-----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, P7LRq9YT2OTCjWtTQKV7FOd+fA80g+s+NWtoE+VZgSUWTja/rYPBuO3BzNMPtgGB bKfwmCllKWBLirh2zVNtZg== 0000725182-97-000011.txt : 19970514 0000725182-97-000011.hdr.sgml : 19970514 ACCESSION NUMBER: 0000725182-97-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19970329 FILED AS OF DATE: 19970513 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: 97602166 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 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
- -------------------------------------------------------------------------------- March 29, December 28, 1997 1996 (In thousands, except share amounts) (Unaudited) - -------------------------------------------------------------------------------- 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 ================================================================================
See accompanying notes. AST RESEARCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
- -------------------------------------------------------------------------------- Three Months Ended -------------------------- March 29, March 30, (In thousands, except per share amounts) 1997 1996 - -------------------------------------------------------------------------------- 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 ================================================================================
See accompanying notes. AST RESEARCH, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Three Months Ended March 29, March 30, (In thousands) 1997 1996 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 $ - ================================================================================
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:
- -------------------------------------------------------------------------------- March 29, December 28, (In thousands) 1997 1996 - -------------------------------------------------------------------------------- Purchased parts $ 70,372 $ 68,877 Work in process 12,127 7,380 Finished goods 57,072 62,750 - -------------------------------------------------------------------------------- $139,571 $139,007 ================================================================================
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:
- -------------------------------------------------------------------------------- Three Months Ended ---------------------------- March 29, March 30, (In thousands) 1997 1996 - -------------------------------------------------------------------------------- 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) ================================================================================
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.
- -------------------------------------------------------------------------------- Percentage of Total Revenue Three Months Ended ----------------------- March 29, March 30, 1997 1996 - -------------------------------------------------------------------------------- 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 ================================================================================
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 EX-11 2 EXHIBIT 11 AST RESEARCH, INC. COMPUTATION OF NET LOSS PER SHARE
- -------------------------------------------------------------------------------- Three Months Ended ------------------------ (In thousands, except per March 29, March 30, share amounts) 1997 1996 - -------------------------------------------------------------------------------- Weighted average shares of common stock outstanding 57,894 44,682 Net loss $(109,848) $(115,760) Loss per share $ (1.90) $ (2.59) ================================================================================
EX-27 3
5 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. 1,000 3-MOS Jan-03-1998 MAR-29-1997 31,699 0 305,887 18,741 139,571 508,360 171,602 (76,195) 697,385 656,857 0 0 2,780 580 (124,202) 697,385 346,942 346,942 352,966 352,966 0 356 11,822 (108,877) 971 (109,848) 0 0 0 (109,848) (1.90) (1.90)
EX-10.33 4 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 EX-10.34 5 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). EX-10.35 6 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 -----END PRIVACY-ENHANCED MESSAGE-----