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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-K405/A
Amendment No. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended July 2, 1994
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
Commission file number 0-13941
__________________________
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-3525565
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
16215 Alton Parkway
Irvine, California 92718
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (714) 727-4141
__________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
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Common Stock, par value $.01
__________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting Common Stock held by
non-affiliates of the registrant was approximately $504,528,525 (computed using
the closing price of $16.94 per share of Common Stock on August 26, 1994 as
reported by NASDAQ). There were 32,352,000 shares of the registrant's Common
Stock, par value $.01 per share, outstanding on August 26, 1994.
__________________________
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders scheduled to be held on October 27, 1994, which Proxy
Statement will be filed no later than 120 days after the close of the
registrant's fiscal year ended July 2, 1994, are incorporated by reference in
Part III of this Annual Report on Form 10-K.
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PART I
Item 1. Business
General
AST Research, Inc. ("AST" or the "Company") was incorporated in
California on July 25, 1980 and reincorporated as a Delaware corporation
effective July 1, 1987. The Company designs, manufactures, markets, services and
supports a broad line of personal computers including desktop, server and
notebook computer systems marketed under the Advantage!(R), Ascentia(TM),
Bravo(TM), Premmia(TM), Manhattan(TM) SMP and PowerExec(TM) brand names. The
Company's products feature advanced design characteristics while remaining
compatible with established industry standards. The Company currently markets
its products through an extensive worldwide distribution network of retail
computer dealers, consumer retailers, international and regional distributors,
value added dealers ("VADs"), value added resellers ("VARs"), original equipment
manufacturers ("OEMs") and U.S. Government ("GSA") approved dealers. See further
discussions under Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition and "Additional Factors That May Affect
Future Results" included therein.
Significant Business Developments in Fiscal 1994
Effective September 1, 1993, the Company completed the purchase of
certain assets and assumption of certain liabilities of Tandy/GRiD France.
Assets acquired consist primarily of inventory, equipment and leased real
property in France. In addition, the Company purchased additional Tandy/GRiD
inventory in Europe and other certain assets in the United States. The purchase
price for the Tandy/GRiD France acquisition and the additional European
inventory and U.S. assets was $6.7 million and was paid through an increase of
the principal amount in the three-year promissory note payable to Tandy
Corporation from $90 million to $96.7 million.
On December 14, 1993, the Company issued $315 million par value of
Liquid Yield Option Notes ("LYONs") due December 14, 2013. The LYONs are zero
coupon convertible subordinated notes which were sold at a significant discount
from par value with a yield to maturity of 5.25% and a total value at maturity
of $315 million. Total proceeds received from the sale of the LYONs were
approximately $111.7 million, which have been utilized for working capital,
including the financing of expected increases in accounts receivable and
inventories, repayment of bank borrowings under the Company's revolving credit
facilities, new product development, and other general corporate purposes.
In May 1994, the Company amended its $225 million unsecured revolving
credit facility to increase the amount to $300 million while keeping the
termination date of September 30, 1996. On August 31, 1994, the Company
announced that it expects its first quarter fiscal 1995 revenues to be flat
relative to the first quarter of fiscal 1994 and down from the previous fiscal
1994 fourth quarter resulting in a net loss for the first quarter of fiscal
1995. Depending on the size of the projected loss for the first quarter of
fiscal 1995, the Company then could be in default of specific covenants in its
committed $300 million revolving credit facility. See further discussion
included in "Liquidity and Capital Resources" under Item 7. Management's
Discussion and Analysis of Results of Operations and Financial Condition.
In June 1994, the Company completed an agreement for the sale and
leaseback of its Hong Kong manufacturing facility. The Company realized a
pretax gain of $6.0 million of which $4.3 million was recognized and included in
"Other income (expense), net" in the accompanying Consolidated Statement of
Operations for the year ended July 2, 1994. The leaseback period is for one
year fixed plus one additional year at the option of the Company.
During fiscal 1994, the Company increased its international presence
by forming wholly-owned subsidiaries in Norway, Denmark, Ireland, Korea and
Malaysia. As part of the Company's worldwide manufacturing restructuring plan,
the Company opened a new European manufacturing facility in Limerick, Ireland.
The Company's Scotland facility, which was acquired as part of the Company's
purchase of Tandy Corporation's personal computer operations, terminated
operations during the fourth fiscal 1994 quarter. The Company also established
a new sales and manufacturing subsidiary in Tianjin, China through a joint
venture with a corporation affiliated with the Chinese government.
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Industry Segments and Geographic Information
AST operates in one industry segment: the manufacture and sale of
personal computers, including desktop, server, and notebook computer systems. A
summary of the Company's operations by geographic area including net sales,
operating income (loss) and identifiable assets is incorporated herein by
reference from Note 11 of Notes to Consolidated Financial Statements.
Business Strategy and Market
The Company's business strategy is to utilize its technological
expertise, worldwide manufacturing capabilities, brand name recognition and
distribution channels to offer its customers a broad range of personal computers
to meet a variety of user needs. The Company believes that its success depends
upon the ability to identify products and product features required by customers
and to design and produce high quality, innovative products compatible with
industry standards on a timely basis and at competitive prices. As new
technology and faster, more powerful microprocessors have become available, the
Company has concentrated its efforts in the higher performance end of the
personal computer market. In pursuing this strategy, the Company has developed
a multi-channel and multi-brand distribution approach which targets a variety of
price points and user requirements. These include the Advantage! computer
product line which is designed for the consumer retail market, the value
oriented Bravo computer product line, the high performance Premmia and Manhattan
SMP computer product lines, and the PowerExec and Ascentia lines of notebook
computers. Within the various brands, the Company offers a full range of
products, including desktop systems from the entry level 80386SX-based systems
to high-end Pentium(TM) systems and servers, monochrome and color notebooks and
the fully symmetric multiprocessor line. The Company's personal computers
incorporate either Industry Standard Architecture ("ISA"), Extended Industry
Standard Architecture ("EISA"), or Peripheral Component Interconnect ("PCI") Bus
Architecture and are compatible with major industry standard operating systems
including MS-DOS(R), UNIX/XENIX, SCO UNIX, Novell NetWare(R) and OS/2(R). The
Company pursues a strategy whereby its products retain their compatibility with
new major industry standards as they are developed.
The personal computer industry is characterized by intense price
competition and the Company believes that the price and performance features of
its products are key factors in the purchase decisions of its customers and, as
a result, has developed a series of product lines each specifically targeted at
certain market segments that are served through various channels of the
Company's distribution network. Price reductions are often determined with
reference to then existing competitive factors, including the prevailing pricing
strategy of other major computer manufacturers. The Company's business strategy
includes the introduction of new products that are priced aggressively to
highlight the price and performance advantages of AST products. The Company
intends for its products to remain competitively priced and will adjust its
prices as needed to maintain or grow its market share. These adjustments may
negatively impact the Company's profitability.
The Company believes that its strategy of establishing a worldwide
presence in countries with developing markets for computer products and
providing products that meet local needs, such as customized systems and local
language documentation, has provided significant opportunity for revenue growth.
International market expansion has been a factor in the Company's growth during
fiscal 1994. Overseas revenues increased 46% in fiscal 1994 over the prior year
and contributed 36% of total worldwide revenues. International revenues
contributed 41% and 44% of total revenues in fiscal 1993 and 1992, respectively.
During fiscal 1995, the Company intends to continue pursuing developing markets
in both Russia and India while concurrently focusing on its Northern Europe and
Pacific Rim markets.
Products
The Company's products range from portable systems to superservers
under the Advantage!, Ascentia, Bravo, PowerExec, Premmia and Manhattan brand
names. The Company also manufactures certain custom desktop system and board-
level products for OEM customers. The Company offers a complete family of
personal computer systems products designed to meet various performance levels
and price points. During fiscal year 1995, the Company intends to enhance its
desktop computer product lines with faster processing power and deluxe features
to satisfy the complex needs of the home, small-business and corporate user.
The Company also plans to expand its mobile computing solutions under the
Ascentia brand name with high-performance, value-oriented and subnotebook
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models. In addition, the Company intends to expand its server products under
its Manhattan brand name and will continue to introduce new products,
technologies and computing solutions for the network environment.
Advantage!
AST's Advantage! family, sold primarily through the consumer retail
market, offers low-cost, ready-to-use desktop and notebook systems designed for
educational, entertainment, home office or business applications. The
Advantage! line is designed to offer a total solution-based package with pre-
installed software, to enhance the system's "ease of use."
The Advantage! family is highlighted by the Adventure multimedia
system that features AST Works(TM) software, considered one of the industry's
most comprehensive and easy-to-use interfaces that combines video help, numerous
productivity tools and telephony capabilities. The numerous pre-installed
software titles and features available on Advantage! models include Microsoft's
Encarta(TM), an electronic encyclopedia; a built-in fax/modem; PRODIGY(R),
America Online(R) and CompuServe(R) on-line information service software starter
kits; and personal finance, home management and graphics programs. Other models
in the pre-configured product line include Advantage! Pro desktop, Advantage!
Plus mini-tower and Advantage! Explorer notebook computers. The Advantage! line
supports a wide range of processing power including 486SX/33, 486SX2/50,
486DX2/66, 486DX4/100 and 60MHz Pentium processors. In addition, these products
are covered by a one year on-site service program and a 24 hour hotline.
Ascentia
The Ascentia family consists of high performance notebook computers
which encompass mobile computing solutions with extensive pre-loaded business
and communications software. These notebook computers also have high
performance processing capabilities with Intel DX2 50MHz and DX4 75MHz
CPUs/processors. In addition to the connectivity and communication solutions
provided through compatibility with more than 150 PCMCIA cards, the Ascentia
notebook computer has among the industry's largest color displays and up to
eight hours of battery life with intelligent power management. The Ascentia
900N high performance model is the successor to the PowerExec notebook computer.
Other models include the Ascentia 500S subnotebook and Ascentia 800N value
notebook. These products include a three year worldwide warranty with a one
year ExeCare(SM) service program and a 48 hour rapid repair service.
Bravo
The Bravo family is AST's value desktop line that provides both small
businesses and large corporate users with a range of computing options. As the
Company's price leader, the value line offers a wide range of processing speeds
focused on business-oriented applications, such as word processing, electronic
mail, graphics and animation programs. The Bravo line was the first AST brand
to offer energy-efficient computers that meet the EPA's "Energy Star"
requirements and now also comply with the Video Electronic Standards Association
("VESA") standard for power management.
The family has multiple lines of computers to satisfy the diverse
needs of the home office and business user. They include the mid-size Bravo LC
desktop, which offers a multimedia model; the Bravo LP low-profile desktop,
winner of PC/Computing's 1993 Most Valuable Product Award; the Bravo NB
notebook, which includes color and color plus local bus enhanced graphics for
fast video performance; the Bravo MT high-performance mini-tower desktop; and
the recently introduced Bravo MS desktop, which incorporates the latest advances
in bus architecture and cache along with the 'plug-and-play'/PCI configuration
and Pentium Overdrive(R) Technology. The new Bravo models, which offer enhanced
video performance, accelerated graphics capabilities and greater expandability
than previous Bravo systems, utilize processors ranging from the 486/25 through
the 60MHz Pentium. In addition, all Bravo systems are covered with a three year
warranty, which includes a one year on-site service program.
Premmia Desktops
The Premmia high-performance desktop line, which includes Pentium and
486-based models, incorporates advanced technologies to suit complex computing
needs. The systems utilize the highest performing standard PCI local bus I/O
architecture and support the 'plug-and-play' configuration. In addition, the
Premmia line offers high-
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performance multimedia systems which combine accelerated full-motion video,
support for 32-bit operating systems, 8MB of memory expandable to 128MB, up to
512KB of secondary cache, five EISA bus master expansion slots and five drive
bays. The Premmia desktop models include the 4/66d, LX P/60, GX and MX and
support Pentium processors up to 90 and 100MHz. Premmia 486 models also feature
high-end video, expandability and upgradeability. These products include a
three year warranty which includes a one year on-site and two year depot service
program.
Premmia Servers
AST's Premmia server line is designed to meet a diverse level of price
and performance requirements in the growing server marketplace. The new line
includes the Premmia MTE, a full-featured, cost-effective server in a mini-tower
enclosure, highly suitable for work groups and small to mid-sized networks.
Also included is the Premmia SE, a high-powered, highly expandable, full-size
system ideal for large departments or client/server computing. Both models are
EISA-based servers with stringent security and upgradeability features which
utilize 486DX/33, 486DX2/66 and 60MHz Pentium processors. During fiscal year
1995, the Company intends to introduce all server products under the Manhattan
brand name.
Manhattan SMP
The Manhattan SMP computer is AST's fully symmetric multiprocessor,
highly effective as a mini-computer alternative or application server. It also
can be used to consolidate large LAN environments. It was designed to be run
with the Pentium processor and is the Company's most powerful system to date.
It can run up to five Pentium processors and its fully symmetric design allows
the system to scale easily with the simple addition of processors. The
Manhattan SMP computer provides high-availability through features important in
today's mission critical environments: ECC memory that corrects memory while
the system is running; optional redundant power supplies to provide continued
system operation and a hardware disk array subsystem for redundancy.
PowerExec
The PowerExec notebook family gives users maximum levels of computing
flexibility and enhanceability. The PowerExec incorporates a 9 1/2" active
matrix screen and allows up to 6 3/4 hours of battery life for non-stop
computing. Corporate professionals and business travelers alike benefit from
the PowerExecs 386SL, 486/25SL and 486/33SL microprocessor, PCMCIA support,
removable and upgradeable hard drive, DOS 6.0, Windows 3.1 and upgradeable
display and memory. These products also include the ExeCare Plus one year
warranty. During fiscal year 1995, the Company intends to have the Ascentia
notebook computer line supersede the PowerExec notebook computer line.
Tandy/GRiD/Victor
As part of the Company's acquisition of Tandy's personal computer
operations, the Company acquired Tandy's GRiD and Victor(R) product lines and
the right to supply personal computers to Tandy Corporation's retail operations
under a three year supply agreement. These lines included various models of
desktop and notebook personal computers (non pen-based products) as well as the
GRiD Convertible(TM), GRiD PalmPad(R) and PalmPad SL, and GRiDPAD(R) 2390 pen-
based systems. During the first and second quarters of fiscal 1994, the Company
focused its efforts with respect to the acquired product lines on manufacturing
personal computers for sale to Tandy Corporation under the supply agreement and
integrating the acquired GRiD and Victor non pen-based product lines into its
product families. Beginning in the third quarter of fiscal 1994, the Company
commenced a reassessment of the GRiD non pen-based product lines and product
capabilities, the current and future prospects for GRiD products and the costs
involved in continuing the GRiD brand name. Based on this review and the
Company's success in transitioning certain GRiD customers to the Company's
product lines, the Company decided in the fourth quarter to eventually
discontinue all manufacturing, marketing and sales efforts related to the
acquired GRiD non pen-based product lines.
By the end of the second quarter of fiscal 1994, the Company completed
an analysis of the inventory acquired from Tandy Corporation by product line and
determined that it had acquired unique purchased parts and finished goods
sufficient to manufacture approximately 40,000 units of pen-based products. In
the third quarter of fiscal 1994, the Company increased its focus on the level
of sales of the GRiD pen-based products relative to the level of acquired pen-
based products inventories. However, the sales volumes attained by the Company
in the first three quarters of
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fiscal 1994, which were consistent with the sales volumes achieved by GRiD in
the three fiscal quarters preceding the acquisition, only utilized approximately
25% of the total quantity of pen-based products acquired. Accordingly, the
Company believed that its sales experience substantiated that a significant
portion of the acquired pen-based products inventory was excess and/or obsolete.
As originally reported, in the fourth quarter of fiscal 1994, the Company
completed its allocation of the purchase price and reduced the preliminary value
assigned to such inventory by $33.6 million and increased the carrying value of
goodwill arising from the Tandy acquisition by a corresponding amount.
The consolidated financial statements for the year ended July 2, 1994
contained in this Form 10-K/A have been restated from those originally issued to
reflect the $33.6 million reduction in the carrying value of GRiD pen-based
products inventories acquired in the Tandy acquisition, made in the fourth
quarter of fiscal 1994, as a charge to cost of sales rather than an increase in
the carrying value of goodwill arising from the Tandy acquisition, which, net of
related income tax benefit of $10.5 million, results in a decrease to net income
of $23.1 million. This restatement was made in connection with a Securities and
Exchange Commission (SEC) review. Following discussions with the SEC staff, in
June 1995, the Company restated its financial statements as further discussed in
Note 2 of Notes to Restated Consolidated Financial Statements.
Other Markets
The Company's monitor line includes the ASTVision(TM) 4N, 4L, 5L, 7L,
4I and 4V models. These monitors consist of low-radiation, multi-sync color and
are designed to VESA DPMS (Display Power Management Signaling) standards.
ASTVision offers personal computer users who operate with graphic-intensive
Windows-based applications a choice of high quality displays available in 17, 15
and 14 inch formats. In addition to the ergonomic design, their multi-
synchronous operation delivers enhanced flexibility in graphics resolutions and
refresh rates, along with user-controlled definition of the horizontal and
vertical image size and positioning.
AST's enhancement product line provides various combinations of
increased memory, additional input/output ports and other features. AST
memory/multifunction products include the SixPak and Rampage Plus lines for both
ISA and MCA-based computers. Graphics products include AST-VGA Plus (16-bit).
AST micro-to-mini communications products allow personal computers to function
as terminals for minicomputers or mainframes, while at the same time retaining
the PC's ability to act as a stand alone desktop computer. In addition, the AST
FourPort AT Plus offers multi-user connectivity for attaching up to four
additional ports.
Product Development
Due to the rapid pace of advances in personal computer technology, the
Company's continued success depends on the timely introduction of new products
that are accepted in the marketplace. Accordingly, the Company is actively
engaged in the design and development of new products and the enhancement of
existing products. During the fiscal years ended July 2, 1994, July 3, 1993 and
June 27, 1992, the Company's engineering and development expenses were
$38,858,000, $31,969,000 and $30,461,000, respectively.
The Company's long standing relationships with major software and
hardware developers such as Banyan Systems Inc., IBM, Intel Corporation,
Microsoft Corporation, Novell Inc. and SCO Inc. assist the Company in bringing
new technologies to the marketplace. Working with these developers in both
compatibility testing and software support programs allows the Company to
introduce products incorporating the latest hardware technology and the
capability to operate the most current software available in the marketplace.
AST is firmly committed to the establishment of industry standards and
actively participates in their development. The Company was one of the nine
original high technology companies which participated in the development of
EISA. In addition, AST's Bravo product line complies with the VESA and Energy
Star programs for power management and energy efficient systems. AST has also
incorporated two of the industries latest technologies, the Pentium processor
and PCI bus, within the Premmia, Bravo and Advantage! product lines.
The Company believes that its technical expertise is a key factor in
its development of new and innovative products. The Company's engineering staff
uses computer-aided design techniques which assist in the development of new
products and enable faster adaptation of printed circuit board layouts for the
manufacturing process. In addition to keeping with AST's philosophy of
providing its customers with the latest technology, the new line of business
desktop computers contain AST FlashBIOS, which is firmware/software written by
AST engineers. The use of AST
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FlashBIOS simplifies the upgrade process when required. AST Works software is
also a new package developed by AST, included in both the Advantage! and
Ascentia product lines, which encompasses instant video help, telephony and
productivity tools. In addition, these business desktop computers contain the
'plug-and-play' peripheral standard which is a new means for automatic card
configurations.
Fiscal year 1994 product development efforts resulted in the
introduction of numerous new products, including the high performance Ascentia
notebook computer line and new generations and enhancements within the
Advantage!, Bravo and Premmia product lines. These new generations and
enhancements included the Pentium processor, PCI local bus, energy-efficiency,
and multi-media strategies that appeal to the wide range of computer users.
Manufacturing
AST's manufacturing operations include procurement and inspection of
components, assembly and testing of printed circuit boards ("PCB") and assembly,
testing and packaging of finished products. The Company's manufacturing and
warehouse facilities include over 1.5 million square feet of capacity and are
located in Fountain Valley, California; Fort Worth, Texas; Hong Kong; People's
Republic of China ("PRC"); Taiwan and Limerick, Ireland.
In its goal to achieve increased operating efficiencies and improve
worldwide product delivery and customer response, the Company has initiated
significant changes in its demand fulfillment strategies. Manufacturing centers
for mobile computers, a high-growth segment of the personal computer market,
have been established in Fountain Valley, California and in Taiwan. Fort Worth,
Texas is the Company's worldwide production center for multiprocessor products.
To better serve the Pacific Rim, American, European and the Rest of the World's
desktop and server product demand with lower costs and expedited time-to-market,
desktop and server products are manufactured in facilities located in Hong Kong
and the PRC, Texas, and Ireland, respectively. In support of its worldwide
systems manufacturing, the Company manufactures PCB assemblies in Hong Kong and
the PRC.
As a result of the Tandy/GRiD acquisition, AST acquired four
manufacturing facilities, including three in Fort Worth, Texas and one in East
Kilbride, Scotland. The physical integration of the acquisition, including the
transfer of capital and labor, was substantially completed in fiscal year 1994.
As a result, the Company closed both a Texas facility and the Scotland facility
and has announced the closure of the Texas PCB assembly facility, to be
completed in the first half of fiscal year 1995. The Company has added system
and PCB assembly capacity through its two new facilities in the PRC. The
Company continues to assess its worldwide manufacturing capacity in an effort to
increase efficiencies and improve product deliveries.
The Company currently procures all of its components from outside
suppliers. AST factory sites are in close proximity to many key international
vendors. Source inspections are conducted at the plants of selected strategic
suppliers, while other parts are sampled for inspection upon receipt at the
Company's manufacturing facilities.
The Company has generally been able to obtain parts from multiple
sources without difficulty. However, increases in demand for personal computers
have created industrywide shortages at times resulting in significant price
increases for key components, such as Dynamic Random Access Memories and high
quality liquid crystal display screens. These shortages have occasionally
resulted in the Company's inability to procure these components in sufficient
quantities to meet demand for its products. In the future, there can be no
assurance that such shortages will not re-occur and significantly increase the
cost or delay the shipment of AST's products, thereby having an adverse impact
on the revenues and profitability of the Company.
Nearly all parts used in AST products are available from multiple
sources. To achieve improvements in cost, the Company negotiates with its
suppliers to develop multiple sources for existing sole-source components.
Nevertheless, some key components are still only available through sole-source
suppliers due to technology, availability, price, quality or other
considerations. Key components currently obtained from single sources include
active-matrix displays, CD-ROMs, application specific integrated circuits, and
microprocessors. AST purchases components pursuant to purchase orders placed in
the ordinary course of business and has no guaranteed supply arrangements with
sole-source suppliers. In the event that a supply of a key single-sourced
component were delayed or curtailed, the Company's ability to ship the related
product in needed quantities and in a timely manner could be adversely affected.
The Company attempts to mitigate these potential risks by working closely with
major suppliers
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on product plans and coordinated product introductions. The Company has also
made a capital investment in the PRC, which has a history of political
instability. The Company attempts to mitigate this potential risk by
maintenance of both primary inventory custody and a management center in Hong
Kong and by alternative sourcing arrangements.
Quality and reliability are emphasized in the development, design and
manufacture of the Company's products. AST continues to focus on successful new
product introductions through a process of concurrent product and process design
efforts which attempt to simplify and streamline the manufacturing process in
the earliest stages of product design. Products undergo quality inspection and
testing throughout the manufacturing process. This is evidenced through
programs which have been implemented for process measurement and improvement,
reduction of the cost structure, maintenance of on-time delivery, increase of
in-process yields and improvement in product field reliability. Additional
manufacturing verification and testing programs include failure analysis, as
well as out-of-box audit programs that consist of extended diagnostic and
software testing and extended early life reliability testing of products taken
from finished goods.
The Company employs a flexible manufacturing line which serves a
customer base that orders non-standard product configurations. This flexible
manufacturing area provides various software/hardware configurations to these
customers.
The Company's strategy is to continuously enhance its manufacturing
procedures to include comprehensive quality management processes. In fiscal
1994, the Company successfully obtained and/or maintained International
Standards Organization ("ISO") 9000 certification at a majority of its sites.
The Company is currently pursuing ISO certification at its remaining non-
certified locations in Texas, Australia, Ireland and the PRC.
Marketing and Sales
The Company employs a worldwide multi-channel distribution strategy
which allows it to reach a variety of customers. While each channel provides
AST with access to a specific target market, the Company's strategy is to
differentiate itself from others in the industry by continuing to realize
significant revenues through its established network of authorized dealers and
resellers. The Company believes that its success in building its network of
dealers and resellers is largely due to the Company's product line breadth, the
quality and reliability of its products and the high level of service and
support provided by the Company. Despite AST's past success within these
channels, the Company continues to focus on broadening its product distribution
channels. In fiscal 1994, the Company realigned its sales organization into
four major geographical groups: The Americas, which includes the U.S., Canada
and Latin America; Europe; Asia/Pacific Rim; and the Rest of the World, which
includes the Middle East, Africa and the Indian subcontinent.
North American Distribution
The Company's North American distribution channels include authorized
independent resellers, dealers, national and regional distributors, OEMs,
consumer retailers and government sales through GSA approved dealers. The
Company sells directly to large VADs and VARs who typically purchase personal
computers from the manufacturer and add enhancement products and software to
assemble a turn-key system which is sold in selected vertical markets. The
Company's VADs and VARs include customers such as CompuCom Systems, MicroAge,
ENTEX Information Services, Inc. and Intelligent Electronics, Inc. The Company
also sells its products to smaller dealers and resellers through major national
distributors including Gates/FA Distributing, Ingram Micro, Merisel and Tech
Data Corporation. In addition, the Company sells to computer store chains such
as Computerland and Inacom Corporation.
The Company's Advantage! line is designed for small office and home
use and is marketed primarily by consumer retail chains including Computer City
Supercenters; Costco Wholesale Club Stores; Circuit City Stores Inc.; Sam's
Wholesale Club, a division of Wal-Mart Stores; CompUSA and Radio Shack(R)
Canada.
The Federal Systems Division of AST focuses on the approximately $3.5
billion federal government personal computer market and supports large
government suppliers such as Electronic Data Systems and Digital Equipment
Corporation. The Federal Systems Division also supports integrators on
proposals requiring customized hardware and software platforms.
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Fiscal 1994 North American revenues rose 83% to $1.5 billion from $830
million for fiscal 1993. Sales through the Company's VAD/VAR and consumer
retail channels constituted 45% and 32%, respectively, of total North American
revenues in fiscal year 1994. Fiscal 1994 sales to distributors and through the
OEM channels contributed 12% and 11% of North American revenues, respectively.
International Distribution
The Company operates internationally through subsidiaries and sales
offices in 43 locations worldwide. In countries where the Company does not have
subsidiary operations, products are sold to retail dealers and distributors.
The Company plans to continue to focus on the international arena including
Europe, the Pacific Rim and the Rest of the World during fiscal 1995. In
addition, the Company intends to pursue opportunities within other developing
countries as they arise.
Success and profitability of international operations could be
adversely affected by conditions that differ from conditions in North America,
including local economic conditions, political instability, tax laws and changes
in the value of the U.S. dollar relative to other currencies in which products
are sold. See Item 7. "Management's Discussion and Analysis of Results of
Operations and Financial Condition-Gross Profit."
In fiscal 1994, international revenues rose 46% over the prior year,
from $582 million to $850 million. European revenues were up 79% to $533
million from $297 million in fiscal 1993 and represented 23% and 21% of total
fiscal 1994 and 1993 revenues, respectively. The Company continued to expand
its European business through the establishment of new subsidiaries within the
Nordic region as well as in Limerick, Ireland. Sales in the Company's Pacific
Rim region grew 9% to $261 million and accounted for 11% of total fiscal 1994
worldwide revenue compared to 17% of total fiscal 1993 revenue. This decline in
the fiscal 1994 growth rate was attributable to significantly increased
competition within this region of the world. The Company anticipates that these
competitive pressures will continue. The Company's Rest of World revenues
increased 22% to $56 million in fiscal 1994 and represented 2% of total fiscal
1994 revenue.
Customer Support and Training
AST believes that customer support, service and training are crucial
to maintaining strong relationships with its customers and that the high level
of its service and support helps differentiate it from other manufacturers in
the personal computer industry. The Company has an AST Customer Care program
which is a comprehensive collection of services for its line of file server,
desktop and notebook computers. AST Customer Care offers technical support to
resellers, dealers and end-users through 24-hour access toll-free telephone
lines; AST On-Line!, a 24-hour electronic bulletin board system; AST Info-Fax
which allows access to a broad selection of technical support documentation via
facsimile 24-hours a day; and a technical support alliance with leading network
and operating system suppliers for one-stop support in multi-vendor networked
environments. In addition, the AST On-Line! service has been expanded to be
available through the CompuServe 24 hour on-line information service, Prodigy
interactive network and the bulletin board system which includes Remote Imaging
Protocol (RIPscrip).
Parts and labor warranties on AST computers range from one to three
years in length, depending on product type. Service is provided by AST
authorized dealers, third party maintenance organizations and the Company's in-
house service and support organization. Trained service technicians are
available in more than 1,500 AST authorized service centers. Included among
these service centers, from which on-site service is also available, are more
than 800 Authorized Service Centers (ASC), over 100 Advanced System Support
Centers (ASSC) and at least 400 third party maintenance locations. In addition,
international customers can be serviced on a carry-in basis by any of the
authorized AST Service Providers located in more than 30 countries around the
world. AST Customer Care also provides comprehensive protection for notebook
users through the ExeCare Plus service program. Expedited repair or replacement
of any AST notebook product anywhere in the United States is available under the
ExeCare Plus service program. In addition, for ExeCare Plus members traveling
abroad, ExeCare Plus service is honored by all AST international subsidiaries.
In addition, the Company offers AST Premium and Premium Plus Support programs to
end-users who have a large installed base of AST computers and internal
information centers providing service and support within the organization. The
Premium Support program features priority toll-free technical support, a video-
based core service training program, subscription to AST Technical Publications
and the ability to purchase spare parts directly from AST. Premium Plus Support
program subscribers also receive labor reimbursements for warranty
8
<PAGE>
repair work performed on AST systems, discounts on spare parts, expedited spare
part cross-shipments, spare parts inventory balancing and a quarterly
newsletter.
Advertising
AST advertises its product domestically and internationally in
selected computer, business and consumer publications. Through the AST
cooperative advertising program, the Company encourages its channel partners to
advertise AST products by funding a portion of joint advertising and promotion
efforts. The Company also participates in major computer and business trade
shows around the world. The Company's advertising targets a wide range of
buyers and influencers including MIS and PC professionals, department managers,
corporate executives, and individual purchasers.
Major Customers
During fiscal 1994, no AST customer accounted for more than 10% of net sales.
Backlog
The Company orders raw materials and components to manufacture
products according to its forecast of near-term demand and maintains inventories
of finished products in advance of receipt of orders from its customers. Orders
from retail accounts are usually placed by the customer on an as-needed basis
and are usually shipped by the Company shortly after receipt. OEMs may place
orders for scheduled deliveries; however, the amount and quantities thereof are
not significant at the present time. Unfilled orders can be, and often are,
canceled or rescheduled with little or no penalty. For these reasons, the
Company's backlog at any particular time is generally not indicative of the
future level of sales. In addition, cancellations and rescheduling can
adversely impact the Company's revenue and profitability.
Patents and Licenses
The Company relies on a combination of contract, patent, copyright,
trademark and trade secret laws to protect its proprietary interests in its
products. The Company owns several U.S. federal registrations for trademarks,
including "AST", the AST logo, "AST PREMIUM", "AST RESEARCH", "ADVANTAGE!",
"GRiD" and "VICTOR". At July 2, 1994, the Company had acquired through
application and purchase over 200 patents and patent applications throughout the
world relating to various aspects of its products.
AST has license agreements for various products, including operating
system software for its personal computer systems with Microsoft Corporation and
IBM Corporation, for which the Company makes payments. In addition, the Company
has a patent cross-licensing agreement with IBM Corporation dated January 1,
1990, which expires January 1, 1995, for which the Company makes payments. AST
also has various license agreements for application software which it
distributes with its products, many of which require the Company to make
payments to the licensor.
Competition
The intense competition in the personal computer industry continued
during the past year and was characterized by frequent product introductions and
an aggressive pricing environment. While some personal computer manufacturers
refocused their channel strategies, the Company broadened its product lines and
channels to further its core strategy of being a price and performance leader.
The Company also expanded its customer service and support programs. The
Company's primary competitors are other computer companies which all offer a
full range of personal computing solutions, including IBM, Compaq Computer
Corporation, Dell Computer Corporation, Gateway 2000, Inc. and Packard Bell.
The Company believes that its main competitive advantage has been and
continues to be the Company's commitment to its channel partners. This channel
focus, in addition to product branding, product line breadth and service and
support, has enabled the Company to enhance its market position in the extremely
competitive personal computer marketplace.
9
<PAGE>
The personal computer market has continued to be highly price
competitive. As a result, price reductions were again made across product lines
during fiscal 1994, resulting in a decline in gross profit margins.
Characteristic of the past few years, the Company anticipates significant
competitive pricing pressure to continue. The ongoing introduction of new
technologies and full-featured systems across all of the Company's product lines
is intended to enable AST to keep pace with rapid market changes and to minimize
the effect of continued pricing pressure. However, there can be no assurance
that the Company will have the financial resources, marketing and distribution
capability, or technological knowledge to continue to compete successfully. In
addition, the Company's results of operations could be adversely impacted if it
is unable to effectively implement its technological and marketing alliances
with other companies, such as Microsoft and Intel, and manage the competitive
risks associated with these relationships.
Regulatory Compliance
FCC Regulations
The Federal Communications Commission ("FCC") in October 1979 and
April 1980 adopted regulations imposing radio frequency emanation standards for
computing equipment. The regulations distinguish between computing devices
marketed for use primarily in a commercial, industrial or business environment
(designated class A) and computing devices marketed for use primarily in a
residential environment (designated class B). All of the Company's products are
designed to comply with applicable FCC standards.
International Standards Organization
The ISO 9000 standard is a quality guideline around which AST has
designed its quality system. This system is designed to help ensure that
customer needs and product specifications are of ongoing quality and
consistency. The Company has achieved and maintained certification and
registration under ISO 9000, section 9002 for the quality systems used in
manufacturing operations at its subsidiary in Taiwan, its Distribution Center in
the United Kingdom and for its Fountain Valley facility in California. In
addition, the AST Hong Kong manufacturing operations have been certified and
registered under ISO 9000, section 9001. In fiscal year 1995, the Company's
Australian subsidiary and its Texas, Ireland and PRC manufacturing operations
plan to pursue ISO 9000, section 9002 certification and registration.
Effects of Environmental Laws
Compliance with laws enacted for the protection of the environment to
date has had no material effect upon the Company's capital expenditures,
earnings or competitive position. The Company has successfully been involved in
such programs as the EPA's Energy Star program and a member of the Portable
Rechargeable Battery Association (PRBA) which identifies new regulations in
various areas with regard to labeling, transportation issues and proper
disposal. Although the Company does not anticipate any material adverse effects
in the future based on the nature of its operations, there can be no assurance
that such laws will not have a material adverse effect on the Company. To its
knowledge, the Company was not named as a defendant in any environmental
lawsuits during fiscal 1994.
Employees
As of August 26, 1994, the Company had 6,977 employees, 4,085 of whom
were employed in manufacturing, 363 in engineering and 2,529 in the areas of
general management, sales, marketing and administration. Of the total, 3,477
were employed in North America, 2,603 were employed in the Pacific Rim, 44 were
employed in the Rest of World (Middle East) and 853 were employed by the
Company's European subsidiaries. The Company believes that it has been
successful to date in attracting and retaining qualified personnel, but believes
its future success will depend in part on its continued ability to attract and
retain highly qualified engineers, technicians, marketing and management
personnel. To assist in attracting qualified employees at all levels, the
Company has adopted stock option, performance based incentive compensation,
profit sharing and other benefit plans. The Company considers its employee
relations to be good. No employee of the Company is represented by a union.
10
<PAGE>
Business Seasonality
Although the Company does not consider its business to be highly
seasonal, the Company experienced seasonally higher sales in the second quarter
of fiscal 1994 due to the holiday demand for some of its products, as it
expanded the consumer retail channel, and anticipates that this trend will
continue.
Item 2. Properties
The Company owns and occupies its worldwide headquarters facility in
Irvine, California. The 232,000 square foot facility accommodates the Company's
executive, finance and administrative, sales, marketing, customer support and
engineering functions. The Company also leases a 246,000 square foot
manufacturing facility in Fountain Valley, California under a ten year lease
agreement, which expires in 1999. As a result of the Tandy/GRiD acquisition,
the Company owns and occupies a 93,000 square foot manufacturing facility in
Fort Worth, Texas and leases an additional 43,000 square feet of manufacturing
space. The Company leases approximately 240,000 square feet for regional sales
offices and 322,000 square feet for warehouse/distribution space for its North
American sales operations.
The Company entered into an agreement for the sale and leaseback of
its 68,000 square foot manufacturing facility in Hong Kong effective June 1994.
The leaseback period is for one year fixed plus one additional year at the
Company's option. The Company leases an additional 82,000 and 25,000 square
feet for warehouse/production activities and office space, respectively, in Hong
Kong. The Company's Taiwanese manufacturing facility includes 54,000 square
feet of leased property. During fiscal 1994, the Company leased an aggregate of
389,000 square feet of manufacturing space in the PRC to service the domestic
Chinese and other Pacific Rim markets. The plant is expected to be in full
operation by the end of fiscal 1995. In addition, the Company leases
approximately 73,000 square feet for sales, marketing and administration offices
and warehouse facilities in the Pacific Rim.
During fiscal 1994, the Company shifted its European production from
the acquired 113,000 square foot East Kilbride, Scotland manufacturing facility
to a 340,000 square foot plant in Limerick, Ireland. The Company began the
centralization of its European, African and Middle Eastern distribution and
European service and support operations in Limerick, Ireland during the third
fiscal 1994 quarter. In addition, the Company has approximately 252,000 square
feet of sales, marketing, administration and warehouse facilities in other
countries in Europe. The Company also leases an additional 32,000 square feet
for warehouse and office space in the Middle East. An additional 182,000 square
feet is leased in the Middle East for planned expansion.
Item 3. Legal Proceedings
In June 1989, Texas Instruments Inc. ("TI") advised the Company that
it believed certain AST computer products infringe certain TI patents. On
January 4, 1994, the Company initiated litigation (the "California action") in
the U.S. District Court for the Central District of California against TI
alleging certain violations of licensing agreements, federal antitrust laws and
the California Unfair Practices Act. In addition, the Company alleged that TI
is infringing an AST patent and that certain TI patents are invalid or
inapplicable. TI has alleged in the California action that the Company is
infringing patents owned by TI. On August 26, 1994, TI filed a lawsuit in the
U.S. District Court for the Eastern District of Texas against the Company
alleging infringement of patents in addition to those asserted by TI in the
California action. These litigations with TI are proceeding. Management does
not believe that the outcome of these matters will have a material adverse
impact on the Company's consolidated financial position or results of
operations.
On March 3 and March 14, 1994, complaints were filed by two
shareholders against the Company and certain of its officers and directors
requesting certification of class action, asserting claims under state and
federal securities law based on allegations that the Company made inadequate and
false disclosures and seeking unspecified compensatory damages and related fees
and costs. The complaints were filed in the United States District Court of the
Central District of California. On May 9, 1994, the Court consolidated the two
cases under the case name In re AST Securities Litigation. On September 12,
1994, a complaint was filed by a shareholder against the Company and certain of
its officers and directors requesting certification of class action, asserting
claims under state and federal securities law based on allegations that the
Company made inadequate and false disclosures and seeking unspecified
compensatory damages and related fees and costs. The complaint was filed in the
United States District Court of the Central District of California under the
case name Steven A. Kornfeld v. James L. Forquer, et al. Management has
11
<PAGE>
reviewed the allegations contained in 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 current examinations
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
The Company has been named as a defendant or co-defendant, frequently
with other personal computer manufacturers, including IBM, AT&T, Unisys, Digital
Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita, in
thirteen similar lawsuits each of which alleges as a factual basis the
occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits
naming the Company are just a few of the many lawsuits of this type which have
been filed, often naming IBM and other major computer companies. The claims
total approximately $15 million in compensatory damages, $130 million in
punitive damages, and additional unspecified amounts. The Company has denied or
is in the process of denying the claims and intends to vigorously defend the
suits. The Company is unable at this time to predict the ultimate outcome of
these suits. Ultimate resolution of the litigation against the Company may
depend on progress in resolving this type of litigation overall. Before
consideration of any potential insurance recoveries, the Company believes that
the claims in the suits filed against it will not have a material impact on the
Company's consolidated financial position or results of operations; however, the
Company is unable to estimate the amount of any loss that may be realized in the
event of an unfavorable outcome. The Company has maintained various liability
insurance policies during the periods covering the claims filed above. While
such policies may limit coverage under certain circumstances, the Company
believes that it is adequately protected. Should the Company not be successful
in defending against such lawsuits or not be able to claim compensation under
its liability insurance policies, the Company's profitability and financial
condition may be adversely affected.
The Company is also subject to other legal proceedings and claims
which also arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
three months ended July 2, 1994.
12
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
AST's Common Stock is traded on the over-the-counter market (NASDAQ
National Market System) under the symbol ASTA. The following tables set forth,
for the fiscal 1994 and 1993 periods indicated, the range of high and low prices
for the Company's Common Stock.
<TABLE>
<CAPTION>
1994: High Low
---- ---- ---
<S> <C> <C>
1st Quarter $18 - 1/2 $13 - 3/4
2nd Quarter 25 - 1/2 16 - 3/4
3rd Quarter 33 20 - 1/4
4th Quarter 22 - 1/2 12 - 1/2
1993:
----
1st Quarter $17 - 3/8 $11 - 1/4
2nd Quarter 23 12 - 3/4
3rd Quarter 24 - 1/4 13
4th Quarter 17 - 1/4 12 - 3/4
</TABLE>
There were approximately 1,113 security holders of record as of August 26,
1994. The Company has not paid dividends to date and intends to retain earnings
for use in the business for the foreseeable future.
13
<PAGE>
Item 6. Selected Financial Data
The following data has been derived from consolidated financial statements
that have been audited by Ernst & Young LLP, independent auditors. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report
on Form 10-K/A.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts) 1994 (1) 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,367,274 $1,412,150 $944,079 $688,477 $533,814
Gross profit 347,733 285,698 293,260 248,347 173,375
Operating income (loss) 53,989 (3) (64,578) (2) 97,526 94,083 54,427
Net income (loss) 31,309 (53,738) 68,504 64,724 35,067
Net income (loss) per share:
Primary $ 0.96 $ (1.72) $ 2.16 $ 2.13 $ 1.43
Fully diluted $ 0.95 $ * $ * $ * $ 1.21
Shares used in computing net income
(loss) per share:
Primary 32,548 31,289 31,758 30,413 24,530
Fully diluted 34,866 * * * 30,960
- -----------------------------------------------------------------------------------------------------------------------
Cash and short-term investments $ 153,118 $ 121,600 $140,705 $153,305 $ 92,252
Working capital 444,974 301,046 (4) 332,793 282,678 185,243
Total assets 1,005,620 886,159 (4) 580,613 485,431 324,175
Long-term debt 215,294 92,258 (4) 2,431 30,110 30,126
Total shareholders' equity $ 361,762 $ 318,806 $363,267 $282,162 $193,286
Shares outstanding at end of period 32,334 31,579 30,787 30,228 15,255
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Fully diluted earnings (loss) per share were anti-dilutive or not materially
different from primary earnings (loss) per share.
(1) Restated. See Note 2 of Notes to Consolidated Financial Statements.
(2) Includes a $125 million pretax restructuring charge. See Note 2 of Notes to
Consolidated Financial Statements.
(3) Includes a $12.5 million pretax credit from the reversal of excess
restructuring charge amounts not used. See Note 2 of Notes to Consolidated
Financial Statements.
(4) Effective June 30, 1993, the Company purchased certain net assets of Tandy
Corporation's personal computer business. The Company's Consolidated
Statements of Operations do not include the revenues and expenses of the
acquired business until fiscal 1994. See Note 2 of Notes to Consolidated
Financial Statements.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion should be read in conjunction with the
consolidated financial statements.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
Results of Operations 1994 Change 1993 Change 1992
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $2,367,274 68% $1,412,150 50% $944,079
Gross profit $ 347,733 22% $ 285,698 (3%) $293,260
Percentage of net sales 14.7% 20.2% 31.1%
Operating expenses (excluding
restructuring costs) $ 306,244 36% $ 225,276 15% $195,734
Percentage of net sales 12.9% 16.0% 20.7%
Restructuring charges (credit) $ (12,500) $ 125,000 $ -
Percentage of net sales (0.5%) 8.9% -
Net income (loss) $ 31,309 158% $ (53,738) (178%) $ 68,504
Net income (loss) per share, fully diluted $ 0.95 155% $ (1.72) (180%) $ 2.16
</TABLE>
Net Sales
Net sales increased to $2.367 billion in fiscal year 1994 from $1.412
billion in fiscal year 1993 and $944 million in fiscal year 1992. These
increases in revenues were due to strong worldwide demand for the Company's
desktop and notebook computer systems. In fiscal 1994, the Company's worldwide
unit shipments increased 78% to 1.432 million, compared with a 69% increase in
unit volume for fiscal 1993. The Company's unit volume growth rate exceeded its
sales growth rate as a result of pricing actions undertaken by the Company due
to continuing industrywide competitive pricing pressures. Price competition
continues to have a significant impact on prices of the Company's products,
especially those aimed at the consumer market, and additional pricing actions
may occur as the Company attempts to maintain its competitive mix of price and
performance characteristics. Going forward, the Company anticipates continued
industrywide competitive pricing and promotional actions. The Company's net
sales (expressed in U.S. dollars) were also reduced by 2.7%, 1.3% and .7% in
fiscal 1994, 1993 and 1992, respectively, due to fluctuations in the average
value of the U.S. dollar relative to its average value in the comparable periods
of the prior years.
Revenues from desktop system products increased 56% to $1.5 billion in
fiscal 1994 from $967 million in fiscal 1993, compared with an increase of 60%
in fiscal 1993. Major contributors to the improved year-over-year revenue
performance were the Company's 486-based desktop systems including the
Advantage! 486SX, 486/66, the Bravo 486SX/25, 486/33, 486/66D, and the entire
Premmia 486 product line. Revenues from sales to Tandy's retail operations and
the acquired GRiD and Victor product lines also contributed to the Company's
fiscal 1994 desktop revenue growth. Sales of the Company's 80386 systems,
reflecting the continuing shift in demand toward higher performance 486-based
systems, declined 58% to $90 million in fiscal 1994, compared to a decline of
42% in fiscal 1993.
Revenues from the Company's notebook computer products increased and
represented 22%, 21% and 24% of net sales for fiscal 1994, 1993 and 1992,
respectively. The Company's notebook computer product revenues rose 79% to $519
million in fiscal 1994 from $290 million in fiscal 1993, compared to an increase
of 28% in fiscal 1993 over fiscal 1992. The increase in net sales of notebook
computers reflects a 74% increase in unit shipments to 268,000 in fiscal 1994
over 154,000 in the same prior year period and a 52% unit volume increase in
fiscal 1993 over fiscal 1992. Fiscal 1994 notebook systems sales growth
occurred in all key notebook product lines including the Bravo, the Advantage!
Explorer, and the PowerExec notebook computer lines. In addition, revenues from
sales to the Company's OEM customers contributed to the Company's fiscal 1994
notebook revenue growth.
North American revenues (including Canada) increased 83% to $1.517
billion in fiscal year 1994 compared with an increase of 56% in fiscal 1993 over
1992. The continued revenue growth was the result of strong unit sales of the
Company's desktop and portable computer systems within each of the Company's
North American distribution channels, including independent resellers, dealers,
national distributors, original equipment manufacturers ("OEMs"), U.S.
Government approved dealers and consumer retailers. While revenue growth
occurred in each channel, fiscal
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1994 sales to the consumer retail channel, which includes fiscal 1994 sales made
to Tandy's retail operations, rose 218% over the prior year. Fiscal 1993
consumer retail channel sales rose 436% above fiscal 1992 as fiscal 1993
represented the first complete year of Company sales into this new channel. The
consumer retail channel, including consumer electronics, office and computer
superstores, increased to 32% of total fiscal 1994 North American revenues
versus 19% in fiscal 1993 and 5% in fiscal 1992. The substantial fiscal 1994
revenue growth within this channel was due largely to the growing popularity of
computer superstores. Sales into this channel, however, are cyclical with the
strongest demand occurring in third and fourth calendar quarters. As this
channel continues to grow, the Company anticipates a corresponding seasonal
impact on the Company's net sales.
International revenues grew 46% to $850 million in fiscal 1994 from
$582 million in fiscal 1993, compared to a 42% growth rate in fiscal 1993 over
fiscal 1992. International revenues represented 36%, 41%, and 44% of net sales
in fiscal 1994, 1993 and 1992, respectively. European revenues increased 79%
over the prior year, compared with 45% in fiscal 1993 over 1992. The United
Kingdom and Sweden continued to be major contributors of total European revenues
with significant fiscal 1994 revenue growth also occurring in France, Italy and
Switzerland. During fiscal 1994, the Company further expanded its presence
within Europe by establishing new subsidiaries in Denmark, Ireland and Norway.
The Company's Scotland facility, which was acquired as part of AST's purchase of
Tandy Corporation's personal computer operations, terminated operations in the
fourth quarter of fiscal 1994.
Revenues from the Company's Pacific Rim region, which includes
Australia, the People's Republic of China ("PRC"), Hong Kong, Japan, Malaysia,
New Zealand, Singapore and Taiwan, combined to contribute to a 9% increase in
fiscal 1994 sales, compared with a 34% increase in fiscal 1993 sales over 1992.
The decline in fiscal 1994 growth rate was attributable to significantly
increased competition within this region of the world. The Company anticipates
that these competitive pressures will continue. During the third quarter of
fiscal 1994, the Company established a new sales and manufacturing subsidiary in
Tianjin, China through a joint venture with a corporation affiliated with the
Chinese government.
A significant portion of the Company's Pacific Rim revenues are
derived from sales to the Hong Kong government and to Hong Kong based dealers
who ultimately market the Company's products within the PRC. Sales into the PRC
accounted for approximately 6% of the Company's total fiscal 1994 revenues,
compared with approximately 11% and 13% in fiscal 1993 and 1992, respectively.
Although the PRC has historically provided the Company with significant revenues
and profitability, future sales of the Company's products into the PRC are
highly dependent upon continuing favorable trade relations between the United
States and the PRC and the general economic and political stability of the
region. Economic factors such as short-term fluctuations in foreign currency
exchange rates, monetary controls, and changes in the PRC tax structure may also
have a negative impact on the region's future sales and operating results.
In the Company's Rest of World region, revenues increased 22% in
fiscal 1994 over the prior year, compared with an increase of 60% in fiscal 1993
over 1992. These increases were due primarily to continuing growth within the
Company's Middle East operations.
Gross Profit
The Company's 1994 gross profit margins of 14.7% represent a continued
decline from 20.2% in fiscal 1993 and 31.1% in fiscal 1992. The downward trend
in gross profit margins was primarily due to continued intense industrywide
competitive pressures which have required pricing reductions at a rate faster
than the Company was able to reduce costs. Selected inventory valuation
adjustments, taken in anticipation of shortening product life cycles, have also
contributed to the fiscal 1994 decline in gross profit margins. Also
contributing to reduced gross profit margins was the increased percentage of
revenues generated by the consumer retail (including sales to Tandy's retail
operations) and OEM channels, which typically yield lower gross margins, and a
$33.6 million write-off of pen-based products inventory acquired as part of the
Tandy acquisition. The $33.6 million represented a reduction in the carrying
value of GRiD pen-based products inventories which had been originally recorded,
during the fourth quarter of fiscal 1994, as an increase in the carrying value
of goodwill. Prior to the $33.6 million write-off of pen-based products
inventory, the Company's 1994 gross profit margins would have been 16.1%. The
Company believes that the industry will continue to be characterized by rapid
introduction of new products, rapid technological advances and product
obsolescence. If the Company's products become technically obsolete, the
Company's net sales and profitability may be adversely affected. Lower gross
margins could result in decreased liquidity and adversely affect the Company's
financial position. In addition, there can be no assurance that additional
inventory valuation
16
<PAGE>
adjustments will not be required, which, if required, would have an adverse
impact on the Company's gross profit margins.
The results of the Company's international operations are subject to
currency fluctuations. As the value of the U.S. dollar strengthens relative to
other currencies, revenues from sales in those currencies converts into fewer
U.S. dollars. This effect on revenue has a corresponding impact on gross profit,
as the Company's production costs are incurred primarily in U.S. dollars. When
comparing fiscal 1994 to fiscal 1993, the U.S. dollar rose substantially against
nearly all European currencies. This year-to-year currency fluctuation resulted
in an approximate two percentage point gross margin reduction in fiscal 1994
compared to fiscal 1993, compared to an approximate one percentage point decline
in fiscal 1993 compared to fiscal 1992.
The personal computer industry continues to experience significant
pricing pressures and the Company believes that industry consolidation and
restructuring will continue to result in an aggressive pricing environment and
continued pressure on the Company's gross profit margins during fiscal 1995.
During fiscal 1994, the Company and the majority of its competitors continued to
introduce new, lower-priced higher performance personal computers resulting in
continued pricing pressures on both new and older technology products. There can
be no assurance that future pricing actions by the Company and its competitors
will not adversely impact the Company's gross margins or profitability.
<TABLE>
<CAPTION>
Operating Expenses 1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selling and marketing $193,053 36% $141,752 18% $120,072
Percentage of net sales 8.2% 10.0% 12.7%
</TABLE>
While total fiscal 1994 selling and marketing spending rose by $51.3
million, it represented only 8.2% of sales compared to 10.0% in fiscal 1993 and
12.7% in fiscal 1992. Expanded worldwide sales and marketing efforts in both
new and existing subsidiary locations resulted in higher payroll related
expenses while increased sales levels resulted in higher sales commissions.
Entry into new domestic and international markets, new product introductions,
expansion of the Company's distribution channels and a greater emphasis on
advertising, sales and marketing programs contributed to increased marketing
promotion and cooperative advertising expenses. Additionally, the Company's
continued focus on increasing brand name awareness led to an increase in media
advertising expense. Part of the Company's increased fiscal 1994 selling and
marketing expenses, however, was mitigated by reduced performance-based employee
benefits which were accrued during fiscal 1994 and adjusted in the fourth
quarter of fiscal 1994 due to reduced corporate profitability. The Company
anticipates that fiscal 1995 selling and marketing expenses may increase in
absolute dollars as the Company continues to expand its marketing and sales
programs and focuses on continued growth in its international markets.
<TABLE>
<CAPTION>
1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
General and administrative $74,333 44% $51,555 14% $45,201
Percentage of net sales 3.1% 3.7% 4.8%
</TABLE>
In fiscal 1994, general and administrative expenses increased in
absolute dollars but declined as a percentage of net sales to 3.1% from 3.7% in
fiscal 1993 and 4.8% in fiscal 1992. During fiscal 1994, the Company expanded
its domestic and international operations, including those acquired through the
purchase of Tandy's computer operations in Norway, Scotland and Texas, and the
Company established new subsidiaries in China, Malaysia, Denmark and Ireland.
Costs associated with these new facilities resulted in increased expenses for
staffing, occupancy, insurance, and outside professional services. Depreciation
and amortization expenses increased in fiscal 1994 due primarily to the expanded
fixed asset base resulting from the acquisition and integration of Tandy's
personal computer business. Part of the Company's increased fiscal 1994 general
and administrative expenses, however, was mitigated by reduced performance-based
employee benefits which were accrued during fiscal 1994 and adjusted in the
fourth quarter of fiscal 1994 due to reduced corporate profitability. The
Company anticipates that fiscal 1995 general and administrative costs may
increase in absolute dollars due to possible growth and expansion into new
global markets.
17
<PAGE>
<TABLE>
<CAPTION>
1994 Change 1993 Change 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Engineering and development $38,858 22% $31,969 5% $30,461
Percentage of net sales 1.6% 2.3% 3.2%
</TABLE>
Engineering and development costs increased in absolute dollars due to
net additions to the Company's engineering staff and higher costs for
engineering materials as the Company continues to invest in the development of
new products and in enhancements to existing products. Engineering and
development expenditures as a percentage of sales have continued to decrease
since fiscal 1992 as a result of revenue growth during fiscal 1993 and 1994.
Products introduced in fiscal 1994 included additions to the Advantage!, Bravo,
Premmia, PowerExec, and Manhattan SMP product lines and the Ascentia 900N
notebook computer.
The personal computer industry is characterized by increasingly rapid
product life cycles. Accordingly, timely development of new and enhanced
products with favorable price/performance features are critical to the Company's
future growth and competitive position in the marketplace. Therefore, the
Company remains committed to continue its investment in research and development
activities and anticipates that fiscal 1995 engineering and development spending
may increase in absolute dollars. There can be no assurance that the Company's
products will continue to be commercially successful or technically advanced, or
that it will be able to deliver commercial quantities of new products in a
timely manner.
<TABLE>
<CAPTION>
1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Restructuring charges
(credits) $(12,500) - $125,000 - -
Percentage of net sales (0.5%) 8.9% -
</TABLE>
In the fourth quarter of fiscal 1993 and in connection with the
Company's acquisition of Tandy's personal computer manufacturing and engineering
operations and GRiD's North American and European sales and marketing
operations, the Company recorded a pretax restructuring charge of $125 million.
The estimated restructuring costs included $68 million in asset write-downs and
$57 million in estimated future cash expenditures. The charge reflected
estimated expenses to combine and restructure the Company's existing worldwide
manufacturing capacity ($34 million), as well as its marketing, engineering,
distribution, sales, and service operations ($41 million). Also included within
the restructuring charge were selected inventory valuation adjustments ($33
million) necessary to realign existing AST product lines in relation to the
acquired Tandy/GRiD and Victor products and to curtail production of certain AST
product offerings as a result of competing Tandy/GRiD product lines. These
estimated restructuring costs represented the Company's best assessment of the
proposed restructuring plans; however, the Company expected that some of these
original plans would be revised as the Company continued to identify the best
means of achieving reductions in its cost structure.
During fiscal 1994, the Company completed most of its previously
identified restructuring activities and incurred asset write-downs of $50
million and cash expenditures of $47 million related directly to its fiscal 1994
restructuring activities. The Company's manufacturing operations were realigned
to integrate the combined operations along product and geographic boundaries and
included the shift of nearly all the Americas desktop production to Texas and
the establishment of a new European manufacturing, distribution and service
operation in Limerick, Ireland. During fiscal 1994, the Company realigned and
centralized its European distribution and service operations in connection with
establishing the new Ireland facilities. The Company also realigned its
engineering and marketing organizations into strategic business units in order
to improve the Company's ability to provide dedicated focus on each of its key
product groups: desktops, servers and notebooks. During the first and second
fiscal quarters, the Company focused its efforts on integrating its existing
product lines with those of the acquired Tandy/GRiD operations, resulting in
price realignments of existing AST products as well as the acceleration of
certain AST end-of-life product cycles caused primarily by the introduction of
the newly acquired Tandy/GRiD products.
The Company established the restructuring reserve as a result of the
Tandy acquisitions and incurred costs related to the impact of the acquisitions
on AST's existing operations and the resulting requirement to realign the new
and larger combined Company's operations. These costs included asset write-
downs, provisions and cash expenditures. Furthermore, the Company used its
restructuring provisions for activities that were either identifiable
18
<PAGE>
with the restructuring plan or that could be reasonably estimated in accordance
with provisions of Financial Accounting Standards Board Statement No. 5,
"Accounting for Contingencies."
In the fourth quarter of fiscal 1994, after concluding that most of
its restructuring activities had been completed or were adequately provided for
within the remaining restructuring accrual, the Company determined that the
total restructuring cost estimate could be lowered. As a result, the Company
took a fourth quarter restructuring credit in the amount of $12.5 million, or
ten percent of the original $125 million charge taken in the comparable prior
year fourth quarter. At July 2, 1994, the Company continues to hold
approximately $15 million in accrued restructuring provisions for the final
restructuring activities, which the Company expects to be completed during the
first half of fiscal 1995. The Company expects most of these costs to represent
future cash expenditures to be incurred to further combine and restructure
existing worldwide manufacturing and distribution capacity.
The Company believes that its fiscal 1994 restructuring activities
were necessary in order to redeploy and reorganize its worldwide operations
after the June 1993 acquisition of Tandy Corporation's personal computer
operations. No assurances can be given that the restructuring actions will be
successful or that similar actions will not be required in the future.
<TABLE>
<CAPTION>
Other Income and Expense 1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest and other income
(expense), net $(7,677) (1,063%) $(660) (124%) $2,758
</TABLE>
In fiscal 1994, the Company had net interest expense of $7.8 million
compared to net interest income of $2.1 million in fiscal 1993 and $4.6 million
in fiscal 1992. Interest expense increased as a result of the note payable to
Tandy Corporation issued in July 1993, the Liquid Yield Option Notes issued in
December 1993, and increased utilization of the Company's bank credit facilities
during the first six months of fiscal 1994.
In fiscal 1994, the Company recognized net other income of $.1 million
compared to net other expense of $2.7 million in fiscal 1993 and $1.8 million in
fiscal 1992. The fiscal 1994 reversal was attributable to the one-time revenues
received from the completion of the sale of the Company's Hong Kong
manufacturing facility in June 1994, which resulted in a pretax gain of $4.3
million. This amount was partially offset by an increase in the cost of hedging
certain foreign currency exposures due to increases in the outstanding dollar
amounts of forward exchange contracts. Other expenses relate primarily to
foreign currency transaction and remeasurement gains and losses and the costs
associated with the Company's foreign currency hedging activities. The Company
adheres to a limited hedging strategy which is designed to minimize the effect
of remeasuring the local currency balance sheets of its foreign subsidiaries on
the Company's consolidated financial position and results of operations. See
further discussion included under "Liquidity and Capital Resources."
<TABLE>
<CAPTION>
Provision (Benefit) for Income Taxes 1994 Change 1993 Change 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Provision (benefit) for
income taxes $15,003 230% $(11,500) (136%) $31,780
Effective tax rate 32.4% (17.6%) 31.7%
</TABLE>
In fiscal 1994, 1993 and 1992, the Company recorded an effective
income tax provision (benefit) of 32.4%, (17.6%) and 31.7%, respectively. The
decrease in the 1993 effective tax rate was due primarily to the Company's
inability to provide tax benefit on a portion of the Company's fiscal 1993
restructure charge. The increase in the 1994 tax rate is attributable to the
one percent increase in the federal income tax rate and changes in the
proportion of income earned within various taxing jurisdictions.
During fiscal 1993, the Company adopted Financial Accounting Standards
Board Statement No. 109 "Accounting for Income Taxes" ("SFAS 109"). The
adoption did not have a material effect on the net loss that was previously
reported for fiscal 1993. In accordance with SFAS 109, the Company recorded
total deferred tax assets of $78 million and $83 million, and total deferred tax
liabilities of $4 million and $2 million at July 2, 1994 and July 3, 1993,
respectively. Realization of the deferred tax assets, which primarily relate to
inventory reserves, restructuring reserves, other accrued liabilities and
foreign net operating loss carryforwards, is in part dependent on future
earnings
19
<PAGE>
from new and existing products. The timing and amount of these future earnings
may be impacted by a number of factors, including those discussed below under
"Additional Factors That May Affect Future Results." In recognition thereof, the
Company has established a deferred tax asset valuation reserve of $35 million
and $33 million at July 2, 1994 and July 3, 1993, respectively.
Acquisitions
In the fourth quarter of fiscal 1993, the Company acquired certain
assets and assumed certain liabilities relating to Tandy Corporation's personal
computer manufacturing operations and the GRiD North American and European sales
divisions. On September 1, 1993, the Company also purchased certain assets and
assumed certain liabilities of Tandy/GRiD France. Assets acquired in the fiscal
1993 fourth quarter purchase included four manufacturing facilities, three of
which were located in Fort Worth, Texas and one in East Kilbride, Scotland.
Other tangible assets acquired consisted primarily of inventory and property,
plant and equipment. As part of the purchase agreement, the Company also
received the right to supply personal computers to Tandy's Radio Shack, Computer
City and Incredible Universe retail operations under a three-year supply
agreement. The total purchase price (including Tandy/GRiD France) was $111.7
million and included a cash payment of $15 million and a three-year promissory
note in the principal amount of $96.7 million.
The preliminary estimate of the excess of the purchase price over the
fair value of the net assets acquired (goodwill) was $20 million relating to
valuation adjustments to inventory ($15 million) and certain accrued liabilities
($5 million). During fiscal 1994, the Company refined the fair value estimates
of the assets acquired and liabilities assumed and, as a result, increased the
recorded goodwill by $11.4 million to $31.4 million.
The accompanying consolidated financial statements for the year ended
July 2, 1994 have been restated from those originally issued to reflect a $33.6
million reduction in the carrying value of GRiD pen-based products inventories
acquired in the Tandy acquisition, made in the fourth quarter of fiscal 1994, as
a charge to cost of sales rather than an increase in the carrying value of
goodwill arising from the Tandy acquisition. This restatement was made in
connection with a Securities and Exchange Commission (SEC) review. Following
discussions with the SEC staff, in June 1995, the Company made the restatement
and related adjustments discussed below.
After giving effect to this restatement, reversal of previously
recorded related goodwill amortization and related income tax effects, fiscal
1994 net income has been restated to $31.3 million ($.95 per share) from $53.5
million ($1.59 per share), and shareholders' equity has been reduced from $384
million to $361.8 million. These adjustments are expected to result in a $10.5
million reduction to income taxes payable but otherwise have no impact on the
Company's working capital or cash flows. Additionally, goodwill amortization
over the remaining portion of the ten-year life assigned to goodwill arising
from the Tandy acquisition will be reduced by $3.6 million annually.
The acquisitions have been accounted for in accordance with the
purchase method of accounting and, accordingly, the net assets acquired have
been included in the Company's consolidated balance sheets based upon their
estimated fair values at the transactions' effective dates. The Company's
consolidated statements of operations include the revenues and expenses of the
acquired businesses after the effective dates of the respective transactions.
<TABLE>
<CAPTION>
Liquidity and Capital Resources 1994 1993 1992
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Cash and cash equivalents $153,118 $121,600 $ 87,874
Short-term investments - - $ 52,831
Working capital $444,974 $301,046 $332,793
Cash provided by (used in):
Operating activities $(40,260) $(68,418) $ 32,193
Investing activities $(35,856) $ 32,523 $(69,100)
Financing activities $107,798 $ 63,010 $(25,653)
</TABLE>
Increased July 2, 1994 cash and cash equivalents were due primarily to
the December 1993 Liquid Yield Option Note issuance in which the Company raised
$111.7 million. The increase in working capital is due primarily to increased
accounts receivable levels which were consistent with the higher sales levels
achieved in fiscal 1994.
20
<PAGE>
In fiscal 1994, net cash used in operating activities declined to
$40.3 million from $68.4 million in fiscal 1993. This decline was due primarily
to increased operating profit and lower inventory levels. Improvement in cash
flow from operations in fiscal 1995 will depend on the Company's ability to
improve profit levels and further reduce inventory levels.
Net cash used in investing activities increased during fiscal 1994
compared with fiscal 1993, primarily due to increases in capital expenditures.
Capital expenditures totaled $30.0 million in fiscal 1994 and consisted of
additions to plant and engineering equipment, office furniture and fixtures, and
worldwide information systems. Included in total fiscal 1994 capital additions
are land and an existing manufacturing plant purchased for $4.6 million and
machinery and equipment purchased for $3.0 million in Limerick, Ireland. The
Company expects its fiscal 1995 capital expenditures to be consistent with those
incurred in fiscal 1994.
The Company's ability to fund its activities from operations is
directly dependent upon its rate of growth, ability to effectively manage its
inventory, the terms under which it extends credit to its customers, the manner
in which it finances any capital expansion, and the Company's ability to access
external sources of financing. The Company intends to fund its fiscal 1995 cash
requirements through a combination of cash on hand, cash provided by operations,
available borrowings under its committed revolving credit facilities and
uncommitted money market lines, and possible future public or private debt
and/or equity offerings. At July 2, 1994, the Company had available a $300
million unsecured committed revolving credit facility with a final maturity date
of September 30, 1996. This revolving credit agreement allows the Company to
borrow, subject to certain leverage and total debt restrictions, at rates based
upon the bank's reference rate, or a spread of .625% over the LIBOR rate, .75%
over the domestic certificate of deposit rate, or at a rate bid by a bank, as
selected by the Company. At July 2, 1994, there was $45 million outstanding as
drawings under this credit facility and $67.7 million outstanding in the form of
a letter of credit issued to Tandy Corporation in support of the acquisition
note payable. The Company also had $5 million outstanding under an uncommitted
money market line of credit. The Company expects that it will continue to incur
short-term borrowings from time to time in order to finance working capital and
capital expenditure requirements. The Company also has various additional letter
of credit facilities and uncommitted money market credit facilities available
for use by the Company and its subsidiaries.
On August 31, 1994, the Company announced that it expects its first
quarter fiscal 1995 revenues to be flat relative to the first quarter of fiscal
1994, which was $514 million, and down from the previous fourth quarter fiscal
1994 revenue of $585 million. This shortfall in expected sales volume and lower
gross margins will result in a net loss for the first quarter of fiscal 1995.
Depending on the size of the projected loss for the first quarter of fiscal
1995, the Company then could be in default of specific financial covenants in
its committed $300 million revolving credit facility. The Company is currently
in negotiations with the bank participants in the revolving credit facility and
expects to have a waiver of certain financial covenants in place prior to any
event of default occurring. The Company currently has no reason to believe that
it will not be able to negotiate waivers to cure any potential defaults under
its revolving credit facility due to the expected loss for the first quarter of
fiscal 1995; however, no assurance can be given that such waivers will be
obtained.
In connection with the Tandy acquisition, the Company issued a $96.7
million promissory note to Tandy Corporation which is due on July 11, 1996.
Interest due the first year was paid on July 11, 1994 at an initial rate of
3.75% per annum. The interest rate has been adjusted to 4.94% per annum,
effective July 11, 1994 and will be adjusted once more on July 11, 1995 to the
lower of either 5% or the "lowest three month rate" within the meaning of
Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995.
There are no sinking fund requirements. The note also requires the Company to
maintain a standby letter of credit payable to Tandy in the amount of 70% of the
face value of the note or $67.7 million. Upon maturity of the note, up to 50% of
the initial principal amount of the promissory note may be converted, at the
option of the Company, into common stock of the Company based upon its then fair
market value, as defined in the promissory note.
Net cash provided by financing activities increased during fiscal 1994
compared with fiscal 1993 and 1992, mainly because of proceeds received in
connection with the issuance of the Liquid Yield Option Notes ("LYONs"). On
December 14, 1993, the Company issued $315 million par value of LYONs due
December 14, 2013. The LYONs are zero coupon convertible subordinated notes
which were sold at a significant discount from par value with a yield to
maturity of 5.25% and a total value at maturity of $315 million. There are no
periodic payments of interest on the LYONs. Each $1,000 principal amount at
maturity of LYONs is convertible into 12.993 shares of the Company's common
stock at any time. Upon conversion of a LYON, the Company may elect to deliver
shares of common stock
21
<PAGE>
at the conversion rate or cash equal to the market value of the shares of common
stock into which the LYONs are convertible. Total proceeds received from the
sale of the LYONs were approximately $111.7 million, which have been utilized
for working capital, including the financing of expected increases in accounts
receivable and inventories, repayment of bank borrowings under the Company's
revolving credit facilities, new product development, and other general
corporate purposes. The holder of a LYON may require the Company to purchase its
LYONs on December 14, 1998, December 14, 2003 and December 14, 2008 (the
"Purchase Dates"), and such payments may reduce the liquidity of the Company.
However, the Company may, subject to certain exceptions, elect to pay the
purchase price on any of the three Purchase Dates in cash or shares of common
stock or any combination thereof. The Company has made no decision as to whether
it will meet future purchase obligations in cash, common stock, or any
combination thereof. Such decision will be based on market conditions at the
time a decision is required, as well as management's view of the liquidity of
the Company at such time.
The Company attempts to minimize its exposure to foreign currency
transaction and remeasurement gains and losses due to the effect of remeasuring
the local currency balance sheets of its foreign subsidiaries on the Company's
consolidated financial position and results of operations. The Company utilizes
a limited hedging strategy which includes the use of foreign currency
borrowings, netting of foreign currency assets and liabilities as well as
forward exchange contracts to hedge its exposure to exchange rate fluctuations
in connection with its subsidiaries' monetary assets and liabilities held in
foreign currencies. The carrying amounts of the forward exchange contracts equal
their fair value and are adjusted at each balance sheet date for changes in
exchange rates. Realized and unrealized gains and losses on the forward
contracts are recognized currently in the consolidated statements of operations.
The Company held forward exchange contracts with a face value of approximately
$143.0 million at July 2, 1994 and $57.5 million at July 3, 1993, which
approximates the Company's net monetary asset exposure to foreign currency
fluctuations at those respective dates. Unrealized losses associated with these
forward contracts totaling $4.8 million at July 2, 1994 and unrealized gains
totaling $1.1 million at July 3, 1993, are included in the Company's
consolidated statements of operations for those periods. Foreign currency
borrowings totaled $3.8 million at July 2, 1994 and $9.1 million at July 3,
1993.
Additional Factors That May Affect Future Results
Future operating results may be impacted by a number of factors,
including worldwide economic and political conditions, industry specific
factors, the availability and cost of components, the Company's ability to
timely develop and produce commercially viable products, the Company's ability
to manage expense levels in response to decreasing gross profit margins, the
continued financial strength of the Company's dealers and distributors, the
Company's ability to accurately anticipate customer demand, and the Company's
ability to successfully complete the integration of the acquired Tandy/GRiD
operations into the Company's business model.
The Company's future success is highly dependent upon its ability to
continue to timely develop and market products that incorporate new technology,
are priced competitively and achieve significant market acceptance. There can be
no assurance that the Company's products will continue to be commercially
successful or technically advanced due to the rapid improvements in computer
technology and resulting product obsolescence. There is also no assurance that
the Company will be able to deliver commercial quantities of new products in a
timely manner, or that such products will receive favorable market acceptance.
The Company regularly introduces new products designed to replace existing
products. While the Company closely monitors new product introductions and
product obsolescence, there can be no assurance that such transitions will occur
without adversely affecting the Company's net sales and profitability. In
addition, if the Company is unable to accurately anticipate the customer demand
shift from 486-based systems to systems utilizing Pentium processors, the life
cycles of the Company's 486-based systems could be shortened which may result in
inventory valuation reserves and could have a material adverse effect on the
Company's net sales and profitability.
Increases in demand for personal computers have created industrywide
shortages, which at times have resulted in premium prices being paid for key
components, such as Dynamic Random Access Memories and high quality liquid
crystal display screens. These shortages have occasionally resulted in the
Company's inability to procure these components in sufficient quantities to meet
demand for its products. In addition, a number of the Company's products
include certain components, such as active-matrix displays, CD-ROMs, application
specific integrated circuits, and microprocessors, that are currently purchased
from single sources due to availability, price, quality or other considerations.
The Company purchases components pursuant to purchase orders placed in the
ordinary course of business and has no guaranteed supply arrangements with
single source suppliers. While the
22
<PAGE>
Company is working with its suppliers to minimize component part shortages,
there can be no assurance that future disruptions in delivery of components will
not occur. Should delays or shortages occur or component costs significantly
increase, the Company's net sales and profitability could be adversely affected.
The Company participates in a highly volatile industry that is
characterized by dynamic customer demand patterns, rapid introduction of new
products, rapid technological advances, and industrywide competition resulting
in an extremely competitive pricing environment with downward pressure on gross
margins. The Company anticipates that the personal computer industry will
continue to experience intense price competition and dramatic price reductions
during fiscal 1995. There can be no assurance that future pricing actions by the
Company and its competitors will not adversely impact the Company's net sales
and profitability.
Consistent with industry practice, the Company provides certain of its
larger distributors, consumer retailers and dealers with stock balancing and
price protection rights that permit these distributors, retailers and dealers to
return slow-moving products to the Company for credit or to receive price
adjustments if the Company lowers the price of selected products within certain
time periods. There can be no assurance that the Company will not experience
rates of return or price protection adjustments that could have a material
adverse impact on the Company's net sales and profitability in the future.
The Company believes that, with the acquisition of additional
manufacturing facilities from Tandy Corporation and the acquisition of
manufacturing facilities both in the PRC and Ireland, production capacity should
be sufficient to support anticipated increases in unit volumes. The Company also
expects to increase inventory levels to support higher production volumes.
However, if the Company is unable to obtain certain key components, or to
effectively forecast customer demand or manage its inventory, these higher
inventory levels may result in increased obsolescence and adversely impact the
Company's gross margins and results of operations. Additionally, if the Company
is unable to timely ramp up its manufacturing operations in Texas and Ireland,
it could adversely impact the Company's net sales, gross profit and
profitability.
The Company's overall operating income varies within each geographic
region. Historically, the Company's North/Latin Americas and Pacific Rim regions
have made the primary contributions to the Company's profitability. Therefore,
should the Company experience significant revenue and/or profitability declines
in either region, this could significantly impact the Company's overall net
sales and profitability. Europe has 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.
The Company's international operations are affected by foreign
currency fluctuations. The financial statements of the Company's foreign
subsidiaries are remeasured into the United States dollar functional currency
for consolidated reporting purposes. Gains and losses resulting from this
remeasurement process are recognized currently in the consolidated results of
operations. The Company attempts to minimize the impact of these remeasurement
gains and losses by adhering to a hedging strategy utilizing forward exchange
contracts and, to a lesser extent, foreign currency borrowings. The Company's
exposure to currency fluctuations will continue to increase as a result of the
expansion of its international operations. Significant fluctuations in currency
values could have an adverse effect on the Company's net sales, gross margins
and profitability.
The Company's international operations may also be affected by changes
in United States trade relationships and the economic stability of the locations
in which sales occur. The Company operates in foreign locations, such as the
PRC, where future sales may be dependent upon continuing favorable trade
relations. Additionally, foreign locations such as the PRC may experience
changes in their general economic stability due to such factors as increased
inflation and political turmoil. Any significant change in United States trade
relations or the economic stability of foreign locations in which the Company
sells its products could have an adverse effect on the Company's net sales and
profitability.
The personal computer industry presents risks for claims of
infringement of patents, trademarks and copyrights. From time to time, the
Company may be notified that certain of its products may infringe upon the
intellectual property rights of others. The Company generally evaluates all such
notices on a case-by-case basis to determine whether licenses are necessary or
desirable. If such claims are made, there can be no assurance that licenses will
be available on commercially reasonable terms or that retroactive royalty
payments on sales of the
23
<PAGE>
Company's computers will not be required. In addition, substantial costs may be
incurred in disputing such claims. The Company believes that the actions it
takes to avoid or minimize the impact to the Company of such claims are prudent,
however, there can be no assurance that such claims will not occur and, if
successful, would not have a material adverse effect on the Company's business
operations and profitability.
The Company continued to broaden its product distribution into new
geographic locations and new sales channels. Certain of the Company's sales were
to newly appointed resellers and new locations for sale of the Company's
products. Offering its products in an increasing number of geographic locations
and through a variety of distribution channels, including distributors,
electronics superstores, and other mass merchandise stores, requires the Company
to increase its geographic presence and to provide direct sales and support
interface with customers. There can be no assurance, however, that this
distribution strategy will be effective, or that the requisite service and
support to ensure the success of the Company's operations in new locations or
through new channels can be achieved without significantly increasing overall
expenses. While the Company anticipates that its geographic expansion will
continue and the number of outlets for its products will increase in fiscal
1995, a reduction in this growth could affect sales and profitability.
The Company's primary means of distribution remains third-party
computer resellers and consumer channels. While the Company continuously
monitors and manages the credit it extends to resellers to limit its credit
risk, the Company's business could be adversely affected in the event that the
generally weak financial condition of third-party computer resellers worsens. In
the event of the financial failure of a major reseller, the Company would
experience disruptions in its distribution as well as the loss of the unsecured
portion of any outstanding accounts receivable.
The Company's corporate headquarters facility, at which the majority
of its research and development activities are conducted, and certain
manufacturing operations are located near major earthquake faults which have
experienced earthquakes in the past. While the Company does carry insurance at
levels management believes is prudent, in the event of a major earthquake
affecting one or more of the Company's facilities, it is likely that insurance
proceeds would not cover all of the costs incurred and, therefore, the
operations and operating results of the Company could be adversely affected.
Because of these and other factors affecting the Company's operating
results, past financial performance should not be considered a reliable
indicator of future performance, and investors should not use historical trends
to anticipate results or trends in future periods. In addition, the Company's
participation in the highly dynamic personal computer industry often results in
significant volatility in the Company's common stock price.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
Financial Statements:
Report of Independent Auditors.
Consolidated Balance Sheets at July 2, 1994 (restated) and July 3,
1993.
Consolidated Statements of Operations for the years ended July 2,
1994 (restated), July 3, 1993 and June 27, 1992.
Consolidated Statements of Shareholders' Equity for the years ended
July 2, 1994 (restated), July 3, 1993 and June 27, 1992.
Consolidated Statements of Cash Flows for the years ended July 2,
1994 (restated), July 3, 1993 and June 27, 1992.
Notes to Restated Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AST Research, Inc.
We have audited the accompanying restated consolidated balance sheets
of AST Research, Inc. as of July 2, 1994 and July 3, 1993, and the related
restated consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended July 2, 1994. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AST
Research, Inc. at July 2, 1994 and July 3, 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended July 2, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
The consolidated financial statements for the year ended July 2, 1994
have been restated as discussed more fully in Note 2 - Acquisitions.
Ernst & Young LLP
Orange County, California
July 26, 1994, except for
Note 2 - Acquisitions
as to which the date is
June 1, 1995
26
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
July 2, July 3,
(In thousands, except share amounts) 1994 1993
(Restated - Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 153,118 $121,600
Accounts receivable, net of allowance for
doubtful accounts of $17,564 ($11,671 in 1993) 326,057 236,020
Inventories 333,729 342,307
Deferred income taxes 43,266 46,058
Other current assets 9,797 15,230
- --------------------------------------------------------------------------------
Total current assets 865,967 761,215
Property and equipment 159,530 134,422
Accumulated depreciation and amortization (56,089) (39,500)
- --------------------------------------------------------------------------------
Net property and equipment 103,441 94,922
Goodwill, net of accumulated amortization
of $3,479 ($606 in 1993) 29,220 20,693
Other assets 6,992 9,329
- --------------------------------------------------------------------------------
$1,005,620 $886,159
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 50,000 $ 59,217
Accounts payable 209,579 157,996
Accrued salaries, wages and employee benefits 21,465 19,042
Other accrued liabilities 112,096 178,835
Income taxes payable 27,455 44,832
Current portion of long-term debt 398 247
- --------------------------------------------------------------------------------
Total current liabilities 420,993 460,169
Long-term debt 215,294 92,258
Deferred income taxes and other non-current
liabilities 7,571 14,926
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 70,000,000 shares
authorized, 32,333,750 shares issued and
outstanding in 1994 (31,579,115 in 1993) 323 316
Additional capital 141,424 129,784
Retained earnings 220,015 188,706
- --------------------------------------------------------------------------------
Total shareholders' equity 361,762 318,806
- --------------------------------------------------------------------------------
$1,005,620 $886,159
================================================================================
</TABLE>
See accompanying notes.
27
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Fiscal Year
------------------------------------
(In thousands, except per share amounts) 1994 1993 1992
(Restated - Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $2,367,274 $1,412,150 $944,079
Cost of sales 2,019,541 1,126,452 650,819
- --------------------------------------------------------------------------------
Gross profit 347,733 285,698 293,260
Selling and marketing expenses 193,053 141,752 120,072
General and administrative expenses 74,333 51,555 45,201
Engineering and development expenses 38,858 31,969 30,461
Restructuring charge (credit) (12,500) 125,000 -
- --------------------------------------------------------------------------------
Total operating expenses 293,744 350,276 195,734
- --------------------------------------------------------------------------------
Operating income (loss) 53,989 (64,578) 97,526
Interest income 2,125 3,341 7,009
Interest expense (9,937) (1,269) (2,439)
Other income (expense), net 135 (2,732) (1,812)
- --------------------------------------------------------------------------------
Income (loss) before income taxes 46,312 (65,238) 100,284
Provision (benefit) for income taxes 15,003 (11,500) 31,780
- --------------------------------------------------------------------------------
Net income (loss) $ 31,309 $ (53,738) $ 68,504
================================================================================
Net income (loss) per share:
Primary $ 0.96 $ (1.72) $ 2.16
Fully diluted $ 0.95 $ (1.72) $ 2.16
================================================================================
Shares used in computing net income
(loss) per share:
Primary 32,548 31,289 31,758
Fully diluted 34,866 31,289 31,774
================================================================================
</TABLE>
See accompanying notes.
28
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Common Stock Additional Retained
(In thousands) Shares Amount Capital Earnings
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at June 28, 1991 30,228 $302 $107,920 $173,940
Exercise of stock options 607 6 2,771 -
Tax benefit related to
employee stock options - - 9,042 -
Vesting of restricted stock - - 782 -
Cancellation of restricted stock (48) - - -
Net income - - - 68,504
- --------------------------------------------------------------------------------
Balance at June 27, 1992 30,787 308 120,515 242,444
Exercise of stock options 867 9 4,939 -
Tax benefit related to
employee stock options - - 3,980 -
Vesting of restricted stock - - 450 -
Cancellation of restricted stock (75) (1) (100) -
Net loss - - - (53,738)
- --------------------------------------------------------------------------------
Balance at July 3, 1993 31,579 316 129,784 188,706
Exercise of stock options and
warrants 755 7 9,554 -
Tax benefit related to
employee stock options - - 1,823 -
Vesting of restricted stock - - 263 -
Net income (Restated - Note 2) - - - 31,309
- --------------------------------------------------------------------------------
Balance at July 2, 1994 (Restated) 32,334 $323 $141,424 $220,015
================================================================================
</TABLE>
See accompanying notes.
29
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year
- ------------------------------------------------------------------------------------------------
(In thousands) 1994 1993 1992
(Restated - Note 2)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Cash received from customers $ 2,274,978 $ 1,322,831 $ 906,319
Cash paid to suppliers and employees (2,294,380) (1,373,528) (846,023)
Interest received 2,052 4,583 6,388
Interest paid (3,149) (1,373) (2,610)
Income tax refunds received 1,989 - -
Income taxes paid (22,210) (13,008) (29,405)
Other cash received (paid) 460 (7,923) (2,476)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities (40,260) (68,418) 32,193
Cash flows from investing activities:
Purchases of short-term investments - (35,155) (120,566)
Proceeds from short-term investments - 87,986 67,735
Payment related to Tandy/GRiD
acquisition (15,000) - -
Purchases of capital equipment (30,045) (20,894) (17,811)
Proceeds from disposition of capital
equipment 10,673 1,146 1,923
Purchases of other assets (1,484) (560) (381)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (35,856) 32,523 (69,100)
Cash flows from financing activities:
Short-term borrowings, net (9,217) 58,417 -
Repayment of long-term debt (520) (355) (28,430)
Proceeds from issuance of long-term debt 107,974 - -
Proceeds from issuance of common stock 9,561 4,948 2,777
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 107,798 63,010 (25,653)
Effect of exchange rate changes on cash
and cash equivalents (164) 6,611 (2,871)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 31,518 33,726 (65,431)
Cash and cash equivalents at beginning
of year 121,600 87,874 153,305
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 153,118 $ 121,600 $ 87,874
================================================================================================
</TABLE>
See accompanying notes.
30
<PAGE>
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
<CAPTION>
Fiscal Year
- -----------------------------------------------------------------------------------------------------
(In thousands) 1994 1993 1992
(Restated - Note 2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net income (loss) to net
cash provided by (used in) operating
activities:
Net income (loss) $ 31,309 $ (53,738) $ 68,504
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 25,861 13,222 11,793
Provision (benefit) for deferred income
taxes 8,983 (55,438) 1,499
Gain on sale of capital equipment (4,286) - -
Pen-based inventory write-off 33,600 - -
Change in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (86,290) (97,059) (37,164)
Inventories (19,808) (59,809) (54,367)
Other current assets 3,317 (552) (4,985)
Accounts payable and accrued expenses (14,093) 137,496 42,862
Income taxes payable (17,377) 28,230 (7,757)
Other current liabilities (3,573) 19,785 9,850
Exchange (gains) losses 2,097 (555) 1,958
- -----------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities $(40,260) $ (68,418) $ 32,193
=====================================================================================================
Supplemental schedule of noncash investing
and financing activities:
The Company purchased certain assets relating
to Tandy Corporation's personal computer
operations effective June 30, 1993. In
addition, the Company purchased certain
assets relating to Tandy/GRiD France's
personal computer operations effective
September 1, 1993. In conjunction with
the acquisitions, liabilities were
assumed as follows:
Fair value of assets acquired $ 16,571 $ 151,000
Note payable and cash due Tandy (6,720) (105,000)
- -----------------------------------------------------------------------------------------------------
Liabilities assumed $ 9,851 $ 46,000
- -----------------------------------------------------------------------------------------------------
Tax benefit of employee stock options $ 1,823 $ 3,980 $ 9,042
=====================================================================================================
</TABLE>
See accompanying notes.
31
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the
accounts of AST Research, Inc. (the "Company") and its wholly and majority owned
subsidiaries. All intercompany accounts and transactions have been eliminated
in consolidation.
Fiscal Year
The Company operates within a conventional 52/53 week accounting
fiscal year. The Company's fiscal year ends on the Saturday closest to June
30th, with the exception of certain foreign subsidiaries which operate on a June
30th fiscal year end. The fiscal years ended July 2, 1994, July 3, 1993 and
June 27, 1992 included 52, 53 and 52 weeks, respectively.
Business
The Company designs, manufactures, markets, services and supports a
broad line of personal computers, including desktop, server, and notebook
systems marketed under the Advantage!, Ascentia, Bravo, Premmia and Manhattan
SMP brand names.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of
deposit, time deposits, commercial paper, money market preferred stocks, short-
term government obligations and other money market instruments. The Company
invests its excess cash in deposits with major international banks, in
government securities and money market securities of investment grade companies
from a variety of industries and, therefore, bears minimal risk. These
securities have original maturity dates not exceeding three months. Such
investments are stated at cost, which approximates fair value, and are
considered cash equivalents for purposes of reporting cash flows.
Inventories
Inventories are stated at the lower of cost, determined on a first-in
first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following estimated useful
lives:
- --------------------------------------------------------------------------------
Buildings 40 years
Machinery and equipment 3-5 years
Furniture and fixtures 3-5 years
Leasehold improvements Shorter of 5 years or remaining term of the lease
- --------------------------------------------------------------------------------
Goodwill
Goodwill, representing the excess of the purchase price over the fair
value of the net assets of the acquired entities, is being amortized on a
straight-line basis over the period of expected benefit of ten years. Total
amortization of goodwill recorded for fiscal years 1994, 1993 and 1992 was $2.9
million, $.1 million and $.1 million, respectively. The carrying value of
goodwill will be reviewed periodically based on the undiscounted cash flows of
the entity acquired over the remaining amortization period. Should this review
indicate that goodwill will not be recoverable, the Company's carrying value of
the goodwill will be reduced by the estimated shortfall of undiscounted cash
flows.
Revenue Recognition
The Company recognizes revenue from product sales at the time of
shipment. The Company has established programs which, under specified
conditions, provide price protection rights and/or enable its customers to
return product. The effect of these programs is estimated and current period
sales and cost of sales are reduced accordingly.
32
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Note 1. Summary of Significant Accounting Policies (Continued)
Warranty Costs
The Company provides, by a current charge to income, an amount it
estimates will be needed to cover future warranty obligations for products sold
during the year. The accrued liability for warranty costs is included in the
caption "Other accrued liabilities" in the accompanying consolidated balance
sheets.
Engineering and Development
Engineering and development costs are expensed as incurred.
Substantially all engineering and development expenses are related to
developing new products and designing significant improvements to existing
products.
Deferred Grants
During fiscal 1994, the Company secured various grants from the
Industrial Development Authority of the Republic of Ireland. These grants
include employment, training and capital grants and extend through December
1996. Employment grants are amortized into income over a period of one year.
Employee training grants are recognized in income in the period in which the
training costs are incurred by the Company. Grants for the acquisition of
property and equipment are deferred and recognized in income on the same basis
as the related property and equipment is depreciated. During fiscal 1994, the
Company recorded approximately $5.1 million in grant funds received or
receivable and at July 2, 1994, $4.5 million of this amount remains as a
deferred credit and is included in "Other accrued liabilities" in the
accompanying consolidated balance sheet.
The Company has a ten year contingent liability to repay, in whole or
in part, grants received under certain circumstances pursuant to the Capital
and Employment Grant Agreements which began February 1994. In addition, the
Company has a five year contingent liability under the Employment Grant
Agreement from date of first payment to repay employment grants paid in respect
to any job if such job remains vacant for a period in excess of six calendar
months. At July 2, 1994, the Company also has a one million Irish pounds (U.S.
$1.5 million) ten year contingent liability related to the purchase of the
manufacturing facility which began in November 1993 and is payable in the event
that the Company terminates operations in Ireland.
Foreign Currency
The financial statements of the Company's foreign subsidiaries are
remeasured into the U.S. dollar functional currency for consolidation and
reporting purposes. Current rates of exchange are used to remeasure monetary
assets and liabilities and historical rates of exchange are used for
nonmonetary assets and related elements of expense. Revenue and other expense
elements are remeasured at rates which approximate the rates in effect on the
transaction dates. Gains and losses resulting from this remeasurement process
are recognized currently in the consolidated statements of operations.
The Company utilizes forward exchange contracts and local currency
borrowings to hedge its exposure to exchange rate fluctuations in connection
with monetary assets and liabilities held in foreign currencies. The carrying
amounts of the forward exchange contracts equal their fair value and are
adjusted at each balance sheet date for changes in exchange rates. Realized
and unrealized gains and losses on the forward contracts are recognized
currently in income, and any premium or discount is recognized over the life of
the contract. The Company held forward exchange contracts maturing at various
dates through January 1995 with a face value of approximately $143.0 million at
July 2, 1994 and $57.5 million at July 3, 1993. Unrealized losses associated
with these forward contracts aggregating $4.8 million at July 2, 1994 and
unrealized gains aggregating $1.1 million at July 3, 1993 are included in the
Company's consolidated statements of operations for those periods. For the
years ended July 2, 1994, July 3, 1993 and June 27, 1992, a net foreign
currency transaction loss of $2,097,000, gain of $555,000 and loss of
$1,958,000, respectively, is included in the caption "Other expense, net" in
the accompanying consolidated statements of operations.
33
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 1. Summary of Significant Accounting Policies (Continued)
Income Taxes
The provision (benefit) for income taxes is computed on the pretax
income (loss) of the consolidated entities located within each taxing country
based on the current tax law. Deferred taxes result from the future tax
consequences associated with temporary differences between the amount of assets
and liabilities recorded for tax and financial accounting purposes.
Incremental United States income taxes have not been provided on $195 million
of cumulative undistributed earnings of the Company's foreign subsidiaries.
These earnings, which reflect full provision for non-U.S. income taxes, are
expected to be reinvested indefinitely in non-U.S. operations or to be remitted
substantially free of additional tax. Accordingly, no material provision has
been made for taxes that might be payable upon remittance of such earnings nor
is it practicable to determine the amount of this liability.
During fiscal 1993, the Company elected the early adoption of the
asset and liability method of accounting for income taxes pursuant to Statement
of Financial Accounting Standards No. 109 "Accounting for Income Taxes" ("SFAS
109"). This change had no material effect on the net loss previously reported
in fiscal 1993.
Per Share Information
Primary earnings (loss) per common share have been computed based
upon the weighted average number of common and common equivalent shares
outstanding. Common equivalent shares result from the assumed exercise of
outstanding stock options that have a dilutive effect when applying the
treasury stock method. The fully diluted per share calculation assumes, in
addition to the above, (i) that the Company's Liquid Yield Option Notes were
converted from the date of issuance with earnings being increased for interest
expense, net of taxes, that would not have been incurred had conversion taken
place, and (ii) the potential additional dilutive effect of stock options.
Capital Stock
The Company follows the practice of recording amounts received upon
the exercise of options by crediting common stock and additional capital. No
charges are reflected in the consolidated statements of operations as a result
of the grant or exercise of stock options. The Company realizes an income tax
benefit from the exercise or early disposition of certain stock options. This
benefit results in a decrease in current income taxes payable and an increase
in additional capital.
Reclassification
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
Note 2. Acquisitions and Restructuring
Acquisitions
In the fourth quarter of fiscal 1993, the Company acquired certain
assets and assumed certain liabilities relating to Tandy Corporation's personal
computer manufacturing operations and the GRiD North American and European
sales divisions. On September 1, 1993, the Company also purchased certain
assets and assumed certain liabilities of Tandy/GRiD France. Assets acquired
in the fiscal 1993 fourth quarter purchase included four manufacturing
facilities, three of which were located in Fort Worth, Texas and one in East
Kilbride, Scotland. Other tangible assets acquired consisted primarily of
inventory and property, plant and equipment. As part of the purchase
agreement, the Company also received the right to supply personal computers to
Tandy's Radio Shack, Computer City and Incredible Universe retail operations
under a three-year supply agreement. The total purchase price (including
Tandy/GRiD France) was $111.7 million and included a cash payment of $15
million and a three-year promissory note in the principal amount of $96.7
million.
34
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Acquisitions and Restructuring (Continued)
The preliminary estimate of the excess of the purchase price over the
fair value of the net assets acquired (goodwill) was $20 million relating to
valuation adjustments to inventory ($15 million) and certain accrued
liabilities ($5 million). During fiscal 1994, the Company refined the fair
value estimates of the assets acquired and liabilities assumed and, as a
result, increased the recorded goodwill by $11.4 million to $31.4 million.
As part of the Company's acquisition of Tandy's personal computer
operations, the Company acquired Tandy's GRiD and Victor(R) product lines.
These lines included various models of desktop and notebook personal computers
(non pen-based products) as well as the GRiD Convertible(TM), GRiD PalmPad(R)
and PalmPad SL, and GRiDPAD(R) 2390 pen-based systems. During the first and
second quarters of fiscal 1994, the Company focused its efforts with respect to
the acquired product lines on manufacturing personal computers for sale to
Tandy Corporation under the supply agreement with Tandy's retail operations and
integrating the acquired GRiD and Victor non pen-based product lines into its
product families. Beginning in the third quarter of fiscal 1994, the Company
commenced a reassessment of the GRiD non pen-based product lines and product
capabilities, the current and future prospects for GRiD products and the costs
involved in continuing the GRiD brand name. Based on this review and the
Company's success in transitioning certain GRiD customers to the Company's
product lines, the Company decided in the fourth quarter to eventually
discontinue all manufacturing, marketing and sales efforts related to the
acquired GRiD non pen-based product lines.
By the end of the second quarter of fiscal 1994, the Company had been
able to complete an analysis of the inventory acquired from Tandy Corporation
by product line and determined that it had acquired unique purchased parts and
finished goods sufficient to manufacture approximately 40,000 units of pen-
based products. In the third quarter of fiscal 1994, the Company also
increased its focus on the level of sales of the GRiD pen-based products
relative to the level of acquired pen-based products inventories. However, the
sales volumes attained by the Company in the first three quarters of fiscal
1994, which were consistent with the sales volumes achieved by GRiD in the
three fiscal quarters preceding the acquisition, only utilized approximately
25% of the total quantity of pen-based products acquired. Accordingly, the
Company believed that its sales experience substantiated that a significant
portion of the acquired pen-based products inventory was excess and/or
obsolete. As originally reported, in the fourth quarter of fiscal 1994 the
Company completed its allocation of the purchase price and reduced the
preliminary value assigned to such inventory by $33.6 million and increased the
carrying value of goodwill arising from the Tandy acquisition by a
corresponding amount.
The consolidated financial statements for the year ended July 2, 1994
contained in this Form 10-K/A have been restated from those originally issued
to reflect the $33.6 million reduction in the carrying value of GRiD pen-based
products inventories acquired in the Tandy acquisition, made in the fourth
quarter of fiscal 1994, as a charge to cost of sales rather than an increase in
the carrying value of goodwill arising from the Tandy acquisition. This
restatement was made in connection with a Securities and Exchange Commission
(SEC) review. Following discussions with the SEC staff, in June 1995, the
Company made the restatement and related adjustments discussed below.
After giving effect to this restatement, reversal of previously
recorded related goodwill amortization and related income tax effects, fiscal
1994 net income has been restated to $31.3 million ($.95 per share) from $53.5
million ($1.59 per share), and shareholders' equity has been reduced from $384
million to $361.8 million. These adjustments are expected to result in a $10.5
million reduction to income taxes payable but otherwise have no impact on the
Company's working capital or cash flows. Additionally, goodwill amortization
over the remaining portion of the ten year life assigned to goodwill arising
from the Tandy acquisition will be reduced by $3.6 million annually.
The acquisitions have been accounted for in accordance with the
purchase method of accounting and, accordingly, the net assets acquired have
been included in the Company's consolidated balance sheets based upon their
estimated fair values at the transactions' effective dates. The Company's
consolidated statements of operations include the revenues and expenses of the
acquired businesses after the effective dates of the respective transactions.
35
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Acquisitions and Restructuring (Continued)
Supplemental Pro Forma Results of Operations (Unaudited)
The following unaudited pro forma summary presents the consolidated
results of operations as if the acquisitions had occurred at the beginning of
the period presented and does not purport to be indicative of what would have
occurred had the acquisitions been made as of such date or of results which may
occur in the future.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
1993
-------------------------------------------------------------------------------
<S> <C>
Net sales $1,982,511
Net loss $ (41,440)
Net loss per share $ (1.32)
- --------------------------------------------------------------------------------
</TABLE>
Adjustments made in arriving at pro forma unaudited results of
operations include the elimination of sales transactions between the Company
and acquired operations, reduction of payroll expenses, increased interest
expense on acquisition debt, amortization of goodwill and related tax
adjustments. Pro forma 1993 net loss excludes restructuring charges and a loss
recognized by Tandy associated with the sale of assets to AST. However, no
effect has been given in the pro forma information for synergistic benefits
that are expected to be realized. The pro forma results for fiscal 1994,
assuming Tandy/GRiD France had been acquired at the beginning of the fiscal
year, would not differ significantly from the financial information presented
in the consolidated statement of operations.
Restructuring
In the fourth quarter of fiscal 1993 and in connection with the
Company's acquisition of Tandy's personal computer manufacturing and
engineering operations and GRiD's North American and European sales and
marketing operations, the Company recorded a pretax restructuring charge of
$125 million. The estimated restructuring costs included $68 million in asset
write-downs and $57 million in estimated future cash expenditures. The charge
reflected estimated expenses to combine and restructure the Company's existing
worldwide manufacturing capacity ($34 million), as well as its marketing,
engineering, distribution, sales, and service operations ($41 million). Also
included within the restructuring charge were selected inventory valuation
adjustments ($33 million) necessary to realign existing AST product lines in
relation to the acquired Tandy/GRiD and Victor products and to curtail
production of certain AST product offerings as a result of competing Tandy/GRiD
product lines. These estimated restructuring costs represented the Company's
best assessment of the proposed restructuring plans; however, the Company
expected that some of these original plans would be revised as the Company
continued to identify the best means of achieving reductions in its cost
structure.
During fiscal 1994, the Company completed most of its previously
identified restructuring activities and incurred asset write-downs of $50
million and cash expenditures of $47 million related directly to its fiscal
1994 restructuring activities. The Company's manufacturing operations were
realigned to integrate the combined operations along product and geographic
boundaries and included the shift of nearly all the Americas desktop production
to Texas and the establishment of a new European manufacturing, distribution
and service operation in Limerick, Ireland. During fiscal 1994, the Company
realigned and centralized its European distribution and service operations in
connection with establishing the new Ireland facilities. The Company also
realigned its engineering and marketing organizations into strategic business
units in order to improve the Company's ability to provide dedicated focus on
each of its key product groups: desktops, servers and notebooks. During the
first and second fiscal quarters, the Company focused its efforts on
integrating its existing product lines with those of the acquired Tandy/GRiD
operations, resulting in price realignments of existing AST products as well as
the acceleration of certain AST end-of-life product cycles caused primarily by
the introduction of the newly acquired Tandy/GRiD products.
36
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 2. Acquisitions and Restructuring (Continued)
The Company established the restructuring reserve as a result of the
Tandy acquisitions and incurred costs related to the impact of the acquisitions
on AST's existing operations and the resulting requirement to realign the new
and larger combined Company's operations. These costs included asset write-
downs, provisions and cash expenditures. Furthermore, the Company used its
restructuring provisions for activities that were either identifiable with the
restructuring plan or that could be reasonably estimated in accordance with
provisions of Financial Accounting Standards Board Statement No. 5, "Accounting
for Contingencies."
In the fourth quarter of fiscal 1994, after concluding that most of
its restructuring activities had been completed or were adequately provided for
within the remaining restructuring accrual, the Company determined that the
total restructuring cost estimate could be lowered. As a result, the Company
took a fourth quarter restructuring credit in the amount of $12.5 million, or
ten percent of the original $125 million charge taken in the comparable prior
year fourth quarter. At July 2, 1994, the Company continues to hold
approximately $15 million in accrued restructuring provisions for the final
restructuring activities, which the Company expects to be completed during the
first half of fiscal 1995. The Company expects most of these costs to represent
future cash expenditures to be incurred to further combine and restructure
existing worldwide manufacturing and distribution capacity.
The Company believes that its fiscal 1994 restructuring activities
were necessary in order to redeploy and reorganize its worldwide operations
after the June 1993 acquisition of Tandy Corporation's personal computer
operations. No assurances can be given that the restructuring actions will be
successful or that similar actions will not be required in the future.
Note 3. Inventories
<TABLE>
<CAPTION>
Inventories consist of the following:
-------------------------------------------------------------------------------
July 2, July 3,
(In thousands) 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 99,959 $146,565
Work in process 53,765 30,890
Finished goods 180,005 164,852
-------------------------------------------------------------------------------
Total $333,729 $342,307
===============================================================================
</TABLE>
Note 4. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
July 2, July 3,
(In thousands) 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C>
Land $ 15,729 $ 12,786
Buildings 35,547 31,382
Machinery and equipment 84,004 69,869
Furniture and fixtures 11,926 10,790
Leasehold improvements 12,324 9,595
-------------------------------------------------------------------------------
Total $159,530 $134,422
===============================================================================
</TABLE>
37
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5. Financing Arrangements
At July 2, 1994, the Company had available a $300 million unsecured
committed revolving credit facility with a final maturity date of September 30,
1996. This revolving credit agreement is provided by 13 major domestic and
international banks and allows the Company to borrow, subject to certain
leverage and total debt restrictions, at rates based upon the bank's reference
rate, or a spread of .625% over the LIBOR rate, .75% over the domestic
certificate of deposit rate, or at a rate bid by a bank, as selected by the
Company. The Company is required to pay a facility fee equal to .375% per annum
based on the total committed amount available under the facility. The fee is
payable quarterly in arrears. At July 2, 1994, there was $45.0 million
outstanding as drawings under this credit facility at an interest rate of 7.25%
and $67.7 million outstanding in the form of a letter of credit issued to Tandy
Corporation in support of the acquisition note payable (Note 6). In addition,
there was $5 million outstanding at July 2, 1994 as borrowings under an
uncommitted money market line of credit available to the Company. The interest
rate on this borrowing was 4.875% and there are no other fees required under
this agreement. The Company also has various additional letter of credit and
money market facilities available for use by the Company and its subsidiaries.
The Company's Taiwan subsidiary has separate letter of credit
facilities aggregating $2 million with a major Taiwanese bank expiring June 22,
1995. At July 2, 1994, there were no letters of credit outstanding under these
facilities.
Certain of the Company's credit facilities require that the Company
maintain a minimum level of tangible net worth and certain financial ratios.
At July 2, 1994, the Company was in compliance with the covenants and
conditions of these credit facilities.
<TABLE>
<CAPTION>
Note 6. Long-Term Debt
Long-term debt consists of the following:
-------------------------------------------------------------------------------
July 2, July 3,
(In thousands) 1994 1993
-------------------------------------------------------------------------------
<S> <C> <C>
Liquid Yield Option Notes (zero coupon convertible
subordinated notes) due 2013, less original issue
discount of $200,334, 5.25% yield to maturity $114,666 $ -
Promissory note payable, interest due annually at
current rate of 4.94%, principal due July 1996 96,720 90,000
Other notes payable due in various installments through
April 2002 4,306 2,505
- --------------------------------------------------------------------------------
215,692 92,505
Less current portion of long-term debt (398) (247)
- --------------------------------------------------------------------------------
Long-term debt $215,294 $92,258
================================================================================
</TABLE>
On December 14, 1993, the Company issued $315 million par value of
Liquid Yield Option Notes ("LYONs") due December 14, 2013. The LYONs are zero
coupon convertible subordinated notes which were sold at a significant discount
from par value with a yield to maturity of 5.25% and a total value at maturity
of $315 million. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. Total proceeds received from the sale of the LYONs were
approximately $111.7 million, which have been utilized for working capital,
including the financing of expected increases in accounts receivable and
inventories, repayment of bank borrowings under the Company's revolving credit
facilities, new product development, and other general corporate purposes. The
holder of a LYON may require the Company to purchase its LYONs on December 14,
1998, December 14, 2003 and December 14, 2008 (the "Purchase Dates"), and such
payments may reduce the liquidity of the Company. However, the Company may,
subject to certain exceptions, elect to pay the purchase price on any of the
three Purchase Dates in cash or shares of common stock or any combination
thereof.
38
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 6. Long-Term Debt (Continued)
In connection with the Tandy acquisition, the Company issued a $96.7
million promissory note to Tandy Corporation which is due on July 11, 1996.
Interest due the first year was paid on July 11, 1994 at an initial rate of
3.75% per annum. The interest rate has been adjusted to 4.94% per annum,
effective July 11, 1994 and will be adjusted once more on July 11, 1995 to the
lower of either 5% or the "lowest three month rate" within the meaning of
Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995.
There are no sinking fund requirements. The note also requires the Company to
maintain a standby letter of credit payable to Tandy in the amount of 70% of
the face value of the note or $67.7 million. Upon maturity of the note, up to
50% of the initial principal amount of the promissory note may be converted, at
the option of the Company, into common stock of the Company based upon its then
fair market value, as defined in the promissory note. This standby letter of
credit was issued under the terms of the Company's revolving credit agreement.
Principal repayments on long-term debt required in fiscal years 1995,
1996, 1997, 1998 and 1999 are $398,000, $2,260,000, $97,167,000, $324,000 and
$272,000, respectively.
Based upon the borrowing rates currently available to the Company for
loans with similar terms or maturity, the fair value of long-term debt is not
significantly different from the carrying value.
Note 7. Income Taxes
<TABLE>
<CAPTION>
The provision (benefit) for income taxes consists of the following:
---------------------------------------------------------------------------
(In thousands) 1994 1993 1992
---------------------------------------------------------------------------
Deferred
Liability Method Method
---------------- ------
<S> <C> <C> <C>
Current:
Federal $(2,781) $ 36,461 $14,700
State (201) 1,116 3,950
Foreign 9,002 6,361 11,631
---------------------------------------------------------------------------
6,020 43,938 30,281
---------------------------------------------------------------------------
Deferred:
Federal 8,532 (54,424) 2,413
State 105 (3,108) 349
Foreign 346 2,094 (1,263)
---------------------------------------------------------------------------
8,983 (55,438) 1,499
---------------------------------------------------------------------------
$15,003 $(11,500) $31,780
===========================================================================
</TABLE>
As discussed in Note 1, the Company adopted SFAS No. 109 in fiscal
1993. This change had no material effect on the previously reported fiscal 1993
net loss. Deferred taxes in 1994 and 1993 reflect the impact of future tax
consequences associated with temporary differences between the amount of assets
and liabilities recorded for tax and financial accounting purposes. These
temporary differences are determined in accordance with SFAS No. 109 and are
more inclusive in nature than "timing differences" as determined under
previously applicable accounting
39
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7. Income Taxes (Continued)
principles. Temporary differences and carryforwards which give rise to a
significant portion of deferred tax assets and liabilities as of July 2, 1994
and July 3, 1993 are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
1994 1993
(In thousands) Assets Liabilities Assets Liabilities
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Inventory reserves $ 16,968 $ - $ 4,109 $ -
Returns and allowances 3,679 - 3,481 -
Other accrued liabilities 7,176 - 3,199 -
Restructuring charge 5,365 - 49,541 -
Warranty reserves 5,201 - - -
State income taxes - (914) - -
Depreciation - - - (1,522)
Goodwill - (2,524) - -
Deferred intercompany profit 1,985 - 2,659 -
Net operating loss
carryforwards 27,366 - 14,719 -
Other 10,736 (274) 5,001 (100)
-----------------------------------------------------------------------------
Total deferreds 78,476 (3,712) 82,709 (1,622)
Valuation allowance (34,524) - (32,889) -
-----------------------------------------------------------------------------
$ 43,952 $(3,712) $ 49,820 $(1,622)
=============================================================================
</TABLE>
During 1992, deferred income taxes were provided for significant
timing differences in the recognition of revenue and expenses for tax and
financial accounting purposes. Principally, these items consisted of the
following: $2,774,000 for earnings not currently taxable in the U.S.,
($1,015,000) for accrued liabilities, ($757,000) for reserves for returns and
allowances, $198,000 for inventory reserves, ($159,000) for bad debt reserves,
and $458,000 for all other.
The provision (benefit) for income taxes differs from the amounts
computed by applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
(In thousands) 1994 1993 1992
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax provision
(benefit) $ 16,209 $(22,181) $34,097
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit (137) (1,312) 3,531
Foreign income taxed at different rates (10,005) (7,635) (9,973)
Losses producing no current tax benefit 8,589 8,307 4,590
Adjustment to deferred assets and
liabilities for change in tax rate (1,266) - -
Restructuring charge producing no current
tax benefit - 12,748 -
Other, net 1,613 (1,427) (465)
-----------------------------------------------------------------------------
$ 15,003 $(11,500) $31,780
=============================================================================
</TABLE>
The Company's manufacturing operations in Taiwan and the PRC operate
under complete or partial tax holidays which expire in 1997 and 1999,
respectively. The aggregate dollar amount and per share effect of these tax
holidays were immaterial for 1994, 1993 and 1992.
40
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7. Income Taxes (Continued)
Pretax profit (losses) from foreign operations were approximately
$29,778,000, ($1,983,000) and $50,287,000 in 1994, 1993 and 1992, respectively.
The Company has $85 million of net operating loss carryforwards in various
foreign countries which can be utilized to offset the Company's future taxable
income. Approximately $34 million of such carryforwards expire from 1995
through 2001. The remaining carryforwards of $51 million have no expiration
date.
The Internal Revenue Service ("IRS") is currently examining the
Company's 1989, 1990 and 1991 federal income tax returns. In addition, the IRS
has completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal tax liabilities
for such years of approximately $8.3 million, excluding interest. The majority
of such proposed adjustments relate to the allocation of income between the
Company and its foreign subsidiaries. Management believes that the Company's
position has substantial merit and intends to vigorously contest these proposed
adjustments. Management further believes that any liability that may result
upon the final resolution of the proposed adjustments or the current
examinations will not have a material adverse effect on the Company's
consolidated financial position or results of operations.
Note 8. Benefit Plans
Profit Sharing Plan
During 1983, the Company established the Profit Sharing Plan for all
employees. The plan is a noncontributory, defined contribution plan that
provides for contributions from the Company based on eligible compensation.
The Company's contributions are determined at the discretion of the Board of
Directors and are not to exceed income before provision for income taxes and
profit sharing expense. The Company did not contribute to the plan for the
years ended July 2, 1994 and July 3, 1993. The Company's contribution for the
year ended June 27, 1992 was $1,621,000.
In 1987, the Company approved a modification to the profit sharing
plan that added a 401(k) employee savings program. Under the 401(k) plan, the
Company is obligated to contribute matching amounts for employee contributions
equal to 100% on the first 2% of employee salary contributions and 50% on the
next 4% of employee salary contributions. Company contributions generally vest
over five years from the date of the employee's eligibility to participate. The
Company contributed approximately $2,064,000 to the plan for the year ended
July 2, 1994, of which approximately $175,000 is included in accrued salaries,
wages and employee benefits in the accompanying July 2, 1994 consolidated
balance sheet. The Company's contributions for the years ended July 3, 1993 and
June 27, 1992 amounted to $1,679,000 and $1,322,000, respectively.
Employee Bonus Plans
Pursuant to the Employee Bonus Plan, all employees of the Company are
eligible to receive, on a quarterly basis, a percentage of their base
compensation as a cash bonus. The percentage paid is at the discretion of
management and is limited to a maximum of 15% of the respective employees' base
quarterly compensation. For fiscal 1994, the Company paid bonuses aggregating
$1,954,000 under the plan, of which $679,000 is included in accrued salaries,
wages and employee benefits in the accompanying July 2, 1994 consolidated
balance sheet. Bonuses paid for the years ended July 3, 1993 and June 27, 1992
were $1,568,000 and $2,528,000, respectively.
The Company also has a performance-based management incentive plan for
officers and key employees. Bonuses under the plan are distributed to officers
and key employees of the Company based upon performance related criteria
determined at the discretion of the Compensation Committee of the Board of
Directors. For fiscal 1994, the Company paid bonuses aggregating $1,920,000
under this plan that is included in accrued salaries, wages and employee
benefits in the accompanying consolidated balance sheet at July 2, 1994.
Bonuses paid for the years ended July 3, 1993 and June 27, 1992 were $3,928,000
and $5,084,000, respectively.
41
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Benefit Plans (Continued)
Stock Plans
The Company has three employee stock plans, adopted in 1983, 1985 and
1989. The Incentive Stock Option, Non-Qualified Stock Option and Restricted
Stock Purchase Plan - 1983 (the "1983 Plan"), as amended in 1984, 1985 and
1987, provides for the granting of options or rights to purchase up to an
aggregate of 3,600,000 shares of the Company's common stock to officers,
directors, employees and others. The Plan also provides for the granting of
stock appreciation rights. Under the Plan, options granted become exercisable
subject to the discretion of the Board of Directors or Compensation Committee
and generally expire five years from the date of grant. For the year ended
July 2, 1994, 86,799 shares were exercised under the 1983 Plan at prices
ranging from $3.44 to $21.50 per share.
In 1985, the Company adopted the Chief Executives' Plan (the "CE
Plan"). The CE Plan, as amended in 1987, provides for an aggregate of 1,200,000
shares of the Company's common stock to be available to the chief executive
officers, which include the president and executive vice presidents of the
Company, and such other officers that the Board of Directors might specifically
designate as a "chief executive officer" for purposes of the CE Plan. At July
2, 1994, non-statutory options covering 800,000 shares have been granted to
certain officers at exercise prices of $3.50 per share of which 350,000 shares
remain outstanding. No shares were exercised under the CE Plan for the year
ended July 2, 1994.
The 1989 Long-Term Incentive Program (the "1989 Program"), as amended
in 1992, provides for the granting of stock options, stock appreciation rights,
restricted stock and performance units. The amendment, as adopted by the Board
and approved by a shareholder vote, annually increases shares authorized to be
issued by 2% of the number of common shares outstanding at each fiscal year
end. At July 2, 1994, an aggregate of 5,893,993 shares of common stock is
authorized to be issued under the 1989 Program. Under the 1989 Program, options
granted become exercisable subject to the discretion of the Board of Directors
or Compensation Committee and expire ten years from the date of grant. During
fiscal 1994, an aggregate of 609,336 shares were exercised at prices ranging
from $4.06 to $22.75 per share. No stock appreciation rights or performance
units have been granted under this program.
The Company's 1991 Stock Option Plan for Non-Employee Directors (the
"Non-Employee Option Plan") provides for an initial grant of options to
purchase 20,000 shares of the Company's common stock to each newly appointed
non-employee director. In addition, on January 1 each year, each participant
will receive an option to purchase 12,000 shares of common stock. The aggregate
number of shares that may be issued under the plan is 250,000. Options vest and
become exercisable at the rate of 25% per year commencing on the first
anniversary of the date of grant. Each option is exercisable at 100% of the
common stock's fair market value on the date of grant. During fiscal 1994,
6,000 shares were exercised at $16.75 per share.
In January 1994, the Company adopted, subject to shareholder approval,
the AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee
Directors. The plan provides that each member of the Company's Board of
Directors on July 1, 1994 who is not an employee of the Company be granted an
option covering 50,000 shares of common stock. All such option grants are
subject to the limitation that not more than 250,000 shares of common stock be
issued under the Plan and that no participant may receive options covering more
than 50,000 shares of common stock in any calendar year. Options are
exercisable at 100% of the fair market value on the date of grant of the
option, and vest over a period of eight years from the date of grant, with
acceleration of vesting possible in the event of certain stock performance. At
July 2, 1994, 50,000 shares had been granted to each of the Company's four non-
employee directors at an exercise price of $14.25 per share.
42
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8. Benefit Plans (Continued)
The following table summarizes 1994 stock option activity under all of the
stock plans:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Number Available for
of options future grant
------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at July 3, 1993 3,504,380 2,052,143
Authorized - 896,675
Granted 1,624,400 (1,624,400)
Exercised (702,135) -
Canceled (380,425) 380,425
Plan shares expired - (99,275)
-------------------------------------------------------------------------------
Outstanding at July 2, 1994 4,046,220 1,605,568
===============================================================================
</TABLE>
Options exercised during fiscal 1994 were at prices ranging from $3.44
to $22.75 per share. Outstanding options at July 2, 1994 were at prices ranging
from $3.50 to $31.63 per share and options for 1,351,661 shares were
exercisable. At July 2, 1994, 5,651,788 shares of the Company's common stock
were reserved for issuance under the Plans.
In December 1990, the Board of Directors authorized the issuance of
warrants to purchase an aggregate of 80,000 shares of the Company's common
stock to certain non-employee directors. The warrants carry an exercise price
of $13.875 per share and vested over a three year period. During fiscal 1994,
40,000 of these warrants were exercised and at July 2, 1994, 40,000 of these
warrants were exercisable. On July 27, 1992, the Board of Directors authorized
the issuance of warrants to purchase 50,000 shares of the Company's common
stock to the Company's then Chairman of the Board. These warrants carry an
exercise price of $13.50 per share and vest over a four year period. During
fiscal 1994, 12,500 of these warrants were exercised and at July 2, 1994, none
of the remaining warrants were exercisable.
Post Employment Benefits
The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards No. 112 "Employers Accounting for Postemployment
Benefits" ("SFAS 112") requiring accrual basis accounting for post employment
benefits. The Company does not offer post employment benefits subject to
guidelines established by SFAS 112. Accordingly, no provisions have been
reflected in the Company's consolidated financial statements at July 2, 1994.
Note 9. Shareholder Rights Plan
On June 30, 1989, the Board of Directors adopted a Shareholder Rights
Plan which is intended to protect stockholders from unfair takeover practices.
Under the Plan, each share of common stock carries one right to obtain
additional stock or other property according to terms provided in the Plan. The
rights, as amended, will not be exercisable or separable from the common stock
until another party acquires at least 15% of the Company's then outstanding
common stock or commences a tender offer for at least 15% of the Company's then
outstanding common stock.
In the event the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving corporation
or 50% or more of its consolidated assets or earning power are sold or
transferred, each right will entitle its holder to receive, at the then current
exercise price, common stock of the acquiring company having a market value
equal to two times the exercise price of the right. If a person or entity were
to acquire 15% or more of the outstanding shares of the Company's common stock,
or if the Company is the surviving corporation in a merger and its common stock
is not changed or exchanged, each right will entitle the holder to receive, at
the then current exercise price, common stock having a market value equal to
two times the exercise price of the right. Until a right is exercised, the
holder of a right, as such, will have no rights as a stockholder of the
Company, including, without limitation, the rights to vote as a stockholder or
receive dividends.
43
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9. Shareholder Rights Plan (Continued)
The rights, which expire on June 30, 1999, may be redeemed by the Company at a
price of $0.01 per right. At July 2, 1994, 500,000 of the 1,000,000 authorized
but unissued preferred shares of the Company are reserved for issuance upon
exercise of these rights.
Note 10. Commitments and Contingencies
Lease Commitments
The Company leases its field offices, certain equipment, automobiles and
most of its operating facilities under operating lease agreements. The Company
also has capital leases for certain equipment. Future minimum lease payments
under these leases approximate the following amounts:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
(In thousands) Lease Obligations
-----------------------------
Fiscal Year Capital Operating
- --------------------------------------------------------------------------------
<S> <C> <C>
1995 $ 531 $13,310
1996 484 10,417
1997 470 6,613
1998 323 5,822
1999 265 4,738
Thereafter 739 14,711
-------------------------------------------------------------------------------
Total minimum lease payments $2,812 $55,611
===============================================================================
</TABLE>
At July 2, 1994, the net present value of obligations under capital
leases total $2,467,000 and are included in long-term and current portion of
long-term debt in the accompanying consolidated balance sheet. At July 2, 1994,
the assets held under capital leases total $4,114,000, net of $1,250,000 in
accumulated depreciation, and are included in buildings and machinery and
equipment in the accompanying consolidated balance sheet.
Rent expense was approximately $10,588,000, $9,215,000 and $8,958,000
for the years ended July 2, 1994, July 3, 1993 and June 27, 1992, respectively.
Royalty Commitments
The Company has commitments for minimum guaranteed royalties under
various licensing agreements which are payable over periods ranging from one to
four years. The Company has been notified that certain of its products may also
require licenses under patents held by others. The Company evaluates these
licensing proposals on a case-by-case basis to determine whether licenses are
necessary or desirable. Although these evaluations continue, management is
accruing amounts that, in its judgment, represent the potential royalties
and/or legal costs of resolving these claims.
Concentrations of Credit Risk
The Company distributes its products through various distribution
channels, including independent resellers, dealers, national distributors,
OEMs, U.S. Government approved dealers and consumer retailers. Concentrations
of credit risk are generally limited due to the Company's broad range of
distribution channels and the Company's geographically diverse customer base.
However, sales into the PRC are to a limited customer base comprised primarily
of larger entities which are affected by the economic conditions or political
occurrences within the PRC. No single customer accounted for more than 10% of
the Company's net sales for fiscal years 1994, 1993 and 1992. In addition, the
Company's sales are primarily to customers whose activities are related to the
retail, consumer electronics or personal computer industries. Therefore, the
Company's ability to collect trade receivables may be adversely impacted by
changes in these industries. Credit limits, ongoing credit evaluations and
account monitoring procedures are utilized to minimize the risk of loss.
44
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Commitments and Contingencies (Continued)
Employment Contracts
The Company has entered into Severance Compensation Agreements with
each of its executive officers. Such agreements provide for severance
compensation equal to two years' salary and bonus and certain other benefits
upon a "change in control" of the Company and termination of the officer for
reasons specified in the contract. In addition, effective July 27, 1993, the
Company entered into a separate employment contract ("Founder's Agreement")
with founder, Chairman and Chief Executive Officer, Safi U. Qureshey. The
Founder's Agreement provides for five years of salary, health and welfare
benefits, two years of bonus and certain other benefits if active employment is
terminated by the Company or by Mr. Qureshey under specified conditions.
The Company has a severance policy for its executive officers which,
in the event of an involuntary termination, other than in connection with a
"change in control", requires the Company to pay its President severance equal
to two years salary and its other executive officers severance equal to six
months salary plus an additional month of salary for each year of employment
with the Company, up to a maximum of 12 months. Benefits are also continued
during this period.
Other Contingencies
In June 1989, Texas Instruments Inc. ("TI") advised the Company that it
believed certain AST computer products infringe certain TI patents. On January
4, 1994, the Company initiated litigation (the "California action") in the U.S.
District Court for the Central District of California against TI alleging
certain violations of licensing agreements, federal antitrust laws and the
California Unfair Practices Act. In addition, the Company alleged that TI is
infringing an AST patent and that certain TI patents are invalid or
inapplicable. TI has alleged in the California action that the Company is
infringing patents owned by TI. On August 26, 1994, TI filed a lawsuit in the
U.S. District Court for the Eastern District of Texas against the Company
alleging infringement of patents in addition to those asserted by TI in the
California action. These litigations with TI are proceeding. Management does
not believe that the outcome of these matters will have a material adverse
impact on the Company's consolidated financial position or results of
operations.
On March 3 and March 14, 1994, complaints were filed by two
shareholders against the Company and certain of its officers and directors
requesting certification of class action, asserting claims under state and
federal securities law based on allegations that the Company made inadequate
and false disclosures and seeking unspecified compensatory damages and related
fees and costs. The complaints were filed in the United States District Court
of the Central District of California. On May 9, 1994, the Court consolidated
the two cases under the case name In re AST Securities Litigation. On September
12, 1994, a complaint was filed by a shareholder against the Company and
certain of its officers and directors requesting certification of class action,
asserting claims under state and federal securities law based on allegations
that the Company made inadequate and false disclosures and seeking unspecified
compensatory damages and related fees and costs. The complaint was filed in the
United States District Court of the Central District of California under the
case name Steven A. Kornfeld v. James L. Forquer, et al. Management has
reviewed the allegations contained in the complaints and believes such
allegations are without merit. Management intends to vigorously defend these
litigations. 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 has been named as a defendant or co-defendant, frequently
with other personal computer manufacturers, including IBM, AT&T, Unisys,
Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and Matsushita,
in thirteen similar lawsuits each of which alleges as a factual basis the
occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits
naming the Company are just a few of the many lawsuits of this type which have
been filed, often naming IBM and other major computer companies. The claims
total approximately $15 million in compensatory damages, $130 million in
punitive damages, and additional unspecified amounts. The Company has denied or
is in the process of denying the claims and intends to vigorously defend the
suits. The Company is unable at this time to predict the ultimate outcome of
these suits. Ultimate resolution of the
45
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 10. Commitments and Contingencies (Continued)
litigation against the Company may depend on progress in resolving this type of
litigation overall. Before consideration of any potential insurance
recoveries, the Company believes that the claims in the suits filed against it
will not have a material impact on the Company's consolidated financial
position or results of operations; however, the Company is unable to estimate
the amount of any loss that may be realized in the event of an unfavorable
outcome. The Company has maintained various liability insurance policies
during the periods covering the claims filed above. While such policies may
limit coverage under certain circumstances, the Company believes that it is
adequately protected. Should the Company not be successful in defending
against such lawsuits or not be able to claim compensation under its liability
insurance policies, the Company's profitability and financial condition may be
adversely affected.
The Company is also subject to other legal proceedings and claims
which also arise in the normal course of business. While the outcome of these
proceedings and claims cannot be predicted with certainty, management does not
believe the outcome of any of these matters will have a material adverse effect
on the Company's consolidated financial position or results of operations.
Note 11. Segment and Geographic Information
The Company operates in one industry segment: the manufacture and sale
of personal computers, including desktop, server, and notebook computer
systems.
A summary of the Company's operations by geographic area is as follows:
<TABLE>
<CAPTION>
Fiscal year ended July 2, 1994
- --------------------------------------------------------------------------------------------------------------
North/Latin Pacific Rest of
(In thousands) America Europe Rim World Eliminated Consolidated
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $1,546,010 $532,921 $ 260,700 $27,643 $ - $2,367,274
Transfers between
geographic areas 404,582 251,605 901,106 3,098 (1,560,391) -
-------------------------------------------------------------------------------------------------------------
Net sales $1,950,592 $784,526 $1,161,806 $30,741 $(1,560,391) $2,367,274
=============================================================================================================
Operating income (loss) $ 22,786 $(20,027) $ 42,729 $ 1,296 $ 7,205 $ 53,989
=============================================================================================================
Identifiable assets $ 541,469 $257,098 $ 191,976 $15,077 $ - $1,005,620
=============================================================================================================
<CAPTION>
Fiscal year ended July 3, 1993
-------------------------------------------------------------------------------------------------------------
North/Latin Pacific Rest of
(In thousands) America Europe Rim World Eliminated Consolidated
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 854,929 $297,312 $ 238,974 $20,935 $ - $1,412,150
Transfers between
geographic areas 234,815 55,690 751,511 897 (1,042,913) -
-------------------------------------------------------------------------------------------------------------
Net sales $1,089,744 $353,002 $ 990,485 $21,832 $(1,042,913) $1,412,150
=============================================================================================================
Operating income (loss) $ (69,677) $(45,569) $ 41,620 $ 838 $ 8,210 $ (64,578)
=============================================================================================================
Identifiable assets $ 574,801 $173,028 $ 122,165 $16,165 $ - $ 886,159
=============================================================================================================
</TABLE>
46
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 11. Segment and Geographic Information (Continued)
<TABLE>
<CAPTION>
Fiscal year ended June 27, 1992
---------------------------------------------------------------------------------------------------------
North/Latin Pacific Rest of
(In thousands) America Europe Rim World Eliminated Consolidated
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $550,887 $204,623 $177,796 $10,773 $ - $944,079
Transfers between
geographic areas 168,346 61,409 432,563 647 (662,965) -
---------------------------------------------------------------------------------------------------------
Net sales $719,233 $266,032 $610,359 $11,420 $(662,965) $944,079
=========================================================================================================
Operating income (loss) $ 40,090 $(10,632) $ 59,087 $ 781 $ 8,200 $ 97,526
=========================================================================================================
Identifiable assets $359,550 $124,332 $ 91,380 $ 5,351 $ - $580,613
=========================================================================================================
</TABLE>
In determining operating income (loss) for each geographic area, sales
and purchases between geographic areas have been accounted for on the basis of
internal transfer prices set by the Company. Identifiable assets are those
tangible and intangible assets used in operations in each geographic area. The
fiscal 1993 restructuring charge of $125 million is included in operating
income (loss) in the geographic areas in which the actual restructuring costs
are expected to be incurred. This amount is comprised of $93.3 million in the
North/Latin America segment, $25.6 million in the Europe segment and $6.1
million in the Pacific Rim segment. The fiscal 1994 restructure credit of $12.5
million relates to and is included in North/Latin America operating income.
Note 12. Selected Quarterly Financial Data (Unaudited)
The tables below set forth selected quarterly financial information
for fiscal years 1994 and 1993 (in thousands, except per share amounts).
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
1994 First Quarter Second Quarter Third Quarter Fourth Quarter*
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $514,409 $677,011 $591,349 $584,505
Gross profit 85,900 114,566 101,106 46,161
Net income (loss) 8,232 17,933 13,214 (8,070)
Net income per share:
Primary $ .26 $ .55 $ .40 $ (.25)
Fully diluted $ .26 $ .54 $ .38 $ (.25)
---------------------------------------------------------------------------------------------------------
* Restated (Note 2).
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
1993 First Quarter Second Quarter Third Quarter Fourth Quarter*
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $286,353 $346,338 $370,251 $409,208
Gross profit 65,015 76,185 71,821 72,677
Net income (loss) 7,641 14,581 11,045 (87,005)
Net income (loss) per
share:
Primary $ .24 $ .46 $ .35 $ (2.76)
---------------------------------------------------------------------------------------------------------
</TABLE>
In the fourth quarter of fiscal 1993, the Company recorded a pretax
restructuring charge of $125 million which is reflected in the fiscal 1993
fourth quarter net loss. In the fourth quarter of fiscal 1994, the Company
recorded a pretax restructuring credit of $12.5 million which is reflected in
the fiscal 1994 fourth quarter net income (Note 2).
47
<PAGE>
AST RESEARCH, INC.
NOTES TO RESTATED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 12. Selected Quarterly Financial Data (Unaudited) (Continued)
In fiscal 1993, fully diluted per share information is anti-dilutive
or does not differ materially from primary net income (loss) per share in any
quarterly period. In fiscal 1994 and 1993, the quarterly per share amounts do
not sum to the net income (loss) for the respective years due to the dilutive
effect of common stock equivalents and other dilutive securities used in
computing per share information in the first three quarters.
48
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth on pages 2 through 3 and 5 through 6 of the
1994 Proxy Statement under the captions "Election of Directors" and "Executive
Officers", respectively, is incorporated herein by reference.
Item 11. Executive Compensation
To the extent required, the information set forth on pages 6 through
12 of the 1994 Proxy Statement under the captions "Compensation of Directors",
"Compensation Committee Interlocks and Insider Participation", "Executive
Compensation" and "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements" is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth on page 4 of the 1994 Proxy Statement under
the caption "Security Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth on page 12 of the 1994 Proxy Statement under
the caption "Certain Transactions" is incorporated herein by reference.
49
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
--------------------
See Index to Consolidated Financial Statements at Item 8 on Page 25
of this report.
(2) Financial Statement Schedules
-----------------------------
II - Amounts Receivable from Related Parties and Underwriters,
Promoters, and Employees Other than Related Parties
VIII - Consolidated Valuation and Qualifying Accounts and Reserves
IX - Consolidated Short-Term Borrowings
X - Consolidated Supplementary Income Statement Information
Financial statement schedules other than those listed above have
been omitted since they are either not required, not applicable, or
the information is otherwise included.
(3) Exhibits
--------
Exhibit
Number Description
- ------ -----------
2.1 Agreement for Purchase and Sale of Assets dated June 30, 1993 between
AST Research, Inc. and Tandy Corporation, TE Electronics, Inc. and
GRiD Systems Corporation. The Schedules have been omitted and are as
described in the Agreement (incorporated by reference to referenced
exhibit number of the Company's report on Form 8-K, No. 0-13941).
2.1.1 Agreement of Sale of Going Business (English translation) between AST
Research France and Tandy GRiD France, effective September 1, 1993
(incorporated by reference to referenced exhibit number of the
Company's report on Form 8-K, No. 0-13941).
3.1 Restated Certificate of Incorporation of AST Research, Inc., a
Delaware corporation (incorporated by reference to referenced exhibit
number in the Company's Annual Report on Form 10-K for the fiscal year
ended June 27, 1992).
3.2 Bylaws of AST Research, Inc., a Delaware corporation, as amended to
date.
4.1 Form of Amended and Restated Rights Agreement dated as of January 28,
1994 between the Company and American Stock Transfer & Trust Co., as
Successor Rights Agent (incorporated by reference to referenced
exhibit number of the Company's report on Form 10-Q for the fiscal
quarter ended January 1, 1994), and Certificate of Designation of
Preferred Stock and Rights Certificate and Summary of Terms of the
Company's Shareholder Rights Plan which were included as exhibits to
the original Rights Agreement dated as of August 15, 1989
(incorporated by reference to Exhibit 1 to the Company's registration
statement on Form 8-A, No. 0-13941, dated August 14, 1989).
10.2* Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan - 1983 (the "Plan") (incorporated by reference to
referenced exhibit number of the Company's registration statement on
Form S-1, No. 2-91089).
10.3* Form of Nonqualified Stock Option Agreement pertaining to the Plan
(incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-1, No. 2-91089).
10.4* Form of Incentive Stock Option Agreement pertaining to the Plan
(incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-1, No. 2-91089).
10.5* Form of Restricted Stock Purchase Agreement pertaining to the Plan
(incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-1, No. 2-91089).
10.6* AST Research, Inc. Profit Sharing Plan (incorporated by reference to
referenced exhibit number of the Company's registration statement on
Form S-1, No. 2-91089).
50
<PAGE>
Exhibit
Number Description
- ------ -----------
10.26* Chief Executives' Plan (comprised of resolutions adopted by the Board
of Directors on July 30, 1985) (incorporated by reference to Exhibit
4.1 to the Company's registration statement on Form S-8, No. 33-1111).
10.27* Form of Nonstatutory Option Agreement pertaining to the Chief
Executives' Plan (incorporated by reference to Exhibit 4.2 to the
Company's registration statement on Form S-8, No. 33-1111).
10.28* 1987 Employee Bonus Plan (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1986).
10.29 Lease Agreement dated November 1, 1985 pertaining to AST Europe
Limited premises at Goat Wharf, Brentford in the London Borough of
Hounslow (incorporated by reference to referenced exhibit number of
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1986).
10.34 Lease commencing September 29, 1986 pertaining to AST Europe Limited's
premises in Brentford, Middlesex (incorporated by reference to
referenced exhibit number of the Company's registration statement on
Form S-1, No. 33-14131).
10.35* First Amendment to the AST Research, Inc. Profit Sharing Plan,
effective October 1, 1986 (incorporated by reference to referenced
exhibit number of the Company's registration statement on Form S-1,
No. 33-14131).
10.36* Amendments to Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1983 related to Internal Revenue Code
of 1986 (incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-1, No. 33-14131).
10.37* Amendments to Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1983 related to Stock Appreciation
Rights (incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-1, No. 33-14131).
10.38* Amendments to Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1983 related to the exercise of
options by delivery of promissory notes (incorporated by reference to
referenced exhibit number of the Company's registration statement on
Form S-1, No. 33-14131).
10.39* Amendment to Chief Executives' Plan (comprised of resolutions adopted
by the Board of Directors on January 5, 1987) (incorporated by
reference to referenced exhibit number of the Company's registration
statement on Form S-1, No. 33-14131).
10.41* Form of Indemnification Agreement, as amended to date.
10.42* Form of Indemnification Trust Agreement (incorporated by reference to
referenced exhibit number of the Company's Registration of Securities
of Certain Successor Issuers on Form 8-B, No. 0-13941).
10.48 Agreement dated September 5, 1987 for the purchase of AST Research
(Far East) Limited's premises in Hong Kong and Mortgage of such
premises to Bank of China, Hong Kong Branch, dated September 11, 1987
(incorporated by reference to referenced exhibit number of the
Company's registration statement on Form S-2, No. 33-21729).
10.52 License Agreement dated November 23, 1987 with Microsoft Corporation,
as amended January 1, 1988 (incorporated by reference to referenced
exhibit number of the Company's registration statement on Form S-2,
No. 33-21729).
10.59* 1989 Long-Term Incentive Program (incorporated by reference to exhibit
number S 4.1, 4.2, 4.3 and 4.4 of the Company's registration statement
on Form S-8, No. 33-29345).
10.60* Supplemental Medical Plan for Executives of AST Research, Inc.
(incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1989).
10.61 Amendment to License Agreement with Microsoft Corporation dated April
5, 1989 (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1989).
10.62 Lease dated August 11, 1989, pertaining to premises located in
Fountain Valley, California (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989).
51
<PAGE>
Exhibit
Number Description
- ------ -----------
10.63 Credit Agreement dated as of November 16, 1988 with Bank of America NT
& SA, Sanwa Bank California, Shawmut Bank, N.A., Manufacturers Hanover
Trust Company and National Westminster Bank PLC (incorporated by
reference to referenced exhibit number of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1989).
10.66 First Amendment to Credit Agreement dated February 28, 1989 with Bank
of America NT & SA, Sanwa Bank California, Shawmut Bank, N.A.,
Manufacturers Hanover Trust Company and National Westminster Bank PLC
(incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1989).
10.68 Second Amendment to Credit Agreement dated May 30, 1989 with Bank of
America NT & SA, Sanwa Bank California, Shawmut Bank, N.A.,
Manufacturers Hanover Trust Company and National Westminster Bank PLC
(incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1989).
10.69 Construction Loan Agreement dated November 28, 1988 between Aetna Life
Insurance Company and Birtcher Campbell AST Partners for the AST
Research Corporate Headquarters in Irvine, California (incorporated by
reference to referenced exhibit number of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1989).
10.70 Option to Purchase General Partnership Interest dated July 25, 1989
with Birtcher Campbell DDA, Ltd. (incorporated by reference to
referenced exhibit number of the Company's Annual Report on Form 10-K
for the fiscal year ended June 30, 1989.)
10.71 Multicurrency Line of Credit dated December 1, 1988 with Bank of
America NT & SA (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989).
10.72 Waiver of Multicurrency Line of Credit dated February 28, 1989 with
Bank of America NT & SA (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989).
10.73 Waiver of Multicurrency Line of Credit dated May 10, 1989 with Bank of
America NT & SA (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989).
10.74 Reduction of Credit Agreement dated February 28, 1989 with Bank of
America NT & SA as Agent (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1989).
10.75 Reduction in Multicurrency Agreement dated February 28, 1989 with Bank
of America NT & SA (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989).
10.76 Amendment to Multicurrency Agreement dated June 30, 1989 with Bank of
America NT & SA (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989).
10.77 Facility Letter Agreement dated July 10, 1989 with National
Westminster Bank PLC (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1989).
10.78 Press release dated June 12, 1990 pertaining to redemption of 8 1/2
percent convertible subordinate debentures (incorporated by reference
to referenced exhibit number of the Company's report on Form 8-K, No.
0-13941).
10.79 Notice of redemption dated June 13, 1990 of 8 1/2 percent convertible
subordinate debentures (incorporated by reference to referenced
exhibit number of the Company's report on Form 8-K, No. 0-13941).
10.80 Amendment VI to License Agreement with Microsoft Corporation dated
April 20, 1990 (incorporated by reference to referenced exhibit number
of the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1990).
10.81 License Agreement with Tomcat Computer Corporation, dated October 16,
1989 (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1990).
52
<PAGE>
Exhibit
Number Description
- ------ -----------
10.82 Cross-License Agreement with International Business Machines (IBM)
Corp., dated January 1, 1990 (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990).
10.83 Third Amendment dated November 8, 1989 to the Credit Agreement dated
November 16, 1988 between the Company and Bank of America NT & SA,
Manufacturers Hanover Trust Company, National Westminster Bank PLC and
Sanwa Bank California (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1990).
10.84 Credit Agreement dated as of June 27, 1990 between the Company and
Bank of America NT & SA, National Westminster Bank PLC and Sanwa Bank
California (incorporated by reference to referenced exhibit number of
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1990).
10.85 First Amendment dated July 30, 1990 to the Credit Agreement dated June
27, 1990 between the Company and Bank of America NT & SA, National
Westminster Bank PLC and Sanwa Bank California (incorporated by
reference to referenced exhibit number of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1990).
10.86 Multicurrency Agreement dated December 22, 1989 with Bank of America
NT & SA (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
30, 1990).
10.87 Amendment to Facility Letter Agreement dated December 18, 1989 with
National Westminster Bank PLC (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990).
10.88 Renewal to Facility Letter Agreement dated July 10, 1990 with National
Westminster Bank PLC (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 30, 1990).
10.89 Agreement for Purchase and Sale of Partnership Interest in Birtcher
Campbell AST Partners dated February 21, 1990 with Birtcher Campbell
DDA, Ltd. (incorporated by reference to referenced exhibit number of
the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1990).
10.90 Assignment and Assumption of Agreement for Purchase and Sale of
Partnership Interest dated February 21, 1990 between AST Realty, Inc.
and AST Research, Inc. (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1990).
10.91 Letter of Agreement dated February 21, 1990 between the Company, AST
Realty, Inc. and Birtcher Campbell DDA, Ltd. (incorporated by
reference to referenced exhibit number of the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 1990).
10.92 License Agreement dated January 1, 1991 with Microsoft Corporation
(incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June
28, 1991).
10.93 Amendment to Facility Letter Agreement dated September 10, 1990 with
National Westminster Bank PLC (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 1991).
10.94 Renewal of Facility Letter Agreement dated June 28, 1991 with National
Westminster Bank PLC (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form 10-K for the fiscal year
ended June 28, 1991).
10.95* Form of Warrant Certificate issued to Non-employee directors in
December 1990 (incorporated by reference to referenced exhibit number
of the Company's Annual Report on Form 10-K for the fiscal year ended
June 28, 1991).
10.96* 1991 Stock Option Plan for Non-employee Directors (incorporated by
reference to referenced exhibit number of the Company's Annual Report
on Form 10-K for the fiscal year ended June 28, 1991).
53
<PAGE>
Exhibit
Number Description
- ------ -----------
10.97* Form of Nonqualified Stock Option agreement under 1991 Stock Option
Plan for Non-employee Directors (incorporated by reference to
referenced exhibit number of the Company's Annual Report on Form 10-K
for the fiscal year ended June 28, 1991).
10.98 Amendment to Facility Letter Agreement dated June 27, 1992 with
National Westminster Bank PLC (incorporated by reference to referenced
exhibit number in the Company's Annual Report on Form 10-K for the
fiscal year ended June 27, 1992).
10.99 Amendment to License Agreement with Microsoft Corporation dated
September 18, 1991 (incorporated by reference to referenced exhibit
number in the Company's Annual Report on Form 10-K for the fiscal year
ended June 27, 1992).
10.100 Credit Agreement dated April 2, 1992, among AST Research, Inc., Bank
of America NT & SA as co-agent and National Westminster Bank PLC as
co-agent (incorporated by reference to referenced exhibit number in
the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1992).
10.101* Form of Warrant Certificate issued to Non-employee Director in July
1992 (incorporated by reference to referenced exhibit number in the
Company's Annual Report on Form 10-K for the fiscal year ended June
27, 1992).
10.102* Amendment to 1989 Long-Term Incentive Program related to increase in
number shares (incorporated by reference to referenced exhibit number
in the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1992).
10.103* Form of Nonqualified Common Stock Option Agreement for officers under
the 1989 Long-Term Incentive Program, approved by Compensation
Committee January 23, 1992 pursuant to administrative authority under
such plan (incorporated by reference to referenced exhibit number in
the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1992).
10.104* Form of Amendment to Officers Nonqualified Common Stock Option
Agreement, approved by Compensation Committee January 23, 1992
pursuant to administrative authority under such plan (incorporated by
reference to referenced exhibit number in the Company's Annual Report
on Form 10-K for the fiscal year ended June 27, 1992).
10.105* Amendment of Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1983 approved by the Board of
Directors April 23, 1992 pursuant to administrative authority under
such plan (incorporated by reference to referenced exhibit number in
the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1992).
10.106* Amended form of Nonqualified Common Stock Option Agreement under the
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan - 1983 with amended provisions approved by the
Compensation Committee January 23, 1992 and by the Board of Directors
April 23, 1992 pursuant to administrative authority under such plan
(incorporated by reference to referenced exhibit number in the
Company's Annual Report on Form 10-K for the fiscal year ended June
27, 1992).
10.107 Amendment to License Agreement with Microsoft Corporation dated
February 15, 1993 (incorporated by reference to referenced exhibit
number of the Company's report on Form 10-Q for the fiscal quarter
ended April 3, 1993).
10.108 Promissory Note dated as of July 12, 1993 between AST Research, Inc.
and Tandy Corporation (incorporated by reference to referenced exhibit
number of the Company's report on Form 8-K, No. 0-13941).
10.108.1 First Amendment dated September 22, 1993 to Promissory Note dated July
12, 1993 between AST Research, Inc. and Tandy Corporation
(incorporated by reference to referenced exhibit number in the
Company's Annual Report on Form 10-K for the fiscal year ended July 3,
1993).
10.108.2 Second Amendment dated October 14, 1993 to Promissory Note dated July
12, 1993 between AST Research, Inc. and Tandy Corporation
(incorporated by reference to referenced exhibit number of the
Company's report on Form 8-K, No. 0-13941).
10.108.3 Third Amendment dated December 30, 1993 to Promissory Note dated July
12, 1993 between AST Research, Inc. and Tandy Corporation
(incorporated by reference to referenced exhibit number of the
Company's report on Form 8-K, No. 0-13941).
54
<PAGE>
Exhibit
Number Description
- ------ -----------
10.109* Amendment to Officer's Restricted Common Stock Grant Agreement
approved by the Board of Directors October 29, 1992 (incorporated by
reference to referenced exhibit number in the Company's Annual Report
on Form 10-K for the fiscal year ended July 3, 1993).
10.110 First Amendment dated April 20, 1993 to Credit Agreement dated April
2, 1992 among AST Research, Inc., Bank of America NT & SA as co-agent
and National Westminster Bank PLC as co-agent (incorporated by
reference to referenced exhibit number in the Company's Annual Report
on Form 10-K for the fiscal year ended July 3, 1993).
10.111 Second Amendment dated June 30, 1993 to Credit Agreement dated April
2, 1992 among AST Research, Inc., Bank of America NT & SA as co-agent
and National Westminster Bank PLC as co-agent (incorporated by
reference to referenced exhibit number in the Company's Annual Report
on Form 10-K for the fiscal year ended July 3, 1993).
10.112* First Amendment to the AST Research, Inc. Profit Sharing Plus Plan,
effective June 27, 1992 (incorporated by reference to referenced
exhibit number in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1993).
10.113* Second Amendment to the AST Research, Inc. Profit Sharing Plus Plan,
effective June 30, 1993 (incorporated by reference to referenced
exhibit number in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1993).
10.114 Licensing Agreement with International Business Machines (IBM) Corp.
re: OS/2, dated July 28, 1993 (incorporated by reference to referenced
exhibit number in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1993).
10.115* Employment Agreement dated July 27, 1993 between Safi U. Qureshey and
AST Research, Inc. (incorporated by reference to referenced exhibit
number in the Company's Annual Report on Form 10-K for the fiscal year
ended July 3, 1993).
10.116 Sales Agreement dated July 13, 1993 between AST Research, Inc. and
Tandy Corporation pursuant to the Agreement for the Purchase and Sale
of Assets dated June 30, 1993 (incorporated by reference to referenced
exhibit number in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 1993).
10.117 Circuit Board Purchase Agreement dated July 13, 1993 between AST
Research, Inc. and TE Electronics Inc. pursuant to the Agreement for
the Purchase and Sale of Assets dated June 30, 1993 (incorporated by
reference to referenced exhibit number in the Company's Annual Report
on Form 10-K for the fiscal year ended July 3, 1993).
10.118* Form of Severance Compensation Agreement (incorporated by reference to
referenced exhibit number in the Company's Annual Report on Form 10-K
for the fiscal year ended July 3, 1993).
10.119 Credit Agreement dated September 30, 1993, among AST Research, Inc.,
Bank of America NT & SA as co-agent (incorporated by reference to
referenced exhibit number of the Company's report on Form 10-Q for the
fiscal quarter ended October 2, 1993).
10.120* AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-
Employee Directors (incorporated by reference to referenced exhibit
number of the Company's report on Form 10-Q for the fiscal quarter
ended January 1, 1994).
10.121* Form of Option Agreement Under 1994 One-Time Grant Stock Option Plan
for Non-Employee Directors of AST Research, Inc. (incorporated by
reference to referenced exhibit number of the Company's report on Form
10-Q for the fiscal quarter ended January 1, 1994).
10.122* Amendment to AST Research, Inc. 1989 Long-Term Incentive Program
(incorporated by reference to referenced exhibit number of the
Company's report on Form 10-Q for the fiscal quarter ended January 1,
1994).
10.123* Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-
Employee Directors (incorporated by reference to referenced exhibit
number of the Company's report on Form 10-Q for the fiscal quarter
ended January 1, 1994).
10.124 First Amendment dated March 30, 1994 to Credit Agreement dated
September 30, 1993 among AST Research, Inc., Bank of America NT & SA
as co-agent and National Westminster Bank Plc as co-agent
(incorporated by reference to referenced exhibit number of the
Company's report on Form 10-Q for the fiscal quarter ended April 2,
1994).
55
<PAGE>
Exhibit
Number Description
- ------ -----------
10.125 Second Amendment dated April 27, 1994 to Credit Agreement dated
September 30, 1993 among AST Research, Inc., Bank of America NT & SA
as co-agent and National Westminster Bank Plc as co-agent
(incorporated by reference to referenced exhibit number of the
Company's report on Form 10-Q for the fiscal quarter ended April 2,
1994).
10.126 Joint Venture Contract dated September 7, 1993 between Tianjin
Economic -Technological Development Area Business Development Co. and
AST Research (Far East) Limited (incorporated by reference to
referenced exhibit number of the Company's report on Form 10-Q for the
fiscal quarter ended April 2, 1994).
10.127* Involuntary Termination Policy dated September 2, 1994.
10.128* Performance Based Annual Management Incentive Plan.
10.129 Employment Grant Agreement dated November 9, 1993 between the
Industrial Development Authority, AST Ireland Limited and AST
Research, Inc. (Confidential treatment is requested with respect to
portions of this exhibit).
10.130 Capital Grant Agreement dated November 9, 1993 between the Industrial
Development Authority, AST Ireland Limited and AST Research, Inc.
(Confidential treatment is requested with respect to portions of this
exhibit).
11. Statement re computation of per share earnings.
21. Subsidiaries of the registrant.
23. Consent of Independent Auditors.
24. Power of Attorney (included on the signature pages of this Annual
Report on Form 10-K).
27. Financial Data Schedule.
* Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item
14 (c).
(b) Reports on Form 8-K
-------------------
AST Research, Inc. was not required to file any reports on Form 8-K for the
quarter ended July 2, 1994.
AST, Advantage!, GRiDPAD, GRiD, Victor and PalmPad are registered trademarks of
AST Research, Inc. The AST Computer logo, AST Works, Ascentia, ASTVision,
Bravo, Convertible, ExeCare, Manhattan, PowerExec, and Premmia are trademarks of
AST Research, Inc. OverDrive is a registered trademark and Pentium is a
trademark of Intel Corporation. OS/2 is a registered trademark of International
Business Machines Corporation. NetWare is a registered trademark of Novell,
Inc. MS-DOS is a registered trademark and Encarta is a trademark of Microsoft
Corporation. Radio Shack is a registered service mark of Tandy Corporation.
Prodigy is a registered trademark of the Prodigy Services Corporation. America
Online is a registered service mark of America Online, Inc. CompuServe is a
registered service mark of CompuServe, Inc. All other product or service names
mentioned herein may be trademarks or registered trademarks of their respective
owners. Reference to the "Energy Star" program does not represent EPA
endorsement of any product or service. Copyright (C)1994 AST Research, Inc.
All Rights Reserved.
56
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on June 5, 1995.
AST RESEARCH, INC.
Date: June 5, 1995 By: /s/Safi U. Qureshey
---------------------------
Safi U. Qureshey
Chief Executive Officer and
Chairman of the Board
POWER OF ATTORNEY
-----------------
We, the undersigned directors and officers of AST Research, Inc., do hereby
constitute and appoint Safi U. Qureshey our true and lawful attorney and agent,
with full power of substitution to do any and all acts and things in our name
and behalf in our capacities as directors and officers and to execute any and
all instruments for us and in our names in the capacities indicated below, which
said attorney and agent may deem necessary or advisable to enable said
corporation to comply with the Securities Exchange Act of 1934, as amended, and
any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K/A, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto; and we do hereby ratify and
confirm all that said attorney and agent, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/Safi U. Qureshey Chief Executive Officer and June 5, 1995
- --------------------------- Chairman of the Board
Safi U. Qureshey (Principal Executive Officer)
/s/Bruce C. Edwards Chief Financial Officer, June 5, 1995
- --------------------------- Executive Vice President and Director
Bruce C. Edwards (Principal Financial and Accounting
Officer)
/s/James T. Schraith Chief Operating Officer, June 5, 1995
- --------------------------- President and Director
James T. Schraith
/s/Richard J. Goeglein Director June 5, 1995
- ---------------------------
Richard J. Goeglein
Director June 5, 1995
- ----------------------------
Carmelo J. Santoro, Ph.D.
/s/Delbert W. Yocam Director June 5, 1995
- ---------------------------
Delbert W. Yocam
/s/Jack W. Peltason Director June 5, 1995
- ---------------------------
Jack W. Peltason
</TABLE>
S-1
<PAGE>
Schedule II
AST RESEARCH, INC.
Amounts Receivable from Related Parties and
Underwriters, Promoters, and Employees
Other than Related Parties
For the Years Ended July 2, 1994,
July 3, 1993 and June 27, 1992
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Balance at Amounts Balance at
Name of Debtor Beginning of Period Additions Collected End of Period
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year Ended July 2, 1994
Scott A. Smith (1) $ - $100 $ - $100
Year Ended July 3, 1993
None - - - -
Year Ended June 27, 1992
Wai S. Szeto (2) $304 $ - $304 $ -
</TABLE>
(1) On September 21, 1993, the Company loaned Vice President Scott A. Smith
$100,000 for the purchase of a primary residence, evidenced by a promissory
note secured by a deed of trust. The loan was issued interest free and is
payable in full on September 21, 1996.
(2) On December 3, 1990, Vice President Wai S. Szeto exercised stock options
issued under the 1983 and 1989 Plans to purchase 50,000 shares of common
stock and issued promissory notes to the Company in the aggregate of
$177,813. The notes included interest at 10% per annum and were due and
payable on December 1, 1991. The notes were paid in full with interest on
August 8, 1991. On April 24, 1991, the Company loaned Mr. Szeto $125,000
for a six month period to purchase a primary residence. The loan was
evidenced by a promissory note secured by a pledge agreement covering his
restricted stock and bore interest at 10% per annum. The note was paid in
full with interest on August 8, 1991.
F-1
<PAGE>
Schedule VIII
AST RESEARCH, INC.
Consolidated Valuation and Qualifying Accounts and Reserves
For the Years Ended July 2, 1994
July 3, 1993 and June 27, 1992
(In thousands)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1994 1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts
Balance, beginning of period $11,671 $ 9,831 $ 6,132
Additions charged to expense 13,219 6,089 5,253
Reductions (7,326) (4,249) (1,554)
------- ------- -------
Balance, end of period $17,564 $11,671 $ 9,831
======= ======= =======
- -------------------------------------------------------------------------------
Allowance for sales returns
Balance, beginning of period $ 9,120 $10,109 $ 7,038
Net additions (reductions) charged to
sales 6,017 (989) 3,071
------- ------- -------
Balance, end of period $15,137 $ 9,120 $10,109
======= ======= =======
- -------------------------------------------------------------------------------
Reserve for excess or obsolete
inventory
Balance, beginning of period $35,595 $14,529 $13,775
Inventory acquired in the Tandy
acquisition, restated - 20,535 -
Allocation of restructure reserves to
identified inventory exposure 693 - -
Net additions charged to expense,
restated 28,980 531 754
------- ------- -------
Balance, end of period $65,268 $35,595 $14,529
======= ======= =======
</TABLE>
F-2
<PAGE>
Schedule IX
AST RESEARCH, INC.
Consolidated Short-Term Borrowings
For the Years Ended July 2, 1994
July 3, 1993 and June 27, 1992
(Dollars in thousands)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
1994 1993 1992
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Amount outstanding at end of period
Short-term bank borrowings $ 50,000 $59,217 $1,374
Interest rate on amount outstanding
Short-term bank borrowings 7.01% 6.13% 10.43%
Maximum amount outstanding during the period
Short-term bank borrowings $108,781 $59,572 $1,399
Average amount outstanding during the period
Short-term bank borrowings $ 29,714 $ 5,243 $1,281
Average interest rate on borrowings during the period
Short-term bank borrowings 4.40% 6.95% 9.87%
</TABLE>
The average amount of short-term borrowings outstanding during the period and
the average interest rate on such borrowings during the period were calculated
using the daily balances outstanding and the interest rates in effect on those
dates.
F-3
<PAGE>
Schedule X
AST RESEARCH, INC.
Consolidated Supplementary Income Statement Information
For the Years Ended July 2, 1994
July 3, 1993 and June 27, 1992
(In thousands)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1994 1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Royalty Expense $56,987 $28,209 $18,059
====== ====== ======
Advertising $41,138 $28,582 $21,398
====== ====== ======
</TABLE>
All other expenses required by this Schedule either are not applicable, or are
disclosed in the consolidated financial statements or notes thereto included
elsewhere in this Annual Report on Form 10-K.
F-4
<PAGE>
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF PER SHARE EARNINGS
For the Years Ended July 2, 1994,
July 3, 1993 and June 27, 1992
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
(In thousands, except per share amounts) 1994 1993 1992
(Restated)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Primary earnings (loss) per share
- ---------------------------------
Shares used in computing primary earnings (loss)
per share:
Weighted average shares of common stock
outstanding 31,921 31,289 30,622
Effect of stock options treated as equivalents
under the treasury stock method 627 - 1,136
------- -------- -------
Weighted average common and common equivalent
shares outstanding 32,548 31,289 31,758
------- -------- -------
Net income (loss) $31,309 $(53,738) $68,504
======= ======== =======
Earnings (loss) per share - primary $ 0.96 $ (1.72) $ 2.16
======= ======== =======
Fully diluted earnings (loss) per share
- ---------------------------------------
Shares used in computing fully diluted earnings
(loss) per share:
Weighted average shares of common stock
outstanding 31,921 31,289 30,622
Effect of stock options treated as equivalents
under the treasury stock method 685 - 1,152
Shares assumed issued on conversion of
Liquid Yield Option Notes 2,260 - -
------- -------- -------
Total fully diluted shares outstanding 34,866 31,289 31,774
------- -------- -------
Net income (loss) - fully diluted earnings per
share:
Net income (loss) - primary earnings per share $31,309 $(53,738) $68,504
Adjustment for interest on LYONs, net of tax 1,950 - -
------- -------- -------
Adjusted net income (loss) - fully diluted
earnings per share $33,259 $(53,738) $68,504
======= ======== =======
Earnings (loss) per share - fully diluted $0.95 $ (1.72) $ 2.16
======= ======== =======
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-96552 and 33-1112) pertaining to the AST Research, Inc.
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan - 1983 (As Amended) and in the related Prospectuses, in the Registration
Statements (Form S-8 Nos. 33-1111 and 33-30666) pertaining to the Chief
Executives' Plan (As Amended) and in the related Prospectuses, in the
Registration Statements (Form S-8 Nos. 33-29345 and 33-57234) pertaining to the
1989 Long-Term Incentive Program (As Amended) and in the related Prospectuses,
in the Registration Statement (Form S-8 No. 33-52482) pertaining to the Non-
Employee Directors' Common Stock Purchase Warrants and 1991 Stock Option Plan
for Non-Employee Directors and in the related Prospectuses, and in the
Registration Statement (Form S-8 No. 33-55241) pertaining to the AST Research,
Inc. 1994 One-Time Grant Stock Option Plan for Non-Employee Directors and in the
related Prospectuses of our report dated July 26, 1994, with respect to the
consolidated financial statements and schedules of AST Research, Inc. included
in this Annual Report (Form 10-K/A) for the year ended July 2, 1994.
Ernst & Young LLP
Orange County, California
June 2, 1995
<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> YEAR
<FISCAL-YEAR-END> JUL-02-1994
<PERIOD-END> JUL-02-1994
<CASH> 153,118
<SECURITIES> 0
<RECEIVABLES> 343,621
<ALLOWANCES> 17,564
<INVENTORY> 333,729
<CURRENT-ASSETS> 865,967
<PP&E> 159,530
<DEPRECIATION> 56,089
<TOTAL-ASSETS> 1,005,620
<CURRENT-LIABILITIES> 420,993
<BONDS> 215,294
<COMMON> 323
0
0
<OTHER-SE> 361,439
<TOTAL-LIABILITY-AND-EQUITY> 1,005,620
<SALES> 2,367,274
<TOTAL-REVENUES> 2,367,274
<CGS> 2,019,541
<TOTAL-COSTS> 2,019,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,080
<INTEREST-EXPENSE> 9,937
<INCOME-PRETAX> 46,312
<INCOME-TAX> 15,003
<INCOME-CONTINUING> 31,309
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,309
<EPS-PRIMARY> .96
<EPS-DILUTED> .95
</TABLE>
