Company or a member of its Controlled Group has applied to the Internal Revenue Service for an advance determination letter to the effect that such Plan and related trust are so qualified and, to the best knowledge of the Company, no circumstances exist that would adversely affect the issuance of such letter or such qualification (other than changes required to be made pursuant to the Tax Reform Act of 1986 and subsequent laws and regulations, which will be made within the applicable remedial amendment period under section 401(b) of the Code). Except as set forth on Schedule 5.07, no Plan subject to Title IV of ERISA has any Unfunded Pension Liability. Except as set forth in Schedule 5.07, no member of the Controlled Group has ever represented, promised or contracted (whether in oral or written form) to any current or former employee (either individually or to employees as a group) that such current or former employee(s) would be provided, at any cost to any member of the Controlled Group, with life insurance or employee welfare plan benefits (within the meaning of Section 3(1) of ERISA) following retirement or termination of employment. To the extent that any member of the Controlled Group has made any such representation, promise or contract, such member has expressly reserved the right to amend or terminate such life insurance or employee welfare plan benefits with respect to claims not yet incurred. Members of the Controlled Group have complied in all material respects with the notice and continuation coverage requirements of Section 4980B of the Code. Except as set forth in Schedule 5.07, no ERISA Event has occurred or is reasonably expected to occur with respect to any Plan. There are no pending or, to the best knowledge of the Company, threatened claims, actions or lawsuits, other than routine claims for benefits in the usual and ordinary course and claims that are not reasonably likely to have a Material Adverse Effect, asserted or instituted against (i) any Plan maintained or sponsored by the Company or its assets, (ii) any member of the Controlled Group with respect to any Qualified Plan, or (iii) any fiduciary with respect to any Plan for which the Company may be directly or indirectly liable, through indemnification obligations or otherwise. Except as set forth in Schedule 5.07, neither the Company nor any ERISA Affiliate has incurred nor reasonably expects to incur (i) any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan or (ii) any liability under Title IV of ERISA (other than premiums due and not delinquent under Section 4007 of ERISA) with respect to a Plan. Except as set forth in Schedule 5.07, neither the Company nor any ERISA Affiliate has transferred any Unfunded Pension Liability outside of the Controlled Group or otherwise engaged in a transaction that could be subject to Section 4069 or 4212(c) of ERISA. No member of the Controlled Group has engaged, directly or indirectly, in a non-exempt prohibited transaction (as defined in Section 4975 of the Code or Section 406 of ERISA) in connection with any Plan which has a reasonable likelihood of having a Material Adverse Effect. Use of Proceeds; Margin RegulationsThe proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.12 and Section 7.08. Neither the Company nor any Subsidiary is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock. Title to PropertiesThe Company and each of its Subsidiaries has good record and marketable title in all their real property, except for Permitted Liens and such defects in title as could not, individually or in the aggregate, have a Material Adverse Effect. Taxes. The Company and its Subsidiaries have filed all federal and other material tax returns and reports required to be filed and have paid all federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets other wise due and payable except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP and no Notice of Lien has been filed or recorded. There is no proposed tax assessment against the Company or any of its Subsidiaries which would, if the assessment were made, have a Material Adverse Effect. Financial Condition; No Material Adverse Change The unaudited consolidated financial statements of financial condition of the Company and its Subsidiaries dated September 30, 1995, and the related consolidated statements of operations, shareholders' equity and cash flows for the fiscal period ended on that date: were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; are complete, accurate and fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby, subject to normal year-end audit adjustments; and show all material indebtedness and other material liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the date thereof (including material liabilities for taxes and material commitments) all as required by GAAP for year- end reporting in accordance with the Company's past practices. Except as disclosed in writing to the Agent and the Banks prior to the Closing Date, since September 30, 1995, there has occurred no event or circumstance that has resulted or will result (assuming for this purpose that no unanticipated mitigating circumstances will arise) in a material adverse change with respect to any of (i) the operations, business, properties or condition (financial or otherwise) of the Company and its Consolidated Subsidiaries taken as a whole; (ii) the ability of the Company to perform its obligations under the Loan Documents without default; or (iii) the legality, validity, binding effect or enforceability of any Loan Document. Environmental Matters. Except as specifically identified in Schedule 5.12: the operations of the Company and each of its Subsidiaries comply in all respects with all Environmental Laws except such non-compliance which would not result in liability in excess, in the aggregate, of 5% of the Company's Tangible Net Worth; the Company and each of its Subsidiaries have obtained all licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") necessary for their operations, and all such Environmental Permits are in good standing, and the Company and each of its Subsidiaries are in compliance with all terms and conditions of such Environmental Permits, except such Environmental Permits of which the failure to obtain could not reasonably be expected to have a Material Adverse Effect; and as of the Closing Date, neither the Company, nor any of its Subsidiaries or any of their present property or operations is in violation of any outstanding written order from or agreement with any Governmental Authority or other Person which expressly mentions the Company or such Subsidiary, nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material. After the Closing Date, other than violations or proceedings which could not reasonably be expected to have a Material Adverse Effect, neither the Company, nor any of its Subsidiaries or any of their present property or operations is in violation of any outstanding written order from or agreement with any Governmental Authority or other Person which expressly mentions the Company or such Subsidiary, nor subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material. Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiaries of the Company, (a) is an "Investment Company" within the meaning of the Investment Company Act of 1940; or (b) is limited in its ability to incur Indebtedness under the Public Utility Holding Company Act of 1935, the federal Power Act, the Interstate Commerce Act, any state public utilities code or any other federal or state statute or regulation. No Burdensome RestrictionsNeither the Company, nor any of its Subsidiaries is a party to or bound by any Contractual Obligation or subject to any charter or corporate restriction or any Requirement of Law which would probably be expected to have a Material Adverse Effect. SolvencyThe Company is Solvent. Error! Bookmark not defined. Copyrights, Patents, Trademarks and Licenses, Etc. The Company or any of its Consolidated Subsidiaries owns or is licensed or otherwise has the right to use all of the patents, trademarks, service marks, trade names, copyrights, franchises, authorizations and other rights the absence of which could not reasonably be expected to have a Material Adverse Effect on the operation of their respective businesses. As of the Closing Date, except where such infringement would not have a Material Adverse Effect, to the best knowledge of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed by the Company or any of its Subsidiaries infringes upon any rights owned by any other Person. Except as set forth on Schedule 5.05, as of the Closing Date, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Company, proposed, which, in either case, would be likely to result in a Material Adverse Effect. SubsidiariesAs of the Closing Date, the Company has no Subsidiaries other than those listed on Schedule 5.17(a) hereto, and has no equity investments in any other corporation or entity that would constitute an Affiliate (other than Subsidiaries listed on Schedule 5.17(a)) except as listed on Schedule 5.17(b) hereto. Full DisclosureNone of the representations or warranties made by the Company or any of its Subsidiaries in the Loan Documents as of the date of such representations and warranties, and none of the statements contained in each Exhibit, Schedule, report, statement or certificate furnished by or on behalf of the Company or any of its Subsidiaries in connection with the Loan Documents, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading. AFFIRMATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: Financial StatementsThe Company shall deliver to the Agent, in form and detail satisfactory to the Agent and the Majority Banks, with sufficient copies for each Bank: as soon as available, but not later than 90 days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of Ernst & Young LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Material Subsidiary's records; and as soon as available, but not later than 50 days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended March 30, 1996), a copy of the unaudited consolidated balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, and certified by a Responsible Officer as fairly presenting, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments), the financial position and the results of operations of the Company and the Subsidiaries; provided, however, that such financial statements need not include footnotes and certain other financial presentations customarily presented only for audited year-end statements under GAAP. Certificates; Other InformationThe Company shall furnish to the Agent, with sufficient copies for each Bank: within 90 days of the delivery of the financial statements referred to in subsection 6.01(a), and within 50 days of the delivery of the financial statements referred to in subsection 6.01(b), a Compliance Certificate executed by a Responsible Officer; promptly (and in any event no later than 5 days after filing with the Securities and Exchange Commission), copies of all financial statements and reports that the Company sends to or files with the Securities and Exchange Commission; and promptly, such additional information regarding the Company as the Agent, at the request of any Bank, may from time to time reasonably request. NoticesThe Company shall promptly notify the Agent and each Bank: of the occurrence of any Default or Event of Default, and of the occurrence or existence of any event or circumstance that, to the knowledge of any Responsible Officer, will become a Default or Event of Default; of any matter that has resulted or may be reasonably likely to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary; including pursuant to any applicable Environmental Laws; of the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the Agent and each Bank a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event: an ERISA Event; a material increase in the Unfunded Pension Liability of any Pension Plan; the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability; or of any material change in accounting policies or financial reporting practices by the Company or any of its Consolidated Subsidiaries. Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under subsection 6.03(a) shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated. Preservation of Corporate Existence, Etc. The Company shall and (with respect to clauses (a), (b) and (c)) shall cause each of its Material Subsidiaries to: with respect to the Company, preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of incorporation and, with respect to the Material Subsidiaries, preserve and maintain in full force and effect the corporate existence and good standing under the laws of each state or jurisdiction of incorporation except where failure to take such actions could not reasonably be expected to have a Material Adverse Effect; preserve and maintain in full force and effect all rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except in connection with (i) dispositions of assets permitted by Section 7.02, (ii) transactions permitted by Section 7.03, and (iii) dissolution or abandonment of any Subsidiary in compliance with either Section 7.02 or 7.03, and the failure to maintain such rights, privileges, qualifications, permits, licenses and franchises would not have a Material Adverse Effect; provided, however, nothing set forth herein shall limit the application of Section 7.02 or 7.03; preserve or renew all of its registered trademarks, trade names and service marks, the non-preservation of which could have a Material Adverse Effect; and use its reasonable efforts, in the ordinary course, to preserve its business and the goodwill of its business. Maintenance of PropertyThe Company shall maintain, and shall cause each Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted, except as permitted by Section 7.02. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities. InsuranceThe Company shall maintain, and shall cause each Subsidiary to maintain, with financially sound and reputable insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons; provided, however, the Company and its Subsidiaries may, with the prior consent of the Majority Banks (which consent may be withheld in their reasonable credit judgment in light of prevailing credit standards), substitute for or augment any insurance with self-insurance; provided, further, that such self-insurance is adequate in view of the risks and financial condition of the Company and its Subsidiaries at such time and is in accordance with customary industry standards; and provided, further, that, for the purposes of this Section 6.06, the self-insurance programs of the Company for employee medical insurance and disability insurance in effect as of the Closing Date are approved. Payment of ObligationsThe Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all their respective obligations and liabilities, including: all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary; all lawful claims which, if unpaid, would by law become a Lien upon its property, other than Permitted Liens; and all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness, except (i) where the amount or validity thereof is being contested in good faith by appropriate proceedings or as to which a bona fide dispute may exist and provision has been made in conformity with GAAP with respect thereto, or (ii) to the extent the failure to pay is due to a good faith error omission and will not in any event have a Material Adverse Effect. Compliance with Laws. The Company shall comply, and shall cause each Subsidiary to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act), except such as may be contested in good faith or as to which a bona fide dispute may exist. Compliance with ERISA. The Company shall, and shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code. Inspection of Property and Books and Records. The Company shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall permit representatives and independent contractors of the Agent or any Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, officers, and independent public accountants, at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when an Event of Default exists the Agent or any Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice. Environmental LawsThe Company shall, and shall cause each Subsidiary to, conduct its operations and keep and maintain its property in compliance with all Environmental Laws. Use of Proceeds. The Company shall use the proceeds of the Loans for working capital not in contravention of any Requirement of Law or of any Loan Document. NEGATIVE COVENANTS So long as any Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Majority Banks waive compliance in writing: Limitation on LiensThe Company shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property or assets, whether now owned or hereafter acquired, or agree to do so, other than the following ("Permitted Liens"): any Lien existing on the property of the Company on the Closing Date as set forth in Schedule 7.01 securing Indebtedness outstanding on such date; any Lien created under any Loan Document; Liens for taxes, fees, assessments or other governmental charges which are not yet delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 6.07, provided that (i) no Notice of Lien has been filed or recorded in the United States of America and (ii) no Notice of Lien has been filed or recorded in any other jurisdiction except such Notices of Lien which would not have a Material Adverse Effect; carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings; Liens (other than any Lien imposed by ERISA) on the property of the Company or any of its Subsidiaries incurred, or pledges or deposits required in connection with worker's compensation, unemployment insurance, other social security legislation and Liens consisting of deposits placed with insurance companies for health insurance created in the ordinary course of business; Liens on the property of the Company or any of its Subsidiaries securing (i) the performance of bids, trade contracts (other than for borrowed money), leases, subleases, statutory obligations and regulatory or other governmentally imposed obligations, and (ii) obligations on surety, appeal, performance or similar bonds, and (iii) other obligations of a like nature incurred in the ordinary course of business provided all such Liens in the aggregate would not have a Material Adverse Effect; easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and its Subsidiaries; purchase money security interests on any real or personal property acquired or held by the Company in the ordinary course of business, securing Indebtedness incurred or assumed for the purpose of financing all or any part of the cost of acquiring such property or Capital Lease Obligations; provided that any such Lien attaches to such property concurrently with or within 30 days after the acquisition or refinancing thereof; Liens on property existing prior to the acquisition of such property by the Company or its Subsidiaries and not created in anticipation of such acquisition; Extensions and renewals of any Lien described in subsection 7.01(a), (b), (f), (h), (i) or (k); Liens which constitute rights of set-off of a customary nature or bankers' Liens with respect to amounts on deposit, whether arising by operation of law or by contract, in connection with working capital facilities, operational services, lines of credit, term loans, or other credit facilities and similar arrangements entered into with banks in the ordinary course of business; Other Liens incidental to the conduct of the business of the Company or any of its Subsidiaries or the ownership of their property which are incurred in the ordinary course of business (and are not security for borrowed money); provided such Liens do not exceed $10,000,000 in the aggregate; and Liens arising in connection with any sale of accounts receivable permitted under Section 7.02; provided, that the Lien does not extend beyond the accounts receivable so sold or discounted except to the extent reasonably required by any purchaser of such accounts receivable. Disposition of AssetsThe Company shall not, nor shall it permit any of its Subsidiaries to, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) any of its material assets, business or property (including accounts and notes receivable (with or without recourse) and equipment sale-leaseback transactions), or enter into any agreement to do any of the foregoing, except: dispositions of inventory, or used, worn-out or surplus equipment, all in the ordinary course of business and other dispositions of property (i) not necessary to the normal operations of the Company and its Subsidiaries taken as a whole as contemplated by this Agreement and (ii) which would not have a Material Adverse Effect; the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment or the proceeds of such sale are promptly applied to the purchase price of such replacement equipment; dispositions in connection with Investments permitted under Section 7.04, provided that full, fair and reasonable consideration is received in return for any assets disposed of to acquire such Investments; dispositions of any Investments, provided that fair and reasonable consideration is received in connection therewith as reasonably determined by the Company; abandonments or dispositions for less than reasonably equivalent value, resulting from any seizure, forfeiture or taking, or any threatened or imminent seizure, forfeiture or taking, of licenses, franchises or properties of Subsidiaries located outside of the United States, so long as all such abandonments and other dispositions will not, in the aggregate, have a Material Adverse Effect; the sale or discounting of accounts receivable by the Company or any Subsidiary, without restriction; sale of trade-related instruments arising in foreign countries, in the ordinary course of business, with or without recourse to the Company or any of its Subsidiaries, to banks or other financial service institutions, for fair value, provided that (i) the amount of any fees, discounts and other considera tion received by such banks or other financial service institutions is normal and customary, and (ii) such sales are customary business practices in the country where such activity takes place; the sale or discounting of accounts receivable through asset- backed securitizations so long as fair market value is received for such accounts and so long as there would be no Material Adverse Effect; disposition of the Company's headquarters building located at the address set forth in Section 10.02 in a sale-leaseback transaction so long as the Company receives fair market value for its ownership interest in its headquarters; dispositions not otherwise permitted hereunder which are made for fair market value; provided, that (i) at the time of any disposition, no Event of Default shall exist or shall result from such disposition, (ii) the aggregate sales price from such disposition shall be paid in cash, and (iii) the aggregate value of all assets so sold by the Company and its Subsidiaries, together, shall not exceed in any fiscal year 15% of Consolidated Total Assets; and such other dispositions as the Agent and the Majority Banks shall agree to in their sole discretion. Consolidations and MergersExcept as provided in Section 7.02, the Company shall not, and shall not permit any of its Material Subsidiaries to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to any Person, except: any Subsidiary of the Company may merge, consolidate or combine with or into, or transfer assets to the Company (provided that the Company shall be the continuing or surviving corporation) or with any one or more Subsidiaries of the Company (provided that if any transaction shall be between a Subsidiary and a Material Subsidiary that is a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation); any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or another Wholly-Owned Subsidiary of the Company if, immediately after giving effect thereto, no Default or Event of Default would exist; and the Company or any of its Subsidiaries may enter into any partnership or joint venture. Loans and InvestmentsThe Company shall not, directly or indirectly, purchase or acquire, or permit any of its Subsidiaries to purchase or acquire, or make any commitment therefor, any capital stock, equity interest, assets, obligations or other securities of or any interest in, any Person (including by merger), or make any advance, loan, extension of credit or capital contribution to or any other investment in, any Person including any Affiliate of the Company ("Investments"), except for: Investments in Marketable Investments; extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business and ordinary course rescheduling of such amounts in connection with the collection thereof; extensions of credit or capital contributions by the Company to any of its Subsidiaries or by any of its Subsidiaries to another of its Subsidiaries; loans to officers or employees of the Company or any Subsidiary of the Company to the extent permitted by applicable law, charter and by-law provisions and which do not exceed in the aggregate amount outstanding at any time for the Company and its Subsidiaries $5,000,000 and are not for the purpose of an Acquisition; Investments in connection with Acquisitions in the capital stock, assets, obligations or other securities of or interest in other Persons, provided, in each case, (i) the amount of consideration payable (including by assumption of liabilities) by the Company or its Subsidiary, when added to similar amounts for all transactions entered into after the Closing Date by the Company or any of its Subsidiaries, does not exceed $50,000,000; and (ii) (x) if any Acquiree is subject to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such Act, the prior, effective written consent of the board of directors or equivalent governing body of the Acquiree is obtained and delivered to the Agent, or (y) if the Acquiree does not meet the qualifications set forth in clause (x) of this subclause (ii) of subsection 7.04(e), the prior effective written consent of the board of directors or equivalent governing body and the percent of any and all classes of stock or other equity of such Acquiree the consent of which, notwithstanding any provisions in the charter or by-laws of the Acquiree to the contrary, is required by applicable statute to consummate the Acquisition, is obtained and delivered to the Agent; purchases or redemptions of debt obligations of the Company or its Subsidiaries so long as no Default or Event of Default exists and is continuing or would occur as a result thereof; Investments for transactions permitted under subsection 7.03(c) hereof; and other Investments not described above and that are not pro hibited elsewhere in this Agreement, to the extent such Investments do not exceed $25,000,000 outstanding at any one time and are not used for the purpose of an Acquisition. Notwithstanding any provision in this Section 7.04 to the contrary, none of the following shall constitute "Investments" for purposes of this Section 7.04: Any distributions paid or made in respect of the stock of the Company or any Subsidiary of the Company (whether in cash, property or stock of the Company or any such Subsidiary), or Any payments (whether in cash, property or stock of the Company or any Subsidiary) to redeem, purchase or otherwise acquire any stock of the Company or any Subsidiary of the Company; provided, in each case, (A) that any such distribution or payment is otherwise permitted under the terms of this Agreement, and (B) if any such distribution or payment is changed from the form in which it was received, it must comply with the provisions of this Section 7.04. For purposes of the preceding sentence, the term "stock" shall include warrants, options and other rights to purchase stock. Transactions With Affiliates. Except as set forth on Schedule 7.05, the Company shall not and shall not permit any of its Subsidiaries to enter into any transaction with any Affiliate of the Company or of any such Subsidiary except as contemplated by this Agreement or in the ordinary course of business and pursuant to the reasonable requirements of the business of the Company or such Subsidiary and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary. Compliance With ERISAExcept with the specific written consent of the Majority Banks, which consent shall not unreasonably be withheld, the Company shall not directly or indirectly and shall not permit any ERISA Affiliate directly or indirectly (i) to terminate any Plan subject to Title IV of ERISA so as to result in any material (in the opinion of the Majority Banks) liability to the Company or any ERISA Affiliate, (ii) to permit to exist any ERISA Event or any other event or condition which presents the risk of a material (in the opinion of the Majority Banks) liability of the Company or any ERISA Affiliate, or (iii) to make a complete or partial withdrawal (within the meaning of ERISA section 4201) from any Multiemployer Plan so as to result in any material (in the opinion of the Majority Banks) liability to the Company or any ERISA Affiliate, (iv) to enter into any new Plan or modify any existing Plan so as to increase its obligations thereunder (except in the ordinary course of business consistent with past practice) which could result in any material (in the opinion of the Majority Banks) liability to any member of the Controlled Group, or (v) permit the present value of all nonforfeitable benefits (within the meaning of ERISA section 4001(a)(8)) under each Plan (using the actuarial assump tions utilized by the PBGC upon termination of a Plan) materially (in the opinion of the Majority Banks) to exceed the fair market value of Plan assets allocable to such benefits, all determined as of the most recent valuation date for each such Plan. Restricted Payments. The Company shall not declare or make any dividend payment or other distribution of assets, properties, cash, rights, obligations or securities on account of any shares of any class of its capital stock or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding; except that the Company and its Subsidiaries may: declare and make dividend payments or other distributions payable solely in its common stock; purchase, redeem or otherwise acquire shares of its common stock or warrants or options to acquire any such shares from employees terminating employment with the Company, pursuant to the Company's customary policies and procedures relating to such matters, up to a maximum aggregate amount of $5,000,000 in any fiscal year of the Company; and purchase or redeem debt obligations convertible into Common Stock. Use of Proceeds. The Company shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance Indebtedness of the Company or others incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. Change in Business. The Company shall not, and shall not suffer or permit any of its Material Subsidiaries to, engage in any material line of business which accounts for a substantial portion of the business or assets of the Company and its Subsidiaries as a whole which is substantially different from those lines of business carried on by it on the date hereof; provided, however, the specific activities listed on Schedule 7.09 hereto will not be deemed to be substantially different; provided, further, no inference as to the character of any other activities may be drawn from Schedule 7.09. The Company and its Consolidated Subsidiaries shall not cease to be primarily engaged in the manufacture or assembly of personal computers, and shall not voluntarily cease to operate its business as a manufacturer or assembler of personal computers for a significant period of time. Accounting ChangesThe Company shall not make any significant or material change in accounting treatment and reporting practices, except in accordance with GAAP. EVENTS OF DEFAULT Event of Default. Any of the following shall constitute an "Event of Default": Non-PaymentThe Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within 10 days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document; or Representation or Warranty. Any representation or warranty by the Company or any Subsidiary made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made or deemed made; or Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Section 6.03 or in Article VII (except for Section 7.01 to the extent Liens are not Voluntary Liens and Section 7.06); or Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 20 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such failure or (ii) the date upon which written notice thereof is given to the Company by the Agent or any Bank; or Cross-DefaultThe Company or any of its Subsidiaries (i) fails to make any payment in respect of any Indebtedness or Contingent Obligation, having an aggregate principal amount (including unused commitments and outstanding amounts) of more than $25,000,000, when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and, in the case of payments other than in respect of principal, such failure continues without any Permitted Waiver for the duration of any grace period specified in the applicable document as of the time such failure occurs; or (ii) fails to perform or observe any other condition or covenant or any other event shall occur or condition exist under any agreement or instrument relating to any such Indebtedness or Contingent Obligation if same has an aggregate principal amount more than $25,000,000, and such failure continues without any Permitted Waiver for the duration of any grace period specified in the applicable document as of the time such failure occurs, if the effect of such event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, such Indebtedness to be declared to be due and payable prior to its stated maturity or such Contingent Obligation to become payable (immediately or after expiration of any grace period); or Insolvency; Voluntary Proceedings. The Company or any Material Subsidiary (i) ceases or fails to be Solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing; or Involuntary Proceedings (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Material Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Material Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Material Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or ERISA (i) An ERISA Event shall occur with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Company under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $25,000,000; (ii) the aggregate amount of Unfunded Pension Liability among all Pension Plans at any time exceeds $25,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $25,000,000; or Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Material Subsidiary involving in the aggregate a liability (to the extent not covered by third-party insurance) as to any single or related series of transactions, incidents or conditions, of 10% of Tangible Net Worth or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 45 consecutive days after the entry thereof; or Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or Change of Control. There occurs any Change of Control; or Guarantor Defaults. The Guarantor fails in any material respect to perform or observe any term, covenant or agreement in the Guaranty, or the Guaranty is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or the Guarantor or any other Person contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder, or any event described at subsections (f) or (g) of this Section occurs with respect to the Guarantor, or the Guarantor fails to promptly obtain the payment authorization of the Guarantor's designated foreign exchange bank, which is currently Hanil Bank, required for payment under the Guaranty, or the Guarantor fails to maintain the approval of such designated foreign exchange bank that has approved the issuance, execution, delivery and performance of the Guaranty by the Guarantor or to promptly (and in any event within 15 days after a request for payment under the Guaranty) obtain the approval of such designated foreign exchange bank to any assignment of, or amendment to, the Guaranty. Remedies. If any Event of Default occurs, the Agent shall, at the request of, or may, with the consent of, the Majority Banks, declare the Commitment of each Bank to make Loans to be terminated, whereupon such Commitments shall be terminated; declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and exercise on behalf of itself and the Banks all rights and remedies available to it and the Banks under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.01 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Agent or any Bank. Rights Not ExclusiveThe rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising. THE AGENT Appointment and Authorization; "Agent. Each Bank hereby irrevocably (subject to Section 9.09) appoints, designates and authorizes the Agent to take such action on its behalf under the provisions of this Agreement and each other Loan Document and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Loan Document, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Loan Document, the Agent shall not have any duties or responsibilities, except those expressly set tc forth herein, nor shall the Agent have or be deemed to have any fiduciary relationship with any Bank, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Agent. Without limiting the generality of the foregoing sentence, the use of the term "agent" in this Agreement with reference to the Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties. Delegation of Duties. The Agent may execute any of its duties under this Agreement or any other Loan Document by or through agents, employees or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects with reasonable care. Liability of Agent. None of the Agent-Related Persons shall (i) be liable for any action taken or omitted to be taken in good faith by any of them under or in connection with this Agreement or any other Loan Document or the transactions contemplated hereby (except for its own gross negligence or willful misconduct), or (ii) be responsible in any manner to any of the Banks for any recital, statement, representation or warranty made by the Company or any Subsidiary or Affiliate of the Company, or any officer thereof, contained in this Agreement or in any other Loan Document, or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Loan Document, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document, or for any failure of the Company or any other party to any Loan Document to perform its obligations hereunder or thereunder. No Agent-Related Person shall be under any obligation to any Bank to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Company or any of the Company's Subsidiaries or Affiliates. Reliance by Agent. (a) The Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, resolution, notice, consent, certificate, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including counsel to the Company), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Banks as it deems appropriate and, if it so requests, it shall first be indemnified to its satisfaction by the Banks against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Loan Document in accordance with a request or consent of the Majority Banks and such request and any action taken or failure to act pursuant thereto shall be binding upon all of the Banks. For purposes of determining compliance with the conditions specified in Section 4.01, each Bank that has executed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter either sent by the Agent to such Bank for consent, approval, acceptance or satisfaction, or required thereunder to be consented to or approved by or acceptable or satisfactory to the Bank. Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default, except with respect to defaults in the payment of principal, interest and fees required to be paid to the Agent for the account of the Banks, unless the Agent shall have received written notice from a Bank or the Company referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". The Agent will promptly notify the Banks of its receipt of any such notice. The Agent shall take such action with respect to such Default or Event of Default as may be requested by the Majority Banks in accordance with Article VIII; provided, however, that unless and until the Agent has received any such request, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of the Banks. Credit Decision. Each Bank acknowledges that none of the Agent-Related Persons has made any representation or warranty to it, and that no act by the Agent hereinafter taken, including any review of the affairs of the Company and its Subsidiaries, shall be deemed to constitute any representation or warranty by any Agent-Related Person to any Bank. Each Bank represents to the Agent that it has, independently and without reliance upon any Agent-Related Person and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and credit worthiness of the Guarantor, the Company and its Subsidiaries, and all applicable bank regulatory laws relating to the transactions contemplated hereby, and made its own decision to enter into this Agreement and to extend credit to the Company hereunder. Each Bank also represents that it will, independently and without reliance upon any Agent-Related Person and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and credit worthiness of the Company and the Guarantor. Except for notices, reports and other documents expressly herein required to be furnished to the Banks by the Agent, the Agent shall not have any duty or responsibility to provide any Bank with any credit or other information concerning the business, prospects, operations, property, financial and other condition or credit worthiness of the Company which may come into the possession of any of the Agent-Related Persons. Indemnification of Agent. The Banks shall indemnify upon demand the Agent-Related Persons (to the extent not reimbursed by or on behalf of the Company and without limiting the obligation of the Company to do so), pro rata, from and against any and all Indemnified Liabilities; provided, however, that no Bank shall be liable for the payment to the Agent-Related Persons of any portion of such Indemnified Liabilities resulting solely from such Person's gross negligence or willful misconduct. Without limitation of the foregoing, each Bank shall reimburse the Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including Attorney Costs) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Loan Document, or any document contemplated by or referred to herein, to the extent that the Agent is not reimbursed for such expenses by or on behalf of the Company. The undertaking in this Section shall survive the payment of all Obligations hereunder and the resignation or replacement of the Agent. Agent in Individual Capacity. BofA and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with the Company and its Subsidiaries and Affiliates as though BofA were not the Agent hereunder and without notice to or consent of the Banks. The Banks acknowledge that, pursuant to such activities, BofA or its Affiliates may receive information regarding the Company or its Affiliates (including information that may be subject to confidentiality obligations in favor of the Company or such Subsidiary) and acknowledge that the Agent shall be under no obligation to provide such information to them. With respect to its Loans, BofA shall have the same rights and powers under this Agreement as any other Bank and may exercise the same as though it were not the Agent, and the terms "Bank" and "Banks" include BofA in its individual capacity. Successor AgentThe Agent may, and at the request of the Majority Banks shall, resign as Agent upon 30 days' notice to the Banks. If the Agent resigns under this Agreement, the Majority Banks shall appoint from among the Banks a successor agent for the Banks. If no successor agent is appointed prior to the effective date of the resignation of the Agent, the Agent may appoint, after consulting with the Banks and the Company, a successor agent from among the Banks. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to all the rights, powers and duties of the retiring Agent and the term "Agent" shall mean such successor agent and the retiring Agent's appointment, powers and duties as Agent shall be terminated. After any retiring Agent's resignation hereunder as Agent, the provisions of this Article IX and Sections 10.04 and 10.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. If no successor agent has accepted appointment as Agent by the date which is 30 days following a retiring Agent's notice of resignation, the retiring Agent's resignation shall nevertheless thereupon become effective and the Banks shall perform all of the duties of the Agent hereunder until such time, if any, as the Majority Banks appoint a successor agent as provided for above. Withholding Tax (a) If any Bank is a "foreign corporation, partnership or trust" within the meaning of the Code and such Bank claims exemption from, or a reduction of, U.S. withholding tax under Sections 1441 or 1442 of the Code, such Bank agrees with and in favor of the Agent, to deliver to the Agent: if such Bank claims an exemption from, or a reduction of, withholding tax under a United States tax treaty, two properly completed and executed copies of IRS Form 1001 before the payment of any interest in the first calendar year and before the payment of any interest in each third succeeding calendar year during which interest may be paid under this Agreement; if such Bank claims that interest paid under this Agreement is exempt from United States withholding tax because it is effectively connected with a United States trade or business of such Bank, two properly completed and executed copies of IRS Form 4224 before the payment of any interest is due in the first taxable year of such Bank and in each succeeding taxable year of such Bank during which interest may be paid under this Agreement; and (iii) such other form or forms as may be required under the Code or other laws of the United States as a condition to exemption from, or reduction of, United States withholding tax. Such Bank agrees to promptly notify the Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction. If any Bank claims exemption from, or reduction of, withholding tax under a United States tax treaty by providing IRS Form 1001 and such Bank sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to notify the Agent of the percentage amount in which it is no longer the beneficial owner of Obligations of the Company to such Bank. To the extent of such percentage amount, the Agent will treat such Bank's IRS Form 1001 as no longer valid. If any Bank claiming exemption from United States withholding tax by filing IRS Form 4224 with the Agent sells, assigns, grants a participation in, or otherwise transfers all or part of the Obligations of the Company to such Bank, such Bank agrees to undertake sole responsibility for complying with the withholding tax requirements imposed by Sections 1441 and 1442 of the Code. If any Bank is entitled to a reduction in the applicable withholding tax, the Agent may withhold from any interest payment to such Bank an amount equivalent to the applicable withholding tax after taking into account such reduction. However, if the forms or other documentation required by subsection (a) of this Section are not delivered to the Agent, then the Agent may withhold from any interest payment to such Bank not providing such forms or other documentation an amount equivalent to the applicable withholding tax imposed by Sections 1441 and 1442 of the Code, without reduction. If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Agent did not properly withhold tax from amounts paid to or for the account of any Bank (because the appropriate form was not delivered or was not properly executed, or because such Bank failed to notify the Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Bank shall indemnify the Agent fully for all amounts paid, directly or indirectly, by the Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Banks under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Agent. MISCELLANEOUS Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Majority Banks (or by the Agent at the written request of the Majority Banks) and the Company and acknowledged by the Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, or consent shall, unless in writing and signed by all the Banks and the Company and acknowledged by the Agent, do any of the following: increase or extend the Commitment of any Bank (or reinstate any Commitment terminated pursuant to Section 8.02); postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Banks (or any of them) hereunder or under any other Loan Document; reduce the principal of, or the rate of interest specified herein on any Loan, or (subject to clause (ii) below) any fees or other amounts payable hereunder or under any other Loan Document; change the percentage of the Commitments or of the aggregate unpaid principal amount of the Loans which is required for the Banks or any of them to take any action hereunder; amend this Section, or Section 2.13, or any provision herein providing for consent or other action by all Banks; modify the definition of "Majority Banks"; or waive any Event of Default under Sections 8.01(k) or (l); and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Majority Banks or all the Banks, as the case may be, affect the rights or duties of the Agent under this Agreement or any other Loan Document, and (ii) the Fee Letter may be amended, or rights or privileges thereunder waived, in a writing executed by the parties thereto. Notices. (a) Except as set forth in subsection 10.02(c), all notices, requests, consents, approvals, waivers and other communications shall be in writing (including, unless the context expressly otherwise provides, by facsimile transmission, provided that any matter transmitted by the Company by facsimile shall be followed promptly by delivery of a hard copy original thereof) and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 10.02; or, as directed to the Company or the Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Agent. All notices to the Company shall be sent to 16215 Alton Parkway, Irvine, CA 92718, Attention: Treasurer (telecopy: 714-727-8584; telephone: 714-727-7717). Except as set forth in subsection 10.02(c), all such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX to the Agent shall not be effective until actually received by the Agent. Notwithstanding anything to the contrary herein, the Company may borrow, continue or convert Loans via telephonic communication so long as such telephonic communication is followed by facsimile confirmation thereof by no later than 11:00 a.m. ( San Francisco time) on the same day. Any agreement of the Agent and the Banks herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company. The Agent and the Banks shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company to give such notice and the Agent and the Banks shall not have any liability to the Company or other Person on account of any action taken or not taken by the Agent or the Banks in reliance upon such telephonic or facsimile notice except for gross negligence or willful misconduct on the part of the Agent and the Banks. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Agent and the Banks to receive written confirmation of any telephonic or facsimile notice or the receipt by the Agent and the Banks of a confirmation which is at variance with the terms understood by the Agent and the Banks to be contained in the telephonic or facsimile notice. No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Agent or any Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. Costs and ExpensesThe Company shall: pay or reimburse BofA (including in its capacity as Agent) promptly after written demand (subject to subsection 4.01(f)) for all reasonable costs and expenses incurred by BofA (including in its capacity as Agent) in connection with the administration and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by BofA (including in its capacity as Agent) with respect thereto; and pay or reimburse the Agent, the Arranger and each Bank promptly after written demand (subject to subsection 4.01(f)) for all reasonable costs and expenses (including Attorney Costs) incurred by them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding). Company IndemnificationThe Company shall indemnify, defend and hold the Agent-Related Persons, and each Bank and each of its respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans and the termination, resignation or replacement of the Agent or replacement of any Bank) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"); provided, that the Company shall have no obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities resulting solely from the gross negligence or willful misconduct of such Indemnified Person. The agreements in this Section shall survive payment of all other Obligations. Payments Set Aside. To the extent that the Company makes a payment to the Agent or the Banks, or the Agent or the Banks exercise their right of set- off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Agent or such Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Bank severally agrees to pay to the Agent upon demand its pro rata share of any amount so recovered from or repaid by the Agent. Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Company may not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Agent and each Bank. Assignments, Participations, Etc. (a) Any Bank may, with the written consent of the Company at all times other than during the existence of an Event of Default and the Agent, which consent of the Company and the Agent shall not be unreasonably withheld, at any time assign and delegate to one or more Eligible Assignees (provided that no written consent of the Company or the Agent shall be required in connection with any assignment and delegation by a Bank to an Eligible Assignee that is an Affiliate of such Bank) (each an "Assignee") all, or any ratable part of all, of the Loans, the Commitments and the other rights and obligations of such Bank hereunder, in a minimum amount of $10,000,000; provided, however, that the Company and the Agent may continue to deal solely and directly with such Bank in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Agent by such Bank and the Assignee; (ii) such Bank and its Assignee shall have delivered to the Company and the Agent an Assignment and Acceptance in the form of Exhibit G ("Assignment and Acceptance") together with any Note or Notes subject to such assignment and (iii) the assignor Bank or Assignee has paid to the Agent a processing fee in the amount of $3,500. From and after the date that the Agent notifies the assignor Bank that it has received (and provided its consent with respect to) an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Bank under the Loan Documents, and (ii) the assignor Bank shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents. Within ten Business Days after its receipt of notice by the Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with subsection 10.08(a)), the Company shall execute and deliver to the Agent, new Notes evidencing such Assignee's assigned Loans and Commitment and, if the assignor Bank has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Bank (such Notes to be in exchange for, but not in payment of, the Notes held by such Bank). Immediately upon each Assignee's making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Bank pro tanto. Any Bank may at any time sell to one or more commercial banks or other Persons not Affiliates of the Company (a "Participant") participating interests in any Loans, the Commitment of that Bank and the other interests of that Bank (the "originating Bank") hereunder and under the other Loan Documents; provided, however, that (i) the originating Bank's obligations under this Agreement shall remain unchanged, (ii) the originating Bank shall remain solely responsible for the performance of such obligations, (iii) the Company and the Agent shall continue to deal solely and directly with the originating Bank in connection with the originating Bank's rights and obligations under this Agreement and the other Loan Documents, and (iv) no Bank shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Banks as described in the first proviso to Section 10.01. In the case of any such participation, the Participant shall not have any rights under this Agreement, or any of the other Loan Documents, and all amounts payable by the Company hereunder shall be determined as if such Bank had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Bank under this Agreement. Notwithstanding any other provision in this Agreement, any Bank may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Note held by it in favor of any Federal Reserve Bank in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR Section203.14, and such Federal Reserve Bank may enforce such pledge or security interest in any manner permitted under applicable law. ConfidentialityEach Bank agrees to take and to cause its Affiliates to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all non-public information provided to it by the Company or any Subsidiary, or by the Agent on the Company's or such Subsidiary's behalf, under this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents or in connection with other business now or hereafter existing or contemplated with the Company or any Subsidiary; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by the Bank, or (ii) was or becomes available on a non-confidential basis from a source other than the Company, provided that such source is not bound by a confidentiality agreement with the Company known to the Bank; provided, however, that any Bank may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Bank is subject or in connection with an examination of such Bank by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Agent, any Bank or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Bank's independent auditors and other professional advisors who are bound by an ethical obligation of confidentiality (it being understood that no written confidentiality agreements are required to be obtained from such auditors or other professional advisors); (G) to any Participant or Assignee, actual or potential, provided that such Person agrees in writing to keep such information confidential to the same extent required of the Banks hereunder; (H) as to any Bank or its Affiliate, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Subsidiary is party or is deemed party with such Bank or such Affiliate; and (I) to its Affiliates. Set-offIn addition to any rights and remedies of the Banks provided by law, if an Event of Default exists or the Loans have been accelerated, each Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, such Bank to or for the credit or the account of the Company against any and all Obligations owing to such Bank, now or hereafter existing, irrespective of whether or not the Agent or such Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. Each Bank agrees promptly to notify the Company and the Agent after any such set-off and application made by such Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. All set-offs shall benefit each Bank in accordance with its Pro Rata Share and the Banks shall share any set- offs among the Banks accordingly. Notification of Addresses, Lending Offices, Etc. Each Bank shall notify the Agent in writing of any changes in the address to which notices to the Bank should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Agent shall reasonably request. CounterpartsThis Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument. SeverabilityThe illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder. No Third Parties BenefitedThis Agreement is made and entered into for the sole protection and legal benefit of the Company, the Banks, the Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents. Governing Law and Jurisdiction (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA; PROVIDED THAT THE AGENT AND THE BANKS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE NORTHERN DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE BANKS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND THE BANKS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY, THE AGENT AND THE BANKS EACH WAIVE PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW. Waiver of Jury TrialTHE COMPANY, THE BANKS AND THE AGENT EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE BANKS AND THE AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. Entire AgreementThis Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Banks and the Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in San Francisco, California by their proper and duly authorized officers as of the day and year first above written. AST RESEARCH, INC. By: /s/ Dennis R. Leibel Title: Senior Vice President, Legal, Administration and Secretary By: /s/Mark P. de Raad Title: Vice President, Controller and Principal Accounting Officer BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/Wendy M. Young Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: /s/Kevin McMahon Title: Vice President ROYAL BANK OF CANADA By: /s/Tom J. Oberaigner Title: Manager BANQUE NATIONALE DE PARIS By: /s/Clive Bettles Title: Senior Vice President and Manager By: /s/Tjalling Terpstra Title: Vice President NATIONSBANK OF TEXAS, N.A. By: /s/Edwin J. Davis Jr. Title: Senior Vice President SCHEDULE 2.01 COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share Bank of America National Trust and Savings Association $ 25,000,000 25% Royal Bank of Canada $ 25,000,000 25% Banque Nationale de Paris $ 25,000,000 25% NationsBank of Texas, N.A. $ 25,000,000 25% TOTAL $100,000,000 100% EX-10.35 4 EXHIBIT 10.35 Annex 3 FIRST AMENDMENT THIS FIRST AMENDMENT ("Amendment"), dated as of February 29, 1996, is entered into by and among AST Research, Inc., a Delaware corporation (the "Company"), the several financial institutions party to this Amendment (collectively, the "Banks"; individually, a "Bank"), and Bank of America National Trust and Savings Association, as Agent for the Banks. RECITALS A. The Company, the Agent and certain of the Banks are party to a Credit Agreement dated as of December 20, 1995 (the "Credit Agreement"), which Credit Agreement became effective on December 27, 1995. B. The Company has requested that (i) several new financial institutions become parties to, and be deemed to be "Banks" in connection with, the Credit Agreement and (ii) the Banks, among other things, agree to amend the Credit Agreement to increase the aggregate Commitments of the Banks. The Agent and the Banks are willing to so amend the Credit Agreement subject to the terms and conditions in this Amendment. NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings, if any, assigned to them in the Credit Agreement. 2. Amendments. (a) The term "Banks" in the introductory paragraph of the Credit Agreement is amended to refer to all Banks executing this Amendment and all of the duties and obligations of the Borrower and the Guarantor under the Loan Documents in existence prior to the date hereof (to which they are respectively parties) shall be deemed to be duties and obligations to the Agent and all of the Banks executing this Amendment. (b) Section 1.01 of the Credit Agreement is amended by deleting the phrase "and each date such Loan is converted into another Type of Loan" in the definition of "Interest Payment Date." (c) Section 2.08(b) of the Credit Agreement is amended by adding in the second sentence the phrase "Offshore Rate" before each occurrence of the word "Loans" and by adding the phrase "on all Loans" after the phrase "Event of Default." (d) Schedule 2.01 to the Credit Agreement is amended by deleting said Schedule 2.01 in its entirety and by inserting in lieu thereof the form of Schedule 2.01 attached hereto as Annex 1. (e) Schedule 10.02 to the Credit Agreement is amended by deleting said Schedule 10.02 in its entirety and by inserting in lieu thereof the form of Schedule 10.02 attached hereto as Annex 2. 3. Representations and Warranties. The Company hereby represents and warrants to the parties hereto as follows: (a) No Defaults or Events of Default have occurred and are continuing under the Loan Documents. (b) The execution, delivery and performance by the Company of this Amendment have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any Governmental Authority) in order to be effective and enforceable. (c) This Amendment and the Loan Documents, as amended by this Amendment, constitute the legal, valid and binding obligations of the Company, enforceable against it in accordance with their respective terms, without defense, counterclaim or offset. (d) All representations and warranties of the Company contained in the Loan Documents are true and correct. (e) The Company is entering into this Amendment on the basis of its own investigation and for its own reasons, without reliance upon the Agent, the Banks or any other Person. 4. Effective Date. This Amendment will become effective on the date ("Effective Date") that each of the following conditions precedent has been satisfied and that all of the following documents required to be delivered are in form and substance satisfactory to the Agent and the Banks: (a) All representations and warranties contained herein are true and correct as of the Effective Date. (b) All Loans outstanding under the Credit Agreement shall bear interest at the Base Rate. (c) The Agent shall have received for its own account, or for the account of the applicable Bank, as the case may be, all payments due on the Effective Date from any Bank in respect of the Loans assigned pursuant to Section 5 and all fees, costs and expenses due and payable pursuant to Section 2.09(b) of the Credit Agreement, if then invoiced. (d) The Agent has received all fees and expenses required to be paid by the Company in connection with the Amendment other than such fees and expenses for which the Company has not received bills from the applicable Person or Persons. (e) The Agent has received from the Company and each of the Banks a duly executed copy of this Amendment. (f) The Agent has received from the Company duly executed copies of the new Notes for all the Banks reflecting the new Commitments of the Banks. (g) The Agent has received: (i) copies of the resolutions of the board of directors of (A) the Company authorizing the transactions contemplated hereby and (B) the Guarantor authorizing the transactions contemplated by the Guarantor Acknowledgment and Consent executed by the Guarantor in the form attached hereto as Annex 3 (the "Consent") and the Guaranty, each certified as of the Effective Date by the Secretary or an Assistant Secretary or other duly authorized officer of such Person; and (ii) a certificate of the Secretary or Assistant Secretary or other duly authorized officer of each of the Company and the Guarantor certifying (A) the names and true signatures of the officers of the Company and the Guarantor, respectively, authorized to execute, deliver and perform, as applicable, this Amendment, and all other Loan Documents to be delivered by it, respectively, hereunder, and (B) that the respective charter documents of the Company and the Guarantor provided to the Banks at the time of the execution and delivery of the Credit Agreement are in full force and effect and are unchanged from the versions of such documents provided to the Banks at the time of the execution and delivery of the Credit Agreement. (h) The Agent has received: (i) an opinion of Stradling, Yocca, Carlson & Rauth, California counsel to the Company, addressed to the Agent and the Banks; (ii) an opinion of Gibson, Dunn & Crutcher, California counsel to the Guarantor, addressed to the Agent and the Banks; and (iii) an opinion of Shin & Kim, Korea counsel to the Guarantor, addressed to the Agent and the Banks. (i) The Agent has received a duly executed copy of the Consent. (j) The Agent has received copies of all consents (including, without limitation, the consent of Hanil Bank) required in connection with the execution of this Amendment and the Consent. 5. Certain Effective Date Transitional Matters. (a) On the Effective Date, each Bank hereby sells and assigns, without recourse, an amount of Loans equal to the product of (i) the excess (if any) of its Original Percentage over its Effective Date Percentage times (ii) the aggregate principal amount of Loans outstanding on such date and each Bank hereby purchases an amount of Loans equal to the product of (i) the excess (if any) of its Effective Date Percentage over its Original Percentage times (ii) the aggregate principal amount of Loans outstanding on such date. Each Bank selling Loans hereunder shall be deemed to have sold (and each Bank purchasing Loans shall be deemed to have purchased) a pro rata portion (based on the aggregate principal amount of Loans then outstanding) of each of such selling Bank's Loans. Payments by each Bank purchasing Loans hereunder shall be made to the Agent not later than 9:00 a.m., San Francisco time in immediately available funds, without setoff, deduction or counterclaim, for the pro rata account (based upon the outstanding principal amount of Loans being sold) of each selling Bank in an amount equal to the aggregate principal amount of outstanding Loans purchased by such Bank. (b) On and after the Effective Date, each Bank shall be entitled to receive commitment fees under Section 2.09(b) of the Credit Agreement and interest on Loans and on any other amount due under any Loan Document, in each case, (i) accrued and unpaid before the Effective Date in accordance with its Original Percentage and (ii) accrued on and after the Effective Date in accordance with its Effective Date Percentage. (c) On and after the Effective Date, to the extent that any commitment and the other rights and obligations of any Bank existing at the time immediately preceding the Effective Date have been assigned or delegated, as applicable, to any Bank hereunder, such Bank hereby assumes such commitment and other obligations and shall have the rights and obligations of a Bank hereunder and under the other Loan Documents and, to the extent that any commitment and other obligations of any Bank existing at the time immediately preceding the Effective Date have been delegated by any Bank pursuant to this Agreement, such Bank shall be released from such commitment and its obligations thereunder and under the other Loan Documents. For purposes of this Section 5, (i) "Original Percentage" means, relative to any Bank, the percentage set forth with respect to such Bank on the schedule attached hereto as Annex 4 and (ii) "Effective Date Percentage" means, relative to any Bank, the percentage set forth with respect to such Bank on the schedule attached hereto as Annex 4. 6. Reservation of Rights. The Company acknowledges and agrees that the execution and delivery by the parties hereto of this Amendment shall not be deemed to create a course of dealing or an obligation to execute similar waivers or amendments under the same or similar circumstances in the future. 7. Miscellaneous. (a) Except as herein expressly amended, all terms, covenants and provisions of the Loan Documents are and shall remain in full force and effect, without defense, offset or counterclaim. All references therein shall henceforth refer to the Loan Documents as amended by this Amendment. This Amendment shall be deemed incorporated into, and a part of, the Loan Documents. (b) This Amendment shall be binding upon and inure to the benefit of the parties hereto and thereto and their respective successors and assigns. No third party beneficiaries are intended in connection with this Amendment. (c) This Amendment shall be governed by and construed in accordance with the law of the State of California; provided that the Agent and the Banks shall retain all rights arising under federal law. (d) This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one and the same instrument. Each of the parties hereto understands and agrees that this Amendment (and any other document required herein) may be delivered by any party thereto either in the form of an executed original or an executed original sent by facsimile transmission to be followed promptly by mailing of a hard copy original, and that receipt by the Agent of a facsimile transmitted document purportedly bearing the signature of a Bank will have the same force and effect as the delivery of a hard copy original. Any failure by the Agent to receive the hard copy executed original of such document shall not diminish the binding effect of receipt of the facsimile transmitted executed original of such document of the party whose hard copy page was not received by the Agent. (e) This Amendment contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein. This Amendment supersedes all prior drafts and communications with respect thereto. This Amendment may not be amended except in accordance with the provisions of Section 10.01 of the Credit Agreement. (f) If any term or provision of this Amendment shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this Amendment or the Loan Documents, respectively. (g) The Company covenants to pay to or reimburse the Agent and the Banks, upon demand, for all reasonable costs and expenses (including allocated costs of in-house counsel) incurred in connection with the development, preparation, negotiation, execution and delivery of this Amendment. (h) Reasonably promptly after the satisfaction of the conditions set forth in Section 4, the Agent will certify such satisfaction in writing to the Company and the Banks. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered in San Francisco, California, by their proper and duly authorized officers as of the day and year first above written. AST RESEARCH, INC. By: /s/Dennis R. Leibel Title: Senior Vice President, Legal and Administration By: /s/Mark P. deRaad Title: Vice President/Controller BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Agent By: /s/Dietmar Schiel Title: Vice President BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: /s/Kevin McMahon Title: Vice President ROYAL BANK OF CANADA By: /s/Michael A. Cole Title: Manager BANQUE NATIONALE DE PARIS By: /s/Clive Bettles Title: Senior Vice President & Manager By: /s/Tjalling Terpstra Title: Vice President NATIONSBANK OF TEXAS, N.A. By: /s/Edwin J. Davis Jr. Title: Senior Vice President COMMERZBANK AKTIENGESELLSCHAFT, LOS ANGELES BRANCH By: /s/Jeffrey A. Lamia Title: Senior Vice President By: /s/Juergen Boysen Title: Senior Vice President THE FIRST NATIONAL BANK OF CHICAGO By: /s/J.W. Park Title: Vice President ABN AMRO BANK N.V., LOS ANGELES INTERNATIONAL BRANCH By: ABN AMRO NORTH AMERICA, INC., as agent therefor By: /s/Paul K. Stimpfl Title: Vice President By: /s/John A. Miller Title: Group Vice President/Director THE BANK OF NOVA SCOTIA By: /s/James S. York Title: Vice President COMMITMENTS AND PRO RATA SHARES Pro Rata Bank Commitment Share Bank of America National $ 40,000,000 20% Trust and Savings Association Royal Bank of Canada $ 25,000,000 12.5% Banque of Nacionale de Paris $ 25,000,000 12.5% Nationsbank of Texas, N.A. $ 25,000,000 12.5% ABN AMRO Band N.V. $ 25,000,000 12.5% Los Angeles International Branch The First National Bank $ 10,000,000 5% of Chicago Commerzbank Aktiengesellschaft $ 25,000,000 12.5% Los Angeles Branch The Bank of Nova Scotia $ 25,000,000 12.5% TOTAL $200,000,000 100% GUARANTOR ACKNOWLEDGMENT AND CONSENT The undersigned, the guarantor with respect to AST Research, Inc.'s (the "Company") obligations to the Agent and the Banks under the Credit Agreement, hereby (a) acknowledges and consents to the execution, delivery and performance by Company of the First Amendment to Credit Agreement dated as of February 29, 1996, a copy of which is attached hereto (the "Amendment"), (b) reaffirms and agrees that the Guaranty and all other documents and agreements executed and delivered by the undersigned to the Agent and the Banks in connection with the Credit Agreement are in full force and effect, without defense, offset or counterclaim and, (c) reaffirms and agrees that all of the provisions of the Guaranty are applicable to, and enforceable by the Agent and all Banks party to the Amendment against, the undersigned with respect to the increased Commitments aggregating $200,000,000 under the Credit Agreement. The undersigned hereby represents and warrants to the Agent and the Banks on the date hereof and as of the Effective Date as follows: (i) the execution, delivery and performance by the undersigned of the Guaranty and this Guarantor Acknowledgment and Consent have been duly authorized by all necessary corporate and other action and do not and will not require any registration with, consent or approval of, notice to or action by, any Person (including any Governmental Authority) in order to be effective and enforceable, except as have been previously obtained and delivered to the Agent and the Banks; (ii) the Guaranty and this Guarantor Acknowledgment and Consent constitute the legal, valid and binding obligations of the undersigned, enforceable against it, in accordance with their respective terms, without defense, counterclaim or offset; (iii) all representations and warranties of the undersigned contained in the Guaranty are true and correct; and (iv) the undersigned is entering into this Guarantor Acknowledgment and Consent on the basis of its own investigations, and for its own reasons, without reliance upon the Agent, the Banks or any other Person. Capitalized terms used herein have the meanings specified in the Amendment. SAMSUNG ELECTRONICS CO., LTD Dated: March 5, 1996 By: /s/Myoung Soo Hong Title: Senior Vice President Sales and Marketing EX-10.67 5 EXHIBIT 10.67 AST RESEARCH, INC. PROFIT SHARING PLUS PLAN Amended and Restated July 1, 1993 TABLE OF CONTENTS Page INTRODUCTION 1 SECTION 1 - DEFINITIONS 2 1.1 Account 2 1.2 Administrative Committee 2 1.3 Affiliated Companies 2 1.4 Beneficiary 2 1.5 Board of Directors 3 1.6 Code 3 1.7 Disabled 3 1.8 Effective Date 3 1.9 Eligible Compensation 3 1.10 Eligible Employee 3 1.11 Employee 4 1.12 Employer 4 1.13 Employer Discretionary Contribution Account 4 1.14 Employer Discretionary Contributions 4 1.15 Employer Matching Contributions 4 1.16 Employer Matching Contribution Account 4 1.17 Employment Commencement Date 4 1.18 Entry Date 5 1.19 ERISA 5 1.20 Fiscal Year 5 1.21 Highly Compensated Employee 5 1.22 Hour of Service 6 1.23 Normal Retirement Date 6 1.24 Participant 6 1.25 Period of Service 6 1.26 Period of Severance 7 1.27 Plan 7 1.28 Plan Administrator 7 1.29 Plan Year 7 1.30 Pre-tax Contribution Account 7 1.31 Pre-tax Contribution 7 1.32 Rollover Account 8 1.33 Rollover Contribution 8 1.34 Separation from Service 8 1.35 Severance From Service Date 8 1.36 Service 8 1.37 Temporarily Terminated 9 1.38 Trust or Trust Fund 9 1.39 Trustee 9 1.40 Valuation Date 9 1.41 Additional Definitions in Plan 9 SECTION 2 - PARTICIPATION AND SERVICE 10 2.1 Participation 10 2.2 Duration and Re-employment After Termination 10 2.3 Inactive Participant 10 2.4 Employees in a Bargaining Unit 10 2.5 Service 11 SECTION 3 - SALARY DEFERRAL 12 3.1 Salary Deferral Agreement 12 3.2 Participant Modification of Salary Deferral Agreement 12 3.3 Procedure for Making and Revoking Salary Deferral Agreement 13 3.4 Non-Discrimination Test For Deferrals (ADP Test) 13 SECTION 4 - PLAN CONTRIBUTIONS 14 4.1 Participant and Employer Contributions 14 4.2 Non-Discrimination Test for Employer Matching Contributions (ACP Test) 15 4.3 Multiple Use of Alternative Limitations Under ADP and ACP Tests 16 4.4 Corrective Procedures to Satisfy Discrimination Tests 16 4.5 Return of Contributions 17 SECTION 5 - ACCOUNT ADMINISTRATION 20 5.1 Types of Accounts 20 5.2 Investment of Contributions 20 5.3 Valuation of the Trust Fund 21 5.4 Allocation of Trust Fund Earnings and Losses to Participant Account 21 5.5 Account Statements 21 5.6 Disposition of Forfeitures 21 SECTION 6 - BENEFITS AND FORMS OF PAYMENT 22 6.1 Benefits Upon Termination 22 6.2 Time of Benefit Commencement 22 6.3 Form of Payment 23 6.4 Withdrawals Prior to Termination 23 6.5 Loans 25 6.6 Death Benefits 25 6.7 Direct Rollovers 26 SECTION 7 - VESTING 28 7.1 Vesting 28 7.2 Forfeitures 28 7.3 Vesting Upon Reemployment 29 SECTION 8 - LIMITATION ON CONTRIBUTIONS 30 8.1 Maximum Annual Contribution to the Plan 30 8.2 Additional Limitation Relating to Defined Benefit Plans 31 SECTION 9 - TOP HEAVY PROVISIONS 33 9.1 Scope 33 9.2 Top Heavy Status 33 9.3 Minimum Contribution 35 9.4 Limitation to Annual Additions in Top Heavy Plan 36 9.5 Vesting 36 SECTION 10 - ADMINISTRATION OF THE PLAN 37 10.1 Plan Administrator 37 10.2 Organization and Procedures 37 10.3 Duties and Authority of Administrative Committee 37 10.4 Expenses and Assistance 38 10.5 Bonding and Insurance 38 10.6 Commencement of Benefits 38 10.7 Appeal Procedure 39 10.8 Plan Administration - Miscellaneous 40 10.9 Domestic Relations Orders 42 10.10 Plan Qualification 43 10.11 Deductible Contribution 43 10.12 Rollovers 43 SECTION 11 - AMENDMENT AND TERMINATION 45 11.1 Amendment - General 45 11.2 Amendment - Consolidation or Merger 45 11.3 Termination of the Plan 45 11.4 Allocation of the Trust Fund on Termination of Plan 45 SECTION 12 - FUNDING 46 12.1 Contributions to the Trust Fund 46 12.2 Trust Fund for Exclusive Benefit of Participants 46 12.3 Trustee 46 12.4 Investment Manager 46 SECTION 13 - FIDUCIARIES 47 13.1 Limitation of Liability of the Employer and Others 47 13.2 Indemnification of Fiduciaries 47 13.3 Scope of Indemnification 47 INTRODUCTION This Plan was originally adopted on June 29, 1983, by AST Research, Inc., a California corporation, hereinafter sometimes called the "Company". The Company desires to encourage loyalty, efficiency, continuity of service and productivity of its Employees. In order to accomplish these purposes, the Company established this Plan to provide incentives for its Employees and their Beneficiaries and to assist them in building financial security. The Plan is hereby amended and restated in its entirety to be generally effective July 1, 1989, in order to incorporate several amendments and to comply with the requirements of the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1986, the Omnibus Budget Reconciliation Act of 1987, the Technical and Miscellaneous Revenue Act of 1988, and the Omnibus Budget Reconciliation Act of 1989, legislative tax changes occurring during 1992/1993 and the Omnibus Budget Reconciliation Act of 1993. Certain provisions of this restated Plan have effective dates of July 1, 1987. DEFINITIONS The following terms when used herein, shall have the following meaning, unless a different meaning is plainly required by the context. Capitalized terms are used throughout the Plan text for terms defined by this and other sections. .0 Account "Account" means a Participant's Pre-tax Contribution Account (which includes a Participant's basic and voluntary contributions from the prior plan), Employer Matching Contribution Account, Employer Discretionary Contribution Account and Rollover Contribution Account. .1 Administrative Committee "Administrative Committee" means the Committee as from time to time constituted and appointed by the Employer to administer the Plan. .2 Affiliated Companies "Affiliated Companies" means ( ) the Employer, (a) any other corporation which is a member of a controlled group of corporations which includes the Employer (as defined in Section 414(b) of the Code), (b) any other trade or business under common control with the Employer (as defined in Section 414(c) of the Code), or (c) an affiliated service group which includes the Employer (as defined in Section 414(m) of the Code). For purposes of the limitation on benefits in Section 8, the determination of whether a corporation is an Affiliated Company will be made by modifying Sections 414(b) and (c) of the Code as specified in Section 415(h). .3 Beneficiary "Beneficiary" means the person or persons designated to be the Beneficiary by the Participant in writing to the Administrative Committee. In the event a married Participant designates someone other than his or her spouse as Beneficiary, such initial designation or subsequent change shall be invalid unless the spouse has consented on a form provided by the Administrative Committee, and such consent has been notarized or witnessed by a Plan representative. If a Participant fails to designate a Beneficiary or if no properly designated Beneficiary survives the Participant, benefits payable under the Plan as a result of the death of the Participant shall be made payable to the Participant's estate. .4 Board of Directors "Board of Directors" shall mean the Board of Directors of AST Research, Inc. .5 Code "Code" means the Internal Revenue Code of 1986, as amended. .6 Disabled "Disabled" means a physical or mental condition of an Employee which results from a bodily injury or disease or mental disease or mental disorder which renders him or her unable or incapable of engaging in any substantial gainful activity which impairment can be expected to result in death or be of a long continued and indefinite duration. The determination of a "Disabled" Employee shall be made by the Administrative Committee based upon medical authority. .7 Effective Date "Effective Date" means July 1, 1989 as amended and restated. This Plan was originally effective June 29, 1983. .8 Eligible Compensation Beginning on July 1, 1994, "Eligible Compensation," for any Plan Year for purposes of determining the Pre-tax Contributions and Employer Matching Contributions means base pay including Participant Pre-tax Contributions to this Plan and Employee elective contributions to a cafeteria plan under Code Section 125, plus overtime, shift premium, and salary continuation, but excluding reimbursements or other expense allowances, fringe benefits (cash or non-cash), commissions, severance pay and bonuses. In no event shall Eligible Compensation include any compensation paid for services prior to the date the Employee becomes a Participant or after his or her Severance from Service Date. Prior to July 1, 1994, "Eligible Compensation" means a Participant's base pay paid by the Employer and excludes overtime and any bonuses or commissions. Notwithstanding the foregoing, Eligible Compensation in excess of $200,000 shall be disregarded. This $200,000 limit shall be automatically adjusted to the maximum permissible dollar limitation permitted by the Commissioner of the Internal Revenue Service under IRC Code Section 401(a)(17). Effective for Plan Years beginning on or after December, 1993, Eligible Compensation shall be limited to $150,000. The $150,000 limit shall be automatically adjusted to the maximum permissible dollar amount. In determining Eligible Compensation of an Employee for purposes of this limitation, earnings of the spouse and any lineal descendants under age 19 shall be attributed to the Employee in accordance with Section 414(q)(6) of the Code. .9 Eligible Employee "Eligible Employee" means any Employee who meets the eligibility requirement of Section 2.1 and this section. "Eligible Employee" excludes any Employee who is a leased employee, piece work subcontractor, or covered under a collective bargaining agreement where retirement benefits were the subject of good faith bargaining which does not provide for retirement benefits under this Plan, or an Employee not on United States payroll. .10 Employee "Employee" means any person who is employed by the Employer as a common law Employee and any leased employee within the meaning of Code Section 414(n)(2); provided, however, if leased employees constitute twenty percent or less of the Employer's non-highly compensated work force, the term "Employee" shall not include a leased employee who is covered by a plan maintained by the leasing organization which meets the requirements of Code Section 414(n)(5). .11 Employer "Employer" means AST Research, Inc. or any Affiliated Company, which by resolution of the Board of Directors and with approval of the Affiliated Company has adopted this Plan as its own. .12 Employer Discretionary Contribution Account "Employer Discretionary Contribution Account" means an account established and maintained by the Employer to receive a Participant's share of Employer Discretionary Contributions to the Plan. .13 Employer Discretionary Contributions "Employer Discretionary Contributions" means the contribution made by the Employer to the Trust pursuant to Section 4.1(c). .14 Employer Matching Contributions "Employer Matching Contributions" means the contributions made by the Employer to the Trust pursuant to Section 4.1(b). .15 Employer Matching Contribution Account "Employer Matching Contribution Account" means an account established and maintained by the Trustee to receive a Participant's share of Employer Matching Contributions to the Plan. .16 Employment Commencement Date "Employment Commencement Date" means the latest of: ( ) the Employee's most recent date of employment (the day on which he or she is first credited with an Hour of Service) with the Employer; or (a) the date on which the Employee is first credited with an Hour of Service for the Employer during the current period of employment; or (b) the Employee's re-employment date if he or she incurs a Break-in-Service and is treated as a new Employee Pursuant to Section 2.2. In addition to the above, the Administrative Committee in its discretion may grant Service credit to any group of persons who become Employees as a result of the acquisition of any asset, corporation, or other trade or business, for so much of their service with a previous employer as the Administrative Committee may specify. For Employees who were prior employees of the Tandy Electronics and GRiD Systems Divisions of Tandy Corporation as of the acquisition date, "Employment Commencement Date" shall be the later of the acquisition date or July 1, 1993. .17 Entry Date "Entry Date" means the first day of the month following an Employee meeting the eligibility requirements of Section 2.1. .18 ERISA "ERISA" means the Employee Retirement Income Security Act of 1974, as amended, and including all regulations promulgated pursuant thereto. .19 Fiscal Year "Fiscal Year" means the 52/53 week period ending on the Saturday closest to June 30. .20 Highly Compensated Employee "Highly Compensated Employee" means an Employee who, during the Plan Year or the twelve-month period preceding the Plan Year, is included in one of the following categories within the meaning of Section 414(q) of the Code and regulations thereunder: (a) an Employee who was at any time a 5% owner of the Employer; (b) an Employee who received aggregate compensation from all the Affiliated Companies in excess of the dollar limitation under Section 414(q)(1)(B) of the Code (as indexed); (c) an Employee who received aggregate compensation from all the Affiliated Companies in excess of the dollar limitation contained in Section 414(q)(1)(C) of the Code (as indexed) and was in the "top paid group" as defined in Section 414(q)(4) of the Code; or ( ) an officer of an Employer whose annual compensation exceeds 50% of the dollar limitation under Section 415(b)(1)(A) of the Code (as indexed). An Employee described in subparagraphs (b) through (d) above for the Plan Year in question, who is not one of the 100 highest paid Employees in the current Plan Year, will not be considered a Highly Compensated Employee for the current year unless he or she was a Highly Compensated Employee in the preceding Plan Year. No more than 50 Employees shall be considered officers or if less, no more than the greater of (i) 3 or (ii) 10% of all Employees shall be considered officers. If all officers earn less than the Eligible Compensation threshold in subparagraph (d) above, then the highest paid officer shall be considered highly compensated. A former Employee shall be considered a Highly Compensated Employee if he or she was a Highly Compensated Employee when he or she separated from service or at any time after attaining age 55. Effective July 1, 1989, the Employer may elect to use the "Calendar Year calculation election" as permitted under IRS Temporary Regulation Section 1.414(q)-1T Q&A14(3)(b). The definition of "compensation" for purposes of this Section 1.21 is Section 415 wages paid for services rendered including overtime, commissions, bonuses and Employee Pre-tax Contributions to this Plan or to a cafeteria plan described in Code Section 125. .21 Hour of Service "Hour of Service" means each hour for which an Employee is paid or entitled to payment by for the performance of duties for the Employer or any Affiliated Company. .22 Normal Retirement Date "Normal Retirement Date" means the day the Participant reaches age 55 and is credited with five years of Service. .23 Participant "Participant" means any Eligible Employee who qualifies for participation pursuant to Section 2.1. A non-vested Participant shall cease to be a Participant on the date he or she terminates employment. A vested Participant shall cease to be a Participant when his or her benefit payments are completed. .24 Period of Service "Period of Service" means the period of time commencing with the Employment Commencement Date and ending on the Severance From Service Date. Non-successive periods are aggregated to determine the Employee's total Period of Service. For vesting and participation purposes, an Employee's Period of Service shall also include the following: ( ) Periods not in Service due to Temporary Termination; and (a) Periods of Service required by Section 414(a)(1) of the Code or under Treasury Regulations issued pursuant to Section 414(a)(2) of the Code, and Service with Affiliated Companies. Where the Employer maintains the plan or predecessor employer, service for such predecessor employer shall be treated as service for the Employer, as required by the Code. In addition to the above, the Administrative Committee in its discretion may grant to any group of persons who become Employees as a result of the acquisition of any asset, corporation, or other trade or business, for so much of their service with a previous employer as the Administrative Committee may specify. For Employees who were prior employees of the Tandy Electronics and GRiD System Divisions of Tandy Corporation as of the acquisition date, "Employment Commencement Date" shall be the later of the acquisition date or July 1, 1993. .25 Period of Severance "Period of Severance" means the period of time commencing at the Severance From Service Date and ending on the date the Employee again performs an Hour of Service for the Employer. However, such period shall commence one year later if a male or female Employee is absent due to pregnancy, birth or adoption of a child, or caring for a child immediately following birth or adoption. A one-year Period of Severance means a 12-consecutive month period beginning on the Severance from Service date and ending on the first anniversary of such date, provided that the Employee does not perform an Hour of Service for an Employer. .26 Plan "Plan" means the AST Research, Inc. Profit Sharing Plus Plan either in its previous or present form or as amended from time to time. .27 Plan Administrator "Plan Administrator" means the person or entity designated in Section 10 to administer the Plan. .28 Plan Year "Plan Year" means the twelve month period commencing each July 1, and ending each June 30, from and after the Effective Date. However, for the period beginning June 27, 1992 and ending June 26, 1993, Plan Year means the 52/53 week period ending on that Saturday, June 26, 1993. .29 Pre-tax Contribution Account "Pre-tax Contribution Account" means an account established and maintained by the Trustee to receive a Participant's pre-tax contributions to the Plan. .30 Pre-tax Contribution "Pre-tax Contribution" means the amount a Participant elects to contribute pursuant to Section 3.1. .31 Rollover Account "Rollover Account" means an account established and maintained by the Trustee to hold a Participant's rollover contribution to the Plan. .32 Rollover Contribution "Rollover Contribution" means the amount a Participant elects to transfer to this Plan from another qualified plan pursuant to the terms set forth in Section 10.12 herein. .33 Separation from Service "Separation from Service" shall mean any termination of the employment relationship between an Employee and the Employer or an Affiliated Company, and shall be deemed to occur upon the earlier of: (1) the date upon which the Employee quits, is discharged, retires, or dies; or (2) the first anniversary of the first day of a period in which the employee is (and remains) absent from the service of the employer or an Affiliated Company for any reason (such as vacation, sickness, layoff, or leave of absence granted by the Employer or an Affiliate Company) not enumerated in paragraph (1) above. An Employee who transfers to a nonparticipating Affiliated Company shall not be treated as having a Separation from Service. An employee who is on leave of absence from work with the Employer or an Affiliated Company in order to serve in the Armed Forces of the United States shall not have a Separation from Service unless he fails to report for work at the end of such leave and prior to expiration of the period in which he has reemployment rights under law. The absence of any employee who fails to return to work within the allocated time shall be subject to the provisions of paragraph (2) above. .34 Severance From Service Date "Severance From Service Date" means the earlier of the date on which an Employee quits, retires, is discharged or dies, or the first anniversary of absence from work for any other reason. .35 Service "Service" with the Employer means periods for which an Employee is paid or entitled to payment for the performance of duties for the Employer as set forth in Section 2.4. The Administrative Committee shall also have the discretion to grant Service credit to any group of persons who become Employees as a result of the acquisition of any asset, corporation or other trade or business, for so much of their service with a previous Employer as the Administrative Committee may specify. For Employees who were prior employees of the Tandy Electronics and GRiD Systems Divisions of Tandy Corporation as of the acquisition date, "Employment Commencement Date" shall be the later of the acquisition date or July 1, 1993. .36 Temporarily Terminated Termination is deemed "Temporary" if the Employee is rehired and in Service within one year of the initial date of absence from work. .37 Trust or Trust Fund "Trust or Trust Fund" means the trust fund into which shall be paid all contributions and from which all benefits shall be paid under this Plan. The Trust Fund includes the Aggressive Stock Fund, the Balanced Fund, the Guaranteed Contract Fund and any other funds as may be established under the Plan. .38 Trustee "Trustee" means the trustee or trustees who receive, hold, invest, and disburse the assets of the Trust in accordance with the terms and provisions set forth in a trust agreement. .39 Valuation Date "Valuation Date" means each day the New York Stock Exchange is open. .40 Additional Definitions in Plan The following terms are defined in the following section of the Plan. Section ACP Test 4.2 ADP Test 3.4 Aggregate Account 9.2 (e) Aggregation Group 9.2 (h) Annual Additions 8.1 (b) Determination Date 9.2 (c) Domestic Relations Orders 10.9 Key Employee 9.2 (g) Lump Sum 6.3 (c) 1 - PARTICIPATION AND SERVICE .0 Participation An Eligible Employee, as defined in Section 1.10, shall become a Participant in this Plan on the later of the Effective Date or the Entry Date on or after the latest of: ( ) attaining age 18; (a) a date that is six months (prior to January 1, 1991, twelve months) after the date an Employee first performs an Hour of Service with the Employer and is still an Eligible Employee on such date; and (b) becoming an Eligible Employee. .1 Duration and Re-employment After Termination An Employee who becomes a Participant shall remain a Participant (or an inactive Participant) until he or she has a Separation from Service (as defined in Section 1.34), and shall continue to be a former Participant thereafter as long as he or she is entitled to receive any benefits. After a Period of Severance, upon the reemployment of a former Participant as an Eligible Employee, he or she shall immediately become a Participant. An Employee who has a Period of Severance prior to becoming a Participant or prior to becoming eligible to participate and is later reemployed shall become eligible to participate and become a Participant upon rehire as an Eligible Employee on the Entry Date on or after the date such individual fulfills the requirements of Section 2.1. .2 Inactive Participant Any Participant who transfers to an employment status with the Employer or an Affiliated Company in which he or she is no longer an Eligible Employee shall become an inactive Participant. An inactive Participant shall not be eligible to make Pre-tax contributions based on pay earned after the date of his or her transfer during the period he or she is an Employee. If a Participant becomes an inactive Participant, his or her Account shall continue to be held under the Plan until he or she becomes entitled to a distribution under Section 6. .3 Employees in a Bargaining Unit An Employee belonging to a collective bargaining unit, which has entered an agreement with the Employer that does not provide for retirement benefits under this Plan, shall not qualify for participation. If such an Employee is a Participant when such an agreement is entered, the Employee shall cease active participation on the effective date of the bargaining agreement. If such an agreement provides for Plan participation, a covered Employee may continue or resume participation. .4 Service Service is used to determine an Employee's eligibility and vesting under the Plan. An Employee shall be credited with Service for the period of time during which the employment relationship exists between the Employee and the Company or an Affiliated Company, the length of which shall be determined, in completed years and months, by counting the number of anniversaries of the date on which credit for Service begins during the following periods of time: ( ) Credit shall be given to an Employee for the period of time beginning on the first day on which he or she first performs an Hour of Service and ending on the date of such Employee's Severance from Service Date. (a) Credit shall be given to an Employee for each period beginning upon the Severance from Service Date and ending upon the first day on which he or she first performs an Hour of Service thereafter but only if the Employee is reemployed and performs such Hour of Service within 12 months of the date of such Severance from Service Date and prior to incurring a five year Period of Severance. In the case of an Employee who is absent from employment under circumstances such as vacation, sickness, layoff or leave of absence granted by the Employer or an Affiliated Company, and then quits, is discharged, or Retires, the first day of such absence shall be considered the Severance from Service Date for purposes of the preceding sentence. (b) Credit shall be given to an Employee after the Severance from Service Date for any period beginning on the day on which the Employee first performs an Hour of Service after his rehire and ending on the date the Employee has a Severance from Service Date thereafter. (c) Whenever the total number of years of Service of an Employee must be ascertained under this Plan, all noncontinuous periods of Service which are credited to such Employee under paragraphs (a), (b), and (c) above, shall be aggregated. For purposes of aggregating such years of Service, the Employer shall calculate an adjusted hire date upon each rehire so that the Participant's entire period of Service can be determined by reference thereto. (d) Notwithstanding the foregoing provisions of this section, the Administrative Committee in its discretion may grant Service credit to any group of persons who become Employees as a result of the acquisition of any asset, corporation, or other trade or business, for so much of their service with a previous employer as the Administrative Committee may specify. For purposes of eligibility to participate, employees of the Tandy Electronics and GRiD Systems Divisions of Tandy Corporation shall receive credit for all prior service with Tandy Corporation. For purposes of vesting, however, such employees shall only receive credit for service from the later of the date of acquisition or July 1, 1993. 2 -SALARY DEFERRAL .0 Salary Deferral Agreement ( ) A Participant may enter into a salary deferral agreement with the Employer. Such agreement shall authorize the Employer to make payroll deductions equal to a whole percentage of Eligible Compensation from 1% up to and including 12%, designated as Pre-tax Contributions. The salary deferral agreement shall be effective on the first day of the payroll period coinciding with or following the Entry Date, which coincides with or next follows completion of the agreement, and shall remain in effect until such agreement is superseded by a subsequent agreement or revoked. Deferrals shall be deducted from a Participant's Eligible Compensation each payroll period (every two weeks), except for those periods in which the deferral amount exceeds the amount remaining after other payroll deductions. In the event a deduction is not taken in a payroll period, the Administrative Committee, with sole discretion, shall determine whether there will be a make-up deduction in a subsequent payroll period. (a) Maximum Dollar Contribution Notwithstanding the foregoing, Pre-tax Contributions for any calendar year shall not exceed the maximum dollar limitation on elective deferrals under Section 402(g) of the Code as indexed. .1 Participant Modification of Salary Deferral Agreement The payroll deduction percentages designated in the Participant's salary deferral agreement shall continue in effect regardless of changes in Eligible Compensation until the Participant elects in writing to change the percentage. A Participant may suspend and/or stop making deferrals at any time by advising the Administrative Committee in writing. Such written notice shall become effective on the date specified on the notice which could be up to 30 days after the notice has been received by the Administrative Committee. A Participant's salary deferral agreement shall automatically be canceled upon a Participant's Severance from Service Date. A Participant may increase or decrease salary deferrals each calendar quarter or during an announced enrollment period by completing a new salary deferral agreement which must be filed with the Administrative Committee at least 30 days prior to the calendar quarter for which the Participant desires the change to become effective. Any such new agreement shall become effective on the first day of such calendar quarter. Completion of a salary deferral agreement shall automatically revoke all prior salary deferral agreements entered into by a Participant. For a voluntary suspension of contributions, a Participant may resume contributions effective on the first day of any calendar quarter by completing a new salary deferral agreement and submitting it to the Administrative Committee at least thirty (30) days before the effective date. If suspension was imposed as a result of a hardship distribution, then a Participant may resume contributions on the first calendar quarter after the imposed suspension by completing a new salary deferral agreement and submitting it to the Administrative Committee at least thirty (30) days before the effective date. .2 Procedure for Making and Revoking Salary Deferral Agreement The salary deferral agreement and any modification or revocation thereof shall be made by the Participant on such form, within such time and in accordance with such rules and procedures as prescribed by the Administrative Committee. .3 Non-Discrimination Test For Deferrals (ADP Test) For each Plan Year beginning on or after July 1, 1987, the Plan must meet one of the actual deferral percentage (hereinafter "ADP") tests described below to satisfy the non-discrimination requirement. For purposes of this ADP test, Eligible Employees who do not qualify for participation pursuant to Section 2 shall not be considered. ( ) The ADP for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ADP for all other Eligible Employees multiplied by 1.25; or (a) The ADP for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ADP for all other Eligible Employees and (ii) does not exceed the ADP for all other Eligible Employees multiplied by 2. The ADP for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee's compensation as defined in Code Section 415(c)(3)) of (i) Participant Pre-tax Contributions to (ii) the Employee's compensation, determined in accordance with Code Section 401(k) and regulations pursuant thereto. In applying the foregoing tests, compensation as defined in Code Section 415(c)(3) paid to and pre-tax contributions on behalf of eligible family members (as defined in Code Section 414(q)(6)(B)) of a Highly Compensated Employee who is a 5% owner or in the group consisting of the ten Highly Compensated Employees paid the greatest compensation shall be combined and deter mined as one and attributed to the Highly Compensated Employee, and such family member shall not be considered a separate employee. If, for any Plan Year, a Highly Compensated Employee is also eligible to participate in another cash or deferred arrangement maintained by any Affiliated Company, then the ADP of such Highly Compensated Employee shall be determined by treating all the cash or deferred arrangements in which he or she is eligible to participate and this Plan as one arrangement. 3 -PLAN CONTRIBUTIONS .0 Participant and Employer Contributions ( ) Participant Payroll Deduction Contributions The Employer shall make a Participant contribution on behalf of each active Participant in an amount equal to 100% of the salary deferral amount pursuant to the Participant's salary deferral agreement for each payroll period. Participant contributions shall be credited to the Participant's Pre-tax Contribution Account. The Employer shall pay at least monthly the Participant contribution for each payroll period in cash to the Trustee. (a) Employer Matching Contributions The Employer may make an Employer Matching Contribution in an amount equal to 100% up to the first 2% of Eligible Compensation deferred and 50% of the amount from 2% up to 6% of Eligible Compensation deferred as a Participant's Pre-tax Contributions not to exceed during the Plan Year the limit contained in Section 3.1(b). Only actual Eligible Compensation earned while an Employee was eligible to Participate in the Plan and actively participating shall be used for determining a Participant's Employer Matching Contribution. A Participant shall receive an Employer Matching Contribution on contributions made during the calendar month in the event the Plan Administrator suspends Participant Pre-tax Contributions to avoid failing IRS nondiscrimination tests or such contributions are suspended voluntarily by the Employee. The Employer Matching Contribution shall be determined and credited to the Participant's Employer Matching Contribution Account monthly. The Employer shall pay the Employer Matching Contributions for each month to the Trustee within a reasonable time as set forth in subsection (d) below. (b) Employer Discretionary Contributions The Employer may also make an Employer Discretionary Contribution for any Plan Year. An Employer Discretionary Contribution may be made on behalf of each eligible Participant who is employed on the earlier of the last day of the Plan Year or the last day of the Employer's Fiscal Year, regardless of whether such eligible Participant has been making Participant contributions to the Plan. In no event shall the Employer Discretionary Contribution be allocated on any compensation for services prior to the date the Employee becomes a Participant or after the date the Employee ceases to be a Participant. Notwithstanding the foregoing, for purposes of this section, Eligible Compensation in excess of $200,000 shall be disregarded. This $200,000 limit shall be automatically adjusted to the maximum permissible dollar limitation permitted by the Commissioner of the Internal Revenue Service. Effective for the Plan Year beginning on or after December 1993, this limit is $150,000 as adjusted. Employer Discretionary Contributions are allocated on the basis of the ratio each Participant's Eligible Compensation for the Plan Year bears to the total Eligible Compensation for the Plan Year of all Participant's eligible to receive a contribution. Only actual Eligible Compensation earned while an Employee was eligible to participate in the Plan shall be used for allocation. The Employer Discretionary Contribution shall be made regardless of whether a Participant makes salary deferral contributions. (c) Time of Contribution The Employer shall pay the Employer Contributions for a Plan Year to the Trustee within a reasonable time after such Plan Year but in no event later than the due date for filing the Employer's federal income tax return plus any extensions. .1 Non-Discrimination Test for Employer Matching Contributions (ACP Test) For each Plan Year beginning on or after July 1, 1987, the Plan must meet one of the average contribution percentage (hereinafter "ACP") tests described below to satisfy this non-discrimination requirement. For purposes of this ACP test, Eligible Employees who do not qualify for Participation pursuant to Section 2 shall not be considered. ( ) The ACP for the group of Eligible Employees who are Highly Compensated Employees does not exceed the ACP for all other Eligible Employees multiplied by 1.25; or (a) The ACP for the group of Eligible Employees who are Highly Compensated Employees (i) is not more than two percentage points higher than the ACP for all other Eligible Employees and (ii) does not exceed the ACP for all other Eligible Employees multiplied by 2. The ACP for a specified group of Eligible Employees shall be the average of the ratios (calculated separately for each Employee in the group to the nearest one-hundredth of one percent of the Employee's compensation as defined in Code Section 415(c)(3)) of Employer Matching Contributions on behalf of each such Employee to (ii) the Employee's Eligible Compensation (as defined in Code Section 415(c)(3)) determined in accordance with Code Section 401(m) and regulations pursuant thereto. In applying the foregoing tests, Eligible Compensation paid to and Employer Matching Contributions on behalf of family members (as defined in Code Section 414(q)(6)(B) of a Highly Compensated Employee who is a 5% owner or in the group consisting of the ten Highly Compensated Employees paid the greatest Eligible Compensation shall be attributed to the Highly Compensated Employee, and such family member shall not be considered a separate Employee. If, for any Plan Year, a Highly Compensated Employee is also eligible to participate in another plan offering employer matching contributions maintained by any Affiliated Company, the ACP of such Highly Compensated Employee shall be determined by aggregating all such contributions. .2 Multiple Use of Alternative Limitations Under ADP and ACP Tests If the sum of the ADP and ACP for Highly Compensated Employees determined under Section 3.4 and Section 4.2, respectively, after correcting any excess deferrals or contributions pursuant to Section 4.5, exceeds the Aggregate Limit defined below, then Highly Compensated Employee contributions shall be further limited pursuant to this section. This multiple use limitation shall be applied in accordance with the provisions of Proposed Treas. Reg. Sections 1.401(m)-1 and 1.401(m)-2. The Aggregate Limit means the sum of: ( ) 1.25 multiplied by the greater of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees, and (a) the lessor of: ( ) two plus the lesser of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees; or (i) two multiplied by the lesser of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees; or (b) the sum of: ( ) 1.25 multiplied by the lesser of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees; and (c) the lesser of: ( ) two plus the greater of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees; or (i) two multiplied by the greater of (i) the ACP, or (ii) the ADP for the group of all Eligible Employees who are not Highly Compensated Employees. In the event contributions exceed this Aggregate Limit, unmatched Participant Pre-tax Contributions and then matched pre-tax contributions shall be considered excess contributions pursuant to the applicable subparagraph of Section 4.5 and shall be returned to Highly Compensated Employees pursuant thereto. .3 Corrective Procedures to Satisfy Discrimination Tests If at any time during a Plan Year the Administrative Committee determines on a projected basis that it is necessary to reduce the Participant Pre-tax Contributions or Employer Matching Contributions to satisfy the dollar limit on annual deferrals, the ADP non-discrimination test, the ACP non- discrimination test, or the multiple use of alternative limitations test, it shall have the authority to do so in such amounts and for such periods of time as it shall deem necessary under the circumstances. The Administrative Committee may, in its sole discretion, elect to aggregate Employer Matching Contributions and/or Employer Discretionary Contributions with Participant Pre-tax Contributions to the extent necessary to satisfy the ADP discrimination test provided such aggregation does not itself result in discrimination. Notwithstanding any Plan provisions to the contrary, any Employer contributions so aggregated shall be 100% vested, may not be withdrawn upon hardship, and the ACP test must be passed without taking such Employer contributions into account. The Administrative Committee may also, in its sole discretion, elect to aggregate Employer Discretionary Contributions with Employer Matching Contributions to the extent necessary to satisfy the ACP discrimination test, provided such aggregation does not itself result in discrimination. .4 Return of Contributions ( ) Nondeductibility or Mistake of Fact The amount of contribution made to the Plan by the Employer for any Plan Year shall be conditioned upon its deductibility. If nondeductible, or if the contribution is in excess of the amount required under Section 4.1 and such excess payment is due to mistake of fact, the Employer shall recover such nondeductible or excess contribution within one year after the date the contribution is made to the Trustee. The return of a contribution shall be permitted hereunder only if the amount so returned (i) is the excess of the amount actually contributed over the amount which would have otherwise been deductible or contributed, (ii) does not include the earnings attributable to such contribution, and (iii) is reduced by any losses attributable to such contribution. (a) Contributions in Excess of Dollar Limitation An excess deferral exists if pre-tax contributions under this Plan together with any other plans subject to the deferral limit in Code Section 402(g) (as indexed) exceed such dollar limitation for any calendar year beginning on or after January 1, 1987. In the event an excess deferral exists in plans maintained by the Employer, and any other employer, and a Participant submits a written request for a return of excess deferrals by March 1, following the calendar year in which an excess deferral occurs, the Administrative Committee shall distribute such excess deferral, adjusted for investment gains or losses, less amounts previously returned pursuant to subparagraph (c), no later than April 15, following the calendar year in which the excess deferral occurred. Such written request shall contain information which the Administrative Committee may require. (b) Adjustment for Income An excess deferral distributed to a Participant shall be adjusted for income or loss by calculating the total income or loss allocable to the Participant's Pre-Tax Contribution Account for the calendar year multiplied by a fraction, the numerator of which is such Participant's excess deferrals for the Plan Year and the denominator is the balance in the Participant's Pre-tax Contributions Account without regard to any income or loss occurring during such calendar year or by any other such reasonable formula as determined by the Administrative Committee. The Administrative Committee may, in its discretion and consistent for all affected Participants, pay income calculated at the rate of ten percent of the amount determined under (i) multiplied by the number of whole calendar months between the end of the year and the date of distribution, counting the month of distribution if distribution occurs after the 15th of such month. (c) ADP Excess Contribution An ADP excess contribution exists if contributions under this Plan on behalf of Highly Compensated Employees fail to meet the ADP test described in Section 3.4. Within twelve months after the end of the Plan Year for which there is an excess, contributions which exceed the ADP limitation adjusted for earnings and losses (using the method described in Section 4.5(b) above) less amounts previously returned pursuant to subparagraph (b), shall be distributed to Highly Compensated Employees by reducing each Highly Compensated Employee's deferral in order of deferral percentages beginning with the highest. Pre-tax Contributions distributed under this provision shall not be eligible for Employer Matching Contributions. (d) ACP Excess Contribution An ACP excess contribution exists if contributions under this Plan on behalf of Highly Compensated Employees fail to meet the ACP test described in Section 4.2. The amount of the ACP excess contribution to be either forfeited or distributed under (i) or (ii) below for each Participant whose Eligible Compensation and Employer Matching Contributions are aggregated with family members shall be determined in accordance with Treasury Regulation Section 1.401(m)-1(e)(2)(iii). "Family member" means a Participant's spouse and linear ascendants or descendants and the spouses of such ascendants or descendants. Within twelve months after the end of the Plan Year for which there is an excess, Employer Matching Contributions of Highly Compensated Employees which exceed the ACP limitation shall be reduced, taking the highest contribution percentage first, as follows: ( ) Any amount reduced from Employer Matching Contributions shall be forfeited, with related earnings, to the extent of any unvested balance in the Employer Matching Contribution Account of the Employee to whom it applies. The unvested balance shall be determined before the reduction. Amounts so forfeited shall be administered in accordance with Section 5.6. (i) Any amount reduced from Employer Matching Contributions not forfeited under (i) above shall be distributed, with related earnings, to the Employee to whom it applies. (ii) For purposes of this Section 4.5(d), related earnings shall be calculated using the method described in Section 4.5(b) above. 4 -ACCOUNT ADMINISTRATION .0 Types of Accounts All contributions shall be made to the Trust Fund which will have the following types of accounts for each Participant: ( ) Pre-tax Contribution Account (a) Employer Matching Contribution Account (b) Employer Discretionary Contribution Account (c) Rollover Contribution Account .1 Investment of Contributions The Trust Fund shall be divided into one or more investment subfunds. Effective July 1, 1991, there shall be five subfunds: the GIC Managed Income Portfolio (previously the GIC Open-End Portfolio), Fidelity Balanced Fund, Fidelity Equity-Income Fund, Fidelity Magellan Fund, and Fidelity Growth Company Fund. Effective August 1, 1995, the Administrative Committee shall, from time to time, select a diversified group of investment subfunds for the investment of the Trust Fund. The Administrative Committee shall furnish descriptions of the subfunds to Participants which describe the features of the subfund. Any subfund may hold for investment any assets permitted by the terms of the Trust agreement, including without limitation, cash or other types of short-term investments. Additional subfunds may be established by agreement between the Administrative Committee and the Trustee. Each Participant may direct investment of his or her Accounts among the available investment subfunds subject to the rules of the Administrative Committee and other provisions of this Plan. An investment request shall remain effective with regard to all subsequent amounts credited to a Participant's Account, until changed in accordance with the provisions of this section. ( ) When Participation Commences A Participant may allocate initial contributions to his or her Account among the investment subfunds, in 1% increments, by giving written direction to the Administrative Committee. Contributions for which a Participant does not make a valid direction will be allocated to a subfund designated by the Administrative Committee that best protects the principal from market fluctuations. (a) Changing Future Contributions A Participant may change his or her investment election with respect to future contributions at any time by telephone access to Fidelity in accordance with the procedures established by the Administrative Committee. Future contributions must be allocated among the investment subfunds in 1% incre ments. (b) Changing Existing Contributions A Participant may change his or her investment election with respect to an existing Account at any time by telephone access to Fidelity in accordance with the procedures established by the Administrative Committee. Existing account balances may be changed among the various investment options in 1% increments so that the total value of the Participant's Accounts equals 100%. .2 Valuation of the Trust Fund The fair market value of the Trust Fund shall be determined as of each Valuation Date and at any time specifically requested by the Plan Administrator in its sole discretion. Any portion of the Trust Fund held under an insurance contract in which asset values are only maintained on a book value basis, shall have that portion of the Trust Fund valued at book value rather than market value. .3 Allocation of Trust Fund Earnings and Losses to Participant Accounts As of each Valuation Date, any increase or decrease in the fair market value (including interest, dividends, realized and unrealized gains and losses) of any subfund shall be allocated among the Participant Accounts on the basis of the Participant's balance compared to the balance for all Participants in the particular subfund held in the Accounts as of that day. .4 Account Statements Each Participant shall be provided with a statement of his or her Accounts under the Plan showing the Account values at least quarterly. If within thirty (30) days after the statement is mailed the Participant makes no objection to the statement, it shall become binding and conclusive on the Participant and any Beneficiary. .5 Disposition of Forfeitures As of each Valuation Date, amounts forfeited during the Plan Year by any Participant shall first be used to restore Employer Matching Contribution Accounts and then Employer Discretionary Contribution Accounts of rehired Participants to the extent required by Section 7, and then to reduce equally the Employer Matching Contributions and then Employer Discretionary Contributions of all Employers (regardless of which Employers employed Participants who incurred the forfeitures) for the calendar quarter. If the amount of forfeitures occurring in a calendar quarter exceeds the amount of Employer Matching and Employer Discretionary Contributions for such calendar quarter, the excess (if any) shall be held in a suspense account and allocated in lieu of Employer Matching and Employer Discretionary Contributions in the succeeding calendar quarter. No further Employer Matching and Employer Discretionary Contributions shall be made until any balance in the suspense account is exhausted. If the Plan is terminated while a balance exists, the balance shall be allocated to the Employer Matching and Employer Discretionary Contribution Accounts of Participants per capita to the extent of the maximum amount permitted under Section 8.1. 5 -BENEFITS AND FORMS OF PAYMENT .0 Benefits Upon Termination A Participant shall be eligible to receive a distribution of his or her Accounts, to the extent vested, upon termination of employment, death or Disability. Notwithstanding the foregoing, in the event a Participant again becomes an Employee before benefits commence, he or she shall no longer be eligible to receive a distribution. .1 Time of Benefit Commencement ( ) Benefit Commencement Benefits shall be paid as soon as practicable following a request for benefit commencement and determination of the amount of payment under Section 6.2(b). The precise timing of any distribution is subject to normal processing delays and other administrative urgencies or special circumstances affecting the distribution and cannot be guaranteed. No interest or investment gains or losses will be allocated for the processing period with respect to an amount that is distributed. Furthermore, unless the Participant otherwise elects according to the terms of the Plan, payment of a Participant's benefit must begin no later than the 60th day after the close of the Plan Year in which occurs the latest of (1) the Participant's attaining age 65; (2) the 10th anniversary of the year in which the Participant commenced participation in the Plan; or (3) the Participant's Severance from Service Date. Participants and Beneficiaries may request benefit commencement as described below. ( ) Participant A Participant who is eligible for benefits may request benefit commencement by written notice to the Administrative Committee. Benefits may commence at any time following termination and on or before the date the Participant attains or would have attained age 70-1/2. If such a Participant fails to request benefit commencement, he or she shall be deemed to have requested that benefits commence at Normal Retirement Date, but not later than on the date the Participant attains or would have attained age 70-1/2. (i) Beneficiary A Beneficiary who is eligible for benefits shall receive benefits within a reasonable time following the date of the Participant's death unless the Beneficiary elects to postpone commencement of benefits to the first day of any month on or before the Participant's Normal Retirement Date determined as if he or she survived. (ii) Age 70-1/2 Limitation In no event shall benefits commence later than April 1, following the calendar year in which the Participant attains age 70-1/2, regardless of whether the Participant continues in Service after that date. (a) Amount of Payment The amount distributed shall be based on the Account balance determined as of the later of: (1) the Valuation Date coinciding with or following the date the Participant terminates employment, or (ii) any later Valuation Date which next precedes the date benefits commence as the Administrative Committee, in its sole discretion, shall determine. (b) Small Benefits Notwithstanding any election to commence benefits or lack thereof, the Administrative Committee shall distribute a benefit which is $3,500.00 or less, in a lump sum as soon as practicable following termination of employment, death or Disability, without Participant or Beneficiary consent. Normal tax withholding rules will be applied as required upon distribution. (d) Outstanding Loans If at the time of benefit commencement a Participant has as outstanding loan balance, such balance shall be due and payable in full upon Separation from Service. Any portion of the outstanding balance not paid in full shall be deemed a distribution, regardless of whether the Account balance is greater than $3,500. .2 Form of Payment Benefits shall be payable in the form of a lump sum cash payment. A Lump Sum distribution shall be a single sum cash payment which represents the Participant's entire interest in the Plan. Normal tax withholding rules will be applied as required upon distribution. .3 Withdrawals Prior to Termination ( ) General Withdrawals A Participant who has attained age 59-1/2 may withdraw up to the balance of his vested Participant Pre-tax Contribution and Rollover Contribution Accounts (valued as of the next Valuation Date) as a single sum distribution by submitting a written request to the Administrative committee. (a) Hardship Withdrawal A Participant may apply to the Administrative Committee for a hardship withdrawal prior to termination of employment of his or her: ( ) Pre-tax Contributions Account balance as of the Valuation Date closest to, but preceding July 1, 1989; (i) Pre-tax Contributions after June 30, 1989, excluding earnings thereon; and (iii) Rollover Account balance. A hardship distribution shall be deducted first from the category of available amount described in (b)(ii) herein and then from the category of available amounts described in (b)(i) herein. Any amount remaining in a Participant's Pre-Tax Contribution Account after a hardship withdrawal shall be distributed in accordance with the terms of the Plan. Effective July 1, 1994, only one hardship withdrawal shall be permitted during the Plan Year. All hardship withdrawals are subject to Administrative Committee approval. A hardship withdrawal shall only be approved if it is for a specific type of expense and if it is necessary to satisfy such expense. Hardship withdrawals are available only to pay for the following expenses: (i) medical expenses in Code Section 213(d) incurred by the Participant, or his or her spouse or dependents (as defined in Code Section 152); (ii) purchase (excluding mortgage payments) of a principal residence for the Participant; (iii) tuition and related educational fees for the next twelve months of post-secondary education for the Participant, his or her spouse, children, or dependents; or (iv) preventing eviction of the Participant from his or her principal residence or foreclosure on the mortgage of the Participant's principal residence. A distribution shall be deemed to be necessary to satisfy an expense described in (i) through (IV) above if both of the following requirements are satisfied: (i) the distribution is not in excess of the amount of such expense; and (ii) the Participant has obtained all distributions (other than hardship distributions), and all nontaxable loans currently available under all plans maintained by the Employer. Participant pre-tax contributions to this or any other qualified retirement plan or non-qualified deferred compensation plan maintained by the Employer shall be suspended for six (6) months after a hardship withdrawal. Following a 6-month suspension, the Participant may resume contributions pur suant to Section 3.1. Effective for hardship withdrawals requested on or after July 1, 1994, the suspension period shall be twelve (12) months after a hardship withdrawal. In addition, the Participant may not make a pre-tax contribution to the Plan or any other plan maintained by the Employer for the Participant's taxable year immediately following the taxable year of the hardship withdrawal, in excess of pre-tax contributions allowable in Section 3.1 for the next taxable year less the amount of such Participant's pre-tax contributions for the taxable year of the hardship withdrawal. Notwithstanding the foregoing, a Participant whose contributions have been suspended for six (6) months [twelve (12) months effective July 1, 1994] due to a hardship withdrawal shall be deemed to be an Eligible Employee for purposes of the ADP test in Section 3.4, ACP test in Section 4.2, and multiple use test in Section 4.3. .4 Loans A Participant may apply to the Administrative Committee for a loan from his or her vested Accounts prior to termination. All policies and procedures concerning the granting of loans shall be governed by the AST Research, Inc. Profit Sharing Plus Plan Loan Policy and Procedure Statement (hereinafter, "Loan Policy and Procedure Statement"). The Loan Policy and Procedure Statement is incorporated in full herein by this reference as though set forth in full. The Participant's vested nonforfeitable right to his or her Accounts shall be determined without regard to any accumulated deductible employee contributions as the term is defined in Code section 72(o). Loan amounts shall be deducted from each vested Account pursuant to the terms of the Loan Policy and Procedure Statement. .5 Death Benefits If a Participant dies prior to the commencement of benefits, the Beneficiary shall receive a distribution of the Participant's Accounts at the time and in the form described below. ( ) Benefit Commencement Benefits for a non-spouse Beneficiary shall commence as soon as practical following the Valuation Date coinciding with or next following the Participant's death. A spouse Beneficiary who is eligible for death benefits may request benefit commencement by written notice to the Administrative Committee. Benefits may commence at any time after the Participant's death and on or before April 1, following the calendar year in which the Participant would have attained age 70-1/2. Benefits shall be paid as soon as practicable following a request for payment and in any event not later than one year after the Participant's death. If the spouse Beneficiary fails to request benefit commencement, benefits shall commence on or immediately preceding April 1, following the calendar year in which the Participant would have attained age 70-1/2 if he or she had survived. (a) Form of Payment Death benefits for a Beneficiary shall be paid in the form of a lump sum cash payment. (b) Amount of Payment The amount distributed shall be based on the Account balance determined as of the later of: (i) the Valuation Date coinciding with or next following the date of the Participant's death, or (ii) any later Valuation Date which next precedes the date benefits commence. (c) Small Benefits Notwithstanding any request for benefit commencement, or lack thereof, the Administrative Committee shall distribute any benefit which is $3,500.00 or less pursuant to Section 6.3(c). (e) Outstanding Loans If a Participant dies prior to the commencement of benefits with an outstanding loan balance, such balance shall be due and payable in full from the Account payable to the Beneficiary. Any portion of the outstanding balance not paid in full shall be deemed a distribution, regardless of whether the Account balance is greater than $3,500. Direct Rollovers This Section applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the plan to the contrary that would otherwise limit a Distributee's election under this Section, a Distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an Eligible Rollover Distribution paid directly to an Eligible Retirement Plan specified by the Distributee in a direct rollover. ( ) Definitions (i) Eligible Rollover Distribution. An Eligible Rollover Distribution is any distribution of all or any portion of the balance to the credit of the Distributee, except that an Eligible Rollover Distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the Distributee or the joint lives (or joint life expectancies) of the Distributee and the Distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). (ii) Eligible Retirement Plan. An Eligible Retirement Plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the Code, an annuity plan described in section 403(a) of the Code, or a qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an Eligible Rollover Distribution to the surviving spouse, an Eligible Retirement Plan is an individual retirement account or individual retirement annuity. (iii) Distributee. A Distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are Distributees with regard to the interest of the spouse or former spouse. (iv) Direct Rollovers. A Direct Rollover is a payment by the plan to the eligible retirement plan specified by the Distributee. 6 -VESTING .0 Vesting ( ) Participant Pre-tax Contribution Account and Rollover Contribution Account Each Participant shall have a 100% vested, nonforfeitable right to his or her Pre-tax Contribution Account and Rollover Contribution Account. (a) Employer Matching Contribution Account and Employer Discretionary Contribution Account Each Participant shall have a vested, nonforfeitable right to his or her Employer Matching Contribution Account and Employer Discretionary Contribution Account based on his or her Service multiplied by the appropriate vesting percentage in accordance with the following table: Completed Periods of Service Vesting Percentage Less than 1 0% 1 20% 2 40% 3 60% 4 80% 5 or more 100% In addition, each Participant shall have a 100% vested, nonforfeitable right to his or her Employer Matching Contribution Account and Employer Discretionary Contribution Account upon reaching age 65, death, or Disability, provided he or she is an Employee on such date. For purposes of vesting, service with the Tandy Electronics and GRiD Systems Divisions of Tandy Corporation prior to an Employee's Employment Commencement Date shall not be counted. .1 Forfeitures In the event a Participant terminates prior to becoming 100% vested in his or her Employer Matching Contribution Account and Employer Discretionary Contribution Account, the non-vested portion shall be forfeited at the earlier of the following dates: ( ) the date the Participant receives a distribution of his or her vested portion of the Account (and for this purpose a totally non-vested Participant shall be deemed to receive a zero distribution upon termination of employment) and (a) the occurrence of a five year Period of Severance. The amount forfeited shall equal the non-vested balance. Forfeitures shall first be used to restore Account balances as provided in Section 5.6. .2 Vesting Upon Reemployment ( ) Periods of Service If a nonvested Participant incurs a five year Period of Severance, his or her Periods of Service preceding the Period of Severance, shall be disregarded, and any amounts contributed to the Employer Matching Contribution Account and Employer Discretionary Contribution Account prior to the Periods of Severance shall be forfeited. If a vested Participant incurs a Period of Severance of any length, all Periods of Service before and after the Period of Severance shall be aggregated for vesting purposes. (a) Repayment If a Participant forfeited all or a portion of his or her Employer Matching Contribution Account and/or Employer Discretionary Contribution Account upon termination and he or she returns to Service prior to incurring a five year Period of Severance, effective July 1, 1994, the Participant may elect to repay the amount previously distributed from his or her Employer Matching Contribution Account and/or Employer Discretionary Contribution Account. Such Participant may elect to repay his or her prior distribution before five years after the date of reemployment. The forfeited amount shall be restored upon such repayment pursuant to Section 5.6. Amounts repaid shall be 100% vested and shall be invested in the same manner as future contributions. The Participant's Vesting Percentage will also apply to the amounts restored. If the Participant is reemployed as an Employee after incurring a five year Period of Severance, any amounts forfeited under this Article shall not be restored, separate Accounts will be established for all contributions allocated after the Participant's reemployment date, and the Participant's Period of Service after his reemployment date shall not increase the Vesting Percentage in his pre-Period of Severance Employer Matching Contribution Account and/or Employer Discretionary Contribution Account. 7 -LIMITATION ON CONTRIBUTIONS .0 Maximum Annual Contribution to the Plan For purposes of this Section 8, the Employer and any Affiliated Companies shall be considered a single employer, to the extent required by the Code. ( ) Primary Rule Notwithstanding any other Plan provision to the contrary, the Annual Additions to a Participant's Accounts in this Plan and any other defined contribution plan maintained by the Employer shall not exceed the lesser of $30,000 or 25% of the Participant's compensation as defined in Code Section 415(c)(3) for purposes of this Section 8 in any Plan Year. (a) Annual Additions Defined For purposes of Section 8, the term "Annual Additions" for any Participant in any Plan Year means the sum of: ( ) the amount of Employer contributions and Participant Pre-tax Contributions and/or any after-tax contributions (if applicable) allocated to a Participant's Accounts; (i) forfeitures allocated to the Participant's Accounts; and (ii) with respect only to the $30,000 limitation, amounts attributable to retiree medical benefits on behalf of a Key Employee in a separate account in a welfare fund subject to Code Section 419A. (b) Cost of Living The $30,000 limit prescribed above shall be automatically adjusted for cost-of-living increases, to the maximum permissible dollar limitation determined by the Commissioner of Internal Revenue. The dollar amount applicable in computing the maximum contribution for any Participant shall be the dollar amount in effect for the calendar year in which the contribution is made. (c) Remedy If, for any Plan Year, the Annual Additions exceed the foregoing limitations as a result of the allocation of forfeitures, a reasonable error in estimating a Participant's annual Eligible Compensation, or under limited facts and circumstances which the Commissioner of Internal Revenue finds justifies the availability of the remedy set forth in this subsection, the Annual Additions for a particular Participant which cause the limitation of Section 415 applicable to that limitation for the Limitation Year to be exceeded, the excess amount shall not be deemed Annual Additions in that Limitation Year, but rather shall be treated as follows: ( ) The excess amounts in the Participant's Account shall first be distributed or forfeited to the extent required herein. (i) Next, any excess due to Participant Pre-tax Contributions and any gain thereon shall be distributed to the extent required to satisfy the limitation of Section 415. (ii) Next, any additional excess due to the Participant's Pre-tax Contributions shall be used to reduce the Participant's Pre-tax Contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for that Participant if that Participant is covered by the Plan as of the end of the Limitation Year. (iii) Finally, any amounts of such excess attributable to Employer contributions shall be used to reduce Employer contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for that Participant if that Participant is covered by the Plan as of the end of the Limitation Year. However, if that Participant is not covered by the Plan as of the end of the Limitation Year, then the excess amounts must be held unallocated in a suspense account for the Limitation Year and allocated and reallocated in the next Limitation Year to all of the remaining Participants in the Plan. Furthermore, the excess amounts must be used to reduce Employer Contributions for the next Limitation Year (and succeeding Limitation Years, as necessary) for all of the remaining Participants in the Plan. In the event the Plan terminates before all amounts remaining in the suspense account have been fully allocated to Participants' Accounts, the balance of the suspense Account shall be distributed to the Employer. .1 Additional Limitation Relating to Defined Benefit Plans ( ) For Participants who participate in the Plan and a defined benefit plan maintained by the Employer, the sum of (1) and (2) below for any calendar year may not exceed 1.0, as determined by the Administrative Committee. (1) The defined benefit plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: (i) The projected annual benefit, (determined by projecting service, but not earnings, to normal retirement age) of the Participant under the Plan determined as of the close of the year. (ii) The lesser of: (a) 1.25 multiplied by the dollar limitation in effect for defined benefit plans under Section 415 of the Code for such year, or (b) 1.4 multiplied by 100% of the Participant's average annual Eligible Compensation from the Employer for the consecutive calendar years (not in excess of three such years) during which he was an active Participant in the Plan and for which such average is highest. (2) The defined contribution plan fraction for any year is equal to the quotient of (i) divided by (ii) below expressed as a fraction: (i) The sum of the Annual Additions to the Participant's Accounts for the current year, as of the close of the year, and for all prior years from and after the Employment Commencement Date. (ii) The sum of the lesser of the following amounts for such year and for each prior year of Service with the Employer (regardless of whether a plan was in existence during those years): (a) 1.25 multiplied by the dollar limitation in effect for defined contribution plans under Section 415 of the Code for such year, or (b) 1.4 multiplied by 25% of a Participant's Eligible Compensation for such year. (a) Remedy If such sum exceeds 1.0, the benefit under the defined benefit plan shall be reduced to the extent necessary to satisfy the limitations of this section. 8 -TOP HEAVY PROVISIONS .0 Scope Notwithstanding any Plan provision to the contrary, for any Plan Year in which the Plan is Top Heavy within the meaning of Section 416(g) of the Code, the provisions of this Section 9 shall govern to the extent they conflict with or specify additional requirements to the Plan provisions governing to the Plan provisions governing Plan Years which are not Top Heavy. .1 Top Heavy Status ( ) Top Heavy This Plan shall be "Top Heavy" if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan of an Aggregation Group, exceeds sixty percent (60%) of the Present Value of the contributions to the Aggregation Group determined in accordance with Code Section 416(g) and regulations thereunder. The Present Value of Accrued Benefits and/or Aggregate Account balance of a Participant who was previously a Key Employee but is no longer a Key Employee (or his or her Beneficiary), shall not be taken into account for purposes of determining Top Heavy status. Further, a Participant's Present Value of Accrued Benefits and/or Aggregate Account balance shall not be taken into account if he or she has not performed services for the Affiliated Companies as any time during the five year period ending on the Determination Date. (a) Super Top Heavy This Plan shall be "Super Top Heavy" if, as of the Determination Date, (1) the Present Value of Accrued Benefits of Key Employees, or (2) the sum of the Aggregate Accounts of Key Employees under this Plan and any plan of an Aggregation Group, exceeds (90%) of the Present Value of the contributions to the Aggregate Accounts of all Participants under this Plan of an Aggregation Group. (b) Determination Date Whether the Plan is Top Heavy for any Plan Year shall be determined as of the Determination Date. "Determination Date" means (a) the last day of the preceding Plan Year, or (b) in the case of the first Plan Year, the last day of such Plan Year. (c) Valuation Date "Valuation Date" means, for purposes of determining Top Heaviness, the Determination Date instead of the meaning set forth in Section 1. (d) Aggregate Account "Aggregate Account" means, with respect to a Participant, the sum of: ( ) his or her account balances as of the Valuation Date; (i) contributions after the Valuation Date due as of the Determination Date; (ii) distributions prior to the Valuation Date, made during the Plan Year that contains the Determination Date and the four preceding Plan Years. (e) Present Value of Accrued Benefits The "Present Value of Accrued Benefits" with respect to a defined benefit plan shall be determined under the method used for accrual purposes in all defined benefit plans of the Affiliated Companies, or if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under Section 411(b)(i)C) of the Code. (f) Key Employee "Key Employee" means an Employee or former Employee (and his or her Beneficiaries) who, at any time during the Plan Year containing the Determination Date or any of the four preceding Plan years, is included in one of the of the following categories as within the meaning of Section 411(i)(l) of the Code and regulations thereunder: ( ) an officer of the employer whose annual aggregate Eligible Compensation from the Affiliated Companies exceeds 50% of the dollar limitation under Code Section 415(b)(1)(A) (as indexed), provided that no more than 50 Employees shall be considered officers, or if less, the greater of 10% of the Em ployees or 3, (i) one of the ten Employees owning the largest interest in the Employer who owns more than a 0.5% interest of the Employer, and whose annual aggregate Eligible Compensation from the Affiliated Companies exceeds the dollar limitation under Section 415(c)(1)(A) of the Code (as indexed), (ii) an Employee who owns more than 5% of the Employer, or (iii) an Employee who owns more than 1% of the Employer with annual aggregate Eligible Compensation from the Affiliated Companies that exceeds $150,000. (g) Aggregation Group "Aggregation Group" means the group of plans that must be considered as a single plan for purposes of determining whether the plans within the group are Top Heavy (Required Aggregation Group), or the group of plans that may be aggregated for purposes of Top Heavy testing (Permissive Aggregation Group). The Determination date for each plan must fall within the same calendar year in order to aggregate the plans. ( ) The Required Aggregation Group includes each plan of the Affiliated Companies in which a Key Employee is a participant in the Plan Year containing the Determination Date or any or the four preceding Plan Years, and each other plan of the Affiliated Companies which, during this period, enables any plan in which a Key Employee participates to meet the minimum participation standards or non-discriminatory contribution requirements of Code Sections 401(a)(4) and 410. (i) A Permissive Aggregation group may include any plan sponsored by an Affiliated Company, provided the group as a whole continues to satisfy the minimum participation standards and non-discriminatory contribution requirements of Code Sections 401(a)(4) and 410. Each plan belonging to a Required Aggregation Group shall be deemed Top Heavy, or non-Top Heavy in accordance with the group's status. In a Permissive Aggregation Group that is determined Top Heavy only those plans that are required to be aggregated shall be Top Heavy. In a Permissive Aggregation Group that is not Top Heavy, no plan in the group shall be Top Heavy. .2 Minimum Contribution ( ) General Rule For any Plan Year in which the Plan is Top Heavy, the total Employer contribution under Section 4.1 and any forfeitures allocated to any non- key Participant's account shall not be less than 3% of such Participant's Eligible Compensation. Participant contributions under Section 4.1(a) are not Eligible Compensation. Participant contributions under Section 4.1(a) are not considered when determining whether this 3% requirement is satisfied. However, in the event the Employer contributions and forfeitures allocated to each Key Employee's account do not exceed 3% of his or her Eligible Compensation, such Employer contributions and forfeitures for non-Key Employees are only required to equal the highest percentage of Eligible Compensation, including Participant Pre-tax Contributions under Section 4.1(a), allocated to any Key Employee's accounts for that Plan Year under any defined contribution plans sponsored by the Affiliated Companies. The minimum contribution must be made on behalf of all non-Key Participants who are employed on the last day of the Plan Year including non-Key Employees who (1) failed to complete a Year of Service, or (2) declined to make any mandatory contributions to the Plan or enter a salary deferral agreement. (a) Special Two Plan Rule Where this Plan and a defined benefit plan belong to an Aggregation Group that is determined Top Heavy, the minimum contribution required under paragraph (a) above shall be increased to 5%. .3 Limitation to Annual Additions in Top Heavy Plan For any Top Heavy Plan Year in which the Employer does not make the extra minimum allocation provided below, 1.0 shall replace the 1.25 factor found in the denominators of the defined benefit and defined contribution plan fractions for purposes of calculating the combined limitation on benefits under a defined benefit and defined contribution plan pursuant to Section 415(e) of the Code (see Section 8.2). If this Plan is Top Heavy, but is not Super Top Heavy, the above referenced fractions set forth in Section 8.2 shall remain unchanged provided the Employer makes an extra minimum allocation for non-Key Participants. The extra allocation (in addition to the minimum contribution set forth in Section 9.3) shall equal at least one percent (1%) of a non-Key Participant's compensation. .4 Vesting ( ) Top Heavy Schedule For any Top Heavy Plan Year, each Participant who completes an Hour of Service in such Year shall become vested and have a nonforfeitable right to retirement benefits he or she has earned under the Plan in accordance with the vesting schedule set forth in Section 7.1(b). (a) Return to Non-Top Heavy Status If the Plan becomes Top Heavy and ceases to be Top Heavy in any subsequent Plan year, the vesting schedule shall automatically revert to the vesting schedule in effect before the Plan became Top Heavy. Such reversion shall be treated as a Plan amendment pursuant to the terms of the Plan, and shall not cause a reduction of any Participant's nonforfeitable interest in the Plan on the date of such amendment. A Participant with three or more Years of Service with the Employer as of the end of the election period, may elect to remain covered by the Top Heavy vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end 60 days after the latest of: ( ) the adoption date of the amendment (i) the effective date of the amendment, or (ii) the date the Participant receives written notice of the amendment from the Administrative Committee. 9 -ADMINISTRATION OF THE PLAN .0 Plan Administrator The Plan Administrator shall be the Employer which shall appoint an Administrative Committee composed of three or more persons which shall carry out the general administration of the Plan. No Administrative Committee member who is an Employee shall receive compensation with respect to his or her services on the Administrative Committee. Any member of the Administrative Committee may resign by delivering written resignation to the Board of Directors and to the Administrative Committee. The Employer may remove or replace any member of the Administrative Committee at any time. .1 Organization and Procedures The Employer shall designate a chairman from the members of the Administrative Committee. The Administrative Committee shall appoint a secretary, who may or may not be a member of the Administrative Committee. The secretary shall have the primary responsibility for keeping a record of all meetings and acts of the Administrative Committee and shall have custody of all documents, the preservation of which shall be necessary or convenient to the efficient functioning of the Administrative Committee. The chairman of the Administrative Committee shall be the agent of the Plan for service of process. All reports required by law may be signed by the chairman or another member of the Administrative Committee designated by the Committee, on behalf of all members of the Administrative Committee. The Administrative Committee shall act by a majority of its members in office and may adopt such by-laws and regulations as it deems desirable for the conduct of its affairs. .2 Duties and Authority of Administrative Committee ( ) Administrative Duties The Administrative Committee shall perform all such duties as are necessary to supervise the administration of the Plan and to control its operation in accordance with the terms thereof, including, but not limited to, the following: ( ) Make and enforce such rules and regulations as it shall deem necessary or proper for the efficient administration of the Plan; (i) Interpret the provisions of the Plan and determine any question arising under the Plan, or in connection with the administration or operation thereof; (ii) Determine all considerations affecting the eligibility of any Employee to be or become a Participant; (iii) Determine eligibility for and amount of retirement benefits for any Participant; (iv) Authorize and direct the Trustee with respect to all disbursements of benefits under the Plan; (v) Employ and engage such persons, counsel and agents and to obtain such administrative, clerical, medical, legal, audit and actuarial services as it may deem necessary in carrying out the provisions of the Plan. (a) Investment Authority The Administrative Committee shall have the responsibility and authority with respect to the management, acquisition, disposition or investment of Plan assets to the extent such responsibility and authority is not delegated to an Investment Manager or Trustee, provided, however, that to the maximum extent permitted by applicable law, if Participants are entitled to direct investments from various investment subfunds, then the Administrative Committee shall not be responsible with respect to the designation of investments as among the available investment subfunds. (b) General Authority The Administrative Committee shall have all powers necessary or appropriate to carry out its duties, including the full discretionary authority to interpret the provisions of the Plan and the facts and circumstances of claims for benefits. Any interpretation or construction of or action by the Administrative Committee with respect to the Plan and its administration shall be conclusive and binding upon any and all parties and persons affected hereby, subject to the exclusive appeal procedure set forth in Section 10.7. .3 Expenses and Assistance All reasonable expenses which are necessary to operate and administer the Plan may be deducted from the Trust Fund or, at the election of the Employer, paid directly by the Employer. .4 Bonding and Insurance To the extent required by law, every Administrative Committee member, every fiduciary of the Plan and every person handling Plan funds shall be bonded. The Administrative Committee shall take such steps as are necessary to assure compliance with applicable bonding requirements. The Administrative Committee may apply for and obtain fiduciary liability insurance insuring the Plan against damages by reason of breach of fiduciary responsibility at the Plan's expense and insuring each fiduciary against liability to the extent permissible by law at the Employer's expense. .5 Commencement of Benefits ( ) Conditions of Payment Benefit payments under the Plan shall not be payable prior to the fulfillment of the following conditions: ( ) The Administrative Committee (or its delegatee) has been furnished with such applications, consents, proofs of birth, address, form of benefit election, spousal consent if required and other information the Administrative Committee deems necessary; (i) The Participant is eligible to receive benefits under the Plan as determined by the Administrative Committee. The amount of benefit payable to a Participant of Beneficiary shall be determined under the terms of the Plan in effect at the time the Participant terminates employment. The valuation of accounts after such employment termination shall be made in accordance with the terms of the Plan on each succeeding Valuation Date. The time benefits commence to a Participant or Beneficiary and the form of payment shall be determined under the terms of the Plan in effect at the time benefits commence. (a) Commencement of Payment Unless a Participant elects otherwise, the payment of benefits shall commence no later than 60 days after the end of the Plan Year in which the latest of the following occurs: ( ) the date the Participant attains age 65, (i) the tenth anniversary of the year in which the Participant commenced participation in the Plan, or (ii) the Participant terminates employment with the Employer; provided that payments shall not commence later than April 1, following the calendar year in which the Participant attains age 70-1/2, regardless of whether he or she remains in service after that date. If the information required in subparagraph (a) above is not available prior to the dates specified in subsections (i) through (iii) above, then the commencement of payments shall be delayed until no more than 60 days after the date the amount of such payment is ascertainable, but in no event shall payment be delayed beyond April 1 of the year following the calendar year in which the Participant attains age 70-1/2. .6 Appeal Procedure ( ) A claim for benefit payment shall be considered filed when an application form is submitted to the Administrative Committee (or its delegatee). (a) Notice of Denial Any time a claim for benefits is wholly or partially denied, the Participant or Beneficiary (hereinafter "Claimant") shall be given written notice of such action within 90 days after the claim is filed, unless special circumstances require an extension of time for processing. If there is an extension, the Claimant shall be notified of the extension and the reason for the extension within the initial 90 day period. The extension shall not exceed 180 days after the claim is filed. Such notice will indicate the reason for denial, the pertinent provisions of the Plan on which the denial is based, an explanation of the claims appeal procedure set forth herein, and a description of any additional material or information necessary to perfect the claim and an explanation of why such material or information is necessary. (b) Right to Request Review Any person who has had a claim for benefits denied by the Administrative Committee, or is otherwise adversely affected by action of the Administrative Committee, shall have the right to request review by the Administrative Committee. Such request must be in writing, and must be made within 60 days after such person is advised of the Administrative Committee's action. If written request for review is not made within such 60-day period, the Claimant shall forfeit his or her right to review. The Claimant or a duly authorized representative of the Claimant may review all pertinent documents and submit issues and comments in writing. (c) Review of Claim The Administrative Committee shall then review the claim. It may hold a hearing if it deems it necessary and shall issue a written decision reaffirming, modifying or setting aside its former action within 60 days after receipt of the written request for review, or 120 days if special circumstances, such as a hearing, require an extension. The Claimant shall be notified in writing of any such extension within 60 days following the request for review. A copy of the decision shall be furnished to the Claimant. The decision shall set forth its reasons and pertinent plan provisions on which it is based. The decision shall be final and binding upon the Claimant and the Administrative Committee and all other persons involved. .7 Plan Administration - Miscellaneous ( ) Limitations on Assignments Benefits under the Plan may not be assigned, sold, transferred, or encumbered, and any attempt to do so shall be void. The interest of a Participant in benefits under the Plan shall not be subject to debts or liabilities of any kind and shall not be subject to attachment, garnishment or other legal process, except as provided in Section 10.9 relating to Domestic Relations Orders, or otherwise permitted by law. (a) Masculine and Feminine, Singular and Plural Whenever used herein, pronouns shall include the opposite gender, and the singular shall include the plural, and the plural shall include the singular, whenever the context shall plainly so require. (b) No Additional Rights No person shall have any rights in or to the Trust Fund, or any part thereof, or under the Plan, except as, and only to the extent, expressly provided for in the Plan. Neither the establishment of the Plan, the granting of a retirement allowance nor any action of the Employer or the Administrative Committee shall be held or construed to confer upon any person any right to be continued as an Employee, or, upon dismissal, any right or interest in the Trust Fund other than as herein provided. The Employer expressly reserves the right to discharge any Employee at any time. (c) Governing Law This Plan shall be construed in accordance with applicable federal law and the laws of the State of California. (d) Severability If any provision of this Plan shall be held illegal or invalid for any reason, such determination shall not affect the remaining provisions of this Plan which shall be construed as if said illegal or invalid provision had never been included. (e) Facility of Payment In the event any benefit under this Plan shall be payable to a person who is under legal disability or is in any way incapacitated so as to be unable to manage his or her financial affairs, the Administrative Committee may direct payment of such benefit to a duly appointed guardian, committee or other legal representative of such person or in the absence of a guardian or legal representative, to a custodian for such person under a Uniform Gift to Minors Act or to any relative of such person by blood or marriage, for such person's benefit. Any payment made in good faith pursuant to this provision shall fully discharge the Employer, the Administrative Committee and the Plan of any liability to the extent of such payment. (f) Correction of Errors Any Employer contribution to the Trust Fund made under a mistake of fact (or investment proceeds of such contribution if a lesser amount) shall be returned to the Employer within one year after payment of the contribution. In the event an incorrect amount is paid to a Participant or Beneficiary, any remaining payments may be adjusted to correct the error. The Administrative Committee may take such other action it deems necessary and equitable to correct any such error. (g) Missing Persons In the event a distribution is required to commence under Section 6.1 and the Participant or Beneficiary cannot be located, the Participant's Account shall be forfeited on the last day of the Plan Year following the Plan Year in which distribution was supposed to commence pursuant to Section 5.6. If the affected Participant or Beneficiary later contacts the Employer, his or her Account shall be reinstated and distributed as soon as practical. The Employer shall reinstate the amount forfeited by making a special Employer contribution equal to such amount and allocating it to the affected Participant's or Beneficiary's Account. Such reinstatement shall not be considered an annual addition for purposes of the limitations on contributions on benefits pursuant to Code Section 415. Prior to forfeiting any Account, the Employer shall attempt to contact the Participant or Beneficiary by return receipt mail at his or her last known address according to the Employer's records, and by the letter forwarding services offered through the Internal Revenue Service, or the Social Security Administration, or such other means as the Administrative Committee deems appropriate. (h) Spousal Consent In the event spousal consent is required for any Plan purpose, such consent shall acknowledge the effect of the consent, the consent must be in writing, and it must be witnessed by a notary public or a plan representative; provided, written consent will not be required if the Participant establishes to the satisfaction of the Employer that no spouse exists, or the spouse cannot be located. .8 Domestic Relations Orders Notwithstanding any Plan provisions to the contrary, benefits under the Plan may be paid to someone other than the Participant or Beneficiary pursuant to a Qualified Domestic Relations Order, in accordance with Section 414(p) of the Code. A Qualified Domestic Relations Order is a judgement, decree, or order ("Order") (including approval of a property settlement agreement) that: ( ) relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent of a Participant; (a) is made pursuant to a state domestic relations law (including a community property law); (b) creates or recognizes the existence of alternative payee's right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable to a Participant under the Plan; (c) specifies the name and last known address of the Participant and each alternate payee; (d) specifies the amount or method of determining the amount of benefit payable to an alternate payee; (e) names each plan to which the order applies; (f) does not require any form, type or amount of benefit not otherwise provided under the Plan; (g) does not conflict with a prior Domestic Relations Order that meets the other requirements of this section. Payments to an alternate payee pursuant to a Qualified Domestic Relations Order may commence at any time as set forth in the order, regardless of the Participant's age or whether the Participant terminates or continues employment. The Administrative Committee shall determine whether an order meets the requirements of this section within a reasonable period after receiving an order. The Administrative Committee shall notify the Participant and any alternate payee that an order has been received. Any amounts which are to be paid pursuant to the order, during the period while its qualified status is being determined, shall be held in a separate account under the Plan for any alternate payee pending determination that an order meets the requirements of this section. After receiving and determining an order to be a Qualified Domestic Relations Order as described above, the Administrative Committee shall instruct the Trustee to make an immediate distribution to the alternate payee of the benefits due under the terms of the order. If within eighteen months after such a separate account is established, the order has not been determined to be a qualified Order, the amount in the separate account shall be distributed to or credited back to the account of the individual who would have been entitled to such amount had there been no order. .9 Plan Qualification Any modification or amendment of the Plan may be made retroactive, as necessary or appropriate, to establish and maintain a "qualified plan" pursuant to Section 401 of the Code, and ERISA and regulations thereunder and exempt status of the Trust Fund under Section 501 of the Code. .10 Deductible Contribution Notwithstanding anything herein to the contrary, any contribution by the Employer to the Trust Fund is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may within one year following a final determination of the disallowance, demand repayment of such disallowed contribution and the Trustee shall return such contribution less any losses attributable thereto to the Employer within one year following the disallowance. .11 Rollovers An Employee may request in writing that the Administrative Committee permit acceptance of a rollover amount which was distributed from another quali fied plan or conduit Individual Retirement Account (IRA). The amount must be rolled over by the Employee within 60 days of receiving the distribution from the other plan or conduit IRA. The Administrative Committee shall have total discretion over acceptance of such amounts into this Plan; provided, rollovers of any type of property other than cash will not be accepted. In the event an Employee is permitted to contribute a rollover amount, such amount shall be allocated to a separate, fully vested account and subject to the same terms of the Plan as other amounts in a Pre-Tax Contribution Account. An Employee shall elect at the time of the rollover, the investment fund from the currently available funds in the plan into which such rollover amount shall be invested pursuant to the terms set forth in Section 5.2. If the Employee never satisfies the requirements of Section 1.10 and Section 2, the Employee shall be considered a Participant only with respect to the rollover amount, and such amount shall be distributed in a lump sum upon termination of employment. 10 -AMENDMENT AND TERMINATION .0 Amendment - General The Employer shall have the right to amend, terminate, or partially terminate this Plan at any time subject to any advance notice or other requirements of ERISA. .1 Amendment - Consolidation or Merger In the event the Plan's assets and liabilities are merged into, transferred to or otherwise consolidated with any other retirement plan, then such action must be accomplished so as to ensure that each Participant would (if the other retirement plan then terminated) receive a benefit immediately after the merger, transfer or consolidation, which is equal to or greater than the benefit the Participant would have been entitled to receive immediately before the merger, transfer or consolidation (as if the Plan had then terminated). This provision shall not be construed as limiting the powers of the Employer to appoint a successor Trustee. .2 Termination of the Plan The termination of the Plan shall not cause or permit any part of the Trust Fund to be diverted to purposes other than for the exclusive benefit of the Participants and their Beneficiaries, or cause or permit any portion of the Trust Fund to revert to or become the property of the Employer at any time prior to the satisfaction of all liabilities with respect to the Participants, except as otherwise provided by applicable law. Upon termination of this Plan, the Administrative Committee shall continue to act for the purpose of complying with the preceding paragraph and shall have all power necessary or convenient to the winding up and dissolution of the Plan as herein provided. While so acting, the Administrative Committee shall be in the same status and position with respect to other persons as if the Plan remained in existence. .3 Allocation of the Trust Fund on Termination of Plan In the event of a complete or partial termination of the Plan, or upon complete discontinuance of contributions under the Plan, with respect to all Participants or a specified group or groups of Participants, the Trustee shall allocate and segregate a proportionate interest in the Trust Fund for the benefit of affected Participants. All Accounts accrued by the affected Participants shall be 100% vested and non-forfeitable. The Administrative Committee shall direct the Trustee to allocate the assets of the Trust Fund to those affected Participants. 11 -FUNDING .0 Contributions to the Trust Fund As a part of this Plan the Employer shall maintain a Trust Fund. From time to time, the Employer shall make contributions to the Trust Fund in accordance with Section 4. .1 Trust Fund for Exclusive Benefit of Participants The Trust Fund is for the exclusive benefit of Participants. Except as provided in Sections 4.5 (Return of Contributions), 10.9 (Domestic Relations Orders) and 10.11 (Deductible Contribution), no portion of the Trust Fund shall be diverted to purposes other than this or revert to or become the property of the Employer at any time prior to the satisfaction of all liabilities with respect to the Participants. .2 Trustee As a part of this Plan, the Employer has entered into an agreement with a Trustee who is designated by the Board of Directors. The Employer has the power and duty to appoint the Trustee and it shall have the power to remove the Trustee and appoint successors at any time. As a condition to exercising its power to remove any Trustee hereunder, the Employer must first enter into an agreement with a successor Trustee. .3 Investment Manager The Administrative Committee has the power to appoint, remove or change from time to time an Investment Manager to direct the investment of all or a portion of the Trust Fund held by the Trustee. For purposes of this section "Investment Manager" shall mean any fiduciary (other than the Trustee) who: ( ) has the power to manage, acquire, or dispose of any asset of the Plan; (a) is either: ( ) registered as an investment advisor under the Investment Advisors Act of 1940, or (i) is a bank, or (ii) is an insurance company qualified under the laws of more than one state to perform the services described in subparagraph (a); and (b) has acknowledged in writing that he, she or it is a fiduciary with respect to the Plan. 12 -FIDUCIARIES .0 Limitation of Liability of the Employer and Others To the extent permitted by law, no Participant shall have any claim against the Employer, or the Administrative Committee, or against their directors, officers, members, agents or representatives, for any benefits under the Plan, and such benefits shall be payable solely from the Trust Fund; nor shall the Employer, nor the Administrative Committee or their directors, officers, members, agents or representatives incur any liability to any person for any action taken or suffered or omitted to be taken by them under the Plan in good faith. .1 Indemnification of Fiduciaries In order to facilitate the recruitment of competent fiduciaries, the Employer adopting this Plan agrees to provide the indemnification as described herein. This provision shall apply to Employees who are considered Plan fiduciaries including without limitation, Administrative Committee members, any agent of the Administrative Committee, or any other officers, directors or Employees. Notwithstanding the preceding, this provision shall not apply and indemnification will not be provided for any Trustee or Investment Manager appointed as provided in this Plan. .2 Scope of Indemnification The Employer agrees to indemnify an Employee fiduciary as described above for all acts taken in good faith in carrying out his or her responsibilities under the terms of this Plan or other responsibilities imposed upon such fiduciary by ERISA. This indemnification for all acts is intentionally broad but shall not provide indemnification for embezzlement or diversion of Plan assets for the benefit of the Employee fiduciary. The Employer agrees to indemnify Employee fiduciaries described herein for all ex penses of defending an action by a Participant, Beneficiary or government entity, including all legal fees for counsel selected with the consent of the Employer and other costs of such defense. The Employer will also reimburse an Employee fiduciary for any monetary recovery in any court or arbitration proceeding. In addition, if the claim is settled out of court with the concur rence of the Employer, the Employer will indemnify an Employee fiduciary for any monetary liability under said settlement. The Employer shall have the right, but not the obligation, to conduct the defense of such persons in any proceeding to which this Section 13.3 applies. The Employer may satisfy its obligations under this Section 13.3 in whole or in part through the purchase of a policy or policies of insurance providing equivalent protection. The AST Research, Inc., Profit Sharing Plus Plan is amended and restated effective as set forth herein. IN WITNESS WHEREOF, the Employer has caused this Plan to be duly executed on this 13th day of December 1995.
AST RESEARCH, INC. By: \s\Dennis Leibel Title: Senior Vice President, Legal, Administration and Secretary EX-10.68 6 EXHIBIT 10.68 FIRST AMENDMENT TO THE AST RESEARCH, INC. PROFIT SHARING PLUS PLAN This Amendment by AST Research, Inc. (hereinafter referred to as the "Company") is made with reference to the following facts: Effective July 1, 1989, the Company adopted the amended and restated AST Research, Inc. Profit Sharing Plus Plan (hereinafter the "Plan") which reserves to the Company the right to amend the Plan (Section 11.1 thereof). The Company has executed this Amendment for purposes of amending the Plan in the manner hereinafter provided. NOW, THEREFORE, the Plan is hereby amended as follows: I. Effective January 1, 1996, Section 1.20 of the Plan is amended in its entirety as follows: "Beginning January 1, 1996, and each Fiscal Year thereafter, `Fiscal Year' means the 52/53 week period ending on the Saturday closest December 31. Prior to January 1, 1996, `Fiscal Year' means the 52/53 week ending on the Saturday closest to June 30." II. Effective January 1, 1996, Section 1.29 of the Plan is amended in its entirety as follows: "Beginning January 1, 1996, and each calendar year thereafter, `Plan Year' means the calendar year. Prior to January 1, 1996, Plan Year means the twelve month period commencing each July 1 and ending each June 30 from and after July 1, 1989. The period June 30, 1995, through December 31, 1995, shall be a short Plan Year period. For the period beginning June 27, 1992, and ending June 26, 1993, Plan Year means the 52/53 week period ending on that Saturday, June 26, 1993." IN WITNESS WHEREOF, AST Research, Inc. has executed this First Amendment effective as set forth herein. Dated: 3/20/96 AST RESEARCH, INC. By: /s/Dennis R. Leibel Title: Senior Vice President, Legal, Administration and Secretary EX-10.69 7 EXHIBIT 10.69 October 31, 1995 Mr. Ian Diery 4175 Woodside Road Woodside, CA 94062 Dear Ian, On behalf of the Board of Directors of AST Research, Inc., I am pleased to offer you the position of President and Chief Executive Officer. The terms of this employment offer are: - - - - BASE SALARY: $700,000.00 annualized, paid on a bi-weekly basis. - - - - STOCK OPTIONS: Stock options will be granted to you as follows: A) A non-qualified stock option or warrant, priced at fair market value (FMV) on the date of grant, for 300,000 shares. - Term of ten years. - Vesting over time on a cumulative basis at the rate of 25% per year commencing on the first anniversary of the date of grant. B) A non-qualified performance-based stock option or warrant, priced at FMV on date of grant, for 700,000 shares. - Term of ten years. - Options vest and become exercisable as follows: . 1/3 of the shares upon the company stock price reaching (and sustaining for a three-month average) at $21.00 per share; . 1/3 of the shares upon the company stock price reaching (and sustaining for a three-month average) at least $30.00 per share; . 1/3 of the shares upon the company stock price reaching (and sustaining for a three-month average) at least $40.00 per share. Mr. Ian Diery October 31, 1995 Page 2 - - - - MANAGEMENT BONUS: You will be eligible for consideration in AST's Management Bonus Program for FY'96 on a prorated basis. This program provides for discretionary bonuses paid to management after the close of each fiscal year. Any bonuses paid are at the discretion of the Board of Directors of AST Research, Inc. - - - - QUARTERLY BONUS: Upon meeting the eligibility requirements, you will be eligible to participate in the discretionary Employee Quarterly Bonus Plan. Any bonus percentage is based upon the performance of the Company and is at the discretion of the Board of Directors of AST Research, Inc. - - - - PROFIT SHARING/401K: Effective the first day of the month following your employment, you will be eligible to participate in AST's Profit Sharing Plus Plan. Any profit sharing contribution is based upon the financial preference of the Company and is at the discretion of the Board of Directors of AST Research,Inc. In addition, you may choose to save 1% to 12% of your base salary with pre-tax dollars. The Company will match a portion of your contributions. - - - - INSURANCE: You will receive Medical, Dental, Life Insurance coverage effective the first day of the month concurrent with or following your date of hire. AST Research, Inc. pays a portion of the premiums for yourself and any eligible dependent that you wish to cover under the plans. - - - - RELOCATION: A relocation allowance of up to $500,000 will be provided to cover moving expenses, as well as any costs and/or loss on the disposition of your existing residence. - - - - TERMINATION: In case of involuntary termination other than for willful cause, i.e., fraud, gross misconduct, you will be provided with a severance package equal to two years base salary and target bonus, benefits continuance, plus the accelerated vesting of any options that would have vested by the passage of time during the two-year period. You will also be given a change of control agreement which will have a double trigger with the first trigger being pulled when any party acquires more than a 50% voting interest in the company and the second trigger being pulled when you are involuntarily terminated or your responsibilities, pay or benefits, etc. are negatively impacted. These agreements are mutually exclusive; however, in case of termination, whichever agreement would provide the greater benefit to you would control. Mr. Ian Diery October 31, 1995 Page 3 As a senior executive and officer of AST, there are a number of other benefits that will be forthcoming. The car allowance, mentioned above is set at the "officer" rate. In addition, you will be eligible for a $20,000.00 per year medical reimbursement plan that will cover deductibles and co-payments (but not bi-weekly deductions). You will be eligible for Tax Planning/Preparation reimbursement of up to $10,000.00 per year. As an officer, you may also participate in our Executive Health Program which covers an extensive physical checkup once per year. Lastly, if you choose optional employee paid LTD, AST will furnish at no cost to you additional officer coverage over the standard employee program up to a maximum of 66-2/3% of your base salary. In accordance with the Immigration Reform & Control Act of 1986, you will be required to provide documentation which establishes your identity and employment eligibility on your first day of employment. It is AST's policy to maintain a drug-free workplace. All employment offers are conditioned upon your consenting to and successfully passing a pre-employment drug screen. Employment is on an at-will basis and can be terminated by you or the Company at any time, for any reason, with or without cause, with or without advance notice. You have told us about arrangements that you had with prior employers, and we are satisfied that they do not create an obstacle to your coming to work for AST as CEO. AST will retain and pay for attorneys if any of your prior employers claim that you cannot come to work for AST as CEO, and AST will pay amounts required by a court or arbitrator in that circumstance. This letter constitutes the entire agreement between the parties; it supersedes any and all prior agreements or understandings, and it cannot be changed except in writing signed by both of the parties. Please date, sign and return the original of this letter to provide written confirmation of your acceptance of our offer. Mr. Ian Diery October 31, 1995 Page 4 I look forward to speaking with you further tomorrow morning. I am confident that you can lead AST to achieve its true potential and rise to new heights. Yours sincerely, /s/Safi Qureshey Safi Qureshey Chairman and CEO cc: Dennis R. Leibel By my signature below, I accept this offer on the terms stated above and will commence work on or before November 3, 1995. /s/ Ian Diery 10/31/95 Ian Diery Signature Date EX-11 8 EXHIBIT 11 AST RESEARCH, INC. COMPUTATION OF PER SHARE EARNINGS (LOSS) FOR THE SIX MONTHS ENDED DECEMBER 30, 1995, AND FOR THE YEARS ENDED JULY 1, 1995, JULY 2, 1994 AND JULY 3, 1993
- - - ------------------------------------------------------------------------------------------------------------------ Six Months Fiscal Year Ended Ended ------------------------------------- December 30, July 1, July 2, July 3, (In thousands, except per share amounts) 1995 1995 1994 1993 - - - ------------------------------------------------------------------------------------------------------------------ Primary earnings (loss) per share - - - --------------------------------- Shares used in computing primary earnings (loss) per share: Weighted average shares of common stock outstanding 42,721 32,371 31,921 31,289 Effect of stock options treated as equivalents under the treasury stock method - - 627 - - - - ------------------------------------------------------------------------------------------------------------------ Weighted average common and common equivalent shares outstanding 42,721 32,371 32,548 31,289 ================================================================================================================== Net income (loss) $ (225,006) $ (99,309) $ 31,309 $ (53,378) ================================================================================================================== Earnings (loss) per share - primary $ (5.27) $ (3.07) $ 0.96 $ (1.72) ================================================================================================================== Fully diluted earnings (loss) per share - - - --------------------------------------- Shares used in computing fully diluted earnings (loss) per share: Weighted average shares of common stock outstanding 42,721 32,371 31,921 31,289 Effect of stock options treated as equivalents under the treasury stock method - - 685 - Shares assumed issued on conversion of Liquid Yield Option Notes - - 2,260 - - - - ------------------------------------------------------------------------------------------------------------------ Total fully diluted shares outstanding 42,721 32,371 34,866 31,289 ================================================================================================================== Net income (loss) - fully diluted earnings per share: Net income (loss) - primary earnings per share $ (225,006) $ (99,309) $ 31,309 $ (53,738) Adjustment for interest on LYONs, net of tax - - 1,950 - - - - ------------------------------------------------------------------------------------------------------------------ Adjusted net income (loss) $ (225,006) $ (99,309) $ 33,259 $ (53,738) ================================================================================================================== Earnings (loss) per share - fully diluted $ (5.27) $ (3.07) $ 0.95 $ (1.72) ==================================================================================================================
EX-21 9 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 Ireland Limited Ireland AST Distribution Ireland Limited Ireland AST New Zealand Limited New Zealand AST Norway AS Norway AST Korea Ltd. Korea AST Computer and Services (M) Sdn. Bhd. Malaysia AST Computer Netherlands B.V. The Netherlands AST Innovations, Inc. United States EX-23 10 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (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); in the Registration Statements (Form S-8 Nos. 33-1111 and 33-30666) pertaining to the Chief Executives' Plan (as amended); in the Registration Statements (Form S-8 Nos. 33-29345, 33-57234 and 333-00485) pertaining to the 1989 Long-Term Incentive Program (as amended); in the Registration Statements (Form S-8 Nos. 33-52482 and 333-00489) pertaining to the Non-Employee Directors' Common Stock Purchase Warrants and 1991 Stock Option Plan for Non-Employee Directors; 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 Registration Statement (Form S-8 No. 333-00487) pertaining to the President's Plan of AST Research, Inc. of our report dated January 23, 1996, except for Note 5, as to which the date is March 6, 1996, with respect to the consolidated financial statements and schedule of AST Research, Inc. included in this Transition Report (Form 10-K) for the six months ended December 30, 1995. Ernst & Young LLP Orange County, California March 22, 1996 EX-27 11
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. 6-MOS DEC-30-1995 DEC-30-1995 125,387 0 411,227 18,629 252,339 837,621 170,897 72,172 1,056,042 614,075 125,540 0 0 447 310,435 1,056,042 1,016,283 1,016,283 1,033,158 1,033,158 0 2,321 8,634 (225,006) 0 (225,006) 0 0 0 (225,006) (5.27) (5.27) The Company changed its fiscal year-end from the Saturday closest to June 30 to the Saturday closest to December 31. The change in fiscal year-end was effective for the six months ended December 30, 1995, and resulted in the attached Transition Report on Form 10-K.
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