SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
----------- ------------
COMMISSION FILE NO. 0-13941
---------------------------------
AST RESEARCH, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-3525565
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
16215 ALTON PARKWAY
IRVINE, CALIFORNIA 92718
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-4141
--------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
-
There were 57,964,830 shares of the registrant's Common Stock, par value
$.01 per share, outstanding on April 25, 1997.
AST RESEARCH, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at March 29, 1997 (Unaudited)
and December 28, 1996 3
Condensed Consolidated Statements of Operations
(Unaudited) for the three months ended
March 29, 1997 and March 30, 1996 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) for the three months ended
March 29, 1997 and March 30, 1996 5
Notes to Condensed Consolidated Financial
Statements (Unaudited) 6-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12-22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23-24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURE 25
This Quarterly Report on Form 10-Q includes certain forward-looking statements,
the realization of which may be affected by certain important factors discussed
in `Management's Discussion and Analysis of Financial Condition and Results of
Operations''and ``Additional Factors That May Affect Future Results''
thereunder and elsewhere herein.
AST RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
March 29, December 28,
1997 1996
(In thousands, except share amounts) (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 31,699 $ 61,063
Accounts receivable, net of
allowance for doubtful accounts
of $18,741 at March 29, 1997
and $20,243 at December 28, 1996,
respectively 287,146 400,061
Inventories 139,571 139,007
Deferred income taxes 18,888 18,813
Other current assets 31,056 19,949
- --------------------------------------------------------------------------------
Total current assets 508,360 638,893
Property and equipment, net 95,407 91,612
Other assets 93,618 100,552
- --------------------------------------------------------------------------------
$ 697,385 $831,057
================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
Current liabilities:
Short-term borrowings $ 249,869 $175,000
Accounts payable, including
payable to related party of
$36,880 at March 29, 1997 and
$58,394 at December 28, 1996,
respectively 197,668 272,693
Accrued salaries, wages
and employee benefits 15,725 15,684
Other accrued liabilities 160,741 184,664
Income taxes payable 32,593 31,610
Current portion of long-term debt 261 291
- --------------------------------------------------------------------------------
Total current liabilities 656,857 679,942
Long-term debt 131,649 131,737
Other non-current liabilities 4,721 7,238
Commitments and contingencies
Shareholders' equity (net capital deficiency):
Preferred stock, par value $.01;
1,000,000 shares authorized,
500,000 shares issued and outstanding
at March 29, 1997 and December 28, 1996,
respectively; liquidation preference
of $32,500,000 27,780 27,780
Common stock, par value $.01;
200,000,000 shares authorized,
57,964,830 shares issued and
outstanding at March 29, 1997
and 44,679,400 shares at
December 28, 1996, respectively 580 578
Additional capital 507,661 505,797
Accumulated deficit (631,863) (522,015)
- --------------------------------------------------------------------------------
Total shareholders' equity
(net capital deficiency) (95,842) 12,140
- --------------------------------------------------------------------------------
$ 697,385 $831,057
================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
--------------------------
March 29, March 30,
(In thousands, except per share amounts) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales $346,942 $519,972
Revenue from related party - 10,000
- --------------------------------------------------------------------------------
Total revenue 346,942 529,972
Cost of sales 352,966 549,618
- --------------------------------------------------------------------------------
Gross loss (6,024) (19,646)
Selling, general and administrative expenses 79,517 76,983
Engineering and development expenses 11,453 10,514
- --------------------------------------------------------------------------------
Total operating expenses 90,970 87,497
- --------------------------------------------------------------------------------
Operating loss (96,994) (107,143)
Financing and other expense, net (11,883) (8,617)
- --------------------------------------------------------------------------------
Loss before income taxes (108,877) (115,760))
Income tax provision 971 -
- --------------------------------------------------------------------------------
Net loss (109,848) $(115,760)
================================================================================
Net loss per share $ (1.90) $ (2.59)
================================================================================
Weighted average common shares outstanding 57,894 44,682
================================================================================
</TABLE>
See accompanying notes.
AST RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 29, March 30,
(In thousands) 1997 1996
<S> <C> <C>
Net cash used in operating activities $(103,341) $ (4,896)
Cash flows from investing activities:
Purchases of capital equipment, net (7,882) (4,848)
Purchases of other assets, net (102) (773)
- --------------------------------------------------------------------------------
Net cash used in investing activities (7,984) (5,621)
Cash flows from financing activities:
Short-term borrowings, net 74,869 10,000
Repayment of long-term debt (8) (2,002)
Proceeds from issuance of common stock, net 786 36
- --------------------------------------------------------------------------------
Net cash provided by financing activities 75,647 8,034
Effect of exchange rate changes on cash and
cash equivalents 6,314 3,953
- --------------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (29,364) 1,470
Cash and cash equivalents at beginning of period 61,063 125,387
- --------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 31,699 $126,857
================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,404 $ 866
Income taxes $ 22 $ -
================================================================================
</TABLE>
See accompanying notes
.
AST RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 29, 1997
Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit (except for the balance sheet information
as of December 28, 1996) in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q
and Article 10 of Regulation S-X. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included.
The accompanying condensed consolidated financial statements do not include
certain footnotes and financial presentations normally required under generally
accepted accounting principles and, therefore, should be read in conjunction
with the audited financial statements included in the Company's Annual Report on
Form 10-K for the year ended December 28, 1996 (`fiscal year 1996''). The
results of operations for the interim periods are not necessarily indicative of
the results to be expected for the full year.
Income Taxes
The Company provides for income taxes in interim periods based on the
estimated effective income tax rate for the complete fiscal year. The income
tax provision is computed on the pretax loss of the consolidated entities
located within each taxing jurisdiction based on current tax law. Deferred
taxes result from the future tax consequences associated with temporary
differences between the amount of assets and liabilities recorded for tax and
financial accounting purposes. A valuation allowance for deferred tax assets is
recorded to the extent the Company cannot determine, in accordance with the
provisions of Statement of Financial Accounting Standards No. 109 `Accounting
for Income Taxes,'' that the ultimate realization of net deferred tax assets is
more likely than not.
For the three-month period ended March 29, 1997, the estimated effective
income tax rate is less than the U.S. statutory rate primarily due to a 100%
valuation allowance provided against the additional deferred tax assets that
arose from the current operating loss.
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. Should the Tender Offer and Merger Agreement be completed as proposed
(see Subsequent Events), the Company's ability to realize benefits from certain
of its net deferred tax assets may be impaired.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
March 29, December 28,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Purchased parts $ 70,372 $ 68,877
Work in process 12,127 7,380
Finished goods 57,072 62,750
- --------------------------------------------------------------------------------
$139,571 $139,007
================================================================================
</TABLE>
Restructuring
At December 28, 1996, $5.2 million of the $125 million restructuring charge
incurred in connection with the 1993 acquisition of certain assets and
assumption of certain liabilities of Tandy's personal computer manufacturing
operation remained accrued on the Company's condensed consolidated balance
sheet. During the three months ended March 29, 1997, the Company incurred cash
expenditures of $0.4 million and non-cash charges of $0.1 million, related
primarily to remaining lease obligations. At March 29, 1997, $4.7 million of
the remaining restructuring accrual consists primarily of amounts provided for
remaining lease obligations and the write-down of related leasehold improvements
to net realizable value. The lease payments are expected to be completed in
fiscal year 1999.
At December 28, 1996, approximately $3.0 million of the $13.0 million
restructuring charge incurred in transition period 1995, in connection with the
Company's decision to increase its utilization of third-party board design and
manufacturing, remained accrued on the Company's condensed consolidated balance
sheet. During the three months ended March 29, 1997, the Company incurred cash
expenditures of $0.9 million and non-cash charges of $0.1 million, related
primarily to severance payments, asset write-downs and lease payments for closed
facilities. At March 29, 1997, $2.0 million of the restructuring accrual
remained on the Company's condensed consolidated balance sheet, consisting
primarily of reserves for asset write-downs and provisions for remaining lease
obligations. As of March 29, 1997, approximately $5.1 million of the total
$11.0 million restructuring charge utilized to date relates to severance
payments made to the approximately 1,570 employees who have been terminated
under this plan. As of March 29, 1997, the majority of the restructuring has
been completed although certain lease obligations will continue through fiscal
year 1998.
At December 28, 1996, approximately $2.1 million of the $6.5 million
restructuring charge incurred in the second quarter of fiscal year 1996, in
connection with the consolidation and closure of certain regional offices and
reconfiguration centers and the suspension of its notebook manufacturing
operations in Taiwan, and the transfer of notebook manufacturing to third-party
original equipment manufacturers, remained accrued on the Company's condensed
consolidated balance sheet. During the three months ended March 29, 1997, the
Company incurred cash expenditures of $0.1 million, related primarily to lease
payments for closed facilities. At March 29, 1997, approximately $2.0 million of
the restructuring accrual remained on the Company's condensed consolidated
balance sheet, consisting primarily of reserves for asset write-downs and
provisions for remaining lease obligations. As of March 29, 1997, 250 employees
have been terminated under this plan, and the total $3.1 million accrued for
severance payments has been paid. As of March 29, 1997, the majority of the
restructuring has been completed, although certain lease obligations will
continue through fiscal year 2001.
During April 1997, in response to the Company's first quarter 1997 results,
the Company decided to restructure its operations. On April 21, 1997, the
Company announced plans to reduce its workforce by 25%. This workforce
reduction was implemented by the Company through a reduction of approximately
1,000 contract, temporary, and full-time employees in various functions. In
addition, the Company plans to consolidate various operations, including the
closure of certain regional offices and to refocus the Company's product and
marketing strategies. The Company expects to finalize its plans and record a
restructuring charge of approximately $10 to $15 million in the consolidated
results of operations during the second quarter of fiscal year 1997.
No assurance can be given that the previous and the anticipated restructuring
actions will be successful or that other restructuring actions will not be
required in the future.
Financing and other expense
Financing and other expense consist of the following:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
----------------------------
March 29, March 30,
(In thousands) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest income $ 409 $ 1,022
Interest expense (11,822) (7,815)
Foreign exchange gain (loss) (345) (1,541)
Other (125) (283)
- --------------------------------------------------------------------------------
$(11,883) $(8,617)
================================================================================
</TABLE>
Per Share Information
Primary loss per common share have been computed by dividing net income
available to common stockholders by the weighted average number of common shares
outstanding during each period.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings Per Share.
SFAS 128 is effective for fiscal years ending after December 15, 1997. SFAS 128
specifies the computation, presentation, and disclosure requirements for basic
earnings per share and diluted earnings per share. The impact of adopting SFAS
128 on the computation of earnings or loss per share is not expected to be
material.
Contingencies
The Internal Revenue Service (``IRS'') is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal 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
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. A settlement agreement dated February 28, 1997 was signed by the
Company to settle each of these California and New Jersey class actions, and the
settlement is subject to court approval. The settlement requires the Company to
make payments to certain prior purchasers of the Company's monitors who apply
for rebates after the purchase of additional Company products, or in a reduced
amount three years after the rebate period starts. The Company is currently
unable to estimate the amount of any loss that may be realized in the event the
settlement should not be approved and there is 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.
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, 1997 in the Superior Court for the County of Orange,
California, under case name Sigler v. AST Research, Inc., et al. On March 26,
1997, Sigler filed a First Amended complaint in the California action, which
names Samsung Electronics Co., Ltd. as the only defendant. 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 was entered on March 7, 1997, and the cases were consolidated
as the `Delaware Action'' under the heading In Re AST Research, Inc.
Shareholder Litigation. Concurrent with the execution of the Merger Agreement
(see Subsequent Events below), Samsung entered into a Memorandum of
Understanding with the plaintiffs in the Delaware Action. The Memorandum of
Understanding calls for a definitive settlement agreement which will provide for
class certification, notice to the members of the class, a release of all claims
against the defendants and dismissal of the Delaware Action. The settlement is
subject to discovery to confirm that the settlement is in the best interests of
the shareholders of the Company and to Delaware Chancery Court approval. If the
settlement is approved by the Delaware Chancery Court and implemented, counsel
for the Delaware Plaintiffs will apply for an award of attorneys' fees and costs
to be paid by Samsung in an amount not to exceed $875,000, and defendants will
not oppose that application. The parties intend to seek to complete the process
of entering into, implementing and seeking Delaware Chancery Court approval of,
the settlement agreement provided for in the Memorandum of Understanding as soon
as possible.
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.
Related Party Transactions
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 the quarter ended March 30, 1996.
During the three-month periods ended March 29, 1997 and March 30, 1996, the
Company purchased components and products from Samsung of approximately $78.4
million and $84.4 million, respectively. Amounts payable to Samsung at March
29, 1997 and December 28, 1996 were $36.9 million and $58.4 million,
respectively.
During the first quarter of fiscal year 1997, Samsung paid the salaries of
certain employees of the Company. The Company recorded a capital contribution
of $1.1 million, which represents the estimated compensation expense of the
employees paid by Samsung.
Subsequent Events
On April 14, 1997, the Company and Samsung entered into an Agreement and Plan
of Merger (the `Merger Agreement'') which provides for the commencement of a
cash tender offer (the `Tender Offer'') to purchase all of the issued and
outstanding shares of the Company's common stock not currently owned by Samsung
or its affiliates at a price of $5.40 per share. The Tender Offer was commenced
April 21, 1997 and expires May 19, 1997, unless extended. The Merger Agreement
provides that following the completion of the Tender Offer, the Company will be
merged with Samsung or one of its subsidiaries, and the Company will become a
subsidiary of Samsung.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARCH 29, 1997
RESULTS OF OPERATIONS
The following table represents the results of operations for the periods
indicated as a percentage of total revenue.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Percentage of Total Revenue
Three Months Ended
-----------------------
March 29, March 30,
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Net sales 100.0% 98.1%
Revenue from related party - 1.9
- --------------------------------------------------------------------------------
Total revenue 100.0 100.0
Cost of sales 101.7 103.7
- --------------------------------------------------------------------------------
Gross profit loss (1.7) (3.7)
Selling, general and
administrative expenses 22.9 14.5
Engineering and development
expenses 3.4 2.0
- --------------------------------------------------------------------------------
Operating loss (28.0) (20.2)
Financing and other expense (3.4) (1.6)
- --------------------------------------------------------------------------------
Loss before income taxes (31.4) (21.8)
Income tax provision (0.3) -
- --------------------------------------------------------------------------------
Net loss (31.7%) (21.8%)
================================================================================
The following table represents selected key asset turnover ratios for the
periods indicated:
Days total revenue in
accounts receivable 74.5 67.6
Inventory turnover (annualized) 10.1 11.5
================================================================================
</TABLE>
Total Revenue
Net sales for the quarter ended March 29, 1997 decreased 33% to $346.9
million from $520.0 million in the comparable prior-year period. The decrease
in sales during the quarter ended March 29, 1997 can primarily be attributed to
a decrease in shipments of desktop systems and a decrease in average selling
prices, which have continued to be negatively impacted by an extremely
competitive pricing environment. Because of this environment, the Company has
continued to take aggressive pricing actions within all of its regions to
maintain its competitive market position. The Company anticipates that the
industry's competitive pricing environment will continue and, as a result, that
additional 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.
Net sales from desktop system products decreased 47% to $214.8 million in the
first quarter of fiscal year 1997 from $407.2 million in the comparable prior-
year period. The decline in sales can be attributed to a 26% decrease in
shipments and aggressive industry pricing actions which led to lower average
selling prices. Sales of the Company's desktop systems represented 62% and 78%
of net sales for the first quarter of fiscal year 1997 and the first quarter of
fiscal year 1996, respectively.
Net sales from notebook computer products decreased 14% to $65.2 million in
the first quarter of fiscal year 1997 from $75.5 million in the first quarter of
fiscal year 1996. Unit shipments of notebook computers were consistent with the
first quarter of fiscal year 1996. The decrease in notebook system sales can
primarily be attributed to lower average selling prices per unit for the quarter
ended March 29, 1997, as the Company was in the process of a product transition
period in which prices on older notebook products were reduced. Net sales of
the Company's notebook computer products represented 19% and 15% of net sales
for the first quarter of fiscal year 1997 and the first quarter of fiscal year
1996, respectively.
Net sales from the Company's Americas region, which includes the United
States and Canada, decreased 33% to $175.5 million in the first quarter of
fiscal year 1997, compared to $260.5 million in the first quarter of fiscal year
1996. Net sales to the independent reseller/dealer sales channel for the first
quarter of fiscal year 1997 decreased 37% compared to the first quarter of
fiscal year 1996, and accounted for 50% of total Americas region sales in the
first quarter of fiscal year 1997 as compared to 54% of Americas region sales in
the first quarter of fiscal year 1996. First quarter fiscal year 1997 sales to
the consumer retail sales channel decreased 28% over the first quarter of fiscal
year 1996, and accounted for 49% percent of total Americas region sales in the
first quarter of fiscal year 1997 as compared to 46% of Americas region sales in
the first quarter of fiscal year 1996.
International sales, which includes the Company's Europe and Asia Pacific
regions, decreased 34% to $171.4 million in the first quarter of fiscal year
1997 from $259.5 million in the first quarter of fiscal year 1996.
International sales represented 49% and 50% of net sales in the first quarter of
fiscal year 1997 and the first quarter of fiscal year 1996, respectively. Net
sales from the Company's Europe region decreased 37% in the first quarter of
fiscal year 1997 from the first quarter of fiscal year 1996 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 in fiscal year 1996, 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 23% in the first quarter of fiscal
year 1997 as compared to the first quarter of fiscal year 1996. The decrease in
net sales was in part attributable to sales declines of 13% in the People's
Republic of China (the `PRC''). 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. Also contributing to the decline in Asia Pacific sales was a 33%
decline in sales in Australia and New Zealand, due to a decrease in demand for
the Company's products and an increase in competitive pressures within those
marketplaces.
The results of the Company's international operations are subject to currency
fluctuations. As the value of the U.S. dollar weakens relative to other
currencies, sales in those currencies convert to more U.S. dollars; conversely,
when the value of the U.S. dollar strengthens relative to other currencies,
sales in those countries convert to fewer U.S. dollars. The Company's net sales
were decreased 0.7% by fluctuations in the average value of the U.S. dollar
relative to other currencies during the three-month period ended March 29, 1997
compared to an increase of 0.8% in the first quarter of fiscal year 1996,
respectively.
Total revenues for the three months ended March 30, 1996 include $10.0
million from a Server Technology Transfer Agreement and a Strategic Consulting
Agreement (the `Technology Agreements'') with Samsung Electronics Co. Ltd.
(`Samsung''). Under the agreements, entered into on February 22, 1996, Samsung
agreed to pay $5 million for a royalty-free license through July 31, 2000 to use
the technical information supplied by the Company to produce server technology
products and $5 million for a royalty-free license through July 31, 2000 to use
various marketing and sales planning studies conducted by the Company. Such
amounts were recorded as revenue from related party in the condensed
consolidated statement of operations for the three months ended March 30, 1996.
Gross Loss
The Company's gross loss for the first quarter of fiscal year 1997 was 1.7%
of total revenue compared to a gross loss of 3.7% of total revenue in the first
quarter of fiscal year 1996. The decrease in the Company's gross loss resulted
primarily from a reduction in cost of goods sold and a reduction in pricing
actions as compared to the prior-year period. In the first quarter of fiscal
year 1996, the Company implemented aggressive inventory reduction efforts, which
required aggressive pricing actions which resulted in both lower average selling
prices and lower margins on certain products. In addition, provisions for
excess and obsolete inventory and for warranty claims were higher in the first
quarter of fiscal year 1996 as compared to the first quarter of fiscal year
1997.
The Company believes that the industry will continue to be characterized by
rapid technological advances and short product life-cycles resulting in
continued risk of product obsolescence. If the Company's products become
technically obsolete, the Company's net sales and profitability may be adversely
affected. The 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. During the first three months of fiscal year 1997, the Company and the
majority of its competitors continued to introduce new, lower-priced, higher-
performance personal computers resulting in continued pricing pressures on both
new and older technology products. Future pricing actions by the Company and
its competitors may continue to adversely impact the Company's gross margins and
profitability, which could also result in decreased liquidity and could
adversely affect the Company's financial position.
The effect of foreign currency fluctuations on sales has a corresponding
impact on gross loss, as the Company's production costs are incurred primarily
in U.S. dollars. This period-to-period currency fluctuation increased the gross
loss 0.6 percentage points for the three-month period ended March 29, 1997,
compared to a decrease of the gross loss by 0.1 percentage points in the
comparable prior-year period. If the value of the U.S. dollar strengthens in
the future, gross margins of the Company will continue to be negatively
impacted.
The Company's gross loss for the first quarter of fiscal year 1996 was also
reduced by 2.0 percentage points as a result of revenue of $10.0 million from
the Technology Agreements with Samsung.
Operating Expenses
Total selling, general and administrative expenses in the first quarter of
fiscal year 1997 of $79.5 million increased by $2.5 million from the comparable
prior-year period and represented 22.9% of total revenue, versus 14.5% of total
revenue in the comparable prior-year period. This increase can primarily be
attributed to higher legal and consulting fees, partially offset by lower
advertising expenses.
Engineering and development costs for the three-month period ended March 29,
1997 decreased by $0.9 million from the comparable prior-year period. The
personal computer industry is characterized by increasingly rapid product life-
cycles. Accordingly, the Company is committed to continued investment in
research and development and believes that the timely introduction of enhanced
products with favorable price/performance features is critical to the Company's
future growth and competitive position in the marketplace. However, there can
be no assurance that the Company's products will continue to be commercially
successful or technically advanced, or that it will be able to deliver
sufficient quantities of new products in a timely manner. The foregoing
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from anticipated results. See `Additional
Factors That May Affect Future Results''herein.
Other Income and Expense
In the first quarter of fiscal year 1997, the Company incurred net interest
expense of $11.4 million compared to $6.8 million in the first quarter of fiscal
year 1996. Approximately $2.1 million of the increase in interest expense is
due to higher amortization expense associated with the costs of obtaining
Samsung credit line guarantees in December 1995 and December 1996. In addition,
interest expense increased due to higher average borrowings in the first quarter
of fiscal year 1997 as compared to the first quarter of fiscal year 1996.
For the three months ended March 29, 1997, the Company recognized net other
expense of $0.5 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 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
The Company realized an effective income tax provision rate of 0.9% and 0%
during the first quarter of fiscal year 1997 and for the first quarter of fiscal
year 1996, respectively. The increase in the fiscal year 1997 effective tax
rate was due to an increase in U.S. taxes on the Company's foreign earnings.
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.
Should the Tender Offer and Merger Agreement 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 the three-month period ended
March 29, 1997 increased to 74.5 from 67.6 in the comparable prior-year period.
The increase can be primarily attributed to slower collections within the
European and Pacific Rim regions.
Inventory turnover for the three-month period ended March 29, 1997 decreased
to 10.1 from 11.5 turns in the comparable prior-year period. Inventory turns
decreased primarily due to a decline in sales in the first quarter of fiscal
year 1997 as compared to the first quarter of fiscal year 1996.
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. As a result of the
Company's recent operating losses, 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 March 29, 1997, the Company had borrowed $249.9 million under bank
lines supported by Samsung guarantees and had $36.9 million due to Samsung under
the vendor credit line. The Company has additional borrowing availability under
the loan guarantees of $150.1 million, all of which is available under current
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 Tender Offer and Merger
Agreement are completed, it would constitute a change in control and the holders
of the LYONs would 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. Samsung has represented to the Company in the Merger Agreement that
Samsung has available credit lines or other sources of financing to fund the
Company's redemption obligations with respect to the LYONs.
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.
The Company's ability to continue its on-going operations on a long term
basis is dependent upon its ability to maintain adequate financing levels,
improve gross margins, and ultimately sustain a profitable level of operations.
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 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.
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 March 29, 1997, 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 0.375% per annum, or the bank's reference rate, at the Company's
option. The Company is required to pay a commitment fee equal to 0.10% per
annum based on the average daily unused portion of the facility. The fee is
payable quarterly in arrears. At March 29, 1997, there was $200 million
outstanding as borrowings under this credit facility at an average interest rate
of 5.98% 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. In
March, 1997, the Company completed the establishment of bank credit lines
totaling $100 million which represents the second $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
March 29 1997, there was $49.9 million outstanding at an average interest rate
of 5.93%.
Analysis of Cash Flows
Working capital deficit of $148.5 million at March 29, 1997 included cash and
cash equivalents of $31.7 million compared to working capital deficit of $41.0
million and cash and cash equivalents of $61.1 million at December 28, 1996.
Net cash used in operating activities for the first quarter of fiscal year 1997
of $103.3 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 resulted from higher short-term borrowings. The
Company had $249.9 million in short-term borrowings at March 29, 1997 compared
to $175.0 million at December 28, 1996.
Net cash used in investing activities of $8.0 million during the first
quarter of fiscal year 1997 was primarily due to capital expenditures related to
software and implementation costs associated with the Company's new world-wide
transaction-based information system.
Net cash provided by financing activities of $75.6 million was due primarily
to the net proceeds from short-term borrowings of $74.9 million
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 Condensed Consolidated
Statement of Operations, and any premium or discount is recognized over the life
of the contract. Some foreign locations, such as the PRC, do not allow open
market hedging of their currencies and, therefore, the Company is not able to
hedge all of its exposure to foreign currency fluctuations.
The Company held forward exchange contracts maturing at various dates through
August 1997 with a face value of approximately $140.5 million at March 29, 1997
and $162.6 million at December 28, 1996, which approximate the Company's
hedgeable net monetary asset exposure to foreign currency fluctuations at those
respective dates. Unrealized losses associated with these forward contracts
totaling $3.7 million and $1.2 million for the three months ended March 29, 1997
and March 30, 1996, respectively, are included in the Company's Condensed
Consolidated Statements of Operations for those periods. Foreign currency
borrowings at March 29, 1997 and December 28, 1996 totaled $1.4 million and $1.5
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.
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 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 its 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 Merger Agreement.
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 the 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.
During April 1997, in response to the Company's first quarter 1997 results,
the Company decided to restructure its operations. On April 21, 1997, the
Company announced plans to reduce its workforce by 25%. This workforce
reduction was implemented by the Company through a reduction of approximately
1,000 contract, temporary, and full-time employees in various functions. In
addition, the Company plans to consolidate various operations, including the
closure of certain regional offices and to refocus the Company's product and
marketing strategies. The Company expects to finalize its plans and record a
restructuring charge of approximately $10 to $15 million in the consolidated
results of operations during the second quarter of fiscal year 1997. Although
the Company believes that the restructuring activities are 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. 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 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 Tender Offer and Merger Agreement be completed as proposed (see Subsequent
Events), the Company's ability to realize benefits from certain of its net
deferred tax assets may 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 Quarterly Report on From 10-Q contains certain forward-looking
statements that are based on current expectations. In light of the important
factors that can materially affect results, including those set forth above and
elsewhere in this Form 10-Q, the inclusion of forward-looking information herein
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. The Company may
encounter competitive, technological, financial, 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 in this document, 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 Tender Offer and Merger Agreement. 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.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Internal Revenue Service (``IRS'') is currently examining the Company's
1989, 1990 and 1991 federal income tax returns. In addition, the IRS has
completed its examination of the Company's 1987 and 1988 federal income tax
returns and has proposed adjustments to the Company's federal 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. A settlement agreement dated February 28, 1997 was signed by the
Company to settle each of these California and New Jersey class actions, and the
settlement is subject to court approval. The settlement requires the Company to
make payments to certain prior purchasers of the Company's monitors who apply
for rebates after the purchase of additional Company products, or in a reduced
amount three years after the rebate period starts. The Company is currently
unable to estimate the amount of any loss that may be realized in the event the
settlement should not be approved and there is 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.
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, 1997 in the Superior Court for the County of Orange,
California, under case name Sigler v. AST Research, Inc., et al. On March 26,
1997, Sigler filed a First Amended Complaint in the California action, which
names Samsung Electronics Co., Ltd. as the only defendant. 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 was entered on March 7, 1997, and the cases were consolidated
as the `Delaware Action'' under the heading In Re AST Research, Inc.
Shareholder Litigation. Concurrent with the execution of the Merger Agreement,
Samsung entered into a Memorandum of Understanding with the plaintiffs in the
Delaware Action. The Memorandum of Understanding calls for a definitive
settlement agreement which will provide for class certification, notice to the
members of the class, a release of all claims against the defendants and
dismissal of the Delaware Action. The settlement is subject to discovery to
confirm that the settlement is in the best interests of the shareholders of the
Company and to Delaware Chancery Court approval. If the settlement is approved
by the Delaware Chancery Court and implemented, counsel for the Delaware
Plaintiffs will apply for an award of attorneys' fees and costs to be paid by
Samsung in an amount not to exceed $875,000, and defendants will not oppose that
application. The parties intend to seek to complete the process of entering
into, implementing and seeking Delaware Chancery Court approval of, the
settlement agreement provided for in the Memorandum of Understanding as soon as
possible.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.33 Revolving line of credit agreement dated March 7, 1997 between
AST Research, Inc. and NationsBank.
10.34 Revolving line of credit agreement dated March 21, 1997 between
AST Research, Inc. and Credit Lyonnais.
10.35 Revolving line of credit agreement dated March 28, 1997 between
AST Research, Inc. and Banca Commerciale Italiana.
11. Computation of Net Loss Per Share.
27. Financial Data Schedule.
(b) Reports on Form 8-K
On January 22, 1997, the Company filed a report on Form 8-K, reporting
under Item 5 thereof, announcing that Scott Bower was named Senior Vice
President, Sales and Marketing, Americas and an officer of the Company.
On February 3, 1997, the Company filed a report on Form 8-K, reporting
under Item 5, thereof announcing 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 Company's Board of Directors 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.
AST, Advantage!, and GRiD are registered trademarks of AST Research, Inc.
Ascentia, Bravo, Premmia and Manhattan are trademarks of AST Research, Inc.
Pentium is a registered trademark of Intel Corporation. Windows is a registered
trademark of Microsoft Corporation. Tandy is a registered trademark of Tandy
Corporation. All other product or service names mentioned herein may be
trademarks or registered trademarks of their respective owners.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AST RESEARCH, INC.
(Registrant)
Date: May 13, 1997 /s/ WON S. YANG
Won S. Yang
Senior Vice President
EXHIBIT 11
AST RESEARCH, INC.
COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Three Months Ended
------------------------
(In thousands, except per March 29, March 30,
share amounts) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Weighted average shares of
common stock outstanding 57,894 44,682
Net loss $(109,848) $(115,760)
Loss per share $ (1.90) $ (2.59)
================================================================================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from AST
Research, Inc.'s First Quarter 1997 10-Q and is qualified in its entirety by
reference to such 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jan-03-1998
<PERIOD-END> MAR-29-1997
<CASH> 31,699
<SECURITIES> 0
<RECEIVABLES> 305,887
<ALLOWANCES> 18,741
<INVENTORY> 139,571
<CURRENT-ASSETS> 508,360
<PP&E> 171,602
<DEPRECIATION> (76,195)
<TOTAL-ASSETS> 697,385
<CURRENT-LIABILITIES> 656,857
<BONDS> 0
0
2,780
<COMMON> 580
<OTHER-SE> (124,202)
<TOTAL-LIABILITY-AND-EQUITY> 697,385
<SALES> 346,942
<TOTAL-REVENUES> 346,942
<CGS> 352,966
<TOTAL-COSTS> 352,966
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 356
<INTEREST-EXPENSE> 11,822
<INCOME-PRETAX> (108,877)
<INCOME-TAX> 971
<INCOME-CONTINUING> (109,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,848)
<EPS-PRIMARY> (1.90)
<EPS-DILUTED> (1.90)
</TABLE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (the "Agreement") is entered into as of this 21st day of
March, 1997 by and between
AST RESEARCH, INC., a corporation organized and existing under the laws of the
State of Delaware with its principal office at 16215 Alton Parkway, Irvine,
California 92619-7005, U.S.A. (the "Borrower"); and
CREDIT LYONNAIS SEOUL Branch, a foreign bank branch duly licensed in Korea,
having its registered office at You One Building, 75-95, Seosomun-Dong, Chung-
Ku, Seoul, Korea (the "Lender") and worldwide headquarters located in France.
WITNESSETH:
WHEREAS, the Borrower has requested the Lender to extend to the Borrower a loan
facility in the aggregate principal amount of up to Thirty Million United Stated
Dollars ("Dollars") (US$30,000,000) to finance the working capital requirement
of the borrower for its business operations and the Lender has agreed thereto on
the terms hereinafter set out;
NOW, THEREFORE, in consideration of the covenants herein contained, the parties
hereby agree as follows:
1. Loan
(A) Subject to the terms and conditions of this Agreement, the Lender hereby
agrees to make advances (the "Advance") in favor of the Borrower according to
the procedure set out in Subsection (B) below; provided that the total amount of
the Advances outstanding at any time shall not exceed Thirty million Dollars
(US$30,000,000) (the "Commitment").
(B) The Borrower may draw the loan in one or more drawdowns in Dollars which
the Lender determines in its sole discretion to be eligible for the purpose of
the loan transactions pursuant hereto; provided, that on the date four (4)
Banking Days prior to the proposed date of drawdown, all applicable conditions
precedent specified in Article 8 shall have been met. In this Agreement, "Loan"
shall mean the aggregate amount of principal of the Advances or, where the
context may require, the amount thereof then outstanding. "Banking Day" shall
mean a day on which (i) banks are open for business in New York and Seoul and
(ii) deposit transactions are carried on in Dollars in the London interbank
market ("Interbank Market").
(C) The Borrower shall give the Lender a notice of Drawdown substantially in the
form of Exhibit B hereto, at least four (4) Banking Days (or such shorter period
as the Lender shall otherwise agree) prior to the proposed date of such
Drawdown. Such notice, once received by the Lender, shall be irrevocable and
binding on the Borrower, and the Borrower shall reimburse the Lender for any
costs or losses incurred by the Lender in the event the Borrower does not
continue to satisfy such condition precedents as of the date of drawdown.
(D)The Commitment shall be terminated before the date (Commitment Termination
Date) falling one year after the date of the first drawdown.
(E) The Loan shall be used for purposes of funding the working capital
requirements of the Borrower for its business operation. However, the Lender
shall not have any responsibility as the Borrower's application of the loan.
2. INTEREST
(A)Interest shall be paid in arrears on each Interest Payment Date and shall be
calculated on the basis of the actual number of days elapsed and a year of 360
days at the interest rate equal to 0.40% per annum above the rate (the
"Interbank Rate") determined by the Lender to be the arithmetic mean (rounded
upwards, if necessary, to the nearest 1/16%) of the per annum interest rates for
deposits in Dollars for the relevant Loan Period quoted on page 3750 of the AP
Telerate System as at approximately 11:00 a.m. (London time) on the two (2)
Business Days prior to the first day of each Interest Period.
(B) If the Lender determines that the Interbank Rate is not available, the
Lender shall so notify the Borrower. The Lender and the Borrower shall then
enter into negotiations in good faith with a view to agreeing on an alternative
mutually acceptable basis for maintaining the Loan and for determining the
interest rates from time to time applicable to the Loan (hereinafter referred to
as the "Substitute Basis of Borrowing"). If at the expiry of twenty-five (25)
days from the date of any such notice, no Substitute Basis of Borrowing has been
agreed upon, then (i) the Borrower shall prepay the Loan on the thirtieth day
after the date of such notice, and (ii) interest shall be payable during such
period at the interest rate which has been applicable immediately prior to such
notice.
(C) If the Borrower fails to make payment when due of any sum hereunder
(whether at its stated maturity, by acceleration or otherwise), the Borrower
shall pay interest on the unpaid amount, to the extent permitted by law, from
and including such due date until the payment of said sum in full (after as well
as before judgment) at the rate of Two percent (2%) per annum above the
Interbank Rate, payable on demand by the Lender.
3. REPAYMENT
The Borrower shall repay each Advance in one lump sum on the last day of the
relevant Loan Period stated in the notice of drawdown set forth in Section 1(C),
together with all unpaid interest accrued on that Advance. Any amount repaid to
the Lender before the Commitment Termination Date will remain available for
reborrowing on the terms and conditions of this Agreement.
4. PAYMENTS
(A) Payments to be made by the Borrower hereunder shall be made in Dollars
without set-off or deduction to the Lender's account, account
No. 01-08411-0-001-00 with Credit Lyonnais New York Branch, New York, N.Y.
U.S.A. or such other account as the Lender may designate.
(B) Any payment made to or collected by the Lender hereunder, under the
Promissory Note (defined in Sub-section 8(A) (i) hereof) or under the Guarantee
shall be applied first against costs, expenses and indemnities due hereunder;
then against default interest, if any; then against interest due on the Loan,
then against the outstanding principal on the Loan.
(C)All sums payable by the Borrower hereunder, whether of principal, interest,
fees, expenses or otherwise, shall be paid in full, free of any deductions or
withholdings. In the event that the Borrower is prohibited by law from making
payments hereunder free of deductions or withholdings, then the Borrower shall
pay such additional amount to the Lender as may be necessary in order that the
actual amount received after deduction or withholding (and after payment of any
additional taxes or other charges due as a consequence of the payment of such
additional amount) shall equal the amount that would have been received if such
deduction or withholding had not been made.
(D)The Borrower shall pay directly to the appropriate taxing authority any and
all present and future taxes, levies, imposts, deductions, stamp and other
duties, filing and other fees or charges and any and all liabilities with
respect thereto imposed by law or by any taxing authority on or with regard to
any aspect of the transactions contemplated in this Agreement or the execution
and delivery of this Agreement or other documentation hereunder, except taxes
(other than taxes imposed on any payment made pursuant to Section 4(C) or this
Section 4(D))imposed on the overall net income of the Lender by the Republic of
Korea. The Borrower shall hold the Lender harmless from any liability with
respect to the delay or failure by the Borrower to pay any such taxes or
charges, and shall reimburse the Lender upon demand for any such taxes paid by
the Lender in connection herewith, together with any interest, penalties and
expenses in connection therewith.
(E)If the Borrower shall pay any tax or charge as provided herein or shall make
any deductions or withholdings from amounts paid hereunder, the Borrower shall
forthwith forward to the Lender official receipts or other evidence acceptable
to the Lender establishing payment of such amounts.
5. GUARANTEE
The Borrower shall deliver to the Lender the Guarantee duly executed by SAMSUNG
ELECTRONICS CO., LTD. with its registered head office at 250, 2-Ka, Taepyung-Ro,
Chung-Ku, Seoul, Korea (the "Guarantor") substantially in the form of Exhibit A
hereof and in any event satisfactory to the Lender and its counsel. The
Guarantee provided hereunder shall remain legal, valid and enforceable
throughout the term of this Agreement in all respects.
6. REPRESENTATIONS AND WARRANTIES
(A)The Borrower hereby represents and warrants:
i)that it has been duly organized and is in good standing under the laws of the
State of Delaware, has full legal power to enter into and perform this Agreement
and the Promissory Note and to borrow the funds available hereunder;
ii)that it has obtained or will obtain before the date of first drawdown all
necessary government approvals, consents and authorizations in United States of
America and Korea for the execution and delivery of this Agreement and
performance and observance of the terms of this Agreement including without
limitation payment hereunder in Dollars, and such terms will not materially
conflict with any existing law, with any other agreement to which the Borrower
is a party, nor with the Memorandum and Articles of Association, the regulations
or equivalent documents of the Borrower;
iii)the execution, delivery and performance by the Borrower of this Agreement
and all other documents and instruments to be executed and delivered hereunder
have been duly authorized or will be authorized prior to the date of first
drawdown by all appropriate actions of the Borrower (including without
limitation its Board of Directors);
iv)that the Borrower is not in default under any agreement to which it is a
party or by which it may be bound, a default in respect of which might have a
material adverse effect on the Borrower or its operations, properties or
financial condition, taken as a whole, and no litigation, administrative
proceeding or arbitration is presently pending or, to the best knowledge of the
Borrower, threatened against it or its properties, which might have a material
adverse effect on its operations, properties or financial conditions, taken as a
whole;
v)that the Loan when made will rank at least pari passu with all other present
or future indebtedness of the Borrower; and
vi)that this Agreement constitutes a valid and legally binding obligation of the
Borrower enforceable in accordance with its terms.
(B)The above representations and warranties shall be deemed to be repeated on
and as of the date of each Advance.
7. COVENANTS
The Borrower hereby covenants with the Lender that during the life of this
Agreement and while any amount is owing by the Borrower to the Lender hereunder
the Borrower shall:
i)forward promptly to the Lender at any time such financial information
regarding its affairs as the Lender may reasonably request;
ii)pay to the Lender reasonable costs, fees and expenses, including fees and
expenses of counsel, which the Lender may expend or become liable for in
preparation, implementation and enforcement of the Loan Agreement including
demanding, suing for, recovering and receiving payment of any sum due to the
Lender hereunder and under any documents executed pursuant hereto;
iii)pay all taxes, assessments and governmental charges upon it or upon its
properties promptly when due and, in any event, prior to the date on which
material penalties may become attached thereto;
iv)as soon as possible but in any event within five (5) days after occurrence,
give written notice to the Lender of any Event of Default as defined in Article
9 hereof or any event which, with the giving of notice or passage of time, or
both, would become an Event of Default and of any other matter which has
resulted or might result in a material adverse change in the Borrower's
financial condition or operations, taken as a whole;
v)maintain its corporate existence in good standing in compliance with all
applicable laws, regulations and other governmental requirements and continue to
conduct its business substantially as such business is now conducted;
vi)obtain and continue in full force and effect all governmental approvals,
consents, licenses, authorizations, declarations, filings and registrations as
may be necessary or advisable for the performance of all the terms and
conditions of this Agreement and every document, the execution and delivery of
which is contemplated herein, and to take all such additional action as may be
proper or advisable in connection therewith;
vii)not, without prior written notice to the Lender, permit any indebtedness,
obligation or liability, actual or contingent, of the Borrower to be secured by
or to benefit from any lien, pledge, mortgage, charge, encumbrance, security
interest or segregation or other preferential arrangement (whether or not
constituting a security interest) in favor of any creditor or class of creditors
in respect of any present or future properties, assets or revenues of the
Borrower or of the right of the Borrower to receive income except as otherwise
provided herein and except for encumbrances or any segregation or other
preferential arrangement (i) for taxes, assessments or other governmental
charges or levies on properties or assets of the Borrower if the same shall not
at the time be delinquent or thereafter can be paid without penalty or the
validity of which is being contested in good faith by appropriate proceedings
upon stay of execution of the enforcement thereof, (ii) imposed by law, such as
carriers', warehousemen and mechanics' liens and other similar liens arising in
the ordinary course of business and not material in amount, (iii) arising out of
pledges or deposits under workmen's compensation laws, unemployment insurance,
old age pensions, or social security or retirement benefits or similar
legislation, or (iv) on properties or assets of the Borrower created at the time
of acquisition of such properties or assets solely to secure the purchase price
of such property or assets; and
viii)not, without the prior written notice to the Lender, (i) merge or
consolidate with any other corporation, partnership or sole proprietorship, or
(ii) acquire all or a substantial part of the assets of any other corporation,
partnership or sole proprietorship.
ix)not, without the prior written consent of the Lender, (i) liquidate or
dissolve, or (ii) sell, transfer or otherwise dispose of its business, or any
significant portion of its property or assets.
8. CONDITIONS PRECEDENT TO DRAWDOWN
The obligation of the Lender to make available any part of the Loan is subject
to the fulfillment, as determined solely by the Lender, of the following
conditions precedent four (4) Business Days prior to the date of initial
drawdown (except as otherwise indicated below) and the continued fulfillment of
such conditions on the date of each succeeding drawdown:
(A)The Lender shall have received, in form and substance satisfactory to it, the
following:
i)a blank promissory note (the "Promissory Note") duly executed and delivered by
the Borrower and guaranteed by the Guarantor together with the power of attorney
authorizing the Lender to complete the Promissory Note;
ii)the Memorandum and Articles of Association (or equivalent documents), as
amended to date of the borrower;
iii)the Certificate of Incorporation concerning the Borrower, as amended to
date;
iv)a copy, certified a true copy by a duly authorized officer, of minutes of the
Board of Directors of the Borrower authorizing the execution and performance of
this Agreement and the Promissory Note, including the incurring of the debt
obligations hereunder, upon the terms of this Agreement and authorizing the
person(s) who signed, or will sign, the Agreement, the Promissory Note, and all
other documents to be executed pursuant hereto on the Borrower's behalf to do
so;
v)a certificate of the Secretary or the Director of the Borrower setting out the
names and signatures of the persons authorized to sign, on behalf of the
Borrower, the Agreement and all documents to be delivered by it pursuant hereto;
vi)the Certificate of Incorporation concerning the Guarantor, as amended to
date;
vii)the executed Guarantee, a duly authenticated copy of the minutes of the
Board of Directors' meeting of the Guarantor at which the resolutions
authorizing the execution, delivery and performance of the Guarantee and
authorizing the persons(s) who have or will execute the Guarantee to do so were
validly adopted;
viii)the seal certificate of the representative director of the Guarantor
together with the representative director's certificate certifying the
genuineness of the seal impressions of each member of the Guarantor's Board of
Directors participating at the Board of Directors' meeting referred to in (vii)
above and of the person(s) authorized to execute the Guarantee on the
Guarantor's behalf;
ix)copies, certified by a duly authorized officer of the Borrower to be true
copies and then to be currently in full force and effect, of any governmental
consents or approvals necessary in connection with the execution or performance
of the terms of this Agreement, the Promissory Note, or the Guarantee;
x)the notice of Drawdown as specified in Section 1(C); and
xi)such other documents as shall be requested by, and in form and substance
satisfactory to the Lender.
(B)The obligation of the Lender to advance the Loan is also subject to the
condition that no Event of Default and no event which with the passage of time
or the giving of notice, or both, would become an Event of Default shall have
occurred and be continuing, and the representations and warranties made herein
shall have remained and then be true and correct as if also made on the date of
the relevant drawdown and all legal matters in connection with the Agreement
shall be satisfactory to the Lender.
9. EVENT OF DEFAULT
In the event that:
i)the Borrower fails to pay in full any sum due hereunder and/or the Promissory
Note on the due date hereof or thereof; or
ii)the Borrower fails to perform or observe any term, covenant or agreement
contained herein or any term, covenant or agreement contained in any document
executed pursuant hereto; or
iii)any representation, warranty or statement made by the Borrower herein or
under any document executed or delivered pursuant hereto proves to have been
incorrect as of the date it was made or deemed made, or is breached in any
material respect; or
iv)any governmental consent, filing or approval granted or required in
connection with this Agreement, the Promissory Note, the Guarantee or any
document executed or delivered pursuant hereto is canceled, revoked, withdrawn
or modified in any way, or any new law or decree is issued which in the Lender's
opinion would prevent the Borrower from fulfilling its obligations hereunder or
under the documents related hereto, or be otherwise detrimental to the Lender's
interest; or
v)The Borrower or the Guarantor fails to pay when due any indebtedness or fails
to observe or perform any term, convenant or agreement contained in any
agreement by which it is bound, evidencing or securing any indebtedness, if the
effect of such failure is to accelerate or to permit (assuming the giving of
notice or passage of time or both, if required) the holder or holders thereof or
of any obligations issued thereunder to accelerate the maturity thereof or of
any such obligations whether or not such acceleration occurs or such default is
waived; or
vi)the Borrower or the Guarantor becomes insolvent or generally unable to pay
its debts when due, or takes any corporate action or other steps are taken or
legal proceedings are started for its winding-up, bankruptcy, administration,
reorganization, compulsory composition, liquidation, or dissolution or any
equivalent or analogous proceedings as for the appointment of a receiver,
trustee, administrator or similar officer of it or any or all of its revenues
and assets; or
vii)the Guarantee for any reason has been revoked, modified or becomes
unacceptable to the Lender or the Guarantor has breached any one of the terms
thereof or any event of default has occurred under and as defined in any other
loan agreement between the Lender and the Guarantor; or
viii)the whole or a substantial part of the business or assets of the Borrower
or the Guarantor is confiscated for any reason or sold, transferred or otherwise
disposed of without the prior written consent of the Lender or an action is
taken for the winding-up of the Borrower or the Guarantor, or the Borrower or
the Guarantor stops or threatens to stop payment of its debts or makes or seeks
to make any arrangement or composition with its creditors; or
ix)it becomes unlawful for the Borrower to perform any obligation hereunder, or
for the Guarantor to perform its obligations under the Guarantee, or
x)any circumstances occur which in the opinion of the Lender give reasonable
grounds for belief that the Borrower or the Guarantor may not (or may not be
able to) perform its obligation hereunder or under any of the Promissory Note or
under the Guarantee;
then, at the option of the Lender, the obligation of the Lender to advance the
Loan hereunder shall immediately cease and the Lender may declare, by notice to
the Borrower, the principal of the Loan, accrued interest thereon and all other
amounts then owed by the Borrower to the Lender immediately due and payable, and
interest shall begin to accrue on all such sums at the interest rate specified
in Section 2(C) hereof and the Lender may take all such other actions as are
permitted by law.
10. CHANGES IN APPLICABLE LAW
If any change in any present or future applicable law or regulation or in the
interpretation thereof by any governmental authority charged with the
administration thereof or any new law or regulation or directive shall make it
impossible or unlawful for the Lender to give effect to its obligations
hereunder or to maintain the Loan, the Lender shall give notice of such an
occurrence to the Borrower, whereupon the Lender's obligations hereunder shall
immediately terminate and the Borrower shall, within 30 days after receipt of
such notice, repay or prepay to the Lender the Loan together with accrued
interest thereon and all other amounts owing or becoming due to the Lender
hereunder.
11. MISCELLANEOUS
(A)This Agreement and all documents executed pursuant hereto shall be governed
by and construed in accordance with the laws of the Republic of Korea.
(B)The representations and warranties of the Borrower set forth herein shall
survive the making of the Loan, and the obligations of the Borrower hereunder to
pay interest, costs or other amounts to the Lender shall survive the repayment o
the Loan.
(C)Whenever any payment or computation is to be made on a day which is not a
Banking Day, such payment or computation shall be made on the next succeeding
Banking Day unless, with respect to payment, as a result thereof, such payment
would be made in the next calendar month, in which case payment shall be made on
the preceding Banking Day. Any adjustment so made shall, as appropriate, be
reflected in the computation of interest, fees and other amounts due hereunder.
(D) All taxes, stamp duties, public imposts and other charges and expenses
payable in the United States of America or Korea on account of or in connection
with the execution and performance of this Agreement, the Promissory Note and
the Guarantee shall be borne solely by the Borrower.
(E)The Borrower represents and warrants that this Agreement and the Loan are
commercial rather than public or governmental acts and that the Borrower is not
entitled to claim immunity from legal proceedings with respect to itself or any
of its property on the grounds of sovereignty or otherwise under any law or in
any jurisdiction where an action may be brought for the enforcement of any of
the obligations arising under or relating to this Agreement or the Promissory
Note. To the extent that the Borrower or any of its properties has or hereafter
may acquire any right to immunity from set-off, legal proceedings, attachment
prior to judgment, other attachment or execution of judgment on the grounds of
sovereignty or otherwise, the Borrower hereby irrevocably waives such rights to
immunity in respect of its obligations arising under or relating to this
Agreement or the Promissory Note.
(F)This Agreement may be amended or supplemented only in writing by mutual
agreement by the Lender and the Borrower and subject to government approval, if
required.
(G)This Agreement shall be binding upon and inure to the benefit of the Borrower
and the Lender and their respective successors and assigns, except that the
Borrower may not assign any of its rights or obligations hereunder, except upon
the prior written consent of Lender.
(H)All notices, demands, requests, statements or other communications to be made
or given by the Borrower hereunder shall be in the English language. Any
documents required to be delivered pursuant to this Agreement which are not in
the English language must be accompanied by a certified English language
translation thereof and in the event of any conflict between the original of the
document and the English language translation thereof, the English language
translation shall prevail.
(I)No delay or omissions by the Lender in exercising any of its rights under
this Agreement shall operate or be construed as a waiver thereof nor shall any
single or partial exercise of any such right preclude any other or further
exercise thereof or the exercise of any other right. In case any one or more of
the provisions contained in this Agreement shall be invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby.
(J)i)The Borrower hereby irrevocably consents that any legal action or
proceeding against it or any of its properties or assets with respect to any of
the obligations arising under or relating to this Agreement or the Promissory
Note may be brought in Seoul Civil District Court and by execution and delivery
of this Agreement, the Borrower hereby submits to and accepts with regard to any
such action or proceeding, for itself and in respect of its properties and
assets, generally and unconditionally, the jurisdiction of the aforesaid court.
The Borrower hereby agrees, upon demand of the Lender at any time, to appoint
and report to the competent court an agent to receive for and on its behalf
service of process in Seoul, Korea in any legal action or proceeding with
respect to this Agreement or the Promissory Note. The foregoing, however, shall
not limit the rights of the Lender to serve process in any other manner
permitted by law or to bring any legal action or proceeding or to obtain
execution of judgment in any other jurisdiction. The Borrower further agrees
that, to the extent permitted by law, final judgment against it in any such
action or proceeding shall be conclusive and may be enforced in any other
jurisdiction within or outside Korea by suit on the judgment, a certified copy
of which shall be conclusive evidence of the fact and of the amount of its
indebtedness.
ii)The Borrower hereby waives any right it may have under the laws of any
jurisdiction to commence by publication any legal action or proceeding with
respect to this Agreement, or the Promissory Note.
iii)The Borrower hereby irrevocably waives any objection which it may now or
hereafter have to the laying of the venue of any suit, action or proceeding
arising out of or relating to this Agreement, or any of the Promissory Note in
Seoul, Korea, and hereby further irrevocably waives any claim that Seoul is not
a convenient forum for any such suit, action or proceeding.
(K)This Agreement and the documents referred to herein constitute the entire
agreement of the parties hereto with respect to the subject matter hereof and
shall supersede any prior or simultaneous expressions of intent or understanding
with respect to this transaction.
(L)Any notice required or permitted to be given hereunder shall be in writing
and shall be (i) personally delivered; (ii) transmitted by postage prepaid mail
(airmail if international), or (iii) transmitted by telex or facsimile to the
parties as follows, as elected by the party giving such notice:
To the Borrower:AST Research, Inc.
Attn: Treasurer
16215 Alton Parkway
Irvine, CA 92618 U.S.A.
Facsimile: (714) 727-8584
To the Lender:Credit Lyonnais, Seoul Branch
You One Building, 75-95, Seosomun-Dong
Chung-Ku, Seoul, Korea
Telex: K23474 CREDIKO
Facsimile: (822) 755-5379
The date of any notice or other communication hereunder shall be deemed to be
(i) the date of receipt if delivered personally, (ii) the date ten (10) days
after posting if transmitted by mail or (iii) the date of transmission with
confirmed answerback or appropriate evidence of receipt if transmitted by telex
or by facsimile, whichever shall first occur, provided, that any notice to be
given to the Lender shall be effective only when received by the Lender. Any
party may change its address for purposes hereof by written notice to the other
in a manner as set forth in this section.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their respective duly authorized representatives as of the day and year first
written above.
Borrower: AST RESEARCH, INC.
/s/ WON S. YANG
Name: Won S. Yang
Title: Senior Vice President, Finance and
Chief Financial Officer (Acting)
Lender: CREDIT LYONNAIS, SEOUL BRANCH
/s/ P.H. JO
Name:P.H. Jo
Title:Assistant General Manager
Banca Commerciale Italiana
MASTER TERM NOTE
For value received, the undersigned (the "Borrower"), HEREBY PROMISES TO PAY to
the order of Banca Commerciale Italiana ("BCI") the aggregate unpaid principal
amount of this note as shown in BCI's confirmations from time to time
("Confirmations") together with interest computed as set forth herein on the
unpaid principal amount of this note outstanding from time to time.
The Borrower has designated, and may from time to time, re-designate, in writing
to BCI one or more "Authorized Representatives" who are authorized to request
and commit with BCI to the terms (including applicable interest rates) of loans
by BCI to Borrower (each an "Advance") by telephone and in writing. Such
Authorized Representatives will confirm all telephone transactions in writing to
BCI the same day that they are entered into but failure to so confirm shall not
affect the Borrower's obligations hereunder.
Each Advance with the date thereof, and each payment made on account of
principal hereof, shall be recorded and confirmed by BCI and, prior to any
transfer hereof, copies of the Confirmations reflecting then unpaid obligations
shall be attached hereto. The interest rate applicable to each Advance will be
shown in the Confirmations as a stated annual percentage. Interest will be
calculated on the basis of the number of days actually elapsed in a 360 day year
and paid on the maturity date of each Advance as shown in its initial
Confirmation. Both principal and interest are payable as shown in BCI's
Confirmations but if not so stated then in lawful money of the United States of
America to the account of BCI's New York Branch No. 026005319 at Federal Reserve
Bank, New York, New York, in immediately available funds. In the event the
Borrower does not repay the loan at maturity, Borrower authorizes BCI to charge
Borrower's accounts with BCI for any amounts due hereunder.
In the absence of manifest error which Borrower agrees to promptly send notice
of to BCI after receipt of any Confirmation, the contents of the Confirmations
are conclusive and binding on the Borrower as to the existence and amounts of
the Borrower's obligations recorded thereon but BCI's failure to complete and
send Confirmations shall not impair its rights or reduce the Borrower's
obligations hereunder all of which shall be determined from BCI's books and
records; provided that no manifest error exists.
If any sum payable on any liability of the Borrower to the holder hereof shall
not be paid when due or if the Borrower shall make a general assignment for the
benefit of creditors, file a petition in bankruptcy, be adjudicated insolvent or
bankrupt, commence any proceeding relating to it under any reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, whether now or hereinafter in effect, or by any act indicate
its consent to, approval of or acquiescence in any proceedings for the
appointment of any receiver, or a liquidator shall be appointed for the Borrower
or for a substantial part of its property, or a petition in bankruptcy or for
reorganization shall be filed against the Borrower; then this note and all
other present and future demands of any and all kinds of the holder hereof
against the Borrower, whether created directly or acquired by assignment,
whether absolute or contingent, shall, unless the holder hereof shall otherwise
elect, forthwith be due and payable. After maturity upon acceleration or
otherwise, each Advance shall bear interest at 3% per annum above the rate
applicable to the Advance before maturity but in no event higher than the
maximum permitted under New York law. The Borrower will pay all reasonable
costs and expenses of the holder of this note in connection with the enforcement
of this note including, without limitation, actual reasonable attorney's fees
and legal expenses. This note shall be construed according to and governed by
the internal law of the State of New York. The Borrower waives diligence,
demand, notice of maturity, presentment for payment, notice of dishonor,
protest, notice of protest, and notice of any kind in the enforcement of this
note.
AST RESEARCH, INC.
/s/ WON S. YANG
by Won S. Yang
Senior Vice President, Finance and
Financial Officer (Acting).
PROMISSORY NOTE
$20,000,000.00 March 7, 1997
FOR VALUE RECEIVED, the undersigned, AST Research, Inc., a Texas
corporation (the `Borrower''), hereby promises to pay to the order of
NationsBank of Texas, N.A. (the `Bank''), at its office at 901 Main Street,
67th floor, Dallas, Texas 75202 (or at such other place as the Bank may
designate from time to time), in lawful money of the United States of America
and in immediately available funds, the principal amount of Twenty Million
Dollars ($20,000,000.00) or such lesser amount as shall equal the aggregate
unpaid principal amount of the advances (the `Advances'') made by the Bank to
the Borrower under this Note, and to pay interest on the unpaid principal amount
of each such Advance at the rates per annum and on the dates specified below.
Each Advance hereunder shall be at the sole discretion of the Bank. Each
Advance shall have a maturity date and shall bear interest at the rate per annum
quoted to the Borrower by the Bank and accepted by the Borrower prior to the
making of such Advance. Each Advance, and accrued and unpaid interest thereon,
shall be due and payable on demand, or if no demand is sooner made, on the
earlier of (a) the maturity date of such Advance, or (b) March 31, 1998. No
Advance shall have a maturity of more than 90 days. If the term of an Advance
is more than 90 days, interest on such Advance shall also be payable on the 90th
day after the making of such Advance and on each 90th day thereafter. The Bank
may, if and to the extent any payment is not made within five business days
after such payment is due hereunder, charge from time to time against any or all
of the Borrower's accounts with the Bank any amount so due.
The date, amount, interest rate, and maturity date of each Advance, and
each payment of principal and interest hereon, shall be recorded by the Bank on
its books, which recordations shall, in the absence of manifest error, be
conclusive as to such matters; provided, that the failure of the Bank to make
any such recordation shall not limit or otherwise affect the obligations of the
Borrower hereunder.
The Borrower may, upon at least one business day's notice to the Bank,
prepay any Advance in whole at any time, or from time to time in part; provided,
that the Borrower shall at the time of prepayment compensate the Bank for any
loss, cost, or expense sustained or incurred by reason of the liquidation or re-
employment of deposits or other funds acquired by the Bank in order to fund such
Advance then being prepaid.
Interest shall be computed on the basis of a year of 360 days and the
actual days elapsed (including the first day but excluding the last day). Any
overdue principal and, to the extent permitted by applicable law, interest shall
bear interest, payable upon demand, for each day from and including the due date
to but excluding the date of actual payment at a rate per annum equal to the sum
of 2% plus the Prime Rate. For purposes of this Note, the term `Prime Rate''
means the rate of interest publicly announced by the Bank from time to time as
its prime rate. Whenever any payment under this Note is due on a day that is
not a business day, such payment shall be made on the next succeeding business
day, and such extension of time shall in such case be included in the
computation of the payment of interest.
Without in any way impairing the demand nature of this Note, each of the
following shall constitute an Event of Default hereunder: (a) the Borrower
shall fail to pay when due any principal of or interest on any Advance, (b) a
default or event of default shall occur under the terms of any other material
indebtedness for which the Borrower or any of its subsidiaries is liable,
whether as principal obligor, guarantor, or otherwise, (c) any representation,
warranty, certification, or statement made by the Borrower to the Bank shall
prove to have been incorrect in any material respect, (d) the Borrower shall
dissolve, liquidate, or terminate its legal existence or shall convey, transfer,
lease, or dispose of (whether in one transaction or a series of transactions)
all or substantially all of its assets to any person or entity, except in a
transaction in which the purchasing, transferee, surviving or resulting party is
Samsung Electronics Co. or one of its direct or indirect wholly-owned
subsidiaries and such party assumes the obligations of the Borrower hereunder,
or (e) a petition shall be filed by or against the Borrower under any law
relating to bankruptcy, reorganization, or insolvency, or the Borrower shall
make an assignment for the benefit of creditors, or a receiver, trustee, or
similar official shall be appointed over the Borrower or a substantial portion
of any of its assets. If an Event of Default shall have occurred and be
continuing, the Bank may declare the outstanding principal of and accrued and
unpaid interest on this Note to be immediately due and payable without
presentment, protest, demand, or other notice of any kind, all of which are
hereby waived by the Borrower. Notwithstanding anything to the contrary
contained herein, the Bank may at any time demand payment of this Note whether
or not an Event of Default exists.
No failure or delay by the Bank in exercising, and no course of dealing
with respect to, any right, power, or privilege hereunder shall operate as a
waiver thereof nor shall any single or partial exercise of any right, power, or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The rights and remedies of
the Bank provided herein shall be cumulative and not exclusive of any other
rights or remedies provided by law. No provision of this Note may be modified
or waived except by a written instrument signed by the Bank and the Borrower.
The Bank shall incur no liability to the Borrower in acting upon any
telephone, telex, or other communication that the Bank, in good faith and after
following reasonable and customary procedures, believes has been given by an
authorized representative of the Borrower.
The Bank may assign to one or more banks or other entities all or any part
of, or may grant participations to one or more banks or other entities in or to
all or any part of, this Note or any Advance or Advances hereunder.
The Borrower shall pay on demand all reasonable costs and expenses
(including reasonable attorneys' fees) incurred by the Bank in connection with
any Event of Default or the enforcement of this Note.
Notwithstanding anything to the contrary contained herein, the interest
paid or agreed to be paid hereunder shall not exceed the maximum rate of non-
usurious interest permitted by applicable law (the `Maximum Rate''). If the
Bank shall receive interest in an amount that exceeds the Maximum Rate, the
excessive interest shall be applied to the principal of this Note or, if it
exceeds the unpaid principal, refunded to the Borrower. In determining whether
the interest contract for, charged, or received by the Bank exceeds the Maximum
Rate, the Bank may, to the extent permitted by applicable law, (a) characterize
any payment that is not principal as an expense, fee, or premium rather than
interest, (b) exclude voluntary prepayments and the effects thereof, and (c)
amortize, prorate, allocate, and spread in equal or unequal parts the total
amount of interest throughout the stated term of this Note.
This Note shall be governed by and construed in accordance with the laws of
the State in which this Note is payable. The Borrower hereby submits to the
nonexclusive jurisdiction of the Federal and State courts in the State where
this Note is payable for the purposes of all legal proceedings arising out of or
relating to this Note. The Borrower irrevocably waives, to the fullest extent
permitted by law, any objection that it may now or hereafter have to the laying
of venue of any such proceeding brought in such a court and any claim that any
such proceeding brought in such a court has been brought in an inconvenient
forum. The Borrower and the Bank by acceptance of this Note hereby irrevocably
waive any and all right to trial by jury in any legal proceeding arising out of
or relating to this Note.
THIS NOTE AND ANY OTHER DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT
THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
AST RESEARCH, INC.
By: /s/ WON S. YANG
Won S. Yang
Senior Vice President
