-----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, N/tbeMHG8gKhsF+ByrLUtRbmrMFtL0qO+6czPgYMzPm/2SpcYGubpGfP6okHqdra zGMoXj4eDWAhGCfbgbRlCQ== 0000898430-96-002530.txt : 19960613 0000898430-96-002530.hdr.sgml : 19960613 ACCESSION NUMBER: 0000898430-96-002530 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19960611 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: APPLIED MAGNETICS CORP CENTRAL INDEX KEY: 0000006948 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 951950506 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-06635 FILM NUMBER: 96579207 BUSINESS ADDRESS: STREET 1: 75 ROBIN HILL RD CITY: GOLETA STATE: CA ZIP: 93117 BUSINESS PHONE: 8056835353 MAIL ADDRESS: STREET 1: 75 ROBIN HILL ROAD CITY: GOLETA STATE: CA ZIP: 93117 10-K/A 1 FORM 10-K/A (AMENDED FORM 10-K) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-K/A NO. 1 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended September 30, 1995 [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from ______________ to ______________ Commission File No. 1-6635 APPLIED MAGNETICS CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-1950506 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 75 ROBIN HILL ROAD, GOLETA, 93117 CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 683-5353 THE PURPOSE OF THIS AMENDMENT IS TO AMEND THE FOLLOWING ITEMS OF REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED SEPTEMBER 30, 1995 AS FOLLOWS: PART I Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations To revise and restate the second to last sentence of the paragraph under the caption "Selling, General and Administrative Expenses." To revise and restate the paragraph under the caption "Special Charges." To correct the second paragraph under the caption "Liquidity and Capital Resources." Item 8 Financial Statements and Supplementary Data To revise and restate Note 7 to the Consolidated Financial Statements. To add a new Note 11 to the Consolidated Financial Statements. Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K. To revise Schedule II Valuation and Qualifying Accounts. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS The Company posted a net profit in fiscal 1995, as compared to net losses during the previous two years of the three year period ended September 30, 1995. The Company's successful turnaround is attributed to numerous factors, including increased customer demand for its thin film products, substantial cost reductions implemented during the last quarter of fiscal 1994, timely production ramps on a number of qualified thin film programs and significant technological process improvements which increased production volumes. This growth was supported by generation of cash as a result of completion of the sale of the Company's Tape Head business unit to Seagate and aggressive cash management practices which included accelerated payment terms with some of the Company's customers, completion of a secured asset-based revolving line of credit and extension of payment on a revolving credit facility with a commercial bank. See "Liquidity" for further discussion. During fiscal 1995, in response to market demands occurring over the three year period, the Company continued its shift from production of ferrite disk heads to thin film disk heads, which offer superior performance characteristics over ferrite disk heads and became competitively priced. The Company furthered its technological development from the thin film microslider to the nanoslider form factor and by the first quarter of fiscal 1995, substantially all thin film shipments were nanoslider products. The Company also made substantial progress in thin 13 film production process improvements including conversion from 3 inch substrate ("wafer") to 6 inch wafer fabrication (which produces more thin film disk heads per wafer), and conversion to fully etched air bearing ("FEAB") and negative pressure air bearing disk head designs, that allowed certain of its products to demonstrate improved performance. MR disk head product development continues to be critical for the Company's future growth. The Company is committed to substantial engineering, production process and capital investments in MR. It continued to ship prototype and qualification samples to selected customers. The Company expects to ship production quantities of MR disk heads by the end of fiscal 1996. See "Products" under Item 1. During fiscal 1994 and fiscal 1993, market demand shifted to the thin film nanoslider form factor from the microslider form factor and from ferrite disk heads. This unexpected rapid market transition contributed to the substantial losses in fiscal 1994 as the Company struggled with its thin film manufacturing process which impacted the Company's ability to quickly ramp production to achieve desired levels of volume shipments in response to strong market demand. The market transition impacted fiscal 1993 as the Company sustained significant losses and recorded a $49.6 million restructuring charge in the fourth quarter to consolidate manufacturing resources and write-down production assets (primarily related to ferrite and thin film microslider production) to their estimated net realizable values. Fiscal 1993 also included completion of management's strategic plan to focus solely on the design, manufacture and sale of magnetic recording head products. The execution of the plan included sale of non-core businesses, a secondary public offering, and establishing a strategic corporate relationship with HML . ANNUAL RESULTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, ---------------------------- 1995 1994 1993 (IN THOUSANDS) -------- -------- -------- Thin Film Disk Head Products Net Sales................................. $250,873 $133,909 $139,553 Percentage of Total....................... 85.7% 48.5% 41.6% Ferrite Disk Head Products Net Sales................................. 30,443 123,254 177,094 Percentage of Total....................... 10.4% 44.7% 52.7% Tape Head Products Net Sales................................. 11,284 18,764 19,251 Percentage of Total....................... 3.9% 6.8% 5.7% -------- -------- -------- Total Net Sales............................. $292,600 $275,927 $335,898 100.0% 100.0% 100.0% ======== ======== ========
NET SALES: Net sales increased 6% from fiscal 1994 to fiscal 1995. Net sales of thin film disk head products increased as a percentage of total net sales from 48.5% of net sales in 1994 to 85.7% of net sales in 1995. In absolute terms, thin film net sales increased 87.3% from 1994 to 1995. The significant growth in thin film disk heads was attributable to achievement of production volumes for nanoslider products and continued strong demand by certain customers on more mature products. Thin film disk head net sales increased quarter-to-quarter for fiscal 1995 and were $41.9 million, $57.9 million, $71.9 million and $79.2 million, respectively. This increase during the first two quarters was due to significant growth in thin film disk head shipments, while the last two quarters were primarily due to the change in mix of shipments from head gimbal assemblies ("HGAs") to head stack assemblies ("HSAs") and to a lesser extent due to growth in thin film disk head shipments. Net sales of ferrite disk head products decreased 75.3% in fiscal 1995 from fiscal 1994. The Company attributes the decline to the market shift to thin film disk heads that offer competitive prices and superior performance and to the Company's decision in fiscal 1994 to focus on thin film disk head product development. The Company believes that computer drive 14 industry demand will continue to shift to thin film and MR disk heads over the long term. As a result, over the past three fiscal years, the Company has committed its engineering and production resources to further advancement of thin film inductive technology. Net sales for tape head products decreased 39.9% in fiscal 1995 from fiscal 1994. Tape head products were produced by the Company's Tape Head business unit which was sold to Seagate in December 1994. Pursuant to the sales agreement, the Company continues to provide certain tape-related goods and services on an ongoing basis. Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of thin film disk head products increased as a percent of total net sales from 41.6% in 1993 to 48.5% of net sales in 1994, but in absolute terms, net sales decreased slightly, by 4.0%, from 1993 to 1994. The decline was caused by difficulties experienced by the Company in achieving production volumes of nanoslider products. Net sales of thin film disk head products for three quarters of fiscal 1994 remained between $30.9 million and $32.5 million. In the fourth quarter of fiscal 1994, thin film disk head shipments increased to $38.0 million as a result of improved production yields. Net sales of ferrite disk head products decreased 30.4% from fiscal 1993 to 1994 as a result of maturing of ferrite-based drive programs for which the Company is a supplier. Net sales of tape head products remained flat in fiscal 1994 as compared to 1993. GROSS PROFIT: The gross margin increased in fiscal 1995 to 13.6% as compared to (2.2%) in fiscal 1994. The increase resulted from significantly higher revenues due to improved production volumes generated from technological improvements in the thin film nanoslider production processes, conversion from the 3 inch to 6 inch wafer fabrication, and due to continued cost reductions implemented during the last quarter of fiscal 1994. The gross margin decreased in fiscal 1994 to (2.2%) as compared to 14.9% in fiscal 1993. This decrease was primarily due to lower sales volumes, lower average unit sales prices and manufacturing difficulties as the Company was confronted with the sudden and unexpected change in market demands from the thin film microslider to the nanoslider form factor. RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were $33.7 million, $38.8 million and $32.6 million for fiscal years 1995, 1994, and 1993, respectively, before cost offsets of $14.1 million in fiscal 1994 and $15.1 million in fiscal 1993. These expenses represented 11.5%, 14.1% and 9.7% of net sales, respectively, for such periods. The cost offsets were related to developmental funding the Company received under a License and Technology Development Agreement with Hitachi Metals, Ltd. for the advancement of the Company's inductive thin film technology and the development and commercialization of MR disk head technology, and from joint product development agreements with certain major disk drive manufacturers for MR disk head development. Funding for these agreements was concluded by the end of fiscal 1994. R&D expenses decreased by $5.1 million from fiscal 1994 to 1995 as the Company implemented cost controls during the fourth quarter of fiscal 1994 in response to significantly lower revenues and deteriorating gross margins. R&D expenses increased $6.2 million from fiscal 1993 to 1994 as the Company increased its investment in the development and commercialization of MR disk head development and continued the advancement of inductive thin film technology. The Company continues to invest in advanced technology products and processes and expects that expenditures generally will increase on an absolute dollar basis, given that the revenue base can support these expenditures. The Company did not receive any development funding from customers and strategic partners in fiscal 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and administrative ("SG&A") expenses in absolute dollars were $7.4 million, $17.3 million, and $20.1 million in fiscal 1995, 1994 and 1993, respectively. These expenses represented 2.5%, 6.3% and 6.0% of net sales, respectively, for such periods. The Company's allowance for uncollectible accounts receivable at September 30, 1995 was $0.7 million, which is $2.9 million less than the reserve required at September 30, 1994. The reduction in this allowance is due to the improved financial stability of the Company's significant customers. The Company expects that SG&A expenses as a percent of sales will vary from period to period depending on the level of net sales. SPECIAL CHARGES: In 1993 the Company recorded a restructuring charge of $49.6 million to consolidate manufacturing resources and write-down manufacturing equipment to estimated net realizable value primarily as a result of the unexpectedly rapid market transition from ferrite and from the thin film microslider to the nanoslider form factor. Also in 1993, the Company completed the sale of three of its subsidiaries which were accounted for as discontinued operations in 1992 (as part of the 1992 restructuring). Magnetic Data, Inc. (MDI) and Brumko Magnetics (Brumko) were sold to Delta Bravo, Inc. (DBI), a privately owned company, and Optical Products Division was sold to Most, Inc. (MOST), a majority-owned subsidiary of Nakamichi Corporation Japan. The stated amount of the consideration received by the Company from DBI exceeded the estimated net realizable value of MDI and Brumko and included long-term notes receivable aggregating $18.4 million. Management believed that it was not probable that the $18.4 million of notes would be realized based upon its evaluation of the underlying operations' cash flows, which were the only source of repayment. Therefore, the $7.7 million reserve established for these discontinued operations in 1992 was applied against the related notes receivable, and an additional provision of $3.1 million was made to record these notes at their estimated net realizable value of $7.6 million. During 1994, the reserve for notes receivable was increased by $0.8 million as all income related to interest payments from DBI was deferred. During 1995, DBI defaulted on certain notes covenants and failed to make the fourth quarter's scheduled interest payment. Due to this situation and related disputes, management determined that the remaining DBI notes receivable balance should be fully reserved. This was accomplished by applying $3.2 million of excess reserve for accounts receivable, $2.8 million of excess 1993 restructuring reserves, and $0.8 million of interest payments received from DBI to the reserve for the notes receivable. 15 INTEREST INCOME AND EXPENSE: Interest income was $2.0 million in fiscal 1995, and $0.8 million in both fiscal 1994 and 1993. Interest income increased $1.2 million in fiscal 1995 from 1994 due to higher average cash balances and improved investment management. Interest income remained unchanged in fiscal 1994 from 1993, primarily due to similar average cash balances in both years. Interest expense was $4.9 million, $4.2 million and $5.6 million in fiscal 1995, 1994 and 1993, respectively. Interest expense increased $0.7 million in fiscal 1995 from 1994 primarily as a result of higher average interest rates on the Malaysian bank loans and letter of credit and loan fees related to the secured asset-based revolving line of credit established in January 1995. Interest expense decreased $1.4 million in fiscal 1994 from 1993 which included the write-off of certain loan origination expenses related to repayment of debt from proceeds of the Company's equity offering in February 1993. OTHER INCOME (EXPENSE): Other income of $6.3 million in fiscal 1995 included $4.9 million income recognized as the Company completed certain performance milestones pursuant to the sale of its Tape Head business unit to Seagate. See Note 6 of Notes to Consolidated Financial Statements for further discussion of the agreement. Other income in fiscal 1995 also included $1.3 million related to sale of tooling and excess assets. Other income (expense) for fiscal 1994 and 1993 primarily consisted of foreign exchange translation and transaction gains and losses. PROVISION FOR INCOME TAXES: For fiscal years 1995, 1994 and 1993, the most significant component of the provision for income taxes was foreign taxes for which there were no foreign tax credit offsets available. See Note 3 of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES In fiscal 1995, in order to improve liquidity and as part of a cash management and operating plan implemented by the Company, cost and cash expenditure controls were established, accelerated payment terms were negotiated with some of the Company's customers, the Tape Head business unit was sold to Seagate and the Company completed other financings, including new loan credit facilities, extensions or renewals of existing facilities and lease financing. The Company expects to continue to use lease financing for capital expenditures and anticipates that it will continue to maintain cost and expenditure controls to provide acceptable liquidity. As of September 30, 1995, the Company's cash and cash equivalents balance increased to $48.2 million from $20.8 million at September 30, 1994. During fiscal 1995, the Company generated $18.9 million from operating activities, comprised primarily of the net effect of the following: i) $1.7 million from net income, which included $27.6 million of depreciation and amortization expense; ii) increase in the accounts payable balance of $23.1 million to support higher levels of net sales and due to extended payment terms from one vendor; iii) increase in the accounts receivable balance of $17.8 million as a result of revenues in the fourth quarter of fiscal 1995 increasing to $92.4 million as compared to the fourth quarter of fiscal 1994 revenues of $64.6 million; and iv) increase in inventories of $3.8 million. Inventories did not increase as significantly as the increase in the accounts payable and receivable balances, as increased thin film disk head inventories were partially offset by the decrease in ferrite disk head inventories, coupled with better inventory management by the Company in fiscal 1995. The Company also generated $25.3 million in cash from the sale of businesses and assets which were made up of the following: (1) the sale of a building in Singapore for $4.9 million; (2) the sale of its Tape Head business unit to Seagate for $21.5 million, of which the Company received $14.0 million at the closing date of the transaction and $5.7 million, net of related costs, upon completion of certain performance milestones and (3) $0.7 million for the sale of excess machinery and equipment. See Note 6 of Notes to Consolidated Financial Statements for discussion of the Seagate agreement. At September 30, 1995, total debt, including notes payable, was $69.6 million, an increase of $2.4 million from the balance outstanding at September 30, 1994, primarily due to capital lease financing in Malaysia, where the Company has substantial manufacturing operations. The Company also had fully drawn down its unsecured Malaysian credit facilities to $46.9 million from a bank in Malaysia. In May 1995, the Company's Malaysian subsidiary agreed with the Malaysian bank to continue these credit facilities which have been in place since 1990. 16 The facilities are callable on demand, have no termination date, are guaranteed by the Company, are secured by the Malaysian subsidiary's real property holdings in Malaysia and are subject to certain covenants which preclude the subsidiary from granting liens and security interests in other assets. Should all or any significant portion of the Malaysian credit facilities become unavailable for any reason, the Company would need to pursue alternative financing sources. During fiscal 1995, the Company's Malaysian subsidiary entered into $5.1 million in capital lease agreements for machinery and equipment. In January 1995, the Company retired the $10.0 million debt obligation owed to Conner. The Company obtained a secured, asset-based revolving line of credit of $35.0 million from CIT Group/Business Credit, Inc. ("CIT"). This line of credit provides for borrowings up to $35.0 million based on eligible trade receivables at various interest rates over a three year term and is secured by trade receivables, inventories and certain other assets. As of September 30, 1995, $7.5 million of borrowings was outstanding. The $7.5 million was fully repaid during October 1995. The balance available for additional borrowings under this line of credit was approximately $1.3 million at September 30, 1995 and the Company was in compliance with all financial covenants. In May 1995, the Company obtained an extension to March 1996, of the maturity date on a $10.0 million revolving credit facility from a commercial bank. This facility is secured by a letter of credit issued for the account of HML, subject to reimbursement by the Company. The Company's reimbursement obligation to HML is secured by a security interest and lien on certain machinery and equipment. The Company continues to have informal understandings with some of its customers to make payments on accelerated terms. However, the liquidity risk associated with the cancellation of one or more of these arrangements is partially ameliorated by the credit available under the CIT Agreement under which available loan proceeds could generally increase as the Company's trade accounts receivable increase. In 1996, the Company plans approximately $100.0 million in capital expenditures related primarily to improving thin film production processes, increasing thin film production volumes and development and production of MR technologies and products. During the next twelve months, the Company believes it will have sufficient cash flows from operations and equipment lease financing alternatives to meet its operating and capital expenditure requirements. The Company's accounts receivable and inventory balances are heavily concentrated with a small number of customers. Sales to Conner and Maxtor accounted for 41% and 19%, respectively, for the Company's sales in 1995. If any large customer of the Company became unable to pay its debts to the Company, liquidity would be adversely affected. In fiscal 1995, Conner agreed to be acquired by Seagate. The Company anticipates that such acquisition will result in a significant decrease in the sales volumes to Conner in fiscal 1996 and in future years. See "Customers and Marketing" under Item 1. The Company operates in a number of foreign countries. Purchases of certain raw materials and certain labor costs are paid for in foreign currencies, as well as repayments of a portion of the Company's Malaysian debt denominated in ringgitts. The Company is not currently hedging against potential foreign exchange risk. Fluctuations of foreign currency to the dollar could have a significant effect on reported cash balances. The effect of foreign currency exchange rate changes were increases of $0.1 million and $1.2 million in cash, for fiscal 1995 and 1994, respectively. Market and customer demand continues to be strong for the Company's thin film disk heads. In the event that demand for the Company's products declines, management believes that it will be able to reduce its funding requirements for planned, but not committed, capital expenditures. However, if the Company were unable to continue to increase sales or maintain production yields at acceptable levels in order to permit it to execute customer orders for new drive programs in a timely manner, there would be a significant adverse impact on liquidity. This would require the Company to either obtain additional capital from external sources or to curtail its capital, research and development and working capital expenditures. Such curtailment could adversely affect the Company's future years' operations and competitive position. 17 RECENT ACCOUNTING PRONOUNCEMENTS In March of 1995 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 ("SFAS 121"). This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. This Statement will become effective for financial statements of the Company in the first quarter of fiscal 1997. Management has not yet determined the impact which SFAS 121 will have on the Company's financial position and results of operations when it is adopted. 18 APPLIED MAGNETICS CORPORATION ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE FINANCIAL STATEMENTS: ---- Report of Independent Public Accountants (Arthur Andersen LLP)...... F-2 Consolidated Statements of Operations for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993...... F-3 Consolidated Balance Sheets as of September 30, 1995 and September 30, 1994........................................................... F-4 Consolidated Statements of Cash Flows for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993...... F-5 Consolidated Statements of Shareholder's Investment for the 52 weeks ended September 30, 1995, September 30, 1994 and September 30, 1993...... F-6 Notes to Consolidated Financial Statements.......................... F-7
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Applied Magnetics Corporation: We have audited the accompanying consolidated balance sheets of Applied Magnetics Corporation (a Delaware corporation) and subsidiaries as of September 30, 1995 and 1994, and the related consolidated statements of operations, shareholders' investment and cash flows for each of the three years in the period ended September 30, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Applied Magnetics Corporation and subsidiaries as of September 30, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Los Angeles, California December 12, 1995 F-2 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FOR THE YEARS ENDED SEPTEMBER 30, ---------------------------------- 1995 1994 1993 ---------- ---------- ---------- Net sales................................. $ 292,600 $ 275,927 $ 335,898 Cost of sales............................. 252,684 281,997 286,017 ---------- ---------- ---------- Gross profit (loss)..................... 39,916 (6,070) 49,881 ---------- ---------- ---------- Research and development expenses......... (33,655) (24,682) (17,504) Selling, general and administrative expenses................................. (7,434) (17,267) (20,115) Restructuring charge ..................... -- -- (49,600) Interest income........................... 1,996 825 803 Interest expense.......................... (4,826) (4,216) (5,632) Other income (expense), net............... 6,335 (160) 1,244 ---------- ---------- ---------- Income (Loss) before income taxes....... 2,332 (51,570) (40,923) Provision for income taxes................ 584 1,100 2,805 ---------- ---------- ---------- Net Income (loss)....................... $ 1,748 $ (52,670) $ (43,728) ========== ========== ========== Net income (loss) per share............. $ 0.08 $ (2.39) $ (2.17) ========== ========== ========== Weighted average common and dilutive equivalent shares outstanding 22,472,208 22,081,751 20,155,868 ========== ========== ==========
The accompanying Notes to Consolidated Financial Statementsare an integral part of these consolidated statements. F-3 APPLIED MAGNETICS CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
AS OF SEPTEMBER 30, ------------------ 1995 1994 -------- -------- ASSETS Current assets: Cash and equivalents..................................... $ 48,236 $ 20,761 Accounts receivable, less allowances of $652 in 1995 and $3,629 in 1994.......................................... 36,571 18,720 Inventories.............................................. 32,727 31,520 Prepaid expenses and other............................... 10,411 6,879 -------- -------- 127,945 77,880 -------- -------- Property, plant and equipment, at cost: Land..................................................... 2,556 3,992 Buildings................................................ 67,314 77,745 Manufacturing equipment.................................. 146,706 163,068 Other equipment and leasehold improvements............... 29,410 30,743 Construction in progress................................. 6,967 13,814 -------- -------- 252,953 289,362 Less--accumulated depreciation and amortization............ (148,636) (165,046) -------- -------- 104,317 124,316 -------- -------- Other assets............................................... 14,555 18,360 -------- -------- $246,817 $220,556 ======== ======== LIABILITIES AND SHAREHOLDERS' INVESTMENT Current liabilities: Current portion of long-term debt........................ $ 12,004 $ 20,412 Bank notes payable....................................... 54,371 46,062 Accounts payable......................................... 44,535 22,332 Accrued payroll and benefits............................. 9,361 9,406 Other current liabilities................................ 13,637 16,111 -------- -------- 133,908 114,323 -------- -------- Long-term debt, net........................................ 3,254 677 -------- -------- Other liabilities.......................................... 6,063 7,123 -------- -------- Shareholders' Investment: Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and outstanding..................... -- -- Common stock, $.10 par value, authorized 40,000,000 shares, issued 22,619,205 shares and 22,161,460 shares at September 30, 1995 and 1994, respectively............ 2,262 2,216 Paid-in capital.......................................... 181,191 178,481 Retained deficit......................................... (79,031) (80,779) -------- -------- 104,422 99,918 Treasury stock, at cost (96,603 shares and 92,509 shares at September 30, 1995 and 1994, respectively)................ (830) (812) Unearned restricted stock compensation..................... -- (673) -------- -------- 103,592 98,433 -------- -------- $246,817 $220,556 ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated balance sheets. F-4 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEARS ENDED SEPTEMBER 30, ------------------------------- 1995 1994 1993 --------- --------- --------- Cash Flows from Operating Activities: Net profit (loss)............................. $ 1,748 $ (52,670) $ (43,728) Adjustments to derive cash flows: Depreciation and amortization............... 27,600 23,643 29,866 Gain on sale of business and assets......... (6,109) -- -- Provision for receivable allowances......... -- 100 550 Restructuring charge........................ -- -- 49,600 Deferred tax provision...................... -- -- 1,384 Amortization of unearned restricted stock compensation, net.......................... 721 (145) 1,225 Other assets................................ -- (4,167) (1,103) Other liabilities........................... (1,060) (300) (3,278) Other, net.................................. -- 1,123 303 Working capital changes affecting cash flows from operations: Accounts receivable........................ (17,712) 19,053 (11,562) Other receivables.......................... -- 5,170 10,900 Inventories................................ (3,772) 10,906 (5,827) Prepaid expenses and other................. (3,074) (305) (921) Accounts payable........................... 23,168 (5,955) (3,007) Accrued payroll and benefits............... 181 (2,739) 2,558 Other current liabilities.................. (2,795) (6,654) 2,424 --------- --------- --------- Net cash flows provided by (used in) operating activities....................... 18,896 (12,940) 29,384 --------- --------- --------- Cash Flows from Investing Activities: Additions to property, plant and equipment.... (23,401) (31,452) (56,652) Proceeds from sale of businesses and assets, net.......................................... 25,264 3,516 15,409 Notes receivable.............................. 2,048 2,038 1,433 --------- --------- --------- Net cash flows provided by (used) in invest- ing activities.............................. 3,911 (25,898) (39,810) --------- --------- --------- Cash Flows from Financing Activities: Proceeds from issuance of debt................ 160,868 142,767 107,724 Proceeds from issuance of capital lease obligations.................................. 5,142 464 728 Repayment of debt............................. (163,705) (134,402) (127,127) Proceeds from sale of common stock............ -- -- 66,488 Proceeds from stock options exercised......... 2,270 153 1,475 --------- --------- --------- Net cash flows provided by financing activities................................. 4,575 8,982 49,288 --------- --------- --------- Effect of exchange rate changes on cash and equivalents.................................. 93 1,246 (964) --------- --------- --------- Net increase (decrease) in cash and equivalents.................................. 27,475 (28,610) 37,898 Cash and equivalents at beginning of period... 20,761 49,371 11,473 --------- --------- --------- Cash and equivalents at end of period......... $ 48,236 $ 20,761 $ 49,371 ========= ========= ========= Supplemental Cash Flow Data: Interest paid, net of amounts capitalized..... $ 4,827 $ 4,215 $ 4,158 ========= ========= ========= Income taxes paid............................. $ 494 $ 1,025 $ 1,209 ========= ========= =========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. F-5 APPLIED MAGNETICS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TREASURY STOCK ------------------ ---------------- UNEARNED RESTRICTED SHARE- NUMBER OF PAID-IN RETAINED NUMBER OF STOCK HOLDERS' SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT COMPENSATION INVESTMENT ---------- ------ -------- -------- --------- ------ ------------ ---------- Balance, September 30, 1992..... 16,444,323 $1,644 $109,563 $ 15,619 67,626 $(631) $(1,796) $124,399 Stock options exercised............ 359,772 36 2,780 -- -- -- -- 2,816 Issuance of common stock................ 5,291,070 529 65,959 -- -- -- -- 66,488 Purchase of treasury stock, net........... -- -- -- -- 11,702 (105) -- (105) Restricted stock issuance, net........ 58,577 6 231 -- -- -- (237) -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- 1,225 1,225 Net loss.............. -- -- -- (43,728) -- -- -- (43,728) ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1993..... 22,153,742 2,215 178,533 (28,109) 79,328 (736) (808) 151,095 Stock options exercised............ 26,087 3 226 -- -- -- -- 229 Purchase of treasury stock, net........... -- -- -- -- 13,181 (76) -- (76) Restricted stock issuance, net........ (18,369) (2) (278) -- -- -- 280 -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- (145) (145) Net loss.............. -- -- -- (52,670) -- -- -- (52,670) ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1994..... 22,161,460 2,216 178,481 (80,779) 92,509 (812) (673) 98,433 Stock options exercised............ 399,773 40 2,668 -- -- -- -- 2,708 Purchase of treasury stock, net........... -- -- -- -- 4,094 (18) -- (18) Restricted stock issuance, net........ 57,972 6 42 -- -- -- (48) -- Amortization of unearned restricted stock compensation, net.................. -- -- -- -- -- -- 721 721 Net income............ -- -- -- 1,748 -- -- -- 1,748 ---------- ------ -------- -------- ------ ----- ------- -------- Balance, September 30, 1995..... 22,619,205 $2,262 $181,191 $(79,031) 96,603 $(830) $ -- $103,592 ========== ====== ======== ======== ====== ===== ======= ========
The accompanying Notes to Consolidated Financial Statements are an integral part of these consolidated statements. F-6 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Applied Magnetics Corporation and its subsidiaries (the "Company"). All significant intercompany accounts and transactions have been eliminated. Certain 1993 and 1994 accounts have been reclassified to conform with the 1995 presentation. TRANSLATION OF FOREIGN CURRENCIES: Financial statements and transactions of subsidiaries operating in foreign countries are translated into U.S. dollars in accordance with Statement of Financial Accounting Standards No. 52. The functional currency for all subsidiaries is the U.S. dollar. The effect of translating assets and liabilities stated in foreign currency is included as a component of "Other Income (Expense), net" in the Consolidated Statements of Operations. Translation and transaction losses of $0.2 million in 1995 and 1994, and gains of $0.8 million in 1993 were included in operations. The Company operates in a number of foreign countries. The relative impact of foreign currency fluctuations on revenue is not significant as product pricing is generally based on the U.S. dollar. Purchases of certain raw materials and certain labor costs are paid for in foreign currencies. Malaysian debt maturities are not currently hedged. As a result, effects of currency rate fluctuations can affect results of operations. Fluctuations may also have a significant effect on reported cash balances. DEPRECIATION AND AMORTIZATION POLICIES: Plant and equipment are depreciated or amortized over their estimated useful lives primarily using the straight- line method. Estimated useful lives are as follows: Buildings................................ 15-50 Years Manufacturing equipment.................. 2-5 Years Other equipment.......................... 1-5 Years Leasehold improvements................... Term of Lease
Depreciation and amortization expense from continuing operations amounted to $27.6 million, $23.6 million and $29.9 million in 1995, 1994 and 1993, respectively. The Company follows the policy of capitalizing expenditures that materially increase asset lives. Maintenance and minor replacements are charged to operations when incurred. Maintenance and repair expenses charged to operations were $6.4 million, $8.7 million and $7.1 million in 1995, 1994 and 1993, respectively. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in operations. The cost of buildings and equipment includes interest expense incurred prior to the time such assets are placed in service. Interest expense of $1.0 million was capitalized in 1993. No interest was capitalized in 1995 and 1994. CASH EQUIVALENTS: Cash equivalents consist primarily of money market instruments maturing within 90 days that are carried at cost, which approximates market. Cash equivalents were $43.6 million and $15.5 million at September 30, 1995 and September 30, 1994, respectively. INVENTORIES: Inventories are stated at the lower of cost (first-in, first- out method) or market. Market for purchased parts and manufacturing supplies is based on replacement costs and for other inventory classifications on net realizable value. Inventories consist of purchased materials and services, direct production labor and manufacturing overhead. F-7 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INVENTORIES: The components of inventory were as follows (in thousands):
SEPTEMBER 30 --------------- 1995 1994 ------- ------- Purchased parts and manufacturing supplies............... $13,036 $ 9,970 Work in process.......................................... 17,589 17,436 Finished goods........................................... 2,102 4,114 ------- ------- $32,727 $31,520 ======= =======
REVENUE RECOGNITION AND WARRANTY POLICIES: Revenue is recognized at the time the product is shipped to the customer. Under the Company's warranty terms, customers are allowed to return products within the applicable warranty periods. The Company accrues for the estimated rework and scrap costs associated with anticipated returns. In addition, the Company reverses the net sales and associated costs upon receipt of returned products. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Net income (loss) per common and common equivalent share is calculated using the treasury stock method, except in those periods where the effect of including common equivalent shares is anti-dilutive. RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged in basic technology and applied research and development programs which are designed to develop new products and product applications and related manufacturing processes. The costs of these programs are classified as research and development expenses and are charged to operations as incurred. Sustaining engineering is charged to cost of sales. OTHER LIABILITIES: Other liabilities are primarily composed of the non- current portion of accrued expenses related to various employee compensation plans. INCOME TAXES: The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." See Note 3. STOCK OPTIONS: Proceeds from the sale of common stock issued upon the exercise of stock options are credited to common stock and paid-in capital accounts at the time the option is exercised. Income tax benefits attributable to stock options exercised are credited to paid-in capital when realized. See Note 4. CONSOLIDATED STATEMENTS OF CASH FLOWS: In accordance with Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows," the Company has selected the "indirect method" of presentation for reporting cash flows. 2. SEGMENTS OF BUSINESS The Company operates in one market worldwide--components for the computer peripheral industry. The Company's trade receivables are unsecured. Sales to major customers are as follows:
FISCAL YEAR ENDED SEPTEMBER 30, (AS A PERCENTAGE OF SALES) ---------------- 1995 1994 1993 ---- ---- ---- Conner Peripherals...................................... 41% 53% 21% Maxtor.................................................. 19% 13% 28% All Others.............................................. 40% 34% 51% --- --- --- Total................................................... 100% 100% 100% === === ===
F-8 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Export sales are made by the United States operations to the following geographic locations (in thousands):
1995 1994 1993 -------- ------- ------- Europe........................................... $ 159 $ 1,523 $11,533 Asia............................................. 231,781 35,082 6,564 North America.................................... -- 67 -- -------- ------- ------- $231,940 $36,672 $18,097 ======== ======= =======
Information regarding the Company's domestic and foreign operations is as follows (in thousands):
UNITED STATES FOREIGN TOTAL ------------- -------- -------- 1995 Net sales.............................. $271,947 $ 20,653 $292,600 ======== ======== ======== Intercompany sales..................... $138,230 $213,260 $ -- ======== ======== ======== Operating profit (loss)................ $ (3,608) $ 8,770 $ 5,162 Interest expense, net.................. (2,830) -------- Income before income taxes........... $ 2,332 ======== Identifiable assets.................... $165,064 $ 81,753 $246,817 ======== ======== ======== 1994 Net sales.............................. $ 98,680 $177,247 $275,927 ======== ======== ======== Intercompany sales..................... $229,022 $220,507 $ -- ======== ======== ======== Operating loss......................... $(27,162) $(21,017) $(48,179) Interest expense, net.................. (3,391) -------- Loss before income taxes............. $(51,570) ======== Identifiable assets.................... $141,029 $ 79,527 $220,556 ======== ======== ======== 1993 Net sales.............................. $159,854 $176,044 $335,898 ======== ======== ======== Intercompany sales..................... $202,335 $236,317 $ -- ======== ======== ======== Operating loss......................... $(32,749) $ (3,345) $(36,094) Interest expense, net.................. (4,829) -------- Loss before income taxes............. $(40,923) ======== Identifiable assets.................... $164,267 $114,249 $278,516 ======== ======== ========
F-9 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Foreign operations primarily consist of operations in the Asia-Pacific region. The increase in U.S. export sales to Asia and the decrease in sales of foreign operations in fiscal 1995 was due to the closure of the Company's production facility in Singapore in July 1994 and the transfer of sales invoicing responsibility to the U.S. operations. See Note 7 regarding the charges recorded in 1993 associated with restructuring of operations. The segment of business information presented above reflects an allocation of such restructuring charges to the location in which restructuring costs were incurred. The amount of these charges allocated between foreign and domestic operations were $30.0 million and $19.6 million, respectively, in 1993. Results of operations for United States-based operations include all research and development expenditures, thereby causing an unfavorable comparison with the operating results of foreign-based operations. United States income for 1993 and 1994 include research and development cost offsets relating to the license and technology development agreement with Hitachi Metals, Ltd. ("HML"). See Note 9. 3. INCOME TAXES The provision for income taxes for the years ended September 30, consists of (in thousands):
1995 1994 1993 ---- ------ ------ Federal Income Taxes Current.............................................. $-- $ -- $ -- Deferred............................................. -- -- 1,384 State income taxes Current.............................................. 92 211 226 Deferred............................................. -- -- -- Foreign income taxes................................... 492 889 1,195 ---- ------ ------ $584 $1,100 $2,805 ==== ====== ======
Reconciliations of the actual provisions for income taxes to the income tax calculated at the United States Federal rates for continuing operations were as follows (in thousands):
1995 1994 1993 ------- -------- -------- Income tax at the United States federal in- come tax rate................................... $ 816 $(18,050) $(13,913) State income taxes, net of federal income tax benefit................................ 59 137 149 Foreign income taxed at lower rate.......... (2,217) (550) (1,536) Temporary differences/net operating losses not benefitted............................. 1,926 19,563 18,116 Other, net.................................. -- -- (11) ------- -------- -------- $ 584 $ 1,100 $ 2,805 ======= ======== ========
F-10 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The provision (benefit) for deferred income taxes results from temporary differences which result from different tax bases for assets and liabilities than their reported amounts in the financial statements. Such differences result in recognition of income or expense in different years for tax and financial statement purposes. The sources of these differences and the tax effect of each at September 30, 1995 and 1994 were as follows (in thousands):
1995 1994 -------- -------- Inventory reserves.................................... $ 1,348 $ 5,181 Restructuring & other reserves........................ 9,594 10,169 Net operating loss carryforwards...................... 32,536 24,204 Foreign tax & general business credit carryforwards... 5,442 4,763 Depreciation.......................................... (4,970) (3,396) Other, net............................................ 2,783 1,884 -------- -------- Subtotal............................................ $ 46,733 $ 42,805 Valuation allowance................................... (46,733) (42,805) -------- -------- Total net deferred tax asset (liability).............. $ -- $ -- ======== ========
SFAS 109 requires that all deferred tax balances be determined using the tax rates and limitations expected to be in effect when the taxes will actually be paid or recovered. Consequently, the income tax provision will increase or decrease in the period in which a change in tax rate or limitation is enacted. As of September 30, 1995, the Company had total deferred tax liabilities of $5.0 million and total deferred tax assets of $51.7 million. The Company recorded a valuation allowance in the amount of $46.7 million against the amount by which deferred tax assets exceed deferred tax liabilities. The valuation reserve increased from $42.8 million at September 30, 1994 primarily due to the current year net operating loss which cannot be recognized. Consolidated retained deficit at September 30, 1995 included approximately $63.9 million of accumulated earnings of foreign operations for which a deferred tax liability has not been recognized. The additional taxes which may become due if those earnings were to be repatriated to the United States, after utilizing available foreign tax credits, would be approximately $20.5 million. However, the Company intends to reinvest these earnings indefinitely in maintaining its foreign operations. The Company had net operating loss carryforwards available for tax purposes of approximately $79.4 million. To the extent not used, the net operating loss carryforward expires in varying amounts beginning in 2006. 4. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS The Company adopted stock option plans in 1988, 1992 and 1994. Incentive or nonstatutory stock options may be granted under the 1992 and 1994 plans while the 1988 plan is limited to nonstatutory options only. The options are issued at exercise prices equal to the fair market value of the Common Stock at the date of grant, and, accordingly, the Company makes no charges against income with respect to these options. Stock option activity under the option plans was as follows:
OPTIONS OUTSTANDING --------------------------------- OPTION PRICE PER NUMBER OF AVAILABLE SHARE SHARES FOR GRANT ----------- --------- ---------- Balance at September 30, 1994.......... $5.00-13.63 1,553,502 744,288 Grants............................... $2.38- 8.88 1,090,455 (1,090,455) Exercised............................ $3.88- 9.38 (338,236) -- Cancelled............................ $2.38-13.63 (861,520) 861,520 --------- ---------- Balance at September 30, 1995.......... $2.38-13.63 1,444,201 515,353 ========= ==========
F-11 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) At September 30, 1995, 1994 and 1993, there were exercisable options outstanding under the option plans to purchase an aggregate of 161,889, 812,002 and 591,786 shares, respectively. The Company adopted long-term incentive plans in 1982, 1986 and 1989. Under the 1982 and 1986 plans, options were issued at exercise prices lower than the market value at the date of grant. The Company accrued as compensation expense, over the life of the plans, the amount by which the market price exceeded the exercise price at the date of grant for options outstanding and for cash performance awards granted under the plans. At September 30, 1995, no options to purchase Common Stock were available for future issuance under these two plans, and nonstatutory options of 36,036 shares were outstanding at prices from $1.90 to $2.04 per share, of which 31,248 shares were exercisable. During 1995, options for 61,537 shares were exercised at prices from $1.30 to $10.95 per share, and options for 16,208 shares were canceled. Under the 1989 plan, the Company grants shares of Common Stock at no cost to the participants. These shares are subject to restrictions which prohibit selling, transferring, assigning or otherwise disposing of the Common Stock. The restrictions automatically expire ten years following the date of grant, or earlier if certain performance objectives are achieved. The market value of Common Stock issued is recorded as unearned restricted stock compensation and shown as a separate component of shareholders' investment. This compensation is amortized against income over the periods in which the participants perform services. At September 30, 1995, 22,335 shares were available for future issuance under the 1989 plan and 95,721 shares remain subject to restrictions. During 1995, 68,000 shares were issued, 10,028 shares were canceled and restrictions were removed from 39,049 shares under the 1989 plan. Compensation expense recorded under the 1989 plan during 1995, 1994 and 1993 was approximately $0.7 million, $0.2 million and $1.2 million, respectively. In 1994, the Company adopted a non-qualified stock option plan for non- employee directors (the "1994 Directors' Plan"). A total of 150,000 shares of the Company's Common Stock are reserved for issuance under the 1994 Directors' Plan. Under this plan, directors who are not employed by the Company are granted options to purchase 5,000 shares of the Company's Common Stock upon being elected to the board and, thereafter, such directors receive automatic annual grants of options to acquire 5,000 shares of Common Stock on March 1 of each year provided the person continues to serve as a director. The exercise price of the options is set at the closing price of the common stock on the New York Stock Exchange on the date of grant. The options granted under the 1994 Directors' Plan become exercisable in one third increments beginning on the first anniversary following the date of grant. At September 30, 1995, options for 25,000 shares had been granted under this plan and 5,000 shares have been canceled. In December 1994, the Company granted 250,000 shares of the Company's Common Stock, at $4.125, to Grisanti, Galef and Goldress, Inc. ("GG&G"), a consulting firm hired in August 1994 to provide the Company with crisis management and turnaround assistance. The options would be exercisable if the turnaround engagement was successfully completed, which the Company determined to be so, in July 1995. The options became exercisable in whole or part and will expire in five years. The exercise price of the options is set at the closing price of the common stock on the New York Stock Exchange on the date of grant. The Company has authorized a class of Preferred Stock consisting of 5,000,000 shares, $.10 par value. The Board of Directors has authority to divide the Preferred Stock into series, to fix the number of shares comprising any series and to fix or alter the rights, privileges and preferences of the Preferred Stock. No shares of the Preferred Stock were outstanding at September 30, 1995 or September 30, 1994. During 1988, the Board of Directors declared a dividend of one Right for each outstanding share of Common Stock to stockholders of record on November 4, 1988. Each Right entitles the holder to buy the economic equivalent of one share of Common Stock in the form of one one-hundredth of a share of the Preferred Stock at an exercise price of $75.00. Under certain conditions, each Right will entitle its holder to purchase, at the Rights exercise price, shares of the Company's Common Stock or common stock equivalents having a market value of twice the Right's exercise price. F-12 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. NOTES PAYABLE AND LONG-TERM DEBT Notes payable and long-term debt consisted of the following at September 30 (in thousands):
1995 1994 ------- ------- Secured revolving credit agreement, interest rate of 10.50% as of September 30, 1995...................... $ 7,500 $ -- 7% secured note purchase agreement, due January 10, 1995................................................. -- 9,827 Secured revolving credit agreement due March 1996, interest rate of 8.75% as of September 30, 1995...... 10,000 10,000 Secured Malaysian bank credit facility, interest rates from 6.00% to 7.41% as of September 30, 1995......... 46,871 46,062 Mortgage payable, interest rate of 8.50% as of September 30, 1995................................... 126 146 Capital leases........................................ 5,132 1,116 ------- ------- 69,629 67,151 Less--current portion, including bank notes payable... (66,375) (66,474) ------- ------- $ 3,254 $ 677 ======= =======
The aggregate principal payments of bank notes payable and long-term debt for the years subsequent to September 30, 1995 are: 1996--$66.4 million, 1997--$1.9 million, 1998--$1.3 million. In January 1995, the Company retired the $10.0 million debt obligation owed to Conner Peripherals Inc. The Company obtained a secured, revolving line of credit from CIT Group/Business Credit, Inc. ("CIT"). This line of credit provides for borrowings up to $35.0 million based on eligible trade receivables at various interest rates over a three-year term and is secured by trade receivables, inventories and certain other assets. As of September 30, 1995, $7.5 million of borrowings was outstanding. The interest rate for the amounts outstanding under the credit facility at September 30, 1995 was 10.5%. The balance available for additional borrowings under this line of credit was approximately $1.3 million at September 30, 1995 and the Company was in compliance with all financial covenants. At September 30, 1995, $4.0 million of standby letters of credit have been issued on behalf of the Company under this facility. The $7.5 million of borrowings was fully repaid during October 1995. The Company has a $10.0 million revolving credit facility from a commercial bank which is supported by a letter of credit issued for the account of HML, subject to reimbursement by the Company and the liens in favor of HML on certain of the Company's manufacturing equipment. At September 30, 1995, the interest rate on the facility was 8.75%. The credit facility expires in March, 1996. The Company's Malaysian subsidiary has loan facilities with a Malaysian bank which have been in place since June 1990, are callable on demand, have no termination date and are guaranteed by the Company. In May 1995, the Company and the Malaysian bank amended these credit facilities to include a security interest in the Company's real property holdings in Malaysia and to include certain covenants which preclude the Company from granting liens and security interests in other assets in Malaysia. The Company was in compliance with all financial covenants under this facility at September 30, 1995. The interest rates outstanding on these loan facilities ranged from 5.2% to 7.6% at September 30, 1995 and had a weighted average interest rate of 6.7%. The Company intends to continue its practice of repaying maturities with new borrowings under the facilities. F-13 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. SALE OF ASSETS During the first quarter of fiscal 1995, the Company completed the sale of a facility in Singapore and received proceeds of $4.9 million in cash, which approximated book value. In December 1994, the Company sold its Tape Head business unit and agreed to perform certain services and to produce certain tape heads for Seagate Technology Inc., for $21.5 million in cash, of which the Company received $19.9 million during fiscal 1995. The Company recorded a gain of $5.7 million, net of related expenses, during the year ended September 30, 1995. It is estimated that certain of the remaining performance milestones will be completed by the end of the first quarter of fiscal 1996 and the remaining cash will be collected. 7. RESTRUCTURING CHARGE The Company recorded a restructuring charge of $49.6 million in 1993 to consolidate manufacturing resources and write-down equipment to estimated net realizable values primarily as a result of the unexpectedly rapid market transition from ferrite to thin film and from thin film microslider to nanoslider form factor. The Company charged costs against these reserves of $38.4 million and $5.1 million in 1993 and 1994, respectively. In 1995, the Company charged $0.8 million of equipment write-downs against the reserve and $0.2 million of expenditures against the reserve. The remaining portion of the 1993 restructuring reserve at September 30, 1995, which is included as a component of Other Current Liabilities in the accompanying Consolidated Balance Sheet, is composed of $3.8 million which is expected to be used to write-down certain long-term assets and $1.3 million to be paid to settle certain contingencies associated with the shutdown of manufacturing facilities. The Company expects that the shutdown of manufacturing facilities associated with the 1993 restructuring will be completed in 1996. 8. COMMITMENTS AND CONTINGENCIES A portion of the Company's facilities and equipment are leased under non- cancelable operating leases and certain equipment is leased under capitalized leases. The terms of the leases for facilities and equipment expire over the next three years with renewal options in certain instances. Future minimum lease payments under capital and operating leases as of September 30, 1995 are as follows (in thousands):
LEASES ------------------ CAPITAL OPERATING ------- --------- 1996................................................... $ 2,553 $10,939 1997................................................... 2,055 7,874 1998................................................... 1,206 3,311 1999................................................... 22 21 2000................................................... -- -- ------- ------- Total minimum payments................................. $ 5,836 $22,145 ------- ------- Less imputed interest.................................. (705) ------- Present value of payments under capital leases......... 5,131 Less current portion................................... (1,984) ------- Long-term lease obligations............................ $ 3,147 =======
Manufacturing and other equipment at September 30, 1995 include assets under capitalized leases of $6.0 million, with related accumulated depreciation of $1.4 million. Total rental expense, net of sublease rental income, for the years ended September 30, 1995, 1994, and 1993, including items on a month-to-month basis, was approximately $10.2 million, $3.6 million and $4.0 million, respectively. The Company does not have a post-retirement benefits program. As a result, no corresponding accrual has been reflected on the accompanying Consolidated Balance Sheets. F-14 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) On November 18, 1994, the Company announced that it had entered into an agreement to dismiss the 1993 securities class action suit brought against the Company and certain former Company Officers in U.S. District Court for the Central District of California. On May 31, 1995, the Court entered into a judgement dismissing the litigation as to all claims against the Company and the other defendants, pursuant to an agreement by the parties to settle the litigation. The terms of this settlement have not yet been completely ratified by the plaintiffs. The Company will not be required to make any cash payments but will issue to plaintiffs shares of its common stock having an aggregate value of $1.25 million, which was provided for in fiscal 1994. The stock, along with $2.75 million from the Company's insurance carrier, will be distributed, after court approval, to a class consisting of all persons who purchased the Company's common stock during the period of October 22, 1992 through October 1, 1993. In addition, the Company or its subsidiaries are defendants in a number of other cases currently in litigation or potential claims encountered in the normal course of business which are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. 9. LICENSE AND TECHNOLOGY DEVELOPMENT AGREEMENTS In September, 1992, the Company entered into a license and technology development agreement with HML (the "HML Agreement") to further the development and marketing of advanced magnetic recording disk head technologies and products. During fiscal 1993 and 1994, HML paid the Company $35.0 million, net of $1.0 million in foreign withholding taxes, and supplied additional technical resources in exchange for certain licenses covering existing technology and future technology developed by the companies under the joint development activities contemplated by the Agreement. The combined technical and financial resources of the Company and HML focused on the improvement of the Company's inductive thin film disk head business and the development and commercialization of MR thin film disk head products. HML has the rights to manufacture products based on this technology and has certain marketing and distribution rights for certain disk head products and markets. HML also provided a guarantee for the extension of the Company's existing $10.0 million revolving credit facility to March 1996. During fiscal 1993, the Company entered into additional technology development agreements (the "Development Agreements") with four major domestic disk drive companies relating to the development of MR thin film disk head products and technology. During fiscal 1994, the joint development efforts under one of these Development Agreements were suspended and, under the remaining Development Agreements, funding of up to an aggregate of $3.1 million was paid to the Company from inception of these programs through the first quarter of fiscal 1994. During each of fiscal years 1994 and 1993 the Company recognized as income, funding under the HML Agreement and the Development Agreements in the amounts of $14.1 million and $15.1 million, respectively. Funding was completed by the end of fiscal 1994. F-15 APPLIED MAGNETICS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED -------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 ----------- -------- -------- ------------ 1995 Net sales........................ $ 55,373 $64,919 $ 79,860 $ 92,448 Gross profit (loss) (1).......... (794) 5,123 16,406 19,181 Net income (loss)................ (11,714) (2,691) 6,721 9,432 Net income (loss) per share $ (0.53) $ (0.12) $ 0.30 $ 0.40 Weighted average common and dilutive equivalent shares outstanding 22,074 22,100 22,666 23,577 1994 Net sales........................ $ 71,244 $69,834 $ 70,289 $ 64,560 Gross profit (loss) (1).......... 2,686 2,011 (2,723) (8,044) Net loss......................... (6,245) (9,375) (16,505) (20,545) Net loss per share $ (0.28) $ (0.42) $ (0.75) $ (0.93) Weighted average common and dilutive equivalent shares outstanding 22,079 22,087 22,081 22,080
- -------- (1) Prior year quarterly G&A expense amounts have been reclassified to cost of sales to conform with fiscal 1995 presentation. 11. RELATED PARTY TRANSACTION The Company paid $680,000 and $140,000 in fiscal year 1995 and fiscal year 1994, respectively, to GG&G for consulting services provided to the Company by employees of GG&G. Craig Crisman, who was a principal of GG&G until August, 1995, has been the Company's Chief Executive Officer and a director since August 1, 1994, and since August 1, 1995, he has been the Chairman of the Company's Board of Directors. F-16 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) The following documents are filed as part of this Report: Financial Statements--See Index to Consolidated Financial Statements at Item 8 on F-1 of this Report. (2) Supplemental Schedule: Report of Arthur Andersen LLP Schedule II Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present in amounts sufficient to require submission of the schedule, or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3 Certificate of Incorporation and Bylaws (1) Amended and Restated Bylaws (2) Amendment to Bylaws dated June 14, 1989(3) Certificate of Incorporation (as amended) (4) 4 Instruments defining the rights of securities holders including indentures Rights Agreement, dated as of October 19, 1988, between Applied Magnetics Corporation and First Interstate Bank of California, as Rights Agent (2) 10 (a) Applied Magnetics Corporation 1982 Long-Term Incentive Plan (5) (b) Applied Magnetics Corporation Nonstatutory Stock Option Plan (6) (c) Applied Magnetics Corporation 1986 Long-Term Incentive Plan (6) (d) Applied Magnetics Corporation 1988 Stock Option Plan (7) (e) Applied Magnetics Corporation 1989 Long-Term Incentive Plan (8) (f) Loan Agreement dated February 13, 1992 between Applied Magnetics Corporation and Union Bank, N.A., as amended (9) (g) License and Technology Development Agreement dated as of September 25, 1992, between Applied Magnetics Corporation and Hitachi Metals, Ltd. (9) (h) Deeds of Trust naming as beneficiary Hitachi Metals, Ltd. to secure the Company's obligations under a letter agreement dated March 24, 1995 (15) (i) Applied Magnetics Corporation 1992 Stock Option Plan (9) (j) Financing Agreement dated January 11, 1995 between the Company and CIT Group/Business Credit, Inc. (14) (k) Letter Agreement between Registrant and Hitachi Metals, Ltd. Dated May 30, 1995 extending maturity date of Letter of Credit to April 12, 1996 (16) (l) Purchase Agreement between the Company and Delta Bravo, Inc. For the purchase of capital stock of Magnetic Data, Inc., a Delaware Corporation and Brumko Magnetic Corp., a Nebraska Corporation (10)
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EXHIBIT NUMBER DESCRIPTION ------- ----------- (m) Security Agreement between Registrant and Hitachi Metals, Ltd. dated May 30, 1995 (16) (n) Cross License and Joint Research and Development Agreement effective as of November 5, 1993, between the Company and Hutchinson Technology Incorporated (11) (o) Applied Magnetics Corporation 1994 Employee Stock Option Plan (12) (p) Applied Magnetics Corporation 1994 Nonemployee Director's Stock Option Plan (12) (q) Letter Agreement dated February 8, 1994 between the Company and O.M. Fundingsland, formerly Executive Vice President of the Company (12) (r) Letter Agreement dated January 12, 1994 between the Company and Louis W. Rayer, formerly Vice President of the Company (12) (s) Retention Agreement dated January 2, 1994, between the Company and Raymond P. Le Blanc, Vice President, Secretary and General Counsel of the Company (12) (t) Letter Agreement dated as of November 14, 1994, between the Company and the CIT Group/Business Credit, Inc. (13) (u) Stock Purchase Agreement by and among the Company, Seagate Technology, Inc. and Applied Tape Technology, Inc. (13) (v) Letter Agreement dated September 12, 1994, between the Company and William R. Anderson (13) (w) Letter Agreement dated June 21, 1994 , between the Company and Dr. Richard D. Balanson (13) (x) Letter Agreement dated September 12, 1994, between the Company and Kathryn E. Gehrke (13) (y) Letter Agreement dated August 1, 1994, between the Company and Grisanti, Galef & Goldress, Inc. (13) (z) Offer letter dated April 19, 1995 between Maybank Banking Berhad and Applied Magnetics (M) Sdn Bhd. for extension of Credit Facility (16) (aa) Corporate Guarantee of the Registrant dated June 8, 1995 in favor of Maybank Banking Berhad (16) (bb) Employment Agreement between Craig D. Crisman and the Company dated August 1, 1995 (cc) Letter Agreement dated July 19, 1995, between the Company and Raymond P. Le Blanc (dd) 1995 Key Management Incentive Bonus Plan dated March 16, 1995 11 Statement re computation of per share earnings. 13 Annual Report to Shareholders. Integrated with Form 10-K 21 Subsidiaries of the registrant. Incorporated by reference on Form 10-K dated December 29, 1994 22 Published report regarding matters submitted to vote of security holders. None 23 Consent of experts and counsel. Consent of Arthur Andersen LLP dated December 20, 1995. 24 Power of Attorney. None 27 Financial Data Schedule 28 Information from reports furnished to state insurance regulatory authorities. None (1) Filed an exhibit to the Company's Registration Statement on Form S-3 (Registration No. 33-13653) filed on April 21, 1987, and incorporated herein by reference (2) Filed as an exhibit to the Company's Current Report on Form 8-K dated October 19, 1988, and incorporated herein by reference (3) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q dated May 4, 1989 and incorporated herein by reference
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EXHIBIT NUMBER DESCRIPTION ------- ----------- (4) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q dated May 4, 1989 and incorporated herein by reference (5) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on January 27, 1983, and incorporated herein by reference (6) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on December 23, 1985, and incorporated herein by reference (7) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on January 7, 1988, and incorporated herein by reference (8) Filed as an exhibit to the Company's definitive Proxy Statement filed pursuant to Regulation 14A on December 30, 1988 and incorporated herein by reference (9) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 22, 1992, as amended by Form 8, filed February 12, 1993 and incorporated herein by reference (10) Filed as an exhibit to the Company's Report on Form 10-Q dated May 14, 1993 and incorporated herein by reference (11) Filed as an exhibit to the Company's Current Report on Form 8-K dated December 2, 1993 and incorporated herein by reference (12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q dated March 31, 1994, and incorporated herein by reference (13) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 29, 1994 (14) Filed as an exhibit to the Company's Current Report on Form 8-K dated January 20, 1995 and incorporated by reference (15) Filed as an exhibit to the Company's Report on Form 10-Q dated May 15, 1995 and incorporated herein by reference. (16) Filed as an exhibit to the Company's Report on Form 10-Q dated August 15, 1995 and incorporated herein by reference. (b) Report on Form-8K. None (c) Exhibits. The exhibits listed (a) (2) above are submitted as a separate section of this report (d) The individual financial statements of the registrant have been omitted since the registrant is primarily an operating company and all subsidiaries are included in the consolidated financial statements.
I-3 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Goleta, California, on the 11th day of June, 1996. APPLIED MAGNETICS CORPORATION By: /s/ Peter T. Altavilla --------------------------------- Peter T. Altavilla Corporate Controller (Principal Financial and Accounting Officer) REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Applied Magnetics Corporation included in this Form 10-K and have issued our report thereon dated December 12, 1995. Our audits were made for the purposes of forming an opinion on the basic consolidated financial statements taken as a whole. The schedule listed in Item 14 (a) (2) is presented for purposes of complying with the Securities and Exchange Commissions rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. Arthur Andersen LLP Los Angeles, California December 12, 1995 SCHEDULE II APPLIED MAGNETICS CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993 (IN THOUSANDS)
BALANCE BALANCE AT AT END BEGINNING OF CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS OTHER (A) PERIOD -------------- ---------- --------- ---------- --------- ------- Year Ended September 30, 1993 Allowance for doubtful col- lection: Accounts Receivable........ $ 1,958 $ 550 $ (5) $ 739 $ 3,242 Notes Receivable........... 2,559 4,309 (3,261) 7,700 11,307 Year Ended September 30, 1994 Allowance for doubtful collection: Accounts Receivable........ $ 3,242 $ 100 $ (28) $ 315 $ 3,629 Notes Receivable........... 11,307 1,878 -- -- 13,185 Year Ended September 30, 1995 Allowance for doubtful collection: Accounts Receivable........ $ 3,629 $ -- $ 268 $(3,245) $ 652 Notes Receivable........... 13,185 1,229 -- 3,245 17,659
- -------- (A) In 1993 and 1994 the accounts receivable allowance amount represents recoveries of accounts previously written off. In 1993, the Company transferred $7.7 million of the remaining reserve for subsidiaries held for sale to the notes receivable reserve as notes were received in 1993 upon the sale of these subsidiaries. In 1995 the Company determined that its allowance for doubtful trade receivables was in excess of the amount needed and it transferred this excess to its allowance for notes receivable where it was required. EXHIBIT INDEX Exhibit Number Description of Exhibit Page - ------------------------------------------------------------------ 23.1 Consent of Independent Public Accountants EX-23.1 2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation in this Form 10-K/A No. 1 of our reports dated December 12, 1995, included in Applied Magnetics Corporation's Form 10-K for the year ended September 30, 1995, as amended by this Form 10-K/A No. 1, and to all references to our Firm included in this Form 10-K/A No. 1. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California June 3, 1996 -----END PRIVACY-ENHANCED MESSAGE-----