SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 28, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-13941
__________________________
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3525565
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92718
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-4141
__________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, PAR VALUE $.01 PER SHARE
__________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting Common Stock
held by non-affiliates of the registrant was approximately $138,684,525
(computed using the closing price of $4.75 per share of Common Stock on
February 21, 1997 as reported by NASDAQ, based on the assumption that
directors and officers and more than 10% shareholders are affiliates).
There were 57,964,830 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on February 21, 1997.
__________________________
This Annual Report on Form 10-K includes certain forward-looking
statements, the realization of which may be impacted by certain important
factors discussed in "Additional Factors That May Affect Future Results." under
Item 7, "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
PART I
ITEM 1. BUSINESS
GENERAL
AST Research, Inc. ("AST" or "Company") was incorporated in California on July
25, 1980 and reincorporated as a Delaware corporation effective July 1, 1987.
The Company designs, manufactures, markets, services and supports a broad line
of personal computers including desktop, notebook and server computer systems
marketed under the Advantage!(R), BravoTM, AscentiaTM, and ManhattanTM brand
names. The Company's products feature advanced design characteristics while
remaining compatible with established industry standards. The Company currently
markets its products through an extensive worldwide distribution network of
retail computer dealers, consumer retailers, international and regional
distributors, value added dealers ("VADs") and value added resellers ("VARs").
See further discussions under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Additional Factors That May
Affect Future Results" therein.
On October 26, 1995, the Company announced its change of 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 ("transition period" or "transition period 1995").
SIGNIFICANT BUSINESS DEVELOPMENTS
In the second quarter of fiscal 1996, the Company implemented a restructuring
plan designed to restructure its worldwide operations into three regional
operating groups and to transfer its notebook manufacturing to third party
original equipment manufacturers ("OEMs"). In connection with this plan, the
Company recorded a restructuring charge of $6.5 million.
On July 11, 1996, the Company paid the $90 million promissory note due to
Tandy Corporation ("Tandy") related to the Company's 1993 acquisition of Tandy's
personal computer manufacturing operations. Payment was in the form of
4,498,594 shares of the Company's common stock, then valued at $30 million, and
$60 million in cash. Subsequent to the issuance of shares to Tandy, also on
July 11, 1996, the Company issued 8,499,336 shares of its common stock to
Samsung Electronics Co., Ltd. ("Samsung") in exchange for $60 million in cash
that was used to fund the cash payment to Tandy.
On December 13, 1996, the Company signed a Second Additional Support Agreement
with Samsung that provided the Company with additional credit guarantees of $200
million through December 31, 1998. As consideration for this new credit
guarantee, the Company issued 500,000 shares of non-voting preferred stock to
Samsung. This second guarantee is in addition to the existing $200 million
credit guarantee, provided pursuant to an Additional Support Agreement between
the Company and Samsung, dated December 21, 1995. The Second Additional Support
Agreement also includes a one-year extension of the original guarantee provided
under the Additional Support Agreement, which results in guarantees totaling
$400 million expiring on December 31, 1998.
On December 18, 1996, the Company established a new $100 million bank credit
line with three banks. In addition, on December 26, 1996 the Company renewed
its existing $200 million credit line, provided through a consortium of ten
financial institutions. As a result of these transactions, the Company has $300
million in credit facilities, all made available through credit guarantees
provided by Samsung. See further discussion included in "Liquidity and Capital
Resources" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
On January 30, 1997 the Company announced that Samsung proposed to commence
negotiations to acquire all of the outstanding shares of common stock of the
Company not currently owned by Samsung or its affiliates at a price of $5.10 per
share (the "Samsung Proposal"). Pursuant to the terms of a Stockholder
Agreement between the Company and Samsung, Samsung's ability to purchase shares
and engage in other transactions with the Company is subject to certain
restrictions, including approval of the Independent Directors, (as defined in
the Stockholder Agreement). The Company's Board of Directors has formed a
special committee, consisting of the Independent Directors, to evaluate the
Samsung Proposal, and to consider other options that may be available to AST.
There is no assurance that any transaction will ultimately occur.
INDUSTRY SEGMENTS AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the manufacture and sale of
personal computers, including desktop, notebook, and server computer systems.
The Company currently markets its products through retail computer dealers,
consumer retailers, international and regional distributors, VADs and VARs. A
summary of the Company's operations by geographic area including net sales,
operating income (loss) and identifiable assets is incorporated herein by
reference to Note 12 of the Notes to Consolidated Financial Statements.
BUSINESS STRATEGY AND MARKET
The Company's business strategy is to focus on being among the first to
bring leading-edge personal computer technology to market within the indirect
sales channel, thereby positioning the Company's products to gain a competitive
advantage. By concentrating its efforts on bringing new products to market
first, the Company will also utilize its technological expertise, worldwide
manufacturing capabilities, brand name recognition and distribution channels to
offer its customers a variety of personal computers to meet diverse user needs.
In support of this goal, the Company is also focusing its efforts on creating
and maintaining short and flexible supply lines to become the most reliable
supplier to the indirect sales channel. The Company believes that the success
of this strategy depends upon its ability to identify products and product
features required by customers and to design and bring to market ahead of its
competitors high quality, innovative products compatible with industry standards
at competitive prices.
As new technologies, including more powerful microprocessors, have become
available, the Company is concentrating its efforts on working closely with
various industry-leading component suppliers, including Samsung, to enable it to
achieve its goal of being first to deliver new products to the indirect channel.
These efforts include working together on technology issues, as well as
shortening supply lines to improve flexibility of related supply arrangements.
See "Additional Factors That May Affect Future Results" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's business strategy is focused on serving the indirect sales
channel worldwide, since the Company believes that the indirect sales channel is
the method by which the majority of users choose to purchase personal computers.
The Company also believes that the indirect sales channel offers the highest
level of service and support to the purchaser and will continue to play a key
role in expanding the use of computers throughout the world. The foregoing
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from anticipated results. See "Additional
Factors That May Affect Future Results" under Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's business strategy also focuses on the continued introduction
of new products that are aggressively priced to highlight the price and
performance advantages of the Company's products. The personal computer
industry is characterized by intense price competition and the Company believes
that the price and performance features of its products are key factors in the
purchase decisions of its customers. The Company intends for its products to
offer a price/performance advantage, and therefore generally adjusts its prices
as needed.
In pursuing its business strategy, the Company has maintained its multi-
channel and multi-brand distribution approach to target a variety of price
points and user requirements, including the Advantage! computer product lines,
which are designed for the consumer retail market; the value oriented Bravo
desktop lines; the Manhattan server line; and the Ascentia line of notebook
computers. Within these brands, the Company offers a variety of products,
including high-end Pentium(R) and Pentium(R) Pro processor-based desktop systems
and servers, and color notebooks. The Company's personal computers incorporate
either Industry Standard Architecture ("ISA"), Extended Industry Standard
Architecture ("EISA"), or Peripheral Component Interconnect ("PCI") Bus
Architecture and are compatible with major industry standard operating systems
including MS-DOS(R), UNIX/XENIX, SCO UNIX, Novell NetWare(R), OS/2(R) and
Windows NTTM. The Company continues to pursue a strategy whereby its products
retain their compatibility with new major industry standards as they are
developed.
The Company believes that its strategy of establishing a worldwide presence
in countries with established markets and those with developing markets for
computer products and of providing products that meet local needs, such as
customized systems and local language documentation, has provided significant
opportunity for revenue growth in these international markets. International
revenues contributed 45%, 55%, 44% and 35% of total revenues in the fiscal year
ended December 28, 1996 ("fiscal year 1996"), transition period 1995, and in the
fiscal years ended July 1, 1995 ("fiscal year 1995") and July 2, 1994 ("fiscal
year 1994"), respectively.
PRODUCTS
The Company's business strategy is to be among the first to market with
leading-edge technologies, which allows the Company's computer reseller and
dealer customers to provide attractive, profitable alternatives to the Company's
indirect channel competitors, as well as direct market competitors, including
mail order companies. The Company's products include desktop systems, mobile
systems, and file servers under the Advantage!, Adventure, Bravo, Ascentia and
Manhattan brand names. Products within these families are designed to meet
multiple performance levels and price points and have received multiple awards
for ingenuity and performance from leading trade publications.
During fiscal year 1997, the Company intends to continue to enhance its
desktop computer product lines with faster processing power and enhanced
features to satisfy the complex needs of the home, small-business and corporate
user. The Company also plans to expand its mobile computing solutions with high
- -performance, leading-edge notebook solutions and value-based consumer oriented
models. In addition, the Company intends to continue to introduce new server
products, technologies and computing solutions for the network environment. The
foregoing forward-looking statements involve risks and uncertainties that could
cause actual results to differ materially from anticipated results. See
"Additional Factors That May Affect Future Results" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Advantage!/Adventure!
Designed for home and home office users, the Company's Advantage! and
Adventure! PCs are sold through consumer retail locations and include popular
educational and entertainment multimedia software titles, as well as the latest
in hardware technologies, including Intel Pentium(R) MMX and Intel Pentium(R)
Pro micro-processors. Systems are configured for ease of use, complete with CD
stereo, full-motion video, telephone answering and voice mail systems, high-
speed fax/data modems, and a selection of pre-installed software titles,
including on-line services.
Bravo
The Bravo desktop line is the Company's value-based price/performance
leader providing entry-level to high-performance systems which are designed to
handle today's increasingly demanding business applications including word
processing, electronic mail, database management, spreadsheet calculations,
Computer Aided Design ("CAD"), graphics, and financial/statistical analysis.
Bravo systems are affordably priced and offer users a choice of super-powerful
processors, PCI-based graphics, the expansion power and flexibility of a PCI bus
and support for future upgrades via Plug-n-Play and DMI standards.
Ascentia
The Company's line of Ascentia notebook computers provides traveling
professionals, home office users and students with a wide variety of mobile
computing solutions. Features include the latest technologies such as powerful
Intel Pentium(R) micro-processors, full-size keyboards, large display screens,
CD-ROMs, multimedia support with 16-bit Sound Blaster audio and dual stereo
speakers, wireless communications, and long-lasting batteries with intelligent
power management capabilities.
Manhattan
The Company's Manhattan server products are designed to provide solutions
tailored to a variety of user needs, with scaleable power to offer enterprise
networks optimum flexibility and dedicated Internet and/or Intranet service.
They include critical networking software to simplify network management and
enhance ease-of-use. Designed to meet current and future multi-user and LAN
operating systems standards, including Novell NetWare and the increasingly
popular Windows(R) NT and Intel Pentium(R) Pro combinations, Manhattan servers
also are bundled with free training courseware to quickly integrate into
corporate and small business environments.
ASTVision
ASTVision monitors offers personal computer users who operate with graphic-
intensive Windows(R) software applications a choice of high quality displays
available in various popular sizes. The product line includes the low-
radiation, multi-sync color ASTVisionTM 4I, 5L, 5M, 5V, 7L and 20H models, which
feature anti-glare/anti-static glass. Each is designed to conform to VESA DPMS
(Display Power Management Signaling) and NUTEK standards and most models are
Plug-n-Play ready.
PRODUCT DEVELOPMENT
Due to the rapid pace of advances in personal computer technology, the
Company's success depends on, among other things, the timely introduction of new
products that are accepted in the marketplace. Accordingly, the Company is
actively engaged in the design and development of new products and the
enhancement of existing products. During fiscal year 1996, transition year
1995, fiscal year 1995, and fiscal year 1994, the Company's engineering and
development expenses were $40,702,000, $19,608,000, $36,383,000 and $38,858,000
respectively. The Company plans to increase its product development
capabilities and resources during fiscal year 1997. 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."
The Company's long-standing relationships with major hardware and software
developers such as Intel Corporation, Microsoft Corporation and Novell Inc.
assist the Company in quickly bringing new technologies to the marketplace. The
Company also works with these developers to test the compatibility of new
hardware and software and to design software support programs enabling the
Company to introduce products incorporating the latest hardware technology that
are capable of operating the most current software available in the marketplace.
The Company maintains its firm commitment to the establishment of industry
standards and actively participates in their development. The Company was one
of the nine original high technology companies which participated in the
development of EISA and also played a key role as a steering committee member in
the development of the Desktop Management Interface (DMI) specification. The
Company has also incorporated some of industry's latest technologies, including
the Pentium(R) and Pentium(R) Pro processors and PCI bus, across all product
lines.
The Company believes that its technical expertise is a key factor in its
development of new and innovative products. The Company's engineering staff
uses the latest tools to assist in the development of new products and enable
faster adaptation of the latest technologies within the manufacturing process.
In addition, the Company continues to utilize third-party printed circuit boards
in the majority of its product lines in order to support its first to market
business strategy.
MANUFACTURING
The Company's manufacturing operations include procurement and inspection
of components and assembly, testing and packaging of finished products. The
Company's manufacturing and warehouse facilities include over 955,000 square
feet of capacity and are located in Fort Worth, Texas, Hong Kong, the People's
Republic of China ("PRC") and Limerick, Ireland.
During fiscal year 1996, the Company continued to modify its worldwide
manufacturing strategies in order to continue to improve its manufacturing
efficiencies. The Company completed the closure of its Taiwan manufacturing
facility in fiscal year 1996 and outsourced the sub-assembly of its mobile
computers to Taiwanese and Korean strategic partners. The Company's desktop
and server products are manufactured in facilities located in Texas, Ireland
and the PRC. The final assembly for the Company's mobile products occur in
both Texas and Ireland. The Company's three regional manufacturing sites
provide an efficient manufacturing model for desktop, server and mobile products
and offer closer proximity to the Company's customers, thereby improving the
Company's ability to deliver product to the market on a timely basis.
In support of its worldwide strategy, in fiscal year 1996 the Company
completed the closure of its printed circuit board ("PCB") assembly operations
in the PRC. Concurrent with the closure of its PCB operations, the Company has
developed strategic alliances with key suppliers to manufacture PCB assemblies.
Despite these changes in fiscal year 1996, the Company intends to continue to
assess its worldwide manufacturing capacity in an effort to continue to increase
efficiencies, reduce costs and improve product deliveries.
The Company currently procures all of its components from outside suppliers
including Samsung and its related companies. The Company's factory sites are in
close proximity to many key international vendors. Source inspections are
conducted at the plants of selected strategic suppliers, while some other parts
are sampled for inspection upon receipt at the Company's manufacturing
facilities.
Increases in demand for personal computers have created industry wide
shortages of components, which at times have resulted in premium prices being
paid for key components, such as flat panel video display screens,
microprocessors, 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, lithium ion batteries, modems, 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.
These single source component suppliers vary over time. The Company purchases
components pursuant to purchase orders placed in the ordinary course of business
and has no guaranteed supply arrangements with single source suppliers.
Reliance on suppliers generally involves risks, including the possibility of
defective parts, a shortage of components, an increase in component costs and
disruptions in delivery of components. Should delays, defects or shortages re-
occur or component costs significantly increase, the Company's net sales and
profitability could be adversely affected. The Company attempts to mitigate
these potential risks by working closely with major suppliers on product plans
and coordinated product introductions. Although no assurances can be given, the
strategic relationship formed with Samsung could further reduce the risk
associated with the procurement of some of these components. The foregoing
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from anticipated results. See "Additional
Factors That May Affect Future Results" under Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company's notebook products are manufactured by outside vendors
including Quanta Computer, Inc. and Compal Electronics, Inc. in Taiwan. These
OEMs are subject to the risks inherent in notebook computing technology,
development and manufacturing. As a result, the Company's ability to bring its
notebook products to market is highly dependent upon the ability of these third-
party vendors to effectively design, develop and manufacture these products.
Should these companies not be able to design, develop or manufacture the
Company's products in a timely manner, the Company's net sales, cash flows and
profitability could be adversely affected. See "Additional Factors That May
Affect Future Results" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
The PRC, in which the Company has manufacturing capacity, has a history of
political instability. The Company also utilizes various notebook and PCB
assembly subcontractors in Taiwan. Political tensions between the PRC and
Taiwan could adversely affect the Company's operations, particularly its
notebook production.
Quality and reliability are emphasized in the development, design and
manufacture of the Company's products. The Company continues to focus on new
product introductions through a process of concurrent product and process design
efforts, which attempt to simplify and streamline the manufacturing process in
the earliest stages of product design. Products undergo quality inspection and
testing throughout the manufacturing process. Additional manufacturing
verification and testing programs include root cause analysis, as well as
customer audit programs that consist of extended diagnostic, software and early
life reliability testing of products randomly taken from finished goods. The
Company's goal is to continuously enhance its manufacturing procedures to
include comprehensive quality management processes.
In fiscal year 1996, the Company achieved and/or maintained certification
and registration under ISO 9000, section 9001 or 9002, for the quality systems
used in its service center in the United Kingdom and its manufacturing
operations in Limerick, Ireland, Fort Worth, Texas and the PRC. All of the
Company's manufacturing operations have ISO certification and registration.
MARKETING AND SALES
The Company employs a worldwide multi-channel indirect distribution
strategy which allows it to reach a variety of customers in most major market
segments. Each channel provides the Company with access to specific market and
customer segments. The Company's strategy is to differentiate itself from
others by being more responsive to customers and by being the first to bring
leading-edge products to market through indirect channels via its established
network of authorized dealers and resellers. The Company believes that its
success in building its network of dealers and resellers is largely due to the
Company's product line breadth, the quality and reliability of its products, its
dedication to the channel, the responsiveness of its employees, and the high
level of service and support provided by the Company. The Company continues to
focus on selectively broadening its distribution channels and enhancing channel
relationships to further its growth objectives. If the Company is unable to
deliver leading edge products to this channel on a timely basis, its net sales
and profitability will be adversely affected.
The Company's worldwide sales organization is organized into three major
geographical groups: the Americas, which includes the United States and Canada;
Europe; and Asia Pacific, which includes Asia, the Pacific Rim and the Middle
East.
Americas Distribution
The Company's Americas indirect distribution channels include authorized
independent resellers and dealers, national reseller organizations, national and
regional distributors and aggregators, systems integrators and consumer
retailers. The Company sells directly and indirectly to large VADs and VARs
that typically purchase personal computers and add enhancement hardware,
software and service to provide the total system solution, which are then sold
in a variety of vertical and horizontal markets. The Company's national
reseller organization accounts include customers such as CompuCom Systems,
MicroAge, and ENTEX Information Services, Inc. The Company also sells its
products to smaller dealers and resellers through major national distributors
including Ingram Micro, Merisel and Tech Data Corporation.
The Company's Advantage! line is designed for small office and home use and
is marketed primarily by consumer retail chains including Computer City
Supercenters; Price/Costco Wholesale Club Stores; Sam's Wholesale Club and Wal-
Mart Stores.
International Distribution
The Company operates internationally through subsidiaries and sales offices
in 44 locations worldwide. In countries where the Company does not have
subsidiary operations, products are sold to retail dealers and distributors.
The Company plans to continue to expand its international business within the
Europe and the Asia Pacific regions during fiscal year 1997. The Company may
also pursue limited expansion plans within certain developing countries as
opportunities arise.
Success and profitability of international operations could be adversely
affected by conditions that may not impact the Americas region, including local
economic conditions, political instability, tax laws and changes in the value of
the U.S. dollar. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Additional Factors That May Affect
Future Results" therein.
Service and Support
The Company believes that customer support, service and training are
crucial to maintaining strong relationships with its customers and attempts to
provide a high level of service and support in order to differentiate it from
other manufacturers in the personal computer industry. The Company provides a
comprehensive collection of services for its products through its "Customer
Care" program. AST Customer Care offers technical support to resellers, dealers
and end-users through access to toll-free telephone lines; AST-Lifeline, an
interactive technical support system that incorporates Radish Communications
Systems VoiceView(R) TALK SHOPTM integrated voice and data protocol with custom
AST technical support software; AST On-Line!, a 24-hour electronic bulletin
board system; AST Info-Fax, which allows access to a broad selection of
technical support documentation via facsimile 24-hours a day; AST Pronto! Pro, a
CD-ROM based reference utility program; and a technical support alliance with
leading network and operating system suppliers for one-stop support in multi-
vendor networked environments. In addition, the AST On-Line! service has been
expanded to be available through the CompuServe(R), Prodigy(R), and America
OnLine(R) information services, and through an AST bulletin board system, which
includes Remote Imaging Protocol (RIPscrip). The Company's support services are
further augmented by AST InfoLINE, an interactive voice response system which
includes automated problem diagnostics as well as automated fax-response
diagnostics.
Parts and labor warranties on the Company's computers range from one to
three years in length, depending on product type. Service is provided by AST
authorized dealers, third-party maintenance organizations and the Company's in-
house service and support organization. Trained service technicians are
available in more than 1,200 AST authorized service centers. Included among
these service centers are more than 800 Authorized Service Centers (ASC), over
250 Advanced System Support Centers (ASSC) and at least 200 third-party
maintenance locations. In addition, international customers can be serviced on
a carry-in basis by any of the authorized AST Service Providers located in more
than 30 countries around the world. AST Customer Care also provides
comprehensive protection for notebook users through the ExeCare PlusSM service
program. Expedited repair of any AST notebook product anywhere in the United
States is available under the ExeCare PlusSM service program. As an additional
upgrade AST offers ExpressONESM, which provides overnight notebook exchange
anywhere in the continental United States. The Company offers the AST Self
Maintainer Support program to end-users who have a large installed base of AST
computers and internal information centers providing service and support within
the organization.
Many of the Customer Care services provided in the U.S. are open to and
used by the Company's customers from around the world. In addition, the
Company's international subsidiaries have developed service and support programs
adapted to the specific needs of local markets. The Company maintains AST On-
Line! bulletin boards in many countries in both the Europe region and the Asia
Pacific region ensuring ease of access to software drivers and technical
bulletins as well as providing a forum for distributing more localized
information. With a significant installed base of system products and growth in
sales throughout the Europe region, the Company has supplemented these local
initiatives by establishing a centralized service and support capability within
its European Operations Center in Limerick, Ireland. The European Call Center
provides multi-lingual help line services and technical support to resellers,
service providers and end-users in mainland Europe and the UK and is
supplemented by separate specialist Call Centers supporting customers in the
Nordic area and in the UK Consumer market. The Company's network of over 500
ASCs and Independent Service Providers in Europe provides warranty repair and
enhanced systems support services for end-users. European Resellers and
Authorized Service Providers are required to participate in Training and
Certification programs delivered through local subsidiaries and can also take
advantage of the high level product and customer support resources of Systems
and Field Engineers based in the subsidiaries. Spare parts and repairs for the
Company's Service Channel are provided by the Company's European Logistics
Center in Limerick, which utilizes express courier and freight handling
companies to ensure prompt delivery of replacement parts throughout the region.
Within the Asia Pacific region, service is provided by AST authorized
dealers, third-party maintenance organizations and the Company's in-house
service and support organization. Trained service technicians are available
throughout the Asia Pacific region in more than 160 ASCs and AST authorized
dealers, over 40 of which are inside the PRC. Express courier and freight
handling companies are also utilized in the Asia Pacific region to ensure prompt
delivery of replacement parts throughout the region. In addition, Asia Pacific
customers can be serviced on a carry-in basis by any of the authorized AST
Service Providers located in more than 30 countries around the world. AST
Customer Care in the Asia Pacific region also provides comprehensive protection
for notebook users through the ExeCare service program.
Advertising
The Company advertises its product domestically and internationally in
selected computer trade, business and consumer publications and via selected
broadcast and display mediums throughout the world. Through the Company's
cooperative advertising programs, the Company encourages its channel partners to
advertise and promote the Company's products by funding a portion of joint
advertising and promotion efforts. The Company also participates in major
computer and business trade shows and field seminars around the world.
Beginning in fiscal year 1996, the Company embarked on more aggressive
marketing initiatives to increase demand for the Company's products. The
Company will continue to market aggressively in fiscal year 1997 to promote its
products and services and, to that effect, has recently hired a new advertising
agency. The foregoing forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
anticipated results. See "Additional Factors That May Affect Future Results"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Major Customers
During fiscal year 1996, no single customer accounted for more than 10% of
the Company's net sales.
BACKLOG
The Company orders raw materials and components to manufacture products
according to its forecast of near-term demand and maintains inventories of
finished products in advance of receipt of orders from its customers. Orders
from retail accounts are usually placed by the customer on an as-needed basis
and are usually shipped by the Company shortly after receipt. Unfilled orders
can be, and often are, canceled or rescheduled to an earlier or later date with
little or no penalty. For these reasons, the Company's backlog at any
particular time is generally not indicative of the future level of sales. In
addition, cancellations and rescheduling can adversely impact the Company's
revenue and profitability.
PATENTS AND LICENSES
The Company relies on a combination of contract, patent, copyright,
trademark and trade secret laws to protect its proprietary interests in its
products. The Company owns trademark registrations in the United States and
other countries for many of its trademarks. The Company owns numerous patents
and patent applications throughout the world relating to various aspects of its
products.
The Company has license agreements for various products, including
operating system software for its personal computer systems with Microsoft
Corporation and IBM Corporation, for which the Company makes payments. In
addition, the Company has a patent cross-licensing agreement with IBM
Corporation, that extends over the life of the covered patents, which is prepaid
and is being amortized over the useful life of the patented technology. The
Company has a patent cross-licensing agreement with Texas Instruments Inc., that
expires December 31, 2000, for which the Company makes periodic royalty
payments. The Company also has various license agreements for application
software which it distributes with its products, many of which require the
Company to make payments to the licensor. Pursuant to a Strategic Alliance
Agreement with Samsung, the Company entered into a patent cross-license
agreement with Samsung that expires on July 31, 2005, for which no payments are
required.
COMPETITION
Intense competition in the personal computer industry continued during
fiscal year 1996 and was characterized by frequent product introductions and an
extremely aggressive pricing environment. The Company's primary competitors are
other computer companies that offer a full range of personal computing
solutions, including IBM, Compaq Computer Corporation, Hewlett-Packard Company,
Digital Equipment Corporation, Dell Computer Corporation, Gateway 2000, Inc.,
NEC/Packard Bell, Sony, and Toshiba.
The Company believes that one of its competitive advantages has been and
continues to be the Company's commitment to its indirect channel partners. This
indirect channel focus, in addition to product branding, product line breadth
and service and support, should enable the Company's products to remain
competitive within the highly-competitive personal computer marketplace. The
Company's focus on being among the first to bring leading-edge products to
indirect channel customers should further strengthen its competitive position
and improve its relationship with the indirect sales channel. The foregoing
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from anticipated results. See "Additional
Factors That May Affect Future Results" under Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The personal computer market continues to be intensely competitive. As a
result, significant price reductions were required across all product lines
during fiscal year 1996, contributing to a decline in gross profit margins.
Characteristic of the past few years, the Company expects these pricing
pressures to continue. 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 to manage the competitive risks associated with these
relationships.
REGULATORY COMPLIANCE
FCC Regulations
The Federal Communications Commission ("FCC") in October 1979 and April
1980 adopted regulations imposing radio frequency emanation standards for
computing equipment. The regulations distinguish between computing devices
marketed for use primarily in a commercial, industrial or business environment
(designated class A) and computing devices marketed for use primarily in a
residential environment (designated class B). All of the Company's products are
designed to comply with applicable FCC standards.
European Regulations
Effective December 31, 1995, all products entering the European Union
("EU") or European Economic Area ("EEA") are required to bear the CE marking.
This marking signifies compliance with the harmonized Euro-Norm ("EN")
standards that are required for trade within the EU/EEA as adopted by CENELEC,
the European Committee for Electrotechnical Standardization. On December 31,
1995, the Electro-Magnetic Capability ("EMC") directive for Information
Technology Equipment ("ITE") became a mandatory standard and all other
conflicting national standards were withdrawn. The Company tests all products
sold into the European community to verify compliance. The regulations also
require the maintenance of a technical construction file, which generally
consists of a collection of information describing the products and how they
conform to the European requirements. The Company maintains this file in its
Ireland manufacturing facility. All required testing for the CE mark program is
performed in-house using a recently enhanced test chamber and testing site.
Effects of Environmental Laws
Compliance with laws enacted for the protection of the environment to date
has had no material effect upon the Company's capital expenditures, earnings or
competitive position. The Company has successfully been involved in such
programs as the Environmental Protection Agency's Energy Star program. Although
the Company does not anticipate any material adverse effects in the future based
on the nature of its operations, there can be no assurance that such laws will
not have a material adverse effect on the Company. To its knowledge, the
Company was not named as a defendant in any environmental lawsuits during fiscal
year 1996.
EMPLOYEES
As of December 30, 1996, the Company had 4,151 employees, 1,580 of whom
were employed in manufacturing, 278 in engineering and 2,293 in the areas of
general management, sales, marketing and administration. Of the total, 2,176
were employed in the Company's Americas region, 835 were employed in the Asia
Pacific region and 1,140 were employed in the Europe region. The Company
believes its future success will depend in part on its continued ability to
attract and retain highly qualified engineers, technicians and marketing and
management personnel. To assist in attracting qualified employees at all
levels, the Company has adopted stock option, performance based incentive
compensation, profit sharing and other benefit plans. There can be no assurance
that this strategy will not require significant new grants or be effective in
any case, particularly in the event of a prolonged decline in the price of the
Company's common stock. The Company considers its employee relations to be
good. No employee of the Company is represented by a union.
Compared to December 1995, the Company's total headcount has declined by
1,855 employees. The decline is due to significant reductions in the Company's
Asia Pacific manufacturing operations and declines in Europe and in the Americas
as a result of staffing reductions related to various down-sizing and
restructuring activities.
BUSINESS SEASONALITY
Although the Company does not consider its business to be highly seasonal,
it has historically experienced seasonally higher sales in the consumer retail
channel in the quarter ended in December, compared to other quarters, due to
strong holiday demand for some of its products.
ITEM 2. PROPERTIES
The Company owns and occupies its worldwide headquarters facility in Irvine,
California. The 232,000 square foot facility accommodates the Company's
executive, finance and administrative functions, the Americas region sales
organization, and the global marketing and product divisions. The Company owns
and occupies a 217,000 square foot manufacturing facility in Fort Worth, Texas,
with an adjacent 202 acres of undeveloped land. The Company leases an
additional 291,000 square feet of manufacturing, engineering, and customer
support and warehouse space in the Fort Worth area. The Company also leases
approximately 59,000 square feet for regional sales offices and 95,000 square
feet for warehouse and distribution space for its Americas sales operations.
The Company is currently obligated under a ten-year lease agreement for a
246,000 square foot facility in Fountain Valley, California, which expires in
1999. This facility was closed in February 1995 as part of a restructuring
plan; 229,000 square feet of the facility are currently being subleased.
The Company owns a 340,000 square foot manufacturing facility in Limerick,
Ireland, which supplies nearly all the desktop requirements for the Europe
region. In addition, the Company also leases approximately 262,000 square feet
of sales, marketing, administration and warehouse facilities in various other
countries throughout Europe.
The Company leases an aggregate of 389,000 square feet of manufacturing space
in the PRC to service the domestic PRC and other Asia Pacific region markets. In
addition, the Company leases approximately 118,000 square feet for sales,
marketing, and administration offices and warehouse facilities in the Asia
Pacific region. The Company leases 69,000 and 27,000 square feet for warehouse
and manufacturing activities and office space, respectively, in Hong Kong. In
connection with the Company's restructuring of its manufacturing operations, the
Company plans to close 68,000 and 54,000 square feet of its manufacturing
facilities in Hong Kong and in the PRC, respectively, in fiscal 1997. The
Company also leases 32,000 square feet of warehouse and office space in the
Middle East with an additional 182,000 square feet available for possible
expansion.
ITEM 3. 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 income tax
liabilities for such years. Initially, the IRS had proposed adjustments of
approximately $12.6 million, plus accrued interest of $17.2 million. Following
the Company's request for an administrative conference to appeal the proposed
adjustments, the IRS Appeals Office returned the case to the Examination Office
for further development, because the method used in determining the original
proposed adjustments was not adopted in the final regulations. Management
further believes that any aggregate liability that may result upon the final
resolution of the proposed adjustments for 1987 and 1988 or the current
examinations of 1989, 1990 and 1991 will not have a material adverse effect on
the Company's consolidated financial position or results of operations.
However, management is unable to estimate the amount of any loss that may be
realized in the event of an unfavorable outcome.
The Company has been named as a defendant or co-defendant, 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.
The Company is currently unable to estimate the amount of any loss that may be
realized in the event of an unfavorable outcome. However, 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. 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. 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 results
of operations 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. The Company is currently unable to estimate the amount of any loss
that may be realized in the event of an unfavorable outcome of any or all of
these similar cases. However, based on preliminary facts available to the
Company, 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.
The Company has been named, along with Samsung and certain current and
former members of the Company's Board of Directors, as a defendant in twelve
shareholder class action lawsuits filed on or shortly after January 31, 1997.
Eleven class action complaints were filed in the Court of Chancery in New Castle
County, Delaware, under case names Miller v. Kim, et al; Tepper v. Samsung
Electronics Co., Ltd., et al.; Kenneth Steiner v. Kim, et al.; William Steiner
v. Kim, et al.; Zeiff v. AST Research, Inc., et al; Schultz v. Choo, et al.;
Ungar v. AST Research, Inc. et al.; Schnoll v. AST Research, Inc., et al.; Krim
v. AST Research, Inc., et al.; Jaroslawicz v. Kim, et al.; and Rattner v.
Samsung Electronics Co., Ltd. A separate class action complaint was filed but
not served on January 31, 1996 in the Superior Court for the County of Orange,
California, under case name Sigler v. AST Research, Inc., et al. The Plaintiffs
allege that the defendants have engaged in an unlawful scheme to enable Samsung
to acquire all outstanding shares of the Company's stock not previously owned by
Samsung for inadequate consideration and in violation of the defendants'
fiduciary duties. The plaintiffs seek to enjoin Samsung's proposed purchase of
the Company's outstanding shares and request unspecified monetary damages,
including attorney and expert fees and costs. On February 27, 1997, the
plaintiffs in the Delaware cases submitted a proposed Order of Consolidation to
the court, which has not yet been entered. The litigation is in its preliminary
stages. The Company is unable at this time to predict the ultimate outcome of
these lawsuits.
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 from anticipated results. 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
No matters were submitted to a vote of security holders during the three
months ended December 28, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AST's common stock is traded on the over-the-counter market (Nasdaq
National Market System) under the symbol ASTA. Set forth below are the high and
low closing sales prices for the Company's common stock for the periods
indicated. On October 26, 1995, 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.
HIGH LOW
Fiscal year ended December 28, 1996:
1st Quarter $ 8 - 7/8 $ 4 - 49/64
2nd Quarter 8 - 1/4 4 - 3/4
3rd Quarter 7 - 1/8 4 - 1/2
4th Quarter 5 - 5/8 4
Six months ended December 30, 1995:
1st Quarter $ 16 - 3/8 $ 10
2nd Quarter 10 - 1/16 7 - 7/8
Fiscal year ended July 1, 1995:
1st Quarter $ 19 - 1/4 $ 12
2nd Quarter 16 - 1/4 10 - 3/8
3rd Quarter 17 13 - 1/8
4th Quarter 19 - 1/8 13 - 1/2
There were approximately 952 security holders of record as of February 21,
1997. The Company has not paid dividends to date and intends to retain any
future earnings for use in the business.
ITEM 6. SELECTED FINANCIAL DATA
The following data has been derived from consolidated financial statements
that have been audited by Ernst & Young LLP, independent auditors. The
information set forth below is not necessarily indicative of the results of
future operations and should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Annual Report
on Form 10-K.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
As of or for As of or for
the Fiscal the Six As of or for the Fiscal Year Ended
Year Ended Months Ended ----------------------------------------------
(In thousands, except December 28, December 30, July 1, July 2, July 3, June 27,
per share amounts) 1996 1995 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,068,643 $ 1,016,283 $ 2,467,783 $ 2,367,274 $ 1,412,150 $ 944,079
Revenue from related party 35,000 - - - - -
Total revenue 2,103,643 1,016,283 2,467,783 2,367,274 1,412,150 944,079
- ---------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 24,868 (16,875) 245,675 347,733 285,698 293,260
Operating income (loss) (385,108) (1) (215,196) (2) (105,690) 53,989 (3) (64,578) (4) 97,526
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) (417,715) (225,006) (99,309) 31,309 (53,738) (6) 68,504
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per share (5) $ (8.22) $ (5.27) $ (3.07) $ 0.96 $ (1.72) $ 2.16
- ---------------------------------------------------------------------------------------------------------------------
Shares used in computing net
income (loss) per share (5) 50,827 42,721 32,371 32,548 31,289 31,758
=====================================================================================================================
Cash and short-term
investments $ 61,063 $ 125,387 $ 95,825 $ 153,118 $ 121,600 $ 140,705
Working capital (41,049) 223,546 306,872 444,974 301,046 (6) 332,793
Total assets 831,057 1,056,042 1,021,501 1,005,620 886,159 (6) 580,613
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt 131,737 125,540 219,224 215,294 92,258 (6) 2,431
Total shareholders' equity $ 12,140 $ 310,882 $ 263,238 $ 361,762 $ 318,806 $ 63,267
Shares outstanding at end
of period 57,758 44,679 32,413 32,334 31,579 30,787
=====================================================================================================================
</TABLE>
(1) Includes a pretax restructuring charge of $6.5 million and other pretax
charges of $26.4 million. See Notes 2 and 3 of Notes to Consolidated
Financial Statements.
(2) Includes a $13 million pretax restructuring charge. See Note 2 of Notes
to Consolidated Financial Statements.
(3) Includes a $12.5 million pretax credit from the reversal of excess
restructuring charge amounts not utilized. See Note 2 of Notes to
Consolidated Financial Statements.
(4) Includes a $125 million pretax restructuring charge. See Note 2 of
Notes to Consolidated Financial Statements.
(5) Fully diluted earnings (loss) per share and shares used in computing
fully diluted earnings (loss) per share were not materially different
from primary earnings (loss) per share and shares used in computing
primary earnings (loss) per share, except in fiscal year 1994, when such
amounts were $0.95 and 34,866 shares, respectively.
(6) Effective June 30, 1993, the Company purchased certain net assets of
Tandy Corporation's personal computer business. The Company's
Consolidated Statements of Operations do not include the revenues and
expenses of the acquired business until fiscal year 1994. See Note 2 of
Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Amounts in tables in thousands, except per share amounts)
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Percentage of Total Revenue
---------------------------------------------------------------------------
Twelve Six Six Fiscal Year
Fiscal Year Months Months Months Ended
Ended Ended Ended Ended ----------------
December 28, December 30, December 30, December 31, July 1,June 2,
1996 1995 1995 1994 1995 1994
(Unaudited) (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales 98.3% 100.0% 100.0% 100.0% 100.0% 100.0%
Revenue from related party 1.7 - - - - -
- --------------------------------------------------------------------------------------------------------------------
Total revenue 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales 98.8 94.7 101.7 90.9 90.0 85.3
- --------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 1.2 5.3 (1.7) 9.1 10.0 14.7
- --------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 16.0 13.9 16.3 13.5 12.8 11.3
Engineering and development expenses 1.9 1.6 1.9 1.6 1.5 1.7
Restructuring charge (credit) 0.3 0.6 1.3 - - (0.5)
Other charges 1.3 - - - - -
- --------------------------------------------------------------------------------------------------------------------
Operating income (loss) (18.3) (10.8) (21.2) (6.0) (4.3) 2.2
Financing and other expense, net (1.6) (0.8) (0.9) (0.5) (0.7) (0.3)
- --------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (19.9) (11.6) (22.1) (6.7) (5.0) 1.9
Income tax provision (benefit) - (0.4) - (1.3) (1.0) 0.6
- --------------------------------------------------------------------------------------------------------------------
Net income (loss) (19.9%) (11.2%) (22.1%) (5.4%) (4.0%) 1.3%
====================================================================================================================
The following table represents selected key asset turnover ratios for the periods indicated:
Days total revenue in accounts receivable 68.5 52.9 69.5 62.6 57.6 49.6
Inventory turnover 15.0 8.8 8.1 7.2 7.1 6.1
====================================================================================================================
</TABLE>
FISCAL YEAR 1996 AND THE TWELVE MONTHS ENDED DECEMBER 30, 1995
Total Revenue
Net sales decreased 12% to $2.068 billion in fiscal year 1996 from $2.348
billion in the comparable prior-year period. This decrease was caused primarily
by a 22% decline in international sales due to the extremely competitive
worldwide selling and pricing environment, the Company's ongoing
restructuring activities, which have resulted in both the closure and
downsizing of various international subsidiaries during the year, and
development delays of certain products. Also contributing to lower sales
were the Company's increased fiscal year 1996 sales of consumer desktop
products, which carry lower average selling prices. In response to the
extremely competitive worldwide selling and pricing environment, the Company
has continued to take aggressive pricing actions within all of its regions.
The Company anticipates that the industry's competitive pricing environment
will continue, and as a result, that future pricing actions may be
necessary in order to maintain its competitive price and performance
product profile. However, there can be no assurance that future pricing
actions will be effective in maintaining existing unit sales or in
stimulating unit sales growth.
The Company's worldwide unit shipments decreased 6% during fiscal year 1996 to
1,297,000 units from 1,380,000 units in the comparable prior-year period.
Average selling prices for the Company's products declined during year fiscal
1996 due primarily to the introduction of a sub $1,000 multimedia desktop system
made exclusively for Wal-Mart. The Company may continue to sell similar $1,000
price-level systems which could continue to impact the Company's overall average
selling prices. The foregoing forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
anticipated results. See "Additional Factors That May Affect Future Results"
herein. The decrease in fiscal year 1996 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 higher average
selling prices than other products.
Net sales from desktop system products decreased 15% to $1.462 billion in
fiscal year 1996 from $1.730 billion in the comparable prior-year period. The
decline can primarily be attributed to lower international sales and the
competitive pricing environment. Sales of the Company's desktop systems
represented 71% of net sales for fiscal year 1996 as compared to 74% of net
sales for the comparable prior-year period.
Net sales from notebook computer products for fiscal year 1996 decreased 9% to
$360.3 million from $397.5 million in the comparable prior-year period. The
decrease resulted primarily from a decrease in fiscal year 1996 unit shipments
of 8% to 160,000 units from 173,000 units in the comparable prior-year period.
Net sales of the Company's notebook computer products represented 17% of net
sales for fiscal year 1996 and the comparable prior-year period.
Net sales from the Company's Americas region, which includes the United States
and Canada, decreased 1% to $1.141 billion in fiscal year 1996, compared to
$1.152 billion in the comparable prior-year period. Net sales to the
independent reseller/dealer sales channel decreased 33% in fiscal year 1996 from
the comparable prior-year period, and accounted for 47% of total Americas region
sales compared to 68% in the comparable prior-year period. Sales to the
consumer retail sales channel for fiscal year 1996 of $608.8 million increased
65% over the comparable prior-year period sales of $369.6 million. The increase
in the consumer retail channel is primarily the result of comparative low prior
year retail channel activity and high fiscal year 1996 shipments of the
Company's 486-based low cost multimedia desktop system.
International sales, which includes the Company's Europe and Asia Pacific
regions, decreased 22% to $927.8 million in fiscal year 1996 from $1.196 billion
in the comparable prior-year period. International sales represented 45% and
51% of net sales fiscal year 1996 and the comparable prior-year period,
respectively. Net sales from the Company's Europe region decreased 18% in
fiscal year 1996 from the comparable prior-year period primarily due to lower
demand for the Company's products, a generally slower economic environment, and
the impact of the Company's decision to restructure its operations, which
involved the closure of certain European sales offices.
Sales from the Company's Asia Pacific region, which includes Asia, the Pacific
Rim, and the Middle East, declined 32% in fiscal year 1996 from the comparable
prior-year period. The decrease in net sales was primarily attributable to
sales declines in the PRC, where reduced demand for the Company's products was
caused by an unexpectedly rapid shift in both availability of and resulting
demand for Pentium(R) processor-based systems in the fiscal year. Sales into
the PRC accounted for approximately 3% of the Company's net sales in fiscal year
1996, compared to approximately 6% in the comparable prior-year period. Also
contributing to the decline in sales into the PRC was a significant increase in
competitive pressures within the PRC marketplace, including a significant
increase in locally produced, low cost computers. 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.
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
continued 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 foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from anticipated results. 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. Fiscal year 1996 net
sales were increased by 0.1%, compared to an increase of 2.2% in the comparable
prior-year period due to fluctuations in the average value of the U.S. dollar
relative to other currencies.
Total revenue for fiscal year 1996 includes $25.0 million from an
Intellectual Property Assignment Agreement dated June 27, 1996, $5.0 million
from a Server Technology Transfer Agreement dated February 22, 1996 and $5.0
million from a Strategic Consulting Agreement dated February 22, 1996, each of
which is with Samsung. The Intellectual Property Assignment Agreement assigns
certain patent applications of the Company to Samsung. Samsung purchased
certain patent applications from the Company for $15 million during the second
quarter of fiscal year 1996, and exercised an option to purchase an additional
group of patent applications for $10 million during the fourth quarter of fiscal
year 1996. The Server Technology Transfer Agreement and the Strategic
Consulting Agreement grant Samsung a royalty-free license through July 31, 2000
to use the technical information supplied by the Company to produce server
technology products and to use various marketing and sales planning studies
provided by the Company, respectively, in exchange for $5 million for each
agreement. The payments from Samsung are not refundable nor are they contingent
upon the rendering of future services by the Company. A total of $35.0 million
related to these agreements was recorded as revenue from related party in the
Consolidated Statements of Operations for fiscal year 1996.
Gross Profit
The Company's gross margin for fiscal year 1996 was 1.2% of total revenue
compared to a gross margin of 5.3% in the comparable prior-year period. The
decrease in the Company's gross margin resulted primarily from the continued
aggressive pricing environment within the personal computer marketplace. In
addition, fiscal year 1996 margins were negatively impacted by high channel
inventory levels which, during periods of rapidly declining average selling
prices, resulted in additional price protection costs. The Company also
encountered selected internal product development issues in fiscal year 1996,
which led to temporary delays in the shipment of selected consumer products.
Gross margins were also negatively impacted in fiscal year 1996 by the Company's
continued aggressive inventory management efforts, which resulted in both lower
average selling prices and lower margins on certain products. Increased
warranty and excess and obsolete service inventory provisions 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
service inventory reserves were due to higher average service inventory levels.
In the second quarter of fiscal year 1996, the Company approved and
implemented a restructuring plan, separate and apart from the restructuring plan
implemented in transition period 1995, designed to restructure its worldwide
operations into three regional operating groups. The Company's fiscal year 1996
plans included the consolidation and/or closure of certain regional offices and
reconfiguration centers and the suspension of its notebook manufacturing
operations in Taiwan, accompanied by the transfer of notebook manufacturing to
third-party OEMs. As a result of the closure of the Company's notebook
manufacturing operations, the remaining notebook production inventory was
rendered obsolete. In addition, the Company closed a service facility in the
United Kingdom, resulting in excess and obsolete service inventory. The Company
wrote down this excess and obsolete inventory to its net realizable value.
These write-downs were charged to cost of sales, negatively impacting gross
margins by $2.8 million, which reduced gross margins by 0.1 percentage points
for fiscal year 1996. The Company believes this charge is directly related to
the restructuring and considers the charge to be non-recurring.
The Company believes that the personal computer 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. During 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. 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 1997.
The effect of foreign currency fluctuations on sales has a corresponding
impact on gross profit/(loss), as the Company's production costs are incurred
primarily in U.S. dollars. This period-to-period currency fluctuation increased
by gross margins by 0.1 percentage points during fiscal year 1996.
The Company's gross profit for fiscal year 1996 was improved by $35.0 million,
or 1.7 percentage points as a result of related party revenue transactions with
Samsung, as previously discussed. The revenue from these transactions, totaling
$35.0 million, was recorded as revenue from related party in the accompanying
Consolidated Statements of Operations for fiscal year 1996.
Operating Expenses
Total selling, general and administrative expenses for fiscal year 1996 of
$336.4 million increased $9.0 million from the comparable prior-year period and
represented 16% of total revenue in fiscal year 1996, versus 13.9% of total
revenue in the comparable prior-year period. The increase in selling, general
and administrative expenses during fiscal year 1996 can be attributed to higher
advertising and technical support costs, partially offset by lower payroll and
related expenses due to lower staffing levels. Beginning in fiscal year 1996,
the Company embarked on more aggressive initiatives to increase demand for the
Company's products. The Company will continue to market aggressively in fiscal
year 1997 to promote its products and services. The foregoing forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from anticipated results. See "Additional Factors That May
Affect Future Results" herein.
Engineering and development costs increased $3.3 million in fiscal year
1996 to $40.7 million, compared to $37.4 million in the comparable prior-year
period. This increase resulted primarily from higher engineering materials
expense related to new product introductions. Throughout fiscal year 1996, the
Company introduced new products to each of its product lines, including
Advantage!, Bravo, Premmia, Ascentia, and Manhattan. During fiscal year 1997,
the Company plans to continue to increase its product development capabilities
and resources. The foregoing forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from
anticipated results. See "Additional Factors That May Affect Future Results"
herein.
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 be
commercially successful or sufficiently technically advanced, or that it will be
able to deliver adequate quantities of new products in a timely manner.
In accordance with the Company's 1996 restructuring plan described above, the
Company recorded a restructuring charge of approximately $6.5 million in the
quarter ended June 29, 1996. Costs included in the restructuring charge
consisted primarily of employee severance, asset write-downs and provisions for
lease obligations. Approximately $5.8 million was expected to involve cash
disbursements with the remaining costs primarily involving asset write-downs.
The employee severance was expected to involve approximately 240 employees,
across all functions and levels. In fiscal year 1996, the Company incurred
aggregate cash expenditures of $4.1 million and non-cash charges of $0.3
million, consisting primarily of employee severance, asset write-downs, and
payments for lease obligations. At December 28, 1996, approximately $2.1
million of the restructuring accrual remained on the Company's consolidated
balance sheet, consisting primarily of provisions for lease obligations. As of
December 28, 1996, 250 employees have been terminated under this plan, and the
total $3.1 accrued for severance payments had been paid. At December 28, 1996,
the majority of the restructuring had been completed, although certain lease
obligations will continue through fiscal year 2001. The foregoing forward-
looking statements involve risks and uncertainties that could cause actual
results to differ materially from anticipated results. See "Additional Factors
That May Affect Future Results" herein.
In addition to the Company's $6.5 million restructuring charge taken in the
second quarter of fiscal year 1996, the Company incurred other charges of $4.7
million, including $1.1 million in asset write-downs directly associated with
its restructuring activities in Europe, and other charges of $3.6 million
related to benefits provided pursuant to the Founder's Agreement with Safi U.
Qureshey, the Company's Chairman Emeritus (discussed below). The Europe asset
write-down charge of approximately $1.1 million was provided as a result of
management's decision to dispose of the existing sales facility in France and
represents the adjustment required to write-down the carrying value of the
facility to its estimated fair value less cost to sell. The Company believes
this charge is directly related to the restructuring and considers it to be non-
recurring.
Effective July 27, 1993, the Company entered into a separate employment
contract ("Founder's Agreement") with its founder and former Chairman of the
Board (now Chairman Emeritus), Safi U. Qureshey, who was then serving as the
Company's Chief Executive Officer. The Founder's Agreement provided for five
years of salary, health and welfare benefits, two years of bonus, acceleration
of stock options and certain other benefits if active employment was terminated
by the Company or by Mr. Qureshey under specified conditions. On June 28, 1996,
the Company elected Kwang-Ho Kim as Chairman and named Mr. Qureshey Chairman
Emeritus, which would have resulted in Mr. Qureshey's being entitled to such
compensation and benefits had he not agreed to defer effectiveness of the
Founder's Agreement to some future date of his choice. As a result, the Company
provided $3.6 million during fiscal year 1996, representing the present value of
the benefits payable to Mr. Qureshey.
Since adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", ("SFAS 121"), the Company has evaluated its long-lived assets
for impairment on a quarterly basis. As a result of an unexpected deterioration
in the Company's operating results for the third quarter of fiscal year 1996 and
the resulting impact on the Company's future expectations, the Company concluded
that its long-lived assets had become impaired. The decline in the Company's
revenue and gross margin during the third quarter resulted primarily from the
Company's inability to generate sufficient demand for its products and the
continued aggressive pricing environment within the computer marketplace. As a
result, the Company updated its cash flow projections for purposes of evaluating
its long-lived assets for impairment to reflect a reduced level of sales growth
and to adjust the period of time and rate by which gross margins are expected to
improve.
In accordance with SFAS 121, the impairment loss equals the difference
between the carrying value of long-lived assets, including goodwill, and the
fair value of the long-lived assets. Within the third fiscal quarter, the
Company completed an estimate of the fair value of its long-lived assets, and,
based on this estimate, the Company recorded an impairment charge of
approximately $21.6 million. The impairment charge consisted of the remaining
net book value of goodwill acquired in connection with the Company's 1993
acquisition of Tandy Corporation's ("Tandy") personal computer manufacturing
operations. The Company's estimate of the fair value of tangible assists was
based upon independent appraisals. The Company's SFAS No. 121 analysis for the
fourth quarter of fiscal year 1996, and appraisals, indicated that the fair
value of its long-lived assets presently approximates their net book value.
Other Income and Expense
In fiscal year 1996, the Company had net interest expense of $30.6 million
compared to $15.2 million in the comparable prior year period. Interest expense
increased by $14.2 million, primarily as a result of $17.2 million of
amortization expense for fiscal year 1996, associated with the cost of obtaining
a $200 million Samsung credit line guarantee in December 1995, and a second $200
million Samsung credit line guarantee in December 1996.
Of the $33.4 million in interest expense for fiscal year 1996,
approximately $23.8 million did not require cash payments. Approximately $17.2
million represented amortization of Samsung credit guarantees and approximately
$6.6 million represented amortization of the discount and issue costs on the
Company's $315 million par value of Liquid Yield OptionTM Notes ("LYONs") that
were issued in 1993 and are due December 14, 2013.
In fiscal year 1996, the Company recognized net other expense of $2.0
million compared to net other expense of $4.6 million in the comparable prior
year period. Other expenses relate primarily to foreign currency transaction
and remeasurement gains and losses and the costs associated with the Company's
foreign currency hedging activities. The Company 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)
In fiscal year 1996 and for the comparable prior year period, the Company
recorded an effective income tax provision (benefit) of 0% and (3%),
respectively. The decrease in the comparable prior year period effective tax
rate was attributable to changes in the proportion of income earned or losses
sustained within various taxing jurisdictions and the tax rates in the locations
in which those earnings or losses were generated, as well as the Company's
inability to benefit from certain deferred tax assets that include loss
carryforwards. The Company recorded net deferred tax assets of $60.5 and $63.5
million at December 28, 1996 and December 30, 1995, respectively.
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 $143 million of future
taxable income. 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. In
addition, on January 30, 1997 Samsung proposed to commence negotiations to
acquire of all of the outstanding shares not currently owned by Samsung or its
affiliates. Should the transaction be completed as proposed, the Company's
ability to realize a benefit from its net deferred tax asset, and a substantial
portion of the Company's deferred tax asset from net operating loss carryovers
that have been offset by a valuation allowance, would be impaired.
Asset Turnover Ratios
Days total revenue in accounts receivable for fiscal year 1996 increased to
68.5 from 52.9 days in the comparable prior-year period. The increase is
primarily due to increased competitive pressures which have required the Company
to offer extended payment terms, primarily in the Company's Europe and Asia
Pacific regions.
Inventory turnover for fiscal year 1996 increased to 15.0 from 8.8 turns
in the comparable prior-year period. The increase is primarily due
to improved inventory and supply management practices implemented over the
past year.
SIX MONTHS ENDED DECEMBER 30, 1995 AND DECEMBER 31, 1994
Total Revenue
Net sales for the six months ended December 30, 1995 ("transition period
1995") decreased 11% to $1.016 billion from $1.136 billion for the six months
ended December 31, 1994 ("comparable prior-year period"). The decrease in
transition period 1995 net sales was primarily due to lower 486-based desktop
and notebook system sales, partially offset by higher Pentium(R) processor-based
desktop systems sales. In transition period 1995, the Company's worldwide unit
shipments decreased 17% to 584,000 from 707,000 in the comparable prior-year
period. The decrease in net sales resulting from decreased unit shipments was
partially offset by increased shipments of Pentium(R) processor-based desktop
systems, which generally sell at higher average selling prices than other
products.
Net sales from desktop system products decreased 2% to $753 million in
transition period 1995 from $765 million in the comparable prior year period.
The decrease can primarily be attributed to lower 486-based desktop system sales
including the Advantage! and Bravo 486DX and 486SX systems. Also contributing
to the decline was lower sales per unit on older products as the Company sought
to aggressively sell these products. These declines were partially offset by
higher sales per unit on Pentium(R) processor-based Advantage! and Bravo desktop
systems. Decreased sales of the Company's 486-based desktop systems in
transition period 1995 are consistent with the shift in demand toward the
Pentium(R) processor-based desktop systems, which accounted for 78% of total
desktop systems sales dollars and 68% of total desktop system units in
transition period 1995 versus 18% and 9%, respectively, in the comparable prior-
year period.
Net sales from the Company's notebook computer products decreased 28% to
$168 million in transition period 1995 from $235 million in the comparable
prior-year period. The decrease in net sales of notebook computers reflects a
39% decrease in unit shipments to 70,000 in transition period 1995 from
115,000 in the comparable prior-year period. The decline in notebook systems
sales occurred in the Advantage! and Bravo notebook product lines. Declines
in sales in the Company's 486-based Ascentia notebook computer line were
generally offset by increased sales of Pentium(R) processor-based Ascentia
notebook computers, which have higher average selling prices per unit. The
39% decrease in unit shipments was partially offset by higher revenue per
unit on the Pentium(R) processor-based Ascentia notebook computer line,
leading to the overall decline in net sales from notebook products of
28%. Net sales from the Company's notebook computer products represented
17% and 21% of net sales for transition period 1995 and the comparable
prior-year period, respectively.
Net sales from the Company's Americas region, decreased 34% to $453 million
in transition period 1995, compared to $688 million in the comparable prior-year
period. Sales to the independent reseller/dealer channel for transition period
1995 decreased 24% compared to the comparable prior year period, and accounted
for 73% of total Americas region sales. Sales to the consumer retail channel
decreased 51% compared with the comparable prior-year period due to lower Tandy
branded system sales and the Company's decision to temporarily reassess its
position within the consumer retail channel.
International sales increased 26% to $563 million in transition period 1995
from $448 million in the comparable prior-year period. International revenues
represented 55% and 39% of net sales in transition period 1995 and the
comparable prior year period, respectively. Net sales from the Company's Europe
region increased 26% over the comparable prior-year period. The United Kingdom
and Sweden were major contributors of total Europe region revenues with
significant transition period 1995 revenue growth also occurring in France,
Norway and Denmark.
Net sales from the Company's Asia Pacific region contributed to a 25%
increase in transition period 1995 sales over the comparable prior-year period.
The increase in transition period 1995 sales was attributable to revenue growth
in the PRC", Australia and Singapore. Sales into the PRC accounted for
approximately 7% of the Company's total transition period 1995 revenues,
compared with approximately 5% in the comparable prior-year period.
The Company experienced product development and production delays
throughout transition period 1995, which contributed in part to lower desktop
and notebook systems sales. In addition, continued industry-wide competitive
pricing pressures prompted aggressive pricing adjustments that further reduced
desktop and notebook system sales.
The results of the Company's international operations are subject to
currency fluctuations. The Company's total revenue was increased by 2.3% in
transition period 1995 compared to an increase of 2.0% 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 transition period 1995 gross loss was 1.7% compared to a
gross profit of 9.1% in the comparable prior-year period. The decrease in the
Company's gross margin resulted primarily from product development and
production delays, which in turn led to delays in shipment and lower average
selling prices of the Company's fall product lines in transition period 1995.
In addition, gross margins were negatively impacted due to the Company's
aggressive inventory reduction efforts, which resulted in both lower average
selling prices and lower margins. The Company's margins were also negatively
impacted by increased warranty and service inventory provisions. Increased
levels of service inventory reserves were required due to the continued
accelerated rate of product transitions and the resulting reduction in service
inventory valuations. The increase in the warranty provision was due to an
increase in both the cost and volume of warranty claims compared with the prior
year.
During transition period 1995, the Company and the majority of its
competitors continued to introduce new, lower-priced, higher-performance
personal computers resulting in continued pricing pressures on both new and
older technology products.
The effect of foreign currency fluctuations on revenue has a corresponding
impact on gross profit, as the Company's production costs are incurred primarily
in U.S. dollars. When comparing transition period 1995 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 two
percentage point increase in gross margins in transition period 1995 compared to
the comparable prior year period.
Operating Expenses
Total transition period 1995 selling, general, and administrative expenses
increased by $12.4 million to $165.7 million from the comparable prior-year
period, and represented 11.6% of net sales in transition period 1995, compared
to 9.7% in the comparable prior-year period. Continued expansion into new and
existing international markets, new product introductions and a greater emphasis
on advertising, sales and marketing programs contributed to increased media
advertising, marketing promotion, sales literature, cooperative advertising
expenses and technical support costs. In addition, in transition period 1995,
the Company incurred one-time severance payments of approximately $4.1 million
to executive officers pursuant to severance compensation agreements. Also
contributing to the higher transition period 1995 costs were consulting fees
incurred in connection with the preparation of the Company's turnaround plan and
professional fees associated with the change in the Company's fiscal year-end.
Transition period 1995 engineering and development costs increased $1.0
million to $9.6 million and increased as a percentage of net sales due to higher
engineering materials expense related to new product introductions. Products
introduced in transition period 1995 included additions to the Advantage!,
Bravo, Premmia, Ascentia, and Manhattan product lines.
In the second quarter of transition period 1995, the Company implemented a
restructuring plan designed to increase its utilization of third-party board
manufacturing and design and realign its Asia Pacific manufacturing operations.
As a result, the Company recorded a restructuring charge of $13.0 million during
the second quarter of transition period 1995. Costs included in the
restructuring charge consisted primarily of employee severance, asset write-
downs, vendor cancellation charges and lease write-offs for closed offices. The
employee severance included approximately 1,500 employees primarily in semi-
skilled and skilled manufacturing positions. Approximately $7.6 million of the
charge was expected to involve cash disbursements with the remaining costs
primarily relating to reductions in net asset values. During transition period
1995, the Company incurred cash expenditures of approximately $0.8 million
related to severance payments to terminated employees. At December 30, 1995,
approximately $12.2 million of the original restructuring accrual remained on
the Company's consolidated balance sheet.
The Company believes that the restructuring activities were necessary in order
to implement its strategy of increased utilization of third-party board
manufacturing and to realign its Asia Pacific manufacturing operations.
Other Income and Expense
In transition period 1995, the Company had net interest expense of $6.0
million compared to $5.9 million in the comparable prior-year period. Interest
expense increased by $1.7 million as a result of higher short-term borrowings
from the Company's bank revolving credit facilities as well as from short-term
loans during transition period 1995, which were utilized to fund the Company's
transition period 1995 operations. Also contributing to higher interest expense
were higher average interest rates on those short-term borrowings as well as
amortization of the Samsung credit line guaranty of $0.5 million, which was
recorded during transition period 1995. The increase in interest expense was
partially offset by an increase in interest income of $1.6 million due to higher
average cash balances during transition period 1995 due to the Samsung
investment.
In transition period 1995, the Company recognized net other expense of $3.8
million compared to net other expense of $1.8 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 transition
period 1995 was primarily due to losses incurred as a result of the unfavorable
movement of the U.S. dollar relative to other currencies in transition period
1995 over the comparable prior-year period. 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 (19.5%) in transition period 1995 and for the comparable prior-year period,
respectively. The decrease in the transition period 1995 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 transition period.
Asset Turnover Ratios
Days total revenue in accounts receivable for transition period 1995 increased
to 69.5 from 62.6 days in the comparable prior-year period. The increase is
primarily due to increased competitive pressures which have required the Company
of offer extended payment terms, primarily in the Company's Europe and Asia
Pacific regions.
Inventory turnover for transition period 1995 increased to 8.1 from 7.2 turns
in the comparable prior-year period. In transition period 1995, the Company
implemented inventory and supply management practices to improve its inventory
management, which resulted in an increase in inventory turns.
FISCAL YEARS ENDED JULY 1, 1995 AND JULY 2, 1994
Total Revenue
Net sales increased to $2.468 billion in fiscal year 1995 from $2.367
billion in fiscal year 1994. The slight improvement in fiscal year 1995
revenues was due to higher Pentium(R) processor-based desktop systems sales
partially offset by lower 386 and 486 desktop systems sales and decreased
shipments of the Company's notebook system products. The Company's net sales
were also increased by 2.3% in fiscal year 1995 compared with a decreases of
2.7% fiscal year 1994 due to fluctuations in the average value of the U.S.
dollar relative to its average value in the comparable prior year. In fiscal
year 1995, the Company's worldwide unit shipments increased 5% to 1,503,000,
compared with a 78% increase in unit volume for fiscal year 1994.
The Company experienced product development and production delays
throughout fiscal year 1995, which in part have contributed to lower desktop and
notebook systems sales. In addition, continued industry-wide competitive
pricing pressures prompted aggressive pricing adjustments that further reduced
desktop and notebook system revenues, particularly in the domestic marketplace.
Net sales from desktop system products increased 15% to $1.741 billion in
fiscal year 1995 from $1.509 billion in fiscal year 1994. Major contributors to
the improved year-over-year sales performance included the Company's Pentium(R)
processor-based desktop systems and selected 486-based desktop systems including
the Advantage! and Bravo 486DX. Despite the overall increase, a decline in the
fiscal year 1995 sales growth rate compared to the prior year was primarily due
to declines in Premmia 486-based and Tandy branded desktop systems sales.
Decreased sales of the Company's 486-based desktop systems in fiscal year 1995
are consistent with the shift in demand toward the Pentium(R) processor-based
desktop systems, which accounted for 35% of total desktop systems sales in
fiscal year 1995 versus 3% in fiscal year 1994.
Net sales from the Company's notebook computer products decreased 11% to
$464 million in fiscal year 1995 from $519 million in fiscal year 1994. The
decline in net sales from notebook products was primarily attributable to the
expiration of two large OEM notebook agreements and the Company's decision to
de-emphasize the OEM channel. The decrease in net sales of notebook computers
reflected a 19% decrease in unit shipments to 218,000 in fiscal year 1995 from
268,000 in fiscal year 1994. The fiscal year 1995 decline in notebook systems
sales occurred in the Advantage!, Bravo and PowerExecTM notebook product lines,
and was partially offset by a significant increase in the Ascentia notebook
computer line. Net sales from the Company's notebook computer products
represented 19%, and 22% of net sales for fiscal years 1995 and 1994,
respectively.
Net sales from the Americas region decreased 10% to $1.387 billion in
fiscal year 1995 as compared to fiscal year 1994. As previously noted, the
fiscal year 1995 revenue decline was due primarily to the completion of two
large OEM contracts in the fourth quarter of fiscal year 1994. Total OEM
channel net sales decreased to one percent of total fiscal year 1995 Americas
net sales compared to 11% in fiscal year 1994. Sales to the independent
reseller/dealer channel for fiscal year 1995 decreased 2% compared to fiscal
year 1994 and accounted for 63% of total Americas net sales. Within the overall
decrease in Americas net sales, sales to the consumer retail channel grew
slightly, increasing 2% over the prior year. The fiscal year 1995 growth rate
was attributable to lower sales related to Tandy branded systems in the United
States.
International sales increased 32% to $1.081 billion in fiscal year 1995
from $821 million in fiscal year 1994. International sales represented 44% and
35% of net sales in fiscal years 1995 and 1994, respectively. Net sales for the
Europe region increased 40% over the prior year. The United Kingdom and Sweden
continued to be major contributors of total Europe region net sales, with
significant fiscal year 1995 revenue growth also occurring in Italy, Norway and
Switzerland. Commencing during the second quarter of fiscal year 1995, the
Company's Ireland manufacturing facility supplied nearly all of the desktop
product requirements for the Europe region. The Company believes that its
localized manufacturing, centralized distribution and service operation in
Limerick, Ireland contributed to its Europe region growth.
Net sales from the Company's Asia Pacific region contributed to a 17%
increase in fiscal year 1995. The increase in the fiscal year 1995 growth rate
was attributable to higher sales growth in Australia, Singapore, Taiwan and the
Middle East, partially offset by a reduction in sales into the PRC due to
significantly increased competition and lower fiscal year 1995 sales to one of
the Company's major customers in the PRC. Sales into the PRC accounted for
approximately 5% of the Company's total fiscal year 1995 revenues, compared with
approximately 6% in fiscal year 1994.
Gross Profit
The Company's fiscal year 1995 gross profit margins of 10.0% declined from
14.7% in fiscal year 1994. The decline in gross profit margins resulted
primarily from product development and production delays, manufacturing related
costs associated with product transitions and continued intense industry-wide
competitive pricing pressures, particularly in the consumer retail sector of the
market. Further contributing to reduced gross profit margins in fiscal year
1995 was the increased percentage of revenues generated by the consumer retail
channel (including sales to Tandy's retail operations) which typically yields
lower gross margins. The consumer retail channel increased to 37% of total
fiscal year 1995 Americas revenues versus 32% in fiscal year 1994.
During fiscal year 1995, the Company and the majority of its competitors
continued to introduce new, lower-priced, higher-performance personal computers
resulting in continued pricing pressures on both new and older technology
products.
The effect of foreign currency fluctuations on revenue has a corresponding
impact on gross profit, as the Company's production costs are incurred primarily
in U.S. dollars. When comparing fiscal year 1995 to fiscal year 1994, the U.S.
dollar declined against nearly all European currencies. This year-to-year
currency fluctuation resulted in an approximate two percentage point gross
margin increase in fiscal year 1995 results compared to fiscal year 1994.
Operating Expenses
In fiscal year 1995, selling, general and administrative expenses increased
$47.6 million from fiscal year 1994. Expanded worldwide sales and marketing
efforts in both new and existing subsidiary locations resulted in higher payroll
and payroll-related expenses. Entry into new international markets, new product
introductions and a greater emphasis on advertising, sales and marketing
programs contributed to increased media advertising, marketing promotion, sales
literature and cooperative advertising expenses. In addition, during fiscal
year 1995, the Company continued to expand its Asia Pacific and Europe region
operations. Costs associated with this international expansion resulted in
increased expenses for staffing, telephone service, insurance, and outside
professional services. The Company also incurred higher legal fees due to
increased litigation activity.
Engineering and development costs decreased from $38.9 million in fiscal
year 1994 to $36.4 million in fiscal year 1995 due to lower payroll and
engineering materials expense as compared to 1994. Products introduced in
fiscal year 1995 included additions to the Advantage!, Bravo, Premmia, Ascentia,
and Manhattan product lines.
During fiscal year 1994, the Company incurred asset write-down charges of
$50 million and cash expenditures of $47 million related directly to its fiscal
year 1994 restructuring activities. The Company recorded a $12.5 million credit
in the fourth quarter of fiscal year 1994 after concluding that most of its
restructuring activities had been completed or were adequately provided for
within the remaining restructuring accrual. At July 2, 1994, $15.2 million of
the restructuring accrual remained on the Company's consolidated balance sheet.
During fiscal year 1995, the Company completed the consolidation of its
worldwide mobile computing manufacturing in Taiwan and the concurrent closure of
its Fountain Valley, California manufacturing facility. During fiscal year
1995, the Company incurred cash expenditures of approximately $4.7 million
related primarily to the closure of its Fountain Valley, California
manufacturing facility. At July 1, 1995, approximately $10.5 million of the
original restructuring accrual remained, consisting primarily of amounts
provided for the net present value of minimum lease payments for facilities that
have been closed and the write-down to net realizable value of related leasehold
improvements.
The Company believes that its restructuring activities were necessary in
order to reorganize its worldwide manufacturing, engineering, sales and service
operations as well as to reposition its product lines after the June 1993
acquisition of Tandy's personal computer operations.
Other Income and Expense
In fiscal year 1995, the Company had net interest expense of $15.1 million
compared to $7.8 million in fiscal year 1994. Interest expense increased as a
result of the increased utilization of the Company's bank revolving credit
facilities during fiscal year 1995, which were utilized to fund the Company's
fiscal year 1995 operations. Interest expense for fiscal year 1995 also
increased due to a full year's inclusion of interest on the LYONs, which were
originally issued in December 1993, generating slightly less than seven months
of interest expense for fiscal year 1994. Additionally, interest expense for
fiscal year 1995 increased due to the increase in the interest rate on the note
payable to Tandy Corporation from 3.75% to 4.94%, effective July 1994.
In fiscal year 1995, the Company recognized net other expense of $2.6
million compared to net other income of $.1 million in fiscal year 1994. The
fiscal year 1994 other income was attributable to the one-time $4.3 million
pretax gain from the sale of the Company's Hong Kong manufacturing facility in
June 1994. Other expenses related primarily to foreign currency transaction and
remeasurement gains and losses and the costs associated with the Company's
foreign currency hedging activities. See further discussion included under
"Liquidity and Capital Resources."
Income Tax Provision (Benefit)
In fiscal years 1995 and 1994, the Company recorded an effective income tax
provision (benefit) of (19.5%) and 32.4%, respectively. The decrease in the
fiscal year 1995 effective tax rate was attributable to changes in the
proportion of income earned or losses sustained within various taxing
jurisdictions and the tax rates in the locations in which those earnings or
losses were generated, as well as the Company's inability to benefit from
certain deferred tax assets that include loss carryforwards. The higher fiscal
1994 effective tax rate was attributable to the one percent increase in the
federal income tax rate and changes in the proportion of income earned within
various taxing jurisdictions.
Asset Turnover Ratios
Days total revenue in accounts receivable for fiscal year 1995 increased to
57.6 from 49.6 days in fiscal year 1994. The increase is primarily due to
increased competitive pressures which have required the Company of offer
extended payment terms.
Inventory turnover for fiscal year 1995 increased to 7.1 from 6.1 turns in
fiscal year 1994, primarily due to improved inventory management in fiscal year
1995 relative to fiscal year 1994.
LIQUIDITY AND CAPITAL RESOURCES
Financing Requirements
The Company's ability to fund its activities from operations is 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 the Company's ability to collect
under such terms, the manner in which it finances any capital expansion and the
Company's ability to access external sources of financing. The Company's recent
operations have resulted in net losses of $417.7 million, $225.0 million, and
$99.3 million for fiscal year 1996, the transition period 1995, and fiscal year
1995, respectively, as well as a working capital deficiency of $41.0 million and
total shareholders' equity of $12.1 million as of December 28, 1996. As a
result, it has been necessary for the Company to look to Samsung, its largest
shareholder, for financial support while management implements changes to the
Company's business in order to return the Company to profitability. In addition
to purchases of common stock from the Company aggregating $309.5 million,
Samsung has provided credit guarantees aggregating $400 million that are
available to support bank borrowings by the Company through December 31, 1998
(for which Samsung received additional Company equity securities then valued at
$58.8 million) and a $100 million vendor credit line available through November
1997 to facilitate component purchases from Samsung.
As of December 28, 1996, the Company had borrowed $175 million under bank
lines supported by Samsung guarantees and had $58.4 million due to Samsung under
the vendor credit line. The Company has additional borrowing availability under
the loan guarantees of $225 million, of which $125 million is available under
presently committed bank loan agreements. Management believes these financial
resources will be sufficient to support the Company's liquidity requirements in
fiscal 1997; however, in the event they are not, the Company would be required
to seek additional financing from Samsung or others, for which it has no current
commitments. The Company has not determined what steps it will take when the
existing additional support agreements terminate in December 1998. 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 from anticipated results. See "Additional
Factors That May Affect Future Results" herein. However, if the Company is
unable to arrange for external financing in December 1998, there would be a
material adverse effect on the Company's business, financial position and
results of operations.
On December 14, 1993, the Company issued $315 million par value of Liquid
Yield OptionTM Notes ("LYONs"), due December 14, 2013 and received total
proceeds of approximately $111.7 million. The LYONs are zero coupon convertible
subordinated notes which were sold at a significant discount from par value with
a yield to maturity of 5.25% and a total value at maturity of $315 million
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.
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
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. Samsung currently
has 49.4% beneficial ownership of the Company. If the Samsung Proposal is
completed, and there is no assurance that it will ultimately occur, it would
constitute a change in control under the Company's and the holders of the LYONs
have the right to require the Company to redeem the LYONs at their issue price
plus accrued original discount through the date set for such redemption. A
LYONs redemption event occurring in fiscal 1997 would result in approximately
$130 to $140 million of additional cash requirements for which the Company would
be required to seek external financing.
No assurance can be given that, if required, additional financing in
amounts in excess of the borrowing availability supported by current Samsung
guarantees will be available on acceptable terms or at all.
Management has developed plans to improve the Company's competitive
position by increasing operating efficiencies, by more focused and aggressive
marketing of the Company's products and through a sharing of expertise with
Samsung, and it anticipates that these efforts will result in an improvement of
the Company's gross margins and operating results. However, no assurances can
be given that the Company will be successful in realizing these goals. If the
Company is unable to improve its gross margins and operating results, management
will be required to significantly adjust the Company's operations. The Company's
ability to continue its on-going operations on a long term basis is dependent
upon its ability maintain adequate financing levels, improve gross margins, and
ultimately sustain a profitable level of operations. The foregoing forward-
looking statement involves risks and uncertainties that could cause actual
results to differ materially from anticipated results. See "Additional Factors
That May Affect Future Results" herein.
Transactions with Samsung
On December 21, 1995, the Company signed the original Additional Support
Agreement with Samsung that provides additional financial support to the
Company, including a guaranty by Samsung of a line of credit of up to $200
million through December 1997 (subsequently extended through December 1998) 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.
At December 28, 1996 the Company has a $200 million revolving credit
facility, guaranteed by Samsung as part of the Additional Support Agreement,
with a final maturity date of December 25, 1997. The credit guarantee expires
December 31, 1998. The revolving credit agreement allows the Company to borrow
at a rate of LIBOR plus 0.25% per annum, or the bank's reference rate, at the
Company's option. The Company is required to pay a commitment fee equal to
0.125% per annum based on the average daily unused portion of the facility. The
fee is payable quarterly in arrears. At December 28, 1996, there was $175
million outstanding as borrowings under this credit facility at an interest rate
of 6.06% per annum.
On December 13, 1996, the Company signed a Second Additional Support
Agreement with Samsung that provided the Company with additional credit
guarantees of $200 million through December 31, 1998. As consideration for this
new credit guarantee, the Company issued 500,000 shares of non-voting preferred
stock to Samsung. This second guarantee is in addition to the existing $200
million credit guarantee, provided pursuant to an Additional Support Agreement
between the Company and Samsung, dated December 21, 1995. The Second Additional
Support Agreement also includes a one-year extension of the original guarantee
provided under the Additional Support Agreement, which results in guarantees
totaling $400 million expiring on December 31, 1998.
On December 18, 1996, the Company completed the establishment of bank
credit lines totaling $100 million with three banks, which represents the
initial $100 million that is guaranteed by the Second Additional Support
Agreement. The credit agreements allow the Company to borrow at rates
approximating prevailing market rates. At December 28, 1996, there were no
outstanding borrowings under these credit lines.
Analysis of Cash Flows
Working capital of $(41.0) million at December 28, 1996 included cash and
cash equivalents of $61.1 million compared to working capital of $223.5 million
and cash and cash equivalents of $125.4 million at December 30, 1995. Net cash
used in operating activities for fiscal year 1996 of $139.0 million was
primarily used to fund the Company's current period operating loss. In addition
to the decrease in cash and cash equivalents, the decrease in working capital
can primarily be attributed to lower inventory, higher accounts payable and
higher short-term borrowings. The reduction in inventory was primarily due to
improved inventory and supply management practices. The Company had $175.0
million in short-term borrowings at December 28, 1996 compared to $75.0 million
at December 30, 1995.
Net cash used in investing activities of $18.6 million during fiscal 1996
was primarily due to capital expenditures. Capital expenditures totaled $22.4
million in fiscal year 1996 and consisted primarily of additions to plant and
production equipment and software and implementation costs associated with the
Company's new world-wide transaction-based information system. The Company
expects its fiscal year 1997 capital expenditures to be somewhat greater than
those incurred in fiscal year 1996 as it continues with the implementation of
the new world-wide transaction-based information system. The foregoing forward-
looking statement involves risks and uncertainties that could cause actual
results to differ materially from anticipated results. See "Additional Factors
That May Affect Future Results" herein.
Net cash provided by financing activities of $97.9 million was due
primarily to the net proceeds from short-term borrowings of $100.0 million and
to proceeds from the issuance of common stock to Samsung for cash of $60
million, partially offset by repayment of long-term debt. On July 11, 1996, the
Company paid the $90 million promissory note due to Tandy related to the
Company's 1993 acquisition of Tandy's personal computer manufacturing
operations. Payment was in the form of 4,498,594 shares of the Company's common
stock, then valued at $30 million, and $60 million in cash. Subsequent to the
issuance of shares to Tandy, also on July 11, 1996, the Company issued 8,499,336
shares of its common stock to Samsung in exchange for $60 million in cash that
was used to pay Tandy. The issuance of common stock to Samsung was made
pursuant to the 1995 Letter of Credit Agreement between the Company and Samsung.
The Company's working capital and its total shareholders' equity increased by
$90 million after completion of the payment of the Tandy note, and issuance of
its common stock to Tandy and Samsung.
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
revolving credit facilities and possible future public or private debt and/or
equity offerings. The Company utilizes a centralized 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.
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 includes 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
June 1997 with a face value of approximately $162.6 million at December 28,
1996, $162.0 million at December 30, 1995, and $162.0 million at July 1, 1995,
which approximate the Company's hedgeable net monetary asset exposure to foreign
currency fluctuations at those respective dates. For the fiscal year ended
December 28, 1996, for the transition period ended December 30, 1995, and for
the fiscal years ended July 1, 1995, and July 2, 1994, a net foreign currency
transaction loss of $0.4 million, loss of $2.9 million, gain of $1.7 million,
and loss of $2.1 million respectively, is included in the caption "Other income
(expense), net" in Note 3. Foreign currency borrowings at December 28, 1996,
December 30, 1995, and July 1, 1995 totaled $1.5 million, $4.0 million, and $4.2
million, respectively.
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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. The majority of these
sources of external financing are supported by guarantees provided to the
Company by Samsung. The Company has not determined what steps it will take when
the existing additional support agreements terminate in December 1998. If the
Company is unable to arrange for external financing in December 1998, when the
Samsung additional support agreements terminate, there would be a material
adverse effect on the Company's business, financial position and results of
operations.
During the first quarter of fiscal year 1997, the Company encountered lower
than anticipated demand for its products. The Company believes that a variety
of factors are contributing to this lower demand including an acceleration in
the competitive pricing environment, a product transition period for both the
Company's commercial desktop and notebook product lines, and customer
uncertainty surrounding the Samsung Proposal. As a result of these factors, the
Company's first quarter net sales and operating losses will be negatively
impacted.
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. 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 has, over the past several years, had difficulty in bringing
products to market. Product development delays have occurred for a variety of
reasons, primarily resulting from difficulties in the Company's product
development processes. While the Company has focused on these issues and
believes that improved processes and procedures have been designed and
implemented, there can be no assurance that these new processes and procedures
will be successful. If these improved processes and procedures are not
successful, there could continue to be material adverse effects on the Company's
net sales, cash flow, and profitability.
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.
The Company's participation in the highly competitive personal computer
industry often results in significant volatility in the Company's common stock
price. Factors such as new product introductions, price changes or other
announcements by the Company or its competitors, as well as quarterly variations
in the financial results of the Company, have caused substantial fluctuations in
the market price of the Company's common stock. In addition, the stock market
has experienced and continues to experience price and volume fluctuations that
have particularly affected the market price for securities of many companies
within the technology sector. These broad market fluctuations, as well as
general economic and political conditions may materially adversely affect the
market price of the Company's common stock and/or the Company's ability to raise
capital.
The Company believes that its production capacity and the production
capacity of its OEM suppliers for the products it manufactures and purchases,
respectively, 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 industry-wide
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 occasionally purchased from single sources due to availability, price,
quality or other considerations. These single source suppliers include
purchases of selected lithium ion batteries from Sony Corporation as well as
selected core logic from Intel Corporation. In addition, the Company also
purchases a majority of its microprocessor requirements from Intel Corporation
and a majority of random access memory chips from Samsung. 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 involvement 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 or to the Samsung Proposal.
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 fiscal year 1996 and in transition period 1995, the Company implemented a
restructuring plan designed to increase its utilization of third-party board
manufacturing and design, to realign its Asia Pacific manufacturing operations,
to close or consolidate certain regional offices, and to transfer manufacturing
of notebooks to OEMs. 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.
In addition, the Company's notebook products are manufactured by outside vendors
including Quanta Computer, Inc. and Compal Electronics, Inc. in Taiwan. These
OEMs are subject to the risks inherent in notebook computing technology,
development and manufacturing. As a result, the Company's ability to bring its
notebook products to market is highly dependent upon these third-party vendors
to effectively design, develop and manufacture these products. Should these
companies not be able to design, develop or manufacture the Company's products
in a timely manner, the Company's net sales, cash flows, 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 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'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. In addition, large industrial
companies with significant consumer electronics expertise, including such
companies at Sony, Fujitsu, Hitachi and Toshiba have entered or increased the
personal computer marketplace with products competing for market share with the
Company's products, leading to increased competition and downward pricing
pressures. 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.
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 political and 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. In addition, the Company
maintains offices in Hong Kong, which will become part of the PRC.
Consistent with industry practice, in certain circumstances, the Company
provides customers with stock rebalancing 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 rebalancing
programs allow customers to return product and receive credit for the invoiced
price less any post-sale pricing reductions. Partially offsetting the credit
issued is the value of the product which is returned. The Company, as part of
its revenue recognition policy, estimates the expected returns and reduces both
sales and cost of sales accordingly. Stock rebalancing and price protection
credits represented 6.0% of net sales during fiscal year 1996, 4.2% during
transition period 1995, 4.0% for fiscal year 1995, and 2.1% for fiscal year
1994. 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 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.
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 would not have a material adverse effect on the Company's business operations
and profitability. Pursuant to its Strategic Alliance Agreement with Samsung
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.
Sections 382 and 383 of the Internal Revenue Code of 1986 ("the Code")
place certain limitations on U.S. net operating loss carryforwards and excess
credits if one or more shareholders have increased their aggregate equity
ownership of the Company by more than 50 percentage points, within a three year
measurement period. As a result of recent shareholder equity transactions with
Tandy Corporation ("Tandy") and Samsung Electronics Co. Ltd, ("Samsung") on July
11, 1996, the Company has experienced a change in ownership as defined in the
Code. Accordingly, the amount of taxable income or income tax in any particular
year that can be offset by net operating loss and tax credit carryforward
amounts is limited to a prescribed annual amount equal to 5.78% of the fair
market value of the Company as of July 11, 1996. Based on preliminary
calculations, the Company does not believe that any of the net operating loss or
tax credit carryforward amounts in the aggregate will be unusable solely as a
result of the annual limitation, although the amounts that can be utilized in
any year may be limited. Should the Samsung Proposal be completed as proposed,
the Company's ability to realize a benefit from its net deferred tax asset, and
a substantial portion of the Company's deferred tax assets from net operating
loss carryovers that have been offset by a valuation allowance, would be
impaired.
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.
This Annual Report on Form 10-K 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-K, 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, legal 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,
results of such undertakings being difficult to assess and potential material
adverse effects due to ultimate loss on substantive issues or the substantial
expense and loss of time connected with defense of claims; (iv) accurately
forecasting capital expenditures; (v) improving efficiencies in world wide
distribution activities; (vi) predicting the significance of the indirect sales
channel; (vii) obtaining new sources of external financing prior to the
expiration of existing or contemplated support arrangements entered into with
Samsung; and (viii) the nature and extent of Samsung's continued financial and
other support for the Company, and the outcome of the Samsung Proposal.
Assumptions relating to budgeting, marketing, advertising, product development,
litigation, taxation 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements:
Report of Independent Auditors.
Consolidated Balance Sheets at December 28, 1996, December 30, 1995, and
July 1, 1995.
Consolidated Statements of Operations for the six months ended December
30, 1995 and for the years ended December 28, 1996, July 1,
1995, and July 2, 1994.
Consolidated Statements of Shareholders' Equity for the six months ended
December 30, 1995 and for the years ended December 28, 1996,
July 1, 1995, and July 2, 1994.
Consolidated Statements of Cash Flows for the six months ended December
30, 1995 and for the years ended December 28, 1996, July 1,
1995, and July 2, 1994.
Notes to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
AST Research, Inc.
We have audited the accompanying consolidated balance sheets of AST
Research, Inc. as of December 28, 1996, December 30, 1995 and July 1, 1995, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year ended December 28, 1996, the six months ended December
30, 1995, and each of the two years in the period ended July 1, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of AST Research,
Inc. at December 28, 1996, December 30, 1995, and July 1, 1995, and the
consolidated results of its operations and its cash flows for the year ended
December 28, 1996, the six months ended December 30, 1995 and each of the two
years in the period ended July 1, 1995, in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Orange County, California
January 30, 1996
AST RESEARCH, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
December 28, December 30, July 1,
(In thousands, except share amounts) 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,063 $ 125,387 $ 95,825
Accounts receivable, net of allowance for doubtful
accounts of $20,243, $18,629, and $17,452 at
December 28, 1996, December 30, 1995, and
July 1, 1995, respectively 400,061 392,598 394,927
Inventories 139,007 252,339 311,469
Deferred income taxes 18,813 19,495 31,973
Other current assets 19,949 47,802 6,938
- --------------------------------------------------------------------------------------------------------------
Total current assets 638,893 837,621 841,132
Property and equipment, net 91,612 98,725 101,255
Other assets 100,552 119,696 79,114
- --------------------------------------------------------------------------------------------------------------
$ 831,057 $ 1,056,042 $ 1,021,501
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 175,000 $ 75,000 $ 156,000
Accounts payable, including payable to related
party of $58,394 and $31,562 at December 28, 1996
and December 30, 1995, respectively 272,693 199,346 213,202
Accrued salaries, wages and employee benefits 15,684 19,827 17,760
Other accrued liabilities 184,664 200,639 119,689
Income taxes payable 31,610 26,902 25,189
Current portion of long-term debt 291 92,361 2,420
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 679,942 614,075 534,260
Long-term debt 131,737 125,540 219,224
Other non-current liabilities 7,238 5,545 4,779
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, par value $.01; 1,000,000 shares
authorized, 500,000 shares issued and outstanding
at December 28, 1996, liquidation preference
of $32,500,000 27,780 - -
Common stock, par value $.01; 200,000,000 shares
authorized, 57,757,830, 44,679,400, and 32,412,500
shares issued and outstanding at December 28, 1996
December 30, 1995, and July 1, 1995, respectively 578 447 324
Additional capital 505,797 414,735 142,208
Retained earnings (deficit) (522,015) (104,300) 120,706
- --------------------------------------------------------------------------------------------------------------
Total shareholders' equity 12,140 310,882 263,238
- --------------------------------------------------------------------------------------------------------------
$ 831,057 $ 1,056,042 $ 1,021,501
==============================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended -------------------------------
December 28, December 30, July 1, July 2,
(In thousands, except per share amounts) 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 2,068,643 $ 1,016,283 $ 2,467,783 $ 2,367,274
Revenue from related party 35,000 - - -
- ------------------------------------------------------------------------------------------------------------------
Total revenue 2,103,643 1,016,283 2,467,783 2,367,274
Cost of sales 2,078,775 1,033,158 2,222,108 2,019,541
- ------------------------------------------------------------------------------------------------------------------
Gross profit (loss) 24,868 (16,875) 245,675 347,733
Selling, general and administrative expenses 336,367 165,746 314,982 267,386
Engineering and development expenses 40,702 19,608 36,383 38,858
Restructuring charge (credit) 6,527 12,967 - (12,500)
Other charges 26,380 - - -
- ------------------------------------------------------------------------------------------------------------------
Total operating expenses 409,976 198,321 351,365 293,744
Operating income (loss) (385,108) (215,196) (105,690) 53,989
Financing and other expense, net (32,607) (9,810) (17,675) (7,677)
- ------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (417,715) (225,006) (123,365) 46,312
Income tax provision (benefit) - - (24,056) 15,003
- ------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (417,715) $ (225,006) $ (99,309) $ 31,309
==================================================================================================================
Net income (loss) per common share:
Primary $ (8.22) $ (5.27) $ (3.07) $ 0.96
Fully diluted $ (8.22) $ (5.27) $ (3.07) $ 0.95
==================================================================================================================
Shares used in computing net income
(loss) per common share:
Primary 50,827 42,721 32,371 32,548
Fully diluted 50,827 42,721 32,371 34,866
==================================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Retained
Preferred Stock Common Stock Additional Earnings
(In thousands) Shares Amount Shares Amount Capital (Deficit)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 3, 1993 - $ - 31,579 $ 316 $ 129,784 $ 188,706
Exercise of stock options - - 755 7 9,554 -
Tax benefit related to employee stock options - - - - 1,823 -
Vesting of restricted stock - - - - 263 -
Net loss - - - - - 31,309
- ------------------------------------------------------------------------------------------------------------------
Balance at July 2, 1994 - - 32,334 323 141,424 220,015
Exercise of stock options - - 79 1 784 -
Net loss - - - - - (99,309)
- ------------------------------------------------------------------------------------------------------------------
Balance at July 1, 1995 - - 32,413 324 142,208 120,706
Issuance of common stock to related party,
net of issuance costs of $8,876 - - 12,070 121 240,443 -
Issuance of stock option to related party in
exchange for additional support - - - - 31,045 -
Exercise of stock options - - 196 2 1,039 -
Net loss - - - - - (225,006)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 30, 1995 - - 44,679 447 414,735 (104,300)
Issuance of preferred stock to related party
in exchange for additional support, net
of issuance costs of $267 500 27,780 - - - -
Issuance of common stock to repay
long-term debt, net of issuance costs
of $152 - - 4,499 45 29,803 -
Issuance of common stock to related party - - 8,499 85 59,915 -
Expenses paid by related party - - - - 1,009 -
Exercise of stock options - - 81 1 335 -
Net loss - - - - - (417,715)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1996 500 $ 27,780 57,758 $ 578 $ 505,797 $ (522,015)
==================================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended ----------------------------
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (417,715) $ (225,006) $ (99,309) $ 31,309
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 27,525 11,595 19,209 22,928
Amortization of debt issue costs and credit
guarantees 23,810 3,675 6,102 2,933
Provision (benefit) for deferred income taxes 3,024 2,047 (25,318) 8,983
Gain on sale of capital equipment (1,812) (435) (870) (4,286)
Other charges 26,380 - - -
Pen-based inventory write-off - - - 33,600
Expenses paid by related party 1,009
Change in operating assets and liabilities, net
of effects of acquisition:
Accounts receivable (5,713) 4,620 (58,714) (86,290)
Inventories 113,332 59,130 22,260 (19,808)
Other current assets 27,545 (17,318) 12,798 3,317
Accounts payable 73,773 (8,322) 2,142 29,545
Accrued salaries, wages, and employee benefits (3,942) 2,105 (4,152) 4,782
Other accrued liabilities (11,437) 64,529 9,215 (43,470)
Income taxes payable 4,708 1,713 (2,266) (17,377)
Other non-current liabilities (1,896) (8,568) 787 (8,523)
Exchange (gains) losses 2,434 2,907 (1,658) 2,097
- ------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (138,975) (107,328) (119,774) (40,260)
Cash flows from investing activities:
Purchases of capital equipment (22,445) (10,649) (26,080) (30,045)
Proceeds from disposition of capital equipment 4,274 1,611 4,474 10,673
Purchases of other assets (462) (2,811) (12,022) (1,484)
Payment related to Tandy/GRiD acquisition - - - (15,000)
- ------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,633) (11,849) (33,628) (35,856)
Cash flows from financing activities:
Short-term borrowings (repayments), net 100,000 (81,000) 106,000 (9,217)
Repayment of long-term debt (62,255) (6,877) (391) (520)
Proceeds from issuance of long-term debt - - 23 107,974
Proceeds from issuance of common stock:
To related party 60,000 240,564 - -
Other 184 1,041 785 9,561
- ------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 97,929 153,728 106,417 107,798
Effect of exchange rate changes on cash and
cash equivalents (4,645) (4,989) (10,308) (164)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (64,324) 29,562 (57,293) 31,518
Cash and cash equivalents at beginning of period 125,387 95,825 153,118 121,600
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 61,063 $ 125,387 $ 95,825 $ 153,118
==================================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended ---------------------------
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance to related party of .5 million shares
of preferred stock in exchange for a
two-year $200 million credit guarantee $ 27,780 $ - $ - $ -
Issuance of 4.5 million shares of common stock
to Tandy Corporation to pay $30 million
of the $90 million promissory note due to
Tandy Corporation $ 30,000 $ - $ - $ -
Issuance to related party of a five-year option
to purchase 4.4 million shares of common
stock at an exercise price of $.01 per share
in exchange for a two-year $200 million
credit guarantee, and a two-year $100 million
vendor line $ - $ 31,045 $ - $ -
Tax benefit of employee stock options $ - $ - $ - $ 1,823
==================================================================================================================
The Company purchased certain assets relating
to Tandy/GRiD France's personal computer
operations effective September 1, 1993. In
conjunction with the acquisition, liabilities
were assumed as follows:
Fair value of assets acquired $ - $ - $ - $ 16,571
Note payable to Tandy - - - (6,720)
- ------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ - $ - $ - $ 9,851
==================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid during the year for interest $ 11,568 $ 7,717 $ 9,937 $ 3,149
Cash paid (received) during the year for
income taxes $ (4,729) $ 913 $ 9,895 $ 22,210
==================================================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
AST Research, Inc. ("Company") and its wholly and majority owned subsidiaries.
All intercompany accounts and transactions have been eliminated in
consolidation. Accounts denominated in foreign currencies have been remeasured
into the functional currency in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation," using the
U.S. dollar as the functional currency.
Business
The Company designs, manufactures, markets, services and supports a variety
of personal computers, including desktop, notebook, and server systems marketed
under the Advantage!, Bravo, Ascentia and Manhattan brand names.
Financing Requirements
The Company's recent operations have resulted in net losses of $417.7
million, $225.0 million, and $99.3 million for fiscal year 1996, transition
period 1995, and fiscal year 1995, respectively, as well as a working capital
deficiency of $41.0 million and total shareholders' equity of $12.1 million as
of December 28, 1996. As a result, it has been necessary for the Company to
look to Samsung Electronics Co., Ltd. ("Samsung"), its largest shareholder, for
financial support while management implements changes to the Company's business
in order to return the Company to profitability. In addition to purchases of
common stock from the Company aggregating $309.5 million, Samsung has provided
credit guarantees aggregating $400 million (see Note 4) that are available to
support bank borrowings by the Company through December 31, 1998 (for which
Samsung received additional Company equity securities then valued at $58.8
million) and a $100 million vendor credit line available through November 1997
to facilitate component purchases from Samsung.
As of December 28, 1996, the Company had borrowed $175 million under bank
lines supported by Samsung guarantees and had $58.4 million due to Samsung under
the vendor credit line. As a result, the Company has additional borrowing
availability under the loan guarantees of $225 million, of which $125 million is
available under presently committed bank loan agreements. Management believes
these financial resources will be sufficient to support the Company's liquidity
requirements in fiscal 1997; however, in the event they are not, the Company
would be required to seek additional financing from Samsung or others for which
it has no current commitments.
Additionally on January 30, 1997, the Company announced that Samsung
proposed to commence negotiations to acquire all of the outstanding shares of
the Company not owned by Samsung or its affiliates at a price of $5.10 per share
(see Note 6). If this transaction were to occur, and there is no assurance that
it will ultimately occur, it would constitute a change in control under the
Company's Liquid Yield OptionTM Notes ("LYONs"), and the holders of the LYONs
have the right to require the Company to redeem the LYONs at their issue price
plus accrued original discount through the date set for such redemption. A
LYONs redemption event occurring in fiscal 1997 would result in approximately
$130 to $140 million of additional cash requirement for which the Company would
be required to seek external financing.
No assurance can be given that, if required, additional financing in
amounts in excess of the borrowing availability supported by current Samsung
guarantees will be available on acceptable terms or at all.
Management has developed plans to improve the Company's competitive
position by increasing operating efficiencies, by more focused and aggressive
marketing of the Company's products and through a sharing of expertise with
Samsung, and it anticipates that these efforts will result in improving the
Company's gross margins and operating results. However, no assurances can be
given that the Company will be successful in realizing these goals. If the
Company is unable to improve its gross margins and operating results, management
will be required to significantly adjust the Company's operations. The Company's
ability to continue its on-going operations on a long term basis is dependent
upon its ability maintain to adequate financing levels, improve gross
margins, and ultimately sustain a profitable level of operations.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fiscal Year
The Company operates within a conventional 52/53 week accounting fiscal
year. On October 26, 1995, the Company changed its fiscal year-end from the
Saturday closest to June 30 to the Saturday closest to December 31, with the
exception of certain foreign subsidiaries that will operate on a December 31
fiscal year-end. The change was made in order to align the Company's year-end
with that of its largest shareholder, Samsung Electronics Co. Ltd. ("Samsung").
The change in fiscal year is effective for the six months ended December 30,
1995 ("transition period" or "transition period 1995"). Fiscal year 1996
included 52 weeks. Transition period 1995 included 26 weeks. The fiscal years
ended July 1, 1995 and July 2, 1994 included 52 weeks.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. The industry in which the Company operates is characterized
by rapid technological change and short product life cycles. As a result,
estimates are required to provide for product returns, product obsolescence and
warranty returns. Actual results may differ, however, from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents generally consist of cash, certificates of
deposit, time deposits, commercial paper, short-term government obligations and
other money market instruments. The Company invests its excess cash in deposits
with major international banks, government securities and money market
securities of investment grade companies from a variety of industries and,
therefore, bears minimal risk. These securities have original maturity dates
not exceeding three months.
Fair Values of Financial Instruments
Fair values of cash and cash equivalents, short-term borrowings and the
current portion of long-term debt approximate cost due to the short period of
time to maturity. Fair values of long-term debt are based on quoted market
prices or on borrowing rates currently available to the Company for loans with
similar terms or maturity. The carrying amounts of the forward exchange
contracts equal their fair value and are adjusted at each balance sheet date for
changes in exchange rates. The estimated fair value amounts disclosed in Note 7
have been determined by the Company using available market information.
However, considerable judgment is necessary in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. Changes in assumptions could significantly affect the
estimates.
Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
are provided on the straight-line method over the following estimated useful
lives:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
Buildings 40 years
Machinery and equipment 3-5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of 5 years or remaining term of the lease
- --------------------------------------------------------------------------------
</TABLE>
Intangible 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." In accordance with SFAS No. 121, long-lived assets
and certain identifiable
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
intangibles held and used by the Company are 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, because the assets being tested do
not have identifiable cash flows that are largely independent of other asset
groupings.
Since adoption of SFAS No. 121, the Company has evaluated its long-lived
assets for impairment on a quarterly basis. As a result of an unexpected
deterioration in the Company's operating results for the third quarter of fiscal
year 1996 and the resulting impact on the Company's future expectations, the
Company concluded that its long-lived assets had become impaired. The decline
in the Company's revenue and gross margin during the third quarter resulted
primarily from the Company's inability to generate sufficient demand for its
products and the continued aggressive pricing environment within the computer
marketplace. As a result, the Company updated its cash flow projections for
purposes of evaluating its long-lived assets for impairment to reflect a reduced
level of sales growth and to adjust the period of time and rate by which gross
margins are expected to improve.
In accordance with SFAS 121, the impairment loss equals the difference
between the carrying value of long-lived assets, including goodwill, and the
fair value of the long-lived assets. Within the third fiscal quarter, the
Company completed an estimate of the fair value of its long-lived assets, and,
based on this estimate, the Company recorded an impairment charge of
approximately $21.6 million. The impairment charge consisted of the remaining
net book value of goodwill acquired in connection with the Company's 1993
acquisition of Tandy Corporation's ("Tandy") personal computer manufacturing
operations. The Company's estimate of fair the value of tangible assets was
based upon independent appraisals. The Company's SFAS No. 121 analysis for the
fourth quarter of fiscal year 1996, and appraisals, indicated that the fair
value of its long-lived assets approximates their net book value.
Patents are amortized using the straight-line method over the estimated
useful life of the patented technology. Licenses are amortized on a straight-
line basis over the estimated economic lives of the related assets.
Revenue Recognition
The Company recognizes revenue from product sales at the time of shipment.
In certain circumstances, the Company provides customers with stock rebalancing
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 rebalancing programs allow customers to return
product and receive credit for the invoiced price less any post-sale pricing
reductions. The effect of these programs is estimated and current period sales
and cost of sales are reduced accordingly.
Warranty Revenue and Costs
Revenue from separately stated warranty programs is deferred and recognized
over the extended warranty period, and the related extended warranty costs are
recognized as incurred.
The Company provides, by a current charge to income, an amount it estimates
will be needed to cover future warranty obligations for products sold during the
year. The accrued liability for warranty costs is included in the caption
"Other accrued liabilities" in the accompanying consolidated balance sheets.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
year ended December 28, 1996, the six months ended December 30, 1995, and the
years ended July 1, 1995, and July 2, 1994 was $71,530,000, $32,795,000,
$59,262,000 and $41,138,000 respectively.
Engineering and Development
Engineering and development costs are expensed as incurred. Substantially
all engineering and development expenses are related to developing new products
and designing significant improvements to existing products.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Grants
During fiscal year 1994, the Company obtained various grants from the
Industrial Development Authority of the Republic of Ireland. These grants
include employment, training and capital grants and extend through December
1996. Employment grants are amortized into income over a period of one year.
Employee training grants are recognized in income in the period in which the
training costs are incurred by the Company. Grants for the acquisition of
property and equipment are deferred and recognized in income on the same basis
as the related property and equipment is depreciated.
During the six months ended December 30, 1995, fiscal year 1995, and fiscal
year 1994, the Company recorded approximately $2.1 million, $8.0 million, and
$5.1 million, respectively, in grant funds received or receivable. The amount
deferred under these grants at December 28, 1996, December 30, 1995, and July 1,
1995 was $3.5 million, $6.0 million, and $6.7 million, respectively, and is
included in "Other accrued liabilities" in the accompanying consolidated balance
sheets. Total grant amounts amortized into income during fiscal year 1996, the
six-month period ended December 30, 1995, fiscal year 1995, and fiscal year 1994
were $2.5 million, $2.8 million, $5.8 million, and $0.6 million, respectively.
The Company has a ten year contingent liability to repay, in whole or in
part, grants received under certain circumstances pursuant to the Capital and
Employment Grant Agreements which began February 1994. In addition, the Company
has a five year contingent liability under the Employment Grant Agreement from
the date of first payment to repay employment grants paid in respect to any job
if such job remains vacant for a period in excess of six months. At December
28, 1996, the Company also has seven years remaining on a one million Irish
punts (U.S. $1.7 million) ten year contingent liability related to the purchase
of the manufacturing facility which began in November 1993 and is payable in the
event that the Company terminates operations in Ireland.
Income Taxes
The income tax provision (benefit) is computed on the pretax income (loss)
of the consolidated entities located within each taxing country based on the
current tax law. Deferred taxes result from the future tax consequences
associated with temporary differences between the amount of assets and
liabilities recorded for tax and financial accounting purposes. A valuation
allowance for deferred tax assets is recorded to the extent the Company cannot
determine, in accordance with the provisions of SFAS No. 109, "Accounting for
Income Taxes," that the ultimate realization of net deferred tax assets is more
likely than not. In making such determination, the Company considers estimated
future reversals of existing taxable temporary differences, estimated future
earnings and available tax planning strategies. To the extent that the
estimates of these items are reduced or not realized, the amount of the deferred
tax assets considered realizable could be adversely affected.
Incremental United States income taxes have not been provided on $70.0
million of cumulative undistributed earnings of the Company's foreign
subsidiaries. These earnings, which reflect full provision for non-U.S. income
taxes, are expected to be reinvested indefinitely in non-U.S. operations or to
be remitted substantially free of additional tax. Accordingly, no material
provision has been made for taxes that might be payable upon remittance of such
earnings nor is it practicable to determine the amount of this liability. As a
result of the restructuring plan completed in the second quarter of the six-
month period ended December 30, 1995 (Note 2), the Company provided for U.S.
taxes on $98.9 million of undistributed foreign earnings that management
believes will no longer be indefinitely reinvested in non-U.S. operations. In
fiscal year 1996, this amount was distributed as a dividend to the U.S.
subsidiary from one of its foreign subsidiaries.
Per Share Information
Primary net income per common share has been computed based upon the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares result from the assumed exercise of outstanding stock options
that have a dilutive effect when applying the treasury stock method. The fully
diluted per share calculation assumes, in addition to the above and where it
results in additional dilution, that the Company's
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Liquid Yield Option Notes were converted from the date of issuance with earnings
being increased for interest expense, net of taxes, that would not have been
incurred had conversion taken place.
Stock Option Plans
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," ("APB 25"), and related Interpretations in
accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized.
The Company records the amounts received upon the exercise of options as a
credit to common stock and additional capital. The Company realizes an income
tax benefit from the exercise or early disposition of certain stock options.
This benefit results in a decrease in current income taxes payable and an
increase in additional capital.
Reclassifications
Certain prior year balances have been reclassified to conform with the 1996
presentation.
NOTE 2. ACQUISITIONS AND RESTRUCTURING
In June 1993, the Company acquired certain assets and assumed certain
liabilities relating to Tandy Corporation's ("Tandy") personal computer
manufacturing operations and the GRiD North American and European sales
divisions. In September 1993, the Company also purchased certain assets and
assumed certain liabilities of Tandy/GRiD France. The total purchase price
(including Tandy/GRiD France) was $111.7 million and included a cash payment of
$15 million and a three-year promissory note in the principal amount of $96.7
million. The acquisitions were accounted for in accordance with the purchase
method of accounting and, accordingly, the net assets acquired were included in
the Company's consolidated balance sheets based upon their estimated fair values
at the transactions' effective dates. The Company's consolidated statements of
operations include the revenues and expenses of the acquired businesses after
the effective dates of the respective transactions.
Restructuring charges of $125 million were recorded in June 1993 in connection
with the Company's acquisition of Tandy's personal computer manufacturing and
engineering operations and GRiD's North American and European sales and
marketing operations. During fiscal year 1994, the Company completed most of
its restructuring activities and incurred asset write-downs of $50 million and
cash expenditures of $47 million related directly to its fiscal year 1994
restructuring activities. The Company recorded a $12.5 million credit in the
fourth quarter of fiscal year 1994 after concluding that most of its
restructuring activities had been completed or were adequately provided for
within the remaining restructuring accrual. At July 2, 1994, $15.2 million of
restructuring accrual remained on the Company's consolidated balance sheet.
During fiscal year 1995, the Company completed the consolidation of its
worldwide mobile computing manufacturing in Taiwan and the concurrent closure of
its Fountain Valley, California manufacturing facility. During fiscal year
1995, the Company incurred cash expenditures of approximately $4.7 million
related primarily to the closure of its Fountain Valley, California
manufacturing facility. At July 1, 1995, approximately $10.5 million of the
original restructuring accrual remained on the Company's consolidated balance
sheet. During transition period 1995, the Company incurred cash expenditures of
approximately $1.3 million related primarily to the closure of its Fountain
Valley, California manufacturing facility and at December 30, 1995, $9.2 million
of the restructuring accrual remained on the Company's consolidated balance
sheet. During fiscal 1996, the Company incurred cash expenditures of
approximately $4.0 million and at December 28, 1996, $5.2 million of the
restructuring accrual remained on the Company's consolidated balance sheet. The
remaining accrual consists of amounts provided for the minimum lease payments
for facilities that have been closed and the write-down to net realizable value
of related leasehold improvements being disposed of. The Company believes that
these restructuring activities were necessary in order to reorganize its
worldwide manufacturing, engineering, sales and service operations as well as
reposition its product lines after the June 1993 acquisition of Tandy's personal
computer operations.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2. ACQUISITIONS AND RESTRUCTURING (CONTINUED)
In the second quarter of transition period 1995, the Company implemented a
restructuring plan, separate and apart from the June 1993 charge, designed to
increase its utilization of third party board manufacturing and design and to
realign its Asia Pacific manufacturing operations. In accordance with this
plan, the Company recorded a restructuring charge of $13.0 million. Costs
included in the restructuring charge consisted primarily of employee severance,
asset write-downs, vendor cancellation charges and lease write-offs for closed
offices. The employee severance included approximately 1,500 employees
primarily in semi-skilled and skilled manufacturing positions. Approximately
$7.6 million of the charge was expected to involve cash disbursements with the
remaining costs primarily relating to reductions in net asset values. During
transition period 1995, the Company incurred cash expenditures of approximately
$0.8 million related to severance payments to terminated employees. At December
30, 1995, approximately $12.2 million of the original restructuring accrual
remained on the Company's consolidated balance sheet. During fiscal year 1996,
the Company incurred cash expenditures of $5.4 million and non-cash charges of
$3.8 million, related primarily to severance payments, asset write-downs and
lease payments for closed facilities. At December 28, 1996, $3.0 million of the
restructuring accrual remained on the Company's consolidated balance sheet,
consisting primarily provisions for lease obligations. As of December 28, 1996,
approximately $4.2 million of the total $10.0 million restructuring charge
utilized to date relates to severance payments made to the 1,532 employees who
have been terminated under this plan. As of December 28, 1996, the majority of
the restructuring has been completed, although certain lease obligations will
continue through fiscal year 1998.
In the second quarter of fiscal year 1996, the Company approved and
implemented a restructuring plan, separate and apart from the restructuring plan
implemented in transition period 1995, designed to restructure its worldwide
operations into three regional operating groups. The Company's plans included
the consolidation and/or closure of certain regional offices and reconfiguration
centers and the suspension of its notebook manufacturing operations in Taiwan,
accompanied by the transfer of notebook manufacturing to third-party original
equipment manufacturers. In accordance with this plan, the Company recorded a
restructuring charge of approximately $6.5 million in the quarter ended June 29,
1996. Costs included in the restructuring charge consist primarily of employee
severance, asset write-downs and provisions for lease obligations.
Approximately $5.8 million is expected to involve cash disbursements with the
remaining costs primarily involving asset write-downs. The employee severance
was expected to involve approximately 240 employees, across all functions and
levels. In fiscal year 1996, the Company incurred aggregate cash expenditures
of $4.1 million and non-cash charges of $0.3 million, consisting primarily of
employee severance, asset write-downs, and payments for lease obligations. At
December 28, 1996, approximately $2.1 million of the restructuring accrual
remained on the Company's consolidated balance sheet, consisting primarily of
provisions for lease obligations. As of December 28, 1996, 250 employees have
been terminated under this plan, and the total $3.1 accrued for severance
payments has been paid. At December 28, 1996, the majority of the restructuring
had been completed, although certain lease obligations will continue through
fiscal year 2001.
Although the Company believes that these restructuring activities were
necessary, no assurance can be given that these restructuring actions will be
successful or that similar actions will not be required in the future.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. SUPPLEMENTAL FINANCIAL INFORMATION
Supplemental Balance Sheet Information
Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 28, December 30, July 1,
(In thousands) 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Purchased parts $ 68,877 $ 73,012 $ 67,296
Work in process 7,380 33,823 36,686
Finished goods 62,750 145,504 207,487
- ---------------------------------------------------------------------------------------------------------------
Total $ 139,007 $ 252,339 $ 311,469
===============================================================================================================
</TABLE>
Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 28, December 30, July 1,
(In thousands) 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land $ 16,079 $ 15,961 $ 15,961
Buildings 34,285 34,253 34,824
Machinery and equipment 89,119 93,990 88,476
Furniture and fixtures 12,627 13,519 12,860
Leasehold improvements 14,097 13,174 13,140
- ---------------------------------------------------------------------------------------------------------------
166,207 170,897 165,261
Accumulated depreciation (74,595) (72,172) (64,006)
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net $ 91,612 $ 98,725 $ 101,255
===============================================================================================================
</TABLE>
Other Assets
Other assets consist of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 28, December 30, July 1,
(In thousands) 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred income taxes $ 41,674 $ 44,016 $ 33,585
Credit line guarantees, less accumulated amortization of 17,723
and $506 at December 28, 1996 and December 30, 1995,
respectively 43,350 32,519 -
Goodwill, less accumulated amortization of $8,218 and $6,615
at December 30, 1995, and July 1, 1995, respectively - 24,250 25,853
Patents,licenses and other intangibles, less accumulated
amortization of $3,672, $2,130 and $436 at December
28, 1996, December 30, 1995 and July 1, 1995, respectively 8,793 10,890 11,382
Other, net 6,735 8,021 8,294
- ---------------------------------------------------------------------------------------------------------------
Total $ 100,552 $ 119,696 $ 79,114
===============================================================================================================
</TABLE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
Other Current Accounts
Accrued royalties of $35.3 million and accrued product warranty of $48.8
million were included in "Other accrued liabilities" at December 28, 1996.
Prepaid value added taxes of $22.2 million were included in "Other current
assets," and amounts payable for value added taxes of $45.3 million were
included in "Other accrued liabilities" at December 30, 1995.
Supplemental Statements of Operations Information
Other Charges
Other charges for the fiscal year ended December 28, 1996 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
December 28,
(In thousands) 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
Asset impairment charge $ 21,643
Facility write-down to net
realizable value 1,149
Provision under Founder's Agreement 3,588
- ---------------------------------------------------------------------------------------------------------------
Total $26,380
===============================================================================================================
</TABLE>
For further information concerning the asset impairment charge, see Note 1.
Summary of Significant Accounting Policies, Intangible Assets.
As part of its second quarter restructuring plan, $1.1 million in other
charges were provided as a result of management's commitment to dispose of its
existing sales facility in France. The carrying amount of the facility, which
includes land, a building, and leasehold improvements, is approximately $3.1
million after the write-down and represents the estimated fair value less costs
to sell.
Effective July 27, 1993, the Company entered into an employment contract
("Founder's Agreement") with founder and former Chairman of the Board (now
Chairman Emeritus), Safi U. Qureshey, who was then serving as the Company's
Chief Executive Officer. The Founder's Agreement provided for five years of
salary, health and welfare benefits, two years of bonus, acceleration of stock
options and certain other benefits if active employment was terminated by the
Company or by Mr. Qureshey under specified conditions. On June 28, 1996, the
Company elected Kwang-Ho Kim as Chairman and named Mr. Qureshey Chairman
Emeritus, which would have resulted in Mr. Qureshey being entitled to such
compensation and benefits had he not agreed to defer its effectiveness to some
future date of his choice. As a result, the Company provided $3.6 million
during fiscal year 1996, representing the present value of the benefits payable
to Mr. Qureshey.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3. SUPPLEMENTAL FINANCIAL INFORMATION (CONTINUED)
Financing and other expense
Financing and other expense consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended --------------------
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income $ 2,777 $ 2,631 $ 2,362 $ 2,125
Interest expense (33,412) (8,634) (17,436) (9,937)
Other income (expense), net (1,972) (3,807) (2,601) 135
- ---------------------------------------------------------------------------------------------------------
Total financing and other expense, net $ (32,607) $ (9,810) $ (17,675) $(7,677)
=========================================================================================================
</TABLE>
NOTE 4. FINANCING ARRANGEMENTS
At December 28, 1996, the Company has a $200 million revolving credit
facility, guaranteed by Samsung as part of the Additional Support Agreement,
with a final maturity date of December 25, 1997. The credit guarantee expires
December 31, 1998. The revolving credit agreement allows the Company to borrow
at a rate of LIBOR plus 0.25% per annum, or the bank's reference rate, at the
Company's option. The Company is required to pay a commitment
fee equal to 0.125% per annum based on the average daily unused portion of the
facility. The fee is payable quarterly in arrears. At December 28, 1996, there
was $175 million outstanding as borrowings under this credit facility at an
interest rate of 6.06% per annum.
On December 13, 1996, the Company signed a Second Additional Support
Agreement (Note 6) with Samsung that provides the Company with an additional
$200 million credit guarantee through December 31, 1998. On December 18, 1996,
the Company completed the establishment of additional bank credit lines totaling
$100 million with three banks, which represents the initial $100 million that is
guaranteed by the Second Additional Support Agreement. The credit agreements
allow the Company to borrow at the prime rate. At December 28, 1996, there were
no outstanding borrowings under these credit lines.
The weighted average interest rate on total short-term borrowings as of
December 28, 1996, December 30, 1995 and July 1, 1995 was 6.06%, 8.50%, and
8.22% respectively.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 28, December 30, July 1,
(In thousands) 1996 1995 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Liquid Yield Option Notes (zero coupon convertible subordinated
notes) due 2013, less original issue discount of $184,470,
$191,063, and $194,232, at December 28, 1996,
December 30, 1995, July 1, respectively, 5.25% yield to maturity $ 130,530 $ 123,937 $ 120,768
Promissory note payable to Tandy, paid July 1996 - 90,000 96,720
Other notes payable and capital lease obligations due in various
installments through April 2002 1,498 3,964 4,156
132,028 217,901 221,644
Less current portion of long-term debt (291) (92,361) (2,420)
- -----------------------------------------------------------------------------------------------------------------
Long-term debt $ 131,737 $ 125,540 $ 219,224
=================================================================================================================
</TABLE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5. LONG-TERM DEBT (CONTINUED)
On December 14, 1993, the Company issued $315 million par value of LYONs due
December 14, 2013 and received total proceeds of approximately $111.7 million.
The LYONs are zero coupon convertible subordinated notes which were sold at a
significant discount from par value with a yield to maturity of 5.25% and a
total value at maturity of $315 million 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.
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
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. On January 30, 1997, Samsung proposed
to commence negotiations regarding the acquisition by Samsung of all of the
outstanding shares of the Company's common stock not currently owned by Samsung
or its affiliates, at a price of $5.10 per share. Samsung currently has 49.4%
beneficial ownership of the Company. If the transaction is consummated, there
would be a change in control, and the holders of the LYONs have the right to
require the Company to redeem the LYONs at their issue price plus accrued
original discount through the date set for such redemption. A LYONs redemption
event occurring in fiscal 1997 would result in approximately $130 million to
$140 million of additional cash requirement for which the Company would be
required to seek external financing. No decision has been made by the
Company with respect to the source of funds to meet the change in control
redemption requirements, should this transaction be completed.
At December 30, 1996, the assets held under capital leases total $3.1
million, net of $0.8 million in accumulated depreciation, and are included in
land and buildings in the accompanying consolidated balance sheet.
Principal repayments on long-term debt required in fiscal years 1997, 1998,
1999, 2000 and 2001 are $291,000, $282,000, $282,000, $282,000 and $282,000,
respectively, exclusive of the purchase of the LYONs, should the proposed
transaction with Samsung be completed.
NOTE 6. SHAREHOLDERS' EQUITY TRANSACTIONS
On February 27, 1995, the Company entered into a Stock Purchase Agreement
("Purchase Agreement") with Samsung providing for a significant minority
ownership interest in the Company of approximately 40%. On June 30, 1995, the
Company's shareholders approved the strategic investment and all regulatory
approval was received as of July 1, 1995. Under the terms of the Purchase
Agreement, as amended by Amendment No. 1 thereto dated June 1, 1995, and
Amendment No. 2 thereto dated July 29, 1995, Samsung purchased 6.44 million
newly issued shares of common stock from the Company, representing 19.9% of the
then outstanding shares of common stock, at $19.50 per share and commenced a
cash tender offer to purchase 5.82 million shares of common stock from the
Company's shareholders, representing 18% of the then outstanding shares of
common stock, at $22 per share. Concurrently with the acceptance of the shares
for purchase under the tender offer, Samsung also purchased 5.63 million
additional newly issued shares of common stock from the Company at $22 per share
so that its aggregate ownership interest in the Company, after completion of all
of the purchases, was approximately 40%. On July 31, 1995, the transaction was
completed and the Company received net proceeds of approximately $240 million.
On December 21, 1995, the Company signed an Additional Support Agreement with
Samsung that provides additional financial support to the Company, principally
including a guarantee 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
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 6. SHAREHOLDERS' EQUITY TRANSACTIONS (CONTINUED)
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 value of 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 million. In connection with this agreement, the Company incurred
professional fees of approximately $2 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 1998.
On July 11, 1996, the Company paid the $90 million promissory note due to
Tandy related to the Company's 1993 acquisition of Tandy's personal computer
manufacturing operations. Payment was in the form of 4,498,594 shares of the
Company's common stock, then valued at $30 million, and $60 million in cash.
Subsequent to the issuance of shares to Tandy, also on July 11, 1996, the
Company issued 8,499,336 shares of its common stock to Samsung in exchange for
$60 million in cash that was used to pay Tandy. The issuance of the common
stock to Samsung was made pursuant to a 1995 Letter of Credit Agreement between
the Company and Samsung. The equity transactions were recorded net of
professional fees of approximately $0.1 million.
On December 13, 1996, the Company signed a Second Additional Support
Agreement with Samsung to provide certain additional financial support to the
Company as consideration for 500,000 shares of non-voting preferred stock. The
shares are not subject to mandatory redemption, but each share is redeemable at
the Company's option for cash of $100.75 or 13.11 shares of the Company's common
stock, beginning in January 1999. The preferred shares carry a quarterly
cumulative dividend, beginning in 1999, at the annual rate of $4.72 per share,
with annual increases to a maximum rate of $7.96 per share in the year 2004 and
thereafter. The value of the benefits received in exchange for the preferred
stock were recorded in "Other assets" based on the estimated fair value of the
stock at the date of issuance, or $28.1 million. In connection with this
agreement, the Company incurred professional fees of approximately $0.3 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 1998.
NOTE 7. FINANCIAL INSTRUMENTS
Foreign Currency Contracts
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 includes 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 People's Republic of China
("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 June 1997 with a face value of approximately $162.6 at December 28,
1996, $162.0 million at December 30, 1995, and $162.0 million at July 1, 1995,
which approximate the Company's hedgeable net monetary asset exposure to foreign
currency fluctuations at those respective dates. For the fiscal year ended
December 28, 1996, the transition period ended December 30, 1995, and the fiscal
years ended July 1, 1995, and July 2, 1994, a net foreign currency transaction
loss of $0.4 million, loss
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 7. FINANCIAL INSTRUMENTS (CONTINUED)
of $2.9 million, gain of $1.7 million, and loss of $2.1 million respectively, is
included in the caption "Financing and other expense, net", in the accompanying
Consolidated Statements of Operations. Foreign currency borrowings at December
28, 1996, December 30, 1995, and July 1, 1995 totaled $1.5 million, $4.0
million, and $4.2 million, respectively.
Fair Values of Financial Instruments
The estimated fair values of financial instruments are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
December 28, 1996 December 30, 1995 July 1, 1995
------------------------ ----------------------- -----------------------
Carrying Estimated Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value Amount Fair Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 61,063 $ 61,063 $ 125,387 $ 125,387 $ 95,825 $ 95,825
Short-term borrowings 175,000 175,000 (75,000) (75,000) (156,000) (156,000)
Current portion of long-term debt (291) (291) (92,361) (92,361) (2,420) (2,420)
Long-term debt:
Liquid Yield Option Notes (130,530) (97,256) (a) (123,937) (107,100) (120,768) (103,950)
Other (1,499) (1,499) (1,603) (1,603) (98,456) (98,456)
Forward exchange contract liability (399) (399) (370) (370) (611) (611)
=================================================================================================================
</TABLE>
(a) Based on quoted market price as required by SFAS No. 107, "Disclosures
about Fair Value of Financial Instruments". On January 30, 1997,
Samsung proposed to commence negotiations to acquire all of the outstanding
shares of the Company's common stock not currently owned by Samsung or its
affiliates, at a price of $5.10 per share. There is no guarantee that
the transaction will ultimately occur. However, if the transaction is
consummated, there would be a change in control (Note 5) and the Company
would be required to repay the LYONs at their issue price plus accrued
original issue discount through the date set for such purchase. Therefore,
assuming completion of the transaction, the Company believes that a better
estimate of the fair market value of the LYONs at December 28, 1996 is the
accreted interest value of $130.5 million.
Concentrations of Credit Risk
The Company's foreign exchange instruments, along with cash and cash
equivalents and accounts receivable, involve elements of market and credit risk.
The counterparties to financial instruments consist of a number of major
financial institutions. In addition to limiting the amount of agreements and
contracts it enters into with any one party, the Company monitors the credit
quality of the financial institutions which are counterparties to these
financial instruments. The Company does not believe that there is significant
risk of nonperformance by the counterparties.
The Company distributes its products through various distribution channels,
including independent resellers, dealers, national distributors, national
reseller organizations, OEMs, U.S. Government approved dealers and consumer
retailers. Concentrations of credit risk are generally limited due to the
Company's broad range of distribution channels and the Company's geographically
diverse customer base. However, sales in certain European countries and into
the PRC are to a more limited customer base comprised primarily of larger
entities which may be affected by, among other things, the economic conditions
and/or political occurrences within the region. Sales into the PRC for fiscal
year 1996, transition period 1995, fiscal year 1995, and fiscal year 1994
accounted for approximately 3%, 7%, 5%, and 6%, respectively, of the Company's
total revenues.
The Company's sales are primarily to customers whose activities are related
to the retail, consumer electronics or personal computer industries. Therefore,
the Company's ability to collect trade receivables may be adversely affected by
changes or conditions impacting these industries. Credit limits, credit
insurance, ongoing credit evaluations and account monitoring procedures are
utilized to various degrees to attempt to reduce the risk of loss on the
Company's accounts receivable. No single customer accounted for more than 10%
of the Company's net sales for fiscal year 1996, transition period 1995, or for
fiscal years 1995, or 1994.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INCOME TAXES
The income tax provision (benefit) is based on income (loss) before income taxes
as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months
Ended Ended Fiscal Year Ended
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. $ (176,999) $ (139,438) $(103,930) $ 16,534
Foreign (240,716) (85,568) (19,435) 29,778
- -----------------------------------------------------------------------------------------------------------------
$ (417,715) $ (225,006) $(123,365) $ 46,312
=================================================================================================================
</TABLE>
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended ---------------------------
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal $ (3,058) $ 2,033 $ (700) $ (2,781)
State 98 107 (124) (201)
Foreign (64) (4,187) 2,086 9,002
- -----------------------------------------------------------------------------------------------------------------
(3,024) (2,047) 1,262 6,020
=================================================================================================================
Deferred:
Federal 3,119 (249) (19,971) 8,532
State (98) (50) (3,722) 105
Foreign 3 2,346 (1,625) 346
- -----------------------------------------------------------------------------------------------------------------
3,024 2,047 (25,318) 8,983
- -----------------------------------------------------------------------------------------------------------------
$ - $ - $(24,056) $ 15,003
=================================================================================================================
</TABLE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INCOME TAXES (CONTINUED)
Deferred taxes reflect the impact of future tax consequences associated
with temporary differences between the amount of assets and liabilities recorded
for tax and financial accounting purposes. These temporary differences are
determined in accordance with SFAS No. 109. Temporary differences and
carryforwards which give rise to a significant portion of deferred tax assets
and liabilities as of December 28, 1996, December 30, 1995, and July 1, 1995
are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 28, 1996 December 30, 1995 July 1, 1995
------------------------ ---------------------- -----------------------
(In thousands) Assets Liabilities Assets Liabilities Assets Liabilities
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Inventory reserves $ 13,441 $ - $ 12,726 $ - $ 11,178 $ -
Accrued liabilities 27,124 - 14,367 - 14,834 -
Undistributed foreign earnings,
net of foreign tax credit - - - (21,976) - -
Warranty reserves 12,063 - 9,868 - 4,857 -
State income taxes - (1,042) - (1,031) - (1,750)
Goodwill and intangibles amortization 3,908 - - (1,441) - (1,762)
Net operating loss carryforwards 206,340 - 147,684 - 72,362 -
Capitalized research and development
costs 21,937 - - - - -
Other 21,752 (180) 18,159 (244) 14,543 (422)
Total deferred taxes 306,565 (1,222) 202,804 (24,692) 117,774 (3,934)
Valuation allowance (244,856) - (114,601) - (48,282) -
- ------------------------------------------------------------------------------------------------------------------
$ 61,709 $ (1,222) $ 88,203 $(24,692) $ 69,492 $ (3,934)
===================================================================================================================
</TABLE>
The Company has established a valuation allowance against its deferred tax
assets in accordance with the provisions of SFAS No. 109. The $130.3 million
increase in this valuation allowance is primarily the result of management's
determination that the increased deferred tax asset resulting from the fiscal
1996 operating loss may not be realized.
In determining the actual amount of the valuation allowance required to be
established, the Company has primarily relied upon its ability to generate
future taxable income using available tax planning strategies involving the
potential sale of certain appreciated assets. 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.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INCOME TAXES (CONTINUED)
The income tax provision (benefit) differs from the amounts computed by
applying the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended ------------------------
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal income tax provision (benefit) $ (146,200) $ (78,752) $ (43,178) $ 16,209
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit - 43 (2,208) (137)
Tax on undistributed foreign earnings 32 34,631 - -
Foreign income taxed at different rates (2,093) 5,642 5,692 (10,005)
Losses producing no current tax benefit 146,148 38,870 15,916 8,589
Adjustment to deferred tax assets and
liabilities for change in tax rate - - - (1,266)
Other, net 2,113 (434) (278) 1,613
- ----------------------------------------------------------------------------------------------------------------
$ - $ - $ (24,056) $ 15,003
================================================================================================================
</TABLE>
The Company's manufacturing operations in Taiwan and the PRC operate under
complete or partial tax holidays which expire in 1997 and 1999, respectively.
The aggregate dollar amount and per share effect of these tax holidays were
immaterial for fiscal year 1996, transition period 1995 and for fiscal years
1995, and 1994.
In determining the provision (benefit) for income taxes for fiscal year
1996, the Company has utilized approximately $0.2 million of prior year net
operating loss ("NOL") carryforwards to reduce the amount of taxes otherwise
payable for such year. The Company has $630 million of remaining NOL
carryforwards which it expects will be available to offset future taxable
income. Approximately $292 million of such carryforwards relate to foreign
operations in various taxing jurisdictions of which $143 million expire in years
1997 through 2006 and $149 million have no expiration date. The remaining $338
million of such carryforwards relate to U.S. operations and expire in the years
2008 to 2012.
Sections 382 and 383 of the Internal Revenue Code of 1986 ("the Code")
place certain limitations on U.S. net operating loss carryforwards and excess
credits if one or more shareholders have increased their aggregate equity
ownership of the Company by more than 50 percentage points, within a three year
measurement period. As a result of recent shareholder equity transactions with
Tandy Corporation ("Tandy") and Samsung Electronics Co. Ltd, ("Samsung") on July
11, 1996, the Company experienced a change in ownership as defined in the Code.
Accordingly, the amount of taxable income or income tax in any particular year
that can be offset by net operating loss and tax credit carryforward amounts is
limited to a prescribed annual amount equal to 5.78% of the fair market value of
the Company as of July 11, 1996. Based on preliminary calculations, the Company
does not believe that any of the net operating loss or tax credit carryforward
amounts in the aggregate will be unusable solely as a result of the annual
limitation, although the amounts that can be utilized in any year may be
limited. On January 30, 1997 Samsung proposed to commence negotiations
regarding the acquisition of all of the outstanding shares not currently owned
by Samsung or its affiliates. Should the transaction be completed as proposed,
the Company's ability to realize a benefit from its net deferred tax asset, and
a substantial portion of the Company's deferred tax assets from net operating
loss carryovers that have been offset by a valuation allowance, would be
impaired.
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 income tax
liabilities for such years. Initially, the IRS had proposed adjustments of
approximately $12.6 million, plus accrued interest of $17.2 million.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 8. INCOME TAXES (CONTINUED)
Following the Company's request for an administrative conference to appeal the
proposed adjustments, the IRS Appeals Office returned the case to the
Examination Office for further development because the method used in
determining the original proposed adjustments was not adopted in the final
regulations. Management believes that any aggregate liability that may result
upon the final resolution of the proposed adjustments for 1987 and 1988 or the
current examinations of 1989, 1990 and 1991 will not have a material adverse
effect on the Company's consolidated financial position or results of
operations. However, management is unable to estimate the amount of any loss
that may be realized in the event of an unfavorable outcome.
NOTE 9. BENEFIT PLANS
Profit Sharing Plan
During 1983, the Company established a profit sharing plan for all
employees. The plan is a noncontributory, defined contribution plan that
provides for contributions from the Company based on eligible compensation. The
Company's contributions are determined at the discretion of the Board of
Directors and are not to exceed income before provision for income taxes and
profit sharing expense. The Company did not contribute to the plan for fiscal
year 1996, transition period 1995, or for the fiscal years 1995 and 1994.
In 1987, the Company approved a modification to the profit sharing plan
that added a 401(k) employee savings program. Under the 401(k) plan, the
Company is obligated to contribute matching amounts for employee contributions
equal to 100% on the first 2% of employee salary contributions and 50% on the
next 4% of employee salary contributions. Company contributions generally vest
over five years from the date of the employee's eligibility to participate. The
Company's contributions for the fiscal year 1996, the transition period ended
December 30, 1995, and fiscal years 1995 and 1994 amounted to $1.6 million, $1.1
million, $2.5 million, and $2.1 million, respectively.
Employee Bonus Plans
Pursuant to the Employee Bonus Plan, all employees of the Company are
eligible to receive, on a quarterly basis, a percentage of their base
compensation as a cash bonus. The percentage paid is at the discretion of
management and is limited to a maximum of 15% of the respective employee's base
quarterly compensation. For fiscal year 1996, transition period 1995 and fiscal
year 1995, no bonuses were paid. Bonuses paid for the fiscal year 1994 were
$2.0 million.
The Company also has a performance based management incentive plan for
officers and key employees. Bonuses under the plan are distributed to officers
and key employees of the Company based upon performance related criteria
determined at the discretion of the Compensation Committee of the Board of
Directors. Bonuses paid for the fiscal year 1996 were $0.5 million. For
transition period 1995 and fiscal year 1995, no bonuses were paid. Bonuses paid
for the fiscal year ended July 2, 1994 were $1.9 million.
Stock Plans
The Company has three employee stock plans, adopted in 1985, 1989 and 1995,
and three non-employee director stock plans adopted in 1991, 1994 and 1996 (the
"Plans").
In 1985, the Company adopted the Chief Executives' Plan (the "CE Plan").
The CE Plan, as amended in 1987, provided for an aggregate of 1.2 million shares
of the Company's common stock to be available to the chief executive officers,
which include the president and executive vice presidents of the Company, and
such other officers that the Board of Directors might specifically designate as
a "chief executive officer" for purposes of the CE Plan. In 1995, the CE Plan
was terminated, except as to options then outstanding. At December 28, 1996,
200,000 options remained outstanding and were exercisable at a price of $3.50
per share.
The 1989 Long-Term Incentive Program (the "1989 Program"), as amended,
provides for the granting of stock options, stock appreciation rights,
restricted stock and performance units. An amendment to the plan, adopted by
the
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9. BENEFIT PLANS (CONTINUED)
Board in 1992, and approved by a shareholder vote, annually increases shares
authorized to be issued by 2% of the number of common shares outstanding at each
fiscal year-end. Under the 1989 Program, options granted become exercisable at
the discretion of the Board of Directors or Compensation Committee and expire
ten years from the date of grant. No stock appreciation rights or performance
units have been granted under the 1989 Program.
The Company's 1991 Stock Option Plan for Non-Employee Directors (the "Non-
Employee Option Plan"), as amended in 1995, provides for an initial grant of
options to purchase 20,000 shares of the Company's common stock to each newly
appointed non-employee director. In addition, on January 1 each year, each
participant will receive an
option to purchase 12,000 shares of common stock. The aggregate number of
shares that may be issued under the Plan is 500,000. Options vest equally over
four years commencing on the first anniversary of the date of grant. Each
option is exercisable at 100% of the common stock's fair market value on the
date of grant.
In 1994, the Company adopted the AST Research, Inc. 1994 One-Time Grant
Stock Option Plan for Non-Employee Directors. The Plan, as amended in 1995,
provided for the grant of an option to purchase 50,000 shares of common stock to
each non-employee member of the Company's Board of Directors on July 1, 1994.
At December 28, 1996, 100,000 options remained outstanding and were exercisable
at a price of $14.25 per share.
In 1995, the Company adopted the President's Plan. The President's Plan
provides for an aggregate of 1,000,000 shares of the Company's common stock to
be available to the President of the Company.
In 1996, the Company adopted the 1996 Non-Employee Director Plan. Subject
to shareholder approval, this plan provides for an aggregate of 500,000 shares
of the Company's common stock to be available to the non-employee members of the
Company's Board of Directors.
The following table summarizes stock options available for grant:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months
Ended Ended Fiscal Year Ended
December 28, December 30, July 1, July 2,
(In thousands) 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period 1,767,744 1,652,631 1,605,568 2,052,143
Authorized 1,679,607 2,143,588 648,250 896,675
Granted (1,949,249) (2,579,425) (1,261,700) (1,624,400)
Canceled 3,005,413 1,345,625 747,195 380,425
Plan shares expired (67,400) (794,675) (86,682) (99,275)
- ----------------------------------------------------------------------------------------------------------------
Available for future grant 4,436,115 1,767,744 1,652,631 1,605,568
================================================================================================================
</TABLE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9. BENEFIT PLANS (CONTINUED)
A summary of the status of the Company's stock option plans as of fiscal
year 1996, transition year 1995, fiscal year 1995, and fiscal year 1994, and
changes during the years ending on those dates is presented below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Year 1996 Transition Year 1995
------------------------- -----------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning of year 5,518,875 $ 10.35 4,481,975 $ 14.86
Granted 1,949,249 5.38 2,579,425 10.50
Exercised (80,500) 4.18 (196,000) 5.29
Canceled (3,005,413) 9.23 (1,346,525) 15.90
----------- -----------
Outstanding at end of year 4,382,211 $ 6.86 5,518,875 $ 10.35
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year 2,057,260 2,183,574
- ---------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options
granted during the year $ 2.25 $ 3.47
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Year 1995 Fiscal Year 1994
---------------------------- --------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 4,046,220 $ 15.60 3,504,380 $ 14.49
Granted 1,261,700 13.95 1,624,400 17.17
Exercised (78,750) 9.97 (755,000) 12.67
Canceled (747,195) 17.95 (327,560) 17.90
----------- -----------
Outstanding at end of year 4,481,975 $ 14.86 4,046,220 $ 15.60
- ---------------------------------------------------------------------------------------------------------------
Exercisable at end of year 1,909,477 1,351,661
===============================================================================================================
</TABLE>
The following table summarizes information about stock options
outstanding at December 28, 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
Number Weighted-average Number
Range of outstanding remaining Weighted-average exercisable Weighted-average
Exercise Prices at 12/28/96 contractual life exercise price at 12/28/96 exercise price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.50 200,000 0.1 years $ 3.50 200,000 $ 3.50
4.00 to 5.00 3,241,711 8.9 4.56 1,082,010 4.58
5.25 to 8.63 70,000 8.9 8.36 17,000 8.49
10.75 to 15.00 309,000 8.0 13.46 238,500 13.70
15.13 to 22.75 561,500 5.8 17.54 519,750 17.43
---------- ----------
$ 3.50 to 22.75 4,382,211 8.0 years $ 6.86 2,057,260 $ 8.81
===============================================================================================================
</TABLE>
At December 28, 1996, 8,818,326 shares of the Company's common stock were
reserved for issuance under the Company's various stock option plans.
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock plans and accordingly, no compensation cost has been recognized.
Pro forma information regarding net income and earnings per share is required by
of Statement of Financial Accounting Standards No. 123, "Accounting for Stock
Based
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 9. BENEFIT PLANS (CONTINUED)
Compensation" ("SFAS No. 123"), and has been determined as if the Company had
accounted for employee stock options under the fair value method of SFAS No.
123. The fair value for stock options was estimated at the date of grant using
a Black-Scholes option pricing model with the following range of assumptions for
fiscal year 1996 and transition period 1995, respectively: risk-free interest
rates of 5.50% and 5.09%; volatility factors of the expected market price of the
Company's common stock of 0.54 and 0.56, and an expected life of the option of
4.1 and 5.1 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The effects
of applying SFAS 123 for providing pro forma disclosures in fiscal 1996 and in
transition period 1995 are not likely to be representative of the effects on
reported net income for future years. The Company's pro forma information
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months
Ended Ended
December 28, December 30,
(In thousands, except per share amounts) 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net loss As reported $ (417,715) $ (225,006)
Pro forma (419,920) (225,865)
Net loss per share As reported $ (8.22) $ (5.27)
Pro forma (8.26) (5.29)
===============================================================================================================
</TABLE>
In December 1990, the Board of Directors authorized the issuance of
warrants to purchase an aggregate of 80,000 shares of the Company's common stock
to its then non-employee directors. At December 28, 1996, 40,000 of these
warrants remained outstanding and were exercisable at an exercise price of
$13.88 per share. On July 27, 1992, the Board of Directors authorized the
issuance of warrants to purchase 50,000 shares of the Company's common stock to
the Company's then Chairman of the Board. At December 28, 1996, 37,500 of these
warrants remained outstanding and were exercisable at a price of $13.50 per
share.
On September 23, 1996, all outstanding stock options held by employees
(excluding executive officers and board members) were repriced with a new
exercise price of $4.63 per share, the closing market price on that date. The
repricing is subject to the condition that the options are not exercised and
employment is not terminated prior to September 22, 1997. The Company intends
to cancel and reissue new options under the Company's 1989 Long Term Incentive
Plan. The number of shares and vesting schedule of the new options grants is
the same as that of the original grant. A total of 3,035,268 options with
exercise prices ranging from $4.81 to $9.38 were repriced.
NOTE 10. SHAREHOLDER RIGHTS PLAN
On June 30, 1989, the Board of Directors adopted a Shareholder Rights Plan
which is intended to protect shareholders from unfair takeover practices. Under
the Plan, each share of common stock carries one right to obtain additional
stock or other property according to terms provided in the Plan. The rights are
not exercisable or separable from the common stock until another party acquires
at least 15% of the Company's then outstanding common stock or commences a
tender offer for at least 15% of the Company's then outstanding common stock.
In the event the Company is acquired in a merger or other business combination
transaction in which the Company is not the surviving corporation or 50% or more
of its consolidated assets or earning power are sold or transferred, each right
will entitle its holder to receive, at the then current exercise price, common
stock of the acquiring company having a market value equal to two times the
exercise price of the right. If a person or entity were to acquire 15% or more
of the outstanding shares of the Company's common stock, or if the Company is
the surviving corporation in a merger and its common stock is not changed or
exchanged, each right will entitle the holder to receive, at the then current
exercise price, common stock having a market value equal to two times the
exercise price of the right. Until a right is exercised, the holder of a right,
as such, will have no rights as a shareholder of the Company, including, without
limitation, the rights to vote as a shareholder or receive dividends.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 10. SHAREHOLDER RIGHTS PLAN (CONTINUED)
The rights, which expire on June 30, 1999, may be redeemed by the Company at a
price of $0.01 per right. At December 28, 1996, 500,000 of the 1,000,000
authorized but unissued preferred shares of the Company are reserved for
issuance upon exercise of these rights.
As a condition of entering into the Stock Purchase Agreement with Samsung, the
Company amended the Shareholder Rights Plan to allow Samsung, in accordance with
the terms and conditions of the Stockholder Agreement between the Company and
Samsung dated July 31, 1995, to acquire, without additional Board or
Stockholder approval and without triggering the Shareholders Rights Plan, up to
49.9% of the common stock during the first four years of its investment, and
after the standstill period, which now ends December 15, 1998, up to 66.67% of
the common stock except that such limits shall not apply to any acquisition by
Samsung made pursuant to a cash tender offer for all equity securities not owned
by Samsung and/or its affiliates.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its field offices, certain equipment, automobiles and
most of its operating facilities under operating lease agreements. Future
minimum lease payments under these leases approximate the following amounts:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
Fiscal Year Amount
- ---------------------------------------------------------------------------------------------------------------
<S> <C>
1997 $ 12,017
1998 8,938
1999 5,483
2000 3,355
2001 3,004
Thereafter 18,361
- ---------------------------------------------------------------------------------------------------------------
Total minimum lease payments $ 51,158
===============================================================================================================
</TABLE>
Operating lease commitments have been reduced for rental income from non-
cancelable subleases by approximately $1.8 million in 1997, $1.4 million in
1998, and $0.9 million in 1999.
Rent expense for fiscal year 1996, transition period 1995, and fiscal years
1995 and 1994, was approximately $10,496,000, $5,070,000, $11,125,000, and
$10,588,000, respectively.
Royalty Commitments
The Company has commitments for minimum guaranteed royalties under various
licensing agreements which are payable over periods ranging from one to five
years. The Company has been notified that certain of its products may also
require licenses under patents held by others. The Company evaluates these
licensing proposals on a case-by-case basis to determine whether licenses are
necessary or desirable. Although these evaluations continue, management is
accruing amounts that, in its judgment, represent the potential royalties and/or
legal costs of resolving these claims.
Employment Contracts
The Company maintains Severance Compensation Agreements with its executive
officers and its non-officer vice presidents. Such agreements provide for (i)
lump sum payments comprised of up to two years of salary and bonus and certain
other benefits for executive officers, or one year of salary and bonus and
certain other benefits for vice presidents who are not executive officers and
(ii) acceleration of the vesting of stock options upon a "change of control" of
the Company and termination of the covered employee for reasons specified in the
contract. The aggregate commitment under these Severance Compensation Agreements
should all covered employees be terminated is approximately $3.4 million.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has a severance policy for its executive officers which, in the
event of an involuntary termination other than in connection with a "change in
control," generally requires the Company to pay its President severance equal to
two years of salary and its other executive officers' severance equal to six
months of salary plus an additional month of salary for each year of employment
with the Company, up to a maximum of 12 months. Benefits are also continued
during this period.
Other Contingencies
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.
The Company is currently unable to estimate the amount of any loss that may be
realized in the event of an unfavorable outcome. However, 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. 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. 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 results
of operations 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. The Company is currently unable to estimate the amount of any loss
that may be realized in the event of an unfavorable outcome in any or all of
these cases. However, based on preliminary facts available to the Company,
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.
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Company has been named, along with Samsung and certain current and
former members of the Company's Board of Directors, as a defendant in twelve
shareholder class action lawsuits filed on or shortly after January 31, 1997.
Eleven class action complaints were filed in the Court of Chancery in New Castle
County, Delaware, under case names Miller v. Kim, et al; Tepper v. Samsung
Electronics Co., Ltd., et al.; Kenneth Steiner v. Kim, et al.; William Steiner
v. Kim, et al.; Zeiff v. AST Research, Inc., et al; Schultz v. Choo, et al.;
Ungar v. AST Research, Inc. et al.; Schnoll v. AST Research, Inc., et al.; Krim
v. AST Research, Inc., et al.; Jaroslawicz v. Kim, et al.; and Rattner v.
Samsung Electronics Co., Ltd. A separate class action complaint was filed but
not served on January 31, 1996 in the Superior Court for the County of Orange,
California, under case name Sigler v. AST Research, Inc., et al The Plaintiffs
allege that the defendants have engaged in an unlawful scheme to enable Samsung
to acquire all outstanding shares of the Company's stock not previously owned by
Samsung for inadequate consideration and in violation of the defendants'
fiduciary duties. The plaintiffs seek to enjoin Samsung's proposed purchase of
the Company's outstanding shares and request unspecified monetary damages,
including attorney and expert fees and costs. On February 27, 1997, the
plaintiffs in the Delaware cases submitted a proposed Order of Consolidation to
the court, which has not yet been entered. The litigation is in its preliminary
stages. The Company is unable at this time to predict the ultimate outcome of
these lawsuits.
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.
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one industry segment: the manufacture and sale of
personal computers, including desktop, server, and notebook computer systems.
The Company currently markets its products through retail computer dealers,
consumer retailers, international and regional distributors, value added
dealers, and value added resellers.
At the end of fiscal year 1995, the Company reorganized its worldwide sales
organization and internal reporting structure into three major geographical
groups: The Americas, which includes the United States and Canada; Europe; and
Asia Pacific, which includes Asia, the Pacific Rim and the Middle East. Prior
period geographic information has been reclassified in accordance with this new
organization.
A summary of the Company's operations by geographic area is as follows:
Year ended December 28, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Asia
(In thousands) Americas Europe Pacific Eliminated Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 1,140,808 $ 675,592 $ 252,243 $ - $ 2,068,643
Transfers between
geographic areas 214,850 649,150 455,586 (1,319,586) -
- ------------------------------------------------------------------------------------------------------------------
Net sales $ 1,355,658 $ 1,324,742 $ 707,829 $(1,319,586) $ 2,068,643
Revenue from related party 25,000 10,000 - - 35,000
- ------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,380,658 $ 1,334,742 $ 707,829 $(1,319,586) $ 2,103,643
==================================================================================================================
Operating loss $ (230,896) $ (110,771) $ (46,928) $ 3,487 $ (385,108)
==================================================================================================================
Identifiable assets $ 420,764 $ 285,534 $ 124,759 $ - $ 831,057
==================================================================================================================
</TABLE>
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 12. SEGMENT AND GEOGRAPHIC INFORMATION (CONTINUED)
[CAPTION]
<TABLE>
Six months ended December 30, 1995
- ------------------------------------------------------------------------------------------------------------------
Asia
(In thousands) Americas Europe Pacific Eliminated Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 453,054 $ 383,304 $ 179,925 $ - $ 1,016,283
Transfers between
geographic areas 140,797 378,420 419,466 (938,683) -
- ------------------------------------------------------------------------------------------------------------------
Total revenue $ 593,851 $ 761,724 $ 599,391 $ (938,683) $ 1,016,283
==================================================================================================================
Operating loss $ (149,180) $ (47,481) $ (18,974) $ 439 $ (215,196)
==================================================================================================================
Identifiable assets $ 491,243 $ 380,769 $ 184,030 $ - $ 1,056,042
==================================================================================================================
</TABLE>
[CAPTION]
<TABLE>
Year ended July 1, 1995
- ------------------------------------------------------------------------------------------------------------------
Asia
(In thousands) Americas Europe Pacific Eliminated Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 1,387,442 $ 743,561 $ 336,780 $ - $ 2,467,783
Transfers between
geographic areas 375,500 628,831 902,319 (1,906,650) -
- ------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,762,942 $ 1,372,392 $ 1,239,099 $(1,906,650) $ 2,467,783
==================================================================================================================
Operating loss $ (91,738) $ (6,362) $ (7,619) $ 29 $ (105,690)
==================================================================================================================
Identifiable assets $ 508,714 $ 287,218 $ 225,569 $ - $ 1,021,501
==================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Year ended July 2, 1994
- ------------------------------------------------------------------------------------------------------------------
Asia
(In thousands) Americas Europe Pacific Eliminated Consolidated
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers $ 1,546,010 $ 532,921 $ 288,343 $ - $ 2,367,274
Transfers between
geographic areas 404,582 251,605 904,204 (1,560,391) -
- ------------------------------------------------------------------------------------------------------------------
Total revenue $ 1,950,592 $ 784,526 $ 1,192,547 $(1,560,391) $ 2,367,274
==================================================================================================================
Operating income (loss) $ 22,786 $ (20,027) $ 44,025 $ 7,205 $ 53,989
==================================================================================================================
Identifiable assets $ 541,469 $ 257,098 $ 207,053 $ - $ 1,005,620
==================================================================================================================
</TABLE>
In determining operating income (loss) for each geographic area, sales and
purchases between geographic areas have been accounted for on the basis of
internal transfer prices set by the Company. Identifiable assets are those
tangible and intangible assets used in operations in each geographic area. The
fiscal year 1994 restructure credit of $12.5 million relates to and is included
in the Americas operating income. The transition period 1995 restructuring
charge of $13 million relates to and is included in the Asia Pacific operating
loss. The fiscal year 1996 restructuring charge of $6.5 million is included in
operating income (loss) in the geographic areas in which the actual
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
restructuring costs are expected to be incurred. This amount is comprised of
$1.1 million in the Americas segment, $3.7 million in the Europe segment and
$1.7 million in the Asia Pacific segment.
The tables below set forth selected quarterly financial information for
fiscal year 1996, transition period 1995, and fiscal year 1995 (in thousands,
except per share amounts).
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 28, 1996 First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 519,972 $ 538,759 $ 408,483 $ 601,429
Revenue from related party 10,000 15,000 - 10,000
- ------------------------------------------------------------------------------------------------------------------
Total Revenue 529,972 553,759 408,483 $ 611,429
Gross profit (loss) (19,646) 18,601 (18,762) 44,675
Net loss (115,760) (98,730) (135,268) (67,957)
Net loss per share $ (2.59) $ (2.21) $ (2.41) $ (1.18)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Six months ended December 30, 1995 First Quarter Second Quarter
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Total revenue $ 403,357 $ 612,926
Gross loss (6,769) (10,106)
Net loss (96,382) (128,624)
Net loss per share $ (2.36) $ (2.88)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Year ended July 1, 1995 First Quarter Second Quarter Third Quarter Fourth Quarter
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenue $ 495,446 $ 640,159 $ 670,176 $ 662,002
Gross profit 37,299 66,318 86,942 55,115
Net loss (39,406) (21,724) (6,548) (31,631)
Net loss per share $ (1.22) $ (.67) $ (.20) $ (.98)
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
In fiscal year 1996 and transition period 1995, the quarterly per share
amounts do not sum to the per share amounts for respective periods due to
differences in the weighted average number of shares outstanding in each
quarterly reporting period versus the weighted average number of shares
outstanding for the respective periods. In fiscal year 1996, transition period
1995 and fiscal year 1995, fully diluted per share information is anti-dilutive.
NOTE 15. RELATED PARTY TRANSACTIONS
On July 31, 1995, the Company completed the sale of 12.07 million shares
of the Company's common stock to Samsung, receiving net proceeds of
approximately $240 million.
On November 22, 1995, Samsung provided a $50 million short-term loan to
the Company at an interest rate of 7.3125% per annum. The Company repaid this
loan on December 28, 1995.
On December 21, 1995, the Company issued a five year option to Samsung
to purchase 4.4 million shares of the Company's common stock at an exercise
price of $.01 per share and allowed Samsung to add an additional member to the
Company's Board of Directors, in exchange for additional financial support,
principally including a two-year $200 million credit guarantee and a two-year
vendor credit line of $100 million for selected component purchases.
On July 11, 1996, the Company paid the $90 million promissory note due to
Tandy related to the Company's 1993 acquisition of Tandy's personal computer
manufacturing operations. Payment was in the form of 4,498,594 shares of the
Company's common stock then valued at $30 million, and $60 million in cash.
Subsequent to the issuance of shares to Tandy, also on July 11, 1996, the
Company issued 8,499,336 shares of its common stock to
AST RESEARCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
NOTE 15. RELATED PARTY TRANSACTIONS (CONTINUED)
Samsung in exchange for $60 million in cash that was used to pay Tandy. The
issuance of the common stock to Samsung was made pursuant to the 1995 Letter of
Credit Agreement between the Company and Samsung.
On October 11, 1996, Samsung provided a $50 million short-term loan to the
Company at an interest rate of 5.9% per annum. The Company repaid the loan,
including interest of $0.6 million, on December 19, 1996.
On December 13, 1996, the Company signed a Second Additional Support
Agreement with Samsung to provide certain additional financial support to the
Company as consideration for 500,000 shares of non-voting preferred stock. The
shares are not subject to mandatory redemption, but each share is redeemable at
the Company's option for cash of $100.75 or 13.11 shares of the Company's common
stock, beginning in January 1999. The preferred shares carry a quarterly
cumulative dividend, beginning in 1999, at the annual rate of $4.72 per share,
with annual increases to a maximum rate of $7.96 per share in the year 2004 and
thereafter.
On February 22, 1996, the Company entered into a Server Technology Transfer
Agreement and a Strategic Consulting Agreement with 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 provided by the Company. Under each agreement, Samsung paid $5
million to the Company. These amounts are not refundable under any circumstance
and are not contingent upon the rendering of future services by the Company. As
a result of these agreements, $10.0 million was recorded as revenue from related
party in fiscal year 1996.
On June 27, 1996, the Company entered into an Intellectual Property
Assignment Agreement with Samsung, which assigns certain patent applications of
the Company to Samsung. Samsung purchased a first group of patent applications
from the Company during the second quarter of fiscal year 1996 for $15 million
and exercised an option to purchase an additional group of patent applications
for $10 million during the fourth quarter of fiscal year 1996. A total of $25
million related to these agreements was recorded as revenue from a related party
in fiscal year 1996. The Company received $15 million in fiscal 1996, and the
remaining payment of $10 million to be received in fiscal year 1997 is not
contingent upon the rendering of future services by the Company
During fiscal year 1996, Samsung paid the salaries of certain employees of
the Company. The Company recorded a capital contribution of $1.0 million, which
represents the estimated compensation expense of the employees paid by Samsung.
During fiscal year 1996 and transition period 1995, the Company purchased
$304.7 million and $144.7 million of components and products from Samsung
respectively. Amounts payable to Samsung at December 28, 1996 and December 30,
1995 were $58.4 million and $31.6 million, respectively.
NOTE 16. SUBSEQUENT EVENT
On January 30, 1997 the Company announced that Samsung proposed to commence
negotiations to the acquire all of the outstanding shares of common stock of the
Company not currently owned by Samsung or its affiliates at a price of $5.10 per
share. Pursuant to the terms of a Stockholder Agreement between the Company and
Samsung, Samsung's ability to purchase shares and engage in other transactions
with the Company is subject to certain restrictions, including approval of the
Independent Directors (as defined in the Stockholder Agreement). The Company's
Board of Directors has formed a special committee, consisting of the Independent
Directors, to evaluate the Samsung Proposal, and to consider other options that
may be available to the Company. There is no assurance that any transaction
will ultimately occur.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for in these four items is incorporated by reference to
AST Research, Inc's, definitive proxy statement relating to its annual meeting
of stockholders, to be filed with the Commission within 120 days of the
end of fiscal year 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
See Index to Consolidated Financial Statements at Item 8 on Page 32 of
this report.
(2) Financial Statement Schedule
II - Consolidated Valuation and Qualifying Accounts and Reserves
Financial statement schedules other than the schedule listed above
have been omitted since they are either not required, not applicable,
or the information is otherwise included.
(3) Exhibits
Exhibit
Number Description
2.1 Agreement for Purchase and Sale of Assets dated June 30, 1993 between
AST Research, Inc. and Tandy Corporation, TE Electronics, Inc. and GRiD
Systems Corporation. The Schedules have been omitted and are as
described in the Agreement (incorporated by reference to referenced
exhibit number of the Company's Current Report on Form 8-K as filed with
the Securities and Exchange Commission on July 28, 1993, Commission
File No. 0-13941).
2.1.2 Circuit Board Purchase Agreement dated July 13, 1993 between AST
Research, Inc. and TE Electronics Inc. pursuant to the Agreement for the
Purchase and Sale of Assets dated June 30, 1993 (incorporated by
reference to referenced exhibit number of the Company's Annual Report on
Form 10-K for the fiscal year ended July 3, 1993, Commission File No. 0-
13941).
2.1.3 Agreement of Sale of Going Business (English translation) between AST
Research France and Tandy GRiD France, effective September 1, 1993
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on October 29, 1993, Commission File No. 0-13941).
2.2 Agreement of Stock Purchase dated as of February 27, 1995 between AST
Research, Inc. and Samsung Electronics Company Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
March 3, 1995, Commission File No. 0-13941).
2.2.1 Amendment No. 1 to Stock Purchase Agreement dated as of June 1, 1995
between AST Research, Inc. and Samsung Electronics Co., Ltd.
(incorporated by reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Amendment No. 1 to Schedule 14D-
9 as filed with the Securities and Exchange Commission on June 8, 1995,
SEC File No. 005-44159).
2.2.2 Amendment No. 2 to Stock Purchase Agreement dated as of July 29, 1995
between AST Research, Inc. and Samsung Electronics Co., Ltd.
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on August 7, 1995, Commission File No. 0-13941).
3.1 Certificate of Incorporation of AST Research, Inc., a Delaware
Corporation, as amended (incorporated by reference to referenced exhibit
number of the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on August 7, 1995 , Commission File
No. 0-13941).
3.2 Bylaws of AST Research, Inc., a Delaware corporation, as amended
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on December 22, 1995, Commission File No. 0-13941).
Exhibit
Number Description
4.1 Form of Amended and Restated Rights Agreement dated as of January 28,
1994 between the Company and American Stock Transfer & Trust Co., as
Successor Rights Agent (incorporated by reference to referenced exhibit
number of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended January 1, 1994), and Certificate of Designation of
Preferred Stock and Rights Certificate and Summary of Terms of the
Company's Shareholder Rights Plan which were included as exhibits to the
original Rights Agreement dated as of August 15, 1989 (incorporated by
reference to Exhibit 1 of the Company's Registration Statement on Form 8-
A as filed with the Securities and Exchange Commission on August 14,
1989, Commission File No. 0-13941).
4.1.1 Amendment to Rights Plan dated as of March 1, 1995 between AST Research,
Inc. and American Stock Transfer & Trust Co. (incorporated by reference
to referenced exhibit number of the Company's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on March 3, 1995,
Commission File No. 0-13941).
10.1 Lease Agreement dated November 1, 1985 pertaining to AST Europe Limited
premises at Goat Wharf, Brentford in the London Borough of Hounslow
(incorporated by reference to referenced exhibit number of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1986,
Commission File No. 0-13941).
10.2 Joint Venture Contract dated September 7, 1993 between Tianjin Economic
- Technological Development Area Business Development Co. and AST
Research (Far East) Limited (incorporated by reference to referenced
exhibit number of the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended April 2, 1994, Commission File No. 0-13941).
10.3 Employment Grant Agreement dated November 9, 1993 between the Industrial
Development Authority, AST Ireland Limited and AST Research, Inc.
(confidential treatment is requested with respect to portions of this
exhibit) (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended July 2,
1994, Commission File No. 0-13941).
10.4 Capital Grant Agreement dated November 9, 1993 between the Industrial
Development Authority, AST Ireland Limited and AST Research, Inc.
(confidential treatment is requested with respect to portions of this
exhibit) (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended July 2,
1994, Commission File No. 0-13941).
10.5 Settlement Agreement and Release dated January 1, 1995, between AST
Research, Inc. and Texas Instruments Incorporated (confidential
treatment is requested with respect to portions of this exhibit)
(incorporated by reference to referenced exhibit number of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended April 1,
1995, Commission File No. 0-13941).
10.6 Strategic Alliance Agreement dated February 27, 1995 between AST
Research, Inc., and Samsung Electronics Company, Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
March 3, 1995, Commission File No. 0-13941).
10.7 Confidentiality Agreement dated December 21, 1994 between AST Research,
Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Solicitation/Recommendation
Statement on Schedule 14D-9 as filed with the Securities and Exchange
Commission on March 6, 1995, SEC File No. 005-44159).
10.8 Registration Rights Agreement dated July 31, 1995 between AST Research,
Inc. and Samsung Electronics Company, Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.9 Stockholder Agreement dated July 31, 1995 between AST Research, Inc. and
Samsung Electronics Company, Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.10 Amendment to Stockholder Agreement dated December 21, 1995 to
Stockholder Agreement dated July 31, 1995 between AST Research, Inc. and
Samsung Electronics Company Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on December 22, 1995,
Commission File No. 0-13941).
Exhibit
Number Description
10.11 Component Sales Agreement dated July 31, 1995 between AST Research, Inc.
and Samsung Electronics Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.12 Cooperative Procurement Agreement dated July 31, 1995 between AST
Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
August 7, 1995, Commission File No. 0-13941).
10.13 Marketing Cooperation Agreement dated July 31, 1995 between AST
Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
August 7, 1995, Commission File No. 0-13941).
10.14 AST OEM Supply to SEC Agreement dated July 31, 1995 between AST
Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
August 7, 1995, Commission File No. 0-13941).
10.15 SEC OEM Supply to AST Agreement dated July 31, 1995 between AST
Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
August 7, 1995, Commission File No. 0-13941).
10.16 Joint Development and Technical Cooperation Agreement dated July 31,
1995 between AST Research, Inc. and Samsung Electronics Co., Ltd.
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on August 7, 1995, Commission File No. 0-13941).
10.17 Patent Cross License Agreement dated July 31, 1995 between AST Research,
Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.18 Employee Exchange Agreement dated July 31, 1995 between AST Research,
Inc. and Samsung Electronics Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.19 General Terms Agreement dated July 31, 1995 between AST Research, Inc.
and Samsung Electronics Co., Ltd. (incorporated by reference to
referenced exhibit number of the Company's Current Report on Form 8-K as
filed with the Securities and Exchange Commission on August 7, 1995,
Commission File No. 0-13941).
10.20 Letter Agreement dated July 31, 1995 between AST Research, Inc. and
Samsung Electronics Co., Ltd. (incorporated by reference to referenced
exhibit number of the Company's Current Report on Form 8-K as filed with
the Securities and Exchange Commission on August 7, 1995, Commission
File No. 0-13941).
10.21 Additional Support Agreement dated December 21, 1995 between AST
Research, Inc. and Samsung Electronics Co., Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
December 22, 1995, Commission File No. 0-13941).
10.22 Credit Agreement dated December 27, 1995 among AST Research, Inc., Bank
of America NT & SA as agent and the other financial institutions party
hereto (incorporated by reference to referenced exhibit number of the
Company's Transition Report on Form 10-K for the fiscal year ended
December 30, 1995, Commission File No. 0-13941).
10.23 First Amendment to Credit Agreement dated February 29, 1996 among AST
Research, Inc., Bank of America NT & SA as agent and the other financial
institutions party hereto (incorporated by reference to referenced
exhibit number of the Company's Transition Report on Form 10-K for the
fiscal year ended December 30, 1995, Commission File No. 0-13941).
Exhibit
Number Description
10.24 Server Technology Transfer Agreement dated February 22, 1996, between
AST Ireland Limited and Samsung Electronics Co. Ltd. (incorporated by
reference to referenced exhibit number of the Company's Transition
Report on Form 10-K for the fiscal year ended December 30, 1995,
Commission File No. 0-13941).
10.25 Strategic Consulting Agreement, dated February 22, 1996, between AST
Ireland Limited and Samsung Electronics Co. Ltd. (incorporated by
reference to referenced exhibit number of the Company's Quarterly Report
on Form 10-Q for the fiscal quarter ended March 30, 1996, Commission
File No. 0-13941).
10.26 Intellectual Property Assignment Agreement dated June 27, 1996, between
AST Research, Inc. and Samsung Electronics Co. Ltd. (incorporated by
reference to referenced exhibit number of the Company's Current Report
on Form 8-K as filed with the Securities and Exchange Commission on June
28, 1996, Commission File No. 0-13941).
10.27 Second Additional Support Agreement dated December 13, 1996 between AST
Research, Inc. and Samsung Electronics Co., Ltd., (incorporated by
reference to referenced exhibit number of the Company's' Current Report
on Form 8-K as filed with the Securities and Exchange Commission on
December 26, 1996, Commission File No. 0-13941).
10.28 Credit Agreement dated December 12, 1996 between AST Research, Inc. and
ABN AMRO Bank, N.V. (incorporated by reference to referenced exhibit
number of the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 26, 1996, Commission File
No. 0-13941).
10.29 Credit Agreement dated December 13, 1996 between AST Research, Inc. and
Bank of America NT & SA (incorporated by reference to referenced exhibit
number of the Company's Current Report on Form 8-K as filed with the
Securities and Exchange Commission on December 26, 1996, Commission File
No. 0-13941).
10.30 Credit Agreement dated December 13, 1996 between AST Research, Inc. and
Societe General (incorporated by reference to referenced exhibit number
of the Company's Current Report on Form 8-K as filed with the Securities
and Exchange Commission on December 26, 1996, Commission File No. 0-
13941).
10.31 Second Amendment to Credit Agreement December 13, 1996 among AST
Research, Inc., Bank of America NT & SA as agent and the other financial
institutions party hereto (incorporated by reference to referenced
exhibit number of the Company's Current Report on Form 8-K as filed with
the Securities and Exchange Commission on December 26, 1996, Commission
File No. 0-13941).
10.32 First Intellectual Property Option Exercise dated December 17, 1996
between AST Research and Samsung Electronics Company Limited
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on December 26, 1996, Commission File No. 0-13941).
Executive Compensation Plans and Arrangements
10.75* 1987 Employee Bonus Plan (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 1986, Commission File No. 0-13941).
10.76* Form of Indemnification Agreement, as amended to date.
10.77* Form of Indemnification Trust Agreement (incorporated by reference to
referenced exhibit number of the Company's Registration of Securities of
Certain Successor Issuers on Form 8-B, Commission File No. 0-13941).
10.78* 1989 Long-Term Incentive Program (incorporated by reference to exhibit
numbers 4.1, 4.2, 4.3 and 4.4 of the Company's Registration Statement on
Form S-8, Registration No. 33-29345).
10.79* Amendment to 1989 Long-Term Incentive Program related to increase in
number of shares (incorporated by reference to referenced exhibit number
of the Company's Annual Report on Form 10-K for the fiscal year ended
June 27, 1992, Commission File No. 0-13941).
Exhibit
Number Description
10.80* Nonqualified Common Stock Option Agreement for officers under the 1989
Long-Term Incentive Program, approved by Compensation Committee January
23, 1992 pursuant to administrative authority under such plan
(incorporated by reference to referenced exhibit number in the Company's
Annual Report on Form 10-K for the fiscal year ended June 27, 1992,
Commission File No. 0-13941).
10.81* Amendment to Officers Nonqualified Common Stock Option Agreement,
approved by Compensation Committee January 23, 1992 pursuant to
administrative authority under such plan (incorporated by reference to
referenced exhibit number in the Company's Annual Report on Form 10-K
for the fiscal year ended June 27, 1992, Commission File No. 0-13941).
10.82* Amendment to AST Research, Inc. 1989 Long-Term Incentive Program
(incorporated by reference to referenced exhibit number of the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended January 1,
1994, Commission File No. 0-13941).
10.83* Supplemental Medical Plan for Executives of AST Research, Inc.
(incorporated by reference to referenced exhibit number of the Company's
Annual Report on Form 10-K for the fiscal year ended June 30, 1989,
Commission File No. 0-13941).
10.84* Form of Warrant Certificate issued to Non-Employee Directors in December
1990 (incorporated by reference to referenced exhibit number of the
Company's Annual Report on Form 10-K for the fiscal year ended June 28,
1991, Commission File No. 0-13941).
10.85* Form of Warrant Certificate issued to Non-Employee Director in July 1992
(incorporated by reference to referenced exhibit number of the Company's
Annual Report on Form 10-K for the fiscal year ended June 27, 1992,
Commission File No. 0-13941).
10.86* Form of Amendment to Warrant Certificate dated as of February 27, 1995
(incorporated by reference to referenced exhibit number of the
Company's Solicitation/Recommendation Statement on Schedule 14D-9 as
filed with the Securities and Exchange Commission on March 6, 1995, SEC
File No. 005-44159).
10.87* 1991 Stock Option Plan for Non-Employee Directors (incorporated by
reference to referenced exhibit number of the Company's Annual Report on
Form 10-K for the fiscal year ended June 28, 1991, Commission File No. 0-
13941).
10.88* Form of Nonqualified Stock Option agreement under 1991 Stock Option Plan
for Non-Employee Directors (incorporated by reference to referenced
exhibit number of the Company's Annual Report on Form 10-K for the
fiscal year ended June 28, 1991, Commission File No. 0-13941).
10.89* Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-Employee
Directors (incorporated by reference to referenced exhibit number of the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
January 1, 1994, Commission File No. 0-13941).
10.90* Amendment to the AST Research, Inc. 1991 Stock Option Plan for Non-
Employee Directors dated February 27, 1995 (incorporated by reference to
referenced exhibit number of the Company's Solicitation and
Recommendation Statement on Schedule 14D-9 as filed with the Securities
and Exchange Commission on March 6, 1995, SEC File No. 005-44159).
10.91* Amendment to AST Research, Inc. 1991 Stock Option Plan for Non-Employee
Directors (comprised of resolutions adopted by the Board of Directors on
July 27, 1995) (incorporated by reference to Exhibit 4.1 of the
Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on January 26, 1996, Registration
No. 333-00489).
10.92* Employment Agreement dated as of July 27, 1993 between Safi U. Qureshey
and AST Research, Inc. (incorporated by reference to referenced exhibit
number of the Company's Annual Report on Form
10-K for the fiscal year ended July 3, 1993, Commission File No. 0-
13941).
10.93* Amendment to and Clarification of Employment Agreement dated as of
February 27, 1995 between AST Research Inc. and Safi U. Qureshey
(incorporated by reference to referenced exhibit number of the Company's
Current Report on Form 8-K as filed with the Securities and Exchange
Commission on March 3, 1995, Commission File No. 0-13941).
10.94* Form of Severance Compensation Agreement (incorporated by reference to
referenced exhibit number of the Company's Annual Report on Form 10-K
for the fiscal year ended July 3, 1993, Commission File No. 0-13941).
Exhibit
Number Description
10.95* Form of Amendment to Executive Officer Severance Compensation Agreement
(incorporated by reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 as filed with
the Securities and Exchange Commission on March 6, 1995, SEC File No.
005-44159).
10.96* Form of Amendment to Vice President Severance Compensation Agreement
(incorporated by reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 as filed with
the Securities and Exchange Commission on March 6, 1995, SEC File No.
005-44159).
10.97* Amendment to Severance Compensation Agreement dated February 27, 1995
between AST Research, Inc. and Safi U. Qureshey (incorporated by
reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 as filed with
the Securities and Exchange Commission on March 6, 1995, SEC File No.
005-44159).
10.98* Involuntary Termination Policy dated September 2, 1994 (incorporated by
reference to referenced exhibit number of the Company's Annual Report on
Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 0-
13941).
10.99* AST Research, Inc. 1994 One-Time Grant Stock Option Plan for Non-
Employee Directors (incorporated by reference to referenced exhibit
number of the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended January 1, 1994, Commission File No. 0-13941).
10.100*Option Agreement Under AST Research, Inc. 1994 One-Time Grant Stock
Option Plan for Non-Employee Directors (incorporated by reference to
referenced exhibit number of the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended January 1, 1994, Commission File No. 0-
13941).
10.101*Amendment to the AST Research, Inc. 1994 One-Time Grant Stock Option
Plan for Non-Employee Directors dated February 27, 1995 (incorporated by
reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 as filed with
the Securities and Exchange Commission on March 6, 1995, SEC File No.
005-44159).
10.102*Form of Acknowledgment/Consent to Waiver of Rights under the 1991 Stock
Option Plan for Non-Employee Directors and/or AST Research Inc. 1994 One-
Time Grant Stock Option Plan for Non-Employee Directors (incorporated by
reference to referenced exhibit number of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 as filed with
the Securities and Exchange Commission on March 6, 1995, SEC File No.
005-44159).
10.103*Performance Based Annual Management Incentive Plan (incorporated by
reference to referenced exhibit number of the Company's Annual Report on
Form 10-K for the fiscal year ended July 2, 1994, Commission File No. 0-
13941).
10.104*President's Plan (comprised of resolutions adopted by the Board of
Directors on November 2, 1995) (incorporated by reference to Exhibit
4.1 of the Company's Registration Statement on Form S-8 as filed with
the Securities and Exchange Commission on January 26, 1996, Registration
No. 333-00487).
10.105*Form of Nonqualified Stock Option Agreement pertaining to the
President's Plan (incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-8 as filed with the
Securities and Exchange Commission on January 26, 1996, Registration No.
333-00487).
10.106*AST Research, Inc. Profit Sharing Plus Plan, amended and restated as of
July 1, 1993 (incorporated by reference to referenced exhibit number of
the Company's Transition Report on Form 10-K for the fiscal year ended
December 30, 1995, Commission File No. 0-13941).
10.107*First Amendment to the AST Research, Inc. Profit Sharing Plus Plan
effective January 1, 1996 (incorporated by reference to referenced
exhibit number of the Company's Transition Report on Form 10-K for the
fiscal year ended December 30, 1995, Commission File No. 0-13941).
10.108*# 1996 Non-Employee Director Plan (comprised of resolutions adopted
by the Board of Directors on November 26, 1996).
21. # Subsidiaries of the registrant.
23. # Consent of Independent Auditors.
24. # Power of Attorney (included on the signature pages of this Annual Report
on Form 10-K).
27. # Financial Data Schedule.
# Filed herewith
*Indicates a management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K pursuant to
Item 14(c).
(b) Reports on Form 8-K
On October 7, 1996, the Company filed a report on Form 8-K reporting, under
Item 5 thereof, that Michael Willcocks, Senior Vice President, Asia
Pacific, and Gerald T. Devlin, Senior Vice President, Americas, resigned.
The Company also announced that Hoon Choo joined the Company as Senior Vice
President, Asia Pacific.
On October 11, 1996, the Company filed a report on Form 8-K reporting,
under Item 5 thereof, that Dennis R. Leibel, Senior Vice President, Legal,
Administration and Secretary, retired.
On November 11, 1996, the Company filed a report on Form 8-K reporting,
under Item 5 thereof, that it signed a non-binding letter of intent with
Samsung Electronics Co., Ltd. ("Samsung") to provide certain additional
financial support to the Company as consideration for shares of non-voting
Preferred Stock. The Company also reported that Roger W. Johnson has been
named as a member of the Company's Board of Directors. In addition, the
Company released results of the third quarter of fiscal year 1996,
reporting a net loss of $135.3 million, or $2.41 per share.
On December 26, 1996, the Company filed a report on Form 8-K reporting,
under Item 5 thereof, that it signed a Second Additional Support Agreement
with Samsung Electronics Co. Ltd. ("Samsung") to provide certain additional
financial support to the Company as consideration for shares of non-voting
preferred stock. In addition, on December 26, 1996, the Company reported
that it renewed its present $200 million credit line with a consortium of
nine banks. The Company further reported that Samsung has exercised its
option to purchase a first group of intellectual properties pursuant to the
Intellectual Property Assignment Agreement dated June 27, 1996 for a
payment of $10 million.
AST Advantage!, AST Adventure!, AST Premmia, AST Research, GRiDPAD, GRiD, Victor
and PalmPad are registered trademarks of AST Research, Inc. AST Computer, the
AST Computer logo, AST Works, Ascentia, ASTVision, Pronto!, Pronto! Pro,
Percepta, Bravo, Convertible, ExeCare, Manhattan, PowerExec, and Premmia are
trademarks of AST Research, Inc. OverDrive and Pentium are registered
trademarks of Intel Corporation. Pentium Pro is a trademark of Intel
Corporation. OS/2 is a registered trademark of International Business Machines
Corporation. NetWare is a registered trademark of Novell, Inc. MS-DOS is a
registered trademark and Encarta is a trademark of Microsoft Corporation. Radio
Shack is a registered service mark of Tandy Corporation. Prodigy is a
registered trademark of the Prodigy Services Corporation. America Online is a
registered service mark of America Online, Inc. CompuServe is a registered
service mark of CompuServe, Inc. Liquid Yield Option and LYON are trademarks of
Merrill Lynch & Co. All other product or service names mentioned herein may be
trademarks or registered trademarks of their respective owners. Reference to
the "Energy Star" program does not represent EPA endorsement of any product or
service. Copyright (C)1996 AST Research, Inc. All Rights Reserved.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on March 28, 1997.
AST RESEARCH, INC.
Date: March 28, 1997 By: \s\ WON S. YANG
Won S. Yang
Senior Vice President
and Chief Financial Officer
(Acting)
POWER OF ATTORNEY
We, the undersigned directors and officers of AST Research, Inc., do hereby
constitute and appoint Young Soo Kim our true and lawful attorney-in-fact and
agent, with full power of substitution to do any and all acts and things in our
name and behalf in our capacities as directors and officers and to execute any
and all instruments for us and in our names in the capacities indicated below,
which said attorney-in-fact and agent may deem necessary or advisable to enable
said corporation to comply with the Securities Exchange Act of 1934, as amended,
and any rules, regulations and requirements of the Securities and Exchange
Commission, in connection with this Annual Report on Form 10-K, including
specifically but without limitation, power and authority to sign for us or any
of us in our names in the capacities indicated below, any and all amendments
(including post-effective amendments) hereto; and we do hereby ratify and
confirm all that said attorney-in-fact and agent shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
Signature Title Date
\s\Young Soo Kim President, Chief Executive Officer
Young Soo Kim and Director
(Principal Executive Officer) March 28, 1997
s\Won Suk Yang Senior Vice President, and Chief
Won Suk Yank Financial Officer
(Acting Principal Financial Officer) March 28, 1997
\s\Mark P. de Raad Vice President, Controller and
Mark P. de Raad Principal Accounting Officer March 28, 1997
\s\Kwang-Ho Kim Chairman of the Board and Director March 28, 1997
Kwang-Ho Kim
\s\Safi U. Qureshey Chairman of the Board, Emeritus
Safi U. Qureshey and Director March 28, 1997
\s\Richard J. Goeglein
Richard J. Goeglein Director March 28, 1997
\s\Roger W. Johnson
Roger Johnson Director March 28, 1997
\s\Ho Moon Kang
Ho Moon Kang Director March 28, 1997
\s\Jack W. Peltason
Jack W. Peltason Director March 28, 1997
\s\Bo-Soon Song
Bo-Soon Song Director March 28, 1997
\s\Yong-Ro Song
Yong-Ro Song Director March 28, 1997
SCHEDULE II
AST RESEARCH, INC.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
AT AND FOR THE YEAR ENDED DECEMBER 28, 1996, THE SIX MONTHS ENDED
DECEMBER 30, 1995, AND AT AND FOR THE YEARS ENDED JULY 1, 1995, AND JULY 2, 1994
(IN THOUSANDS)
[CAPTION]
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months
Ended Ended Fiscal Year Ended
December 28, December 30, July 1, July 2,
1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Balance, beginning of period $ 18,629 $ 17,452 $ 17,564 $ 11,671
Additions charged to expense 7,135 2,321 6,091 13,219
Reductions (5,521) (1,144) (6,203) (7,326)
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 20,243 $ 18,629 $ 17,452 $ 17,564
==================================================================================================================
ALLOWANCE FOR SALES RETURNS AND
PRICE PROTECTION
Balance, beginning of period $ 26,233 $ 19,514 $ 15,137 $ 9,120
Net additions (reductions) charged to sales 20,457 6,719 4,377 6,017
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 46,690 $ 26,233 $ 19,514 $ 15,137
==================================================================================================================
RESERVE FOR EXCESS OR OBSOLETE INVENTORY
Balance, beginning of period $ 49,351 $ 45,536 $ 65,268 $ 35,595
Net additions (reductions) charged to expense 3,870 3,815 (19,732) 29,673
- ------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 53,221 $ 49,351 $ 45,536 $ 65,268
==================================================================================================================
</TABLE>
AST RESEARCH, INC.
a Delaware corporation
Meeting of the Board of Directors
November 26, 1996
Nonqualified Stock Options under 1996
Non-Employee Director Plan
WHEREAS, it has been proposed that this Corporation adopt a stock option
plan covering an aggregate of 500,000 shares of the Corporation's Common Stock,
$0.01 par value per share (the "Common Stock"), the participants in which would
be limited to non-employee members of the Corporation's Board of Directors; and
WHEREAS, it is deemed to be in the best interests of this Corporation and
all its stockholders that this Corporation adopt such plan and issue options
thereunder;
NOW, THEREFORE, BE IT RESOLVED, that this Board of Directors hereby adopts
a plan to be designated as the "1996 Non-Employee Director Plan" (herein, the
"Plan"), and authorizes the officers of the Corporation to develop and prepare
or cause to be developed and prepared a form of Nonqualified Stock Option
Agreement to be used under such Plan, and this Board of Directors hereby
approves the form to be so developed and prepared; and
RESOLVED FURTHER, that the Plan shall cover the sale and issuance of up to
an aggregate of 500,000 shares of the Corporation's Common Stock, and the Board
of Directors shall be authorized to grant nonqualified stock options under the
Plan to non-employee members of the Board of Directors, subject, however, to
stockholder approval of the Plan; and
RESOLVED FURTHER, that these resolutions and the form of Nonqualified Stock
Option Agreement used hereunder shall comprise the Plan and, pursuant to the
Plan, nonqualified stock options covering an aggregate of 50,000 shares of
Common Stock are hereby granted to Roger Johnson, and nonqualified stock options
covering an aggregate of 70,000 shares of Common Stock are hereby granted to
each of Richard Goeglein and Jack Peltason, subject, however, to stockholder
approval of the Plan, such options to be exercisable at $4,0625 per share, which
price is hereby determined to be the per share fair market value of the Common
Stock on the date hereof; and
RESOLVED FURTHER, that Messrs. Johnson, Goeglein and Peltason hereby excuse
themselves from the vote with respect their respective stock option grants, but
not from the unanimous approval of the Plan's adoption or of the other stock
option grants and related matters set forth herein; and
RESOLVED FURTHER, that the foregoing grants to Messrs. Johnson, Goeglein
and Peltason of nonqualified stock options shall vest ratably over a period of
four years from the date hereof; and
RESOLVED FURTHER, that these resolutions and the proposed issuance of
nonqualified stock options shall comprise an employee stock option plan or
agreement for all purposes under the California Corporations Code, including
Section 408(a) thereof, and the U.S. Securities Laws, and that only the
Corporation's non-employee directors shall be entitled to participate in the
Plan; and
RESOLVED FURTHER, that 500,000 shares of the Corporation's Common Stock are
hereby reserved for issuance under the pursuant to the terms of the Plan, and
when the purchase price therefor shall have been received, as determined from
time to time by the Corporation, shall be duly and validly issued, fully paid
and nonassessable shares of the Corporation's Common Stock, and that the
consideration so received for such shares shall be credited to the appropriate
Common Stock or other capital accounts of the Corporation; and
RESOLVED FURTHER, that the officers of the Corporation be, and they hereby
are, authorized and directed to prepare or have prepared a Registration
Statement on Form S-8 (the "Registration Statement") under the 1933 Act,
relating to the Plan covering the shares of Common Stock issuable under the
Plan, and the appropriate officers of the Corporation are authorized and
directed, in the name and on behalf of the Corporation, to execute and cause to
be filed with the SEC under the 1933 Act such Registration Statement (including
the exhibits listed therein), with such changes therein and additions thereto as
such officers may, with the advice of counsel, approve, the filing thereof to be
conclusive evidence of their approval, and to execute and cause to be filed with
the SEC all such amendments to such Registration Statement and all certificates,
exhibits, documents, letters and other instruments in connection therewith as
they may, with the advice of counsel, deem necessary or advisable to effect the
Plan; and
RESOLVED FURTHER, that Randall G. Wick, Vice President of the Corporation,
is appointed as the Agent for Service of Process for the Corporation to be named
in the Registration Statement, with all other powers incident to such
appointment; and
RESOLVED FURTHER, that the directors hereby appoint Messrs. Won Suk Yang
and Randall G. Wick, or either of them, as the true and lawful attorneys and
agents for the Corporation, each with the power of substitution, to do any and
all acts and things in the Corporation's name and behalf, and to execute any and
all instruments for the Corporation in its name, which said attorneys and
agents, or either of them, may deem necessary or advisable to enable this
Corporation to comply with the 1933 Act, and any rules, regulations and
requirements of the SEC in connection with the Registration Statement, including
specifically, but without limitation, power and authority to sign for this
Corporation in its name, any and all amendments (including post-effective
amendments) thereto; and the Corporation does hereby ratify and confirm all that
said attorneys and agents, or their substitute or substitutes, or any one of
them, shall do or cause to be done by virtue here; and
RESOLVED FURTHER, that this Board of Directors hereby deems the grant and
issuance of stock options and shares of Common Stock under the Plan to be exempt
from qualification under the California Corporations Code pursuant to Section
25100(o) thereof; and
RESOLVED FURTHER, that the officers of the Corporation be, and each there
of hereby is, authorized to effect the notification of The Nasdaq Stock Market
of the adoption of the Plan and of the Corporation's intent to obtain
stockholder approval of such Plan, and also to effect the additional listing on
The Nasdaq Stock Market of the 500,000 shares of Common Stock reserved for
issuance under the Plan, and to execute and deliver such documents and to do and
perform such further acts as may be required to ensure the continued listing of
the Corporation's Common Stock on The Nasdaq Stock Market; and
RESOLVED FURTHER, that the officers of the Corporation be, and each thereof
hereby is authorized to execute and deliver such further documents and
instruments and to do and perform such other acts as may be necessary or
advisable in order to carry out and perform the purposes and intentions of the
foregoing resolutions; and
RESOLVED FURTHER, that the Secretary or any Assistant Secretary of the
Corporation is authorized to certify and deliver a copy of this resolution, and
any one or more of the foregoing resolutions, to such persons, firms or
corporations as he may deem necessary or advisable.
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
FOR THE YEAR ENDED DECEMBER 28, 1996, THE SIX MONTHS ENDED DECEMBER 30, 1995,
AND FOR THE YEARS ENDED JULY 1, 1995, AND JULY 2, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Fiscal Year Six Months Fiscal Year Ended
Ended Ended --------------------
December 28, December 30, July 1, July 2,
(In thousands, except per share amounts) 1996 1995 1995 1994
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings (loss) per share
Shares used in computing primary earnings (loss) per share:
Weighted average shares of common stock outstanding 50,827 42,721 32,371 31,921
Effect of stock options treated as equivalents under
the treasury stock method - - - 627
- -----------------------------------------------------------------------------------------------------------------
Weighted average common and common equivalent
shares outstanding 50,827 42,721 32,371 32,548
Net income (loss) $(417,715) $(225,006) $(99,309) $ 31,309
Earnings (loss) per share - primary $ (8.22) $ (5.27) $ (3.07) $ 0.96
=================================================================================================================
Fully diluted earnings (loss) per share
Shares used in computing fully diluted earnings (loss)
per share:
Weighted average shares of common stock outstanding 50,827 42,721 32,371 31,921
Effect of stock options treated as equivalents under
the treasury stock method - - - 685
Shares assumed issued on conversion of
Liquid Yield Option Notes - - - 2,260
- -----------------------------------------------------------------------------------------------------------------
Total fully diluted shares outstanding 50,827 42,721 32,371 34,866
Net income (loss) - fully diluted earnings per share:
Net income (loss) - primary earnings per share $(417,715) $(225,006) $(99,309) $ 31,309
Adjustment for interest on LYONs, net of tax - - - 1,950
- -----------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $(417,715) $(225,006) $(99,309) $ 33,259
Earnings (loss) per share - fully diluted $ (8.22) $ (5.27) $ (3.07) $ 0.95
=================================================================================================================
</TABLE>
EXHIBIT 21
LIST OF SUBSIDIARIES
Jurisdiction of
Name Organization
AST Europe Limited United Kingdom
AST Research (Far East) Limited Hong Kong
AST Computer (China) Limited People''s Republic of China
AST Research France S.A.R.L. France
AST Research Deutschland GmbH Germany
AST Taiwan Ltd. Taiwan
AST Research (Japan) K.K. Japan
AST Research (Switzerland) S.A. Switzerland
AST Australia Pty. Limited Australia
AST Research Italia S.p.A. Italy
AST Canada Inc. Canada
AST Middle East Limited United Arab Emirates (Dubai)
AST Middle East, Inc. United States of America
AST de Mexico S.A. de C.V. Mexico
AST Benelux N.V. Belgium
AST Research Spain, S.L. Spain
AST Singapore Pte. Ltd. Singapore
AST Sweden AB Sweden
AST Denmark A/S Denmark
AST Finland OY Finland
AST Holdings Ireland Limited Ireland
AST Ireland Limited Ireland
AST Distribution Ireland Limited Ireland
AST New Zealand Limited New Zealand
AST Norway AS Norway
AST Korea Ltd. Korea
AST Computer and Services (M) Sdn. Bhd. Malaysia
AST Computer Netherlands B.V. The Netherlands
AST Innovations, Inc. United States
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 2-96552 and 33-1112) pertaining to the AST Research, Inc.
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan - 1983 (as amended); in the Registration Statements (Form S-8 Nos. 33-1111
and 33-30666) pertaining to the Chief Executives' Plan (as amended); in the
Registration Statements (Form S-8 Nos. 33-29345, 33-57234 and 333-00485)
pertaining to the 1989 Long-Term Incentive Program (as amended); in the
Registration Statements (Form S-8 Nos. 33-52482 and 333-00489) pertaining to the
Non-Employee Directors' Common Stock Purchase Warrants and 1991 Stock Option
Plan for Non-Employee Directors; in the Registration Statement (Form S-8 No. 33-
55241) pertaining to the AST Research, Inc. 1994 One-Time Grant Stock Option
Plan for Non-Employee Directors; and in the Registration Statement (Form S-8 No.
333-00487) pertaining to the President's Plan of AST Research, Inc. of our
report dated January 30, 1997, with respect to the consolidated financial
statements and schedule of AST Research, Inc. included in this Annual Report
(Form 10-K) for the year ended December 28, 1996.
Ernst & Young LLP
Orange County, California
March 28, 1997
<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> 12-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 61,063
<SECURITIES> 0
<RECEIVABLES> 420,304
<ALLOWANCES> 20,243
<INVENTORY> 139,007
<CURRENT-ASSETS> 638,893
<PP&E> 166,207
<DEPRECIATION> 74,595
<TOTAL-ASSETS> 831,057
<CURRENT-LIABILITIES> 679,942
<BONDS> 131,737
0
27,780
<COMMON> 578
<OTHER-SE> (16,218)
<TOTAL-LIABILITY-AND-EQUITY> 831,057
<SALES> 2,068,643
<TOTAL-REVENUES> 2,106,643
<CGS> 2,078,775
<TOTAL-COSTS> 2,078,775
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,779
<INTEREST-EXPENSE> 33,412
<INCOME-PRETAX> (417,715)
<INCOME-TAX> 0
<INCOME-CONTINUING> (417,715)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (417,715)
<EPS-PRIMARY> (8.22)
<EPS-DILUTED> (8.22)
</TABLE>
