-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LtIiZ2mj8jHJCSu9nerXXvNbUz6O5TSNspZWqUscXzQ1i18xk1tKlgxYmNZ3VHjv nbORNhCtEkb0eF9XkIetlA== 0000725182-95-000032.txt : 19951119 0000725182-95-000032.hdr.sgml : 19951119 ACCESSION NUMBER: 0000725182-95-000032 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AST RESEARCH INC /DE/ CENTRAL INDEX KEY: 0000725182 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPUTERS [3571] IRS NUMBER: 953525565 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-13941 FILM NUMBER: 95591276 BUSINESS ADDRESS: STREET 1: 16215 ALTON PKWY CITY: IRVINE STATE: CA ZIP: 92718 BUSINESS PHONE: 7147274141 10-Q 1 ________________________________________________________________________________ ________________________________________________________________________________ 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 SEPTEMBER 30, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO __________________ COMMISSION FILE NO. 0-13941 AST RESEARCH, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-3525565 (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 16215 ALTON PARKWAY IRVINE, CALIFORNIA 92718 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 727-4141 _________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ There were 44,679,000 shares of the registrant's Common Stock, par value $.01 per share, outstanding on October 27, 1995. ________________________________________________________________________________ ________________________________________________________________________________ AST RESEARCH, INC. INDEX
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets at September 30, 1995 (Unaudited) and July 1, 1995 3 Consolidated Statements of Operations (Unaudited) for the three months ended September 30, 1995 and October 1, 1994 4 Consolidated Statements of Cash Flows (Unaudited) for the three months ended September 30, 1995 and October 1, 1994 5-6 Notes to Consolidated Financial Statements (Unaudited) 7-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11-19 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20-21 Item 6. Exhibits and Reports on Form 8-K 22 SIGNATURES 22
AST RESEARCH, INC. CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------- September 30, July 1, 1995 1995 (In thousands, except share amounts) (Unaudited) - --------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 135,326 $ 95,825 Accounts receivable, net of allowance for doubtful accounts of $17,690 at September 30, 1995 and $17,452 at July 1, 1995 281,964 394,927 Inventories 349,223 311,469 Deferred income taxes 33,585 31,973 Other current assets 13,965 6,938 - --------------------------------------------------------------------------------------------------------- Total current assets 814,063 841,132 Property and equipment 167,938 165,261 Accumulated depreciation and amortization (68,585) (64,006) - --------------------------------------------------------------------------------------------------------- Net property and equipment 99,353 101,255 Other assets 78,328 79,114 - --------------------------------------------------------------------------------------------------------- $ 991,744 $ 1,021,501 ========================================================================================================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings $ - $ 156,000 Accounts payable 190,591 213,202 Accrued salaries, wages and employee benefits 20,678 17,760 Other accrued liabilities 128,379 119,689 Income taxes payable 24,795 25,189 Current portion of long-term debt 92,352 2,420 - --------------------------------------------------------------------------------------------------------- Total current liabilities 456,795 534,260 Long-term debt 122,518 219,224 Other non-current liabilities 4,583 4,779 Commitments and contingencies Shareholders' equity: Common stock, par value $.01; 200,000,000 shares authorized, 44,677,900 shares issued and outstanding at September 30, 1995 and 32,412,500 shares at July 1, 1995 447 324 Additional capital 383,077 142,208 Retained earnings 24,324 120,706 - --------------------------------------------------------------------------------------------------------- Total shareholders' equity 407,848 263,238 - --------------------------------------------------------------------------------------------------------- $ 991,744 $ 1,021,501 =========================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------ Three Months Ended ------------------------------ September 30, October 1, (In thousands, except per share amounts) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Net sales $ 403,357 $ 495,446 Cost of sales 410,126 458,147 - ------------------------------------------------------------------------------------------------------------ Gross profit (loss) (6,769) 37,299 Selling and marketing expenses 51,302 51,865 General and administrative expenses 23,891 21,369 Engineering and development expenses 9,566 9,902 - ------------------------------------------------------------------------------------------------------------ Total operating expenses 84,759 83,136 - ------------------------------------------------------------------------------------------------------------ Operating loss (91,528) (45,837) Interest income 1,194 484 Interest expense (4,798) (3,289) Other expense, net (1,250) (310) - ------------------------------------------------------------------------------------------------------------ Loss before income taxes (96,382) (48,952) Income tax benefit - (9,546) - ------------------------------------------------------------------------------------------------------------ Net loss $ (96,382) $ (39,406) ============================================================================================================ Net loss per share $ (2.36) $ (1.22) ============================================================================================================ Weighted average common shares outstanding 40,762 32,346 ============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------ Three Months Ended ---------------------------------- September 30, October 1, (In thousands) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Cash received from customers $ 515,291 $ 500,376 Cash paid to suppliers and employees (546,805) (534,009) Interest received 1,031 431 Interest paid (6,875) (4,240) Income tax refunds received - 117 Income taxes paid (236) (3,314) Other cash received (paid) 7,562 (1,819) - ------------------------------------------------------------------------------------------------------------ Net cash used in operating activities (30,032) (42,458) Cash flows from investing activities: Purchases of capital equipment (4,495) (8,598) Proceeds from disposition of capital equipment 592 1,504 Purchases of other assets (1,119) (1,218) - ------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (5,022) (8,312) Cash flows from financing activities: Short-term borrowings, net (156,000) - Repayment of long-term debt (6,774) (32) Proceeds from issuance of common stock, net 240,992 347 - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 78,218 315 Effect of exchange rate changes on cash and cash equivalents (3,663) (1,939) - ------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 39,501 (52,394) Cash and cash equivalents at beginning of period 95,825 153,118 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 135,326 $ 100,724 ============================================================================================================
See accompanying notes. AST RESEARCH, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) RECONCILIATION OF NET LOSS TO NET CASH USED IN OPERATING ACTIVITIES:
- -------------------------------------------------------------------------------------------------------------- Three Months Ended ------------------------------------ September 30, October 1, (In thousands) 1995 1994 - -------------------------------------------------------------------------------------------------------------- Net loss $ (96,382) $ (39,406) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 7,475 5,936 Deferred income tax benefit - (439) Gain on sale of capital equipment (218) (218) Change in operating assets and liabilities: Accounts receivable 114,229 7,009 Inventories (37,754) (7,033) Other current assets (9,383) (16,897) Accounts payable and accrued expenses (14,247) 20,858 Income taxes payable (394) (12,212) Other current liabilities 3,264 1,298 Exchange loss (gain) 3,378 (1,354) - -------------------------------------------------------------------------------------------------------------- Net cash used in operating activities $ (30,032) $ (42,458) ==============================================================================================================
See accompanying notes. AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 Basis of Presentation The accompanying consolidated financial statements have been prepared by the Company without audit (except for the balance sheet information as of July 1, 1995) in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying 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 1995 Annual Report on Form 10-K. The Company has elected to change its fiscal year end to the Saturday closest to December 31 from the Saturday closest to June 30. The change was made in order to align the Company's fiscal year end with the reporting requirements of its largest shareholder, Samsung Electronics Co., Ltd. This change in the fiscal year end will result in a transition period, for reporting purposes, of July 2, 1995 to December 30, 1995, which will be referred to as transition period 1995 herein. The results of operations for the three-month period ended September 30, 1995 are not necessarily indicative of the results to be expected for the transition period ended December 30, 1995. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended July 1, 1995. Restatements The Company filed an amendment on Form 10-K/A with the Securities and Exchange Commission to restate its consolidated financial statements for the year ended July 2, 1994, to account for a $33.6 million reduction in the carrying value of GRiD(R) pen-based products inventories made in the fourth quarter of fiscal 1994 as a charge to cost of sales rather than an adjustment to the carrying value of goodwill arising from the Tandy acquisition. After giving effect to this restatement, reversal of previously recorded related goodwill amortization and related tax effects, the Company's restated consolidated balance sheet at July 2, 1994 reflects shareholders' equity of $361.8 million rather than $384.0 million as previously reported. The Company also filed amendments on Form 10-K/A with the SEC to restate its consolidated financial statements for the periods ended October 1, 1994, December 31, 1994, and April 1, 1995, to reflect both the fiscal 1994 restatements and a resulting reduction in fiscal 1995 goodwill amortization and related income tax effects. The effect of these restatements decreased shareholders' equity at October 1, 1994 by $21.7 million from the amount of shareholders' equity previously reported, and reduced previously reported net loss for the three-month period ended October 1, 1994 by $.5 million. 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 benefit is computed on the pretax loss of the consolidated entities located within each taxing jurisdiction based on current tax law. Deferred taxes result from the future tax consequences associated with temporary differences between the amount of assets and liabilities recorded for tax and financial accounting purposes. A valuation allowance for deferred tax assets is recorded to the extent the Company cannot determine, in accordance with the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes", that the ultimate realization of net deferred tax assets against income is more likely than not. For the three-month period ended September 30, 1995, the estimated effective income tax rate is less than the U.S. statutory rate primarily due to the Company's provision of a full valuation reserve against the additional deferred tax assets arising from its current operating loss. Differences between the estimated effective tax rate and the Company's actual effective tax rate could result from changes in the Company's ability to recognize its AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 deferred tax assets and from changes in the mix of income/loss in the various tax jurisdictions. The effects of such changes are recognized when known. Restructuring At July 2, 1994, $15.2 million of the $125 million restructuring charge incurred in connection with the 1993 acquisition of certain assets and assumption of certain liabilities of Tandy Corporation's ("Tandy") personal computer manufacturing operation remained accrued on the Company's consolidated balance sheet. During fiscal 1995, the Company incurred cash expenditures of approximately $4.7 million ($.2 million, $.5 million, $2.4 million and $1.6 million in the first through fourth quarters of fiscal 1995, respectively) related primarily to the closure of its Fountain Valley, California manufacturing facility. At July 1, 1995, approximately $10.5 million of the original restructuring accrual remained, consisting primarily of amounts provided for the net present value of minimum lease payments for facilities that have been closed and the write-down to net realizable value of related leasehold improvements being disposed of. At September 30, 1995, the Company continues to hold approximately $9.7 million in accrued restructuring provisions for final restructuring activities, which relate primarily to various ongoing lease obligations representing potential future cash expenditures. The Company plans to increase its utilization of third party board manufacturing and design and to realign certain related manufacturing operations. The Company is currently completing its restructuring plan and anticipates a restructuring charge of approximately $20 million. Approximately $8 million of the charge is expected to involve cash disbursements with the remaining costs primarily relating to reductions in net asset values. The Company expects to finalize and announce its plans and record the restructuring charge in the consolidated results of operations by the end of the second quarter of the transition period ended December 31, 1995. However, no assurance can be given that these anticipated restructuring actions will be successful or that similar actions will not be required in the future. Goodwill Goodwill, representing the excess of the purchase price over the fair value of the net assets of the acquired entities, is being amortized on a straight-line basis over the period of expected benefit of ten years. During the third quarter of fiscal 1995, the Company elected the early adoption of Statement of Financial Accounting Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with SFAS No. 121, long-lived assets and certain identifiable intangibles held and used by the Company will be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability test was performed at a consolidated level based on undiscounted net cash flows since the assets being tested do not have identifiable cash flows that are largely independent of other asset groupings. Based upon the Company's analysis under SFAS No. 121, the Company believes that no impairment of the carrying value of its long-lived assets inclusive of goodwill existed at September 30, 1995. Contingencies On March 3 and March 14, 1994, complaints were filed by two shareholders against the Company and certain of its officers and directors requesting certification of a class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court for the Central District of California. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of a class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The September 12, 1994 complaint was filed in the United States District Court for the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was filed by a shareholder in the United States District Court for the Central District of California. The October 6, 1994 AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 complaint names the Company and certain of its officers and directors as defendants, asserts claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures, and seeks unspecified compensatory damages and related fees and costs. The cases with complaints filed on March 3, 1994, March 14, 1994, and October 6, 1994, have been consolidated under the case name In re AST Research Securities Litigation. The AST Research Securities Litigation and Kornfeld cases are being treated as related cases by the court. A settlement agreement dated August 28, 1995 was signed to end the AST Research Securities Litigation and Kornfeld cases, and requires the payment of $12.5 million by the defendants to the plaintiffs in November 1995. An Order Preliminarily Approving Settlement dated August 28, 1995 was entered by the Court to begin the process of approving the settlement. The Company expects that a majority of the settlement payment will be covered by insurance. The Internal Revenue Service ("IRS") is currently examining the Company's 1989, 1990 and 1991 federal income tax returns. In addition, the IRS has completed its examination of the Company's 1987 and 1988 federal income tax returns and has proposed adjustments to the Company's federal tax liabilities for such years of approximately $8.3 million, excluding interest, relating to the allocation of income between the Company and its foreign subsidiaries. Management believes that the Company's position has substantial merit and intends to vigorously contest these proposed adjustments. Management further believes that any liability that may result upon the final resolution of the proposed adjustments for 1987 and 1988 or current examinations of 1989, 1990 and 1991 will not have a material adverse effect on the Company's consolidated financial position or results of operations. The 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 sixteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. The claims against the Company total in excess of $100 million in compensatory damages and punitive damages and additional unspecified amounts. The Company has denied or is in the process of denying the claims and intends to vigorously defend the suits. The Company is unable at this time to predict the ultimate outcome of these suits. Ultimate resolution of the litigation against the Company may depend on progress in resolving this type of litigation overall. Before consideration of any potential insurance recoveries, the Company believes that the claims in the suits filed against it will not have a material impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. The Company has maintained various liability insurance policies during the periods covering the claims filed above. While such policies may limit coverage under certain circumstances, the Company believes that it is adequately insured. Should the Company not be successful in defending against such lawsuits or not be able to claim compensation under its liability insurance policies, the Company's profitability and financial condition may be adversely affected. The Company was named, along with twelve other personal computer companies, as a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the County of Merced, California. The case name for this March 27, 1995 filing is People v. Acer, et al., and alleges that the Company has engaged in deceptive advertising and unlawful business practices with relation to computer monitor screen measurements. 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 also 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. Further, the Company was AST RESEARCH, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SEPTEMBER 30, 1995 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. Management does not believe that the outcome of these disputes will have a material adverse impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. The Company is also subject to other legal proceedings and claims which also arise in the normal course of business. While the outcome of these proceedings and claims cannot be predicted with certainty, management does not believe the outcome of any of these matters will have a material adverse effect on the Company's consolidated financial position or results of operations. Inventories Inventories are stated at the lower of cost (first-in, first-out) or market and consist of the following:
- ----------------------------------------------------------------------------------------------------------- September 30, July 1, (In thousands) 1995 1995 - ----------------------------------------------------------------------------------------------------------- Purchased parts $ 93,738 $ 67,296 Work in process 47,450 36,686 Finished goods 208,035 207,487 - ----------------------------------------------------------------------------------------------------------- $ 349,223 $ 311,469 ===========================================================================================================
Subsequent Event On November 2, 1995, the Company announced that it had entered into a letter of intent agreement with Samsung Electronics Co., Ltd. ("Samsung") pursuant to which Samsung would provide certain additional support to the Company as consideration for such number of shares of Common Stock as would increase its ownership to 49.9 percent. The additional support includes a line of credit, or other form of credit support, through November 30, 1996, in the amount of $100 million, secured by an interest in inventory, accounts receivable, and other available assets of the Company as requested by Samsung, and an increase in the Company's supplier line of credit with Samsung to $100 million through November 30, 1996, with an extension of payment terms under such line of credit to 90 days through November 30, 1996, decreasing to 30 days for products shipped after January 30, 1997. In addition, Samsung will provide certain other elements of support to the Company, the amount and value to be agreed to by Samsung and a committee of independent directors. In connection with this agreement, the Company will issue a number of shares of Common Stock to Samsung so as to increase its ownership to 49.9%, and Samsung will appoint two additional directors to the Company's board of directors. In addition, Samsung and the Company agreed to negotiate further support arrangements by Samsung, which if met, would increase Samsung's ownership to 60 percent. The support transactions are subject to definitive documentation and approvals. The letter of intent agreement is non-binding, and in the event that the Company is unable to secure the financial support under the agreement or is unable to secure alternative sources of financing, the Company's operations would be adversely affected. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SEPTEMBER 30, 1995 RESULTS OF OPERATIONS The following table shows the results of operations for the periods indicated as a percentage of net sales.
Percentage of Net Sales Three Months Ended ----------------------------- September 30, October 1, 1995 1994 - ----------------------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% Cost of sales 101.7 92.5 - ----------------------------------------------------------------------------------------------------------- Gross profit (loss) (1.7) 7.5 - ----------------------------------------------------------------------------------------------------------- Selling and marketing expenses 12.7 10.5 General and administrative expenses 5.9 4.3 Engineering and development expenses 2.4 2.0 - ----------------------------------------------------------------------------------------------------------- Operating loss (22.7) (9.3) Other expense, net (1.2) (0.6) - ----------------------------------------------------------------------------------------------------------- Loss before income taxes (23.9) (9.9) Income tax benefit - (1.9) - ----------------------------------------------------------------------------------------------------------- Net loss (23.9%) (8.0%) ===========================================================================================================
Net Sales Net sales for the three-month period ended September 30, 1995 decreased 19% to $403.4 million from $495.4 million in the three-month period ended October 1, 1994. This decline in revenues was due to lower desktop systems sales and decreased shipments of the Company's notebook system products. Lower than anticipated sales in the North American marketplace, particularly in the consumer retail channel, and seasonal softness in Europe were compounded by significant downward industry pricing actions and delays in some new product shipments. The Company's lower first quarter revenues were also negatively impacted by customer uncertainty regarding Microsoft's Windows(R)95 software announcement. While the Company anticipates a continued competitive pricing environment, there can be no assurance that further pricing actions will be effective in stimulating sales growth. The Company shipped 245,000 computer systems in the first three months of transition period 1995, a decrease of 21% from the 309,000 units shipped in the same prior year period. Revenues from desktop system products decreased 6% to $286.2 million for the three-month period ended September 30, 1995 from $304.2 million in the comparable prior year period. Increased sales of selected Pentium(R) processor- based desktops were offset by declines in revenues from the Advantage!(R) 486SX, the BravoTM 486DX and SX, and 486 PremmiaTM desktop systems sales. The Company's notebook computer product revenues decreased 37% to $76.4 million in the three-month period ended September 30, 1995 from $120.7 million in the comparable prior year period. This decrease reflects a 49% decrease in unit shipments to 32,000 for the three-month period ended September 30, 1995 from 63,000 in the same prior year period. Notebook system sales declines occurred in all notebook product line offerings including the Bravo, Advantage! and AscentiaTM notebook computer lines. Americas revenue (including Canada and Latin America) decreased by 42% to $191.7 million during the first three months of transition period 1995 from revenue of $330.5 million in the comparable prior year period. Sales to the independent reseller/dealer channel for the three-month period ended September 30, 1995 decreased 23% from the same prior year period and accounted for 87% of total Americas revenue. Revenue from the consumer retail channel decreased 80% from the comparable prior year quarter primarily due to the loss of selected retail customers within the United States marketplace. The consumer retail channel and the OEM channel accounted for 11% and 2%, respectively, of total Americas revenues during the three-month period ended September 30, 1995 as compared to 33% and 2% for the prior year period. First quarter transition period 1995 international revenues rose 28% to $211.7 million from $164.9 million in the comparable prior year period and accounted for 52% of total first quarter transition period 1995 revenues. The European region provided 59% of the total international revenues for the period ended September 30, 1995, as compared to 66% for the same period last year. The United Kingdom and Sweden continue to be major contributors of total European revenues with significant year-over-year revenue growth also occurring in Denmark, Norway and France. Continued increased demand for the Company's Advantage! and Bravo 486-based desktop systems and the Bravo and Ascentia notebook systems contributed to the European revenue growth. Revenue from the Company's Asia Pacific region, which includes Australia, the People's Republic of China ("PRC"), Hong Kong, Japan, Korea, Malaysia, New Zealand, Singapore, Taiwan and the Middle East, totaled $86.4 million in the three-month period ended September 30, 1995, rising 55% over the comparable prior year total of $55.6 million. The increase in the transition period 1995 growth rate was attributable to sales within the PRC compared to the same period last year. Sales into the PRC accounted for approximately 7% of the Company's total first quarter transition period 1995 revenues, compared with approximately 3% in the prior year quarter. Revenues from the Company's Australia, Japan and Singapore subsidiaries also increased significantly in the first quarter of transition period 1995 over the same comparable prior year period. A significant portion of the Company's Asia Pacific revenues are derived from sales to the Hong Kong government and to Hong Kong based dealers who ultimately market the Company's products within the PRC. Although the PRC has historically provided the Company with significant revenues and profitability, future sales of the Company's products into the PRC are highly dependent upon continuing favorable trade relations between the United States and the PRC and the general economic and political stability of the region. Economic factors such as competitive pricing, short-term fluctuations in foreign currency exchange rates and changes in the PRC tax structure could have a corresponding impact on future sales and operating results. Gross Profit (Loss) Gross profit margins decreased to a gross loss of 1.7% in the three-month period ended September 30, 1995 from 7.5% in the three-month period ended October 1, 1994. This decline in margins was a result of continued intense industrywide competitive pressures which have required pricing reductions at a rate faster than the Company was able to reduce costs. These pricing reductions also have resulted in significant price protection adjustments related to product within the Company's various sales channels. The Company's margins were also negatively impacted by costs associated with software upgrades relating to Microsoft's August 1995 Windows95 product introduction and by the delayed shipment of some of the Company's new product offerings. 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 could be adversely affected. The personal computer industry continues to experience significant pricing pressures and the Company believes that aggressive pricing actions by the Company and its competitors may continue to adversely impact the Company's gross margins which could also result in decreased liquidity and adversely affect the Company's financial position.. The results of the Company's international operations are subject to currency fluctuations. As the value of the U.S. dollar weakens relative to other currencies, revenues from sales in those currencies convert to more U.S. dollars; conversely, when the value of the U.S. dollar strengthens relative to other currencies revenues from sales in those countries convert to fewer U.S. dollars. This effect on revenue has a corresponding impact on gross margins, as the Company's production costs are incurred primarily in U.S. dollars. When comparing the three-month period ended September 30, 1995 to the three-month period ended October 1, 1994, the U.S. dollar declined against nearly all European currencies. This year-to-year currency fluctuation resulted in an approximate two percentage point gross margin increase in transition year-to- date 1995 results compared to the same prior year period. Operating Expenses Total operating expenses increased 2.0% to $84.8 million for the three-month period ended September 30, 1995 from $83.1 million for the three-month period ended October 1, 1994. As a percentage of sales, operating expenses increased to 21.0% from 16.8% in the comparable prior year period. Selling and marketing expenses decreased 1.1% to $51.3 million for the three months ended September 30, 1995 from $51.9 million in the prior year period. Lower consumer retail sales contributed to lower expenses for media advertising, product marketing and dealer promotional activities. This decrease was partially offset by higher payroll and phone expenses due to expanded service and support operations. As a percentage of sales, selling and marketing expenses increased to 12.7% for the period ended September 30, 1995 from 10.5% in the prior year period. General and administrative expenses increased by 11.8% to $23.9 million for the three-month period ended September 30, 1995 from $21.4 million in the same fiscal 1995 period. General and administrative expenses increased primarily due to higher payroll and employee insurance costs as well as various one-time severance payments made in the first quarter of transition period 1995. As a percentage of sales, general and administrative expenses increased to 5.9% from 4.3% in the comparable prior year period. Engineering and development costs declined by 3.4% to $9.6 million for the three-month period ended September 30, 1995 from $9.9 million in the comparable prior fiscal period. Lower payroll related expenses and other professional fees were partially offset by increased engineering supply expenses associated with new product development activities. Products introduced in the first quarter of transition period 1995 included additions to the Bravo MS, Premmia GX and the Ascentia 950N product lines. As a percentage of sales, engineering and development expenses increased to 2.4% from 2.0% in the comparable prior year period. Other Income and Expense For the three-month period ended September 30, 1995, the Company had net interest expense of $3.6 million compared to $2.8 million in the corresponding fiscal 1995 period. Interest expense increased as a result of higher average short-term borrowings, a higher effective interest rate on the note payable to Tandy and increased interest expense associated with the Company's Liquid Yield Option Notes due 2013. In the first three months of transition period 1995, the Company recognized net other expenses of $1.3 million compared to $.3 million for the same fiscal 1995 period. These amounts relate primarily to foreign currency transaction and remeasurement gains and losses and the costs associated with the Company's foreign currency hedging activities. The Company adheres to a hedging strategy which is designed to minimize the effect of remeasuring local currency balance sheets of its foreign subsidiaries on the Company's consolidated financial position and results of operations. Income Tax Benefit The Company was unable to record a tax benefit for the loss incurred during the quarter ended September 30, 1995, yielding an effective tax rate of zero. This effective tax rate compares to an effective income tax benefit of 19.5 % for the same prior year period. The decrease in the tax rate is attributable to the Company's provision of a full valuation reserve against any additional deferred tax assets arising from the Company's current operating loss. The realization of previously recorded deferred tax assets is in large part dependent on the Company's ability to generate future taxable income from reversals of existing taxable temporary differences, sales of new and existing products and/or available tax planning strategies. 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 such deferred tax assets and the Company's effective tax rate may be adversely affected. LIQUIDITY AND CAPITAL RESOURCES Working capital of $357.3 million at September 30, 1995 included cash and cash equivalents of $135.3 million compared to working capital of $306.9 million and cash and cash equivalents of $95.8 million at July 1, 1995. The Company had no short-term borrowings at September 30, 1995 compared to $156.0 million at July 1, 1995. During the first three months of transition period 1995, the Company used $30.0 million of cash principally to fund its operating loss for the quarter. Net cash used in investing activities decreased during the first quarter of transition period 1995 compared with the same comparable year period, primarily due to a decrease in capital expenditures in transition period 1995. Capital expenditures totaled $4.5 million in the first three months of transition period 1995 compared to $8.6 million in the comparable prior year period. Capital expenditures consisted primarily of additions to plant and engineering equipment. The Company regularly reviews its cash funding requirements on a consolidated basis and attempts to meet those requirements through a combination of cash on hand, cash provided by operations, available borrowings under any credit facilities and possible future public or private debt and/or equity offerings. The Company utilizes a centralized corporate approach for its cash management activities and attempts to maximize the use of its consolidated cash resources so as to minimize additional debt requirements while complying with any legal or other restrictions upon the free flow of funds from one segment, division or subsidiary to another. The Company invests its excess cash in investment grade short-term money market instruments. On February 27, 1995, the Company entered into a Stock Purchase Agreement ("Purchase Agreement") with Samsung Electronics Co., Ltd. ("Samsung"), providing for a significant minority ownership interest in the Company of approximately 40%. On June 30, 1995, AST stockholders approved the strategic investment and all regulatory approval had been received as of July 1, 1995. Under the terms of the Purchase Agreement, as amended by Amendment No. 1 thereto, dated as of June 1, 1995, and Amendment No. 2 thereto, dated as of July 29, 1995, Samsung purchased 6.44 million newly issued shares of common stock from AST, representing 19.9% of the then currently outstanding shares of common stock, at $19.50 per share and commenced a cash tender offer to purchase 5.82 million shares of common stock from the Company's stockholders, representing 18% of the then currently outstanding shares of common stock, at $22 per share. Concurrent with the acceptance of the shares for purchase under the tender offer, Samsung purchased an additional 5.63 million newly issued shares of common stock from AST at $22 per share so that its aggregate ownership interest in AST, after completion of all of the purchases, is approximately 40%. On July 31, 1995, the transaction was completed and the Company received net proceeds of approximately $240 million. The proceeds received from the Samsung investment were utilized to repay the amounts outstanding under both the $185 million and $50 million revolving credit facilities. The Company expects that it will utilize the remaining proceeds for working capital and capital expenditure requirements. In addition to these proceeds, the Company's ability to fund its activities from operations is directly dependent upon its rate of growth, ability to effectively manage its inventory, the terms under which suppliers extend credit to the Company, the terms under which the Company extends credit to its customers and its ability to collect under such terms, the manner in which it finances any capital expansion, and the Company's ability to access external sources of financing. While the Company has been able to maintain access to external financing sources, no assurance can be given that such access will continue or that the Company will be successful in obtaining new or replacement sources of financing to replace the bank credit facilities which the Company canceled in August 1995. If the Company is unable to maintain access to financing sources or is unable to secure new sources, the Company's ongoing operations would be adversely impacted. In addition, continued operating losses by the Company would likely make it more difficult for the Company to access external financing sources, which would also adversely impact the Company's ongoing operations. On November 2, 1995, the Company announced that it had entered into a letter of intent agreement with Samsung pursuant to which Samsung would provide certain additional support to the Company as consideration for such number of shares of Common Stock as would increase its ownership to 49.9 percent. The additional support includes a line of credit, or other form of credit support, through November 30, 1996, in the amount of $100 million, secured by an interest in inventory, accounts receivable, and other available assets of the Company as requested by Samsung, and an increase in the Company's supplier line of credit with Samsung to $100 million through November 30, 1996, with an extension of payment terms under such line of credit to 90 days through November 30, 1996, decreasing to 30 days for products shipped after January 30, 1997. In addition, Samsung will provide certain other elements of support to the Company, the amount and value to be agreed to by Samsung and a committee of independent directors. In connection with this agreement, the Company will issue a number of shares of Common Stock to Samsung so as to increase its ownership to 49.9%, and Samsung will appoint two additional directors to the Company's board of directors. In addition, Samsung and the Company agreed to negotiate further support arrangements by Samsung, which if met, would increase Samsung's ownership to 60 percent. The support transactions are subject to definitive documentation and approvals. The letter of intent agreement is non-binding, and in the event that the Company is unable to secure the financial support under the agreement or is unable to secure alternative sources of financing, the Company's operations would be adversely affected. In connection with the Tandy acquisition, the Company issued a $96.7 million promissory note to Tandy Corporation which is due on July 11, 1996. Interest due related to fiscal 1995 was paid on July 11, 1995 at a rate of 4.94% per annum. The interest rate has been adjusted to 5.00%, effective July 11, 1995, based on the lower of either 5% or the "lowest three month rate" within the meaning of Section 1274(d)(2) of the Internal Revenue Code of 1986 as of July 11, 1995. Interest is paid once a year on July 11th and there are no sinking fund requirements. The note also required the Company to maintain a standby letter of credit payable to Tandy in the amount of 70% of the face value of the note or $67.7 million. Upon maturity of the note, up to 50% of the initial principal amount of the promissory note was convertible, at the option of the Company, into common stock of the Company based upon its then fair market value, as defined in the promissory note. Under the terms of the Purchase Agreement, Samsung agreed to provide a letter of credit to support the promissory note due to Tandy Corporation replacing the Company's letter of credit and to provide funds to satisfy $75 million of the note obligation. On August 23, 1995, the Company and Tandy Corporation amended the terms of the $96.7 million promissory note. Pursuant to such amendments, the Company paid $6.7 million on August 25, 1995, thereby reducing the note balance to $90 million. Tandy allowed the substitution of a letter of guarantee from both Samsung Electronics Co., Ltd. and Samsung Electronics America, Inc. for the letter of credit previously required from the Company. Additionally, upon maturity of the note, the maximum principal amount of the note that may be converted, at the option of the Company, into common stock of the Company, based upon its then fair market value as defined in the note, was reduced to $30 million. All other terms of the promissory note remained unchanged. On December 14, 1993, the Company issued $315 million par value of Liquid Yield Option Notes ("LYONs") due December 14, 2013 and received total proceeds of approximately $111.7 million. The LYONs are zero coupon convertible subordinated notes which were sold at a significant discount from par value with a yield to maturity of 5.25% and a total value at maturity of $315 million. There are no periodic payments of interest on the LYONs. Each $1,000 principal amount at maturity of LYONs is convertible into 12.993 shares of the Company's common stock at any time. Upon conversion of a LYON, the Company may elect to deliver shares of common stock at the conversion rate or cash equal to the market value of the shares of common stock into which the LYONs are convertible. 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 or any combination thereof. The Company has made no decision as to whether it will meet future purchase obligations in cash, common stock, or any combination thereof. Such decision will be based on market conditions at the time a decision is required, as well as management's view of the liquidity of the Company at such time. The total accreted value of the LYONs at September 30, 1995 is $120.8 million. In addition, as of 35 business days after the occurrence of any change in control of the Company occurring on or prior to December 14, 1998, each LYON will be purchased for cash by the Company, at the option of the holder, for a change in control purchase price equal to the issue price of the LYONs plus accrued original issue discount through the date set for such purchase. A change in control of the Company is deemed to have occurred under the terms of the LYONs at such time as any person, other than the Company, has become the beneficial owner of 50% or more of the Company's common stock or the Company is not the surviving corporation of any consolidation or merger of the Company. The Purchase Agreement and ownership by Samsung of approximately 40% of the common stock of the Company does not have any impact on the terms of the LYON securities. In addition, the potential increase in ownership by Samsung to 49.9% pursuant to the letter of intent agreement pursuant to the letter of intent agreement does not have any impact on the terms of the LYONs. The terms of the LYONs would only be impacted if Samsung's ownership exceeds 50%. The Company attempts to minimize its exposure to foreign currency transaction and remeasurement gains and losses due to the effect of remeasuring the local currency balance sheets of its foreign subsidiaries on the Company's consolidated financial position and results of operations. The Company utilizes a limited hedging strategy which includes the use of foreign currency borrowings, netting of foreign currency assets and liabilities as well as forward exchange contracts to hedge its exposure to exchange rate fluctuations in connection with its subsidiaries' monetary assets and liabilities held in foreign currencies. The carrying amounts of the forward exchange contracts equal their fair value and are adjusted at each balance sheet date for changes in exchange rates. Realized and unrealized gains and losses on the forward contracts are recognized currently in the consolidated statements of operations. The Company held forward exchange contracts with a face value of approximately $157.4 million at September 30, 1995 and $162.0 million at July 1, 1995, which approximates the Company's hedgeable net monetary asset exposure to foreign currency fluctuations at those respective dates. 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 exposures. Unrealized losses associated with these forward contracts totaling $1.8 million at September 30, 1995 and $0.6 million at July 1, 1995 are included in the Company's consolidated statements of operations for those periods. Foreign currency borrowings totaled $4.1 million at September 30, 1995 and $4.2 million at July 1, 1995. ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS Future operating results may be impacted by a number of factors, including worldwide economic and political conditions, industry specific factors, the Company's ability to maintain access to external financing sources 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 is 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 commercially successful or technically advanced due to the rapid improvements in computer technology and resulting product obsolescence. There is also no assurance that the Company will be able to deliver commercial quantities of new products in a timely manner. The success of new product introductions is dependent on a number of factors, including market acceptance, the Company's ability to manage risks associated with product transitions, the effective management of inventory levels in line with anticipated product demand and the timely manufacturing of products in appropriate quantities to meet anticipated demand. The Company regularly introduces new products designed to replace existing products. While the Company attempts to closely monitor new product introductions and product obsolescence, there can be no assurance that such transitions will occur without adversely affecting the Company's net sales, cash flow and profitability, as occurred in fiscal 1995 and the first quarter of transition period 1995. In addition, if the Company is unable to successfully anticipate and manage shifts in microprocessor 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's ability to compete is largely dependent upon its financial strength and its ability to adequately fund its operations. Many of the Company's competitors are significantly larger and have significantly greater financial resources than the Company. The Company's sources of financing include cash on hand, cash provided by operations, available borrowings under its revolving credit facilities (which were canceled in August 1995) and possible future public or private debt and/or equity offerings. The Company's future success is highly dependent upon its continued access to sources of financing which it believes are necessary for the continued growth of the Company. As discussed above in Liquidity and Capital Resources, the Company entered into a letter of intent agreement with Samsung pursuant to which the Company will receive a line of credit or other form of credit support of $100 million through November 30, 1996, and an increase in its supplier line of credit support to $100 million with an extension payment terms of 90 days through November 30, 1996, and other elements of support to be agreed upon. The letter of intent agreement is non-binding, and in the event that the Company is unable to secure the financial support under the agreement or is unable to secure alternative sources of financing, there would be a material adverse effect on the Company's business operations. Increases in demand for personal computers have created industrywide shortages, which at times have resulted in premium prices being paid for key components, such as Dynamic Random Access Memory chips ("DRAMs"), some Static Random Access Memory chips, CD-ROMs 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, some Static Random Access Memory chips and Application Specific Integrated Circuits, that are currently purchased from single sources due to availability, price, quality or other considerations. The Company purchases components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with single source suppliers. Reliance on suppliers generally involves risks, including the possibility of defective parts, a shortage of components, an increase in component costs and disruptions in delivery of components. Should delays, defects or shortages re-occur or component costs significantly increase, the Company's net sales and profitability could be adversely affected. The Company and Samsung, effective July 31, 1995, entered into strategic agreements covering a broad range of commercial relationships including, among others, component supply agreements for certain critical components manufactured by Samsung and used by the Company in the manufacture of personal computers and a joint procurement agreement providing a mechanism for Samsung and the Company to coordinate their purchases from third parties in order to obtain more favorable pricing. However, as Samsung is a supplier of critical components in a highly competitive marketplace, other suppliers may be less likely to extend attractive terms to or to do business with the Company. In addition, because Samsung has other business involvements typical of large, multi-national companies and is not based in the U.S., it is possible that some suppliers, customers, employees and others will not react favorably to Samsung's investment in the Company. The Company participates in a highly competitive and volatile industry that is characterized by dynamic customer demand patterns, rapid introduction of new products, technological advances and product obsolescence resulting in an extremely competitive pricing environment with downward pressure on gross margins. The Company anticipates that the personal computer industry will continue to experience intense price competition and dramatic price reductions during transition period 1995. There can be no assurance that future pricing actions by the Company and its competitors will not adversely impact the Company's net sales and profitability. Consistent with industry practice, the Company provides certain of its larger distributors, consumer retailers and dealers with stock balancing and price protection rights that permit these distributors, retailers and dealers to return slow-moving products to the Company for credit or to receive price adjustments if the Company lowers the price of selected products within certain time periods. If sales and pricing trends experienced in the current year continue or accelerate, there can be no assurance that the Company will not experience rates of return or price protection adjustments that could continue to adversely impact on the Company's net sales and profitability in the future. The Company believes that its production capacity should be sufficient to support anticipated unit volumes for the foreseeable future. However, if the Company is unable to obtain certain key components, or to effectively forecast customer demand or manage its inventory, increased inventory obsolescence or reduced utilization of production capacity could adversely impact the Company's gross margins and results of operations. 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 in the past experienced seasonally higher sales in the second quarter ending December 31 of the fiscal year due to holiday demand for some of its products in the consumer retail channel. The Company's overall operating income varies within each geographic region. Historically, the Company's Americas and Asia Pacific regions made the primary contributions to the Company's profitability. Therefore, should the Company continue to experience significant revenue and/or profitability problems in either region, this could significantly impact the Company's results of operations. Europe had historically shown an operating loss primarily due to a lack of centralized manufacturing, distribution and service operations. During fiscal 1994, the Company realigned and centralized its European distribution and service operations in conjunction with establishing a new manufacturing facility in Limerick, Ireland. As a result, the Company has seen lower operating losses throughout the European region in fiscal 1995 and the first quarter of transition period 1995. However, if the Company is unable to achieve further manufacturing efficiencies or offset future pricing actions with further cost reductions, the ability of the Company's European operations to become profitable could be adversely affected. 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 adhering to a hedging strategy utilizing forward exchange contracts and, to a lesser extent, foreign currency borrowings. The Company's exposure to currency fluctuations will continue to increase as a result of the expansion of its international operations. Significant fluctuations in currency values could have an adverse effect on the Company's net sales, gross margins and profitability. The Company's international operations may also be affected by changes in United States trade relationships, increased competition and the economic stability of the locations in which sales occur. The Company operates in foreign locations, such as the PRC, where future sales may be dependent upon continuing favorable trade relations. Additionally, foreign locations such as the PRC may experience changes in their general economic stability due to such factors as increased inflation and political turmoil. Any significant change in United States trade relations or the economic stability of foreign locations in which the Company operates could have an adverse effect on the Company's net sales and profitability. The personal computer industry presents risks for claims of infringement of patents, trademarks and copyrights. From time to time, the Company is notified that certain of its products may infringe upon the intellectual property rights of others. The Company generally evaluates all such notices on a case-by-case basis to determine whether licenses are necessary or desirable. If such claims are made, there can be no assurance that licenses will be available on commercially reasonable terms or that retroactive royalty payments on sales of the Company's computer products will not be required. In addition, substantial costs may be incurred in disputing such claims. The Company believes that the actions it takes to avoid or minimize the impact to the Company of such claims are prudent; however, there can be no assurance that such claims will not occur or, if successful, would not have a material adverse effect on the Company's business operations and profitability. Pursuant to the Strategic Alliance Agreement with Samsung Electronics Co., Ltd. dated February 27, 1995, the Company entered into a patent cross license agreement with Samsung dated July 31, 1995 that expires on July 31, 2005. The Company's primary means of distribution remains 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. In determining the amount of the valuation allowance required to be established against deferred tax assets in accordance with the provisions of Statement of Financial Accounting Standards No. 109 "Accounting for Income Taxes", the Company has primarily relied upon its ability to generate future taxable income using certain available tax planning strategies. The amount of taxable income that could actually be generated from such tax planning strategies is dependent upon the Company being able to sell certain appreciated assets at the current estimated fair market value. Although the Company has utilized an outside valuation firm to determine the current estimated fair market value of such assets, changes in market conditions could result in a reduction of the estimated fair market value of these assets that would adversely affect the amount of the valuation allowance and reduce the amount of net deferred tax assets considered realizable. The Company's corporate headquarters facility, at which the majority of its research and development activities are conducted, is located near major earthquake faults which have experienced earthquakes in the past. While the Company does carry insurance at levels management believes to be prudent, in the event of a major earthquake or other disaster affecting one or more of the Company's facilities, it is likely that insurance proceeds would not cover all of the costs incurred and, therefore, the operations and operating results of the Company could be adversely affected. Because of these and other factors affecting the Company's operating results, past financial performance should not be considered a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods. In addition, the Company's participation in the highly dynamic personal computer industry often results in significant volatility in the Company's common stock price. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On March 3 and March 14, 1994, complaints were filed by two shareholders against the Company and certain of its officers and directors requesting certification of a class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The complaints were filed in the United States District Court for the Central District of California. On September 12, 1994, a complaint was filed by a shareholder against the Company and certain of its officers and directors requesting certification of a class action, asserting claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures and seeking unspecified compensatory damages and related fees and costs. The September 12, 1994 complaint was filed in the United States District Court for the Central District of California under the case name Steven A. Kornfeld v. James L. Forquer, et al. On October 6, 1994, a complaint was filed by a shareholder in the United States District Court for the Central District of California. The October 6, 1994 complaint names the Company and certain of its officers and directors as defendants, asserts claims under state and federal securities laws based on allegations that the Company made inadequate and false disclosures, and seeks unspecified compensatory damages and related fees and costs. The cases with complaints filed on March 3, 1994, March 14, 1994, and October 6, 1994, have been consolidated under the case name In re AST Research Securities Litigation. The AST Research Securities Litigation and Kornfeld cases are being treated as related cases by the court. A settlement agreement dated August 28, 1995 was signed to end the AST Research Securities Litigation and Kornfeld cases, and requires the payment of $12.5 million by the defendants to the plaintiffs in November 1995. An Order Preliminarily Approving Settlement dated August 28, 1995 was entered by the Court to begin the process of approving the settlement. The Company expects that a majority of the settlement payment will be covered by insurance. The Internal Revenue Service ("IRS") is currently examining the Company's 1989, 1990 and 1991 federal income tax returns. In addition, the IRS has completed its examination of the Company's 1987 and 1988 federal income tax returns and has proposed adjustments to the Company's federal tax liabilities for such years of approximately $8.3 million, excluding interest, relating to the allocation of income between the Company and its foreign subsidiaries. Management believes that the Company's position has substantial merit and intends to vigorously contest these proposed adjustments. Management further believes that any liability that may result upon the final resolution of the proposed adjustments for 1987 and 1988 or current examinations of 1989, 1990 and 1991 will not have a material adverse effect on the Company's consolidated financial position or results of operations. The 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 sixteen similar lawsuits each of which alleges as a factual basis the occurrence of carpal tunnel syndrome or repetitive stress injuries. The suits naming the Company are just a few of the many lawsuits of this type which have been filed, often naming IBM and other major computer companies. The claims against the Company total in excess of $100 million in compensatory damages and punitive damages and additional unspecified amounts. The Company has denied or is in the process of denying the claims and intends to vigorously defend the suits. The Company is unable at this time to predict the ultimate outcome of these suits. Ultimate resolution of the litigation against the Company may depend on progress in resolving this type of litigation overall. Before consideration of any potential insurance recoveries, the Company believes that the claims in the suits filed against it will not have a material impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. The Company has maintained various liability insurance policies during the periods covering the claims filed above. While such policies may limit coverage under certain circumstances, the Company believes that it is adequately insured. Should the Company not be successful in defending against such lawsuits or not be able to claim compensation under its liability insurance policies, the Company's profitability and financial condition may be adversely affected. The Company was named, along with twelve other personal computer companies, as a defendant in a lawsuit filed on March 27, 1995 in the Superior Court for the County of Merced, California. The case name for this March 27, 1995 filing is People v. Acer, et al., and alleges that the Company has engaged in deceptive advertising and unlawful business practices with relation to computer monitor screen measurements. 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 also 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. Further, 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. Management does not believe that the outcome of these disputes will have a material adverse impact on the Company's consolidated financial position or results of operations; however, the Company is unable to estimate the amount of any loss that may be realized in the event of an unfavorable outcome. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 11. Computation of Net Income (Loss) Per Share. 27. Financial Data Schedule (b) Reports on Form 8-K On August 7, 1995, the Company filed a report on Form 8-K under Item 5 thereof regarding the completion of the Samsung strategic investment providing for an ownership interest of up to approximately 40 percent in the Company, as well as other strategic relationships, including component supply and joint procurement agreements, effective July 31, 1995. On September 6, 1995, the Company filed a report on Form 8-K under Item 5 thereof regarding the August 29, 1995 preliminary approval by the U.S. District Court for the Central District of California for a settlement agreement in four class-action shareholder lawsuits. On September 18, 1995 the Company filed a report on Form 8-K reporting under Item 5 thereof regarding the resignations of Jim Schraith, as president, chief operating officer and a board member; Jim Wittry, senior vice president, Americas and Scott Smith, vice president and general manager, desktop products, effective September 11, 1995 and the appointment of Gerald T. Devlin as senior vice president, Americas. The Company also announced anticipated lower first quarter fiscal 1996 performance and a net loss significantly higher than the $40 million loss recorded during the prior year period. On September 21, 1995, the Company filed a report on Form 8-K under Item 5 thereof regarding the resignation of Kirby Coryell, senior vice president and officer, worldwide manufacturing operations and the promotion of Gary Weaver formerly vice president, operations, Americas replacing Mr. Coryell, effective September 20, 1995. On September 25, 1995, the Company filed a report on Form 8-K reporting under Item 5 thereof regarding resignations of board members Delbert W. Yocam and Noh Byung Park, effective September 21, 1995. AST, Advantage!, and GRiD are registered trademarks of AST Research, Inc. Ascentia, Bravo, Premmia and Manhattan are trademarks of AST Research, Inc. Pentium is a registered trademark of Intel Corporation. Windows is a registered trademark of Microsoft Corporation. Tandy is a registered trademark of Tandy Corporation. All other product or service names mentioned herein may be trademarks or registered trademarks of their respective owners. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AST Research, Inc. (Registrant) Date: November 13, 1995 Bruce C. Edwards Executive Vice President and Chief Financial Officer EX-11 2 EXHIBIT 11 AST RESEARCH, INC. COMPUTATION OF NET LOSS PER SHARE
Three Months Ended ------------------------ September 30, October 1, (In thousands, except per share amounts) 1995 1994 - ------------------------------------------------------------------------------ Primary loss per share - ---------------------- Shares used in computing primary loss per share: Weighted average shares of common stock outstanding 40,762 32,346 Effect of stock options treated as common stock equivalents under the treasury stock method - - -------- -------- Weighted average common and common equivalent shares outstanding 40,762 32,346 -------- -------- Net loss $(96,382) $(39,406) -------- -------- Loss per share - primary $ (2.36) $ (1.22) ======== ======== Fully diluted loss per share - ---------------------------- Shares used in computing fully diluted loss per share: Weighted average shares of common stock outstanding 40,762 32,346 Effect of stock options treated as common stock equivalents under the treasury stock method - - Shares assumed issued on conversion of Liquid Yield Option Notes (LYONs) - - -------- -------- Total fully diluted shares outstanding 40,762 32,346 -------- -------- Net loss - fully diluted loss per share: Net loss $(96,382) $(39,406) Adjustment for interest on LYONs, net of tax - - -------- -------- Adjusted net loss $(96,382) $(39,406) -------- -------- Loss per share - fully diluted $ (2.36) $ (1.22) ======== ========
EX-27 3
5 This schedule contains summary financial information extracted from the accompanying Consolidated Balance Sheets and Consolidated Statements of Operations and is qualified in its entirety by reference to such financial statements. 1,000 3-MOS DEC-30-1995 SEP-30-1995 135,326 0 299,654 17,690 349,223 814,063 167,938 68,585 991,744 456,975 122,518 447 0 0 407,401 991,744 403,357 403,357 410,126 410,126 0 859 4,798 (96,382) 0 (96,382) 0 0 0 (96,382) (2.36) (2.36)
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