<PAGE>
________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q/A
Amendment No. 1
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 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 32,385,750 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on April 28, 1995.
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
AST RESEARCH, INC.
INDEX
Page
----
Part I. Financial Information
Item 1. Financial Statements
Restated Consolidated Balance Sheets
at April 1, 1995 (Unaudited)
and July 2, 1994 3
Consolidated Statements of Operations
(Unaudited) for the three months and
nine months ended
April 1, 1995 (restated) and April 2,
1994 4
Consolidated Statements of Cash Flows
(Unaudited) for the nine months ended
April 1, 1995 (restated) and April 2,
1994 5-6
Notes to Restated 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
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
<PAGE>
AST RESEARCH, INC.
RESTATED CONSOLIDATED BALANCE SHEETS (Note 1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
April 1, July 2,
1995 1994
(In thousands, except share amounts) (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 67,464 $ 153,118
Accounts receivable, net of allowance for
doubtful accounts of $17,908 at April 1, 1995
and $17,564 at July 2, 1994 465,022 326,057
Inventories 354,702 333,729
Deferred income taxes 48,423 43,266
Other current assets 73 9,797
- --------------------------------------------------------------------------------
Total current assets 935,684 865,967
Property and equipment 169,877 159,530
Accumulated depreciation and amortization (66,751) (56,089)
- --------------------------------------------------------------------------------
Net property and equipment 103,126 103,441
Goodwill, net of accumulated amortization of $5,774
at April 1, 1995 and $3,479 at July 2, 1994 26,694 29,220
Other assets 10,331 6,992
- --------------------------------------------------------------------------------
$1,075,835 $1,005,620
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 100,000 $ 50,000
Accounts payable 287,304 209,579
Accrued salaries, wages and employee benefits 20,999 21,465
Other accrued liabilities 137,307 112,096
Income taxes payable 10,743 27,455
Current portion of long-term debt 2,472 398
- --------------------------------------------------------------------------------
Total current liabilities 558,825 420,993
Long-term debt 216,282 215,294
Deferred income taxes and other non-current
liabilities 6,241 7,571
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares
authorized, 32,376,500 shares issued and
outstanding at April 1, 1995 and 32,333,750
shares at July 2, 1994 324 323
Additional capital 141,826 141,424
Retained earnings 152,337 220,015
- --------------------------------------------------------------------------------
Total shareholders' equity 294,487 361,762
- --------------------------------------------------------------------------------
$1,075,835 $1,005,620
================================================================================
</TABLE>
See accompanying notes.
3
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
-------------------------------- -----------------------------------
April 1, April 2, April 1, April 2,
(In thousands, except per 1995 1994 1995 1994
share amounts) (Restated-Note 1) (Restated-Note 1)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $670,176 $591,349 $1,805,781 $1,782,769
Cost of sales 583,234 490,243 1,615,222 1,481,197
- -----------------------------------------------------------------------------------------------------------
Gross profit 86,942 101,106 190,559 301,572
Selling and marketing expenses 58,934 50,031 169,347 145,124
General and administrative
expenses 22,005 19,968 64,941 57,256
Engineering and development
expenses 9,016 9,579 27,566 30,226
- -----------------------------------------------------------------------------------------------------------
Total operating expenses 89,955 79,578 261,854 232,606
- -----------------------------------------------------------------------------------------------------------
Operating income (loss) (3,013) 21,528 (71,295) 68,966
Interest income 471 625 1,478 1,252
Interest expense (4,669) (2,881) (11,561) (7,067)
Other income (expense), net (923) 750 (2,694) (3,485)
- -----------------------------------------------------------------------------------------------------------
Income (loss) before income
taxes (8,134) 20,022 (84,072) 59,666
Provision (benefit) for
income taxes (1,586) 6,808 (16,394) 20,287
- -----------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,548) $ 13,214 $ (67,678) $ 39,379
===========================================================================================================
Net income (loss) per share:
Primary $(.20) $.40 $(2.09) $1.21
Fully diluted $(.20) $.38 $(2.09) $1.18
===========================================================================================================
Shares used in computing net
income (loss) per share:
Primary 32,376 33,080 32,364 32,512
Fully diluted 32,376 37,179 32,364 34,238
===========================================================================================================
</TABLE>
See accompanying notes.
4
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Nine Months Ended
--------------------------
April 1, April 2,
(In thousands) 1995 1994
(Restated - Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,693,897 $ 1,666,651
Cash paid to suppliers and employees (1,793,097) (1,697,421)
Interest received 1,564 1,358
Interest paid (6,699) (2,668)
Income tax refunds received 3,320 1,192
Income taxes paid (10,233) (13,305)
Other cash received 1,697 888
- --------------------------------------------------------------------------------
Net cash used in operating activities (109,551) (43,305)
Cash flows from investing activities:
Payment related to Tandy/GRiD acquisition - (15,000)
Purchases of capital equipment (20,446) (20,902)
Proceeds from disposition of capital equipment 2,812 1,169
Purchases of other assets, net (2,556) (758)
- --------------------------------------------------------------------------------
Net cash used in investing activities (20,190) (35,491)
Cash flows from financing activities:
Short-term borrowings, net 50,000 (9,203)
Repayment of long-term debt (409) (136)
Proceeds from issuance of long-term debt, net - 107,974
Proceeds from issuance of common stock 403 8,991
- --------------------------------------------------------------------------------
Net cash provided by financing activities 49,994 107,626
Effect of exchange rate changes on cash and cash
equivalents (5,907) 1,450
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (85,654) 30,280
Cash and cash equivalents at beginning of period 153,118 121,600
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 67,464 $ 151,880
================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
Reconciliation of net income (loss) to net cash used in operating activities:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Nine Months Ended
--------------------------------
April 1, April 2,
(In thousands) 1995 1994
(Restated - Note 1)
- ---------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ (67,678) $ 39,379
Adjustments to reconcile net income (loss) to
net cash
used in operating activities:
Depreciation and amortization 18,836 17,818
Provision (benefit) for deferred income taxes (6,486) 104
Gain on sale of capital equipment (653) -
Change in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable (127,892) (108,440)
Inventories (20,973) 5,643
Other current assets 1,963 8,349
Accounts payable and accrued expenses 106,471 32,831
Income taxes payable (16,712) (1,741)
Other current liabilities 4,876 (40,578)
Exchange loss (gain) (1,303) 3,330
- ---------------------------------------------------------------------------------
Net cash used in operating activities $(109,551) $ (43,305)
=================================================================================
Supplemental schedule of non-cash investing
and financing activities:
The Company purchased certain assets relating
to Tandy/GRiD
France's personal computer operations
effective September 1, 1993.
In conjunction with the acquisition,
liabilities were assumed as
follows:
Fair value of assets acquired - $ 10,171
Note payable - (6,720)
- ---------------------------------------------------------------------------------
Liabilities assumed - $ 3,451
=================================================================================
Tax benefit of employee stock options - $ 1,823
=================================================================================
</TABLE>
See accompanying notes.
6
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 1, 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 2,
1994) in accordance with generally accepted accounting principles for interim
financial information and with the 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 1994 Annual Report on
Form 10-K/A. The results of operations for the three- and nine-month periods
ended April 1, 1995 are not necessarily indicative of the results to be expected
for the full year. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report on Form
10-K/A for the year ended July 2, 1994.
Restatements
The Company has filed a 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 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 million
as previously reported. For further information concerning this restatement see
Note 2 of Notes to the Restated Consolidated Financial Statements for the year
ended July 2, 1994.
The accompanying restated consolidated balance sheet at July 2, 1994 reflects
these restatements and the consolidated financial statements for the three- and
nine-month periods ended April 1, 1995 have been restated to reflect both the
fiscal 1994 restatements and a resulting reduction in fiscal 1995 goodwill
amortization, net of related income tax effects, of approximately $.6 million
per quarter. The effect of these restatements is to decrease shareholders'
equity at April 1, 1995 by $20.4 million from the amount of shareholders'
equity previously reported, and to reduce previously reported net loss for the
three- and nine-month periods ended April 1, 1995 by $.7 million and $1.8
million, respectively. These adjustments have no impact on the Company's
working capital or cash flows.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. For the nine-
month period ended April 1, 1995, the estimated tax benefit rate is less than
the U.S. statutory rate due to estimates of the proportion of the Company's
fiscal 1995 consolidated income/loss that will be realized in foreign tax
jurisdictions with various tax rates and the Company's inability to benefit
certain of its deferred tax assets including loss carryforwards. 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 benefit its deferred
tax assets and from changes in the mix of income/loss in the various tax
jurisdictions within which the Company operates. Such differences are
recognized when known.
The provision (benefit) for income taxes is computed on the pretax income
(loss) of the consolidated entities located within each taxing country based on
the current tax law. Deferred taxes result from the future tax consequences
associated with temporary differences between the amount of assets and
liabilities recorded for tax and financial accounting purposes. 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
7
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 1, 1995
No. 109 "Accounting for Income Taxes," that the ultimate realization of net
deferred tax assets is more likely than not.
Acquisitions and Restructuring
In the fourth quarter of fiscal 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 the fourth
quarter of fiscal 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 1994, the Company completed most of its previously identified
restructuring activities and incurred asset write-downs of $50 million and cash
expenditures of $47 million related directly to its fiscal 1994 restructuring
activities. The Company recorded a $12.5 million credit in the fourth quarter
of fiscal 1994 after concluding that most of its restructuring activities had
been completed or were adequately provided for within the remaining
restructuring accrual. At July 2, 1994, $15.2 million of the restructuring
accrual remained on the Company's consolidated balance sheet. In October 1994,
the Company announced plans to consolidate its worldwide mobile computing
manufacturing in Taiwan and the concurrent closure of its Fountain Valley,
California manufacturing facility February 1, 1995. During the first nine
months of fiscal 1995, the Company incurred cash expenditures of approximately
$3.1 million related primarily to the closure of its Fountain Valley, California
manufacturing facility. At April 1, 1995, approximately $12.1 million of
restructuring accruals 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 certain equipment and
leasehold improvements being disposed of. The Company expects to complete the
restructuring-related asset disposition process during the fourth quarter of
fiscal 1995.
The Company believes that its restructuring activities were necessary in order
to reorganize its worldwide operations 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.
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 will be 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. 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. 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
April 1, 1995.
8
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 1, 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 complaint names the Company and
certain of its officers and directors as defendants, asserts claims under the
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. Management has
reviewed the allegations and the complaints and believes such allegations are
without merit. Management intends to vigorously defend these litigations. While
it is not possible to predict what impact the restatement might have on these
litigations or whether or not additional complaints may be filed, management
does not believe that the outcome of these matters will have a material adverse
impact on the Company's consolidated financial position or results of
operations; however, the Company is unable to estimate the amount of any loss
that may be realized in the event of an unfavorable outcome.
The Internal Revenue Service ("IRS") is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal tax liabilities
for such years of approximately $8.3 million, excluding interest. The majority
of such proposed adjustments relate to the allocation of income between the
Company and its foreign subsidiaries. Management believes that the Company's
position has substantial merit and intends to vigorously contest these proposed
adjustments. Management further believes that any liability that may result
upon the final resolution of the proposed adjustments for 1987 and 1988 or the
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, or
Matsushita, in thirteen 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 computer companies. The
claims against the Company total in excess of $100 million in compensatory 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 period covering the claims filed above. While
such policies may limit coverage under certain circumstances, the Company
believes that it is adequately insured against potential losses that may result
from these claims. Should the Company not be successful in defending against
such lawsuits or not be entitled to claim compensation
9
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
April 1, 1995
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 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.
Management does not believe that the outcome of this dispute 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 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.
Per Share Information
Earnings (loss) per share for fiscal 1995 and 1994 have been computed based
upon the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares result from the assumed exercise of
outstanding stock options that have a dilutive effect when applying the treasury
stock method. In fiscal 1994, the fully diluted per share calculation assumes,
in addition to the above, (i) that the Company's Liquid Yield Option(TM) Notes
were converted from the date of issuance with earnings being increased for
interest expense, net of taxes, that would not have been incurred had conversion
taken place, and (ii) the potential additional dilutive effect of stock options.
In fiscal 1995, fully diluted earnings (loss) per share were antidilutive.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consisted of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
April 1, July 2,
(In thousands) 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $113,014 $ 99,959
Work in process 51,036 53,765
Finished goods 190,652 180,005
- --------------------------------------------------------------------------------
$354,702 $333,729
================================================================================
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
April 1, 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 Percentage of Net Sales
Three Months Ended Nine Months Ended
----------------------- -----------------------
April 1, April 2, April 1, April 2,
1995 1994 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 87.0 82.9 89.4 83.1
- --------------------------------------------------------------------------------
Gross profit 13.0 17.1 10.6 16.9
- --------------------------------------------------------------------------------
Selling and marketing expenses 8.8 8.5 9.4 8.1
General and administrative
expenses 3.3 3.4 3.6 3.2
Engineering and development
expenses 1.4 1.6 1.5 1.7
- --------------------------------------------------------------------------------
Operating income (loss) (0.5) 3.6 (3.9) 3.9
Other expense, net (0.7) (0.2) (0.7) (0.6)
- --------------------------------------------------------------------------------
Income (loss) before income
taxes (1.2) 3.4 (4.6) 3.3
Provision (benefit) for income
taxes (0.2) 1.2 (0.9) 1.1
- --------------------------------------------------------------------------------
Net income (loss) (1.0%) 2.2% (3.7%) 2.2%
================================================================================
</TABLE>
Sales
Net sales for the nine-month period ended April 1, 1995 increased 1% to $1.806
billion from $1.783 billion in the nine-month period ended April 2, 1994. This
slight improvement in revenues was due to higher Pentium(TM) 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 has experienced product development and production delays throughout
fiscal 1995 which have contributed to lower 486 desktop and notebook systems
sales. In addition, continued industrywide competitive pricing pressures have
prompted aggressive pricing and promotional activities which have further
reduced total 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 Company
shipped 1,107,000 computer systems in the first nine months of fiscal 1995, an
increase of 2% from the 1,084,000 units shipped in the same prior year period.
Revenues from desktop system products increased 13% to $1.252 billion for the
nine-month period ended April 1, 1995 from $1.109 billion in the comparable
prior year period. Increased sales of the Pentium processor-based desktop
systems, Advantage!(R) 486DX and the Bravo(TM) 486DX were partially offset by
declines in revenues from the Advantage! and Bravo 486SX, Premmia(TM) 486DX and
Tandy(R) branded desktop systems sales. Decreased sales of the Company's 486-
based desktop systems reflected the shift in demand toward the Pentium desktop
systems, which accounted for 24% of total desktop systems sales for the nine-
month period ended April 1, 1995 versus 3% in the comparable fiscal 1994 period.
Included within total desktop revenues were sales of the Company's 386 systems,
which declined to $7 million in the nine-month period ended April 1, 1995,
compared to $50 million in the first nine months of fiscal 1994.
The Company's notebook computer product revenues declined 18% to $346 million
in the nine-month period ended April 1, 1995 from $422 million in the comparable
prior year period. This decrease reflects a 23% reduction in unit shipments to
164,000 for the nine-month period ended April 1, 1995 from 213,000 in the same
prior year period. Increased Ascentia(TM) 486SLE notebook systems sales were
offset by declines in revenues from the Bravo and Advantage! 486SX lines of
notebook computers and the PowerExec(TM) notebook product line.
11
<PAGE>
Additionally, a decline in revenues from sales to the Company's original
equipment manufacturer ("OEM") customers has contributed to the overall decrease
in fiscal 1995 notebook revenues.
North American revenues (including Canada) decreased by 13% to $1.012 billion
during the first nine months of fiscal 1995 from the comparable prior year
period. Revenue from the consumer retail channel decreased 3% from the
comparable prior year period and accounted for 37% of total North American
revenues. Revenues related to Tandy branded systems sales in the U.S. are
primarily responsible for year-over-year decreased sales in the consumer retail
channel. Sales to the independent reseller/dealer channel for the nine-month
period ended April 1, 1995 decreased 5% over the same prior year period and
accounted for 49% of total North American revenues versus 44% in the comparable
fiscal 1994 period. Revenue from the OEM channel declined significantly during
the first nine months of fiscal 1995 due to the completion of two large OEM
contracts in the fourth quarter of fiscal 1994. Within the overall decrease in
North American revenues, sales to the national distributor channel grew
slightly, increasing 2% over the same prior year period. The national
distributor channel and the OEM channel accounted for 13% and 1%, respectively,
of total North American revenues during the nine-month period ended April 1,
1995.
Nine month fiscal 1995 international revenues rose 28% to $794 million from
$619 million in the comparable prior year period and accounted for 44% of total
fiscal 1995 revenues compared to 35% of total fiscal 1994 revenues. The
European region provided 69% of total international revenues for the nine-month
period ended April 1, 1995 and increased 39% over the same period last year.
The United Kingdom and Sweden continued to be major contributors to total
European revenues with significant fiscal 1995 revenue growth also occurring in
Norway and Switzerland. Increased demand for the Company's Advantage and Bravo
486DX desktop systems, Pentium desktops and the Ascentia 486SLE notebook systems
contributed to the European revenue growth. In January 1994, the Company
established a centralized European manufacturing, distribution and service
operation in Limerick, Ireland. During the second quarter of fiscal 1995, the
Ireland facility supplied nearly all of the desktop product requirements for the
European region. Increased revenues and improved profitability in Europe for
fiscal 1995 have resulted from localized manufacturing, centralized distribution
and service and an expanded consumer retail market.
Pacific Rim revenues totaled $200 million in the nine-month period ended April
1, 1995, up 10% from the prior year total of $182 million. Although Pacific Rim
revenues rose during the nine-month period ended April 1, 1995, revenues to the
People's Republic of China ("PRC") declined 26% compared to the same prior year
period. This decline was attributable to significantly increased competition
and to lower first and third quarter sales to one of the Company's major
customers within this region. The Company anticipates that these competitive
pressures will continue and may adversely impact the Company's net sales and
profitability. A significant portion of the Company's Pacific Rim revenues are
derived from sales to the Hong Kong government and to Hong Kong based dealers
who ultimately market the Company's products within the PRC. 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 also have a
corresponding impact on future sales and operating results. Revenues from the
Company's Australian subsidiary increased 73% in the first nine months of fiscal
1995 over the same prior year period.
In the Company's Rest of World region, revenues increased 8% to $45 million in
the nine-month period ended April 1, 1995 compared to the same prior year
period. This increase is primarily due to a 27% revenue growth rate in Latin
America. However, economic risks such as the December devaluation of the
Mexican peso, as well as risks in other less developed countries, could have a
corresponding impact on future sales and operating results in these regions.
Revenues for the quarter ended April 1, 1995 increased 13% to $670 million
from $591 million in the quarter ended April 2, 1994 due primarily to higher
Pentium processor-based desktop systems sales. Third quarter fiscal 1995
international revenues of $333 million were 43% higher than the comparable prior
year quarter, while North American revenues decreased 6% to $337 million.
European revenues represented 73% of total international revenues for the third
quarter of fiscal 1995 and increased 52% over the same prior year quarter.
During the third
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quarter of fiscal 1995, the Company began shipments of the Premmia MX P/75 and
Ascentia 910N. The Company also shipped new models of the Advantage! multimedia
personal computers.
Gross Profit
Gross profit margins decreased to 10.6% in the nine-month period ended April
1, 1995 from 16.9% in the nine-month period ended April 2, 1994. This decline in
margins resulted primarily from product development and production delays,
manufacturing related costs associated with product transitions and continued
intense industrywide competitive pricing pressures. 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.
Gross profit margins have improved slightly each quarter throughout fiscal
1995 due to improvements in the Company's manufacturing processes, component
costs, currency fluctuations and a rising proportion of sales of the Company's
higher margin products, particularly the Pentium processor-based desktop
systems. However, due to continuing industry pricing pressures and the
potential significant impact of shifts within the Company's channel and product
mix, the Company is unable to provide any assurance as to whether this trend
will continue. During the first nine months of fiscal 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 or
profitability, 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. This effect on revenue has a corresponding impact on gross profit, as
the Company's production costs are incurred primarily in U.S. dollars. During
the nine-month period ended April 1, 1995 compared to the nine-month period
ended April 2, 1994, the U.S. dollar declined against nearly all European
currencies. This year-to-year currency fluctuation resulted in approximately a
two percentage point gross margin increase in fiscal year-to-date 1995 results
compared to the same prior year period. Currency fluctuations also resulted in
increased third quarter fiscal 1995 gross margins by approximately two and a
half percentage points when compared to results of currency fluctuations in the
prior year third quarter.
Operating Expenses
Total operating expenses increased 12.6% to $261.9 million for the nine-month
period ended April 1, 1995 from $232.6 million for the nine-month period ended
April 2, 1994. As a percentage of sales, operating expenses increased to 14.5%
from 13.0% in the comparable prior year period. The increase in operating
expenses in the aggregate and as a percentage of sales was primarily due to
continued worldwide expansion and an increased level of international sales
compared to the same prior year period.
Selling and marketing expenses increased 16.7% to $169.3 million for the nine
months ended April 1, 1995 from $145.1 million in the prior year period.
Selling and marketing expenses increased due to higher payroll costs consistent
with increases in worldwide sales and marketing staff. Enhanced product
marketing and dealer promotional activities resulted in higher expenses for
other promotions, co-op advertising and sales literature related to new product
introductions. Additionally, the Company's continued focus on increasing brand
name awareness led to an increase in media advertising expenses. As a
percentage of sales, selling and marketing expenses increased to 9.4% for the
nine-month period ended April 1, 1995 from 8.1% in the comparable prior year
period.
General and administrative expenses increased by 13.4% to $64.9 million for
the nine-month period ended April 1, 1995 from $57.3 million in the same fiscal
1994 period. Worldwide expansion, including operations in China, Ireland, Korea
and the Netherlands, resulted in increased payroll and administrative costs.
The Company also incurred higher legal fees due to increased litigation activity
and additional patent/trademark expenses primarily resulting from an expanded
patent/trademark portfolio. Depreciation and amortization expense rose due to a
larger fixed asset base and increased goodwill amortization resulting from the
acquisition of Tandy
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Corporation's personal computer manufacturing operations. As a percentage of
sales, general and administrative expenses increased to 3.6% in the first nine
months of fiscal 1995 from 3.2% in the comparable prior year period.
Engineering and development costs declined by 8.8% to $27.6 million for the
nine-month period ended April 1, 1995 from $30.2 million in the comparable
fiscal 1994 period. Lower payroll and employee benefit costs were partially
offset by higher expenses for equipment rental and increased engineering
material expenses. Products introduced in the first nine months of fiscal 1995
included additions to the Advantage! product line, the Bravo MS and Premmia MX
desktops, the Bravo MS-T minitower and the Bravo MS-L low-profile desktop, the
Manhattan V, P and G series of Pentium-based servers, the Ascentia 800N and 810N
value notebooks and the Ascentia 910N professional notebook. As a percentage of
sales, engineering and development expenses declined to 1.5% for the nine-month
period ended April 1, 1995 from 1.7% in the comparable prior year period.
Total operating expenses for the quarter ended April 1, 1995 increased 13.0%
to $90.0 million from $79.6 million in the same fiscal 1994 quarter. As a
percentage of sales, operating expenses were 13.5% in both the current and prior
year quarter. The overall increase in spending is primarily due to increased
payroll costs related to worldwide expansion and expanded sales and marketing
activities consistent with increased sales levels.
Other Income and Expense
For the nine-month period ended April 1, 1995, the Company had net interest
expense of $10.1 million compared to $5.8 million in the corresponding fiscal
1994 period. Interest expense increased as a result of the note payable to
Tandy, the Company's December 1993 issuance of Liquid Yield Option(TM) Notes and
increased utilization of the Company's bank revolving credit facilities.
In the first nine months of fiscal 1995, the Company recognized net other
expenses of $2.7 million compared to $3.5 million for the same fiscal 1994
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.
Provision (Benefit) for Income Taxes
The Company recorded an effective tax benefit of 19.5% for the nine-month
period ended April 1, 1995. This compares to an effective income tax provision
of 34% for the same prior year period. The decrease in the fiscal 1995
effective tax rate is attributable to changes in the proportion of income earned
or losses sustained within various taxing jurisdictions and the tax rates in the
location 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 realization of deferred tax assets is in large part
dependent on future taxable income. To the extent that the Company does not
ultimately realize future taxable income, the Company's effective tax rate may
be negatively impacted.
Liquidity and Capital Resources
Working capital of $376.9 million at April 1, 1995 included cash and cash
equivalents of $67.5 million which compares to working capital of $445.0 million
and cash and cash equivalents of $153.1 million at July 2, 1994. The Company
had short-term borrowings of $100.0 million and $50.0 million at April 1, 1995
and July 2, 1994, respectively. During the first nine months of fiscal 1995,
the Company used $109.6 million of cash to fund its operating loss for the
period, its increased levels of accounts receivable consistent with increased
international sales levels and higher inventory levels.
Net cash used in investing activities decreased during fiscal 1995 compared
with fiscal 1994, primarily due to a one-time cash payment of $15 million
related to the Tandy/GRiD acquisition recorded during the first quarter of
fiscal 1994, partially offset by increased purchases of other assets in fiscal
1995. Capital expenditures totaled $20.4 million in the first nine months of
fiscal 1995 compared to $20.9 million in the prior year period and consisted
primarily of additions to plant and engineering equipment in Asia and Ireland
partially offset by reductions of plant and engineering equipment in the U.S.
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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 its revolving
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
short-term money market instruments. The Company has a $225 million revolving
credit facility secured with a pledge of all of the Company's domestic U.S.
assets with a final maturity date of September 30, 1996. This revolving credit
facility allows the Company to borrow, subject to certain leverage and borrowing
base restrictions, at rates based upon the bank's reference rate, or a spread
over the LIBOR rate, the domestic certificate of deposit rate, or at a rate bid
by a bank, as selected by the Company. At April 1, 1995, there was $100 million
outstanding as drawings under this credit facility and $67.7 million outstanding
in the form of a letter of credit issued to Tandy Corporation in support of the
acquisition note payable. Under the terms of the leverage and borrowing base
restrictions of the credit agreement, the Company had the ability at April 1,
1995, to utilize a total of $193.6 million under the agreement. The amount
available under the borrowing base restriction is dependent upon the Company's
level of U.S. based accounts receivable and, therefore, subject to fluctuation.
If the Company's level of U.S. based sales were to significantly decrease, its
ability to utilize the credit facility would be reduced and its liquidity would
be adversely affected. The Company also has various letter of credit facilities
available for use by the Company and its subsidiaries. The Company believes the
restatement does not represent an event of default under the terms of its
revolving credit agreements; however, should it be determined that an event of
default has occurred, the Company would be required to obtain a waiver of such
default. While the Company believes that such a waiver could be obtained,
failure to obtain a waiver would have a material adverse effect on the Company.
On February 9, 1995, the Company and four of its foreign subsidiaries entered
into a $50 million committed revolving credit agreement provided by one bank.
This credit facility is guaranteed by the Company and is available for
borrowings by certain foreign subsidiaries of the Company. Drawings by foreign
subsidiaries of the Company can be made available to the Company or any of its
subsidiaries for use in its worldwide operations, subject to any legal or other
restrictions upon the free flow of funds from one segment, division or
subsidiary to another. Under the original terms of the agreement, only $25
million of the $50 million amount was available under the new facility. On
April 5, 1995, the Company and its four foreign subsidiaries amended the
agreement to increase the availability to $50 million under the facility. This
new credit facility may only be utilized after the borrowing availability under
the $225 million revolving credit agreement is fully utilized. The financial
covenants of the new $50 million credit agreement are similar to those of the
$225 million credit agreement. This new facility has an expiration date of
August 9, 1995. As of April 1, 1995, there were no amounts outstanding under
this facility.
The Company expects that it will continue to finance its working capital and
capital expenditure requirements primarily through short-term borrowings. 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.
On February 27, 1995, the Company entered into a Stock Purchase Agreement
("Purchase Agreement") with Samsung Electronics Co., Ltd. ("Samsung"), providing
for an ownership interest in the Company of up to 40.25%. Under the terms of
the Purchase Agreement, Samsung will purchase from AST 6.44 million newly issued
shares of Common Stock, representing approximately 19.9% of the currently
outstanding shares of Common Stock, at $19.50 per share, and will commence a
cash tender offer to purchase from the Company's stockholders 5.82 million
shares of Common Stock, representing approximately 18% of the currently
outstanding shares of Common Stock, at $22 per share. Concurrently with the
acceptance of the shares for purchase under the tender offer, Samsung will
purchase from AST 5.63 million additional newly issued shares of Common Stock at
$22 per share so that its aggregate ownership in AST, after completion of all of
the purchases, would be approximately 40.25%. The closing of each of the
purchases, other than the 19.9% investment, is subject to approval by the
stockholders of AST, among other conditions. Samsung may elect to close the
purchase of the 19.9% interest at any time, subject to regulatory approval and
certain other conditions.
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Assuming that the proposed investments by Samsung are completed, the estimated
net proceeds to be received by the Company from the transactions will be
approximately $240 million. The proceeds will be used for working capital,
including the financing of expected increases in accounts receivable, retirement
of bank debt, capital expenditure requirements and other general corporate
purposes. The Company's $50 million credit agreement dated February 9, 1995
requires the Company to utilize proceeds from an equity offering to repay any
amounts then outstanding under this facility. While the Company has no other
commitments for the use of the funds, the Company may choose to utilize proceeds
from the Samsung investment to repay some or all of the then current outstanding
borrowings under its $225 million credit agreement, which does not require any
repayments of principal until its September 30, 1996 termination date.
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
or successfully complete the Purchase Agreement with Samsung regarding its
equity investment in the Company. If the Company is unable to maintain access
to its existing financing sources or is unable to secure new sources, the
Company's ongoing operations would be adversely impacted. In addition,
continued financial 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.
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. The
interest rate has been adjusted to 4.94% per annum, effective July 11, 1994, and
will be adjusted once more on July 11, 1995 to the lower of either 5% or the
"lowest three month rate" within the meaning of Section 1274(d)(2) of the
Internal Revenue Code of 1986 as of July 11, 1995. Interest is paid once a year
on July 11th and there are no sinking fund requirements. The note also requires
the Company to maintain a standby letter of credit payable to Tandy in the
amount of 70% of the face value of the note or $67.7 million. Upon maturity of
the note, up to 50% of the initial principal amount of the promissory note may
be converted, at the option of the Company, into common stock of the Company
based upon its then fair market value, as defined in the promissory note. Under
the terms of the Purchase Agreement, Samsung has 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. The Company, however, will be obligated to reimburse Samsung
for any letter of credit fees incurred.
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield Option Notes ("LYONs") due December 14, 2013. The LYONs are zero coupon
convertible subordinated notes which were sold at a significant discount from
par value with a yield to maturity of 5.25% and a total value at maturity of
$315 million. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. Total proceeds received from the sale of the LYONs were
approximately $111.7 million, which have been utilized for working capital,
including the financing of increases in accounts receivable and inventories,
repayment of bank borrowings under the Company's revolving credit facilities,
new product development, and other general corporate purposes. The holder of a
LYON may require the Company to purchase 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 April 1, 1995 is
$117.7 million. The Purchase Agreement and investment by Samsung will not have
any impact on the terms of the LYON securities.
Additional Factors That May Affect Future Results
Future operating results may be impacted by a number of factors, including
worldwide economic and political conditions, industry specific factors, the
availability and cost of components, the Company's ability to timely develop and
produce commercially viable products at competitive prices, the Company's
ability to manage expense levels, the Company's ability to maintain access to
external financing sources and its financial liquidity,
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the continued financial strength of the Company's dealers and distributors,
the Company's ability to accurately anticipate customer demand.
The Company's future success is highly dependent upon its ability to 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 closely monitors new product introductions and product obsolescence,
there can be no assurance that such transitions will occur without adversely
affecting the Company's net sales, cash flow and profitability as resulted in
the first three quarters of fiscal 1995. In addition, if the Company is unable
to accurately anticipate the customer demand shift from 486-based systems to
systems utilizing Pentium processors, the product life cycles of the Company's
486-based systems could be shortened, which may require additional inventory
valuation reserves and may 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 dynamic random access memory chips ("DRAMs"), high quality
liquid crystal display panels 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 active-matrix displays,
CD-ROMs, application specific integrated circuits, and microprocessors, that are
currently purchased from single sources due to availability, price, quality or
other considerations. The Company purchases components pursuant to purchase
orders placed in the ordinary course of business and has no guaranteed supply
arrangements with single source suppliers. Reliance on suppliers generally
involves several 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 occur or component costs
significantly increase, the Company's net sales and profitability could be
adversely affected.
If the transactions contemplated by the Purchase Agreement are consummated,
the Company and Samsung will enter 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. The Company has received notice from LG
Semicon Co., Ltd., one of its suppliers of DRAM, that, it will no longer supply
such components to the Company, effective April 1995. For the twelve months
ended March 31, 1995, LG Semicon Co., Ltd. and its related companies supplied
approximately 15% of the Company's DRAM requirements. In the event that the
Company is unable to obtain such components from Samsung, it will be required to
find alternative sources of supply. If it is unable to locate sufficient
supply, or if the terms are less favorable than those previously obtained by the
Company, the Company's results of operations could be adversely affected. 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 the proposed arrangements.
The Company participates in a highly competitive volatile industry that is
characterized by dynamic customer demand patterns, rapid introduction of new
products, rapid technological advances, and rapid 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 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.
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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 committed 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. While the Company is
evaluating various financing alternatives, there can be no assurance that it
will be able to obtain any additional sources of financing. In the event the
Company is unable to maintain access to its existing financing sources or is
unable to obtain new or replacement sources and does not successfully complete
the Purchase Agreement with Samsung regarding its proposed equity investment in
the Company, there would be a material adverse effect on the Company's business
operations.
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. While stock balancing and price protection rights have not had a
material adverse impact on the Company's results of operations or liquidity to
date, there can be no assurance that the Company will not experience rates of
return or price protection adjustments that could have a material adverse impact
on the Company's net sales and profitability in the future.
The Company believes that, with the acquisition of additional manufacturing
facilities from Tandy Corporation and the acquisition of manufacturing
facilities both in the PRC and Ireland, production capacity should be sufficient
to support anticipated increases in unit volumes for the foreseeable future.
The Company also expects that gross inventory levels will increase to support
higher production volumes. However, if the Company is unable to obtain certain
key components, or to effectively forecast customer demand or manage its
inventory, these higher inventory levels may result in increased obsolescence
and adversely impact the Company's gross margins and results of operations.
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 experienced seasonally higher sales in
the second quarter of the fiscal year due to holiday demand for some of its
products in the consumer retail channel. The continued expansion of the
consumer retail business is likely to result in the increased seasonality of the
Company's business and its financial results being more dependent on retail
business fluctuations.
The Company's overall operating income varies within each geographic region.
Historically, the Company's Americas and Pacific Rim regions have made the
primary contributions to the Company's profitability. Therefore, should the
Company continue to experience significant revenue and/or profitability declines
in either region, this could significantly impact the Company's overall net
sales and profitability. 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 improved profitability throughout the European region in fiscal 1995.
However, if the Company is unable to achieve further manufacturing efficiencies
or offset future pricing actions with further cost reductions, Europe's
profitability could be adversely affected.
The Company's international operations are affected by foreign currency
fluctuations. The financial statements of the Company's foreign subsidiaries
are remeasured into the United States dollar functional currency for
consolidated reporting purposes. Gains and losses resulting from this
remeasurement process are recognized currently in the consolidated results of
operations. The Company attempts to minimize the impact of these remeasurement
gains and losses by adhering to a hedging strategy utilizing forward exchange
contracts and, to a lesser extent, foreign currency borrowings. The Company's
exposure to currency fluctuations will continue to increase as a result of the
expansion of its international operations. Significant fluctuations in currency
values could have an adverse effect on the Company's net sales, gross margins
and profitability.
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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 sells its products could have an adverse effect on the
Company's net sales and profitability.
The personal computer industry presents risks for claims of infringement of
patents, trademarks and copyrights. From time to time, the Company 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. Assuming the closing of the Samsung
investment, the Strategic Alliance Agreement dated February 27, 1995 provides
for negotiation and entering into of a cross license agreement between the
Company and Samsung to provide licenses to each other for certain of their
respective intellectual property rights, to, among other things, foster rapid
product development and lower-cost production.
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.
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.
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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 the
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. Management has
reviewed the allegations and the complaints and believes such allegations are
without merit. Management intends to vigorously defend these litigations.
While it is not possible to predict what impact the restatement might have on
these litigations or whether or not additional complaints may be filed,
management does not believe that the outcome of these matters will have a
material adverse impact on the Company's consolidated financial position or
results of operations; 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 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 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.
Management does not believe that the outcome of this dispute 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.
20
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.132 Credit Agreement dated February 9, 1995, among AST Research,
Inc., AST Canada, Inc., AST Europe Limited, AST Research
France S.A.R.L., AST Sweden AB and Bank of America NT & SA.
10.133 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.)
11. Computation of Net Income (Loss) Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K
On March 3, 1995, the Company filed a report on Form 8-K reporting
under Item 5 thereof regarding the agreement with Samsung Electronics
Co., Ltd., concerning the investment by Samsung Electronics Co., Ltd.
providing for an ownership interest of up to 40.25 percent in the
Company, as well as other strategic relationships, including component
supply and joint procurement, effective February 27, 1995.
AST and Advantage! are registered trademarks of AST Research, Inc. Ascentia,
Bravo, Premmia, PowerExec and Manhattan are trademarks of AST Research, Inc.
Pentium is a trademark of Intel Corporation. Tandy is a registered trademark of
Tandy Corporation. 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.
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: June 5, 1995 /s/ Bruce C. Edwards
------------ --------------------
Bruce C. Edwards
Executive Vice President
and Chief Financial Officer
21
<PAGE>
EXHIBIT 11
AST RESEARCH, INC.
Computation of Net Income (Loss) Per Share
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
---------------------- -------------------
April 1, April 2, April 1, April 2,
(In thousands, except per share 1995 1994 1995 1994
amounts) (Restated) (Restated)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings (loss) per share
- ---------------------------------
Shares used in computing primary
earnings (loss) per share:
Weighted average shares of
common stock outstanding 32,376 32,103 32,364 31,784
Effect of stock options treated
as equivalents under the
treasury stock method - 977 - 728
--------- ------ --------- ------
Weighted average common
and common equivalent
shares outstanding 32,376 33,080 32,364 32,512
--------- ------ --------- ------
Net income (loss) $(6,548) $13,214 $(67,678) $39,379
-------- ------- --------- -------
Earnings (loss) per share - primary $(.20) $.40 $(2.09) $1.21
====== ==== ======= =====
- -------------------------------------------------------------------------------
Fully diluted earnings (loss) per share
- ---------------------------------------
Shares used in computing fully diluted
earnings (loss) per share:
Weighted average shares of
common stock outstanding 32,376 32,103 32,364 31,784
Effect of stock options treated as
equivalents under the treasury
stock method - 983 - 805
Shares assumed issued on
conversion of Liquid Yield
Option Notes - 4,093 - 1,649
------- ------- -------- -------
Total fully diluted shares
outstanding 32,376 37,179 32,364 34,238
------- ------- -------- -------
Net income (loss) - fully diluted
earnings per share:
Net income (loss) - primary
earnings per share $(6,548) $13,214 $(67,678) $39,379
Adjustment for interest on LYONs,
net of tax - 890 - 1,066
------- ------- -------- -------
Adjusted net income (loss) - fully
diluted
earnings per share (6,548) 14,104 (67,678) 40,445
------- ------- -------- -------
Earnings (loss) per share - fully
diluted $ (.20) $ .38 $ (2.09) $1.18
======= ======= ======== =======
- -------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING RESTATED CONSOLIDATED BALANCE SHEETS AND RESTATED CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-END> APR-01-1995
<CASH> 67,464
<SECURITIES> 0
<RECEIVABLES> 482,930
<ALLOWANCES> 17,908
<INVENTORY> 354,702
<CURRENT-ASSETS> 935,684
<PP&E> 169,877
<DEPRECIATION> 66,751
<TOTAL-ASSETS> 1,075,835
<CURRENT-LIABILITIES> 558,825
<BONDS> 216,282
<COMMON> 324
0
0
<OTHER-SE> 294,163
<TOTAL-LIABILITY-AND-EQUITY> 1,075,835
<SALES> 1,805,781
<TOTAL-REVENUES> 1,805,781
<CGS> 1,615,222
<TOTAL-COSTS> 1,615,222
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,161
<INTEREST-EXPENSE> 11,561
<INCOME-PRETAX> (84,072)
<INCOME-TAX> (16,394)
<INCOME-CONTINUING> (67,678)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (67,678)
<EPS-PRIMARY> (2.09)
<EPS-DILUTED> (2.09)
</TABLE>
