________________________________________________________________________________
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _________________
COMMISSION FILE NO. 0-13941
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3525565
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92718
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-4141
_________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No _
There were 44,735,900 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on April 26, 1996.
________________________________________________________________________________
________________________________________________________________________________
AST RESEARCH, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
March 30, 1996 (Unaudited)
and December 30, 1995 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months ended
March 30, 1996 and April 1, 1995 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the three months ended
March 30, 1996 and April 1, 1995 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-10
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 11-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21-22
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 24
This Quarterly Report on Form 10-Q includes certain forward-looking statements,
the realization of which may be affected by certain important factors discussed
in "Additional Factors That May Affect Future Results" under "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
AST RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
March 30, December 30,
1996 1995
(In thousands, except share amounts) (Unaudited)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 126,857 $ 125,387
Accounts receivable, net of allowance for
doubtful accounts of $17,636 at March 30, 1996
and $18,629 at December 30, 1995 398,305 392,598
Inventories 190,414 252,339
Deferred income taxes 19,492 19,495
Other current assets 39,894 47,802
- -----------------------------------------------------------------------------------------------------------
Total current assets 774,962 837,621
Property and equipment, net 97,821 98,725
Other assets 110,983 119,696
- -----------------------------------------------------------------------------------------------------------
$ 983,766 $ 1,056,042
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 85,000 $ 75,000
Accounts payable, including payable to related party
of $38,942 at March 30, 1996 and $31,562 at
December 30, 1995 259,408 199,346
Accrued salaries, wages and employee benefits 19,225 19,827
Other accrued liabilities 181,298 200,639
Income taxes payable 22,585 26,902
Current portion of long-term debt 90,306 92,361
- -----------------------------------------------------------------------------------------------------------
Total current liabilities 657,822 614,075
Long-term debt 125,493 125,540
Other non-current liabilities 5,293 5,545
Commitments and contingencies
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares
authorized, 44,685,900 shares issued and
outstanding at March 30, 1996 and 44,679,400
shares at December 30, 1995 447 447
Additional capital 414,771 414,735
Retained earnings (deficit) (220,060) (104,300)
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 195,158 310,882
- -----------------------------------------------------------------------------------------------------------
$ 983,766 $ 1,056,042
===========================================================================================================
See accompanying notes.
</TABLE>
AST RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Three Months Ended
-------------------------------
March 30, April 1,
(In thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 519,972 $ 670,176
Revenue from related party 10,000 -
- ----------------------------------------------------------------------------------------------
Total revenue 529,972 670,176
Cost of sales 549,618 583,234
- ----------------------------------------------------------------------------------------------
Gross profit (loss) (19,646) 86,942
Selling, general and administrative expenses 76,983 80,939
Engineering and development expenses 10,514 9,016
- ----------------------------------------------------------------------------------------------
Total operating expenses 87,497 89,955
- ----------------------------------------------------------------------------------------------
Operating loss (107,143) (3,013)
Financing and other expense, net (8,617) (5,121)
- ----------------------------------------------------------------------------------------------
Loss before income taxes (115,760) (8,134)
Income tax provision (benefit) - (1,586)
- ----------------------------------------------------------------------------------------------
Net loss $ (115,760) $ (6,548)
==============================================================================================
Net loss per share $ (2.59) $ (.20)
==============================================================================================
Weighted average common shares outstanding 44,682 32,376
==============================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended
-----------------------------------
March 30, April 1,
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net cash used in operating activities $ (4,896) $ (15,079)
Cash flows from investing activities:
Purchases of capital equipment, net (4,848) (4,443)
Purchases of other assets, net (773) (997)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,621) (5,440)
Cash flows from financing activities:
Short-term borrowings, net 10,000 25,000
Repayment of long-term debt (2,002) (183)
Proceeds from issuance of common stock, net 36 12
- ---------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 8,034 24,829
Effect of exchange rate changes on cash and cash equivalents 3,953 (5,500)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,470 (1,190)
Cash and cash equivalents at beginning of period 125,387 68,654
- ---------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 126,857 $ 67,464
===============================================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 866 $ 2,002
Income taxes $ - $ 800
===============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 1996
Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of December 30, 1995) in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included.
The accompanying condensed consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Transition
Report on Form 10-K for the transition period from July 2, 1995 to December 30,
1995. The results of operations for the three-month period ended March 30, 1996
are not necessarily indicative of the results to be expected for the fiscal year
ended December 28, 1996 ("fiscal year 1996"). For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Transition Report on Form 10-K for the six months ended December 30,
1995.
On October 26, 1995, the Company changed its fiscal year from the Saturday
closest to June 30 to the Saturday closest to December 31. The change was
effective for the six-month transition period ended December 30, 1995
("transition period 1995").
The Company has elected to change the presentation of its consolidated
statement of cash flows from the direct method to the indirect method of
presentation. In addition, the Company has elected to present condensed
consolidated financial statements for its quarterly interim reporting. The
changes are effective for fiscal year 1996.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. The income
tax provision (benefit) is computed on the pretax loss of the consolidated
entities located within each taxing jurisdiction based on current tax law.
Deferred taxes result from the future tax consequences associated with temporary
differences between the amount of assets and liabilities recorded for tax and
financial accounting purposes. A valuation allowance for deferred tax assets is
recorded to the extent the Company cannot determine, in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes", that the ultimate realization of net deferred tax assets
against income is more likely than not.
For the three-month period ended March 30, 1996, the estimated effective
income tax rate is less than the U.S. statutory rate primarily due to the
Company's provision of a full valuation reserve against the additional deferred
tax assets arising from its current operating loss. Differences between the
estimated effective tax rate and the Company's actual effective tax rate could
result from changes in the Company's ability to recognize its deferred tax
assets and from changes in the mix of income/loss in the various tax
jurisdictions. The effects of such changes are recognized when known.
Intangible Assets
Goodwill, representing the excess of the purchase price over the fair value of
the net assets of the acquired entities, is being amortized on a straight-line
basis over the period of expected benefit of ten years. Patents are amortized
using the straight-line method over the lives of the patents. Licenses are
amortized on a straight-line basis over the estimated economic lives of the
related assets. During the fiscal year ended July 1, 1995, the Company elected
the early adoption of Statement of Financial Accounting Standards No. 121 ("SFAS
No. 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." Prior to the adoption of SFAS No. 121, the
carrying value of goodwill was reviewed periodically based on the undiscounted
cash flows of the entity acquired over the remaining amortization period.
In accordance with SFAS No. 121, long-lived assets and certain identifiable
intangibles held and used by the Company will be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. The recoverability test is performed at a
consolidated level based on undiscounted net cash flows since the assets being
tested do not have identifiable cash flows that are largely independent of other
asset groupings. Based upon the Company's analysis under SFAS No. 121, the
Company believes that no impairment of the carrying value of its long-lived
assets inclusive of goodwill existed at March 30, 1996. The Company's analysis
at March 30, 1996 has been based on an estimate of future undiscounted cash
flows using forecasts contained in the Company's operating plan. Should the
results of the operating plan not be achieved, future analysis may indicate
insufficient future undiscounted net cash flows to recover the carrying value of
the Company's long-lived assets, in which case SFAS No. 121 would require the
carrying value of such assets to be written down to fair value if lower than the
carrying value. The Company would then be required to make a determination of
the fair value of its long-lived assets. The Company is unable to predict
whether any write-down would be required in such circumstances. The Company's
historical results of operations and its cash flows in the first quarter of
fiscal year 1996, transition period 1995 and in fiscal years 1995 and 1994
indicate that it is at least reasonably possible that such circumstances could
arise in fiscal year 1996.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" becomes effective for the Company for fiscal year
1996. The Company will continue to measure compensation expense for its stock-
based employee compensation plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB 25") and related Interpretations, and will provide proforma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value-based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
Restructuring
At December 30, 1995, $9.2 million of the $125 million restructuring charge
incurred in connection with the 1993 acquisition of certain assets and
assumption of certain liabilities of Tandy Corporation's ("Tandy") personal
computer manufacturing operation remained accrued on the Company's condensed
consolidated balance sheet. During the quarter ended March 30, 1996, the
Company incurred cash expenditures of $.7 million, related primarily to the
closure of its Fountain Valley, California manufacturing facility. At March 30,
1996, $8.5 million of the restructuring accrual remained on the Company's
condensed consolidated balance sheet, consisting primarily of amounts provided
for lease payments for facilities that have been closed and the write-down to
net realizable value of related leasehold improvements being disposed of.
At December 30, 1995, approximately $12.2 million of the $13.0 million
restructuring charge incurred in connection with the Company's decision to
increase its utilization of third-party board design and manufacturing and, as
a result, to realign its Asia Pacific manufacturing operations remained
accrued on the Company's condensed consolidated balance sheet. During the
quarter ended March 30, 1996, the Company incurred cash expenditures of $.5
million and non-cash charges of $.1 million. At March 30, 1996, $11.6 million
of the restructuring accrual remained on the Company's condensed consolidated
balance sheet, consisting primarily of employee severance and asset write-downs,
including lease write-offs for closed offices.
On May 1, 1996, the Company announced plans to restructure its worldwide
operations into three regional operating groups, each with distinct goals and
objectives. In addition, the Company plans to consolidate some operations,
including the closing of certain regional offices and reconfiguration centers.
The Company is currently completing its restructuring plan and anticipates a
restructuring charge of approximately $10 to $15 million, which will consist of
severance, asset write-downs and lease write-offs for closed facilities. The
employee severance will include approximately 300 contract, temporary and full-
time employees in various functions. Approximately $10 million of the charge is
expected to involve cash disbursements with the remaining costs primarily
related to reductions in net asset values. The Company expects to finalize its
plans and record the restructuring charge in the consolidated results of
operations by the end of the second quarter of fiscal year 1996.
No assurance can be given that the previous and the anticipated restructuring
actions will be successful or that similar actions will not be required in the
future.
AST RESEARCH, INC.
NOTES TO CONSOLDIATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 1996
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
March 30, December 30,
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 82,657 $ 73,012
Work in process 27,923 33,823
Finished goods 79,834 145,504
- ---------------------------------------------------------------------------------
$ 190,414 $ 252,339
=================================================================================
</TABLE>
Supplemental Consolidated Statement of Operations Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Three Months Ended
---------------------------------
March 30, April 1,
(In thousands) 1996 1995
- ---------------------------------------------------------------------------------
Financing and other expense:
<S> <C> <C>
Interest income $ 1,022 $ 471
Interest expense (7,815) (4,669)
Foreign exchange gain (loss) (1,541) (847)
Other (283) (76)
- ---------------------------------------------------------------------------------
$ (8,617) $ (5,121)
=================================================================================
</TABLE>
Per Share Information
Primary and fully diluted loss per share have been computed based upon the
weighted average number of common shares outstanding.
Contingencies
The Internal Revenue Service ("IRS") is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal tax liabilities
for such years of approximately $8.3 million, excluding interest, relating to
the allocation of income between the Company and its foreign subsidiaries.
Management believes that the Company's position has substantial merit and
intends to vigorously contest these proposed adjustments. Management further
believes that any liability that may result upon the final resolution of the
proposed adjustments for 1987 and 1988 or current examinations of 1989, 1990 and
1991 will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially. See "Additional Factors That May Affect Future Results"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 1996
The Company has been named as a defendant or co-defendant, generally with
other personal computer manufacturers, including such companies as IBM, AT&T,
Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and
Matsushita, in eighteen similar lawsuits each of which alleges as a factual
basis the occurrence of carpal tunnel syndrome or repetitive stress injuries.
The suits naming the Company are just a few of the many lawsuits of this type
which have been filed, often naming IBM and other major computer companies. The
claims against the Company total in excess of $100 million in compensatory
damages and punitive damages and additional unspecified amounts. The Company
has denied or is in the process of denying the claims and intends to vigorously
defend the suits. The Company is unable at this time to predict the ultimate
outcome of these suits. Ultimate resolution of the litigation against the
Company may depend on progress in resolving this type of litigation overall.
Before consideration of any potential insurance recoveries, the Company believes
that the claims in the suits filed against it will not have a material impact on
the Company's consolidated financial position or results of operations; however,
the Company is unable to estimate the amount of any loss that may be realized in
the event of an unfavorable outcome. The Company has maintained various
liability insurance policies during the periods covering the claims above.
While such policies may limit coverage under certain circumstances, the Company
believes that it is adequately insured. The foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially. See "Additional Factors That May Affect Future Results"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Should the Company not be successful in defending
against such lawsuits or not be able to claim compensation under its liability
insurance policies, the Company's profitability and financial condition may be
adversely affected.
The Company was named, along with twelve other personal computer companies, as
a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the
County of Merced, California. The case name for this March 27, 1995 filing is
People v. Acer, et al., and the complaint alleged that the Company has engaged
in deceptive advertising and unlawful business practices in relation to computer
monitor screen measurements. The People v. Acer lawsuit was resolved by a
Stipulated Judgment that the Company signed along with representatives of all
other defendants. The Company was named, along with three other personal
computer or monitor companies, as a defendant in a class action lawsuit filed on
May 2, 1995 in the Superior Court for the County of Marin, California. The case
name for this May 2, 1995 filing is Kaplan, et al. v. Viewsonic, et al., and
alleges that the defendants have engaged in unfair business practices, false
advertising and breach of implied warranty concerning the advertisement of the
size of computer monitor screens. The Company was named, along with 37 other
defendants, in a class action lawsuit, Long v. Packard Bell, et al., filed on
August 21, 1995 in the Superior Court for the County of Orange, California,
which alleges certain claims concerning the advertising of the sizes of computer
monitors. The Company was named, along with nine other defendants, in a class
action lawsuit, Randy Davis, Ph.D., Inc. v. AST Research, et al., filed on
August 23, 1995 in Superior Court for the County of Orange, California, which
alleges certain claims concerning the advertising of the sizes of computer
monitors. The Company was named, along with 35 other defendants, in a class
action lawsuit, Sutter v. Acer, et al., filed on September 7, 1995 in the
Superior Court for the County of Sacramento, California, which alleges certain
claims concerning the advertising of the sizes of computer monitors. The
Company was named, along with 41 other defendants, in a class action lawsuit,
Shapiro v. ADI Systems, Inc., et al., filed on August 14, 1995 in Santa Clara
County, California, which alleges certain claims concerning the advertising of
the sizes of computer monitors. The Company was named, along with 29 other
defendants, in a class action lawsuit, Maizes & Maizes, et al., v. Apple
Computer Inc., et al., filed on December 15, 1995 in Essex County, New Jersey,
which alleges certain claims concerning the advertising of the sizes of computer
monitors. Management does not believe that the outcome of these disputes will
have a material adverse impact on the Company's consolidated financial position
or results of operations; however, the Company is unable to estimate the amount
of any loss that may be realized in the event of an unfavorable outcome. The
foregoing forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially. See "Additional Factors That May
Affect Future Results" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 30, 1996
The Company is also subject to other legal proceedings and claims that arise
in the normal course of business. While the outcome of these proceedings and
claims cannot be predicted with certainty, management does not believe that the
outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations. The
foregoing forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially. See "Additional Factors That May
Affect Future Results" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Related Party Transactions
On February 22, 1996, the Company entered into a Server Technology Transfer
Agreement and a Strategic Consulting Agreement with Samsung Electronics Co. Ltd.
("Samsung"). The Server Technology Transfer Agreement grants Samsung a royalty-
free license through July 31, 2000 to use the technical information supplied by
the Company to produce server technology products. The Strategic Consulting
Agreement grants Samsung a royalty-free license through July 31, 2000 to use
various marketing and sales planning studies conducted by the Company. Under
the agreements, Samsung agreed to pay $5 million to the Company for each
agreement. Such amounts were recorded as revenue from related party in the
accompanying condensed consolidated statement of operations. As of March 30,
1996, $5 million had been received from Samsung and $5 million was receivable
from Samsung and is included in accounts receivable in the accompanying
condensed consolidated balance sheet.
During the quarter ended March 30, 1996, the Company purchased $84.4 million
of components and products from Samsung. Amounts payable to Samsung at
March 31, 1996 were $38.9 million.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 30, 1996
RESULTS OF OPERATIONS
The following table shows the results of operations for the periods indicated
as a percentage of total revenue.
<TABLE>
<CAPTION>
Percentage of Total Revenue
Three Months Ended
------------------------------
March 30, April 1,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales 98.1% 100.0%
Revenue from related party 1.9 -
- --------------------------------------------------------------------------------
Total revenue 100.0 100.0
Cost of sales 103.7 87.0
- --------------------------------------------------------------------------------
Gross profit (loss) (3.7) 13.0
Selling, general and administrative expenses 14.5 12.1
Engineering and development expenses 2.0 1.4
- --------------------------------------------------------------------------------
Operating loss (20.2) (0.5)
Financing and other expense (1.6) (0.7)
- --------------------------------------------------------------------------------
Loss before income taxes (21.8) (1.2)
Income tax provision (benefit) - (0.2)
- --------------------------------------------------------------------------------
Net loss (21.8%) (1.0%)
================================================================================
</TABLE>
Total Revenues
Net sales for the three months ended March 30, 1996 ("the first quarter of
fiscal year 1996") decreased 22% to $520.0 million from $670.2 million for the
three months ended April 1, 1995 ("comparable prior year period"). The decrease
in sales was primarily caused by excess competitor inventory in the sales
channel, reduced demand for personal computers during the first two months of
the quarter, aggressive pricing actions throughout the industry, and internal
product development delays. The Company took aggressive pricing actions to
maintain its competitive position and to move its existing products through the
sales channel to make room for its spring 1996 product launch, which began at
the end of the quarter. The Company anticipates that additional pricing actions
will be necessary as it attempts to maintain its competitive price and
performance product profile; however, there can be no assurance that future
pricing actions will be effective in stimulating sales growth.
In the three months ended March 30, 1996, the Company's worldwide unit
shipments decreased 25% to 300,000 from 400,000 in the comparable prior year
period. The decrease in sales resulting from decreased unit shipments was
partially offset by increased shipments of Pentium(R) processor-based desktop
systems and notebooks, which generally sell at a higher average selling price.
Total revenues for the three months ended March 30, 1996 include $10.0 million
from a Server Technology Transfer Agreement and a Strategic Consulting Agreement
with Samsung Electronics Co. Ltd. ("Samsung"). Under the agreements, entered
into on February 22, 1996, Samsung agreed to pay $5 million for a royalty-free
license through July 31, 2000 to use the technical information supplied by the
Company to produce server technology products and $5 million for a royalty-free
license through July 31, 2000 to use various marketing and sales planning
studies conducted by the Company. Such amounts were recorded as revenue from
related party in the condensed consolidated statement of operations for the
three months ended March 30, 1996.
Sales from desktop system products decreased 16% to $407.2 million in the
first quarter of fiscal year 1996 from $486.8 million in the comparable prior
year period. The decrease can primarily be attributed to aggressive industry
pricing actions, reduced demand for personal computers during the first two
months of the quarter, and internal product development delays. Also
contributing to the decline was a lower average selling price per unit on
certain products as the Company sought to reduce sales channel inventories of
older products. These declines in average selling prices were more than offset
by a higher average selling price per unit on Pentium(R) processor-based
Advantage! and Bravo desktop systems. Decreased sales of the Company's 486-
based desktop systems in the first quarter of fiscal year 1996 are consistent
with the shift in demand toward the Pentium(R) processor-based desktop systems,
which accounted for 97% of total desktop systems sales dollars and 93% of total
desktop system units in the first quarter of fiscal year 1996 versus 42% and
28%, respectively, in the comparable prior year period.
The Company's notebook computer product sales decreased 32% to $75.5 million
in the first quarter of fiscal year 1996 from $111.5 million in the comparable
prior year period. The decrease in net sales of notebook computers reflects a
39% decrease in unit shipments to 30,000 in the first quarter of fiscal year
1996 from 49,000 in the comparable prior year period. The decline in notebook
system sales is primarily attributable to delays in delivery of the Company's
newest line of notebook computers. The 39% decrease in unit shipments was
partially offset by higher average selling prices per unit on the Pentium(R)
processor-based based Ascentia notebook computers. Sales from the Company's
notebook computer products represented 15% and 17% of net sales for the first
quarter of fiscal year 1996 and the comparable prior year period, respectively.
Sales from the Company's Americas region, which includes the United States and
Canada, decreased 25% to $260.5 million in the first quarter of fiscal year
1996, compared to $346.4 million in the comparable prior year period. Sales to
the independent reseller/dealer sales channel for the first quarter of fiscal
year 1996 decreased 38% compared to the comparable prior year period, and
accounted for 54% of total Americas sales. First quarter fiscal year 1996 sales
to the consumer retail sales channel of $120.1 million were comparable to the
comparable prior year period.
International sales, which includes the Company's Europe and Asia Pacific
regions, decreased 20% to $259.5 million in the first quarter of fiscal year
1996 from $323.8 million in the comparable prior year period. International
sales represented 50% and 48% of net sales in the first quarter of fiscal year
1996 and the comparable prior year period, respectively. Sales from the
Company's Europe region decreased 20% from the comparable prior year period with
sales declines occurring primarily within the Company's Nordic territory.
Sales from the Company's Asia Pacific region, which includes Asia, the Pacific
Rim, and the Middle East, declined 20% in the first quarter of fiscal year 1996
from the comparable prior year period. The decrease in sales in the first
quarter of fiscal year 1996 was attributable to sales declines in the People's
Republic of China ("PRC"). Sales into the PRC accounted for approximately 3% of
the Company's total sales in the first quarter of fiscal year 1996, compared
with approximately 5% in the comparable prior year period. The PRC market
experienced a significant increase in competitive pressures, including a
significant increase in lower priced products, which directly increased pricing
pressures within the PRC market. Although the PRC has historically provided the
Company with significant sales, 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, the general economic and political stability of the
region and the competitive position of the Company in the local PRC marketplace.
Economic and political risks in the countries in this geographical area could
have a corresponding impact on future sales and operating results. The Company
believes that economic factors such as competitive pricing and a lower margin
customer mix will continue to impact this region's future sales and operating
results. The foregoing forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" herein.
The results of the Company's international operations are subject to currency
fluctuations. As the value of the U.S. dollar weakens relative to other
currencies, sales in those currencies convert to more U.S. dollars; conversely,
when the value of the U.S. dollar strengthens relative to other currencies,
sales in those countries convert to fewer U.S. dollars. The Company's net sales
were increased by 0.8% the first quarter of fiscal year 1996 compared to an
increase of 3.0% in the comparable prior year period, due to fluctuations in the
average value of the U.S. dollar relative to other currencies.
Gross Profit (Loss)
The Company's gross loss for the first quarter of fiscal year 1996 was 3.7%
compared to a gross profit of 13.0% in the comparable prior year period. The
decrease in the Company's gross margin resulted primarily from excess competitor
inventory in the sales channel and reduced industry demand for personal
computers during the first two months of fiscal year 1996, which required
aggressive pricing actions to reduce sales channel inventory of the Company's
older products. The Company also encountered selected product development
issues which led to delays in shipment of the Company's spring product lines in
the first quarter of fiscal year 1996. Gross margins were also negatively
impacted by the Company's aggressive inventory reduction efforts which resulted
in both lower average selling prices and lower margins on certain products.
Increased warranty provisions and increased provisions for excess and obsolete
inventory also negatively impacted margins. The increase in the warranty
provision was due to an increase in costs associated with increased warranty
claims while the increased levels of inventory reserves were due to the impact
of reduced production plans.
The Company believes that the industry will continue to be characterized by
rapid technological advances and short product life-cycles resulting in
continued risk of product obsolescence. If the Company's products become
technically obsolete, the Company's net sales and profitability may be adversely
affected.
The Company's gross loss for the first quarter of fiscal year 1996 was reduced
by 2.0 percentage points as a result of revenue of $10.0 million from a Server
Technology Transfer Agreement and a Strategic Consulting Agreement with Samsung
Electronics Co. Ltd. ("Samsung"). Under the agreements, entered into on
February 22, 1996, Samsung agreed to pay $5 million for a royalty-free license
through July 31, 2000 to use the technical information supplied by the Company
to produce server technology products and $5 million for a royalty-free license
through July 31, 2000 to use various marketing and sales planning studies
conducted by the Company. Such amounts were recorded as revenue from related
party in the accompanying condensed consolidated statement of operations for the
three months ended March 30, 1996.
The personal computer industry continues to experience significant pricing
pressures and the Company believes that industry consolidation and restructuring
will continue to result in an aggressive pricing environment and continued
pressure on the Company's gross profit margins during fiscal year 1996. During
the first quarter of fiscal year 1996, the Company and the majority of its
competitors continued to introduce new, lower-priced, higher-performance
personal computers resulting in continued pricing pressures on both new and
older technology products. Future pricing actions by the Company and its
competitors may continue to adversely impact the Company's gross margins and
profitability, which could also result in decreased liquidity and could
adversely affect the Company's financial position.
The effect of foreign currency fluctuations on sales has a corresponding
impact on gross profit, as the Company's production costs are incurred primarily
in U.S. dollars. When comparing the first quarter of fiscal year 1996 to the
comparable prior year period, the U.S. dollar declined against nearly all
European currencies. This period-to-period currency fluctuation resulted in an
approximate 0.8% increase in gross margin in the first quarter of fiscal year
1996 compared to the comparable prior year period. If the value of the U.S.
dollar strengthens in the future, gross margins of the Company will be
negatively impacted.
Operating Expenses
Total general, selling and administrative expenses in the first quarter of
fiscal year 1996 of $77.0 million decreased by $4.0 million from the comparable
prior year period and represented 14.5% of total revenue, versus 12.1% of total
revenue in the comparable prior year period. The decline can primarily be
attributed to advertising rebates received during the current quarter. These
amounts were partially offset by increased advertising expenditures and higher
technical support costs.
Beginning in fiscal year 1996, the Company is embarking on aggressive new
marketing initiatives designed to increase demand for the Company's products
including a new U.S. television advertising campaign that will be airing on
selected domestic cable networks and an outdoor advertising campaign in major
U.S. cities and airports. The new marketing initiatives are expected to result
in an increase in general, selling and administrative expenses in fiscal year
1996. The foregoing forward-looking statements involve risks and uncertainties
that could cause actual results to differ materially. See "Additional Factors
That May Affect Future Results" herein.
Engineering and development costs for the first quarter of fiscal year 1996
increased in absolute dollars and as a percentage of net sales due primarily to
higher engineering materials expense related to new product introductions.
Products introduced in the first quarter of fiscal year 1996 included additions
to the Advantage!, Bravo and Ascentia product lines.
The personal computer industry is characterized by increasingly rapid product
life cycles. Accordingly, the Company is committed to continued investment in
research and development and believes that the timely introduction of enhanced
products with favorable price/performance features is critical to the Company's
future growth and competitive position in the marketplace. However, there can
be no assurance that the Company's products will continue to be commercially
successful or technically advanced, or that it will be able to deliver
commercial quantities of new products in a timely manner. The foregoing
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially. See "Additional Factors That May Affect
Future Results" herein.
In the second quarter of fiscal year 1996, the Company plans to restructure
its worldwide operations into three regional operating groups, each with
distinct goals and objectives. In addition, the Company plans to consolidate
some operations, including the closing of certain regional offices. The Company
is currently completing its restructuring plan and anticipates a restructuring
charge of approximately $10 to $15 million, which will consist of severance,
asset write-downs and lease write-offs for closed facilities. The employee
severance will include approximately 300 contract, part-time and full-time
employees in various functions. Approximately $10 million of the charge is
expected to involve cash disbursements with the remaining costs primarily
related to reductions in net asset values. The Company expects to finalize its
plans and record the restructuring charge in the consolidated results of
operations by the end of the second quarter of fiscal year 1996. No assurance
can be given that these anticipated restructuring actions will be successful or
that similar actions will not be required in the future. The foregoing forward-
looking statements involve risks and uncertainties that could cause actual
results to differ materially. See "Additional Factors That May Affect Future
Results" herein.
Other Income and Expense
In the first quarter of fiscal year 1996, the Company had net interest expense
of $6.8 million compared to $4.2 million in the comparable prior year period.
Interest expense increased by $3.1 million primarily as a result of $4.1 million
of amortization expense associated with the cost of obtaining a Samsung credit
guarantee in December 1995. The increase in net interest expense was partially
offset by higher interest income due to higher average cash balances.
In the first quarter of fiscal year 1996, the Company recognized net other
expense of $1.8 million compared to net other expense of $.9 million in the
comparable prior year period. Other expense relates primarily to net foreign
currency transaction and remeasurement gains and losses and the costs associated
with the Company's foreign currency hedging activities. The increase in the
first quarter of fiscal year 1996 was primarily due to losses incurred as a
result of the unfavorable movement of the U.S. dollar relative to other
currencies in the first quarter of fiscal year 1996 over the comparable prior
year period. The Company utilizes a limited hedging strategy which is designed
to minimize the effect of remeasuring the local currency balance sheets of its
foreign subsidiaries on the Company's consolidated financial position and
results of operations. See further discussion included under "Liquidity and
Capital Resources."
Income Tax Provision (Benefit)
The Company recorded an effective income tax provision (benefit) rate of 0%
and (0.2%) during the first quarter of fiscal year 1996 and for the comparable
prior year period, respectively. The decrease in the first quarter of fiscal
year 1996 effective tax benefit rate was primarily due to the Company's
provision of a 100% valuation allowance against additional deferred tax assets
(including loss carryforwards) that arose during the first quarter of fiscal
year 1996.
Realization of the deferred tax assets, which primarily relate to net
operating loss carryforwards, inventory reserves and other accrued liabilities,
is dependent on the Company generating approximately $141 million of future
taxable income during applicable carry forward periods. Although the Company is
primarily relying on certain tax planning strategies to generate such future
taxable income, such income could also arise from reversals of existing taxable
temporary differences and/or sales of new and existing products. The timing and
amount of such future taxable income may be impacted by a number of factors,
including those discussed below under "Additional Factors That May Affect Future
Results." To the extent that estimates of future taxable income are reduced or
not realized, the amount of the deferred tax asset considered realizable could
be adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
Working capital of $117.1 million at March 30, 1996 included cash and cash
equivalents of $126.9 million compared to working capital of $223.5 million and
cash and cash equivalents of $125.4 million at December 30, 1995. The decrease
in working capital can primarily be attributed to lower inventory balances,
partially offset by higher accounts payable and higher short-term borrowings.
The significant reduction in inventory balances was due to improved inventory
management. The Company had $85.0 million in short-term borrowings at March 30,
1996 compared to $75.0 million at December 30, 1995. During the first quarter
of fiscal year 1996, the Company used $4.9 million of cash to fund its operating
loss for the quarter.
Net cash used in investing activities decreased during the first quarter of
fiscal year 1996 compared with the same comparable prior year period, primarily
due to a decrease in net capital expenditures. Net capital expenditures totaled
$4.8 million in the first quarter of fiscal year 1996 compared to $4.4 million
in the comparable prior year period. Capital expenditures consisted primarily
of additions to plant and production equipment. The Company expects its total
fiscal year 1996 capital expenditures to be somewhat greater than those incurred
in the first quarter of fiscal year 1996, annualized for a full year of
expenditures. The foregoing forward-looking statement involves risks and
uncertainties that could cause actual results to differ materially. See
"Additional Factors That May Affect Future Results" herein.
Net cash provided by financing activities of $8.0 million was due to the
proceeds from short-term borrowings, partially offset by repayment of long-term
debt.
The Company regularly reviews its cash funding requirements on a consolidated
basis and attempts to meet those requirements through a combination of cash on
hand, cash provided by operations, available borrowings under any credit
facilities and possible future public or private debt and/or equity offerings.
The Company utilizes a centralized corporate approach for its cash management
activities and attempts to maximize the use of its consolidated cash resources
so as to minimize additional debt requirements while complying with any legal or
other restrictions upon the free flow of funds from one segment, division or
subsidiary to another. The Company invests its excess cash in investment grade
short-term money market instruments.
On December 21, 1995, the Company signed an Additional Support Agreement with
Samsung that provides additional financial support to the Company, principally
including a guaranty by Samsung of a line of credit of up to $200 million
through December 1997 and a vendor line of credit with Samsung of $100 million
through November 1997 for component purchases. In exchange for the additional
financial support, the Company issued an option to Samsung to purchase 4.4
million shares of the Company's common stock at an exercise price of $.01 per
share, exercisable between July 1, 1996 and June 30, 2001, and allowed Samsung
to add an additional member to the Company's Board of Directors. The issuance
of the option increases Samsung's potential ownership in the Company to
approximately 45%. The benefits received in exchange for the option were
recorded in "Other assets" based on the fair value of the option at the date of
issuance, or $31.0 million. In connection with this agreement, the Company
incurred professional fees of approximately $2.0 million, which were also
capitalized. This other asset will be amortized on a straight-line basis to
interest expense over the benefit period ending December 1997.
On December 27, 1995, the Company entered into a $100 million revolving credit
agreement, guaranteed by Samsung as part of the Additional Support Agreement,
with a final maturity date of December 25, 1996. The revolving credit agreement
allows the Company to borrow at a rate of LIBOR plus .25% per annum, or the
bank's reference rate, at the Company's option. The Company is required to pay
a commitment fee equal to .125% per annum based on the average daily unused
portion of the facility. The fee is payable quarterly in arrears. On March 6,
1996, the total amount available for borrowings under the facility and
guaranteed by Samsung was increased to $200 million. All other terms of the
credit agreement remained unchanged. At March 30, 1996, there was $85.0 million
outstanding as borrowings under this credit facility at an average interest rate
of 7.00% per annum.
In connection with the Company's acquisition from Tandy Corporation ("Tandy")
of Tandy's personal computer manufacturing operations, the Company issued a
$96.7 million promissory note to Tandy which is due on July 11, 1996. Interest
due related to fiscal year 1995 was paid on July 11, 1995 at a rate of 4.94% per
annum. The interest rate was adjusted to 5.00%, effective July 11, 1995, based
on the lower of either 5% or the "lowest three month rate" within the meaning of
Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995.
Interest is paid once per year on July 11th and there are no sinking fund
requirements. The note also required the Company to maintain a standby letter
of credit payable to Tandy in the amount of 70% of the face value of the note or
$67.7 million. Upon maturity of the note, up to 50% of the initial principal
amount of the promissory note was convertible, at the option of the Company,
into common stock of the Company based upon its then fair market value, as
defined in the promissory note. Under the terms of the Stock Purchase
Agreement, Samsung agreed to provide a letter of credit to support the
promissory note due to Tandy Corporation replacing the Company's letter of
credit and to provide funds to satisfy $75.0 million of the note obligation upon
maturity of the note.
On August 23, 1995, the Company and Tandy amended the terms of the $96.7
million promissory note. Pursuant to such amendments, the Company paid $6.7
million on August 25, 1995, thereby reducing the note balance to $90.0 million.
Tandy allowed the substitution of a letter of guarantee from both Samsung
Electronics Co., Ltd. and Samsung Electronics America, Inc. for the letter of
credit previously required from the Company. Additionally, the maximum
principal amount of the note that may be converted, at the option of the
Company, into common stock of the Company upon maturity of the note, based upon
its then fair market value as defined in the note, was reduced to $30.0 million.
All other terms of the promissory note remained unchanged. Although the Company
has made no decision as to the source of funds to be used to repay this note, or
whether it will exercise its option to repay a portion of the note through the
issuance of common stock, the Company currently expects to fund the repayment
through cash from operations and/or through a borrowing from Samsung of up to
$75 million that is available to the Company upon maturity of the note pursuant
to the Stock Purchase Agreement with Samsung.
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield Option Notes ("LYONs") due December 14, 2013 and received total proceeds
of approximately $111.7 million. The LYONs are zero coupon convertible
subordinated notes which were sold at a significant discount from par value with
a yield to maturity of 5.25% and a total value at maturity of $315.0 million
payable in cash. There are no periodic payments of interest on the LYONs. Each
$1,000 principal amount at maturity of LYONs is convertible into 12.993 shares
of the Company's common stock at any time. Upon conversion of a LYON, the
Company may elect to deliver shares of common stock at the conversion rate or
cash equal to the market value of the shares of common stock into which the
LYONs are convertible. The holder of a LYON may require the Company to purchase
all or a portion of its LYONs on December 14, 1998, December 14, 2003 and
December 14, 2008 (the "Purchase Dates"), and such payments may reduce the
liquidity of the Company. However, the Company may, subject to certain
exceptions, elect to pay the purchase price on any of the three Purchase Dates
in cash or shares of common stock based upon its then fair market value as
defined in the indenture, or any combination thereof. The Company has made no
decision as to whether it will meet these future purchase obligations in cash,
common stock, or any combination thereof. Such decision will be based on market
conditions at the time a decision is required, as well as management's view of
the liquidity of the Company at such time. In addition, as of 35 business days
after the occurrence of any change in control of the Company occurring on or
prior to December 14, 1998, each LYON will be purchased for cash by the Company,
at the option of the holder, for a change in control purchase price equal to the
issue price of the LYONs plus accrued original issue discount through the date
set for such purchase. A change in control of the Company is deemed to have
occurred under the terms of the LYONs at such time as any person, other than the
Company, has become the beneficial owner of 50% or more of the Company's common
stock or the Company is not the surviving corporation of any consolidation or
merger of the Company. The Stock Purchase Agreement and ownership by Samsung of
approximately 40% of the common stock of the Company does not have any impact on
the terms of the LYON securities. In addition, the potential increase in
ownership by Samsung to 45% assuming exercise of its option on 4.4 million
shares of common stock as part of the Additional Support Agreement would not
have any impact on the terms of the LYONs.
The Company's ability to fund its activities from operations is directly
dependent upon its rate of growth, ability to effectively manage its inventory,
the terms under which suppliers extend credit to the Company, the terms under
which the Company extends credit to its customers and its ability to collect
under such terms, the manner in which it finances any capital expansion, and the
Company's ability to access external sources of financing. While the Company
currently has adequate sources of external financing available to meet its
current operating requirements, these sources of external financing are
supported by a guarantee provided for the Company by Samsung. The Company has
not determined what steps it will take when the existing additional support
agreements terminate in December 1997. The Company believes that it will have
adequate time prior to the expiration of the support agreements to arrange for
new sources of external financing. The foregoing forward-looking statement
involves risks and uncertainties that could cause actual results to differ
materially. See "Additional Factors That May Affect Future Results" herein.
However, if the Company is unable to arrange for external financing in December
1997, there would be a material adverse effect on the Company's business,
financial position and results of operations.
Foreign Exchange Hedging
In the ordinary course of business and as part of the Company's asset and
liability management, the Company enters into various types of transactions that
involve contracts and financial instruments with off-balance sheet risk. The
Company utilizes foreign exchange contracts and foreign currency borrowings to
hedge its exposure to foreign exchange rate fluctuations impacting its U.S.
dollar consolidated financial statements. The Company attempts to minimize its
exposure to foreign currency transaction and remeasurement gains and losses due
to the effect of remeasuring the local currency balance sheets of its foreign
subsidiaries on the Company's consolidated financial position and results of
operations by utilizing a limited hedging strategy which has included the use of
foreign currency borrowings, the netting of foreign currency assets and
liabilities and forward exchange contracts. The actual gain or loss associated
with forward exchange contracts are limited to the contract amount multiplied by
the value of the exchange rate differential between the time the contract is
entered into and the time it matures. The Company typically holds all of its
contracts until maturity and enters forward contracts ranging in maturity dates
from one to nine months. Realized and unrealized gains and losses on the
forward contracts are recognized currently in the consolidated statement of
operations, and any premium or discount is recognized over the life of the
contract. Some foreign locations, such as the PRC, do not allow open market
hedging of their currencies and, therefore, the Company is not able to hedge all
of its exposure to foreign currency fluctuations.
The Company held forward exchange contracts maturing at various dates through
August 1996 with a face value of approximately $171.0 million and $162.0 million
at March 30, 1996 and December 30, 1995, respectively. The face value of the
contracts approximates the Company's hedgeable net monetary asset exposure to
foreign currency fluctuations at those respective dates. Unrealized losses
associated with these forward contracts totaling $1.2 million and $.4 million at
March 30, 1996 and at December 30, 1995 are included in the Company's
consolidated statements of operations for those periods. Foreign currency
borrowings at March 30, 1996 and at December 30, 1995 totaled $1.9 million and
$4.0 million, respectively.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include worldwide
economic and political conditions, industry specific factors, the Company's
ability to maintain access to external financing sources (including Samsung) and
its financial liquidity, the Company's ability to timely develop and produce
commercially viable products at competitive prices, the availability and cost of
components, the Company's ability to manage expense levels, the continued
financial strength of the Company's dealers and distributors, and the Company's
ability to accurately anticipate customer demand.
The Company's future success will be highly dependent upon its ability to
develop, produce and market products that incorporate new technology, are priced
competitively and achieve significant market acceptance. There can be no
assurance that the Company's products will be technically advanced or
commercially successful due to the rapid improvements in computer technology and
resulting product obsolescence. There is also no assurance that the Company
will be able to deliver commercial quantities of new products in a timely
manner. The success of new product introductions is dependent on a number of
factors, including market acceptance, the Company's ability to manage risks
associated with product transitions, the effective management of inventory
levels in line with anticipated product demand and the timely manufacturing of
products in appropriate quantities to meet anticipated demand. The Company
regularly introduces new products designed to replace existing products. While
the Company attempts to closely monitor new product introductions and product
obsolescence, there can be no assurance that such transitions will occur without
adversely affecting the Company's net sales, cash flow and profitability, as
occurred in the first quarter of fiscal year 1996. In addition, if the Company
is unable to successfully anticipate and manage shifts in personal computer
technology, the Company's product life cycles could be negatively impacted and
may continue to have a material adverse effect on the Company's net sales, cash
flow and profitability.
The Company believes that its production capacity should be sufficient to
support anticipated unit volumes for the foreseeable future. However, if the
Company is unable to obtain certain key components, or to effectively forecast
customer demand or manage its inventory, increased inventory obsolescence or
reduced utilization of production capacity could adversely impact the Company's
gross margins and results of operations.
Increases in demand for personal computers have created industrywide
shortages, which at times have resulted in premium prices being paid for key
components, such as flat panel display screens, Dynamic Random Access Memory
chips ("DRAMs"), Static Random Access Memory chips, CD-ROM drives and monitors.
These shortages have occasionally resulted in the Company's inability to procure
these components in sufficient quantities to meet demand for its products. In
addition, a number of the Company's products include certain components, such as
microprocessors, video chips, core logic, modems, lithium ion batteries, Static
Random Access Memory chips and Application Specific Integrated Circuits, that
are currently purchased from single sources due to availability, price, quality
or other considerations. The Company purchases both components and selected
finished goods pursuant to purchase orders placed in the ordinary course of
business and has no guaranteed supply arrangements with single source suppliers.
Reliance on suppliers generally involves risks, including the possibility of
defective parts, a shortage of components, an increase in component costs and
disruptions in delivery of components. Should delays, defects or shortages re-
occur or component costs significantly increase, the Company's net sales and
profitability could be adversely affected.
The Company and Samsung have entered into strategic agreements covering a
broad range of commercial relationships including, among others, component
supply agreements for certain critical components manufactured by Samsung and
used by the Company in the manufacture of personal computers and a joint
procurement agreement providing a mechanism for Samsung and the Company to
coordinate their purchases from third parties in order to obtain more favorable
pricing. However, as Samsung is a supplier of critical components in a highly
competitive marketplace, other suppliers may be less likely to extend attractive
terms to or to do business with the Company. In addition, because Samsung has
other business involvements typical of large, multi-national companies and is
not based in the U.S., it is possible that some additional suppliers, customers,
employees and others will not react favorably to Samsung's investment in the
Company.
Samsung is a critical supplier of components to the Company and is based in
South Korea. Political turmoil between North and South Korea could adversely
affect the Company's operations.
In December 1995, the Company implemented a restructuring plan designed to
increase its utilization of third-party board manufacturing and design and to
realign its Asia Pacific manufacturing operations. The Company's increased
reliance on third-party board manufacturers involves risks, including the
possibility of defective boards, a shortage of boards, an increase in board
costs and disruptions in delivery of boards. Should delays, defects or
shortages occur or board costs significantly increase, the Company's net sales
and profitability could be adversely affected. Although the Company believes
that the restructuring activities were necessary, no assurance can be given that
the restructuring action will be successful or that similar action will not be
required in the future.
The ongoing introduction of new technologies across all of the Company's
product lines is intended to enable the Company to keep pace with rapid market
changes and to minimize the effect of continued competitive pricing. However,
there can be no assurance that the Company will have the financial resources,
marketing and distribution capability, or the technological knowledge to compete
successfully. In addition, the Company's results of operations could be
adversely impacted if it is unable to effectively implement its technological
and marketing alliances with other companies, such as Microsoft and Intel, and
manage the competitive risks associated with these relationships.
The Company's ability to compete is largely dependent upon its financial
strength and its ability to adequately fund its operations. Many of the
Company's competitors are significantly larger and have significantly greater
financial resources than the Company. The Company's sources of financing
include cash on hand, cash provided by operations, available borrowings under
its revolving credit facilities and possible future public or private debt
and/or equity offerings. The Company's future success is highly dependent upon
its continued access to sources of financing which it believes are necessary for
the continued growth of the Company. The Company currently has a $200 million
revolving credit facility guaranteed by Samsung. However, in the event the
Company is unable to maintain access to its existing financing sources, there
would be a material adverse effect on the Company's business operations.
The Company participates in a highly competitive and volatile industry that is
characterized by dynamic customer demand patterns, rapid introduction of new
products, technological advances and product obsolescence resulting in an
extremely competitive pricing environment with downward pressure on gross
margins. The Company anticipates that the personal computer industry will
continue to experience intense price competition and dramatic price reductions.
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 re-balancing and price
protection rights that permit these distributors, retailers and dealers to
return slow-moving products to the Company for credit or to receive price
adjustments if the Company lowers the price of selected products within certain
time periods. Stock re-balancing and price protection credits represented 5.9%
of total revenue during the first quarter of fiscal year 1996, compared to 3.2%
for the comparable prior year period. If sales and pricing trends experienced
in the current year continue or accelerate, there can be no assurance that the
Company will not experience rates of return or price protection adjustments that
could adversely impact the Company's net sales and profitability in the future.
The Company's primary means of distribution continues to be third-party
computer resellers and consumer retailers. While the Company continuously
monitors and manages the credit it extends to its customers to limit its credit
risk, the Company's business could be adversely affected in the event that the
financial condition of its customers weakens. In the event of the financial
failure of a major customer, the Company would experience disruptions in its
distribution as well as the loss of the unsecured portion of any outstanding
accounts receivable.
General economic conditions have an impact on the Company's business and
financial results. From time to time, the markets in which the Company sells
its products experience weak economic conditions that may negatively affect
sales of the Company's products. Although the Company does not consider its
business to be highly seasonal, it has historically experienced seasonally
higher sales in the consumer retail sales channel in the quarter ended in
December due to strong holiday demand for some of its products in certain
regions.
The Company's international operations may be affected by changes in United
States trade relationships, increased competition and the economic stability of
the locations in which sales occur. The Company operates in foreign locations,
such as the PRC, where future sales may be dependent upon continuing favorable
trade relations. Additionally, foreign locations such as the PRC and Taiwan may
experience changes in their general economic stability due to such factors as
increased inflation and political turmoil. Also, political tensions between the
PRC and Taiwan could adversely affect the Company's operations, particularly its
notebook production. Any significant change in United States trade relations or
the economic or political stability of foreign locations in which the Company
operates could have an adverse effect on the Company's net sales and
profitability.
The Company's international operations are also affected by foreign currency
fluctuations. The financial statements of the Company's foreign subsidiaries
are remeasured into the United States dollar functional currency for
consolidated reporting purposes. Gains and losses resulting from this
remeasurement process are recognized currently in the consolidated results of
operations. The Company attempts to minimize the impact of these remeasurement
gains and losses by utilizing a limited hedging strategy which includes the use
of foreign currency borrowings, the netting of foreign currency assets and
liabilities, and forward exchange contracts. The Company's exposure to currency
fluctuations will continue to increase as a result of the expansion of its
international operations. Significant fluctuations in currency values could
have an adverse effect on the Company's net sales, gross margins and
profitability.
The personal computer industry presents risks for claims of infringement of
patents, trademarks and copyrights. From time to time, the Company is notified
that certain of its products may infringe upon the intellectual property rights
of others. The Company generally evaluates all such notices on a case-by-case
basis to determine whether licenses are necessary or desirable. If such claims
are made, there can be no assurance that licenses will be available on
commercially reasonable terms or that retroactive royalty payments on sales of
the Company's computer products will not be required. In addition, substantial
costs may be incurred in disputing such claims. The Company believes that the
actions it takes to avoid or minimize the impact to the Company of such claims
are prudent; however, there can be no assurance that such claims will not occur
or, if successful, would not have a material adverse effect on the Company's
business operations and profitability. Pursuant to its Strategic Alliance
Agreement with Samsung Electronics Co., Ltd. dated February 27, 1995, the
Company has a patent cross license agreement with Samsung dated July 31, 1995
that expires on July 31, 2005.
In determining the amount of the valuation allowance required to be
established against deferred tax assets in accordance with the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", the Company has primarily relied upon its ability to generate future
taxable income using certain available tax planning strategies. The amount of
taxable income that could actually be generated from such tax planning
strategies is dependent upon the Company being able to sell certain appreciated
assets at the current estimated fair market value. Although the Company has
utilized an outside valuation firm to determine the current estimated fair
market value of such assets, changes in market conditions could result in a
reduction of the estimated fair market value of these assets that would
adversely affect the amount of the valuation allowance and reduce the amount of
net deferred tax assets considered realizable.
The Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, is located near major
earthquake faults which have experienced earthquakes in the past. While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major earthquake or other disaster affecting one or more of the
Company's facilities, it is likely that insurance proceeds would not cover all
of the costs incurred and, therefore, the operations and operating results of
the Company could be adversely affected.
Because of these and other factors affecting the Company's operating results,
past financial performance should not be considered a reliable indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods. In addition, the Company's participation
in the highly competitive personal computer industry often results in
significant volatility in the Company's common stock price.
This Quarterly Report on Form 10-Q contains certain forward-looking statements
that are based on current expectations. In light of the important factors that
can materially affect results, including those set forth above and elsewhere in
this Form 10-Q, the inclusion of forward-looking information herein should not
be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. The Company may encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to develop, market, manufacture and ship new
products on a timely basis; competitive conditions within the personal computer
industry may change adversely; demand for the Company's products may weaken; the
market may not accept the Company's new products; the Company may be unable to
retain existing key management personnel; inventory risks may rise due to shifts
in market demand; the Company's forecasts may not accurately anticipate market
demand; and there may be other material adverse changes in the Company's
operations or business. Certain important presumptions affecting the forward
looking statements made herein include, but are not limited to (i) timely
identifying, designing, and delivering new products as well as enhancing
existing products, (ii) implementing current restructuring plans, (iii)
defending positions with the IRS and in the legal proceedings described above,
(iv) accurately forecasting capital expenditures, and (v) obtaining new sources
of external financing prior to the expiration of existing support arrangements
entered into with Samsung. Assumptions relating to budgeting, marketing,
advertising, product development and other management decisions are subjective
in many respects and thus susceptible to interpretations and periodic revisions
based on actual experience and business developments, the impact of which may
cause the Company to alter its marketing, capital expenditure or other budgets,
which may in turn affect the Company's financial position and results of
operations.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service ("IRS") is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal tax liabilities
for such years of approximately $8.3 million, excluding interest, relating to
the allocation of income between the Company and its foreign subsidiaries.
Management believes that the Company's position has substantial merit and
intends to vigorously contest these proposed adjustments. Management further
believes that any liability that may result upon the final resolution of the
proposed adjustments for 1987 and 1988 or current examinations of 1989, 1990 and
1991 will not have a material adverse effect on the Company's consolidated
financial position or results of operations. The foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially. See "Additional Factors That May Affect Future Results"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company has been named as a defendant or co-defendant, generally with
other personal computer manufacturers, including such companies as IBM, AT&T,
Unisys, Digital Equipment Corporation, NEC, Olivetti, NCR, Panasonic, and
Matsushita, in eighteen similar lawsuits each of which alleges as a factual
basis the occurrence of carpal tunnel syndrome or repetitive stress injuries.
The suits naming the Company are just a few of the many lawsuits of this type
which have been filed, often naming IBM and other major computer companies. The
claims against the Company total in excess of $100 million in compensatory
damages and punitive damages and additional unspecified amounts. The Company
has denied or is in the process of denying the claims and intends to vigorously
defend the suits. The Company is unable at this time to predict the ultimate
outcome of these suits. Ultimate resolution of the litigation against the
Company may depend on progress in resolving this type of litigation overall.
Before consideration of any potential insurance recoveries, the Company believes
that the claims in the suits filed against it will not have a material impact on
the Company's consolidated financial position or results of operations; however,
the Company is unable to estimate the amount of any loss that may be realized in
the event of an unfavorable outcome. The Company has maintained various
liability insurance policies during the periods covering the claims filed above.
While such policies may limit coverage under certain circumstances, the Company
believes that it is adequately insured. The foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially. See "Additional Factors That May Affect Future Results"
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations." Should the Company not be successful in defending against such
lawsuits or not be able to claim compensation under its liability insurance
policies, the Company's profitability and financial condition may be adversely
affected.
The Company was named, along with twelve other personal computer companies, as
a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the
County of Merced, California. The case name for this March 27, 1995 filing is
People v. Acer, et al., and the complaint alleged that the Company has engaged
in deceptive advertising and unlawful business practices in relation to computer
monitor screen measurements. The People v. Acer lawsuit was resolved by a
Stipulated Judgment that the Company signed along with representatives of all
other defendants. The Company was named, along with three other personal
computer or monitor companies, as a defendant in a class action lawsuit filed on
May 2, 1995 in the Superior Court for the County of Marin, California. The case
name for this May 2, 1995 filing is Kaplan, et al. v. Viewsonic, et al., and
alleges that the defendants have engaged in unfair business practices, false
advertising and breach of implied warranty concerning the advertisement of the
size of computer monitor screens. The Company was named, along with 37 other
defendants, in a class action lawsuit, Long v. Packard Bell, et al., filed on
August 21, 1995 in the Superior Court for the County of Orange, California,
which alleges certain claims concerning the advertising of the sizes of computer
monitors. The Company was named, along with nine other defendants, in a class
action lawsuit, Randy Davis, Ph.D., Inc. v. AST Research, et al., filed on
August 23, 1995 in Superior Court for the County of Orange, California, which
alleges certain claims concerning the advertising of the sizes of computer
monitors. The Company was named, along with 35 other defendants, in a class
action lawsuit, Sutter v. Acer, et al., filed on September 7, 1995 in the
Superior Court for the County of Sacramento, California, which alleges certain
claims concerning the advertising of the sizes of computer monitors. The
Company was named, along with 41 other defendants, in a class action lawsuit,
Shapiro v. ADI Systems, Inc., et al., filed on August 14, 1995 in Santa Clara
County, California, which alleges certain claims concerning the advertising of
the sizes of computer monitors. The Company was named, along with 29 other
defendants, in a class action lawsuit, Maizes & Maizes, et al., v. Apple
Computer Inc., et al., filed on December 15, 1995 in Essex County, New Jersey,
which alleges certain claims concerning the advertising of the sizes of computer
monitors. Management does not believe that the outcome of these disputes will
have a material adverse impact on the Company's consolidated financial position
or results of operations; however, the Company is unable to estimate the amount
of any loss that may be realized in the event of an unfavorable outcome. The
foregoing forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially. See "Additional Factors That May
Affect Future Results" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
The Company is also subject to other legal proceedings and claims that arise
in the normal course of business. While the outcome of these proceedings and
claims cannot be predicted with certainty, management does not believe that the
outcome of any of these matters will have a material adverse effect on the
Company's consolidated financial position or results of operations. The
foregoing forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially. See "Additional Factors That May
Affect Future Results" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1995 Annual Meeting of Stockholders was held on January 25,
1996. Matters submitted to a vote of security holders included:
(1) The election of the following ten directors to hold office until the next
annual meeting and until their successors are elected and duly qualified:
Director For Withheld
------------------------- ---------- ---------
Ian Diery 37,449,492 404,149
Richard J. Goeglein 37,441,452 412,189
Jack W. Peltason 37,453,232 400,409
Safi U. Qureshey 37,452,172 401,469
Carmelo J. Santoro, Ph.D. 37,455,832 397,809
Hoon Choo 37,411,167 442,474
Kwang-Ho Kim 37,443,193 410,448
Young Soo Kim 37,441,329 412,312
Won Suk Yang 37,455,032 398,609
Hee Dong Yoo 37,453,391 400,250
(2) The approval of additional shares to be available under the AST Research,
Inc. 1991 Stock Option Plan for Non-Employee Directors.
In favor 33,660,622
Opposed 3,500,882
Abstentions 119,503
Broker Non-Votes 572,634
(3) The approval of the appointment of Ernst & Young LLP as independent
auditors for the fiscal year ending December 28, 1996.
In favor 37,642,228
Opposed 142,043
Abstentions 69,300
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Server Technology Transfer Agreement dated February 22,
1996, between AST Ireland Limited and Samsung Electronics Co. Ltd.
10.2 Strategic Consulting Agreement, dated February 22, 1996,
between AST Ireland Limited and Samsung Electronics Co. Ltd.
11. Computation of Net Income (Loss) Per Share.
27. Financial Data Schedule
(b) Reports on Form 8-K
On February 1, 1996, the Company filed a report on Form 8-K
reporting under Item 5 thereof, the persons elected as directors at the
Company's Annual Meeting of Shareholders held on Thursday, January 25,
1996. In addition, the Company announced an increase in the size of the
board from 10 to 11 and that Bo-Soon Sung was designated by Samsung and
named as an additional director of the Company.
AST, Advantage!, and GRiD are registered trademarks of AST Research, Inc.
Ascentia, Bravo, Premmia and Manhattan are trademarks of AST Research, Inc.
Pentium is a registered trademark of Intel Corporation. Windows is a registered
trademark of Microsoft Corporation. Tandy is a registered trademark of Tandy
Corporation. All other product or service names mentioned herein may be
trademarks or registered trademarks of their respective owners.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AST Research, Inc.
(Registrant)
Date: May 14, 1996 /s/JOSEPH E. NORBERG
---------------------
Joseph E. Norberg
Senior Vice President
and Chief Financial Officer
EXHIBIT 10.1
SERVER TECHNOLOGY TRANSFER AGREEMENT
THIS SERVER TECHNOLOGY TRANSFER AGREEMENT ("AGREEMENT") is made as of February
22, 1996 by and between AST Ireland Limited, an Irish corporation ("AST"), and
Samsung Electronics Company Limited, a Korean corporation ("SEC").
PURPOSE
AST has available for license certain technology for use in the personal
computer industry and for the manufacturing of personal computer products and
components. SEC wishes to obtain information concerning the technology,
documentation allowing SEC to implement the technology in SEC products, and
operational details on the manufacturing of products using the technology. SEC
is willing to pay AST a technology transfer fee in order to obtain the
information that it desires, and wishes to establish a formal contractual
framework to obtain a license to allow SEC to utilize the technology.
AGREEMENT
ARTICLE L. DEFINITIONS
1.1 The terms as used in this Agreement shall, unless the context clearly
indicates to the contrary, have the meanings set forth in this Article 1.
1.2 "EFFECTIVE DATE" means February 22, 1996.
1.3 "SUBSIDIARIES" means any corporation, company or other entity controlled
by, controlling, or under common control with, either party hereto. As
used herein, the term "control" means ownership or control, direct or
indirect, now or hereafter during the term of this Agreement, of more than
fifty percent (50%) of the outstanding shares or interest entitled to vote
for the election of directors (other than any shares or stock whose voting
rights are subject to restriction) of such corporation, company or other
entity. Any corporation, company or other entity which would at any time
be a Subsidiary of AST or SEC, as the case may be, by reason of the
foregoing shall be considered a Subsidiary for the purposes of the
Agreement only so long as such control exists. Any and all licenses and
other rights granted to Subsidiaries pursuant to this Agreement shall
automatically and immediately terminate at such time as such corporation,
company or other entity no longer satisfies the control or other
requirements set forth in this Section.
1.4 "TRANSFERRED TECHNOLOGY" means the information and technological
developments defined by the Technology Transfer Project contained in
Exhibit A to this agreement, or such other Technology Transfer Projects as
are agreed to in writing between SEC and AST.
1.5 "INTELLECTUAL PROPERTY RIGHTS" shall mean patents, patents applications and
utility models, copyrights, mask work rights, trade secrets, or any other
intellectual property rights, which are owned by AST, or its Subsidiaries,
and which are required for the making of the Technology Product.
1.6 "TECHNOLOGY PRODUCT" means the personal computer or personal computer
component product defined by the Transferred Technology.
1.7 "TECHNICAL INFORMATION" shall mean the information, data and materials,
including, without limitation, any and all technologies, inventions,
discoveries, know-how, designs, drawings and other proprietary information
which are owned by the parties and used in connection with design,
development and manufacture of the Technology Product.
ARTICLE 2. TECHNOLOGY TRANSFER PROJECT
2.1 Existing Technology Transfer Project. AST agrees to provide to SEC the
items defined in the Technology Transfer Project defined in this Agreement,
Appendix A. Such items shall be shipped from the AST facility in Limerick,
Ireland to the SEC facility in Seoul, Korea.
ARTICLE 3. PAYMENT
3.1 License Fee. SEC agrees to pay to AST the amount listed in Appendix B on
the date specified in Appendix B in exchange for the transfer and license
to the existing technology defined in Appendix A. The total of the license
fee shall be five million United States dollars (US$5,000,000.00), plus any
taxes payable pursuant to Article 25.
3.2 Payment Schedule. SEC agrees to pay to AST the amount listed in Appendix B
on the date specified in Appendix B in exchange for the transfer and
license to the technology defined in Appendix A. Payment of three million
United States dollars (US$3,000,000.00) shall be due for the Manufacturing
Technology and Electrical Technology listed in Appendix A on the Effective
Date, and payable within 45 days of the Effective Date. Payment of two
million United States dollars (US$2,000,000.00) shall be due for the
Testing Technology and Mechanical Technology listed in Appendix A on the
Effective Date, and payable within 45 days of the Effective Date.
ARTICLE 4. PROPRIETARY RIGHTS
4.1 License Grant. AST hereby grants to SEC and its Subsidiaries a non-
exclusive, non-transferable, worldwide, perpetual and royalty-free license
to use Technical Information supplied by AST and under the Intellectual
Property Rights therefor, subject to the terms of this Agreement, to
develop, manufacture, have manufactured, use, modify, prepare derivative
works based upon, copy, distribute, use in public performances, lease, sell
or otherwise dispose of any Technology Product. Nothing herein shall be
construed as granting a right to sublicense to any third party the license
granted above without a prior written consent of AST. Any licenses granted
to any Subsidiary hereunder shall terminate at such time as such entity no
longer qualifies as a Subsidiary as defined in this Agreement.
4.2 Limitations on License. Notwithstanding any other provision of this
Agreement, for those patent rights licensed or sublicensed to SEC from AST
under this Agreement, SEC shall not have the right to grant licenses or
sublicenses to any third parties, excepting for licenses or sublicenses to
SEC Subsidiaries to the extent permitted under this Agreement, and further
excepting licenses which would otherwise be implied to purchasers of AST
products for the use or resale of such products. Notwithstanding any other
provision of this Agreement, any purported or attempted grant by AST or SEC
of a license or sublicense contrary to this Agreement shall be of no force
or effect.
ARTICLE 5. WARRANTY
5.1 Warranty Disclaimer. AST provides SEC its Technical Information on an "as-
is" basis only, except that the Technical Information provided has not been
illegally copied from or misappropriated from any third party, and AST does
not warrant or represent that the operation of the Technical Information
will be uninterrupted or error free.
5.2 Warranty Limitations. Nothing contained in this Agreement, unless
otherwise agreed to in writing by both SEC and AST, shall be construed as:
(a) a warranty or representation that the manufacture, use, sale or other
disposal of any Technology Products by the other party under this
Agreement will be free from infringement of patents or any other
intellectual property rights of any third party; or
(b) conferring any right to use in advertising, publicity or otherwise,
any trademark, trade name or names, or any contraction, abbreviation
or simulation thereof, of either party; or
(c) conferring by implication, estoppel or otherwise, any license or other
right except for the license expressly granted hereunder; or
(d) an obligation to furnish any technical information or know-how except
as otherwise specifically provided herein.
ARTICLE 6. EFFECT OF TERMINATION
In any event of termination pursuant to this Agreement, (i) SEC shall be
entitled to retain any Technology Products and Intellectual Property Rights
contained therein which it obtained to the date of such termination, (ii)
all licenses granted to the non-defaulting (if any) party and its
Subsidiaries prior to the effective date of such termination shall continue
in full force and effect, and (iii) all licenses granted to the defaulting
(if any) party hereunder and its Subsidiaries shall immediately terminate.
ARTICLE 7. TERM AND TERMINATION
7.1 Term. This Agreement shall become effective and come into full force on
the Effective Date. The Agreement shall not be effective and shall have no
force prior to the Effective Date. This Agreement shall continue in full
force and effect until July 31, 2000, unless earlier terminated as provided
in this Agreement. The term of the Agreement may be extended by mutual
written consent of both parties.
7.2 Termination on Bankruptcy or Material Adverse Change. Either party may
terminate this Agreement effective immediately and without liability upon
written notice to the other party if: (i) either party declares bankruptcy
or bankruptcy proceedings are instituted involuntarily on his behalf, and
the voluntary or involuntary proceedings are not dismissed within 30 days,
or (ii) there is a material adverse change in the financial condition of
the other party.
7.3 Termination on Default. Except as otherwise provided elsewhere herein, if
either party fails to perform any material obligation under this Agreement,
then, the non-defaulting party may terminate this Agreement forthwith upon
written notice to the defaulting party, unless the breach has been cured
within 45 days after a notice of such breach is given.
7.4 Post-Termination Activities. In the event of any termination of this
Agreement, the parties shall cooperate in good faith to conclude any
ongoing activities related to this Agreement provided, however, that
neither party shall be obligated to incur any material expense in
connection with such cooperation or otherwise take actions that may result
in a material detriment to such party.
ARTICLE 8. SURVIVALS
Except as otherwise explicitly provided in this Agreement, the parties'
rights and obligations which, by their nature, would continue beyond the
termination, cancellation, or expiration of this Agreement shall survive
such termination, cancellation, or expiration.
ARTICLE 9. CONFIDENTIALITY
9.1 Definition. The term "Confidential Information" shall mean any information
disclosed by one party (the "Disclosing Party") to the other party (the
"Receiving Party") in connection with performance of this Agreement which
is in written, graphic, machine readable or other tangle form and is marked
"Confidential", "Proprietary" or in some other manner to indicate its
confidential nature. Confidential Information may also include orally
disclosed information, provided that such information is designated as
confidential at the time of disclosure and included in a written summary
sent by the Disclosing Party to the Receiving Party within thirty (30) days
after its oral disclosure, and which is marked in a manner to indicate its
confidential nature.
9.2 Confidentiality Obligations. Receiving Party shall keep and shall cause
its Subsidiaries to keep any Confidential Information, including but not
limited to the Technical Information disclosed by the Disclosing Party
hereunder, in confidence, and shall not disclose such Confidential
Information to any third party during the term of this Agreement or at any
time thereafter. The Receiving Party shall only permit disclosure of the
Confidential Information to the Receiving Party's employees or consultants
(who are bound by written confidentiality agreements imposing substantially
the same obligations as set forth herein) who have a need to know and shall
not use the Confidential Information for any purpose other than the purpose
contemplated by this Agreement in connection with which such Confidential
Information is disclosed. The Receiving Party agrees to obtain any
necessary consents from third parties before Confidential Information is
disclosed from the Disclosing Party to the Receiving Party under this
Agreement.
9.3 Confidentiality for Have-Made Manufacturers. Each party shall cause any of
its have-made manufacturers having access to the Confidential Information
of the other party to comply with the confidentiality obligation set forth
in this Article 9 by entering into a Confidentiality Agreement with such
manufacturer that imposes upon the manufacturer, confidentiality
obligations substantially the same as set forth herein.
9.4 Exceptions. The confidentiality obligations set forth in this Article 9
shall not apply to any information which:
(a) is rightfully in the possession of the Receiving Party prior to
receipt from the Disclosing Party; or
(b) is publicly known through no fault of the Receiving Party; or
(c) is rightfully received by the Receiving Party from a third party
without the breach of any restriction on disclosure; or
(d) is independently developed by the Receiving Party provided that the
Receiving Party provides substantial documentation of such independent
development and demonstrates that such independent development was
accomplished without any reference to or based upon the Confidential
Information; or
(e) is disclosed after obtaining the prior written consent of the
Disclosing Party; or
(f) is disclosed pursuant to applicable laws, regulations or court order,
provided that the Receiving Party shall give the Disclosing Party
prompt notice of such request so that the Disclosing Party has an
opportunity to defend, limit or protect such disclosure; or
(g) is established to be in the public domain other than as a consequence
of a breach of an obligation undertaken not to disclose the
information; or
(h) is approved for release by prior written consent of the Disclosing
Party; or
(i) is disclosed to the Receiving Party by a third party having no
obligation to the Disclosing Party to keep the information on
confidence; or
(j) is made public by the Disclosing Party.
9.5 Non-Disclosure. Neither party hereto shall disclose any Confidential
Information, obtained from the other party in the course of business under
this Agreement to any third party during the term of this Agreement or at
any time thereafter.
ARTICLE 10. ASSIGNMENT
The Agreement and the licenses granted herein shall inure to the benefit of
the parties hereto and, within the limitations set forth in Articles 1.3,
4.1 and 4.2 hereof, to the Subsidiaries of the parties hereto. Neither
party hereto nor any of its Subsidiaries shall assign or transfer any
rights, privileges or obligations hereunder or thereunder without the prior
written consent of the other party hereto, except that SEC may assign this
Agreement to a person or entity into which it has merged or which has
otherwise succeeded to all or substantially all of its business and assets,
and which has assumed in writing or by operation of law its obligations
under this Agreement.
ARTICLE 11. NOTICES
All notices required or permitted to be given hereunder shall be in writing
and shall be valid and sufficient if dispatched by registered airmail,
postage prepaid, in any post office in Korea or in Ireland, as the case may
be, and with a copy sent by a commercial express delivery service offering
routine two-day delivery of messages between Ireland and Korea (for
example, currently these would include Federal Express or DHL), and
addressed as follows:
If to SEC: Samsung Electronics Co., Ltd.
16th Fl., Joon-ang Daily News Bldg.
7 Soonhwa-dong, Choong-ku
C. P. O. Box 2775
Seoul, Korea
Attn: Kurt Jun
If to AST: AST Ireland Limited
National Technological Park
Plassey
Limerick
Eire
Attn: Managing Director
With copy to: AST Research, Inc.
16215 Alton Parkway
Irvine, California 92718
Attn: General Counsel
Either party may change its address by a notice given to the other party in
the manner set forth above. Notices given as herein provided shall be
considered to have been given fourteen (14) days after the mailing thereof.
ARTICLE 12. AMENDMENT
No oral explanation or oral information by either part hereto shall alter
the meaning or interpretation of the Agreement. No modification,
alteration, addition or change in the terms hereof shall be binding on
either party unless reduced to writing and duly executed by a duly
authorized officer of the parties.
ARTICLE 13. GOVERNING LAW
This Agreement and matters connected with the performance thereof shall be
construed, interpreted, applied and governed in all respects in accordance
with the laws of Ireland, without regard to its conflicts of law
principles.
ARTICLE 14. ARBITRATION
14.1 Negotiation and Arbitration. All disputes arising during performance under
this Agreement shall be settled through friendly negotiation between the
parties, including providing written notice of the dispute to the other
party in advance of submitting any dispute to arbitration or making any
filing with any judicial, administrative or regulatory authority concerning
the dispute. The parties agree, when time and circumstances reasonably
permit, that no arbitration, judicial, administrative or regulatory action
concerning a dispute between the parties will be started until after the
senior executive of each company has attempted to speak (in person, by
telephone or by videophone) to the other concerning the dispute and
attempted to resolve the dispute. In case no settlement can be reached,
the dispute shall be submitted to arbitration if both parties determine
that the subject matter of the dispute is such that arbitration will be an
efficient, effective and timely method of resolving the dispute.
14.2 Arbitration Procedures. If the dispute is submitted to arbitration, the
dispute shall be finally settled by an arbitration tribunal which shall be
convened and conducted in accordance with the applicable rules and
procedure of arbitration of the International Chamber of Commerce adopted
in 1988. The arbitration proceeding shall be held before three (3)
arbitrators in the headquarters city of the party not initiating the claim.
Two (2) of the arbitrators shall first be appointed by the parties, one (1)
by AST and one (1) by SEC. The arbitrators so appointed shall appoint a
third arbitrator who shall be neither an ROK nor an Irish national, and
shall act as the chairman of the arbitral tribunal. If the arbitrators
appointed by the parties fail to appoint a third arbitrator within sixty
(60) days after they have been appointed, the third arbitrator may be
appointed by the arbitration body before which the arbitration is being
held. In such event, the third arbitrator shall be neither an ROK nor an
Irish national. The arbitration proceedings shall be conducted in English,
and the law applied shall be the same as the governing law selected in
Article 9 of this Agreement. The results of such arbitration shall be
conclusive and binding upon the parties, and shall be enforceable in any
court having jurisdiction over the parties against whom the award was
rendered.
ARTICLE 15. SEVERABILITY
Should any clause, sentence, or paragraph of this Agreement judicially be
declared to be invalid, unenforceable, or void, such decision shall not
have the effect of invalidating or voiding the remainder of this Agreement
unless the economic equity of the parties is materially affected thereby.
ARTICLE 16. FORCE MAJEURE
In the event of acts of God, war, blockade, insurrection, mobilization or
any other actions of Government authorities, riots, civil commotion,
warlike conditions, strikes, lockout, shortage or control of power supply,
plague or other epidemics, fire, flood, tidal waves, typhoon, hurricane,
cyclone, earthquake, lightning, explosion, or any other causes beyond the
reasonable control of either party or Force Majeure, neither party shall be
liable for any default in performance of this Agreement arising therefrom.
ARTICLE 17. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGE OF ANY KIND,
(INCLUDING WITHOUT LIMITATION LOSS OF PROFIT OR DATA) WHETHER OR NOT
ADVISED OF THE POSSIBILITY OF SUCH LOSS.
ARTICLE 18. ENTIRE AGREEMENT
This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter of this Agreement and merges all prior
discussions between them, and neither of the parties shall be bound by any
modification of this Agreement, other than as expressly provided in this
Agreement or as duly set forth on or subsequent to the date hereof in
writing and signed by a duly authorized representative of the party to be
bound thereby.
ARTICLE 19. COMPLIANCE WITH LAWS
Each party shall at all times and at its own expense comply in all material
respects to all applicable laws and regulations of the Irish, Korean, US
and other governments (and political subdivisions thereof) and any
applicable notification requirements related to the transactions
contemplated by this Agreement including, without limitation, documentation
and fees associated with the Import/Export of the Products or any
documentation or licenses related to the use thereof and obtaining any
governmental approvals related to the performance of either party
hereunder.
ARTICLE 20. COOPERATION
Each of the parties agrees to do such further acts and to execute and
deliver such additional documents as are reasonably necessary or
appropriate to give effect to the transactions contemplated by this
Agreement and carry out the purpose and intent of this Agreement.
ARTICLE 21. EQUITABLE RELIEF
The parties acknowledge and agree that any unauthorized use, transfer or
copying of the Confidential Information will cause irreparable injury to
the Disclosing Party by substantially diminishing the value of the
Disclosing Party's trade secrets and other proprietary rights contained in
the Confidential Information. Therefore, if the Receiving Party (including
its employees and consultants) attempts to use, transfer, copy, license,
assign or otherwise convey the Confidential Information in any manner
contrary to the terms of the Agreement, the Disclosing Party shall, in
addition to any other remedies available to it, have the right to enjoin,
preliminary and permanently, the Receiving Party from any such act, and the
Receiving Party hereby acknowledges that other remedies are inadequate and
consents to such injunction, provided that the court being requested to
provide such remedy would otherwise find adequate grounds for such remedy.
ARTICLE 22. CHOICE OF FORUM
Any action arising out of or related to this Agreement or the transaction
herein described, whether at law or in equity, not otherwise subject to
International Arbitration under Article 10 hereof including, without
limitation, the enforcement of any award, the seeking of injunctive relief
to prevent or restrain infringement of valid intellectual property rights,
may be instituted in and litigated in the courts of the Republic of Korea,
the Courts of Ireland or the courts of the United States of America. In
accordance herewith, the parties hereto submit to the jurisdiction of the
courts of the Republic of Korea, the Courts of Ireland and the courts of
the United States of America.
ARTICLE 23. GOVERNMENT CONTRACTING
If products are transferred from one party to this Agreement to another
("Products") and are used in connection with foreign or domestic government
contracting or subcontracting, including, without limitation, either
party's performance of any government contracts or subcontracts (the
"Government Contracting Party"), then the Government Contracting Party
shall ensure that: (l) the Products shall not constitute deliverables
under any government contracts or subcontracts, and (2) no government
entity shall acquire, under the terms of any government contracts or
subcontracts, or any applicable government contracting laws, rules or
regulations, any intellectual property rights of any nature in the
Products, including rights under any copyrights, patents, trade secrets, or
other proprietary rights attendant thereto. However, either party may
supply Products to government agencies and transfer the usual rights to use
the products or prepare archival copies of software, in accordance with the
usual and conventional terms and conditions used by government agencies for
the acquisition of commercially available products.
ARTICLE 24. TIME LIMITATION ON ACTIONS
Actions however asserted under this Agreement shall be commenced within one
(1) year from the date the cause of action accrues.
ARTICLE 25. TAXES/DUTIES/FEES
In addition to the purchase price payable under this Agreement, SEC and AST
when each is the purchasing party, shall pay all taxes (including, without
limitation, sales, use, privilege, ad valorem or excise taxes), customs
duties and import/export fees of any kind (including, without limitation,
any fees for permits or licenses related to import/export compliance) paid
or now or hereafter payable, however designated, levied or based on amounts
payable to the selling party hereunder, on the purchasing party's
acquisition, use or possession of products under this Agreement or upon the
presence of products at the designated site, but exclusive of federal,
state and local taxes based on the selling party's net income. The
purchasing party shall not deduct or withhold from payments to selling
party any amounts paid or payable to third parties for taxes, customs
duties or import/export fees, however designated.
ARTICLE 26. DUE EXECUTION
Each party hereto warrants and represents to the other that the acceptance,
execution and delivery of this Agreement has been duly authorized, and that
all corporate actions and other steps necessary to make the acceptance of
this Agreement and all the terms hereof valid and binding obligations have
been duly taken.
ARTICLE 27. APPROVALS AND SIMILAR ACTIONS
Where agreement, approval, acceptance, consent or similar action by either
party is required by any provision of this Agreement, such action shall not
be unreasonably delayed or withheld, unless specifically permitted by the
Agreement.
ARTICLE 28. RIGHTS AND REMEDIES
Except as otherwise expressly provided herein, the rights and remedies
provided in this Agreement are cumulative and not exclusive of any rights
or remedies any party could have at law or in equity or otherwise.
ARTICLE 29. COUNTERPARTS
This Agreement may be executed in one or more counterparts all of which
taken together will constitute one and the same instrument.
ARTICLE 30. HEADINGS
Headings of articles and other provisions of this Agreement are for
convenience only, and do not alter the meaning of this Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement, on the dates below indicated.
SAMSUNG ELECTRONICS CO., LTD. AST IRELAND LIMITED
By: /s/N.B. PARK By: /s/SAFI U. QURESHEY
Name: N.B. Park Name: Safi U. Qureshey
Title: Sr. Exec. Managing Director Title: Chairman of the Board
Date: March 15, 1996 Date: March 15, 1996
EXHIBIT 10.2
STRATEGIC CONSULTING AGREEMENT
THIS STRATEGIC CONSULTING AGREEMENT ("AGREEMENT") is made as of February 22,
1996 by and between AST Ireland Limited, an Irish corporation ("AST"), and
Samsung Electronics Company Limited, a Korean corporation ("SEC").
PURPOSE
SEC wishes to obtain, and AST wishes to supply consulting services concerning
product planning for personal computers and their components, the sales and
marketing strategies for personal computers, and other personal computer related
subjects in accordance with AST's developed expertise and experience and in
accordance with SEC's needs and desires.
AGREEMENT
ARTICLE 1. DEFINITIONS
1.1 The terms as used in the Agreement shall, unless the context clearly
indicates to the contrary, have the meanings set forth in this Article 1.
1.2 "EFFECTIVE DATE" shall mean February 22, 1996.
1.3 "SUBSIDIARIES" shall mean any corporation, company or other entity
controlled by, controlling, or under common control with, either party
hereto. As used herein, the term "control" means ownership or control,
direct or indirect, now or hereafter during the term of this Agreement, of
more than fifty percent (50%) of the outstanding shares or interest
entitled to vote for the election of directors (other than any shares or
stock whose voting rights are subject to restriction) of such corporation,
company or other entity. Any corporation, company or other entity which
would at any time be a Subsidiary of AST or SEC, as the case may be, by
reason of the foregoing shall be considered a Subsidiary for the purposes
of this Agreement only so long as such control exists. Any and all
licenses and other rights granted to Subsidiaries pursuant to this
Agreement shall automatically and immediately terminate at such time as
such corporation, company or other entity no longer satisfies the control
or other requirements set forth in this Section.
1.4 "CONSULTING PROJECT PLAN" means a plan as mutually agreed and defined in
writing between AST and SEC, including, but not limited to, those tasks
defined in the attached Appendix A.
1.5 "CONSULTING DELIVERABLE" means the written documents and tangible physical
items required to be delivered by AST pursuant to a Consulting Project
Plan.
1.6 "WORKING SCHEDULE" means the schedule specified in Appendix A.
ARTICLE 2. FORMULATION OF EACH CONSULTING PROJECT PLAN
2.1 Plans Defined in This Agreement. Exhibit A is the Consulting Project that
has been defined and agreed on between AST and SEC as of the Effective
Date.
2.2 Additional Consulting Project Plans. SEC and AST may agree upon additional
Consulting Projects as each shall determine to be necessary and desirable
during the term of this Agreement, and such Consulting Project Plans shall
be performed and result in obligations to make Consulting Payments as
defined in this Agreement.
2.3 Changes to Consulting Project Plans. If AST or SEC desire to make any
changes to the Consulting Project, each party agrees to discuss such
proposed changes with the other, and agrees that such changes shall not be
effective until a written amendment to this Agreement is signed by
authorized representatives of AST and SEC.
ARTICLE 3. PERFORMANCE OF CONSULTING PROJECTS
3.1 Consulting Activities. AST agrees to provide consulting activities in the
areas defined in the Consulting Project, and to complete such activities
using its skills and resources in a cooperative manner with SEC, in
response to requests and directions provided by SEC, and during the Working
Schedule.
3.2 Transfer of Deliverables. AST agrees to transfer to SEC the deliverables
defined for the Consulting Project. Such deliverables shall be shipped from
the AST facility in Limerick, Ireland to the SEC facility in Seoul, Korea.
3.3 License to Use Deliverables. AST hereby grants to SEC and its Subsidiaries
a non-exclusive, non-transferable, worldwide, perpetual and royalty-free
license to use any Consulting Deliverable supplied by AST and under the
copyright and trade secret rights therefor to the extent owned by AST,
subject to the terms of this Agreement, to use, modify, prepare derivative
works based upon, copy, distribute, use in public performances, and to
lease, sell or otherwise dispose of any product made using the Consulting
Deliverable. Nothing herein shall be construed as granting a right to
sublicense to any third party the license granted above without a prior
written consent of AST. Any licenses granted to any Subsidiary hereunder
shall terminate at such time as such entity no longer qualifies as a
Subsidiary as defined in this Agreement.
ARTICLE 4. PAYMENT OF CONSULTING FEE
4.1 Fee Payments. SEC agrees to pay to AST the fee defined in Appendix B to
this Agreement, on the schedule defined in that appendix. The total amount
of the fee shall be five million United States dollars (US$5,000,000.00),
plus any taxes payable pursuant to Article 23, which shall be due on the
Effective Date and payable within 45 days of the Effective Date.
ARTICLE 5. TERM AND TERMINATION
5.1 Term. This Agreement shall become effective and come into full force on
the Effective Date. The Agreement shall continue in full force and effect
until July 31, 2000, unless earlier terminated as provided in this
Agreement. The term of this Agreement may be extended by mutual written
consent of both parties.
5.2 Termination on Bankruptcy or Material Adverse Change. Either party may
terminate this Agreement effective immediately and without liability upon
written notice to the other party if: (i) either party declares bankruptcy
or bankruptcy proceedings are instituted involuntarily on his behalf, and
the voluntary or involuntary proceedings are not dismissed within 30 days,
or (ii) there is a material adverse change in the financial condition of
the other party.
5.3 Termination on Default. Except as otherwise provided elsewhere herein, if
either party fails to perform any material obligation under this Agreement,
then, the non-defaulting party may terminate this Agreement forthwith upon
written notice to the defaulting party, unless the breach has been cured
within 45 days after a notice of such breach is given.
5.4 Post-Termination Activities. In the event of any termination of this
Agreement, the parties shall cooperate in good faith to conclude any
ongoing activities related to this Agreement provided, however, that
neither party shall be obligated to incur any material expense in
connection with such cooperation or otherwise take actions that may result
in a material detriment to such party.
ARTICLE 6. SURVIVALS
Except as otherwise explicitly provided in this Agreement, the parties'
rights and obligations which, by their nature, would continue beyond the
termination, cancellation, or expiration of this Agreement shall survive
such termination, cancellation, or expiration.
ARTICLE 7. CONFIDENTIALITY
7.1 Definition. The term "Confidential Information" shall mean any information
disclosed by one party (the "Disclosing Party") to the other party (the
"Receiving Party") in connection with performance of this Agreement which
is in written, graphic, machine readable or other tangle form and is marked
"Confidential", "Proprietary" or in some other manner to indicate its
confidential nature. Confidential Information may also include orally
disclosed information, provided that such information is designated as
confidential at the time of disclosure and included in a written summary
sent by the Disclosing Party to the Receiving Party within thirty (30) days
after its oral disclosure, and which is marked in a manner to indicate its
confidential nature.
7.2 Confidentiality Obligations. Receiving Party shall keep and shall cause
its Subsidiaries to keep any Confidential Information, including but not
limited to the Technical Information disclosed by the Disclosing Party
hereunder or pursuant to this Agreement, in confidence, and shall not
disclose such Confidential Information to any third party during the term
of this Agreement or at any time thereafter. The Receiving Party shall
only permit disclosure of the Confidential Information to the Receiving
Party's employees or consultants (who are bound by written confidentiality
agreements imposing substantially the same obligations as set forth herein)
who have a need to know and shall not use the Confidential Information for
any purpose other than the purpose contemplated by the Individual Contract
in connection with which such Confidential Information is disclosed.
7.3 Exceptions. The confidentiality obligations set forth in this Article 5
shall not apply to any information which:
(a) is rightfully in the possession of the Receiving Party prior to
receipt from the Disclosing Party; or
(b) is publicly known through no fault of the Receiving Party; or
(c) is rightfully received by the Receiving Party from a third party
without the breach of any restriction on disclosure; or
(d) is independently developed by the Receiving Party provided that the
Receiving Party provides substantial documentation of such independent
development and demonstrates that such independent development was
accomplished without any reference to or based upon the Confidential
Information; or
(e) is disclosed after obtaining the prior written consent of the
Disclosing Party; or
(f) is disclosed pursuant to applicable laws, regulations or court order,
provided that the Receiving Party shall give the Disclosing Party
prompt notice of such request so that the Disclosing Party has an
opportunity to defend, limit or protect such disclosure; or
(g) is established to be in the public domain other than as a consequence
of a breach of an obligation undertaken not to disclose the
information; or
(h) is approved for release by prior written consent of the Disclosing
Party; or
(i) is disclosed to the Receiving Party by a third party having no
obligation to the Disclosing Party to keep the information on
confidence; or
(j) is made public by the Disclosing Party.
7.4 Non-Disclosure. Neither party hereto shall disclose any Confidential
Information, obtained from the other party in the course of business under
this Agreement to any third party during the term of this Agreement or at
any time thereafter.
ARTICLE 8. ASSIGNMENT
The Agreement and the licenses granted herein shall inure to the benefit of
the parties hereto and, within the limitations set forth in Articles 1.3
and 3.3 hereof, to the Subsidiaries of the parties hereto. Neither party
hereto nor any of its Subsidiaries shall assign or transfer any rights,
privileges or obligations hereunder or thereunder without the prior written
consent of the other party hereto, except that SEC may assign this
Agreement to a person or entity into which it has merged or which has
otherwise succeeded to all or substantially all of its business and assets,
and which has assumed in writing or by operation of law its obligations
under this Agreement.
ARTICLE 9. NOTICES
All notices required or permitted to be given hereunder shall be in writing
and shall be valid and sufficient if dispatched by registered airmail,
postage prepaid, in any post office in Korea or in Ireland, as the case may
be, and with a copy sent by a commercial express delivery service offering
routine two-day delivery of messages between Ireland and Korea (for
example, currently these would include Federal Express or DHL), and
addressed as follows:
If to SEC: Samsung Electronics Co., Ltd.
16th Fl., Joon-ang Daily News Bldg.
7 Soonhwa-dong, Choong-ku
C. P. O. Box 2775
Seoul, Korea
Attn: Kurt Jun
If to AST: AST Ireland Limited
National Technological Park
Plassey
Limerick
Eire
Attn: Managing Director
With copy to: AST Research, Inc.
16215 Alton Parkway
Irvine, California 92718
Attn: General Counsel
Either party may change its address by a notice given to the other party in
the manner set forth above. Notices given as herein provided shall be
considered to have been given fourteen (14) days after the mailing thereof.
ARTICLE 10. AMENDMENT
No oral explanation or oral information by either part hereto shall alter
the meaning or interpretation of the Agreement. No modification,
alteration, addition or change in the terms hereof shall be binding on
either party unless reduced to writing and duly executed by a duly
authorized officer of the parties.
ARTICLE 11. GOVERNING LAW
This Agreement and matters connected with the performance thereof shall be
construed, interpreted, applied and governed in all respects in accordance
with the laws of Ireland, without regard to its conflicts of law
principles.
ARTICLE 12. ARBITRATION
12.1 Negotiation and Arbitration. All disputes arising during performance under
this Agreement shall be settled through friendly negotiation between the
parties, including providing written notice of the dispute to the other
party in advance of submitting any dispute to arbitration or making any
filing with any judicial, administrative or regulatory authority concerning
the dispute. The parties agree, when time and circumstances reasonably
permit, that no arbitration, judicial, administrative or regulatory action
concerning a dispute between the parties will be started until after the
senior executive of each company has attempted to speak (in person, by
telephone or by videophone) to the other concerning the dispute and
attempted to resolve the dispute. In case no settlement can be reached,
the dispute shall be submitted to arbitration if both parties determine
that the subject matter of the dispute is such that arbitration will be an
efficient, effective and timely method of resolving the dispute.
12.2 Arbitration Procedures. If the dispute is submitted to arbitration, the
dispute shall be finally settled by an arbitration tribunal which shall be
convened and conducted in accordance with the applicable rules and
procedure of arbitration of the International Chamber of Commerce adopted
in 1988. The arbitration proceeding shall be held before three (3)
arbitrators in the headquarters city of the party not initiating the claim.
Two (2) of the arbitrators shall first be appointed by the parties, one (1)
by AST and one (1) by SEC. The arbitrators so appointed shall appoint a
third arbitrator who shall be neither an ROK nor an Irish national, and
shall act as the chairman of the arbitral tribunal. If the arbitrators
appointed by the parties fail to appoint a third arbitrator within sixty
(60) days after they have been appointed, the third arbitrator may be
appointed by the arbitration body before which the arbitration is being
held. In such event, the third arbitrator shall be neither an ROK nor an
Irish national. The arbitration proceedings shall be conducted in English,
and the law applied shall be the same as the governing law selected in
Article 9 of this Agreement. The results of such arbitration shall be
conclusive and binding upon the parties, and shall be enforceable in any
court having jurisdiction over the parties against whom the award was
rendered.
ARTICLE 13. SEVERABILITY
Should any clause, sentence, or paragraph of this Agreement judicially be
declared to be invalid, unenforceable, or void, such decision shall not
have the effect of invalidating or voiding the remainder of this Agreement
unless the economic equity of the parties is materially affected thereby.
ARTICLE 14. FORCE MAJEURE
In the event of acts of God, war, blockade, insurrection, mobilization or
any other actions of Government authorities, riots, civil commotion,
warlike conditions, strikes, lockout, shortage or control of power supply,
plague or other epidemics, fire, flood, tidal waves, typhoon, hurricane,
cyclone, earthquake, lightning, explosion, or any other causes beyond the
reasonable control of either party or Force Majeure, neither party shall be
liable for any default in performance of this Agreement arising therefrom.
ARTICLE 15. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGE OF ANY KIND,
(INCLUDING WITHOUT LIMITATION LOSS OF PROFIT OR DATA) WHETHER OR NOT
ADVISED OF THE POSSIBILITY OF SUCH LOSS.
ARTICLE 16. ENTIRE AGREEMENT
This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter of this Agreement and merges all prior
discussions between them, and neither of the parties shall be bound by any
modification of this Agreement, other than as expressly provided in this
Agreement or as duly set forth on or subsequent to the date hereof in
writing and signed by a duly authorized representative of the party to be
bound thereby.
ARTICLE 17. COMPLIANCE WITH LAWS
Each party shall at all times and at its own expense comply in all material
respects to all applicable laws and regulations of the Irish, Korean, US
and other governments (and political subdivisions thereof) and any
applicable notification requirements related to the transactions
contemplated by this Agreement including, without limitation, documentation
and fees associated with the Import/Export of the Products or any
documentation or licenses related to the use thereof and obtaining any
governmental approvals related to the performance of either party
hereunder.
ARTICLE 18. COOPERATION
Each of the parties agrees to do such further acts and to execute and
deliver such additional documents as are reasonably necessary or
appropriate to give effect to the transactions contemplated by this
Agreement and carry out the purpose and intent of this Agreement.
ARTICLE 19. EQUITABLE RELIEF
The parties acknowledge and agree that any unauthorized use, transfer or
copying of the Confidential Information will cause irreparable injury to
the Disclosing Party by substantially diminishing the value of the
Disclosing Party's trade secrets and other proprietary rights contained in
the Confidential Information. Therefore, if the Receiving Party (including
its employees and consultants) attempts to use, transfer, copy, license,
assign or otherwise convey the Confidential Information in any manner
contrary to the terms of the Agreement, the Disclosing Party shall, in
addition to any other remedies available to it, have the right to enjoin,
preliminary and permanently, the Receiving Party from any such act, and the
Receiving Party hereby acknowledges that other remedies are inadequate and
consents to such injunction, provided that the court being requested to
provide such remedy would otherwise find adequate grounds for such remedy.
ARTICLE 20. CHOICE OF FORUM
Any action arising out of or related to this Agreement or the transaction
herein described, whether at law or in equity, not otherwise subject to
International Arbitration under Article 10 hereof including, without
limitation, the enforcement of any award, the seeking of injunctive relief
to prevent or restrain infringement of valid intellectual property rights,
may be instituted in and litigated in the courts of the Republic of Korea,
the courts of Ireland or the courts of the United States of America. In
accordance herewith, the parties hereto submit to the jurisdiction of the
courts of the Republic of Korea, the courts of Ireland and the courts of
the United States of America.
ARTICLE 21. GOVERNMENT CONTRACTING
If products are transferred from one party to this Agreement to another
("Products") and are used in connection with foreign or domestic government
contracting or subcontracting, including, without limitation, either
party's performance of any government contracts or subcontracts (the
"Government Contracting Party"), then the Government Contracting Party
shall ensure that: (l) the Products shall not constitute deliverables
under any government contracts or subcontracts, and (2) no government
entity shall acquire, under the terms of any government contracts or
subcontracts, or any applicable government contracting laws, rules or
regulations, any intellectual property rights of any nature in the
Products, including rights under any copyrights, patents, trade secrets, or
other proprietary rights attendant thereto. However, either party may
supply Products to government agencies and transfer the usual rights to use
the products or prepare archival copies of software, in accordance with the
usual and conventional terms and conditions used by government agencies for
the acquisition of commercially available products.
ARTICLE 22. TIME LIMITATION ON ACTIONS
Actions however asserted under this Agreement shall be commenced within one
(1) year from the date the cause of action accrues.
ARTICLE 23. TAXES/DUTIES/FEES
In addition to the purchase price payable under this Agreement, SEC and AST
when each is the purchasing party, shall pay all taxes (including, without
limitation, sales, use, privilege, ad valorem or excise taxes), customs
duties and import/export fees of any kind (including, without limitation,
any fees for permits or licenses related to import/export compliance) paid
or now or hereafter payable, however designated, levied or based on amounts
payable to the selling party hereunder, on the purchasing party's
acquisition, use or possession of products under this Agreement or upon the
presence of products at the designated site, but exclusive of federal,
state and local taxes based on the selling party's net income. The
purchasing party shall not deduct or withhold from payments to selling
party any amounts paid or payable to third parties for taxes, customs
duties or import/export fees, however designated.
ARTICLE 24. DUE EXECUTION
Each party hereto warrants and represents to the other that the acceptance,
execution and delivery of this Agreement has been duly authorized, and that
all corporate actions and other steps necessary to make the acceptance of
this Agreement and all the terms hereof valid and binding obligations have
been duly taken.
ARTICLE 25. APPROVALS AND SIMILAR ACTIONS
Where agreement, approval, acceptance, consent or similar action by either
party is required by any provision of this Agreement, such action shall not
be unreasonably delayed or withheld, unless specifically permitted by the
Agreement.
ARTICLE 26. RIGHTS AND REMEDIES
Except as otherwise expressly provided herein, the rights and remedies
provided in this Agreement are cumulative and not exclusive of any rights
or remedies any party could have at law or in equity or otherwise.
ARTICLE 27. COUNTERPARTS
This Agreement may be executed in one or more counterparts all of which
taken together will constitute one and the same instrument.
ARTICLE 28. HEADINGS
Headings of articles and other provisions of this Agreement are for
convenience only, and do not alter the meaning of this Agreement.
IN WITNESS WHEREOF, the parties have caused their duly authorized
representatives to execute this Agreement, on the dates below indicated.
SAMSUNG ELECTRONICS CO., LTD. AST IRELAND LIMITED
By: /s/KURT JUN By: /s/SAFI U. QURESHEY
Name: Kurt Jun Name: Safi U. Qureshey
Title: Director Title: Chairman of the Board
Date: March 15, 1996 Date: March 15, 1996
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Three Months Ended
------------------------------
March 30, April 1,
(In thousands, except per share amounts) 1996 1995
- ------------------------------------------------------------------------------------------------------
Primary loss per share
- ----------------------
<S> <C> <C>
Shares used in computing primary loss per share:
Weighted average shares of common stock outstanding 44,682 32,376
Effect of stock options treated as common stock
equivalents under the treasury stock method - -
- ------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding 44,682 32,376
======================================================================================================
Net loss $ (115,760) $ (6,548)
======================================================================================================
Loss per share - primary $ (2.59) $ (0.20)
======================================================================================================
Fully diluted loss per share
- ----------------------------
Shares used in computing fully diluted loss per share:
Weighted average shares of common stock outstanding 44,682 32,376
Effect of stock options treated as common stock
equivalents under the treasury stock method - -
Shares assumed issued on conversion of
Liquid Yield Option Notes (LYONs) - -
- ------------------------------------------------------------------------------------------------------
Total fully diluted shares outstanding 44,682 32,376
======================================================================================================
Net loss - fully diluted earnings per share:
Net loss $ (115,760) $ (6,548)
Adjustment for interest on LYONs, net of tax - -
- ------------------------------------------------------------------------------------------------------
Adjusted net loss $ (115,760) $ (6,548)
======================================================================================================
Loss per share - fully diluted $ (2.59) $ (0.20)
======================================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying Consolidated Balance Sheets and Consolidated Statements of
Operations and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1996<F1>
<PERIOD-END> MAR-30-1996
<CASH> 126,857
<SECURITIES> 0
<RECEIVABLES> 415,941
<ALLOWANCES> 17,636
<INVENTORY> 190,414
<CURRENT-ASSETS> 774,962
<PP&E> 174,363
<DEPRECIATION> 76,542
<TOTAL-ASSETS> 983,766
<CURRENT-LIABILITIES> 657,822
<BONDS> 125,493
0
0
<COMMON> 447
<OTHER-SE> 194,711
<TOTAL-LIABILITY-AND-EQUITY> 983,766
<SALES> 519,972
<TOTAL-REVENUES> 529,972
<CGS> 549,618
<TOTAL-COSTS> 549,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 61
<INTEREST-EXPENSE> 7,815
<INCOME-PRETAX> (115,760)
<INCOME-TAX> 0
<INCOME-CONTINUING> (115,760)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (115,760)
<EPS-PRIMARY> (2.59)
<EPS-DILUTED> (2.59)
<FN>
<F1> The Company changed its fiscal year-end from the Saturday closest to June
30 to the Saturday closest to December 31. The change in fiscal year-end
was effective for the six months ended December 30, 1995.
</FN>
</TABLE>
