<PAGE>
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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 December 31, 1994
-----------------
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 32,376,500 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on January 27, 1995.
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<PAGE>
AST RESEARCH, INC.
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Restated Consolidated Balance Sheets
at December 31, 1994 (Unaudited)
and July 2, 1994 3
Consolidated Statements of Operations
(Unaudited) for the three months and six months ended
December 31, 1994 (restated) and January 1, 1994 4
Consolidated Statements of Cash Flows
(Unaudited) for the six months ended
December 31, 1994 (restated) and January 1, 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 11-18
Part II. Other Information
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 21
</TABLE>
<PAGE>
AST RESEARCH, INC.
RESTATED CONSOLIDATED BALANCE SHEETS (NOTE 1)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31, July 2,
1994 1994
(In thousands, except share amounts) (Unaudited)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 68,654 $ 153,118
Accounts receivable, net of allowance for
doubtful accounts of $17,920 at December 31, 1994
and $17,564 at July 2, 1994 375,087 326,057
Inventories 351,362 333,729
Deferred income taxes 48,947 43,266
Other current assets 14,780 9,797
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Total current assets 858,830 865,967
Property and equipment 166,227 159,530
Accumulated depreciation and amortization (62,259) (56,089)
- ---------------------------------------------------------------------------------------
Net property and equipment 103,968 103,441
Goodwill, net of accumulated amortization of $4,932
at December 31, 1994 and $3,479 at July 2, 1994 27,536 29,220
Other assets 9,495 6,992
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$ 999,829 $1,005,620
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 75,000 $ 50,000
Accounts payable 252,579 209,579
Accrued salaries, wages and employee benefits 19,952 21,465
Other accrued liabilities 113,351 112,096
Income taxes payable 13,040 27,455
Current portion of long-term debt 398 398
- ---------------------------------------------------------------------------------------
Total current liabilities 474,320 420,993
Long-term debt 218,158 215,294
Deferred income taxes and other non-current liabilities 6,328 7,571
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares
authorized, 32,374,200 shares issued and
outstanding at December 31, 1994 and 32,333,750
shares at July 2, 1994 324 323
Additional capital 141,814 141,424
Retained earnings 158,885 220,015
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Total shareholders' equity 301,023 361,762
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$ 999,829 $1,005,620
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</TABLE>
See accompanying notes.
3
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------ ---------------------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
(In thousands, except per share amounts) 1994 1994 1994 1994
(Restated - Note 1) (Restated - Note 1)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $640,159 $677,011 $1,135,605 $1,191,420
Cost of sales 573,841 562,445 1,031,988 990,954
- -------------------------------------------------------------------------------------------------------------
Gross profit 66,318 114,566 103,617 200,466
Selling and marketing expenses 58,548 53,022 110,413 95,093
General and administrative expenses 21,567 19,698 42,936 37,288
Engineering and development expenses 8,648 10,403 18,550 20,647
- -------------------------------------------------------------------------------------------------------------
Total operating expenses 88,763 83,123 171,899 153,028
- -------------------------------------------------------------------------------------------------------------
Operating income (loss) (22,445) 31,443 (68,282) 47,438
Interest income 523 373 1,007 627
Interest expense (3,603) (2,581) (6,892) (4,186)
Other expense, net (1,461) (2,064) (1,771) (4,235)
- -------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (26,986) 27,171 (75,938) 39,644
Provision (benefit) for income taxes (5,262) 9,238 (14,808) 13,479
- -------------------------------------------------------------------------------------------------------------
Net income (loss) $(21,724) $ 17,933 $ (61,130) $ 26,165
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Net income (loss) per share:
Primary $ (.67) $ .55 $ (1.89) $ .81
Fully diluted $ (.67) $ .54 $ (1.89) $ .79
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Shares used in computing net
income (loss) per share:
Primary 32,369 32,454 32,358 32,228
Fully diluted 32,369 33,404 32,358 33,195
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</TABLE>
See accompanying notes.
4
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Six Months Ended
--------------------------------------
December 31, January 1,
(In thousands) 1994 1994
(Restated - Note 1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 1,088,368 $ 1,055,099
Cash paid to suppliers and employees (1,175,936) (1,091,042)
Interest received 1,122 614
Interest paid (4,697) (2,166)
Income tax refunds received 3,322 1,130
Income taxes paid (9,435) (8,706)
Other cash received (paid) 2,784 (5,137)
- ---------------------------------------------------------------------------------------------------
Net cash used in operating activities (94,472) (50,208)
Cash flows from investing activities:
Payment related to Tandy/GRiD acquisition -- (15,000)
Purchases of capital equipment (15,220) (11,186)
Proceeds from disposition of capital equipment 2,029 530
Sales (purchases) of other assets (1,559) 470
- ---------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,750) (25,186)
Cash flows from financing activities:
Short-term borrowings, net 25,000 (9,195)
Repayment of long-term debt (226) (121)
Proceeds from issuance of long-term debt, net -- 108,733
Proceeds from issuance of common stock 391 1,410
- ---------------------------------------------------------------------------------------------------
Net cash provided by financing activities 25,165 100,827
Effect of exchange rate changes on cash and cash equivalents (407) (1,606)
- ---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (84,464) 23,827
Cash and cash equivalents at beginning of period 153,118 121,600
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Cash and cash equivalents at end of period $ 68,654 $ 145,427
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</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>
- ---------------------------------------------------------------------------------------------------
Six Months Ended
--------------------------------------
December 31, January 1,
(In thousands) 1994 1994
(Restated - Note 1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $(61,130) $ 26,165
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 12,498 11,154
Provision (benefit) for deferred income taxes (6,358) 979
Gain on sale of capital equipment (435) --
Change in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable (45,975) (127,863)
Inventories (17,633) 38,205
Other current assets (8,151) 1,119
Accounts payable and accrued expenses 52,952 41,631
Income taxes payable (14,415) (1,010)
Other current liabilities (2,941) (44,933)
Exchange loss (gain) (2,884) 4,345
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities $(94,472) $ (50,208)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
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)
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Liabilities assumed -- $ 3,451
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Tax benefit of employee stock options -- $ 1,823
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</TABLE>
See accompanying notes.
6
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1994
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 six-month periods
ended December 31, 1994 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
six-month periods ended December 31, 1994 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 December 31, 1994 by $21.1 million from the amount of shareholders'
equity previously reported, and to reduce previously reported net loss for the
three- and six-month periods ended December 31, 1994 by $.6 million and $1.1
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 six-
month period ended December 31, 1994, the estimated tax benefit rate is less
than the U.S. statutory rate primarily due to estimates of the proportion of the
Company's fiscal 1995 consolidated income/loss which will be realized in lower
rate foreign tax jurisdictions, as well as the Company's inability to benefit
all of its deferred tax assets. 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 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>
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 six months
of fiscal 1995, the Company incurred cash expenditures of approximately $.7
million related primarily to the closure of its Fountain Valley, California
manufacturing facility. At December 31, 1994, approximately $14.5 million of
restructuring accruals remained for final restructuring activities, which the
Company expects to be completed by the end of the fourth quarter of fiscal 1995.
The Company expects these costs to represent a combination of future cash
expenditures and asset write-downs necessary to combine and restructure existing
worldwide manufacturing and distribution capacity, including the closure of its
Fountain Valley facility.
The Company believes that its restructuring activities were necessary in order
to redeploy and reorganize its worldwide operations after the June 1993
acquisition of Tandy's personal computer operations. However, no assurances can
be given that these restructuring actions will be successful or that similar
actions will not be required in the future.
8
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1994
Contingencies
In June 1989, Texas Instruments Inc. ("TI") advised the Company that it
believed certain AST(R) computer products infringe certain TI patents. On
January 4, 1994, the Company initiated litigation (the "California action") in
the U.S. District Court for the Central District of California against TI
alleging certain violations of licensing agreements, federal antitrust laws and
the California Unfair Practices Act. In addition, the Company alleged that TI
is infringing AST patents and that certain TI patents are invalid or
inapplicable. TI has alleged in the California action that the Company is
infringing patents owned by TI. On August 26, 1994, TI filed a lawsuit in the
U.S. District Court for the Eastern District of Texas against the Company
alleging infringement of patents in addition to those asserted by TI in the
California action. These litigations with TI were settled on February 7, 1995
and a Settlement Agreement and Release was entered into by the parties. The
Settlement Agreement and Release includes, in part, a patent cross-license
agreement between AST and TI for the calendar years 1995 through 2000, and
requires periodic royalty payments from AST to TI.
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 Securities Litigation. The AST 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 or the current
examinations will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
9
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 1994
The Company has been named as a defendant or co-defendant, generally with
other personal computer manufacturers, including IBM, AT&T, Unisys, Digital
Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in twelve
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 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 under its liability insurance policies, the Company's profitability
and financial condition may be adversely affected.
The Company is also subject to other legal proceedings and claims which 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 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 consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
December 31, July 2,
(In thousands) 1994 1994
- --------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 93,762 $ 99,959
Work in process 51,136 53,765
Finished goods 206,464 180,005
- --------------------------------------------------------------------
$351,362 $333,729
- --------------------------------------------------------------------
- --------------------------------------------------------------------
</TABLE>
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 1994
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 Six Months Ended
----------------------- -----------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
1994 1994 1994 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 89.6 83.1 90.9 83.2
- -----------------------------------------------------------------------------------------
Gross profit 10.4 16.9 9.1 16.8
- -----------------------------------------------------------------------------------------
Selling and marketing expenses 9.1 7.9 9.7 8.0
General and administrative expenses 3.4 2.9 3.8 3.1
Engineering and development expenses 1.4 1.5 1.6 1.7
- -----------------------------------------------------------------------------------------
Operating income (loss) (3.5) 4.6 (6.0) 4.0
Other expense, net (0.7) (0.6) (0.7) (0.7)
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes (4.2) 4.0 (6.7) 3.3
Provision (benefit) for income taxes (0.8) 1.4 (1.3) 1.1
- -----------------------------------------------------------------------------------------
Net income (loss) (3.4%) 2.6% (5.4%) 2.2%
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
Sales
Net sales for the six-month period ended December 31, 1994 decreased 5% to
$1.136 billion from $1.191 billion in the six-month period ended January 1,
1994. This decline in revenues was primarily due to lower 386 and 486 desktop
systems sales and decreased shipments of the Company's notebook system products.
The Company has experienced unanticipated product development and production
delays over the prior two quarters which have contributed to lower 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 707,000 computer systems in the first six months of fiscal 1995, a
decrease of 6% from the 752,000 units shipped in the same prior year period.
Revenues from desktop system products decreased 2% to $765 million for the
six-month period ended December 31, 1994 from $780 million in the comparable
prior year period. Increased sales of the Advantage!(R) 486DX and the Bravo(TM)
486DX were offset by declines in revenues from the Advantage! and Bravo 486SX,
Premmia(TM) 486DX and Tandy(R) desktop systems sales. Decreased sales of the
Company's 486-based desktop systems reflected the shift in demand toward the
Pentium(TM) desktop systems which accounted for 16% of total desktop systems
sales for the six-month period ended December 31, 1994 versus 3% in the
comparable fiscal 1994 period. Included within total desktop revenues were sales
of the Company's 80386 systems which declined to $3 million in the six-month
period ended December 31, 1994, compared to $41 million in the first six months
of fiscal 1994.
The Company's notebook computer product revenues declined 7% to $235 million
in the six-month period ended December 31, 1994 from $252 million in the
comparable prior year period. This decrease reflects a 8% reduction in unit
shipments to 115,000 for the six-month period ended December 31, 1994 from
125,000 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>
North American revenues (including Canada) decreased by 16% to $675 million
during the first six months of fiscal 1995 from the comparable prior year
period. Revenue from the consumer retail channel decreased 20% from the
comparable prior year period and accounted for 37% of total North American
revenues. Revenues related to Tandy branded systems sales are primarily
responsible for year-over-year decreased sales in the consumer retail channel.
Sales to the independent reseller/dealer channel for the six-month period ended
December 31, 1994 decreased 5% over the same prior year period and accounted for
48% of total North American revenues versus 42% in the comparable fiscal 1994
period. Revenue from the original equipment manufacturers ("OEM") channel
declined significantly during the first six months of fiscal 1995 due to the
completion of two large OEM contracts in the fourth quarter of fiscal 1994. The
Company expects revenues from the OEM channel to represent a smaller portion of
its revenue base in fiscal year 1995 compared to fiscal year 1994 as the Company
focuses on AST(R) branded products. Within the overall decrease in North
American revenues, sales to the national distributor channel grew slightly,
increasing 3% over the same prior year period. The national distributor channel
and the OEM channel accounted for 13% and 2%, respectively, of total North
American revenues during the six-month period ended December 31, 1994.
Six month fiscal 1995 international revenues rose 20% to $461 million from
$385 million in the comparable prior year period and accounted for 41% of total
fiscal 1995 revenues. The European region provided 66% of total international
revenues for the six-month period ended December 31, 1994, a 30% increase 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 Italy and Switzerland. Increased demand for the
Company's Advantage and Bravo 486-based desktop systems, Pentium desktops and
the Ascentia 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 new Ireland facility manufactured nearly all of the
desktop production requirements for the European region.
Pacific Rim revenues totaled $128 million in the six-month period ended
December 31, 1994, up 3% from the prior year total of $125 million. 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 People's Republic of China ("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. The
current trade dispute between the United States and China may result in trade
sanctions which could have an adverse impact on the Company's future sales
and/or operations. 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. Although Pacific Rim revenues rose during the six-month period ended
December 31, 1994, revenues to the PRC declined 32% compared to the same prior
year period. This decline was attributable to significantly increased
competition and to lower first 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. Revenues from the Company's Australian subsidiary increased 94%
in the first six months of fiscal 1995 over the same prior year period.
In the Company's Rest of World region, revenues increased 9% to $29 million in
the six-month period ended December 31, 1994 compared to the same prior year
period. This increase is primarily due to a 15% growth rate in the Company's
Middle East operations and a 19% growth rate in Latin America. However,
economic risks in Mexico as well as in other less developed countries, such as
the recent Mexican currency devaluation, could have a corresponding impact on
future sales and operating results in various less developed regions of the
world.
Revenues for the quarter ended December 31, 1994 decreased 5% to $640 million
from $677 million in the quarter ended January 1, 1994 due primarily to lower
notebook systems sales. Second quarter fiscal 1995 international revenues of
$290 million were 28% higher than the comparable prior year quarter, while North
American revenues decreased 22% to $350 million. During the second quarter of
fiscal 1995, the Company began shipments of the Bravo MS-T minitower and the
Bravo MS-L low-profile desktop. The Company also shipped new models of the
Manhattan(TM) V and P series of Pentium-based servers, as well as the Ascentia
810N value notebook.
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Gross Profit
Gross profit margins decreased to 9.1% in the six-month period ended December
31, 1994 from 16.8% in the six-month period ended January 1, 1994. This decline
in margins resulted primarily from unanticipated 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.
The personal computer industry continues to experience significant pricing
pressures and the Company believes that industry consolidation and restructuring
will result in an aggressive pricing environment and continued pressure on the
Company's gross profit margins during fiscal 1995. During the first six 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. When
comparing the six-month period ended December 31, 1994 to the six-month period
ended January 1, 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 second quarter fiscal 1995 gross margins by approximately two
percentage points when compared to results of currency fluctuations in the prior
year second quarter.
Operating Expenses
Total operating expenses increased 12.3% to $171.9 million for the six-month
period ended December 31, 1994 from $153.0 million for the six-month period
ended January 1, 1994. As a percentage of sales, operating expenses increased
to 15.1% from 12.8% 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 in anticipation of higher than realized
sales.
Selling and marketing expenses increased 16.1% to $110.4 million for the six
months ended December 31, 1994 from $95.1 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 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 9.7% for the six-month period ended
December 31, 1994 from 8.0% in the comparable prior year period.
General and administrative expenses increased by 15.1% to $42.9 million for
the six-month period ended December 31, 1994 from $37.3 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 Corporation's
personal computer manufacturing operations. As a percentage of sales, general
and administrative expenses increased to 3.8% in the first six months of fiscal
1995 from 3.1% in the comparable prior year period.
Engineering and development costs declined by 10.2% to $18.6 million for the
six-month period ended December 31, 1994 from $20.6 million in the comparable
prior fiscal period. Lower payroll and employee benefit costs were partially
offset by increased engineering material expenses and other professional fees
relating to new product development activities. Products introduced in the
first six months of fiscal 1995 included the Advantage! Adventure 4000 and
Advantage! 6000 multimedia desktops, Advantage! 8000 minitower, the Bravo
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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 and
the Ascentia 800N and 810N value notebooks. As a percentage of sales,
engineering and development expenses declined to 1.6% for the period ended
December 31, 1994 from 1.7% in the comparable prior year period.
Total operating expenses for the quarter ended December 31, 1994 increased
6.8% to $88.8 million from $83.1 million in the same fiscal 1994 quarter. As a
percentage of sales, operating expenses increased to 13.9% from 12.3% in the
prior year quarter. The overall increase in spending is primarily due to
increased payroll costs consistent with the Company's worldwide expansion and
expanded sales and marketing activities.
Other Income and Expense
For the six-month period ended December 31, 1994, the Company had net interest
expense of $5.9 million compared to $3.6 million in the corresponding fiscal
1994 period. Interest expense increased as a result of the additional interest
expense related to the note payable to Tandy, the debt associated with the
Company's December 1993 issuance of Liquid Yield Option Notes and increased
utilization of the Company's bank credit facilities.
In the first six months of fiscal 1995, the Company recognized net other
expenses of $1.8 million compared to $4.2 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 six-month
period ended December 31, 1994. This compares to an effective income tax
provision of approximately 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 $384.5 million at December 31, 1994 included cash and cash
equivalents of $68.7 million compared 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 $75.0 million and $50.0 million at December 31, 1994
and July 2, 1994, respectively. During the first six months of fiscal 1995, the
Company used $94.5 million of cash to fund its operating loss for the period, as
well as increased levels of accounts receivable consistent with increased
international sales 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 an increase in capital expenditures and
increased purchases of other assets in fiscal 1995. Capital expenditures
totaled $15.2 million in the first six months of fiscal 1995 compared to $11.2
million in the prior year period and consisted primarily of additions to plant
and engineering equipment in the Far East and Ireland.
The Company intends to fund its fiscal 1995 cash requirements through a
combination of cash on hand, cash provided by operations, available borrowings
under its committed revolving credit facilities, and possible future public or
private debt and/or equity offerings. On December 23, 1994, the Company amended
its $300 million unsecured committed revolving credit agreement by reducing the
total amount of the facility to $225 million and securing the credit facility
with a pledge of all of the Company's domestic United States assets. The
amended agreement also changed certain financial covenants, thereby preventing a
possible event of default under the prior
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agreement due to the Company's net loss for the quarter ended December 31, 1994.
The amended revolving credit agreement retains the original maturity date of
September 30, 1996 and 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 December 31, 1994, there
was $70 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
amended credit agreement, the Company had the ability at December 31, 1994, to
utilize a total of $152 million under the agreement. The Company also had $5
million outstanding under an uncommitted money market line of credit at December
31, 1994. The Company also has various letter of credit facilities available for
use by the Company and its subsidiaries.
On February 9, 1995, the Company and four of its 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 use by certain
subsidiaries of the Company. Drawings by subsidiaries of the Company can be
made available to the Company for use in its operations. Under the terms of the
agreement the Company has the ability to initially utilize $25 million of the
new facility. The second $25 million will be available upon completion of
certain conditions, which include, among others, the granting of certain
security interests to the bank which the Company expects to complete within 60
days. This new credit facility may only be utilized after the borrowing
availability under the amended $225 million revolving credit agreement is fully
utilized. The financial covenants of the new $50 million credit agreement are
similar to those of the amended $225 million credit agreement. This new
facility has an expiration date of August 9, 1995.
The Company will continue to incur short-term borrowings in order to finance
working capital and capital expenditure requirements. The Company's ability to
fund its activities from operations is directly dependent upon its rate of
growth, ability to effectively manage its inventory, the terms under which it
extends credit to its customers 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. The Company is actively pursuing
additional sources of financing which it believes are necessary for the
continued growth of the Company. Efforts include the structuring of a non-U.S.
based trade receivables securitization financing as well as potential equity
investments in the Company. On February 9, 1995, the Company announced that it
is in discussions with certain parties, including Samsung Electronics Co., Ltd.,
regarding a potentially significant minority investment in the Company and
possible strategic business arrangements. 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
additional sources of financing or reach any agreements with certain parties
regarding any potential equity investments in the Company. If the Company is
unable to maintain access to its existing financing sources or is unable to
obtain new sources, the Company's ongoing operations would be adversely
impacted. In addition, continued financial losses by the Company will 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.
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield Option Notes ("LYONs") due December 14, 2013. The LYONs are zero coupon
convertible subordinated notes which were sold at a significant discount from
par value with a yield to maturity of 5.25% and a total value at maturity of
$315 million. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. Total proceeds received from the sale of the LYONs were
approximately $111.7 million, which have been utilized for working capital,
including the financing of expected increases in accounts receivable and
inventories, repayment of bank
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borrowings under the Company's revolving credit facilities, new product
development, and other general corporate purposes. The holder of a LYON may
require the Company to purchase its LYON 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 December 31, 1994 is $117.7 million.
Additional Factors That May Affect Future Results
Future operating results may be impacted by a number of factors, including
worldwide economic and political conditions, industry specific factors, the
availability and cost of components, the Company's ability to timely develop and
produce commercially viable products, the Company's ability to manage expense
levels in response to lower gross profit margins, the Company's ability to
maintain access to external financing sources and its financial liquidity, the
continued financial strength of the Company's dealers and distributors, the
Company's ability to accurately anticipate customer demand, and the Company's
ability to successfully complete the integration of the acquired Tandy/GRiD
operations into the Company's business model.
The Company's future success is highly dependent upon its ability to 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 it did in the
first quarter 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 Memories and high quality liquid
crystal display screens. These shortages have occasionally resulted in the
Company's inability to procure these components in sufficient quantities to meet
demand for its products. In addition, a number of the Company's products
include certain components, such as active-matrix displays, CD-ROMs, application
specific integrated circuits, and microprocessors, that are currently purchased
from single sources due to availability, price, quality or other considerations.
The Company purchases components pursuant to purchase orders placed in the
ordinary course of business and has no guaranteed supply arrangements with
single source suppliers. 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.
The Company participates in a highly volatile industry that is characterized
by dynamic customer demand patterns, rapid introduction of new products, rapid
technological advances, and industrywide competition resulting in an extremely
competitive pricing environment with downward pressure on gross margins. The
Company anticipates that the personal computer industry will continue to
experience intense price competition and dramatic price reductions during fiscal
1995. There can be no assurance that future pricing actions by the Company and
its competitors will not adversely impact the Company's net sales and
profitability.
Consistent with industry practice, the Company provides certain of its larger
distributors, consumer retailers and dealers with stock balancing and price
protection rights that permit these distributors, retailers and dealers to
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return slow-moving products to the Company for credit or to receive price
adjustments if the Company lowers the price of selected products within certain
time periods. There can be no assurance that the Company will not experience
rates of return or price protection adjustments that could have a material
adverse impact on the Company's net sales and profitability in the future.
The Company believes that, with the acquisition of additional manufacturing
facilities from Tandy Corporation and the acquisition of manufacturing
facilities both in the PRC and Ireland, production capacity should be sufficient
to support anticipated increases in unit volumes. The Company also expects 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. Additionally, if the Company
is unable to bring its Texas manufacturing operation into full production, this
could adversely impact the Company's net sales, gross profit and profitability.
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.
The Company's international operations are affected by foreign currency
fluctuations. The financial statements of the Company's foreign subsidiaries
are remeasured into the United States dollar functional currency for
consolidated reporting purposes. Gains and losses resulting from this
remeasurement process are recognized currently in the consolidated results of
operations. The Company attempts to minimize the impact of these remeasurement
gains and losses by adhering to a hedging strategy utilizing forward exchange
contracts and, to a lesser extent, foreign currency borrowings. The Company's
exposure to currency fluctuations will continue to increase as a result of the
expansion of its international operations. Significant fluctuations in currency
values could have an adverse effect on the Company's net sales, gross margins
and profitability.
The Company's international operations may also be affected by changes in
United States trade relationships, 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 may be
notified that certain of its products may infringe upon the intellectual
property rights of others. The Company generally evaluates all such notices on
a case-by-case basis to determine whether licenses are necessary or desirable.
If such claims are made, there can be no assurance that licenses will be
available on commercially reasonable terms or that retroactive royalty payments
on sales of the Company's computers will not be required. In addition,
substantial costs may be incurred in disputing such claims. The Company
believes that the actions it takes to avoid or minimize the impact to the
Company of such claims are prudent; however, there can be no assurance that such
claims will not occur or, if successful, would not have a material adverse
effect on the Company's business operations and profitability.
The Company's ability to compete is largely dependent upon its financial
strength and its ability to adequately fund its operations. 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 dependent upon its continued access to sources of
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financing. The Company is actively pursuing additional sources of financing
which it believes are necessary for the continued growth of the Company. While
the Company is pursuing various alternatives, there can be no assurance that
such efforts will be successful. In the event the Company is unable to maintain
access to its existing financing sources or is unable to obtain new sources,
there would be a material adverse effect on the Company's business operations.
The Company's primary means of distribution remains third-party computer
resellers and consumer channels. While the Company continuously monitors and
manages the credit it extends to resellers to limit its credit risk, the
Company's business could be adversely affected in the event that the financial
condition of third-party computer resellers weakens. In the event of the
financial failure of a major reseller, the Company would experience disruptions
in its distribution as well as the loss of the unsecured portion of any
outstanding accounts receivable.
The Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, and certain manufacturing
operations are located near major earthquake faults which have experienced
earthquakes in the past. While the Company does carry insurance at levels
management believes is prudent, in the event of a major earthquake affecting one
or more of the Company's facilities, it is likely that insurance proceeds would
not cover all of the costs incurred and, therefore, the operations and operating
results of the Company could be adversely affected.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's participation
in the highly dynamic personal computer industry often results in significant
volatility in the Company's common stock price.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
In June 1989, Texas Instruments Inc. ("TI") advised the Company that it
believed certain AST computer products infringe certain TI patents. On January
4, 1994, the Company initiated litigation (the "California action") in the U.S.
District Court for the Central District of California against TI alleging
certain violations of licensing agreements, federal antitrust laws and the
California Unfair Practices Act. In addition, the Company alleged that TI is
infringing AST patents and that certain TI patents are invalid or inapplicable.
TI has alleged in the California action that the Company is infringing patents
owned by TI. On August 26, 1994, TI filed a lawsuit in the U.S. District Court
for the Eastern District of Texas against the Company alleging infringement of
patents in addition to those asserted by TI in the California action. These
litigations with TI were settled on February 7, 1995 and a Settlement Agreement
and Release was entered into by the parties. The Settlement Agreement and
Release includes, in part, a patent cross-license agreement between AST and TI
for the calendar years 1995 through 2000, and requires periodic royalty payments
from AST to TI.
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 Securities Litigation. The AST 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 received an inquiry letter dated December 20, 1994 from the Office
of Consumer Affairs of the Securities and Exchange Commission ("SEC"). The
letter asked for a report and documentation concerning a September 1, 1994
newspaper article on the Company's August 31, 1994 announcement that it
anticipated lower first quarter performance. The Company is cooperating with
the SEC in this inquiry.
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Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1994 Annual Meeting of Stockholders was held on October 27,
1994 in Newport Beach, California. Matters submitted to a vote of security
holders included:
(1) The election of the following seven directors to hold office until the
next annual meeting and until their successors are elected and duly
qualified:
Safi U. Qureshey Carmelo J. Santoro
Bruce C. Edwards James T. Schraith
Richard J. Goeglein Delbert W. Yocam
Jack W. Peltason
(2) The approval of the amendment of the Company's Certificate of
Incorporation to increase the authorized number of shares of common
stock.
In Favor 19,649,633
Opposed 10,244,512
Abstentions 129,685
(3) The approval of the amendment of the Company's Certificate of
Incorporation to establish the size of the Board.
In Favor 24,459,727
Opposed 4,171,920
Abstentions 139,327
Broker Non-Votes 1,252,856
(4) The approval of the AST Research, Inc. Performance Based Annual
Management Incentive Plan.
In Favor 23,080,615
Opposed 4,858,255
Abstentions 175,314
Broker Non-Votes 1,909,646
(5) The approval of the amendment of the 1989 Long-Term Incentive Program to
increase the number of shares reserved for issuance under the Program.
In Favor 9,227,120
Opposed 11,723,034
Abstentions 169,199
Broker Non-Votes 8,904,477
(6) The approval of the AST Research, Inc. 1994 One-Time Grant Stock Option
Plan for Non-Employee Directors.
In Favor 13,382,120
Opposed 7,149,264
Abstentions 207,166
Broker Non-Votes 9,285,280
(7) The approval of the appointment of Ernst & Young as independent auditors
for the fiscal year ending July 1, 1995.
In Favor 29,741,856
Opposed 184,617
Abstentions 97,157
Broker Non-Votes 200
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Item 5. Other Information
On February 9, 1995, the Company announced that it is in discussions with
certain parties, including Samsung Electronics Co., Ltd., regarding a
potentially significant minority investment in the Company and possible
strategic business arrangements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.131 Third Amendment dated December 23, 1994 to Credit Agreement dated
September 30, 1993 among AST Research, Inc., Bank of America NT &
SA, as administrative agent, co-agent and issuing bank, National
Westminster Bank Plc, CIBC, Inc. and Shawmut Bank, N.A., as co-
agents.
11. Computation of Net Income (Loss) Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K
On October 18, 1994, the Company filed a report on Form 8-K reporting
under Item 5 thereof the announcement of fiscal first quarter revenue of
approximately $495 million and the consolidation of its worldwide mobile
computing manufacturing in Taiwan and the concurrent closure of its
Fountain Valley, California manufacturing facility February 1, 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. 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 Six Months Ended
--------------------- ----------------------
Dec. 31, Jan. 1, Dec. 31, Jan. 1,
(In thousands, except per share amounts) 1994 1994 1994 1994
(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 32,369 31,659 32,358 31,625
Effect of stock options treated as
equivalents under the treasury
stock method -- 795 -- 603
-------- ------- -------- -------
Weighted average common
and common equivalent
shares outstanding 32,369 32,454 32,358 32,228
-------- ------- -------- -------
Net income (loss) $(21,724) $17,933 $(61,130) $26,165
-------- ------- -------- -------
Earnings (loss) per share - primary $ (.67) $ .55 $ (1.89) $ .81
======== ======= ======== =======
- ----------------------------------------------------------------------------------------------
Fully diluted earnings (loss) per share
- ---------------------------------------
Shares used in computing fully diluted
earnings (loss) per share:
Weighted average shares of
common stock outstanding 32,369 31,659 32,358 31,625
Effect of stock options treated as
equivalents under the treasury
stock method -- 890 -- 715
Shares assumed issued on conversion
of Liquid Yield Option Notes -- 855 -- 855
-------- ------- -------- -------
Total fully diluted shares outstanding 32,369 33,404 32,358 33,195
-------- ------- -------- -------
Net income (loss) - fully diluted earnings
per share:
Net income (loss) - primary earnings
per share $(21,724) $ 17,933 $( 61,130) $ 26,165
Adjustment for interest on LYONs,
net of tax -- 176 -- 176
-------- ------- -------- -------
Adjusted net income (loss) - fully diluted
earnings per share 21,724) $ 18,109 $( 61,130) $ 26,341
-------- ------- -------- -------
Earnings (loss) per share - fully diluted $ (.67) $ .54 $ (1.89) $ .79
-------- ------- -------- -------
- ----------------------------------------------------------------------------------------------
</TABLE>
1
<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> 6-MOS
<FISCAL-YEAR-END> JUL-01-1995
<PERIOD-END> DEC-31-1994
<CASH> 68,654
<SECURITIES> 0
<RECEIVABLES> 393,007
<ALLOWANCES> 17,920
<INVENTORY> 351,362
<CURRENT-ASSETS> 858,830
<PP&E> 166,227
<DEPRECIATION> 62,259
<TOTAL-ASSETS> 999,829
<CURRENT-LIABILITIES> 474,320
<BONDS> 218,158
<COMMON> 324
0
0
<OTHER-SE> 300,699
<TOTAL-LIABILITY-AND-EQUITY> 999,829
<SALES> 1,135,605
<TOTAL-REVENUES> 1,135,605
<CGS> 1,031,988
<TOTAL-COSTS> 1,031,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,193
<INTEREST-EXPENSE> 6,892
<INCOME-PRETAX> (75,938)
<INCOME-TAX> (14,808)
<INCOME-CONTINUING> (61,130)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,130)
<EPS-PRIMARY> (1.89)
<EPS-DILUTED> (1.89)
</TABLE>
