________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO __________________
COMMISSION FILE NO. 0-13941
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3525565
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92718
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-4141
_________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _
There were 44,679,000 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on October 27, 1995.
________________________________________________________________________________
________________________________________________________________________________
AST RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at
September 30, 1995 (Unaudited)
and July 1, 1995 3
Consolidated Statements of Operations
(Unaudited) for the three months ended
September 30, 1995 and October 1, 1994 4
Consolidated Statements of Cash Flows
(Unaudited) for the three months ended
September 30, 1995 and October 1, 1994 5-6
Notes to Consolidated Financial
Statements (Unaudited) 7-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20-21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 22
</TABLE>
AST RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
September 30, July 1,
1995 1995
(In thousands, except share amounts) (Unaudited)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 135,326 $ 95,825
Accounts receivable, net of allowance for
doubtful accounts of $17,690 at
September 30, 1995 and $17,452 at July 1, 1995 281,964 394,927
Inventories 349,223 311,469
Deferred income taxes 33,585 31,973
Other current assets 13,965 6,938
- ---------------------------------------------------------------------------------------------------------
Total current assets 814,063 841,132
Property and equipment 167,938 165,261
Accumulated depreciation and amortization (68,585) (64,006)
- ---------------------------------------------------------------------------------------------------------
Net property and equipment 99,353 101,255
Other assets 78,328 79,114
- ---------------------------------------------------------------------------------------------------------
$ 991,744 $ 1,021,501
=========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - $ 156,000
Accounts payable 190,591 213,202
Accrued salaries, wages and employee benefits 20,678 17,760
Other accrued liabilities 128,379 119,689
Income taxes payable 24,795 25,189
Current portion of long-term debt 92,352 2,420
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 456,795 534,260
Long-term debt 122,518 219,224
Other non-current liabilities 4,583 4,779
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares
authorized, 44,677,900 shares issued and
outstanding at September 30, 1995 and 32,412,500
shares at July 1, 1995 447 324
Additional capital 383,077 142,208
Retained earnings 24,324 120,706
- ---------------------------------------------------------------------------------------------------------
Total shareholders' equity 407,848 263,238
- ---------------------------------------------------------------------------------------------------------
$ 991,744 $ 1,021,501
=========================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Ended
------------------------------
September 30, October 1,
(In thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 403,357 $ 495,446
Cost of sales 410,126 458,147
- ------------------------------------------------------------------------------------------------------------
Gross profit (loss) (6,769) 37,299
Selling and marketing expenses 51,302 51,865
General and administrative expenses 23,891 21,369
Engineering and development expenses 9,566 9,902
- ------------------------------------------------------------------------------------------------------------
Total operating expenses 84,759 83,136
- ------------------------------------------------------------------------------------------------------------
Operating loss (91,528) (45,837)
Interest income 1,194 484
Interest expense (4,798) (3,289)
Other expense, net (1,250) (310)
- ------------------------------------------------------------------------------------------------------------
Loss before income taxes (96,382) (48,952)
Income tax benefit - (9,546)
- ------------------------------------------------------------------------------------------------------------
Net loss $ (96,382) $ (39,406)
============================================================================================================
Net loss per share $ (2.36) $ (1.22)
============================================================================================================
Weighted average common shares outstanding 40,762 32,346
============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Three Months Ended
----------------------------------
September 30, October 1,
(In thousands) 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 515,291 $ 500,376
Cash paid to suppliers and employees (546,805) (534,009)
Interest received 1,031 431
Interest paid (6,875) (4,240)
Income tax refunds received - 117
Income taxes paid (236) (3,314)
Other cash received (paid) 7,562 (1,819)
- ------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (30,032) (42,458)
Cash flows from investing activities:
Purchases of capital equipment (4,495) (8,598)
Proceeds from disposition of capital equipment 592 1,504
Purchases of other assets (1,119) (1,218)
- ------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,022) (8,312)
Cash flows from financing activities:
Short-term borrowings, net (156,000) -
Repayment of long-term debt (6,774) (32)
Proceeds from issuance of common stock, net 240,992 347
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 78,218 315
Effect of exchange rate changes on cash and cash equivalents (3,663) (1,939)
- ------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 39,501 (52,394)
Cash and cash equivalents at beginning of period 95,825 153,118
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 135,326 $ 100,724
============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Three Months Ended
------------------------------------
September 30, October 1,
(In thousands) 1995 1994
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss $ (96,382) $ (39,406)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,475 5,936
Deferred income tax benefit - (439)
Gain on sale of capital equipment (218) (218)
Change in operating assets and liabilities:
Accounts receivable 114,229 7,009
Inventories (37,754) (7,033)
Other current assets (9,383) (16,897)
Accounts payable and accrued expenses (14,247) 20,858
Income taxes payable (394) (12,212)
Other current liabilities 3,264 1,298
Exchange loss (gain) 3,378 (1,354)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (30,032) $ (42,458)
==============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company without audit (except for the balance sheet information as of July 1,
1995) in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. In the opinion of management, all adjustments (consisting only
of normal recurring accruals) considered necessary for a fair presentation have
been included.
The accompanying consolidated financial statements do not include certain
footnotes and financial presentations normally required under generally accepted
accounting principles and, therefore, should be read in conjunction with the
audited financial statements included in the Company's 1995 Annual Report on
Form 10-K. The Company has elected to change its fiscal year end to the Saturday
closest to December 31 from the Saturday closest to June 30. The change was
made in order to align the Company's fiscal year end with the reporting
requirements of its largest shareholder, Samsung Electronics Co., Ltd. This
change in the fiscal year end will result in a transition period, for reporting
purposes, of July 2, 1995 to December 30, 1995, which will be referred to as
transition period 1995 herein. The results of operations for the three-month
period ended September 30, 1995 are not necessarily indicative of the results to
be expected for the transition period ended December 30, 1995. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
July 1, 1995.
Restatements
The Company filed an amendment on Form 10-K/A with the Securities and Exchange
Commission to restate its consolidated financial statements for the year ended
July 2, 1994, to account for a $33.6 million reduction in the carrying value of
GRiD(R) pen-based products inventories made in the fourth quarter of fiscal 1994
as a charge to cost of sales rather than an adjustment to the carrying value of
goodwill arising from the Tandy acquisition. After giving effect to this
restatement, reversal of previously recorded related goodwill amortization and
related tax effects, the Company's restated consolidated balance sheet at July
2, 1994 reflects shareholders' equity of $361.8 million rather than $384.0
million as previously reported.
The Company also filed amendments on Form 10-K/A with the SEC to restate its
consolidated financial statements for the periods ended October 1, 1994,
December 31, 1994, and April 1, 1995, to reflect both the fiscal 1994
restatements and a resulting reduction in fiscal 1995 goodwill amortization
and related income tax effects. The effect of these restatements decreased
shareholders' equity at October 1, 1994 by $21.7 million from the amount of
shareholders' equity previously reported, and reduced previously reported net
loss for the three-month period ended October 1, 1994 by $.5 million.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. The income
tax benefit is computed on the pretax loss of the consolidated entities located
within each taxing jurisdiction based on current tax law. Deferred taxes result
from the future tax consequences associated with temporary differences between
the amount of assets and liabilities recorded for tax and financial accounting
purposes. A valuation allowance for deferred tax assets is recorded to the
extent the Company cannot determine, in accordance with the provisions of
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes", that the ultimate realization of net deferred tax assets against income
is more likely than not.
For the three-month period ended September 30, 1995, the estimated effective
income tax rate is less than the U.S. statutory rate primarily due to the
Company's provision of a full valuation reserve against the additional deferred
tax assets arising from its current operating loss. Differences between the
estimated effective tax rate and the Company's actual effective tax rate could
result from changes in the Company's ability to recognize its
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
deferred tax assets and from changes in the mix of income/loss in the various
tax jurisdictions. The effects of such changes are recognized when known.
Restructuring
At July 2, 1994, $15.2 million of the $125 million restructuring charge
incurred in connection with the 1993 acquisition of certain assets and
assumption of certain liabilities of Tandy Corporation's ("Tandy") personal
computer manufacturing operation remained accrued on the Company's consolidated
balance sheet. During fiscal 1995, the Company incurred cash expenditures of
approximately $4.7 million ($.2 million, $.5 million, $2.4 million and $1.6
million in the first through fourth quarters of fiscal 1995, respectively)
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 being disposed of. At September 30, 1995, the Company
continues to hold approximately $9.7 million in accrued restructuring
provisions for final restructuring activities, which relate primarily to
various ongoing lease obligations representing potential future cash
expenditures.
The Company plans to increase its utilization of third party board
manufacturing and design and to realign certain related manufacturing
operations. The Company is currently completing its restructuring plan and
anticipates a restructuring charge of approximately $20 million. Approximately
$8 million of the charge is expected to involve cash disbursements with the
remaining costs primarily relating to reductions in net asset values. The
Company expects to finalize and announce its plans and record the restructuring
charge in the consolidated results of operations by the end of the second
quarter of the transition period ended December 31, 1995. However, no assurance
can be given that these anticipated restructuring actions will be successful or
that similar actions will not be required in the future.
Goodwill
Goodwill, representing the excess of the purchase price over the fair value of
the net assets of the acquired entities, is being amortized on a straight-line
basis over the period of expected benefit of ten years. During the third
quarter of fiscal 1995, the Company elected the early adoption of Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." 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 was 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 September 30, 1995.
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 a class action, asserting claims under state and federal
securities laws based on allegations that the Company made inadequate and false
disclosures and seeking unspecified compensatory damages and related fees and
costs. The complaints were filed in the United States District Court for the
Central District of California. On September 12, 1994, a complaint was filed by
a shareholder against the Company and certain of its officers and directors
requesting certification of a class action, asserting claims under state and
federal securities laws based on allegations that the Company made inadequate
and false disclosures and seeking unspecified compensatory damages and related
fees and costs. The September 12, 1994 complaint was filed in the United States
District Court for the Central District of California under the case name Steven
A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was
filed by a shareholder in the United States District Court for the Central
District of California. The October 6, 1994
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
complaint names the Company and certain of its officers and directors as
defendants, asserts claims under state and federal securities laws based on
allegations that the Company made inadequate and false disclosures, and seeks
unspecified compensatory damages and related fees and costs. The cases with
complaints filed on March 3, 1994, March 14, 1994, and October 6, 1994, have
been consolidated under the case name In re AST Research Securities Litigation.
The AST Research Securities Litigation and Kornfeld cases are being treated as
related cases by the court. A settlement agreement dated August 28, 1995 was
signed to end the AST Research Securities Litigation and Kornfeld cases, and
requires the payment of $12.5 million by the defendants to the plaintiffs in
November 1995. An Order Preliminarily Approving Settlement dated August 28,
1995 was entered by the Court to begin the process of approving the settlement.
The Company expects that a majority of the settlement payment will be covered by
insurance.
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 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 sixteen 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.
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 alleges that the Company has engaged in deceptive
advertising and unlawful business practices with relation to computer monitor
screen measurements. 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 also 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. Further, the Company was
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1995
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. 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 which also
arise in the normal course of business. While the outcome of these proceedings
and claims cannot be predicted with certainty, management does not believe the
outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
September 30, July 1,
(In thousands) 1995 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 93,738 $ 67,296
Work in process 47,450 36,686
Finished goods 208,035 207,487
- -----------------------------------------------------------------------------------------------------------
$ 349,223 $ 311,469
===========================================================================================================
</TABLE>
Subsequent Event
On November 2, 1995, the Company announced that it had entered into a letter
of intent agreement with Samsung Electronics Co., Ltd. ("Samsung") pursuant to
which Samsung would provide certain additional support to the Company as
consideration for such number of shares of Common Stock as would increase its
ownership to 49.9 percent. The additional support includes a line of credit, or
other form of credit support, through November 30, 1996, in the amount of $100
million, secured by an interest in inventory, accounts receivable, and other
available assets of the Company as requested by Samsung, and an increase in the
Company's supplier line of credit with Samsung to $100 million through November
30, 1996, with an extension of payment terms under such line of credit to 90
days through November 30, 1996, decreasing to 30 days for products shipped after
January 30, 1997. In addition, Samsung will provide certain other elements of
support to the Company, the amount and value to be agreed to by Samsung and a
committee of independent directors. In connection with this agreement, the
Company will issue a number of shares of Common Stock to Samsung so as to
increase its ownership to 49.9%, and Samsung will appoint two additional
directors to the Company's board of directors. In addition, Samsung and the
Company agreed to negotiate further support arrangements by Samsung, which if
met, would increase Samsung's ownership to 60 percent. The support transactions
are subject to definitive documentation and approvals. The letter of intent
agreement is non-binding, and in the event that the Company is unable to secure
the financial support under the agreement or is unable to secure alternative
sources of financing, the Company's operations would be adversely affected.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEPTEMBER 30, 1995
RESULTS OF OPERATIONS
The following table shows the results of operations for the periods indicated
as a percentage of net sales.
<TABLE>
<CAPTION>
Percentage of Net Sales
Three Months Ended
-----------------------------
September 30, October 1,
1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 101.7 92.5
- -----------------------------------------------------------------------------------------------------------
Gross profit (loss) (1.7) 7.5
- -----------------------------------------------------------------------------------------------------------
Selling and marketing expenses 12.7 10.5
General and administrative expenses 5.9 4.3
Engineering and development expenses 2.4 2.0
- -----------------------------------------------------------------------------------------------------------
Operating loss (22.7) (9.3)
Other expense, net (1.2) (0.6)
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes (23.9) (9.9)
Income tax benefit - (1.9)
- -----------------------------------------------------------------------------------------------------------
Net loss (23.9%) (8.0%)
===========================================================================================================
</TABLE>
Net Sales
Net sales for the three-month period ended September 30, 1995 decreased 19% to
$403.4 million from $495.4 million in the three-month period ended October 1,
1994. This decline in revenues was due to lower desktop systems sales and
decreased shipments of the Company's notebook system products. Lower than
anticipated sales in the North American marketplace, particularly in the
consumer retail channel, and seasonal softness in Europe were compounded by
significant downward industry pricing actions and delays in some new product
shipments. The Company's lower first quarter revenues were also negatively
impacted by customer uncertainty regarding Microsoft's Windows(R)95 software
announcement. While the Company anticipates a continued competitive pricing
environment, there can be no assurance that further pricing actions will be
effective in stimulating sales growth. The Company shipped 245,000 computer
systems in the first three months of transition period 1995, a decrease of 21%
from the 309,000 units shipped in the same prior year period.
Revenues from desktop system products decreased 6% to $286.2 million for the
three-month period ended September 30, 1995 from $304.2 million in the
comparable prior year period. Increased sales of selected Pentium(R) processor-
based desktops were offset by declines in revenues from the Advantage!(R) 486SX,
the BravoTM 486DX and SX, and 486 PremmiaTM desktop systems sales.
The Company's notebook computer product revenues decreased 37% to $76.4
million in the three-month period ended September 30, 1995 from $120.7 million
in the comparable prior year period. This decrease reflects a 49% decrease in
unit shipments to 32,000 for the three-month period ended September 30, 1995
from 63,000 in the same prior year period. Notebook system sales declines
occurred in all notebook product line offerings including the Bravo, Advantage!
and AscentiaTM notebook computer lines.
Americas revenue (including Canada and Latin America) decreased by 42% to
$191.7 million during the first three months of transition period 1995 from
revenue of $330.5 million in the comparable prior year period. Sales to the
independent reseller/dealer channel for the three-month period ended September
30, 1995 decreased 23% from the same prior year period and accounted for 87% of
total Americas revenue. Revenue from the consumer retail channel decreased 80%
from the comparable prior year quarter primarily due to the loss of selected
retail customers within the United States marketplace. The consumer retail
channel and the OEM channel accounted for 11% and 2%, respectively, of total
Americas revenues during the three-month period ended September 30, 1995 as
compared to 33% and 2% for the prior year period.
First quarter transition period 1995 international revenues rose 28% to $211.7
million from $164.9 million in the comparable prior year period and accounted
for 52% of total first quarter transition period 1995 revenues. The European
region provided 59% of the total international revenues for the period ended
September 30, 1995, as compared to 66% for the same period last year. The United
Kingdom and Sweden continue to be major contributors of total European revenues
with significant year-over-year revenue growth also occurring in Denmark, Norway
and France. Continued increased demand for the Company's Advantage! and Bravo
486-based desktop systems and the Bravo and Ascentia notebook systems
contributed to the European revenue growth.
Revenue from the Company's Asia Pacific region, which includes Australia, the
People's Republic of China ("PRC"), Hong Kong, Japan, Korea, Malaysia, New
Zealand, Singapore, Taiwan and the Middle East, totaled $86.4 million in the
three-month period ended September 30, 1995, rising 55% over the comparable
prior year total of $55.6 million. The increase in the transition period 1995
growth rate was attributable to sales within the PRC compared to the same period
last year. Sales into the PRC accounted for approximately 7% of the Company's
total first quarter transition period 1995 revenues, compared with
approximately 3% in the prior year quarter. Revenues from the Company's
Australia, Japan and Singapore subsidiaries also increased significantly in the
first quarter of transition period 1995 over the same comparable prior year
period.
A significant portion of the Company's Asia Pacific revenues are derived from
sales to the Hong Kong government and to Hong Kong based dealers who ultimately
market the Company's products within the PRC. Although the PRC has historically
provided the Company with significant revenues and profitability, future sales
of the Company's products into the PRC are highly dependent upon continuing
favorable trade relations between the United States and the PRC and the general
economic and political stability of the region. Economic factors such as
competitive pricing, short-term fluctuations in foreign currency exchange rates
and changes in the PRC tax structure could have a corresponding impact on future
sales and operating results.
Gross Profit (Loss)
Gross profit margins decreased to a gross loss of 1.7% in the three-month
period ended September 30, 1995 from 7.5% in the three-month period ended
October 1, 1994. This decline in margins was a result of continued intense
industrywide competitive pressures which have required pricing reductions at a
rate faster than the Company was able to reduce costs. These pricing reductions
also have resulted in significant price protection adjustments related to
product within the Company's various sales channels. The Company's margins
were also negatively impacted by costs associated with software upgrades
relating to Microsoft's August 1995 Windows95 product introduction and by the
delayed shipment of some of the Company's new product offerings. 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 could be adversely affected. The
personal computer industry continues to experience significant pricing pressures
and the Company believes that aggressive pricing actions by the Company and its
competitors may continue to adversely impact the Company's gross margins which
could also result in decreased liquidity and adversely affect the Company's
financial position..
The results of the Company's international operations are subject to currency
fluctuations. As the value of the U.S. dollar weakens relative to other
currencies, revenues from sales in those currencies convert to more U.S.
dollars; 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. This effect on revenue has a corresponding impact on gross margins,
as the Company's production costs are incurred primarily in U.S. dollars. When
comparing the three-month period ended September 30, 1995 to the three-month
period ended October 1, 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 transition year-to-
date 1995 results compared to the same prior year period.
Operating Expenses
Total operating expenses increased 2.0% to $84.8 million for the three-month
period ended September 30, 1995 from $83.1 million for the three-month period
ended October 1, 1994. As a percentage of sales, operating expenses increased
to 21.0% from 16.8% in the comparable prior year period.
Selling and marketing expenses decreased 1.1% to $51.3 million for the three
months ended September 30, 1995 from $51.9 million in the prior year period.
Lower consumer retail sales contributed to lower expenses for media advertising,
product marketing and dealer promotional activities. This decrease was
partially offset by higher payroll and phone expenses due to expanded service
and support operations. As a percentage of sales, selling and marketing
expenses increased to 12.7% for the period ended September 30, 1995 from 10.5%
in the prior year period.
General and administrative expenses increased by 11.8% to $23.9 million for
the three-month period ended September 30, 1995 from $21.4 million in the same
fiscal 1995 period. General and administrative expenses increased primarily due
to higher payroll and employee insurance costs as well as various one-time
severance payments made in the first quarter of transition period 1995. As a
percentage of sales, general and administrative expenses increased to 5.9% from
4.3% in the comparable prior year period.
Engineering and development costs declined by 3.4% to $9.6 million for the
three-month period ended September 30, 1995 from $9.9 million in the comparable
prior fiscal period. Lower payroll related expenses and other professional fees
were partially offset by increased engineering supply expenses associated with
new product development activities. Products introduced in the first quarter
of transition period 1995 included additions to the Bravo MS, Premmia GX and
the Ascentia 950N product lines. As a percentage of sales, engineering and
development expenses increased to 2.4% from 2.0% in the comparable prior year
period.
Other Income and Expense
For the three-month period ended September 30, 1995, the Company had net
interest expense of $3.6 million compared to $2.8 million in the corresponding
fiscal 1995 period. Interest expense increased as a result of higher average
short-term borrowings, a higher effective interest rate on the note payable to
Tandy and increased interest expense associated with the Company's Liquid Yield
Option Notes due 2013.
In the first three months of transition period 1995, the Company recognized
net other expenses of $1.3 million compared to $.3 million for the same fiscal
1995 period. These amounts relate primarily to foreign currency transaction and
remeasurement gains and losses and the costs associated with the Company's
foreign currency hedging activities. The Company adheres to a hedging strategy
which is designed to minimize the effect of remeasuring local currency balance
sheets of its foreign subsidiaries on the Company's consolidated financial
position and results of operations.
Income Tax Benefit
The Company was unable to record a tax benefit for the loss incurred during
the quarter ended September 30, 1995, yielding an effective tax rate of zero.
This effective tax rate compares to an effective income tax benefit of 19.5 %
for the same prior year period. The decrease in the tax rate is attributable to
the Company's provision of a full valuation reserve against any additional
deferred tax assets arising from the Company's current operating loss.
The realization of previously recorded deferred tax assets is in large part
dependent on the Company's ability to generate future taxable income from
reversals of existing taxable temporary differences, sales of new and existing
products and/or available tax planning strategies. 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 such deferred tax assets and the Company's effective tax
rate may be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $357.3 million at September 30, 1995 included cash and cash
equivalents of $135.3 million compared to working capital of $306.9 million and
cash and cash equivalents of $95.8 million at July 1, 1995. The Company had no
short-term borrowings at September 30, 1995 compared to $156.0 million at July
1, 1995. During the first three months of transition period 1995, the Company
used $30.0 million of cash principally to fund its operating loss for the
quarter.
Net cash used in investing activities decreased during the first quarter of
transition period 1995 compared with the same comparable year period, primarily
due to a decrease in capital expenditures in transition period 1995. Capital
expenditures totaled $4.5 million in the first three months of transition period
1995 compared to $8.6 million in the comparable prior year period. Capital
expenditures consisted primarily of additions to plant and engineering
equipment.
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 credit
facilities and possible future public or private debt and/or equity offerings.
The Company utilizes a centralized corporate 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.
On February 27, 1995, the Company entered into a Stock Purchase Agreement
("Purchase Agreement") with Samsung Electronics Co., Ltd. ("Samsung"), providing
for a significant minority ownership interest in the Company of approximately
40%. On June 30, 1995, AST stockholders approved the strategic investment and
all regulatory approval had been received as of July 1, 1995. Under the terms
of the Purchase Agreement, as amended by Amendment No. 1 thereto, dated as of
June 1, 1995, and Amendment No. 2 thereto, dated as of July 29, 1995, Samsung
purchased 6.44 million newly issued shares of common stock from AST,
representing 19.9% of the then currently 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 stockholders, representing 18% of the
then currently outstanding shares of common stock, at $22 per share. Concurrent
with the acceptance of the shares for purchase under the tender offer, Samsung
purchased an additional 5.63 million newly issued shares of common stock from
AST at $22 per share so that its aggregate ownership interest in AST, after
completion of all of the purchases, is 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 Company expects that it will utilize the remaining proceeds for
working capital and capital expenditure requirements. In addition to these
proceeds, 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 has been able to maintain access to external financing
sources, no assurance can be given that such access will continue or that the
Company will be successful in obtaining new or replacement sources of financing
to replace the bank credit facilities which the Company canceled in August 1995.
If the Company is unable to maintain access to financing sources or is unable to
secure new sources, the Company's ongoing operations would be adversely
impacted. In addition, continued operating losses by the Company would likely
make it more difficult for the Company to access external financing sources,
which would also adversely impact the Company's ongoing operations.
On November 2, 1995, the Company announced that it had entered into a letter
of intent agreement with Samsung pursuant to which Samsung would provide certain
additional support to the Company as consideration for such number of shares of
Common Stock as would increase its ownership to 49.9 percent. The additional
support includes a line of credit, or other form of credit support, through
November 30, 1996, in the amount of $100 million, secured by an interest in
inventory, accounts receivable, and other available assets of the Company as
requested by Samsung, and an increase in the Company's supplier line of credit
with Samsung to $100 million through November 30, 1996, with an extension of
payment terms under such line of credit to 90 days through November 30, 1996,
decreasing to 30 days for products shipped after January 30, 1997. In addition,
Samsung will provide certain other elements of support to the Company, the
amount and value to be agreed to by Samsung and a committee of independent
directors. In connection with this agreement, the Company will issue a number
of shares of Common Stock to Samsung so as to increase its ownership to 49.9%,
and Samsung will appoint two additional directors to the Company's board of
directors. In addition, Samsung and the Company agreed to negotiate further
support arrangements by Samsung, which if met, would increase Samsung's
ownership to 60 percent. The support transactions are subject to definitive
documentation and approvals. The letter of intent agreement is non-binding, and
in the event that the Company is unable to secure the financial support under
the agreement or is unable to secure alternative sources of financing, the
Company's operations would be adversely affected.
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 1995 was paid on July 11, 1995 at a rate of 4.94% per
annum. The interest rate has been 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 a 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 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.
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, upon
maturity of the note, the maximum principal amount of the note that may be
converted, at the option of the Company, into common stock of the Company, based
upon its then fair market value as defined in the note, was reduced to $30
million. All other terms of the promissory note remained unchanged.
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.
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 or any combination thereof. The Company has made no decision as to
whether it will meet future purchase obligations in cash, common stock, or any
combination thereof. Such decision will be based on market conditions at the
time a decision is required, as well as management's view of the liquidity of
the Company at such time. The total accreted value of the LYONs at September
30, 1995 is $120.8 million. 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 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 49.9% pursuant to the letter of intent agreement
pursuant to the letter of intent agreement does not have any impact on the terms
of the LYONs. The terms of the LYONs would only be impacted if Samsung's
ownership exceeds 50%.
The Company attempts to minimize its exposure to foreign currency transaction
and remeasurement gains and losses due to the effect of remeasuring the local
currency balance sheets of its foreign subsidiaries on the Company's
consolidated financial position and results of operations. The Company utilizes
a limited hedging strategy which includes the use of foreign currency
borrowings, netting of foreign currency assets and liabilities as well as
forward exchange contracts to hedge its exposure to exchange rate fluctuations
in connection with its subsidiaries' monetary assets and liabilities held in
foreign currencies. The carrying amounts of the forward exchange contracts
equal their fair value and are adjusted at each balance sheet date for changes
in exchange rates. Realized and unrealized gains and losses on the forward
contracts are recognized currently in the consolidated statements of operations.
The Company held forward exchange contracts with a face value of approximately
$157.4 million at September 30, 1995 and $162.0 million at July 1, 1995, which
approximates the Company's hedgeable net monetary asset exposure to foreign
currency fluctuations at those respective dates. Some foreign locations, such
as the PRC, do not allow open market hedging of their currencies and, therefore,
the Company is not able to hedge all of its exposures. Unrealized losses
associated with these forward contracts totaling $1.8 million at September 30,
1995 and $0.6 million at July 1, 1995 are included in the Company's consolidated
statements of operations for those periods. Foreign currency borrowings totaled
$4.1 million at September 30, 1995 and $4.2 million at July 1, 1995.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Future operating results may be impacted by a number of factors, including
worldwide economic and political conditions, industry specific factors, the
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 is 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 commercially successful or
technically advanced due to the rapid improvements in computer technology and
resulting product obsolescence. There is also no assurance that the Company
will be able to deliver commercial quantities of new products in a timely
manner. The success of new product introductions is dependent on a number of
factors, including market acceptance, the Company's ability to manage risks
associated with product transitions, the effective management of inventory
levels in line with anticipated product demand and the timely manufacturing of
products in appropriate quantities to meet anticipated demand. The Company
regularly introduces new products designed to replace existing products. While
the Company 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 fiscal 1995 and the first quarter of transition period 1995. In
addition, if the Company is unable to successfully anticipate and manage shifts
in microprocessor 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.
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 (which were canceled in August 1995) 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. As discussed above in Liquidity and Capital Resources, the Company
entered into a letter of intent agreement with Samsung pursuant to which the
Company will receive a line of credit or other form of credit support of $100
million through November 30, 1996, and an increase in its supplier line of
credit support to $100 million with an extension payment terms of 90 days
through November 30, 1996, and other elements of support to be agreed upon. The
letter of intent agreement is non-binding, and in the event that the Company is
unable to secure the financial support under the agreement or is unable to
secure alternative sources of financing, there would be a material adverse
effect on the Company's business operations.
Increases in demand for personal computers have created industrywide
shortages, which at times have resulted in premium prices being paid for key
components, such as Dynamic Random Access Memory chips ("DRAMs"), some Static
Random Access Memory chips, CD-ROMs 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, some 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.
The Company and Samsung, effective July 31, 1995, 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 suppliers,
customers, employees and others will not react favorably to Samsung's investment
in the Company.
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 transition period 1995. There can be no assurance that future pricing
actions by the Company and its competitors will not adversely impact the
Company's net sales and profitability.
Consistent with industry practice, the Company provides certain of its larger
distributors, consumer retailers and dealers with stock balancing and price
protection rights that permit these distributors, retailers and dealers to
return slow-moving products to the Company for credit or to receive price
adjustments if the Company lowers the price of selected products within certain
time periods. 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 continue
to 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 in the past experienced seasonally higher
sales in the second quarter ending December 31 of the fiscal year due to holiday
demand for some of its products in the consumer retail channel.
The Company's overall operating income varies within each geographic region.
Historically, the Company's Americas and Asia Pacific regions made the primary
contributions to the Company's profitability. Therefore, should the Company
continue to experience significant revenue and/or profitability problems in
either region, this could significantly impact the Company's results of
operations. Europe had historically shown an operating loss primarily due to a
lack of centralized manufacturing, distribution and service operations. During
fiscal 1994, the Company realigned and centralized its European distribution and
service operations in conjunction with establishing a new manufacturing facility
in Limerick, Ireland. As a result, the Company has seen lower operating losses
throughout the European region in fiscal 1995 and the first quarter of
transition period 1995. However, if the Company is unable to achieve further
manufacturing efficiencies or offset future pricing actions with further cost
reductions, the ability of the Company's European operations to become
profitable could be adversely affected.
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 adhering to a hedging strategy utilizing forward exchange
contracts and, to a lesser extent, foreign currency borrowings. The Company's
exposure to currency fluctuations will continue to increase as a result of the
expansion of its international operations. Significant fluctuations in currency
values could have an adverse effect on the Company's net sales, gross margins
and profitability.
The Company's international operations may also be affected by changes in
United States trade relationships, increased competition and the economic
stability of the locations in which sales occur. The Company operates in
foreign locations, such as the PRC, where future sales may be dependent upon
continuing favorable trade relations. Additionally, foreign locations such as
the PRC may experience changes in their general economic stability due to such
factors as increased inflation and political turmoil. Any significant change in
United States trade relations or the economic stability of foreign locations in
which the Company 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 the Strategic Alliance
Agreement with Samsung Electronics Co., Ltd. dated February 27, 1995, the
Company entered into a patent cross license agreement with Samsung dated July
31, 1995 that expires on July 31, 2005.
The Company's primary means of distribution remains 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 dynamic personal computer industry often results in significant
volatility in the Company's common stock price.
PART II
OTHER INFORMATION
ITEM 1. 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 a class action, asserting claims under state and federal
securities laws based on allegations that the Company made inadequate and false
disclosures and seeking unspecified compensatory damages and related fees and
costs. The complaints were filed in the United States District Court for the
Central District of California. On September 12, 1994, a complaint was filed by
a shareholder against the Company and certain of its officers and directors
requesting certification of a class action, asserting claims under state and
federal securities laws based on allegations that the Company made inadequate
and false disclosures and seeking unspecified compensatory damages and related
fees and costs. The September 12, 1994 complaint was filed in the United States
District Court for the Central District of California under the case name Steven
A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was
filed by a shareholder in the United States District Court for the Central
District of California. The October 6, 1994 complaint names the Company and
certain of its officers and directors as defendants, asserts claims under state
and federal securities laws based on allegations that the Company made
inadequate and false disclosures, and seeks unspecified compensatory damages and
related fees and costs. The cases with complaints filed on March 3, 1994, March
14, 1994, and October 6, 1994, have been consolidated under the case name In re
AST Research Securities Litigation. The AST Research Securities Litigation and
Kornfeld cases are being treated as related cases by the court. A settlement
agreement dated August 28, 1995 was signed to end the AST Research Securities
Litigation and Kornfeld cases, and requires the payment of $12.5 million by the
defendants to the plaintiffs in November 1995. An Order Preliminarily Approving
Settlement dated August 28, 1995 was entered by the Court to begin the process
of approving the settlement. The Company expects that a majority of the
settlement payment will be covered by insurance.
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 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 sixteen 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.
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 alleges that the Company has engaged in deceptive
advertising and unlawful business practices with relation to computer monitor
screen measurements. 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 also 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. Further, 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. 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Net Income (Loss) Per Share.
27. Financial Data Schedule
(b) Reports on Form 8-K
On August 7, 1995, the Company filed a report on Form 8-K
under Item 5 thereof regarding the completion of the Samsung strategic
investment providing for an ownership interest of up to approximately 40
percent in the Company, as well as other strategic relationships,
including component supply and joint procurement agreements, effective
July 31, 1995.
On September 6, 1995, the Company filed a report on Form 8-K
under Item 5 thereof regarding the August 29, 1995 preliminary approval
by the U.S. District Court for the Central District of California for a
settlement agreement in four class-action shareholder lawsuits.
On September 18, 1995 the Company filed a report on Form 8-K
reporting under Item 5 thereof regarding the resignations of Jim
Schraith, as president, chief operating officer and a board member; Jim
Wittry, senior vice president, Americas and Scott Smith, vice president
and general manager, desktop products, effective September 11, 1995 and
the appointment of Gerald T. Devlin as senior vice president, Americas.
The Company also announced anticipated lower first quarter fiscal 1996
performance and a net loss significantly higher than the $40 million
loss recorded during the prior year period.
On September 21, 1995, the Company filed a report on Form 8-K
under Item 5 thereof regarding the resignation of Kirby Coryell, senior
vice president and officer, worldwide manufacturing operations and the
promotion of Gary Weaver formerly vice president, operations, Americas
replacing Mr. Coryell, effective September 20, 1995.
On September 25, 1995, the Company filed a report on Form 8-K
reporting under Item 5 thereof regarding resignations of board members
Delbert W. Yocam and Noh Byung Park, effective September 21, 1995.
AST, Advantage!, and GRiD are registered trademarks of AST Research, Inc.
Ascentia, Bravo, Premmia and Manhattan are trademarks of AST Research, Inc.
Pentium is a registered trademark of Intel Corporation. Windows is a registered
trademark of Microsoft Corporation. Tandy is a registered trademark of Tandy
Corporation. All other product or service names mentioned herein may be
trademarks or registered trademarks of their respective owners.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AST Research, Inc.
(Registrant)
Date: November 13, 1995 Bruce C. Edwards
Executive Vice President
and Chief Financial Officer
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
------------------------
September 30, October 1,
(In thousands, except per share amounts) 1995 1994
- ------------------------------------------------------------------------------
<S> <C> <C>
Primary loss per share
- ----------------------
Shares used in computing primary loss per share:
Weighted average shares of common stock outstanding 40,762 32,346
Effect of stock options treated as common stock
equivalents under the treasury stock method - -
-------- --------
Weighted average common and common equivalent
shares outstanding 40,762 32,346
-------- --------
Net loss $(96,382) $(39,406)
-------- --------
Loss per share - primary $ (2.36) $ (1.22)
======== ========
Fully diluted loss per share
- ----------------------------
Shares used in computing fully diluted loss per share:
Weighted average shares of common stock outstanding 40,762 32,346
Effect of stock options treated as common stock
equivalents under the treasury stock method - -
Shares assumed issued on conversion of
Liquid Yield Option Notes (LYONs) - -
-------- --------
Total fully diluted shares outstanding 40,762 32,346
-------- --------
Net loss - fully diluted loss per share:
Net loss $(96,382) $(39,406)
Adjustment for interest on LYONs, net of tax - -
-------- --------
Adjusted net loss $(96,382) $(39,406)
-------- --------
Loss per share - fully diluted $ (2.36) $ (1.22)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 135,326
<SECURITIES> 0
<RECEIVABLES> 299,654
<ALLOWANCES> 17,690
<INVENTORY> 349,223
<CURRENT-ASSETS> 814,063
<PP&E> 167,938
<DEPRECIATION> 68,585
<TOTAL-ASSETS> 991,744
<CURRENT-LIABILITIES> 456,975
<BONDS> 122,518
<COMMON> 447
0
0
<OTHER-SE> 407,401
<TOTAL-LIABILITY-AND-EQUITY> 991,744
<SALES> 403,357
<TOTAL-REVENUES> 403,357
<CGS> 410,126
<TOTAL-COSTS> 410,126
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 859
<INTEREST-EXPENSE> 4,798
<INCOME-PRETAX> (96,382)
<INCOME-TAX> 0
<INCOME-CONTINUING> (96,382)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (96,382)
<EPS-PRIMARY> (2.36)
<EPS-DILUTED> (2.36)
</TABLE>
