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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K
[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, 1994
[ ] 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Robin Hill Road, Goleta, California 93117
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (805) 683-5353
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange on
Title of each Class which registered
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Common Stock, $.10 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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(Title of Class)
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in
any amendment to this Form 10-K [ ]
The aggregate market value of the Common Stock held by non-affiliates* of
registrant was $3,617,517 as of December 15, 1994.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of December 15, 1994.
Common Stock (Par Value $.10) 22,194,675
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* Without acknowledging that any person other than Harold R. Frank is an
affiliate, all directors and executive officers of registrant have been included
as affiliates solely for the purposes of this computation.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended September 30, 1994, are incorporated by reference into Parts I and II.
Portions of the Proxy Statement for the registrant's 1994 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A within 120 days
following the registrant's fiscal year ended September 30, 1994, are
incorporated by reference into Part III.
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PART I
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ITEM 1. BUSINESS
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GENERAL
Applied Magnetics Corporation (the "Company" or "Applied Magnetics"),
incorporated in California in 1957, was reincorporated in Delaware in 1987
pursuant to a merger into a wholly owned subsidiary, also named Applied
Magnetics Corporation. The reincorporation merger was approved at the
Annual Meeting of Stockholders in February 1987.
The Company presently operates in one industry segment, namely,
components for the computer peripheral industry with one major product
group, recording heads for rigid disk drives.
Applied Magnetics is a leading independent supplier of magnetic
recording heads and of head stack assemblies for rigid disk drives. The
Company supplies advanced inductive thin-film ("thin-film") disk head
products, magnetoresistive ("MR") disk head products and ferrite disk head
products, including ferrite metal-in-gap ("MIG") and double-MIG disk heads
and head stack assemblies.
Prior to and during fiscal 1994, the Company also manufactured and
sold recording heads for tape drives which are used in the computer
peripheral industry. On December 10, 1994, the Company sold its Tape Head
business unit to Seagate Technology, Inc. ("Seagate"), pursuant to a Stock
Purchase Agreement (the "Seagate Agreement"). The consideration paid by
Seagate was $21.5 million cash, of which $1.0 million is held in escrow as
a standard hold-back, for one year, to indemnify the buyer for any claims
relating to the representations and warranties made by the Company in
connection with the divestiture. Another $6.5 million is held in escrow
pending completion by the Company of certain performance obligations to
supply tape related products and services to Seagate under certain
agreements. Except for those arrangements to provide tape-related products
and services to Seagate, the Company is no longer engaged in the design,
development, manufacture and sale of recording heads for tape drives.
In recent years, the Company has pursued a product strategy in which
it has concentrated its resources on its disk head business with particular
emphasis on thin-film and MR technologies and on developing capability for
producing smaller form factor nanoslider thin-film disk heads. The
Company's customers include, among others, Conner Peripherals, Maxtor,
Quantum, Western Digital, IBM and NEC.
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Performance improvements in microprocessors and the related,
continuing proliferation of powerful operating systems and applications
software, which require increased data storage capacity and faster data
transfer rates, have resulted in increasing demand for greater data storage
capacity and performance in smaller form factor disk drives. In addition,
the rapid market growth of notebook and sub-notebook computers has
increased demand for smaller form factor disk drives. Due to these trends,
thin-film disk heads, which generally permit greater storage capacities per
disk and provide higher data transfer rates than ferrite disk heads,
represent one of the fastest growing segments of the recording head
industry.
The Company has focused its long-range growth strategy on thin-film
and MR disk head technologies and believes that MR disk heads, which afford
greater recording densities and other performance advantages as compared to
thin-film heads, represent the next important magnetic recording head
technology. The Company was one of the first independent suppliers to ship
test samples of MR disk heads. In fiscal 1994, the Company began shipping
nanoslider MR disk heads in prototype volumes.
The Company believes that, overall, the market for ferrite disk heads
is declining. However, advances in ferrite disk head technology have
occasionally permitted storage capacities per disk, for drives using these
devices, to approach those achieved with thin-film disk heads. As a
result, for certain disk drive applications, the Company's advanced ferrite
disk heads, including its MIG and double MIG products, have offered
required performance while providing cost advantages over thin-film disk
heads. During fiscal 1993, the industry experienced significant
overcapacity conditions in thin-film disk head supplies and intense price
competition for these products. As a consequence, many customers that had
previously selected ferrite disk head products for cost reasons revised
their disk head requirements and, instead, selected competitively priced
thin-film products.
Market conditions for the disk drive industry served by the Company
during fiscal year 1993 reflected rapid changes in, and more abbreviated,
product life cycles, intense price erosion and excess supplies of disk
drives and disk drive components, particularly thin-film disk heads. In
connection with these developments and in response to significant order
cancellations and reschedules and related product and technology
transitions, in September, 1993, the Company recorded, for fiscal year
1994, a restructuring charge of approximately $50 million. This charge
included approximately $40 million for write downs of equipment and tooling
to estimated net realizable values and $10 million for costs attributable
to the planned consolidation of certain of the Company's manufacturing
facilities.
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Due to lower sales volume and significant production and quality
problems experienced by the Company during fiscal year 1994, the Company
continued to experience major operating losses and financial difficulties,
including negative cash flows and significant limitations on cash and
working capital during the year ended September 30, 1994.
The Company has taken a number of actions to reverse these
difficulties, improve its cash and working capital position, reduce
operating losses and return to profitability. In June, 1994, the Company
announced that it had engaged Lehman Brothers, Inc., as financial advisors
to assist the Company in exploring various strategic alliances and other
opportunities to maximize shareholder value. In August, 1994, the Company
engaged the consulting firm of Grisanti, Galef & Goldress ("GG&G") to
provide crisis management and turnaround assistance and advice to the
Company. It also appointed Mr. Craig D. Crisman, a partner in GG&G who has
considerable experience in turnaround engagements, as the Company's Chief
Executive Officer. Significant cost reductions have been implemented,
including reductions in employment, curtailment of capital expenditures,
consolidations of manufacturing activities, production and other resources
and sales of excess properties and assets. The implementation of
aggressive cash management practices and the Company's sale of its tape
head business unit to Seagate in December, 1994, have, together with other
cost reductions and control practices, improved the Company's cash and
working capital resources.
INDUSTRY OVERVIEW
Rigid disk drives are the predominant data storage device used in
computers. Disk drives include one or more rigid disks onto and from which
data are recorded and retrieved by recording heads positioned by an
actuator to fly within micro-inches of one or both sides of each disk. A
recording head (or "slider") attached to a flexure or suspension arm
comprises a head gimbal assembly ("HGA"). Multiple HGAs, assembled
together with other components, comprise a head stack assembly ("HSA").
Although some drive manufacturers assemble HSAs from HGAs purchased from
head manufacturers, the Company has experienced increased demand for disk
head products in the HSA configuration.
Disk drive manufacturers develop a variety of different drive programs
to meet different design, performance and cost requirements. Magnetic
recording head suppliers, such as the Company, work with drive
manufacturers to determine the performance characteristics required for the
heads to be used in a new drive design and develop customized heads and
HSAs for each drive program. Head suppliers seek to have their heads
"designed-in" for a particular drive program and to become qualified as a
primary supplier for the new drive. Achieving such a "design-in" position
is usually a significant competitive
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advantage relative to suppliers who are not initially qualified on the new
drive program.
The development and commencement of production of disk head products
for a new drive program involves major expenditures for product design,
production engineering and capital equipment. Often, certain production
processes must also be adjusted to accommodate the unique specifications of
the new design. While the Company has been successful in achieving design-
in status on some disk drive programs during fiscal 1994, it has
experienced production yield, quality and manufacturing difficulties on
some disk head products which have adversely affected its ability to obtain
the desired production ramp levels on a timely basis. These difficulties
also led to unfavorable financial conditions, including significant
operating losses and limitations on cash and working capital resources.
The Company has taken a number of steps to improve yields, reduce costs and
strengthen its cash and working capital resources. However, the disk head
industry is intensely competitive and if these production problems and the
related financial conditions, including operating losses and limitations on
capital resources, continue or reoccur, the Company's ability to
successfully achieve design-in positions on future, new disk head products
and its ability, once having achieved design-in status on such products, to
execute on production programs could be adversely affected. Accordingly,
there are no assurances that the Company will be able to continue these
design-in successes. Further, its financial difficulties, limited
resources and aggressive cash management/cost reduction activities may
limit or delay the Company's ability to direct sufficient technical,
research and other resources, on a timely basis, to new products or new
generations of existing products in response to customer demands.
TECHNOLOGY
Magnetic recording heads are electromechanical devices that record
("write") data onto and retrieve ("read") data from the magnetic layers of
digital data storage media, either disk or tape. The principal elements of
an inductive magnetic recording head are a magnetic core, which is
interrupted by a non-magnetic gap, and an electrically conducting coil
wrapped or deposited in turns around the core. To write data, a current is
passed through the coil, thereby inducing a magnetic field in the core.
Since the core is interrupted by a non-magnetic gap, the magnetic field
must "fringe" out from the gap, and in doing so, it magnetizes a segment of
the media. Reversing the direction of the current reverses the polarity of
the next magnetized segment of the media, thus allowing data to be encoded
as a pattern of reversing polarities. To read data, the previously encoded
media is passed by the head and the reversing magnetic polarities induce
reversing magnetic fields in the core. These reversing magnetic fields in
the core generate correspondingly reversing
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currents in the coil which are sensed and decoded by the drive circuitry.
Disk drive storage capacity and performance are largely determined by
the magnetic properties and interface of the recording head and disk. The
number of coil turns and magnetic materials of the recording head are each
optimized to achieve required performance. The number of coil turns and
coil pitch characteristics (including the geometry of the coils and the
distance between the coils) are selected to provide appropriate writing and
maximum read-back signal levels. Higher densities require that the head
fly both closer to the disk and at more uniform flying heights across the
disk. This is influenced by the size and mass of the head and its
hydrodynamic characteristics.
Generally, rigid disk drives use either ferrite or thin-film heads.
Historically, ferrite disk heads have represented more cost-effective
design alternatives for rigid disk drives than thin-film disk heads.
However, as demand for high performance, small form factor rigid disk
drives has grown, there has been a corresponding increase in demand for
disk heads that provide higher areal densities and data transfer rates.
This technology and market shift has resulted in disk head specifications
that increasingly require higher performance thin-film heads. For certain
disk drive applications, technology advances and improvements relating to
MIG and double MIG disk head designs and production processes have
occasionally allowed, and may, in the future allow ferrite disk heads to
serve as a design alternative to thin-film disk heads, with competitive or
enhanced price-performance characteristics. However, due to the increasing
supply of competitively priced thin-film disk heads and the tendency of
many major disk drive customers to select thin-film products rather than
ferrite disk heads, the Company continues to expect that on an overall
basis, demand for these devices will continue to decline.
Ferrite disk heads incorporate either conventional ferrite technology
or ferrite-MIG technology. Conventional devices are constructed with a
material which is limited to relatively low levels of magnetic field
strength and attempts to produce stronger magnetic fields limit disk head
performance at higher areal densities. MIG construction overcomes this
limitation and allows the device to produce much stronger magnetic fields
without saturation, thus permitting operation at much higher areal
densities.
Thin-film head technology offers several performance advantages over
ferrite technology, primarily higher areal densities, improved signal-to-
noise ratios and higher data transfer rates. Thin-film heads are produced
with processes adapted from semiconductor manufacturing operations in which
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thin-films of magnetic, conductive and insulating materials are deposited
on a non-magnetic substrate to form the magnetic core and the electrical
coils of the head. This process permits a greater degree of precision and
repeatability, greater miniaturization and lower mass than can be achieved
with ferrite production methods in which the electrical coil is usually
hand-wound on a machined ferrite core.
The Company believes that MR disk heads represent the next important
magnetic recording head technology. In contrast to an inductive disk head,
which is designed to "read" and "write" data using a simple inductive
element, an MR disk head uses an inductive element to "write" data onto the
media and a separate MR element to "read" data from the media. The MR read
element incorporates a magnetoresistor whose electrical resistance changes
in the presence of a magnetic field. As the encoded media is passed by the
read element, the disk drive circuitry senses and decodes the changes in
electrical resistance caused by the reversing magnetic polarities. The
greater sensitivity of MR read elements provides higher signal output per
unit of recording track width on the media surface. As a result, MR disk
heads have certain design and performance advantages over inductive heads,
particularly in high performance small form factor disk drive applications.
In addition, MR disk heads can read data from a rotating disk independent
of the speed of rotation, thus allowing these devices to read data more
reliably from small form factor disk media in which linear velocities are
inherently lower. MR disk heads also allow for optimization of read and
write gaps independently. This cannot be accomplished with inductive heads
which incorporate a single gap for both read and write functions.
PRODUCTS
THIN-FILM AND MR DISK HEADS. The Company currently produces thin-film
HGAs and HSAs in nanoslider and microslider form factors. During fiscal
1994, the Company became qualified and began to make volume production
shipments on a number of new disk drive programs, some of which require
nanoslider thin-film products. The Company's thin-film microslider and
nanoslider products are produced in volume for 3.5-inch disk drives to
achieve areal densities of up to approximately 300 megabits of data per
square inch. The nanoslider disk drive programs for which the Company has
become and is seeking to become qualified are primarily for high capacity,
low profile 3.5-inch disk drives for use in workstations and next
generation personal computers, and for 2.5-inch and smaller form factor
drives for use in notebook products.
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Development and commercialization of MR disk heads continued to be a
major focus for the Company in fiscal 1994. During fiscal year 1994, the
Company continued to ship prototype and qualification samples of MR disk
head products to selected customers for drive applications with recording
densities of up to 650 megabits per square inch.
The Company has also made important progress in the design and
production of new, advanced thin-film disk heads including higher
efficiency products which increase the output signal for a given number of
coil turns. Advances have also been made in the Company's efforts to
develop and offer thin-film and MR disk heads with fully etched air bearing
("FEAB") or other negative air pressure bearing surfaces. The
implementation of these designs and processes improves production yields
and enhances the hydrodynamic characteristics of the disk heads, allowing
the head to fly at lower, more uniform heights, thus contributing to higher
areal densities.
FERRITE DISK HEADS. The Company offers primarily ferrite-MIG HGAs and
HSAs in microslider and minislider form factors. The use of ferrite heads
in high performance disk drives presents technological challenges.
However, advances in MIG technology resulted in situations in which certain
ferrite disk heads are more competitive, for certain drive applications,
than thin-film products. While certain ferrite disk head designs may still
be utilized in selective disk drive programs thus providing a limited
market for the Company's ferrite disk head products, on a case-by-case
basis, the Company believes that overall demand for ferrite disk heads
continues to decline. Further, because the Company's thin-film disk head
production is vertically integrated, the Company believes that obtaining
sales of thin-film products generally represents more attractive
opportunities for revenue growth and profit improvement than ferrite disk
head business.
TAPE HEADS. During fiscal 1994, through its Tape Head business unit,
the Company supplied various metal-core tape heads for both conventional
one-half inch open reel and QIC tape drives and IBM-compatible 18-track MR
heads for one-half inch cartridge tape drives and was involved in the
development and production of MR tape heads for QIC tape drives. The
Company's sales of tape heads for the year ended September 30, 1994,
represented 6.8% of consolidated net sales. The Company sold this business
unit to Seagate on December 10, 1994. However, pursuant to certain ongoing
contractual arrangements, it will continue to sell to Seagate various tape-
related goods and services.
CUSTOMERS AND MARKETING
The Company's customers include, among others, Conner, Maxtor, Quantum
and IBM. The Company's top four customers
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accounted for 86% of the Company's net sales in the year ended September
30, 1994. Conner, Maxtor, Quantum and IBM represented approximately 53%,
13%, 10% and 10%, respectively, of net sales during the year ended
September 30, 1994. During fiscal 1993, Conner, Maxtor, Quantum and IBM
represented approximately 21%, 28%, 18% and 17%, respectively, of net
sales.
Due to the small number of disk drive manufacturers and computer
system companies requiring independent sources of supply for magnetic
recording heads, the Company's customer base is likely to remain
concentrated. In addition, the customer base may become more concentrated
when, as and if disk drive manufacturers that do not have their own
internal capabilities for designing and producing disk heads adopt and
implement further vertical integration strategies. See "Competition".
While the Company believes that industry conditions and economic factors
will continue to create an environment in which drive manufacturers will
require, as their primary source of supply, independent suppliers of
magnetic recording heads and in which vertically integrated disk drive and
systems companies will require alternative or "secondary" sources of
supply, the further consolidation or integration of one or more of the
Company's major customers with other disk drive or disk head firms could
have an adverse effect on the Company's business.
Maxtor has recently announced continuing operating losses and
significant actions to reorganize and consolidate its operations. If these
or other similar developments restrict or limit the development of major,
new disk drive programs for which the Company anticipates supplying disk
heads or prevent this customer from completing existing, major disk drive
programs for which the Company supplies disk heads, such matters could have
an adverse affect on the Company's business.
The Company believes that the most effective means of marketing and
selling magnetic recording disk heads is by establishing close customer
relationships at the engineering level, which permits technical
collaboration and may result in the Company's heads being designed-in for
particular drives. Through its product planning and marketing efforts, the
Company seeks to identify those high performance disk drive programs that
it believes will achieve high volume and concentrates its engineering
resources on these programs.
The Company's magnetic recording disk heads are sold in the United
States and foreign countries by its direct sales personnel and through its
subsidiaries in Singapore, Malaysia and Ireland. Some of the Company's
United States sales activities are conducted through independent sales
representatives. Historically, the Company sold its products in Japan
through its Japanese subsidiary. As of December 1992, in accordance with a
License and Technology Development Agreement ("HML Agreement")
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between it and Hitachi Metals, Ltd. ("HML"), the Company granted certain
exclusive marketing rights in Japan to HML and retained rights to market
products to only one Japanese manufacturer.
The Company has been successful in achieving some design-in positions
with certain customers on certain disk drive programs. However, in the
past, the Company has experienced difficulties in consistently achieving
design-in positions. Further, in some cases its products have not achieved
the technical, performance or pricing objectives required by the customers.
In fiscal 1994, having achieved design-in positions on certain programs,
the Company experienced significant production yield and quality problems
which led to significant operating losses and, in some cases, the Company
was not able to deliver production volumes in accordance with the delivery
schedules to which it had initially agreed. Accordingly, there can be no
assurance that the Company will successfully obtain design-in positions on
a sufficient number of the new disk drive programs that it is currently
pursuing or that it expects to pursue, or that, after having achieved this
position on any given customer program, it will not experience difficulties
in obtaining desired levels of production volumes on a timely basis. The
failure to secure and satisfactorily perform against orders for volume
shipments of thin-film disk heads could result in customer cancellations,
reschedules and diversion of certain orders to the Company's competitors.
To the extent any significant orders for the Company's thin-film disk heads
are canceled, rescheduled or diverted, such actions could have an adverse
effect on the Company's operations.
RESEARCH AND DEVELOPMENT
The Company commits substantial resources to research and development
in order to meet its customers' continuing demands for higher performance
disk heads for successive disk drive product families. The Company has
augmented its research and development programs with the financial and
technical resources of certain strategic partners. In addition to the HML
Agreement, the Company has pursued joint product development agreements
with certain major disk drive manufacturers for MR disk head development.
Under the HML and other agreements, the Company recognized as income $14.1
million and $15.1 million in fiscal years 1994 and 1993. The development
effort under two of the agreements with the disk drive companies was
completed or substantially completed by the end of fiscal 1994, development
efforts are continuing under one agreement and have been suspended under
another agreement.
Research and development expenses totaled $38.8 million in fiscal
1994, before giving effect to $14.1 million in development funding that was
recognized as cost offsets. Research and
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development expenses in fiscal 1993 totaled $32.6 million, before giving
effect to $15.1 million in development funding that was recognized as cost
offsets.
Research and development activities relate to creating technological
advances required for new product development and the advancement of
production processes required in new product production (e.g. development
of smaller form factor products, advanced coil structures, constant flying
height technologies and the development of MR technology). In addition,
development activities focus on conceptual formulation, design and testing
of new product alternatives and construction of prototypes. Substantially
all research and development activities relating to disk head products are
performed at the Company's Goleta, California operations. A dedicated
group of engineering and technical personnel has focused on product design
and process development for the Company's MR disk head products. In
addition, the Company also has engineering and technical staff dedicated to
various production operations to provide manufacturing process and
integration support for nanoslider products.
While demand for nanoslider thin-film disk heads was strong during
fiscal 1994, during this year the Company experienced production yield,
quality and manufacturing difficulties. As a result, on some programs it
was not able to ramp production volumes to desired levels in order to
satisfy scheduled deliveries. These conditions, in turn, resulted in loss
of revenues and operating losses during fiscal 1994. While the Company has
taken, and is taking, a number of actions to improve the efficiency,
quality and timeliness of the process by which its new and emerging
products and product designs transition from the development stage into
volume production, there are no assurances that this process may be
adversely affected by similar problems or difficulties that might arise
with respect to other new products or technologies that the Company may
pursue in the future.
The Company's technology development is primarily devoted to
commercialization of MR disk head technology. The Company has been
developing MR technology since 1979. The Company expended $33.6 million in
MR disk head development in fiscal year 1994, and expects to expend
approximately an additional $53.0 million through the end of fiscal 1995.
The expenditures in 1993 and 1994 were partially offset by payments
received under the HML Agreement and the joint product technology
development agreements with four disk drive manufacturers described above.
The Company does not currently have any ongoing technology development
agreements which provide for it to receive any significant payments during
fiscal 1995, for research and
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development efforts relating to MR products or other new or advanced
technology disk head products. While it may continue to consider and
pursue opportunities relating to such arrangements, it believes that its
existing cash resources and expected operating results will provide
sufficient financial resources, on an independent basis, to fund its
ongoing MR research and development activities in a manner consistent with
its current operating plans.
Under the HML Agreement, the Company has granted to HML an exclusive,
non-transferable license to use the Company's technology to manufacture in
Japan thin-film, MR and certain ferrite disk head products, HSAs, HGAs and
components (the "Licensed Products") and a nonexclusive license to have
Licensed Products made by HML subsidiaries and affiliates worldwide.
Additionally, the Company has granted HML and its subsidiaries and
affiliates certain exclusive rights to market and sell Licensed Products to
disk drive and head manufacturers in Japan and has retained exclusive
marketing rights to Licensed Products and improvements to Licensed Products
in the rest of the world. HML has paid the Company $35 million, net of $1.0
million in Japanese withholding taxes, for joint development, and related
licenses, for thin-film and MR disk head technology. In addition to this
funding, HML is contributing engineering personnel, technology and know-how
to the joint development program.
MANUFACTURING
The Company's thin-film and ferrite heads have different "front-end"
or slider fabrication processes but similar "back-end" suspension assembly
processes.
FRONT END FABRICATION
THIN-FILM. Thin-film heads are manufactured using a semiconductor-
like fabrication process in which the coil and other critical structures of
the magnetic sensor are created utilizing photolithography, vacuum
deposition, wet chemical etching and precision electroplating technologies.
The Company's fabrication process uses both three-inch and six-inch round
non-magnetic ceramic wafers made of alumina titanium carbide. Six-inch
wafers can produce 4.5 times more microsliders than three-inch wafers and
six times more nanosliders than three-inch wafers. Volume production of
six-inch wafers commenced in September 1992 and by September 1994
constituted over 80% of the Company's thin-film slider production. During
the second quarter of fiscal 1994, the Company completed construction of a
six-inch wafer fabrication facility for the volume production of MR heads.
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In fiscal 1995, the Company will discontinue producing wafers for its
thin-film and MR disk head products from its older, 3 inch lines and all
wafers for thin-film and MR disk heads will be produced from 6 inch lines.
This action is expected to improve production efficiencies and reduce
costs.
The Company fabricates all of its wafers at its Goleta, California
facilities. The wafer moves through a sequence of processes employing
photolithography, electroplating and sputtering techniques to deposit and
form the magnetic elements of several thousand heads in thin-film layers on
the surface of the wafer. The magnetic elements are made by depositing as
many as twenty-one layers of various materials including gold, copper, and
alloys of nickel and iron, using photo masking and selective etching
techniques. Finished wafers are then tested, at the Goleta facilities, and
sliced into "rows". These "rows" are then mounted on bars that serve as
holding fixtures and then shipped to the Company's Malaysian facilities for
further processing as a result of which approximately 1,000 or 1,800
sliders can be produced from three-inch wafers and 4,500 or 8,400 sliders
from six-inch wafers, depending on whether microsliders or nanosliders are
being manufactured. Each slider is ground and lapped to small tolerances
in order to achieve the electromagnetic capabilities and hydrodynamic
characteristics specified for the completed head.
The production yield, quality and manufacturing difficulties
experienced by the Company during fiscal 1994 included problems relating to
its ability to produce wafers for thin-film disk heads with acceptable
production yields from the Company's six-inch line. The Company has
implemented additional manufacturing and process control procedures and
other steps which resulted in improved yields in its wafer fabrication
activities, including the six-inch line, during the last quarter of fiscal
1994, and continuing into the first quarter of 1995. While the Company
will continue to monitor these control procedures and implement new or
supplemental manufacturing and control procedures to sustain wafer yields
at acceptable levels, there can be no assurances that its efforts to
maintain production yields at acceptable levels will not be adversely
affected by similar or other difficulties that may arise with respect to
new products, new product designs or changes in manufacturing processes
which would result in lower than acceptable production yields. To the
extent, if any, the Company's ability to execute customer orders is
adversely affected by lower than acceptable production yields or other
difficulties, the Company's ability to generate sufficient cash flows from
operations to meet its operating and capital expenditure requirements
consistent with management's intentions to return the Company to
profitability by the end of fiscal 1995 could be adversely affected.
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The Company expects that demand for thin-film disk head products will
continue to increase. The Company's ability to achieve desired increases
in production output levels from its six inch wafer fabrication line in
order to respond to increased market demands in its thin-film products is,
to a large extent, dependent on its ability to fund capital expenditures
needed to improve and refine certain processes and process equipment. If,
because of restrictions on cash and other capital resources, the Company is
unable to obtain the required funds in sufficient amounts and at required
times, its future revenues could be adversely affected.
The Company believes that demand for disk heads with FEAB or other
negative air pressure bearing surfaces, which enhance the hydrodynamic
characteristics of the disk heads, will increase and that it has made
important progress in its efforts to develop processes relating to these
designs and in implementing these designs in a number of its thin-film disk
head programs. The Company is also converting some of its conventional
processes and equipment so as to increase its capabilities in this area.
However, circumstances may arise in which the demand for disk head products
with these features may exceed, on a temporary basis, the Company's
manufacturing capacity.
FERRITE. Ferrite disk heads consist of a polycrystalline or single
crystal ferrite core bonded to a slider body. The slider body is
manufactured from ferrite (monolithic) or non-magnetic ceramic (composite)
materials and is processed through several high precision grinding and
lapping operations. The Company purchases its requirements of both
monolithic and composite ferrite sliders from outside vendors. These
sliders are delivered to facilities in Korea, Malaysia or China where the
coils are wound with fine copper wire using either manual or automatic
processes. Procurement of sliders from established vendors allows the
Company to avoid making capital expenditures for ferrite slider production
capacity.
BACK-END ASSEMBLY
Sliders are attached to a stainless steel suspension, forming an HGA.
The Company performs assembly and testing of thin-film and ferrite HGAs at
its facilities in Ireland, Korea and Malaysia. Assembly and testing
operations were also conducted, previously, at the Company's Singapore
facility until those operations were consolidated with the Malaysian
facility in the latter half of fiscal 1994. The Company has undertaken
substantial capital expenditures for the mechanization of its HGA
production processes, which has resulted in increased productivity, reduced
critical device tolerances and improved quality. In addition to increasing
manufacturing output, these improvements have resulted in more uniform
performance by the Company's HGAs, which the Company believes provides it
with a
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<PAGE>
competitive advantage. The Company manufactures a substantial portion of
its stainless steel suspension requirements at a manufacturing facility in
Korea. The Company has been assembling complex ferrite HSAs since the mid-
1970s.
FOREIGN OPERATIONS
With the exception of its wafer fabrication operations, and certain
slider fabrication operations, which are located in Goleta, California, the
Company conducts substantially all of its production, assembly and test
operations at its facilities in Korea and Malaysia. Since July, 1994,
following the consolidation, into its Malaysian facility, of certain
assembly and test operations formerly done at the Singapore business unit,
the Company's Singapore subsidiary has been engaged in customer service and
support operations relating to several disk drive customers who conduct
operations in that country.
The Company has contractual relationships with unaffiliated parties
who provide manufacturing and assembly operations on a contract-labor basis
for the Company in Korea and in the People's Republic of China ("PRC").
The PRC operations are monitored by an office maintained by the Company in
Hong Kong. During fiscal 1995, the Company expects to terminate these
contractual arrangements and close the Hong Kong office as it consolidates
these operations at other facilities. The Company supports its European
markets primarily from its facility in Dublin, Ireland.
The Company's operations in Korea have, from time to time in recent
years, been affected by labor disruptions and slow-downs. In addition to
risks of labor disruptions, civil unrest and political instability, the
Company's foreign operations subject it to risks associated with obtaining
governmental permits and approvals, currency exchange fluctuations,
currency restrictions, trade restrictions and changes in tariff and freight
rates. Further, language barriers and distances between the Company's
domestic and foreign operations occasionally contribute to logistic and
communication difficulties in manufacturing and production activities.
The Company has consolidated much of its manufacturing and assembly
operations at its facility in Penang, Malaysia which, at September 30,
1994, employed approximately 3,200 persons. Because the number of
employees in this region is increasing and because employers currently
located in this region are expanding their operations, there may, from time
to time, be situations in which there are shortages of labor resources
having the desired skills and experience for the Company's operations at
its Malaysian facility. These developments could adversely affect shipment
levels or result in higher labor costs.
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<PAGE>
SOURCES OF SUPPLY
The Company relies on Sumitomo, Ltd. as its principal supplier of
substrates which are used to produce wafers for the Company's thin-film and
MR disk heads and on multiple independent suppliers for photoresist, wire
and other materials used in the manufacture of thin-film disk heads and
ferrite sliders. Although the Company has not experienced significant
limitations on the availability of these materials, shortages could occur
in the future. These developments could disrupt the Company's production
volume and have an adverse effect on the Company.
BACKLOG
The Company receives purchase orders from its customers, or in some
cases master purchase agreements, which express the customer's intentions
to purchase, at stated unit prices, certain quantities of products during a
specified period. Although the customers are not obligated under these
agreements to purchase the total quantities, the purchase of a smaller
quantity may result in an increased unit price for the number purchased.
Further, some orders are subject to rescheduling provisions which permit
increases or decreases in volume of shipments during a specified period.
In addition, at times of supply shortages, the Company believes it is a
common practice for disk drive manufacturers to place orders in excess of
actual requirements. The Company has experienced cancellation and
rescheduling of orders, reductions in quantities and repricing as customer
requirements change.
The contractual arrangements between the Company and most of its
customers permit the Company to assert claims for cancellation costs and
expenses in these circumstances. However, the resolution of these claims
is often a lengthy and extensively negotiated process, resulting in a
compromise arrangement in which, among other things, the Company and the
customer may agree that the claim amount to be paid is reduced or that the
Company will continue to deliver and the customer will accept all or part
of the canceled order over an extended period of time at reduced unit
prices. The significant order cancellations and reschedules which occurred
in September, 1993, resulted, generally, in compromise arrangements of this
nature.
In previous years, particularly those in which the disk drive industry
was undergoing overcapacity and intense price competition conditions,
certain of the Company's customers have delayed shipment dates and
requested extended payment terms and price concessions. It is possible
that these circumstances could reoccur in future periods as a result of
which the Company's revenues and profitability could be adversely affected.
Further,
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<PAGE>
as a result of the foregoing factors, the Company's backlog may not be
indicative of product shipments in any future period.
The Company's backlog of unfilled orders for thin-film or ferrite disk
heads and tape heads as of September 30, 1994 and September 30, 1993 is set
forth below. Orders in backlog with specified delivery dates are,
generally, for delivery within six months. The Company's backlog is
subject to substantial fluctuations depending on the timing of orders,
shipments and release dates with respect to the Company's principal
customers. Further, in December, 1994, the Company completed the sale of
its Tape Head operations to Seagate and following the divestiture, its
production and sale of tape related goods and services will be limited to
that required in order for it to comply with certain continuing contractual
obligations between it and the buyer. See Item 1, "Business - General".
<TABLE>
<CAPTION>
Orders With Orders With
Specified Delivery Delivery Dates
September 30, 1994 Date To Be Determined Total
- - ------------------ ------------------ ---------------- --------------
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C>
Thin-film disk
head products $34,703 $11,461 $46,164
Ferrite disk
head products 9,923 18 9,941
Tape head
products 8,611 65 8,676
------- ------- -------
$53,237 $11,544 $64,781
======= ======= =======
September 30, 1993
- - ------------------
Thin-film disk
head products $25,764 $ 6,608 $32,372
Ferrite disk
head products 37,059 1,934 38,993
Tape head
products 4,225 1,536 5,761
------- ------- -------
$67,048 $10,078 $77,126
======= ======= =======
</TABLE>
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<PAGE>
COMPETITION
The Company competes with other independent recording head suppliers,
two major disk drive companies and some systems companies that produce
magnetic recording heads used in their own products. In the case of thin-
film heads, some systems companies who manufacture disk drives internally,
such as IBM, Fujitsu and NEC (each with significantly greater financial,
technical and marketing resources than the Company), are vertically
integrated and produce thin-film heads for their own use. Quantum and
Seagate, both of which are major independent disk drive manufacturers, and
IBM occasionally make their thin-film disk head products available on the
market to competing drive manufacturers.
In fiscal 1994, Quantum Corporation, a major disk drive manufacturer,
acquired from Digital Equipment that firm's controlling interest in Rocky
Mountain Magnetics, a joint venture with Storage Technology and Digital's
thin-film disk head operations. Rocky Mountain Magnetics is primarily
engaged in the development, production and sale of MR disk heads. Relative
to Applied Magnetics, these companies have greater financial and
operational resources and may have closer and faster access to disk drive
technology development, thus allowing them a competitive advantage over the
Company.
However, the Company believes that disk drive customers and systems
companies that are not vertically integrated continue to represent
significant opportunities for sales of the Company's disk head products for
competitive and other reasons. Moreover, the Company believes that certain
vertically integrated companies will continue to rely on independent
suppliers of disk head products, for competitive and other reasons, as
alternative sources of supply or in some cases as primary sources of supply
for discrete disk head solutions.
The Company believes that Read-Rite Corporation has had substantially
greater sales of thin-film disk head products than the Company and is
presently its primary competitor among independent thin-film disk head
manufacturers. Read-Rite has formed a joint venture with Sumitomo Metal
Industries, Ltd. to manufacture and distribute thin-film heads to Japanese
customers. In addition, in fiscal 1994, Read-Rite acquired Sunward
Technologies, Inc., a manufacturer of ferrite disk head products. While
this acquisition will allow Read-Rite to compete with the Company in both
product offerings, the same price-performance considerations related to
offering ferrite, as compared to thin-film disk head products, for
different disk drive applications, that have applied to the Company are
likely to affect this competitor and may contribute to greater stability in
product pricing decisions. See "Item 1. Business, Technology".
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<PAGE>
Komag, a large independent supplier of disk media, Asahi Glass, a
large diversified Japanese industrial concern, and Hewlett Packard Company
have recently announced the formation of Headway Technologies, Inc., a
joint venture to develop, produce and market MR disk heads.
The principal competitive factors in the markets the Company addresses
are price, product performance and quality, product availability,
responsiveness to customers and technological sophistication. The Company
believes that it competes favorably with respect to these factors, but
there is no assurance that it will continue to be able to do so. The
financial difficulties experienced by the Company during fiscal 1994 and
the limitations on its scientific, technical, cash and working capital
resources have required the Company to impose greater focus and management
controls on research and development projects and, in certain cases, to
delay, postpone or curtail certain advanced technology research and
development efforts. However, the Company believes that it has continued
to make satisfactory progress and achievements in program-specific
development efforts involving both thin-film and MR disk head products.
Additional or more severe financial conditions, operating losses and
restrictions on capital resources could have an adverse effect on the
Company's research and development activities in these areas. The Company
currently experiences limited competition from domestic U.S. independent
head manufacturers in ferrite disk heads but believes that its primary
competitors, TDK and its SAE subsidiary, each have revenues from ferrite
disk heads comparable to those of the Company.
In previous years, the Company believes that its ability to offer both
thin-film and ferrite disk head technologies has allowed its customers to
select the desired price-performance characteristics for specific drive
programs and, therefore, provided the Company a competitive advantage over
those competitors with narrower product lines. However, as the turmoil and
uncertainty in the industry increased in the latter part of 1993, combined
with significant price erosion in thin-film disk heads, these products
currently represent attractive price-performance alternatives to ferrite
disk heads. As a consequence, the Company anticipates that, while there
may continue to be situations in which ferrite disk heads provide a more
attractive solution for particular disk drive applications, given relevant
price-performance considerations, the competitive benefits of being able to
offer both ferrite and thin-film disk products will be outweighed by price,
performance, quality, time-to-market and other considerations involving
thin-film disk heads.
The disk head industry is intensely competitive and largely dependent
on sales to a limited number of disk drive manufacturers and systems
companies. The Company's ability to
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<PAGE>
obtain new orders depends on its ability to anticipate technological
changes, develop products to meet individualized customer requirements and
timely deliver products that meet customer specifications at competitive
prices. The market for the Company's disk head products could be adversely
affected if one or more disk drive manufacturers were to vertically
integrate by acquiring disk head manufacturing capability. In addition,
the disk drive industry is highly cyclical. Disk drive manufacturers may
quickly lose market share as a result of the technological innovations of
their competitors or various other factors. A reduction in orders from, or
loss of a customer, which could occur as a result of these or a wide
variety of other reasons, could have a material adverse effect on the
Company's operations and financial condition, including collection of
accounts receivable and realization of inventories relating to that
customer.
RECENT DEVELOPMENTS
As a result of its deteriorating financial condition, operating losses
and declining revenues during fiscal 1994 and continuing into 1995, the
Company took a number of actions intended to assure the Company's
survivability, to maximize shareholder value and to set the Company on a
course leading to a return to profitability. In June, 1994, the Company
announced that it had retained Lehman Brothers, Inc. as financial advisors
to assist in exploring strategic alliances and other opportunities to
maximize shareholder value. In August, 1994, the Company announced that it
had retained Grisanti, Galef & Goldress, Inc. ("GG&G") a consulting firm
with considerable crisis management and turnaround experience, to assist
the Company in its efforts to conserve and generate cash and working
capital, reduce costs, stem operating losses and return to profitability.
Further, Mr. Craig D. Crisman, a partner in GG&G, was appointed as
President and Chief Executive Officer and as a member of the Board of
Directors.
Substantial changes in the Company's executive management team have
been implemented and significant reductions in the Company's employment
force have taken place. In November, 1994, the Company announced and on
December 10, 1994, it completed, the sale of its Tape Head business unit to
Seagate for $21.5 million cash, of which the Company has received $14.0
million. Of the remaining funds, $1.0 million is held in escrow as a
standard hold-back, for one year, to indemnify the buyer for any claims
relating to the representations and warranties provided by the Company in
connection with the divestiture. Another $6.5 million is held in escrow
pending the completion by the Company of certain performance milestones,
most of which are scheduled for completion within twelve (12) months
following the sale of this business unit, under the Company's agreements to
provide certain tape-related goods and services to the buyer following the
sale.
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<PAGE>
The Company believes that all or substantially all the funds being held in
escrow will eventually be distributed to it. However, if for any reason
claims are made by, and resolved in favor of, the buyer to the extent that
all or a significant portion of the escrowed funds are not distributed to
the Company, this could have an adverse impact on the Company's liquidity.
In November, 1994, the Company also announced that it had entered into
a commitment letter with The CIT Group/Business Credit, Inc. ("CIT") for an
asset-based credit facility of up to $35.0 million. The closing of the
transaction, which is subject to preparation and execution of definitive
loan documentation and certain other closing conditions, is expected to
occur in early January, 1995.
In November, 1994, the Company also announced that it entered into an
agreement to dismiss a securities class action suit brought against it and
several present and former officers in U.S. District Court for the Central
District of California. No findings or admissions of liability on the part
of the Company or the named defendants have been made and the Company will
not have to make any cash payments to resolve the suit. Moreover, while
the Company believes the allegations in the suit are totally without merit,
it will not have to undergo protracted and expensive litigation to defend
the case and will, instead, be able to focus its resources, skills and
energies towards operational goals and objectives. The agreement is
subject to the terms of a definitive written agreement which is to be
submitted to the court for preliminary approval. See Item 3, "Legal
Proceedings".
The Company has also implemented consolidations of manufacturing
operations at several domestic and foreign facilities which have resulted
in cost reductions and the sale or expected sale of excess properties and
assets. Moreover, the Company has implemented aggressive cash management
practices and operating plans for fiscal 1995, that are being closely
managed.
On the basis of these actions and other, continuing management actions
that are being taken to reduce costs, limit and control capital
expenditures, achieve operational objectives, resolve yield problems and
production difficulties and manage cash and working capital resources, the
Company's objective is to return to profitability by the end of fiscal
1995, provided there are no significant external adverse developments
including, but not limited to, market conditions similar to those
experienced in fiscal 1993, major consolidation of customers or
competitors, significant and unanticipated technological developments or
other considerations.
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<PAGE>
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing process, product
design, and equipment as proprietary and seeks to protect its proprietary
rights through a combination of employee and third party non-disclosure
agreements, internal procedures and patent protection. The Company has
been issued a number of United States patents and has multiple patent
applications pending. There is no assurance that patents will issue with
respect to such applications or that any patents issued to the Company will
protect the Company's competitive position. The Company believes its
competitive position is more dependent on the technological know-how and
creative skills of its personnel.
In addition, the Company and IBM hold cross licenses with respect to
certain patents held by each of them. Such cross licenses do not include
any patents filed by IBM after January 1, 1991. The Company is currently
in negotiation with IBM regarding extensions of existing licenses.
Further, under an agreement with Hutchinson Technology, Inc., the Company
and Hutchinson hold cross licenses with respect to certain patents held by
each of them concerning suspension assemblies to make, use and sell such
products. The Company's purpose of entering into the Hutchinson Agreement
was to avoid possible future infringements, thereby reducing the prospects
for disputes and litigation. See "Sources of Supply".
In connection with the sale of its Tape Head business unit to Seagate
in December, 1994, the Company and Seagate entered into a broad cross
license with respect to certain patents held by each of them.
The Company believes that its success depends on the innovative skills
and technological competence of its employees and upon proper protection of
its intellectual properties. Despite the Company's protective measures,
however, competitors or customers could obtain information that the Company
regards as proprietary.
The Company has from time to time been notified of claims that it may
be infringing patents owned by others. If it appears necessary or
desirable, the Company may seek licenses under patents which it is
allegedly infringing. Although patent holders commonly offer such
licenses, no assurance can be given that licenses will be offered or that
the terms of any offered licenses will be acceptable to the Company. The
failure to obtain a key patent license from a third party could cause the
Company to incur substantial liabilities and to suspend the manufacture of
the products utilizing the patented invention.
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<PAGE>
EMPLOYEES
As of September 30, 1994, the Company had approximately 5,500
employees of whom approximately 800 are located in California,
approximately 4,600 are located in Asia and approximately 100 are located
in Ireland. The Company believes that its future success will depend in
large part upon its ability to continue to attract, retain, train and
motivate highly skilled and dedicated employees. The Company's employees
located in Korea are represented by a labor union, and the Company's Korean
operations have, from time to time in recent years, been affected by labor
disruptions and slow downs.
ENVIRONMENTAL REGULATIONS AND WATER SUPPLY RESTRICTIONS
The Company uses certain hazardous chemicals in its manufacturing
process and is subject to a variety of environmental and land use
regulations related to the use, storage discharge and disposal of such
chemicals and the conduct of its manufacturing operations. The state of
California recently enacted legislation generally referred to as "permit by
rule." This legislation requires permits for any treatment or
transportation of materials considered hazardous wastes. Although the
Company believes it will receive the necessary permits prior to the time
required by this legislation, there is no assurance that such permits will
be issued in a timely manner or at all. A failure by the Company to comply
with present or future regulations, or to obtain all permits as required
under such regulations, could subject it to liability or result in
production suspension or delay. In addition, environmental and land use
regulations could restrict the Company's ability to expand its present
production facilities or establish additional facilities in other
locations, or could require the Company to acquire costly equipment, or to
incur other significant expenses for compliance with environmental
regulations or to clean up prior discharges. The Company, which is subject
to water use restrictions, uses a significant amount of water in its
manufacturing process. Although to date the Company has been able to
obtain sufficient water supplies without significantly increased costs,
stricter water use restrictions may be mandated and additional expenditures
for water reclamation and conservation may be required. The Company has
been identified as a potentially responsible party at a hazardous waste
facility operated by the Omega Chemical Corporation in Whittier,
California. Based on Company records of shipments to this site and
preliminary estimates of cleanup costs, it appears that any exposure to the
Company will not be material.
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<PAGE>
SEASONALITY
Generally, the Company's revenues for the first quarter (October 1-
December 31) of its fiscal year tend to be lower than the last quarter of
the preceding fiscal year and may be lower than those of one or more
succeeding quarters. To some extent this is due to inventory and
production planning and scheduling requirements imposed by some customers
during the last quarter of the calendar year. This is also due to the
holidays which occur during the period and related temporary plant close-
downs at some of the Company's manufacturing locations during these
holidays. There are occasional exceptions to this general condition. For
example, during the course of a calendar year, market conditions may
rapidly shift from oversupply to cutback conditions during the first half
of the year to an increase in demand for products during the latter half.
The disk drive industry is cyclical and has been characterized by
periods of intense product demand requiring high production levels followed
by periods of oversupply, order cancellations, pricing pressure and reduced
production levels. During periods of high demand, the Company has expanded
production facilities but at times has been unable to expand facilities and
hire and train production personnel rapidly enough to meet the demand for
its products. Conversely, in periods of lower demand, the Company has had
excess production capacity and has experienced margin declines.
WORKING CAPITAL
The manufacture of recording heads, particularly thin-film and MR disk
heads, is capital intensive. In fiscal 1994, revenues fell below 1993
volumes, and the Company experienced manufacturing difficulties and
production yield problems. These factors combined to reduce the Company's
cash balance from $49.4 million at September 30, 1993, to $20.8 million at
September 30, 1994. In addition, as a result of significant operating
losses and capital expenditures during fiscal 1994, at September 30, 1994,
the Company had a negative working capital of $36.4 million as compared to
a positive working capital of $33.9 million at September 30, 1993.
As a result, the Company's ability to make major capital investments
in equipment, tooling and facilities to support improvements and
investments in its thin-film disk head products and technology has been
constrained. The Company has, however, successfully managed its working
capital to make selected capital expenditures during this period. In
response to these developments, in the fourth quarter of fiscal 1994, the
Company implemented cost and cash expenditure controls that included staff
reductions and aggressive cash management practices.
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<PAGE>
The Company has also negotiated accelerated payment terms with some of
its key customers and is exploring other financing alternatives, including
new loan and credit facilities, extensions or renewals of existing
facilities, lease financing opportunities and other cash and working
capital sources.
During fiscal 1994, the Company experienced a net use of cash in the
amount of $12.9 million for operating activities which included the receipt
of $15.9 million of joint development funding received under the HML
Agreement and the Development Agreements, and decreases in accounts
receivable and inventory of $19.1 million and $10.9 million, respectively.
During fiscal 1994, net cash from financing activities was $9.0 million,
primarily from utilization of the Company's unsecured credit facility with
a Malaysian bank. During this period, the Company made capital
expenditures of $31.5 million, primarily related to increasing thin-film
disk head production capacity and development of MR disk head technology.
Additionally, the Company entered into $12.0 million of operating leases
with terms of three (3) years.
At September 30, 1994, total debt, including notes payable, was $67.2
million, an increase of $10.0 million from the balance outstanding at
September 30, 1993. The Company had fully drawn down its unsecured
Malaysian credit facility to $46.1 million, which has no stated maturity
but is callable on demand from a bank in Malaysia where the Company has
substantial manufacturing operations. The Company also had outstanding
$10.0 million under a revolving credit facility with a commercial bank.
The credit facility provides for up to $10.0 million in aggregate
commitments, is supported by a letter of credit issued for the account of
HML, subject to reimbursement by the Company and the interest rate under
this credit facility was 5.4% for the year ended September 30, 1994. This
credit facility was amended to extend the maturity to March 15, 1995. All
other terms of the facility remain unchanged.
The Company also had outstanding a $10.0 million note with Conner,
pursuant to a Note Purchase Agreement, which is secured by accounts
receivable arising from sales to Conner and by certain capital equipment.
The underlying loan, which matures December 31, 1994, is convertible, at
Conner's election at any time, into shares of the Company's Common Stock at
a conversion price of $10.25 per share. On December 21, 1994, in
connection with the contemplated credit agreement between the Company and
CIT, described above in "Recent Developments", the Company and Conner
entered into an agreement to extend the maturity date of the Note Purchase
Agreement to the earlier of January 10, 1995, or the closing date of the
CIT credit agreement.
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<PAGE>
In 1995, the Company plans approximately $49.0 million in capital
expenditures relating primarily to its thin-film and MR disk head
production capacity and development of related technologies. During the
next twelve months, the Company believes that additional sources of capital
will be required in order to fund the planned production ramp-up of thin-
film and MR disk heads and to maintain planned levels of research and
development and capital expenditure levels required for these disk head
technologies. The Company has implemented an operating and cash management
plan, the objective of which is to provide sufficient cash flows from
operations to meet its operating and capital expenditure requirements
consistent with management's intentions to return the Company to
profitability by the end of fiscal 1995. Management believes that it will
be able to reduce its funding requirements for planned but not committed
capital expenditures required to develop and achieve volume production of
certain disk head products if market demand for those products does not
materialize or declines. However, if the Company is unable to increase
sales and maintain production yields at acceptable levels in order to
permit it to execute customer orders for the new drive programs in a manner
consistent with management's intentions to return to profitability by the
end of fiscal 1995, there could be a significant adverse impact on
liquidity, which would require the Company to obtain additional capital
from external sources. There are no assurances that such sources of
capital will be available or that the terms associated with external
funding sources will be satisfactory to the Company. If the Company is
unable to obtain sufficient capital it would need to curtail its capital,
research and development and working capital expenditures which would
adversely affect the Company's future years' operations and competitive
position.
The Company's accounts receivable and inventory balances are heavily
concentrated with a small number of customers. Sales to Conner, Maxtor,
Quantum and IBM accounted for 53%, 13%, 10% and 10%, respectively, of the
Company's sales in 1994. If any large customer of the Company became
unable to pay its debts to the Company, liquidity would be adversely
affected. Further, while management has not been informed of any facts or
circumstances suggesting that the Malaysian bank intends, during fiscal
1995 to cease making the Malaysian Credit Facility available, should the
bank decide, for any reason, to make all or any significant portion
unavailable in fiscal 1995, the Company would need to pursue alternative
financing sources. Moreover, the Company has reached informal agreements
and understandings with some of its customers to make payments on
accelerated terms. Generally, these arrangements may be canceled at any
time and the customers could revert to payments in accordance with usual
and customary terms. Should one or more of these customers determine that
all or a significant portion of the Company's trade accounts which are
currently being paid on accelerated terms should revert to standard terms,
there could be a significant impact on liquidity
-25-
<PAGE>
unless the Company has been able to obtain additional or supplementary
sources of capital. However, this liquidity risk may be partially
ameliorated by the credit available under the contemplated CIT Credit
Facility under which available loan proceeds could, generally, increase as
the Company's trade accounts receivable increase. See "Recent
Developments".
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. Raw material purchases in yen are
selectively hedged. The Malaysian debt maturities are also hedged. The
Company effects these hedges primarily with forward contracts in order to
reduce the effects of currency rate fluctuations on its results of
operations. However, such fluctuations can have a significant effect on
reported cash balances. The effect of foreign currency exchange rate
changes was a $1.2 million increase in fiscal 1994, and a $1.0 million
decrease in fiscal 1993 in cash and equivalents held in foreign currency.
ITEM 2. PROPERTIES
The Company's continuing manufacturing operations are located in
California, Malaysia, Korea and Ireland. These manufacturing facilities
comprise over 900,000 square feet, substantially all of which are owned by
the Company. The Company is offering for sale certain of its facilities in
Korea comprising approximately 93,000 square feet. In addition, one
separate facility is owned by the Company in connection with a subsidiary
which had been previously divested. This facility is currently leased to
the acquirors of the subsidiary.
The Company does not believe it will be required to acquire or lease
significant additional facilities at least through fiscal 1995. Moreover,
the Company anticipates that it will, during fiscal 1995, undergo some
further consolidation of certain of its manufacturing facilities.
The following table sets forth information concerning the principal
manufacturing and sales facilities of the Company and other properties
owned by the Company. Except as noted below with respect to certain
facilities that are no longer required and are being offered for sale, the
Company considers the utilization and productive capacity of these
facilities adequate and suitable for its business as it is presently being
conducted. During fiscal 1994, the Company sold its facilities in Golden
Valley, Minnesota and Monument, Colorado, comprising approximately 81,000
and 17,000 square feet, respectively. In the first quarter of fiscal 1995,
the sale of an approximate 6,000 square feet facility owned by the
Company's Singapore
-26-
<PAGE>
subsidiary was completed and, in connection with the sale of its Tape Head
business unit to Seagate, the Company transferred ownership of its 30,000
square feet facility in Santa Maria, California.
<TABLE>
<CAPTION>
Approximate Expiration of
Floor Area Original or
(Sq. Ft.) Option Term of Lease
--------------- --------------------
<S> <C> <C>
Goleta (Santa Barbara)
California 217,000 Owned
San Jose, California 1,265 Month-to-Month
Dassel, (Minneapolis)
Minnesota 20,000 Owned /(1)/
Penang, Malaysia 208,000 Owned
Republic of Singapore 6,000 July, 1997
Chuncheon and
Chung Ju, Korea 451,761 Owned /(2)/
Seoul, Korea 31,385 December, 1996
Dublin, Ireland 40,000 Owned
</TABLE>
[FN]
/(1)/ This facility is leased by the Company to the acquiror of a
subsidiary which was previously sold by the Company.
/(2)/ One of the facilities at Chung Ju, comprising approximately 93,000
square feet is being offered for sale or lease.
ITEM 3. LEGAL PROCEEDINGS
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 present and former Company officers in U.S.
District Court for the Central District of California. Settlement of the
suit is subject to the terms of a definitive agreement which is expected to
be submitted to the court for preliminary approval during December, 1994.
The settlement is ultimately subject to final court approval after notice
to the class members of the terms. Under the terms of this settlement, the
Company will not be required to make any cash payments but will contribute
shares of its common stock having an aggregate value of $1.25 million. 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.
-27-
<PAGE>
The Company is not a party, nor are its properties subject to, any material
pending legal proceedings other than ordinary routine litigation incidental to
the Company's business and the matters described above.
PART II
-------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
NONE
ITEMS 5. through 8.
The information called for by Part II of Form 10-K (Item 5 - Market for
Registrant's Common Equity and Related Stockholder Matters; Item 6 - Selected
Financial Data; Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations; and Item 8 - Financial Statements and
Supplementary Data) is set forth on page 10, and pages 5 through 14, in the
Company's Annual Report to Shareholders for the fiscal year ended September 30,
1994, and such information is incorporated herein by this reference. There were
no cash dividends paid by the Company during the fiscal years 1994 or 1993.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL DISCLOSURE
-----------------------------------
None
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The following table sets forth information as to the name, age, and office(s)
held by each director and executive officer of the Company as of December 29,
1994:
<TABLE>
<CAPTION>
Name Age Office Held
- - ---------------------- --- -------------------------
<S> <C> <C>
Harold R. Frank 70 Chairman of the Board
Dr. R.C. Mercure, Jr. 63 Director
Herbert M. Dwight, Jr. 64 Director
Craig D. Crisman 53 Director, President and
Chief Executive Officer,
Chief Financial Officer
</TABLE>
-28-
<PAGE>
<TABLE>
<S> <C> <C>
Raymond P. Le Blanc 49 Vice President, Secretary
and General Counsel
Peter T. Altavilla 41 Corporate Controller
John Ross 49 General Manager, Wafer
Fabrication Business Unit
</TABLE>
Harold R. Frank has been Chairman of the Board of the Company for more than
five years. Mr. Frank also serves as a member of the boards of directors of
Circon Corporation, La Cumbre Savings Bank and Key Technology, Inc.
Dr. R.C. Mercure, Jr. became director of the Company in October 1982. He
serves as Professor and Director, Engineering Management Program, University of
Colorado at Boulder. Dr. Mercure previously served as Vice President, Colorado
Venture Management, Inc., a management consulting firm, and is a director of
Imex Medical Systems.
Herbert M. Dwight, Jr. became a director of the Company in August 1989. He has
been President of Optical Coating Laboratory, Inc., a manufacturer of precision
optical thin-film products and components, since August 1991. Previously, Mr.
Dwight was a founder, President, Chairman and Chief Executive Officer of
Spectra-Physics, Inc., a manufacturer of laser products and scientific
instruments. Mr. Dwight is also a director of Applied Materials, Inc.,
Laserscope, Inc. and Trans Ocean, Ltd., a sea container leasing corporation.
Mr. Crisman is a partner in the firm of Grisanti, Galef & Goldress, Inc.
("GG&G") which firm was engaged by the Company on August 1, 1994, to provide
crisis management and turnaround services to the Company. He was appointed Chief
Executive Officer on August 1, 1994, and, subsequently, assumed the additional
duties of President and Chief Financial Officer. During the five years preceding
his appointment as Chief Executive Officer and as a Director of the Company, Mr.
Crisman, acting as a partner in GG&G, has been engaged, as a crisis management
consultant, in business turnaround assignments involving a number of different
enterprises in various industry segments.
Raymond P. Le Blanc has served as Vice President since September 1985 and as
Secretary and General Counsel since 1982. He joined the Company in February
1974.
-29-
<PAGE>
Peter T. Altavilla has been employed by the Company for approximately
seven (7) years. He served as Assistant Controller until August 11, 1994,
when he was elected to his present position.
John Ross became employed by the Company on June 1, 1993. Prior to
this date he had served as Director, Wafer Fab Operations, at Read-Rite,
Inc., a competitor, since March, 1991. Before joining Read-Rite, Mr. Ross
served as Vice-President, Operations, at Tegal Corporation, a company that
makes and sells semiconductor manufacturing equipment.
Certain information with respect to the Company's directors required
by Part III of Form 10-K, Item 10, will be set forth in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A within
120 days of the Company's fiscal year ended September 30, 1994, and such
information is incorporated herein by this reference.
ITEMS 11. - 13.
The information called for by Part III of Form 10-K (Item 11 Executive
Compensation, Item 12 - Security Ownership of Certain Beneficial Owners and
Management, and Item 13 - Certain Relation-ships and Related Transactions)
will be set forth in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days of the Company's fiscal year
ended September 30, 1994, and such information is incorporated herein by
this reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
---------------------------------------------------
ON FORM 8-K
-----------
I. FINANCIAL STATEMENTS
(1) The financial statements listed below are set forth in the
Company's Annual Report to Shareholders for the fiscal year ended September
30, 1994, and are incorporated herein by this reference.
-30-
<PAGE>
Annual Report
Page No.
-------------
Consolidated Statements of Operations for 11
the Years Ended September 30, 1994, 1993
and 1992
Consolidated Balance Sheets, 12
September 30, 1994 and 1993
Consolidated Statements of Cash Flows 13
for the years ended September 30, 1994,
1993, and 1992
Consolidated Statements of Shareholders' 14
Investment for the Years Ended September 30,
1994, 1993 and 1992
Notes to Consolidated Financial Statements 15-25
Report of Independent Public Accountants 26
(2) Supplemental financial statement schedules required to be filed as
a part of this report:
Form 10-K
Page No.
----------
Supplemental Note to Consolidated 38
Financial Statements, September 30, 1994
Schedules for the years ended 39-43
September 30, 1994, 1993 and 1992
II. AMOUNTS RECEIVABLE FROM RELATED PARTIES 39
AND UNDERWRITERS, PROMOTERS AND EMPLOYEES
OTHER THAN RELATED PARTIES
V. PROPERTY, PLANT AND EQUIPMENT 40
VI. ACCUMULATED DEPRECIATION AND 41
AMORTIZATION
VIII. VALUATION AND QUALIFYING ACCOUNTS 42
IX. SHORT-TERM BORROWINGS 43
Notes to Supplemental Financial Statement 44-45
Schedules
Report of Independent Public Accountants on 46
Schedules and Supplemental Note to
Consolidated Financial Statements
-31-
<PAGE>
Schedules other than those listed above are omitted since they are not
applicable, not required, or the information required to be set forth
therein is included in the consolidated financial statements or notes
thereto incorporated by reference in this report.
Individual financial statements of the Company are omitted because the
Company is primarily an operating company and all subsidiaries included in
the consolidated financial statements filed are totally held and long-term
debt (excluding debt guaranteed by the Company) of certain consolidated
subsidiaries is, in the aggregate, not significant.
(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)
9 Voting trust agreement. None
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) Letter Agreement dated October 30, 1992 between Applied Magnetics
Corporation and Dr.Richard D. Balanson (9)
(i) Applied Magnetics Corporation 1992 Stock Option Plan (9)
(j) Note Purchase Agreement dated as of December 2, 1992 between
Applied Magnetics Corporation and Conner Peripherals, Inc. (9)
(k) Letter Agreement dated as of December 22, 1992 between Applied
Magnetics Corporation and The Prudential Insurance Company of
America (9)
-32-
<PAGE>
(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 Magnetics Corp., a Nebraska Corporation
(10)
(m) Retention Agreement dated November 3, 1993, between the Company
and Kathryn E. Gehrke (11)
(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 Directors' Stock
(12) Option Plan
(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.
(u) Stock Purchase Agreement by and among the Company, Seagate
Technology, Inc. and Applied Tape Technology, Inc.
(v) Letter Agreement dated September 12, 1994, between the Company and
William R. Anderson
(w) Letter Agreement dated June 21, 1994, between the Company and Dr.
Richard D. Balanson
(x) Letter Agreement dated September 12, 1994, between the Company and
Kathryn E. Gehrke
(y) Letter Agreement dated August 1, 1994, between the Company and
Grisanti, Galef & Goldress, Inc.
11 Statement re computation of per share earnings.
12 Statement re computation of ratios. None.
13 Annual Report to Shareholders.
18 Letter re change in accounting principles. None.
-33-
<PAGE>
20 (a) Press release (dated September 30, 1993) announcing expected
operating loss for the Company's fourth quarter of fiscal 1993
and a restructuring charge of approximately $50 million. (17)
(b) Press release (dated October 22, 1993) announcing Company's
intent to vigorously defend several lawsuits filed in the U.S.
District Court, Central District of California, accusing the
Company and certain executive officers of violating federal
securities laws. (14)
(c) Press release (dated January 19, 1994) announcing the Company's
unaudited first quarter results for fiscal 1994.
(d) Press release (dated January 27, 1994) announcing the Company's
strategic alliance with Storage Technology, Inc. for the
manufacturing and development of technology for thin-film tape
heads.
(e) Press release (dated February 3, 1994) announcing the addition of
Mr. Nic Pignati (General Manager of final assembly) and George
Shaw (General Manager of Malaysian operations) to the senior
management team.
(f) Press release (dated April 4, 1994) announcing the consolidation
of the Company's southeast Asian operations transferring the
manufacturing operations of Applied Magnetics Singapore to
Applied Magnetics Malaysia and second quarter operating losses.
(g) Press release (dated April 20, 1994) announcing the Company's
unaudited second quarter results.
(h) Press release (dated May 17, 1994) announcing the Company's
receipt of ISO 9002 certification of all foreign plants
(i) Press release (dated June 7, 1994) announcing lower than expected
results for third quarter of fiscal 1994
(j) Press release (dated June 17, 1994) announcing the Company's
retention of Lehman Brothers, Inc. for assistance in securing
strategic alliances, a reduction in the work force and the
resignation of Dr. Richard D. Balanson.
(k) Press release (dated July 20, 1994) announcing the unaudited
third quarter results of fiscal 1994.
(l) Press release (dated August 2, 1994) announcing the retention of
Grisanti, Galef & Goldress ("GG&G") as a consulting firm to
assist the Company in affecting a turnaround strategy and the
appointment of Craig D. Crisman as President, Chief Executive
Officer and a Director.
(m) Press release (dated August 17, 1994) announcing another
reduction in employment.
(n) Press release (dated September 12, 1994) announcing the
resignation of William R. Anderson as President and Chief
Operating Officer.
-34-
<PAGE>
(o) Press release (dated November 1, 1994) announcing the Company's
unaudited fiscal year 1994 results.
(p) Press release (dated November 8, 1994) announcing the Company's
intentions to sell the Tape Division operation in Santa Maria to
Seagate Technology, Inc.
(q) Press release (dated November 15, 1994) announcing the Commitment
Letter between the Company and The CIT Group/Business Credit,
Inc. ("CIT") for an asset-based credit facility of up to $35
million.
(r) Press release (dated November 18, 1994) announcing the settlement
and agreement of dismissal of a 1993 securities class action suit
brought against the Company and several present and former
officers in the U.S. District Court for the Central District of
California.
(s) Press release (dated December 12, 1994) announcing the completion
of the sale of the Tape Division to Seagate Technology, Inc.
21 Subsidiaries of the registrant.
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 27, 1994.
24 Power of Attorney. None
27 Financial Data Schedules.
28 Information from reports furnished to state insurance regulatory
authorities. None
29 Additional Exhibits. None
(1) Filed as exhibits 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 reference
(3) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
December 21, 1989, and incorporated herein by reference
(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.
-35-
<PAGE>
(6) Filed as an exhibit to the Company's definitive Pro%y 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.
(b) Reports on Form 8-K. The Company filed a report on Form 8-K during
the quarter ended September 30, 1994, reporting, under Item 5 of such
Form, the retention of Grisanti, Galef & Goldress, Inc. as consultants
to provide crisis management and turnaround services. The Company also
filed current reports on Form 8-K during the quarter ended December
31, 1994, reporting, under Item 5 of such Form, (a) the Company's
settlement of a 1993 securities class action suit filed in the U.S.
District Court for the Central District of California against the
Company and certain executive officers under the federal securities
laws, (b) the Company's intentions to sell its Tape Head operations to
Seagate Technology, Inc. and (c) a commitment letter between the
Company and The CIT Group/Business Credit, Inc. for an asset-based
credit facility of up to $35 million.
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K dated
December 28, 1991 and incorporated herein by reference.
(14) Filed as an exhibit to the Company's Current Report on Form 8-K dated
September 28, 1992 and incorporated herein by reference.
(15) Filed as an Exhibit to the Company's Current Report on Form 8-K dated
September 30, 1992 and incorporated herein by reference.
-36-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13(d) or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
APPLIED MAGNETICS CORPORATION
By: ____________________________ Date: December 29, 1994
Craig D. Crisman
President, Chief Executive Officer and
Chief Financial Officer
(Principal Financial Officer)
By: ____________________________ Date: December 29, 1994
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company
and in the capacities and on the dates Indicated.
/s/
_______________________________________ December 29, 1994
Harold R. Frank, Chairman of the Board
/s/
_______________________________________ December 29, 1994
R.C. Mercure, Jr., Director
/s/
_______________________________________ December 29, 1994
Herbert M. Dwight, Jr., Director
/s/
_______________________________________ December 29, 1994
Craig D. Crisman, Director, President
and Chief Executive Officer
-37-
<PAGE>
Supplemental Note to
Consolidated Financial
Statements
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1994
11. INVENTORIES
The components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
September 30
----------------
1994 1993
------- -------
<S> <C> <C>
Purchased parts and
manufactured supplies $ 9,970 $13,810
Work in process 17,436 23,541
Finished goods 4,114 5,075
------- -------
$31,520 $42,426
======= =======
</TABLE>
-38-
<PAGE>
SCHEDULE II
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE II - AMOUNTS RECEIVABLE FROM RELATED
PARTIES AND UNDERWRITERS, PROMOTERS, AND
EMPLOYEES OTHER THAN RELATED PARTIES
For the Years Ended September 30, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
Balance
Balance at at End
Beginning of
Name of Debtor of Period Additions Deductions Period (E)
- - ------------------------------------ --------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Year Ended September 30, 1992
Richard D. Balanson, President
and Chief Operations Officer $ -- $ 250 $ -- $ 250
===== ===== ===== =====
Year Ended September 30, 1993
Richard D. Balanson, President
and Chief Operations Officer $ 250 $ 250 $ 125 $ 375
===== ===== ===== =====
Year Ended September 30, 1994
Richard D. Balanson, President
and Chief Operations Officer $ 375 $ -- $ 375 $ --
Kathryn E. Gehrke, Vice President,
Chief Financial Officer and
Treasurer -- 150 150 --
----- ----- ----- -----
$ 375 $ 150 $ 525 $ --
===== ===== ===== =====
</TABLE>
The accompanying Notes to Supplemental Financial Statement Schedules are an
integral part of this schedule.
39
<PAGE>
SCHEDULE V
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
For the Years Ended September 30, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
Balance
Balance at Translation at End
Beginning Additions Retirement Transfers Adjustment Other of
Classification (A) of Period at cost or Sales (G) (B) (F) (H) Period
- - ------------------ ---------- --------- ---------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 1992
Land $ 6,183 $ -- $ -- $ -- $ 4 $ (894) $ 5,293
Buildings 73,952 565 (533) (3,416) 161 (3,140) 67,589
Manufacturing equipment 151,608 7,815 (21,398) 9,697 457 (22,036) 126,143
Other equipment and
leasehold improvements 33,913 881 (6,771) 1,279 35 (5,363) 23,974
Construction in process 13,329 20,550 (21) (12,230) (61) (2,359) 19,208
-------- ------ -------- -------- ----- -------- --------
Total $278,985 $29,811 $(28,723) $ (4,670) $ 596 $(33,792) $242,207
======== ======= ======== ======== ===== ======== ========
Year Ended September 30, 1993
Land $ 5,293 $ -- $(1,192) $ 1 $ -- $ -- $ 4,102
Buildings 67,589 1,520 (2,694) 3,382 -- 10 69,807
Manufacturing equipment 126,143 17,177 (7,446) 20,731 -- (9,088) 147,517
Other equipment and
leasehold improvements 23,974 3,302 (980) 3,045 -- (651) 28,690
Construction in process 19,208 34,653 (258) (27,159) -- (5,128) 21,316
-------- ------- -------- -------- ----- -------- --------
Total $242,207 $56,652 $(12,570) $ -- $ -- $(14,857) $271,432
======== ======= ======== ======== ===== ======== ========
Year Ended September 30, 1994
Land $ 4,102 $ -- $ (110) $ -- $ -- $ -- $ 3,992
Buildings 69,807 616 (38) 7,360 -- -- 77,745
Manufacturing equipment 147,517 7,145 (4,702) 15,468 -- (2,360) 163,068
Other equipment and
leasehold improvements 28,690 1,607 (2,228) 3,032 -- (358) 30,743
Construction in process 21,316 22,084 (51) (29,489) -- (46) 13,814
-------- ------- -------- -------- ----- -------- --------
Total $271,432 $31,452 $ (7,129) $ (3,629) $ -- $ (2,764) $289,362
======== ======= ======== ======== ===== ======== ========
</TABLE>
The accompanying Notes to Supplemental Financial Statement Schedules
are an integral part of this schedule.
40
<PAGE>
<TABLE>
<CAPTION>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND AMORTIZATION SCHEDULE VI
For the Years Ended September 30, 1994, 1993 and 1992
(in thousands)
Additions Balance
Balance at Charged to Translation at End
Beginning Costs and Retirement Transfers Adjustment Other of
Classification (A) of Period Expenses (C) or Sales (G) (B) (F) (H) Period
- - ------------------ ---------- ------------- ---------- --------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 1992
Buildings $ 16,505 $ 3,112 $ (186) $ (809) $ 53 $ (891) $ 17,784
Manufacturing equipment 77,992 20,328 (13,245) 31 396 (15,015) 70,487
Other equipment and
leasehold improvements 20,509 4,968 (4,880) (31) 34 (2,404) 18,196
-------- ------- -------- ------- ---- -------- --------
Total $115,006 $28,408 $(18,311) $ (809) $483 $(18,310) $106,467
======== ======= ======== ======= ==== ======== ========
Year Ended September 30, 1993
Buildings $ 17,784 $ 3,126 $ (1,109) $ (143) $ -- $ 1,648 $ 21,306
Manufacturing equipment 70,487 21,980 (5,081) 790 -- 20,681 108,857
Other equipment and
leasehold improvements 18,196 3,837 (1,218) (647) -- 1,693 21,861
-------- ------- -------- ------- ---- -------- --------
Total $106,467 $28,943 $ (7,408) $ -- $ -- $ 24,022 $152,024
======== ======= ======== ======= ==== ======== ========
Year Ended September 30, 1994
Buildings $ 21,306 $ 3,891 $ (18) $(1,492) $ -- $ 12 $ 23,699
Manufacturing equipment 108,857 15,011 (3,315) (50) -- (1,712) 118,791
Other equipment and
leasehold improvements 21,861 3,869 (2,034) 173 -- (1,313) 22,556
-------- ------- -------- ------- ---- -------- --------
Total $152,024 $ 22,771 $ (5,367) $(1,369) $ -- $ (3,013) $165,046
======== ======= ======== ======= ==== ======== ========
The accompanying Notes to Supplemental Financial Statement Schedules
are an integral part of this schedule.
</TABLE>
41
<PAGE>
SCHEDULE VIII
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended September 30, 1994, 1993 and 1992
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS DEDUCTIONS
------------------------- ----------
Balance
Balance at Charged Accounts Translation at End
Beginning to costs and Written Adjustment Other of
Classification of Period expenses Recoveries Off (B) (F) Period
- - ---------------------------------- ---------- ------------ ---------- ---------- ----------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year Ended September 30, 1992
Allowance for doubtful collection:
Accounts Receivable $ 1,872 $ 889 $ 230 $ (338) $ (9) $ (686) $ 1,958
Notes Receivable -- 2,559 -- -- -- -- 2,559
-------- -------- ----- -------- ---- ------ --------
Total $ 1,872 $ 3,448 $ 230 $ (338) $ (9) $ (686) $ 4,517
======== ======== ===== ======== ==== ====== ========
Year Ended September 30, 1993
Allowance for doubtful collection:
Accounts Receivable $ 1,958 $ 550 $ 739 $ (5) $ -- $ -- $ 3,242
Notes Receivable 2,559 12,009 -- (3,261) -- -- 11,307
-------- -------- ----- -------- ---- ------ --------
Total $ 4,517 $ 12,559 $ 739 $ (3,266) $ -- $ -- $ 14,549
======== ======== ===== ======== ==== ====== ========
Year Ended September 30, 1994
Allowance for doubtful collection:
Accounts Receivable $ 3,242 $ 100 $ 315 $ (28) $ -- $ -- $ 3,629
Notes Receivable 11,307 1,878 -- -- -- -- 13,185
-------- -------- ----- -------- ---- ------ --------
Total $ 14,549 $ 1,978 $ 315 $ (28) $ -- $ -- $ 16,814
======== ======== ===== ======== ==== ====== ========
</TABLE>
The accompanying Notes to Supplemental Financial Statement Schedules
are an integral part of this schedule.
42
<PAGE>
SCHEDULE IX
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM BORROWINGS
For the Years Ended September 30, 1994, 1993 and 1992
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Category of Weighted Maximum Amount Average Amount Weighted Average
Aggregate Balance at Average Outstanding Outstanding Interest Rate
Short-Term End of Interest During the During the During the
Borrowings Period Rate Period Period Period (D)
- - ------------- ---------- -------- -------------- -------------- ----------------
Notes Payable
1992 $38,111 7.6% $38,275 $35,371 7.5%
1993 $35,198 6.8% $40,953 $36,300 8.2%
1994 $46,062 4.9% $46,062 $42,744 5.6%
</TABLE>
The accompanying Notes to Supplemental Financial Statement Schedules are an
integral part of this schedule.
43
<PAGE>
Notes to Supplemental
Financial Statement
Schedules
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES
SEPTEMBER 30, 1994
(A) Reference is made to Note 1 of the Notes to Consolidated
Financial Statements in the Company's Annual Report to
Shareholders for the fiscal year ended September 30, 1994, with
respect to accounting policies for property, plant and equipment.
(B) Represents translation adjustments made in accordance with
Statement of Financial Accounting Standards No. 52. See Note 1
of Notes to Consolidated Financial Statements.
(C) Additions charged to costs and expenses do not include
amortization of two facilities included in Other Assets of $.2
million in fiscal 1994 and $.3 million in each of the fiscal
years 1993 and 1992, accretion of the discount on a long-term
note of $.7 million in fiscal 1994 and $.6 million in fiscal
1993, and amortization of manufacturing processes of $.1 million
in fiscal 1992.
(D) Represents actual interest expense on short-term borrowings
divided by the average monthly amount of short-term borrowings
outstanding during the period.
(E) Represents loans issued to Company Officers, which are interest
free and will be forgiven in equal annual installments, provided
their employment is not terminated. The loan to Dr. Balanson was
issued on March 2, 1992 and subsequently amended on October 21,
1992. He terminated on July 31, 1994, and the principal balance
of the loan was subsequently paid. The loan to Ms. Gehrke was
issued on November 3, 1994 and pursuant to the termination
agreement dated September 12, 1994, was forgiven.
(F) In June, 1992 the Company developed plans to divest its non-core
businesses. See Note 8 of the Notes to Consolidated Financial
Statements. As a result, Supplemental Financial Statement
Schedules V, VI and VIII reflect activities of discontinued
operations only through June 30, 1992.
-44-
<PAGE>
(G) Net transfers for the year ended September 30, 1992 represent the
transfer to Other Assets of the net book value of two facilities
distributed to the Company in the form of a dividend in
connection with the sale of the Nortronics subsidiary. Net
transfers for the year ended September 30, 1994, represent the
transfer of the net book value of one building included in the
sale of the Optical Products Division, and transfer of the net
book value to Other Assets of a vacant building in Korea held for
sale.
(H) Other for the year ended September 30, 1992, represents
activities of discontinued operations only through June 30, 1992.
Other for the year ended September 30, 1993, represents write-
down of equipment to estimated net realizable value as a result
of various factors, including the unexpectedly rapid market
transition from ferrite to thin-film and from thin-film
microslider to the nanoslider form factor. See Note 6 of Notes
of Consolidated Financial Statements. Other for the year ended
September 30, 1993, and September 30, 1994, also includes
reclassification of balances from cost to accumulated
depreciation as a result of reconciliation of the fixed asset
data base to the general ledger balances.
-45-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES AND
SUPPLEMENTAL NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
To Applied Magnetics Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Applied
Magnetics Corporation's Annual Report to Shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated
December 22, 1994.
Our audits were made for the purpose of forming an opinion on those
statements taken as a whole. Schedule II - Amounts Receivable from Related
Parties and Underwriters, Promoters and Employees other than Related
Parties; Schedule V - Property, Plant and Equipment; Schedule VI -
Accumulated Depreciation and Amortization; Schedule VIII - Valuation and
Qualifying Accounts; and Schedule IX - Short-Term Borrowings and the
related Notes and the Supplemental Note to Consolidated Financial
Statements are the responsibility of the Company's management and are
presented for purposes of complying with the Securities and Exchange
Commissions rules and are not part of the basic consolidated financial
statements. These schedules and supplemental note have been subjected to
the auditing procedures applied in the audits of the basic consolidated
financial statements and, in our opinion, fairly state 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 22, 1994
-46-
<PAGE>
EXHIBIT 10(t)
The CIT Group/
Business Credit
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
Tel: 213 613-2575
Fax: 213 613-2588
(LOGO OF THE CIT GROUP)
November 14, 1994
Mr. Craig D. Crisman
Chief Executive Officer
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, California 93117
Dear Mr. Crisman:
You have asked us to provide Applied Magnetics Corporation (the "Company") with
$35,000,000 in secured financing to provide working capital loans. We have
reviewed the information you have submitted to us and are pleased to inform you
that we have approved a secured committed credit facility ("Line of Credit"),
consisting of, and subject to, the following:
Borrower: The Company
Lender(s): The CIT Group/Business Credit, Inc. ("CITBC")
Line of Credit: $35,000,000
1. Revolving Line of Credit:
-------------------------
A revolving line of credit (the "Revolving Line of Credit")
evidenced by a Financing Agreement ("Agreement") providing for
revolving advances ("Revolving Loans") up to the lesser of (a)
$35,000,000 or (b) 80% of eligible accounts receivable due
from U.S. residents. We will make accounts receivable from
certain mutually agreed upon foreign account debtors,
including foreign subsidiaries of Maxtor Corporation, Western
Digital Corporation and Conner Peripherals, Inc. ("Conner"),
eligible accounts receivable, provided that such accounts
receivable comply with all of the other criteria of
eligibility. Ineligible accounts will include, but not be
limited to, i) accounts not payable in U.S. dollars, ii)
accounts not originated by, or payable to, the Company, iii)
accounts not payable in the United States and (iv) accounts
receivable related to the pending sale of tape products
operations. In addition, eligible accounts receivable due from
any one customer will be limited to 50% of total eligible
accounts receivable and eligible accounts receivable will be
reduced by the aggregate amount of payables, if any, due-to
the debtors of eligible accounts receivable. After giving
effect to all loans, advances and extensions of credit to be
made at closing, we will require, on the day of closing only,
that a minimum additional availability of $5,000,000 exist. It
is understood that such requirement contemplates that, on the
day of closing, all of the
1
<PAGE>
Company's debts, obligations and payables will be current.
2. LETTER OF CREDIT SUBLINE:
-------------------------
Within the Revolving Line of Credit we will assist the Company
in opening up to $10,000,000 at any time of documentary and
standby letters of credit for purposes approved by us. All
letters of credit shall be fully reserved from availability.
3. TERM:
-----
The Agreement shall have an initial term of three years with
automatic annual renewals thereafter (herein each an
"Anniversary Date") unless terminated by either of us, as of
an Anniversary Date, upon 90 days prior notice.
INTEREST RATES, LETTER OF CREDIT CHARGES AND FEES:
- - --------------------------------------------------
We will charge:
(a) (i) interest on all outstanding Revolving Loans under the
Agreement at a rate equivalent to either the Chemical Bank
Rate plus one and three-quarters percent (1.75%) per annum, or
at the election of the Company, LIBOR plus three and one-
quarter percent (3.25%) per annum if the Company's operating
earnings in the previous quarter were zero or less; or
(ii) interest on all outstanding Revolving Loans under the
Agreement at a rate equivalent to either the Chemical Bank
Rate plus one and one-quarter percent (1.25%) per annum, or at
the election of the Company, LIBOR plus two and three-quarters
percent (2.75%) per annum if the Company's operating earnings
in the previous quarter were greater than zero;
Each change in the rate as set forth above will occur on the
first of the month following the filing of the Company's 10Q
(or 1 OK if after fiscal year end ) with the SEC and our
receipt of a copy thereof.
The Company will give the Lender five (5) days prior written
notice of any LIBOR election and the Company cannot make a
LIBOR election if a default or event of default under the
Agreement remains unwaived. Upon the Company's election of a
LIBOR option, the Company will specify a one, two, three, or
six month LIBOR period.
Collections will be credited to the Company's account upon our
receipt of good funds at our bank account in New York, New
York. Interest on all obligations due us shall be payable
monthly.
(b) in addition to passing along all bank charges, a service fee
in connection with each letter of credit equal to; (i) one and
one-half percent (1.5%) per annum on the face amount of each
standby letter of credit and (ii) two percent (2.0%) per annum
on the face amount of each documentary letter of credit.
(c) a Line of Credit Fee, calculated and payable monthly, of one
half of one percent (.5%) per annum computed on the difference
between the Line of Credit and the average daily Revolving
Loan balance due us. This fee will be reduced to one-quarter
percent (.25%) per
2
<PAGE>
annum if the Company's net income for the previous quarter was
positive. Changes in this fee will be made as indicated in (a)
above.
(d) a Collateral Management Fee of $100,000 per year for each year
the Agreement is in effect. Such fee shall be payable annually
in advance and shall be non-refundable. This fee will be
reduced to $50,000 per year in subsequent years if the
Company's net income for the previous fiscal year was
positive.
(e) a $525,000 Loan Facility Fee payable at closing.
EARLY TERMINATION:
- - ------------------
Upon any termination of the Agreement by the Company prior to
an Anniversary Date we shall be entitled to an Early
Termination Fee equal to one percent (1 %) of the Line of
Credit. A termination effective on an Anniversary Date will
not incur an Early Termination Fee.
COLLATERAL:
- - -----------
All obligations due us will be secured by a first and
exclusive lien on all assets and property of the Company
including, without limitation, all present and future accounts
receivable, inventory, trademarks, Intellectual Property
Collateral, general intangibles and equipment excluding (i)
confidential and proprietary know-how and technology, as shall
be mutually agreed upon ("Proprietary Know-How"); (ii) real
property; (iii) subject to the provisions of the immediately
following sentence, certain accounts receivable due from
Conner and equipment (the "Conner Collateral") which are
subject to a security interest in favor of Conner to secure a
payment obligation owed to Conner by the Company in the total
principal amount of $8,645,485.44 (the "Conner Debt") in
connection with that certain Note Purchase Agreement dated
November 25, 1992 (the "Conner Agreement") between the Company
and Conner, a copy of which has been provided to us by the
Company; (iv) accounts receivable, inventory, trademarks,
Intellectual Property, general intangibles and equipment
related to the pending sale of the tape products operations;
and (v) such other permitted security interests, liens and
encumbrances as are mutually agreed by us and the Company. We
will require an Intercreditor Agreement with the Company and
Conner, on terms and conditions mutually agreed, in good
faith, among the parties, pursuant to which we shall be
granted a second and subordinate security interest in the
Conner Collateral and the Company and Conner shall agree not
to amend the Conner Agreement so as to increase the amount of
the Conner Debt without our consent, which shall not be
unreasonably withheld. We will permit up to $20,000,000, in
the aggregate at any one time outstanding, of additional
secured financing of equipment and real estate, only so long
as, at the time of closing of any loan pursuant to such
additional financing (i) there is no default or event of
default under the Financing Agreement and (ii) the aggregate
amount of such loans are equal to at least 50% of the book
value of the pool of assets securing such loans. Additionally,
we will require a pledge of 65% of the stock of all
subsidiaries, excluding the Company's Malaysian subsidiary,
Applied Magnetics Malaysian Sdn. Bhd. ("AMM"). "Intellectual
Property Collateral " shall mean patents, patent applications
and/or registrations, trademarks and license agreements in
which the Company is or becomes licensed to use patents or
trademarks of others. Until the occurrence of an event of
default by the Company under the Agreement and our exercise of
our foreclosure remedies with respect to the pledged stock,
the Company shall retain all voting and dividend rights on the
pledged stock and, subject to certain terms and
3
<PAGE>
provisions, the right to transfer such stock to one or more of
its subsidiaries. Further, the Company shall retain, inter
alia, the rights to (a) grant licenses or sublicenses in
Proprietary Know-How and Intellectual Property Collateral,
provided that any such transactions shall take place in a
manner consistent with the Company's current and past business
practices and upon terms and provisions no less favorable to
the licensor than it could have obtained in a comparable arms
length transaction except as to transactions with the
licensor's subsidiaries and affiliates for which our consent
is required but, which consent shall not be unreasonably
withheld, and (b) threaten, commence, pursue, settle and
conclude litigation or proceedings to enforce, prosecute,
defend or otherwise respond to actions, suits or proceedings
regarding such Proprietary Know-How and Intellectual Property
Collateral. As to the Proprietary Know-How, the Company shall
grant us a royalty-free, non- exclusive right and license to
use the Proprietary Know-How to sell or otherwise dispose of
magnetic recording disk heads; provided, however, that (a)
such license shall be subject to any other licenses and rights
heretofore or hereafter granted, provided our license is not
prohibited or restricted and (b) such right and license will
be effective only upon the occurrence of a default under the
agreement. As to license agreements that are included within
the Intellectual Property Collateral, the security interests
granted to us shall be subject to whatever restriction,
limitations and terms, including, but not limited to,
restrictions or limitations on assignment as are set forth in
such license agreements.
If the pending sale of the tape products operations has not
been completed by March 31,1995, the Agreement will be amended
to grant us a first and exclusive lien on all accounts
receivable, inventory, trademarks, Intellectual Property,
general intangibles and equipment related to the pending sale
of the tape products operations.
COVENANTS:
- - ----------
The Agreement will contain such covenants, warranties,
representations, events of default, notice, confidentiality
and other provisions as are customary for financing
transactions of this type, which will include certain
financial covenants, including:
Free Cash Flow
Limitation on Capital Expenditures
Minimum Net Worth
Limitation on Dividends
Ratio of Total Liabilities to Net Worth
Minimum Operating Earnings
The Company will be required to submit to us, among other
things, monthly interim financial statements plus fiscal
year-end financial statements. The year-end statements must be
certified by an independent public accountant acceptable to
us. We agree that your use of Arthur Anderson & Co. is
acceptable to us.
KEY CONDITIONS:
- - ---------------
We will require:
(a) completion by the Company of a 12 month Cash Budget
Projection on our form prior to closing.
4
<PAGE>
(b) the Maybank facility, or a comparable debt facility, must
remain in place at all times under terms and conditions at
least as favorable to the Company as presently exist or under
revised terms and conditions satisfactory to CITBC, and
borrowings under that facility must, at all times, equal or
exceed the lesser of (a) the amount available under the
facility, as presently calculated, based on eligible invoices,
or (b) $40,000,000, provided, however, that a breach or
violation of this condition shall not occur with respect to
(i) any amendment to such facility that would provide a higher
rate of interest than that currently in effect provided such
increase is not greater than 5% over the then current interest
rate, would require granting a security interest, lien or
charge on, in or against AMM's properties or assets to Maybank
or another lender; or (ii) repayment or refinancing of all or
any part of such facility with the proceeds of or in
connection with (x) the sale of any assets or properties which
are not included within the CITBC Collateral, (y) any new
issuance of securities ( including common stock, preferred
stock or convertible securities ) by the Company, AMM or any
subsidiary of the Company or AMM; provided, however, that
after giving effect to such asset sales or issuance of
securities, the Company remains in compliance with the
Agreement, or (z) any joint venture, or similar arrangement or
agreement by and among the Company, AMM, or either of them,
and any third party, provided that all of the preceding is, in
form and substance, satisfactory to us.
(c) the stock of AMM may not be pledged as collateral, or
conveyed to any third party provided, however, that a breach
or violation of this condition shall not occur with respect to
(i) any assignment, transfer or conveyance to any subsidiaries
or affiliates of the Company, (ii) any merger, reorganization,
or consolidation of AMM with or into any subsidiary or
affiliate of the Company,(iii) any pledge, transfer,
assignment or conveyance made in order to comply with laws,
rules or regulations of the Malaysian government or any agency
or instrumentality thereof, (iv) any pledge, assignment,
transfer or conveyance in connection with any joint venture,
or similar arrangement or agreement by and among the Company,
AMM, or either of them, and any third party, so long as any of
the preceding does not have an adverse affect on AMM and/or
the Maybank facility.
(d) that loans, investments and advances in, or to, other
persons or entities may not exceed an aggregate amount to be
agreed upon, except that investments may be made in
obligations of or instruments guaranteed by the U.S.
government, certificates of deposit from banks domiciled in
the U.S. and other short term investments rated M or better.
(e) Additionally, we may require an environmental audit
conducted by an environmental engineering firm retained by and
acceptable to us but paid for by you, to be performed on each
parcel of real estate located in the United States owned by
the Company, except for the Company's facility in Santa Maria
which is included in the pending sale of the tape products
operations. The Company may provide to us a Phase One Report
prepared by a licensed environmental consultant retained by
the Company of one or more of its domestic U.S. facilities
provided such was prepared within the four year period
preceding the date of this letter, and upon satisfactory
review of the form and substance of any such environmental
audit by an environmental engineering firm selected by us but
paid for by you, we shall waive the foregoing requirement for
an additional audit. Should this audit or, in lieu thereof,
the Phase One Report, indicate the presence of hazardous
substances or liability (real or potential) stemming from
operations and/or hazardous waste disposal practices under any
local, state.or federal laws or regulations, we may either, at
our option, decline to consummate the proposed arrangement, or
impose such additional conditions as we deem necessary.
5
<PAGE>
OUT OF POCKET EXPENSES:
- - -----------------------
The Company shall pay (whether or not this transaction is
consummated) all of our out-of-pocket costs and expenses
(including reasonable fees of outside legal counsel, but
excluding fees of in-house legal counsel ) incurred in
connection with the Agreement, including, but not limited to,
those incurred by us in connection with the preparation,
execution and closing of this financing transaction.
OTHER CONDITIONS OF CLOSING:
- - ----------------------------
The foregoing is furnished to you as a means of affording you
a guide to, and an outline of, the material terms and
conditions of the proposed accommodation being considered.
Moreover, you appreciate that the foregoing is subject to:
(a) successful completion of all the above items;
(b) the execution and delivery of appropriate legal
documentation which must be satisfactory in form and substance
to each of us and to our respective counsels;
(c) on or before closing of the Agreement, all of the tangible
non-real estate assets, except for a total of $2.0 million of
equipment and/or inventory, of Applied Magnetics (Singapore)
Pte. Ltd. will have, in accordance with applicable law, been
transferred or dividended to the Company with respect to its
accounts receivable or its Subsidiaries with respect to all
other assets. Subsequent to this transfer of assets, Applied
Magnetics (Singapore) Pte. Ltd. will not purchase or sell any
assets except its real estate.
(d) the absence of any material adverse change in the
financial condition, business, prospects, profitability,
assets or operations of the Company or any of its
subsidiaries. It is understood and agreed that any adverse
change in the terms, conditions, assumptions or projections
supplied to us by the Company and on which we based our
decision to issue this letter will be construed by us as a
material adverse change.
CONFIDENTIALITY:
- - ----------------
This letter and the financing arrangements described herein
are delivered to you with the understanding that neither this
letter nor the substance of said proposed financing
arrangements shall be disclosed by you to anybody outside your
organization, except to those professional advisors who are in
a confidential relationship with you and require knowledge
thereof to perform their duties (such as your legal counsel,
accountants and financial advisers), or where disclosure is
required by law. CITBC will protect the confidential or
proprietary nature of any Proprietary Know-How.
COMMITMENT FEE:
- - ---------------
To induce us to issue this commitment letter we will require
payment by you of a Commitment Fee of $125,000 which will be
credited against the Loan Facility Fee upon consummation of
the proposed transaction. lf the Agreement is not consummated
6
<PAGE>
for any reason whatsoever, $50,000 of the Commitment Fee, less
our expenses incurred heretofore or hereafter, will be
refunded to the Company and the balance of the Commitment Fee
shall be non-refundable.
WE EACH HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, ACTION
OR CAUSE OF ACTION ARISING UNDER THIS LETTER, ANY TRANSACTION RELATED HERETO, OR
ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH, WHETHER SOUNDING IN CONTRACT, TORT OR OTHERWISE.
This letter (a) embodies the entire agreement and understanding between the
parties hereto with respect to the subject matter of this letter and supersedes
all prior agreements, commitments, arrangements, negotiations or understandings,
whether oral or written, of the parties with respect thereto, and (b) can be
changed only by a writing signed by each of the parties hereto and shall bind
and benefit each of such parties and their respective successors and assigns.
If the foregoing is acceptable to you, please so indicate by signing and
returning to us the enclosed copy of this letter together with your check to our
order in the amount of $50,000 not later than the close of business on November
14, 1994. We will treat this $50,000 and the $75,000 previously delivered to us
under our proposal letter of June 6, 1994 as the Commitment Fee. If not accepted
by you as herein provided, this commitment shall expire at the close of business
on November 14, 1994. If accepted, the financing facility offered herein will
expire at the close of business on January 15, 1995 unless the documents
contemplated hereunder have been fully executed. Upon our receipt from you of an
executed copy of this letter together with a check for $50,000 we will sign
below to confirm our acceptance and return a fully executed copy of this letter
to you.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Alan Grosshans
--------------------------------
Title: Vice President
Commitment Letter Accepted: Commitment Letter Accepted:
APPLIED MAGNETICS CORPORATION THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Craig D. Crisman By: /s/ Alan Grosshans
-------------------------- ---------------------------
Title: Chief Executive Officer Title: Vice President
7
<PAGE>
================================================================================
EXHIBIT 10(u)
-------------
STOCK PURCHASE AGREEMENT
dated as of
NOVEMBER 4, 1994
by and among
SEAGATE TECHNOLOGY, INC.,
APPLIED MAGNETICS CORPORATION
and
APPLIED TAPE TECHNOLOGY, INC.
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I FORMATION OF ATTI.................................. 2
SECTION 1.01 Contribution of Assets to ATTI................. 2
SECTION 1.02 Retained Assets................................ 4
SECTION 1.03 Assumption of Liabilities by ATTI.............. 6
SECTION 1.04 Excluded Liabilities........................... 6
SECTION 1.05 Certain Tax Matters............................ 7
ARTICLE II PURCHASE AND SALE OF ATTI SHARES................... 8
SECTION 2.01 Purchase and Sale of ATTI Shares............... 8
SECTION 2.02 Payment for ATTI Shares........................ 8
SECTION 2.03 Preliminary Balance Sheet...................... 8
SECTION 2.04 Adjustment to the Initial Price................ 8
ARTICLE III CLOSING............................................ 10
SECTION 3.01 Time of Closing................................ 10
SECTION 3.02 Payments at Closing............................ 10
SECTION 3.03 Closing Deliveries............................. 10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER............ 11
SECTION 4.01 Organization of Buyer.......................... 11
SECTION 4.02 Authority...................................... 11
SECTION 4.03 Noncontravention............................... 11
SECTION 4.04 Brokers, Finders............................... 11
ARTICLE V REPRESENTATIONS AND WARRANTIES OF SELLER........... 12
SECTION 5.01 Corporate Organization......................... 12
SECTION 5.02 Authorization of Seller........................ 12
SECTION 5.03 Noncontravention............................... 13
SECTION 5.04 Subsidiaries................................... 13
SECTION 5.05 Contracts and Commitments...................... 13
SECTION 5.06 Inventory...................................... 13
SECTION 5.07 Receivables.................................... 14
SECTION 5.08 Financial Statements........................... 14
SECTION 5.09 Events Subsequent to August Balance Sheet Dat.. 14
</TABLE>
i.
<PAGE>
<TABLE>
<S> <C>
SECTION 5.10 Assets Are All Assets of the Tape Head
Division....................................... 15
SECTION 5.11 Title to the Assets............................ 15
SECTION 5.12 Division Patents and Intellectual Property..... 15
SECTION 5.13 Litigation..................................... 16
SECTION 5.14 Taxes.......................................... 16
SECTION 5.15 Compliance with Law............................ 16
SECTION 5.16 Labor Relations................................ 17
SECTION 5.17 Environmental Matters.......................... 18
SECTION 5.18 No Defaults.................................... 19
SECTION 5.19 Capitalization of Surf Tape.................... 19
SECTION 5.20 Insurance...................................... 20
SECTION 5.21 Restrictions on Business Activities............ 20
SECTION 5.22 Customs........................................ 20
SECTION 5.23 Product Warranty............................... 20
SECTION 5.24 Disclosure..................................... 21
SECTION 5.25 Undisclosed Liabilities........................ 21
SECTION 5.26 Bulk Sales Compliance.......................... 21
SECTION 5.27 Brokers, Finders............................... 21
ARTICLE VI PRE-CLOSING COVENANTS.............................. 21
SECTION 6.01 General Covenants.............................. 22
SECTION 6.02 Notices and Consents........................... 22
SECTION 6.03 Operation of Business.......................... 22
SECTION 6.04 Preservation of Business....................... 22
SECTION 6.05 Compliance with Obligations.................... 22
SECTION 6.06 Access to Financial, Operation, Technical and
Scientific Information......................... 22
SECTION 6.07 Notice of Developments......................... 23
SECTION 6.08 Exclusivity.................................... 23
SECTION 6.09 Buyer to Offer Employment...................... 24
SECTION 6.10 Title Insurance................................ 25
SECTION 6.11 Other Insurance................................ 25
SECTION 6.12 Modification and Termination of Existing
Agreements..................................... 25
ARTICLE VII POST-CLOSING COVENANTS.............................. 26
SECTION 7.01 General........................................ 26
SECTION 7.02 Litigation Support............................. 26
SECTION 7.03 Transition..................................... 26
SECTION 7.04 Confidentiality................................ 27
</TABLE>
ii.
<PAGE>
<TABLE>
<S> <C>
ARTICLE VIII CONDITIONS TO OBLIGATION TO CLOSE................ 27
SECTION 8.01 Conditions to Obligation of Buyer............ 27
SECTION 8.02 Conditions to Obligation of Seller........... 30
ARTICLE IX INDEMNIFICATION.................................. 32
SECTION 9.01 Survival..................................... 32
SECTION 9.02 Indemnification Provisions for Benefit of
Buyer........................................ 32
SECTION 9.03 Cash Escrow.................................. 33
SECTION 9.04 Indemnification Provisions for Benefit of
Seller....................................... 33
SECTION 9.05 Other Indemnification Provisions............. 33
SECTION 9.06 Matters Involving Third Parties.............. 34
SECTION 9.07 Limitations.................................. 34
ARTICLE X TERMINATION...................................... 35
SECTION 10.01 Termination of Agreement..................... 35
SECTION 10.02 Effect of Termination........................ 35
ARTICLE XI MISCELLANEOUS.................................... 35
SECTION 11.01 Expenses..................................... 35
SECTION 11.02 Press Releases and Announcements............. 36
SECTION 11.03 No Third-Party Beneficiaries................. 36
SECTION 11.04 Entire Agreement............................. 36
SECTION 11.05 Succession and Assignment.................... 36
SECTION 11.06 Headings..................................... 36
SECTION 11.07 Notices...................................... 36
SECTION 11.08 Interpretation............................... 37
SECTION 11.09 Governing Law................................ 37
SECTION 11.10 Amendments and Waivers....................... 37
SECTION 11.11 Severability................................. 38
SECTION 11.12 Specific Performance......................... 38
SECTION 11.13 Counterparts................................. 38
</TABLE>
iii.
<PAGE>
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), dated as of November
4, 1994, is entered into by and among Seagate Technology, Inc., a Delaware
corporation ("Buyer"), Applied Magnetics Corporation, a Delaware corporation
("Seller"), and Applied Tape Technology, Inc., a California corporation and a
wholly owned subsidiary of Seller ("ATTI").
RECITALS
--------
A. Seller is presently engaged in the business of designing,
developing, manufacturing and marketing magnetic recording disks and Tape Heads
for use in computer disk and tape drives. As used herein, the term "Tape Head"
shall mean a device designed and manufactured for the purpose of recording
information on or reading or erasing information from magnetic tape and
comprising one or more transducers, a support housing for said transducers and
electrical circuit means such as flex circuits. Seller's business of designing,
developing, manufacturing and marketing Tape Heads for use in computer tape
drives (the "Business") is presently conducted by Seller as a division (the
"Division" or "Tape Head Division") with its one principal facility located in
Santa Maria, California (the "Santa Maria Facility"), and additional operations
at the Seller's other facilities located in Seoul, South Korea (the "Seoul
Facility"), and in Chung Ju, South Korea (the "Chung Ju Facility"). The Seoul
Facility and the Chung Ju Facility are collectively referred to herein as the
"Korean Facilities."
B. Seller now desires to sell, and Buyer now desires to acquire, the
Business and the Tape Head Division on the terms and conditions hereinafter set
forth.
C. Prior to the consummation of the contemplated transaction, the
parties intend that certain specified assets and liabilities of the Tape Head
Division be contributed to ATTI, which was formed by Seller on August 26, 1994.
D. The parties further intend that the acquisition of the Business
be accomplished by means of an acquisition by Buyer of all of the outstanding
capital stock of ATTI.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements hereinafter set forth, the parties hereby agree as
follows:
1.
<PAGE>
ARTICLE I
FORMATION OF ATTI
SECTION 1.01 Contribution of Assets to ATTI.
------------------------------
(a) On the Closing Date (as defined in Section 3.01 below), Seller
shall assign, transfer, convey, deliver and contribute to ATTI, on a going
concern basis, in exchange for shares of capital stock of ATTI, all of Seller's
right, title and interest in and to all of the assets, properties and rights,
other than the Retained Assets (as defined in Section 1.02 below), owned, leased
or used by Seller in connection with the Seller's operation of the Tape Head
Division or relating to the Business, of every kind and description, whether
real, personal or mixed (the "Tape Head Division Assets"), including, without
limitation, the following:
(i) All real property and all buildings thereon, all
improvements thereto and fixtures thereon and all related rights at the
Santa Maria Facility, the legal description of which being set forth at
Schedule 1.01-A;
(ii) All machinery, equipment, leasehold improvements,
construction in progress, tooling, furniture, fixtures, motor vehicles,
supplies, repair and maintenance parts, fuel, and other fixed assets,
including any items of capital equipment that were purchased through
funding or co-funding arrangements with third parties and are used in
connection with the operation of the Business, a listing of all items
described in this subpart (ii) having an original purchase price or
cofunded value in excess of $500 being set forth at Schedule 1.01-B;
(iii) All accounts receivable arising out of the ordinary course
of the Business on or prior to the Closing Date;
(iv) All inventory of raw materials, work-in-process and
finished goods;
(v) All prepaid expenses and prepaid taxes, to the extent not
pro rated pursuant to Section 1.05 hereof, lease and rent deposits, and all
other current assets, a listing of which being set forth at Schedule 1.01-
C;
(vi) All claims and rights under all leases, agreements,
contracts, licenses, evidences of indebtedness, purchase and sale orders
and other executory commitments, including the Contracts (as defined in
Section 5.05);
(vii) All rights to receive proceeds under insurance policies
maintained by the Seller insofar as they (1) relate to the liabilities
assumed by Buyer pursuant to this Agreement and (2) provide coverage with
respect to the Business or the Tape Head Division Assets for losses
occurring after the Closing Date, or claims
2.
<PAGE>
made after the Closing Date with respect to occurrences prior to the
Closing Date, a listing of such insurance policies being set forth at
Schedule 1.01-D;
(viii) All permits, consents and certificates of any regulatory,
administrative or other governmental agency or body that are used in, or
are required or necessary for, the ownership or operation of the Business
and the Tape Head Division Assets;
(ix) All rights relating to or arising out of the Business under
express or implied warranties from its suppliers insofar as they relate to
the Tape Head Division Assets;
(x) Subject to (1) certain rights and licenses granted under the
AMB Agreement, the Nortronics Agreement, the IBM Agreement, the 3M
Agreement, the Kodak Agreement and the STK Agreement (as those terms are
defined herein), and (2) the license retained by Seller pursuant to the
License Agreement referred to in Section 8.01(j) hereof, all patents,
patent applications and invention disclosures that are used primarily for
the design, development, manufacture and marketing of Tape Heads a listing
of which being set forth in Schedule 1.01-E (the "Division Patents");
(xi) Subject to certain rights and licenses granted under the AMB
Agreement, the Nortronics Agreement, the IBM Agreement, the 3M Agreement,
the Kodak Agreement and the STK Agreement (as those terms are defined
herein), all (1) copyrights and registrations and applications for
registration thereof; (2) masks, mask designs and mask works, and
registrations and applications for registration thereof; (3) computer
software, data, and documentation; (4) trade secrets (including ideas,
formulas, compositions, inventions, whether patentable or unpatentable and
whether or not reduced to practice), know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data and copyrightable
works; (5) registered and common law trademarks, servicemarks, tradenames,
trademark and servicemark applications and copies thereof and tangible
embodiments thereof (in whatever form or medium) that are used solely for
the design, development, manufacture and marketing of Tape Heads
("Intellectual Property");
(xii) All rights under Seller's existing employee
confidentiality and assignment agreements to employee inventions,
discoveries and improvements with respect to Division Patents and
Intellectual Property;
3.
<PAGE>
(xiii) Copies (whether in written or electronically recorded
form or otherwise) of all books of account, general ledgers, sales
invoices, accounts payable and payroll records, drawings, files, papers and
all other records relating to the operation of the Business; and
(xiv) All other intangible assets and goodwill related to or
arising out of the Business.
(b) Seller, ATTI and Buyer acknowledge that the Business has used in
the ordinary course, the trademarks, trade names or service marks "Applied
Magnetics," "Applied Magnetics Corporation," and "/+" and various geometric
representations or stylized versions or combinations of the foregoing
(collectively, "AMC Marks") in connection with documents, product brochures,
stationery, sales and promotional literature, visual expressions of computer
software and programs and the like ("Visual Materials"). While nothing
contained herein shall be deemed to grant to Buyer or ATTI any right or license
to use AMC Marks, ATTI shall be permitted, for a period not exceeding 180 days
following the Closing, to use such Visual Materials which exist at Closing and
which contain or incorporate AMC Marks, provided that in using the same ATTI
shall undertake its best reasonable efforts to obliterate, overprint or
otherwise obscure or eliminate such marks. After the expiration of such 180 day
period, ATTI shall forever cease and desist from using such marks.
SECTION 1.02 Retained Assets. Notwithstanding anything in Section
1.01 to the contrary, Seller shall retain all of its right, title and interest
in and to, and there shall be excluded from the transfer of assets contemplated
by Section 1.01, the following assets and rights (collectively, the "Retained
Assets"):
(i) All cash and cash equivalents;
(ii) All of Seller's right, title and interest in and to the real
property, and all buildings thereon, all improvements thereto and fixtures
thereon, and all related leases and rights, at the Korean Facilities;
(iii) All rights to the use of the AMC Marks, except to the
extent contemplated by Section 1.01(b);
(iv) All patents, patent applications and invention disclosures
owned or held by Seller other than Division Patents;
(v) The consideration delivered to Seller pursuant to this
Agreement;
4.
<PAGE>
(vi) All of the Seller's rights under confidentiality and
assignment agreements and under applicable law with respect to the
obligations of employees of the Tape Head Division ("Division Employees")
to not disclose or misappropriate Seller's confidential and proprietary
information and trade secrets which are not Division Patents and
Intellectual Property, and with respect to the disclosure, assignment,
ownership, and prosecution of inventions, patents, and patent applications
other than Division Patents and Intellectual Property;
(vii) All of the Seller's rights under (1) that certain
Agreement dated as of March 11, 1993, between the Seller and Applied
Magnetics Belgium, N.V. (the "AMB Agreement"), (2) that certain Stock
Purchase Agreement dated as of November 16, 1991 among Seller, Nortronics
Company, Inc., Alan C. Kronfeld, Thomas Philipich and Robert Cistori (the
"Nortronics Agreement"), (3) that certain Agreement dated as of June 12,
1991, between Seller and Center for Magnetic Recording Research, University
of California at San Diego, (4) that certain Agreement dated as of June 8,
1990, between Seller and Carnegie Mellon University, Data Storage Center,
and (5) subject to the rights of ATTI as an "Operating Subsidiary", that
certain License Agreement between Seller and International Business
Machines Corporations dated as of July 1, 1986 (the "IBM Agreement").
(viii) With respect to (1) that certain agreement dated as of
January 1, 1994, between Seller and Storage Technology Corporation (the
"STK Agreement"); (2) that certain agreement dated as of December 19, 1994,
between Seller and 3M Corporation (the "3M Agreement"); (3) that certain
agreement dated as of May 10, 1993, between Seller and Eastman Kodak
Company (the "Kodak Agreement"); and (4) non-disclosure agreements with
actual or prospective customers and suppliers of the Division, all rights
that (x) impose on the parties to such agreements and contracts obligations
or restrictions with respect to the use or disclosure of AMC's confidential
or proprietary information, Excluded Intellectual Property or Licensed
Trade Secrets (as defined in 1.02(xi) and (xii) below), (y) grant to AMC
any actual or prospective rights or licenses in any inventions,
improvements or discoveries to make, have made, use or sell products or
services other than Tape Heads, or (z) relate to, involve or are connected
with, in any manner whatsoever, either the enforcement, perfection or
performance of the obligations, restrictions, rights and licenses described
in clauses (x) and (y) above, or, in the case of a violation, breach or
default by any party of such obligations, restrictions, rights and
licenses, the ability of AMC to pursue any and all remedies at law or in
equity;
(viii) All of Seller's capital stock in each of its subsidiaries
other than ATTI;
(ix) The original books of account, general ledgers, sales
invoices, accounts payable and payroll records, drawings, files, papers and
all other records relating thereto;
5.
<PAGE>
(x) All rights to all (1) copyrights and registrations and
applications for registration thereof; (2) masks, mask designs, mask works,
and registrations and applications for registration thereof; (3) computer
software, data, and documentation; (4) trade secrets (including ideas,
formulas, compositions, inventions, whether patentable or unpatentable and
whether or not reduced to practice, know-how, manufacturing and production
processes and techniques, research and development information, drawings,
specifications, designs, plans, proposals, technical data and copyrightable
works); (5) registered and common law trademarks, service marks, trade
names, trademark and service mark applications; and copies and tangible
embodiments thereof (in whatever form or medium), in each case other than
the Intellectual Property ("Excluded Intellectual Property"); and
(xii) All rights to Licensed Trade Secrets as defined in and
subject to the license granted to ATTI under the License Agreement
contemplated by Section 8.01(j).
SECTION 1.03 Assumption of Liabilities by ATTI. Concurrently with
the conveyance of the Tape Head Division Assets to ATTI, Seller shall cause ATTI
to assume, and become responsible for paying and satisfying, the following
debts, liabilities and obligations of Seller (and only such debts, liabilities
and obligations) (the "Assumed Liabilities"):
(i) All trade and other accounts payable of Seller exclusively
related to the Business which shall have arisen, and shall have been
booked, in the ordinary course of the Business on or prior to the Closing
Date;
(ii) All accrued vacation and paid leave benefits for Seller's
employees at the Santa Maria Facility as of the Closing Date;
(iii) All product warranty obligations arising after Closing but
which relate to products sold by the Tape Head Division prior to Closing;
(iv) All liabilities and obligations of the Business under the
Contracts listed in Schedule 1.03; and
(v) All liabilities and obligations relating to the offers of
employment which Buyer has ATTI make as contemplated under Section 6.09(a)
and (b), and any employment agreements, expressed or implied, oral or in
writing, arising therefrom.
SECTION 1.04 Excluded Liabilities. Except as otherwise provided in
Section 1.03 and as contemplated under certain of the agreements described in
Article VIII, neither Buyer nor ATTI shall by the execution, delivery and
performance of this Agreement,
6.
<PAGE>
or otherwise, assume or otherwise be responsible for any liability or obligation
of any nature of Seller, known or unknown, contingent or otherwise, or any
liability or obligation arising out of or related to Seller's ownership of the
Tape Head Division Assets or operation of the Business on or prior to the
Closing Date (the "Excluded Liabilities"). The disclosure by Seller elsewhere
in this Agreement or in a Disclosure Schedule (as defined in Article V) of a
fact, condition or circumstance that may give rise to a possible liability,
obligation or claim of or against Seller, ATTI or Buyer following the Closing
shall in no way affect the preceding limitation. Specifically, but without
intending to limit the foregoing, Seller acknowledges and agrees that neither
Buyer nor ATTI shall have any liability whatsoever with respect to those
liabilities and obligations Seller (or its subsidiaries) may have as of the
Closing Date in respect of Seller's employees at the Korean Facilities,
including any liabilities associated with payroll, severance, retirement and all
other employee benefits. In addition, the parties hereto acknowledge that (i)
all claims, suits and charges threatened or pending against the Business or the
Tape Head Division as of the Closing Date or which may arise after the Closing
Date but which are based upon or relate to events or circumstances occurring or
existing prior to the Closing Date shall be deemed Excluded Liabilities for
purposes of this Agreement, notwithstanding the fact that such threatened or
pending claims, suits or charges shall have been disclosed by Seller on Schedule
5.13 of the Disclosure Schedule, and (ii) any Environmental Liability (as
defined in Section 5.17) that ATTI or Buyer may incur, and any remediation costs
incurred in connection therewith, shall be covered as an Excluded Liability by
the indemnification rights set forth in Section 9.02(b), notwithstanding the
fact such potential Environmental Liabilities shall have been disclosed by
Seller on Schedule 5.17 of the Disclosure Schedule.
SECTION 1.05 Certain Tax Matters.
-------------------
(a) Returns and Payments. Seller agrees to bear, pay promptly when
due, and file all necessary returns with respect to, all Taxes that arise in or
are attributable to the operations of the Tape Head Division (or its
incorporation) for any taxable period ending prior to or on the Closing Date.
Buyer agrees to bear, pay promptly when due and file all necessary returns with
respect to all Taxes that are attributable to the operations of STTI for any
taxable period beginning after the Closing Date. For taxable periods that begin
before and end after the Closing Date, Seller agrees to pay all Taxes
attributable to the pre-Closing Date period on the basis of an interim closing
of the books as of the end of the Closing Date. Buyer shall file all returns
required to be filed for taxable periods ending after the Closing Date. For
purposes of this section, Tax and/or Taxes means any net income, alternative or
add-on minimum tax, gross income, gross receipts, sales, use, ad valorem,
franchise, capital, paid-in capital, profits, greenmail, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property,
environmental, windfall profit tax, custom, duty or other tax, governmental fee
or other like assessment or charge of any kind, together with any interest or
any penalty, addition to tax or additional amount imposed by any taxing
authority, provided that Buyer shall reimburse Seller for actual transfer and
sales taxes arising as a result of the transfer of assets pursuant to this
Agreement up to a maximum reimbursement of $10,000.
7.
<PAGE>
(b) Section 338(h)(10) Election. Buyer shall have the option to make
elections under Section 338(h)(10) of the Internal Revenue Code ("IRC") (or the
state equivalent) for federal and/or state tax purposes. Seller agrees to join
with Buyer in making timely, effective and irrevocable IRC Section 338(h)(10)
elections (or the state equivalent) in the taxing jurisdictions identified by
Buyer. Buyer shall retain a nationally recognized firm to appraise the value of
the assets of ATTI that are deemed to have been acquired pursuant to the Section
338(h)(10) Election. The costs, fees and expenses of such firm shall be borne
by Buyer. Buyer shall allocate the modified aggregate deemed sales price as
such term is defined in Regulation Section 1.338(h)(10)-1(f), among the assets
of ATTI in accordance with the appraisal and the regulations promulgated under
Section 338(h)(10). Such allocation shall be the price allocation and shall be
binding on the parties hereto.
ARTICLE II
PURCHASE AND SALE OF ATTI SHARES
SECTION 2.01 Purchase and Sale of ATTI Shares. Subject to the terms
and conditions of this Agreement, on the Closing Date, Buyer shall purchase from
Seller, and Seller shall sell to Buyer, all of the ATTI Shares (as defined in
Section 5.19 below) for the consideration specified herein.
SECTION 2.02 Payment for ATTI Shares. The total purchase price due
at Closing (the "Initial Price") for the ATTI Shares shall be $21,500,000 of
which $7,500,000 in the aggregate shall be held in escrow pursuant to the Escrow
Agreement. Such Initial Price shall be paid in the manner described in Section
3.02.
SECTION 2.03 Preliminary Balance Sheet. Schedule 2.03 to this
Agreement presents an unaudited balance sheet (the "August Balance Sheet")
prepared by Seller that sets forth (i) the Tape Head Division Assets and the
Assumed Liabilities as of August 27, 1994 (the "August Balance Sheet Date") with
line item entries that have been prepared in accordance with generally accepted
accounting principles ("GAAP") and on a basis consistent with Seller's past
accounting practices except that such August Balance Sheet shall reflect a
reserve for product warranty claims on Tape Head Division product sales through
the August Balance Sheet Date which is not consistent with Seller's past
accounting practices, and (ii) a calculation of the net book value of such
assets and liabilities as of such date (the "August Net Value").
SECTION 2.04 Adjustment to the Initial Price.
-------------------------------
(a) Closing Date Statement. Not more than 20 days following the
Closing Date, Seller shall deliver to Buyer an unaudited closing balance sheet
of the Tape Head Division Assets and the Assumed Liabilities as of the Closing
Date (the "Closing Date Statement") with line item entries that have been
prepared in accordance with GAAP and on a basis consistent with the
methodologies and assumptions used in preparing the August
8.
<PAGE>
Balance Sheet, which shall set forth the net book value of such assets and
liabilities as of the Closing Date (the "Closing Net Value"). Upon receipt of
the Closing Date Statement, Buyer, and, if so desired by Buyer and at Buyer's
expense, Buyer's independent accountants, shall be permitted during the
succeeding 30-day period to examine, and Seller shall make available, the books
and records of Seller associated with the Business and any work papers and
reconciliations prepared by Seller in the preparation of the Closing Date
Statement. As promptly as practicable and in no event later than the last day
of such 30-day period, Buyer shall either inform Seller in writing that the
Closing Date Statement is acceptable, or object to the Closing Date Statement by
delivering to Seller a written statement setting forth a specific description of
Buyer's objections to the Closing Date Statement (the "Statement of
Objections").
If Buyer shall fail to deliver such a Statement of Objections within
such 30-day period, the Closing Date Statement shall be deemed to have been
accepted by Buyer. In the event Buyer shall object to the Closing Date
Statement as provided above, Seller and Buyer shall attempt in good faith to
resolve any such objections within 14 days of Seller's receipt of Buyer's
Statement of Objections. If Seller and Buyer shall be unable to resolve the
matter within such 14-day period, they shall, within 30 days thereafter, jointly
select and engage a nationally recognized firm of U.S. independent certified
public accountants to resolve any unresolved objections of Buyer and to make any
adjustments to the unresolved items on the Closing Date Statement. In making
any such adjustments, such accountants shall evaluate the line item entries that
have been set forth in the August Balance Sheet and in the Closing Date
Statement to the extent that they have been prepared in accordance with GAAP and
on a basis consistent with the Seller's past accounting practices. The fees of
such firm shall be divided equally between Seller and Buyer. Seller and Buyer
and their respective accountants shall each make readily available to such firm
all relevant books and records and work papers prepared by them relating to the
Closing Date Statement as may be requested by such firm to resolve the disputes.
Such firm's resolution of the dispute and its adjustments to the Closing Date
Statement shall be conclusive and binding upon the parties.
(b) Adjustment to Initial Price. Upon the later to occur of (i)
acceptance of the Closing Date Statement or (ii) the resolution of Buyer's
objections in connection therewith, Seller shall pay to Buyer the amount, if
any, by which $10,000,000 exceeds the Closing Net Value or, conversely, Buyer
shall pay to Seller the amount, if any, by which the Closing Net Value exceeds
$10,000,000; provided, however, that no adjustment payment shall be required of
either Seller or Buyer pursuant to the foregoing to the extent that the Closing
Net Value shall not differ (either positively or negatively) from $10,000,000 by
more than $100,000. If the difference shall, however, be greater than $100,000,
then the receiving party shall be entitled to the full amount of such
difference. The applicable amount shall be paid by wire transfer of immediately
available funds to the appropriate party within five business days after its
determination. If the foregoing procedure shall indicate that Seller shall be
required to make a post-Closing adjustment payment to Buyer and if such payment
shall not have been made by Seller within such prescribed period,
9.
<PAGE>
Buyer shall be entitled, but not required, to make a claim against the Claims
Deposit (as defined in Section 9.03(a)) for the appropriate amount. If the
foregoing procedure shall indicate that Buyer shall be required to make a post-
Closing adjustment payment to Seller and if such payment shall not have been
made by Buyer within such prescribed period, Seller shall be entitled, but not
required, to receive a payment from the Claims Deposit for the appropriate
amount. If Seller receives such a payment, Buyer shall be required to deposit
the amount of such payment in the Escrow Fund.
ARTICLE III
CLOSING
SECTION 3.01 Time of Closing. The closing of the transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Brobeck, Phleger & Harrison, One Market Plaza, Spear Street Tower, San
Francisco, California as soon as practicable following satisfaction or waiver of
the latest to occur of the conditions set forth in Article VIII, or such other
place or date as Buyer and Seller may mutually agree in writing (the date on
which the Closing shall occur, "Closing Date").
SECTION 3.02 Payments at Closing. At the Closing, in addition to
any other amounts required to be paid hereunder or under any other agreements
between or among Buyer and Seller, Buyer shall pay (i) to Seller $14,000,000,
and (ii) to the Escrow Agent (as defined in Section 9.03(a)) named in the Escrow
Agreement (also as defined in Section 9.03(a)) $7,500,000, to be held and
disbursed by such Escrow Agent in accordance with the terms of such Escrow
Agreement and in such accounts as are set forth in such Escrow Agreement, of
which (a) an aggregate of $5,000,000 shall be held in escrow pursuant to the
License Agreement, (b) an aggregate of $1,000,000 and $500,000 shall be held in
escrow pursuant to the Wafer Supply Agreement and Manufacturing Agreement,
respectively, and (c) an aggregate of $1,000,000 shall be held in escrow
pursuant to the terms of Section 9.03 hereof. Such payments shall be made by
Buyer to Seller and the Escrow Agent by means of a wire transfer of immediately
available funds. The payment to Seller shall be made to Seller's account at
First Interstate Bank of California, Goleta, California Branch, Account No. 308-
7-02356 or at such other account as Seller may designate in writing not later
than three (3) days prior to the Closing Date.
SECTION 3.03 Closing Deliveries. At the Closing, (i) Seller shall
deliver to Buyer the various certificates, instruments and documents referred to
in Section 8.01, all duly and properly executed, (ii) Buyer shall deliver, in
addition to the payments referred to in Section 3.02 above, the various
certificates, instruments and documents referred to in Section 8.02, all duly
and properly executed, and (iii) Seller shall deliver to Buyer a share
certificate representing all of the ATTI Shares, endorsed in blank or
accompanied by duly executed assignment documents.
10.
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller that the statements contained
in this Article IV are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing Date (as though then made and as
though the Closing Date were substituted for the date of this Agreement
throughout this Article IV).
SECTION 4.01 Organization of Buyer. Buyer is a corporation duly
organized and validly existing under the laws of the State of Delaware.
SECTION 4.02 Authority. Buyer has the requisite corporate power and
authority to enter into this Agreement, perform its obligations hereunder and
consummate the transactions contemplated hereby and by the ancillary agreements
contemplated by Article VIII hereof. This Agreement has been duly authorized,
executed and delivered and constitutes a valid and binding obligation of Buyer,
enforceable in accordance with its terms, except to the extent that such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally or by general equitable principals. Buyer need not give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order to consummate the transactions
contemplated by this Agreement other than those consents mandated by the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act").
SECTION 4.03 Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (i) assuming compliance with the HSR Act, violate any
statute, regulation, rule, judgment, order, decree, stipulation, injunction,
charge, or other restriction of any government, governmental agency, or court to
which Buyer is subject or any provision of its charter or bylaws, or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any material contract, lease, sublease,
license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness or other arrangement to which Buyer
is a party or by which it is bound or to which any of its assets is subject.
SECTION 4.04 Brokers, Finders. The transactions contemplated hereby
were not submitted to Buyer by any broker, finder or other person entitled to a
commission, fee or like payment thereon and were not, with the consent of Buyer,
submitted to Seller by any broker, finder or other person, and the actions of
Buyer have not given rise to any claim by any person against Seller for a
commission, fee or like payment.
11.
<PAGE>
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer that, except as set forth in a
document which identifies the Section and subsection to which the disclosures
set forth therein relate and is delivered by Seller to Buyer prior to the date
hereof (the "Disclosure Schedule"), the statements contained in this Article V
are correct and complete as of the date of this Agreement and will be correct
and complete as of the Closing Date (as though then made and as though the
Closing Date were substituted for the date of this Agreement throughout this
Article V). Nothing in the Disclosure Schedule shall be deemed adequate to
disclose an exception to a representation or warranty made herein unless the
Disclosure Schedule shall identify the exception with reasonable particularity
and shall describe the relevant facts in reasonable detail. For purposes of
this Article V, any representation or warranty made by Seller with respect to
itself, the Tape Head Division, the Tape Head Division Assets or the Assumed
Liabilities shall be deemed to have been made in a like manner with equal force
with respect to ATTI and its organization, operations and assets. In addition,
all references in this Article V to "Seller" shall also be deemed to include
ATTI.
SECTION 5.01 Corporate Organization. Each of Seller and ATTI is a
corporation duly organized, validly existing and in good standing under the laws
of its respective jurisdiction of incorporation with all requisite corporate
power and authority to carry on the Business. Prior to Closing, ATTI shall be
duly qualified to do business as a foreign corporation and be in good standing
in each jurisdiction where the character of the property owned or leased by it
or the nature of its activities as of the Closing makes such qualification
necessary, except for those jurisdictions where the failure to be so qualified
would not, individually or in the aggregate, have a material adverse affect on
the condition (financial or otherwise), assets, properties, liabilities, results
of operations or prospects of the Business (a "Material Adverse Effect") and a
listing of each such jurisdiction is set forth in Schedule 5.01 of the
Disclosure Schedule.
SECTION 5.02 Authorization of Seller. Seller has the requisite
corporate power and authority to enter into this Agreement, perform its
obligations hereunder and consummate the transactions contemplated hereby and by
the ancillary agreements contemplated by Article VIII hereof. This Agreement
has been duly authorized, executed and delivered and constitutes a valid and
binding obligation of Seller, enforceable in accordance with its terms, except
to the extent that such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization or other laws affecting the enforcement of creditors'
rights generally or by general equitable principals. Seller need not give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government or governmental agency in order to consummate the
transactions contemplated by this Agreement other than those consents mandated
by the applicable requirements of the HSR Act.
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SECTION 5.03 Noncontravention. Neither the execution and the
delivery of this Agreement, nor the consummation of the transactions
contemplated hereby, will (i) assuming compliance with the HSR Act, violate any
statute, regulation, rule, judgment, order, decree, stipulation, injunction,
charge, or other restriction of any government, governmental agency, or court to
which Seller is subject or any provision of the charter or bylaws of Seller,
except for such violations which, individually or in the aggregate, would not
have a Material Adverse Effect, and (ii) except for the contemplated
modification of the 3M Agreement, the termination of the STK Agreement as
required in Sections 8.01(n) and (o) hereof and the credit facilities
contemplated under Section 8.01(v) hereof, respectively, conflict with, result
in a breach of, constitute a default under, result in the acceleration of,
create in any party the right to accelerate, terminate or cancel any material
contract, lease, sublease, license, sublicense, franchise, permit, indenture,
agreement or mortgage for borrowed money, instrument of indebtedness, security
interest, or other arrangement to which Seller is a party or by which it is
bound or to which any of the Tape Head Division Assets is subject, (iii) result
in the imposition of any lien, security interest, mortgage, pledge, charge or
encumbrance of any kind (a "Lien") upon any of the Tape Head Division Assets; or
(iv) except for the contemplated modification of the 3M Agreement and the
termination of the STK Agreement, create in a party to a Contract the right to
accelerate, modify or cancel such Contract.
SECTION 5.04 Subsidiaries. ATTI does not have any direct or indirect
interest or equity participation in any corporation, partnership, trust or other
business association or entity.
SECTION 5.05 Contracts and Commitments. Schedule 5.05 of the
Disclosure Schedule sets forth all material contracts, commitments, leases,
permits, purchase orders, sales orders and other instruments binding upon Seller
with respect to the Business (collectively, the "Contracts"). Prior to the date
of this Agreement, Seller has delivered to Buyer true and complete copies of all
items listed in Schedule 5.05, and any amendments thereof. To Seller's
knowledge, all such Contracts are in full force and effect and are valid,
binding and enforceable in all material respects in accordance with their
respective provisions, except as enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. Seller is not in default nor, to Seller's knowledge, has there
occurred an event or condition which, with the passage of time or giving of
notice (or both), would constitute a default with respect to the payment or
performance of any obligation thereunder; and no claim of such a default has
been asserted and, to Seller's knowledge, there is no reasonable basis upon
which such a claim could validly be made.
SECTION 5.06 Inventory. The inventory of Seller with respect to the
Business reflected on the August Balance Sheet was valued at cost (determined on
a first-in first-out basis) or market, whichever is lower, with proper allowance
for excess and obsolete items in accordance with GAAP. Except for such amounts
as are reserved in accordance
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with GAAP, such inventory consists of items which are of quality usable or
saleable in the normal course of business of the Tape Head Division, and is of a
quantity that is not in excess of the reasonable requirements of the Business
for the next six months based upon the current operation and projected
operations of the Business (as projected by the Seller based on current
operations). No items included in the inventory shown on the August Balance
Sheet are pledged as collateral or are held by Seller on consignment from
others.
SECTION 5.07 Receivables. The accounts receivable reflected on the
August Balance Sheet arose from sales in the ordinary course of business, have
been collected or are collectible in the book amounts thereof, less an amount
not in excess of the allowance for doubtful accounts provided for in such
balance sheet. The receivables of the Tape Head Division arising after the date
of the August Balance Sheet but prior to the Closing Date arose or will arise in
the ordinary course of business and have been collected or are or will be
collectible in the book amounts thereof, less an allowance for doubtful accounts
calculated in a manner consistent with the methodologies and assumptions used in
preparing the August Balance Sheet. None of such accounts receivable have been
pledged as collateral or factored by Seller. Schedule 5.07 of the Disclosure
Schedule sets forth an accounts receivable aging schedule which allocates the
accounts receivable balance shown on the August Balance Sheet on a 30-day, 60-
day, 90-day and over 90-day basis and further sets forth the amount of the
allowance for doubtful accounts.
SECTION 5.08 Financial Statements. The Seller has delivered to Buyer
the August Balance Sheet and an income statement (the "Income Statement") for
the Tape Head Division for the 11 months ended August 27, 1994 (collectively,
the "Financial Statements"). The August Balance Sheet is a special purpose
balance sheet that reflects only the assets to be acquired and liabilities to be
assumed by ATTI and the line items accruals with respect to such assets and
liabilities have been properly stated in accordance with GAAP and on a basis
consistent with Seller's past accounting practices except that such August
Balance Sheet shall reflect a reserve for product warranty claims on Tape Head
Division product sales through the August Balance Sheet Date which is not
consistent with Seller's past accounting practices. The Income Statement fairly
presents the results of operations of the Tape Head Division for the period
covered thereby and is consistent with the books and records of Tape Head
Division. The Financial Statements have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby, except
that none of the required footnotes, the cashflow statements or other
supplemental disclosures have been provided. The Business Plan dated as of
August, 1994 presented by Seller to Buyer regarding the future prospects and
operations of the Tape Head Division was prepared by the management of Seller in
good faith based upon estimates and assumptions deemed reasonable and
appropriate by management provided that Seller makes no other representation or
warranty, expressed or implied, regarding the Business Plan or the attainment of
the projected results set forth in the Business Plan.
SECTION 5.09 Events Subsequent to August Balance Sheet Date. Since
the August Balance Sheet Date, there has not been any material adverse change in
the
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assets, liabilities, business, properties, financial condition, or results of
operations of the Business, and, except for this Agreement and the transactions
contemplated hereunder, Seller has conducted the Business in the ordinary
course.
SECTION 5.10 Assets Are All Assets of the Tape Head Division. Except
for the fact that ATTI will not have any direct manufacturing capabilities in
Korea following the Closing, the Tape Head Division Assets, together with the
rights conveyed to ATTI under the various agreements contemplated under Sections
8.01(h), (j), (k), (l) and (n), include all of the real and personal property
(or interests therein), machinery, tools, equipment, inventory, intellectual
property and other property which are used by Seller (or its subsidiaries) in
the conduct of the Business and which are necessary for the continued operation
of the Business in a manner consistent with its current operations, giving
effect to usual and customary production planning and manufacturing
considerations based on existing and anticipated customer orders.
SECTION 5.11 Title to the Assets.
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(a) Except for the Lien of any current assessments or taxes not yet
delinquent and mechanics and similar Liens arising in the ordinary course of
business, and except, as of the date of this Agreement, for the Liens listed in
Schedule 5.11 in favor of 3M (the "3M Liens"), Seller has, and at the time of
the Closing Seller will convey to ATTI, good and marketable title to the Tape
Head Division Assets, free and clear of all pledges, liens, encumbrances,
security interests, equities, charges, clouds and restrictions of any nature
whatsoever, including, at the time of the Closing, the 3M Liens.
(b) Except as set forth in Schedule 5.11 attached, the equipment owned
or leased by Seller is, taken as a whole, (i) adequate for the conduct of the
Business consistent with its past practice, (ii) suitable for the uses to which
it is currently employed, (iii) in good usable condition, normal wear and tear
excepted, (iv) reasonably maintained in accordance with Seller's normal and
customary business practices relating to the Business, and (v) not in need of
renewal or replacement, except for renewal or replacement in the ordinary course
of business.
SECTION 5.12 Division Patents and Intellectual Property. The
Division Patents and Intellectual Property, to be transferred to ATTI and the
Licensed Patents and Licensed Trade Secrets which will be licensed to ATTI under
the License Agreement provided for in Section 8.01(j) hereof, constitute all of
the intellectual property, whether or not owned by Seller, used by it to any
material extent in the conduct of the Business. Except as set forth on such
Schedule: (a) none of such Division Patents, or Intellectual Property has been
assigned, transferred or licensed to or from any third party, and (b) the
validity or enforceability of such Division Patents, and Intellectual Property
as used in the conduct of the Business has not been challenged by others in any
proceeding or dispute about which Seller has received notice in writing, nor is
there any pending or, to the best knowledge of Seller, threatened litigation or
proceeding challenging Seller's right to use any
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of such Division Patents, and Intellectual Property. Seller's use of the
Division Patents and Intellectual Property in connection with its operation of
the Business in the ordinary course does not, to its knowledge, conflict with or
constitute an infringement of the rights of any other person. The consummation
of the transactions contemplated by this Agreement will not adversely affect
ATTI's rights to the Division Patents and Intellectual Property.
SECTION 5.13 Litigation. There is no claim, litigation, action, suit
or proceeding, administrative or judicial, pending or, to the best knowledge of
Seller, threatened against Seller involving the Tape Head Division or the
Business, at law or in equity, before any federal, state, local or foreign court
or regulatory agency, or other governmental authority. Seller has delivered to
Buyer correct and complete copies of all audit response letters prepared by its
counsel for Seller's independent public accountants, if any, relative to the
Tape Head Division or the Business in connection with the audit of Seller's
financial statements for its most recent fiscal year end, and any such
correspondence since such date.
SECTION 5.14 Taxes. Seller has no tax, deficiency or claim
outstanding or assessed against it, or, to the best of Seller's knowledge,
proposed against it, and, to the best of Seller's knowledge, there is no basis
for any such deficiency or claim, which is reasonably likely to result in the
imposition of any lien, claim or encumbrance on the Tape Head Division Assets or
against Buyer or ATTI. All tax returns and reports by Seller required to be
filed by Seller and which are material to the Business have been duly and timely
filed and all taxes which were required to be paid have been paid. Schedule
5.14 of the Disclosure Schedule constitutes a complete list of all real property
and personal property tax bills of Seller, with respect to the Tape Division
Assets, for the current and prior property tax years, indicating whether or not
Seller is aware of any proposal by any such taxing authority to change the
assessed values or assessment rate reflected in such bills.
SECTION 5.15 Compliance with Law. Seller is in compliance in all
material respects with all applicable federal, state and local laws, statutes,
licensing requirements, rules and regulations, and judicial or administrative
decisions applicable to the Business. Seller has been granted any and all
licenses, permits (temporary and otherwise), authorizations and approvals from
federal, state, local and foreign government regulatory bodies necessary to
carry on the Business as currently conducted, all of which are valid and in full
force and effect, except where failure to have such licenses, permits,
authorizations or approvals granted would not have a Material Adverse Effect on
the Business. Each such license, permit, authorization and approval that is
material to the continued operation of the Business has been set forth in
Schedule 5.15 of the Disclosure Schedule. As of the date of this Agreement,
there has been no order issued, investigation or proceeding pending, or to the
best knowledge of Seller threatened, or notice served with respect to any
violation of any law, ordinance, order, writ, decree, rule or regulation issued
by any federal, state, local or foreign court or governmental agency or
instrumentality applicable to the Business.
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SECTION 5.16 Labor Relations.
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(a) With respect to its Tape Head Division operations at the Santa
Maria Facility, (i) to its knowledge, Seller is in compliance with all currently
applicable laws and regulations of the State of California and of the United
States respecting employment, discrimination in employment, verification of
immigration status, terms and conditions of employment and wages and hours and
occupational safety and health and employment practices (collectively,
"Employment Regulations") and is not engaged in any unfair labor practice, (ii)
Seller has not received, with respect to any Division Employees any notice from
any governmental entity with respect to a violation of Employment Regulations
within three years preceding the date hereof, (iii) there has not, to the
Seller's knowledge, been asserted before any governmental entity any claim,
action or proceeding alleging a violation of Employment Regulations with respect
to Division Employees or an unfair labor practice committed by the Seller with
respect to the Division Employees and (iv) there is neither pending, nor to the
knowledge of Seller, threatened any investigation or hearing concerning the
Division Employees arising out of or based upon any such Employment Regulations.
(b) The Seller's employees listed in Exhibit 8.01F and each other
Division Employee who is employed at the Santa Maria Facility in a technical,
managerial or executive capacity and whose departure as an employee would have a
Material Adverse Effect on the Business have the right under applicable
U.S.immigration laws to work in their present locations for at least two years
from the Closing Date; provided, however, that at or immediately following the
Closing, ATTI or Buyer (i) obtains new I-9 verification forms from such
employees and (ii) is substituted as named petitioner with respect to all such
employees, if any, who hold H-1, L-1, H-3, F-1 or other similar temporary visas.
(c) There are no material labor controversies pending or, to the best
of Seller's knowledge, threatened as of the date of this Agreement between
Seller and any of the Division Employees of the Tape Head Division, and Seller
is not aware of any basis for such controversies.
(d) Seller is not a party to any collective bargaining or union
contract in connection with the Business as conducted at the Santa Maria
Facility.
(e) Schedule 5.16 of the Disclosure Schedule constitutes a complete
and correct list of (i) all employment, bonus, profit-sharing, percentage
compensation, employee benefit plans, incentive plans, pension or retirement
plans, stock purchase and stock option plans, contracts or agreements with
officers, employees or unions, or consulting agreements, to which Seller is a
party or is subject as of the date of this Agreement and which relate to the
Division Employees; (ii) the names and current salary rates of all Division
Employees who have officer titles (vice president and above), and (iii) the wage
rates for the non-executive Division Employees by classification. Schedule 5.16
of the Disclosure Schedule also sets forth a listing of all bonuses paid to
Division Employees at the Santa Maria Facility since December 31, 1992.
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(f) Seller is not a party to or bound by any express, written
employment agreements or any employment contracts that are not terminable at
will without extraordinary severance payments or other penalties, other than as
required by law or the Seller's benefit plans with any of the Division
Employees.
SECTION 5.17 Environmental Matters.
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(a) Seller has not within the five (5) years preceding the date hereof
received, with respect to its operations at the Santa Maria Facility, any
written notice, demand, citation, summons, complaint or order or any notice of
any penalty, lien or assessment, and, to the knowledge of Seller, no
investigation or review is pending by any governmental entity, with respect to
any (i) alleged violation by the Tape Head Division of any Environmental Law (as
defined in subsection (e) below), (ii) alleged failure by the Tape Head Division
to have any environmental permit, certificate, license, approval, registration
or authorization required, under any Environmental Law, in connection with the
conduct of the Business or (iii) Regulated Activity (as defined in subsection
(e) below).
(b) Except as set forth on Schedule 5.17 of the Disclosure Schedule,
the Tape Head Division has no Environmental Liabilities (as defined in
subsection (e) below), and the Tape Head Division has not had within the five
(5) years preceding the date hereof a release of Hazardous Substances (as
defined in subsection (e) below) into the environment in violation of any
Environmental Law or environmental permit.
(c) Seller shall reimburse ATTI or Buyer for any costs incurred by
ATTI or Buyer in connection with remediating any violations of Environmental
Laws by Seller which shall have occurred prior to the Closing Date and Buyer
shall reimburse Seller for any costs incurred by Seller in connection with
remediating any violations of Environmental Laws by ATTI which shall occur after
the Closing Date.
(d) Seller has delivered to Buyer copies of all environmental audits
and other similar reports which have been prepared by or for the Tape Head
Division with respect to the Santa Maria Facility within five (5) years
preceding the date hereof.
(e) For the purposes of this Section 5.17, the following terms have
the following meanings:
"Environmental Laws" shall mean any and all federal, state
and local laws, regulations or ordinances, relating to the protection
of human health, the environment or to emissions, discharges or
releases of pollutants, contaminants, Hazardous Substances or wastes
into the environment or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of pollutants, contaminants, Hazardous Substances or
wastes or the clean-up or other remediation thereof.
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"Environmental Liabilities" shall mean all liabilities,
whether vested or unvested, contingent or fixed, which (i) arise under
or relate to Environmental Laws and (ii) relate to actions occurring
or conditions existing on or prior to the Closing Date with respect to
the Santa Maria Facility and Seller's operation of the Business.
"Hazardous Substances" shall mean any toxic, radioactive,
caustic or otherwise hazardous substance regulated by any
Environmental Law, including petroleum, its derivatives, by-products
and other hydrocarbons, or any substance having any material
constituent elements displaying any of the foregoing characteristics.
"Regulated Activity" shall mean any generation, treatment,
storage, recycling, transportation, disposal or release of any
Hazardous Substances.
SECTION 5.18 No Defaults. Seller is not, and has not received
notice that it would be with the passage of time, (i) in violation of any
provision of its charter or bylaws or (ii) in default or violation of any term,
condition or provision of (A) any judgment, decree, order, injunction or
stipulation applicable to the Tape Head Division or (B) any material agreement,
note, mortgage, indenture, contract, lease or instrument, permit, concession,
franchise or license relating to the Tape Head Division to which Seller is a
party or by which Seller or the Tape Head Division Assets may be bound.
SECTION 5.19 Capitalization of ATTI. The authorized capital stock
of ATTI consist of 1,000 shares of common stock without par, of which 100 shares
will, as of the Closing, be issued and outstanding and owned by Seller (such
issued and outstanding shares, the "ATTI Shares"). All outstanding shares of
capital stock of ATTI have been duly authorized and validly issued and are fully
paid and nonassessable. Except as contemplated by Section 2.01, 2.02, Article
III, Section 5.18 and Article VIII, there are outstanding (i) no shares of
capital stock or other voting securities of ATTI, (ii) no securities of ATTI
convertible into or exchangeable for shares of capital stock or voting
securities of ATTI, and (iii) no options or other rights to acquire from Seller
or ATTI, and no obligation of ATTI to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
other voting securities of ATTI (collectively, "ATTI Securities"). There are no
outstanding obligations of ATTI to repurchase, redeem or otherwise acquire any
ATTI Securities. There are no voting or other shareholder agreements in effect
with respect to the ownership or voting of ATTI Securities. Seller has
delivered to Buyer copies of ATTI's Articles of Incorporation and Bylaws as in
effect on the date hereof. Seller has valid and marketable title to the ATTI
Shares and, upon payment for such ATTI Shares by Buyer as provided in Section
3.02, Buyer shall acquire valid and marketable title thereto, free and clear of
any restrictions on transfer, claims, taxes, security interests, liens, pledges,
hypothecations, options, warrants, rights, contracts, calls, commitments,
equities, demands or other encumbrance.
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SECTION 5.20 Insurance. Schedule 5.20 of the Disclosure Schedule
constitutes a list of all insurance policies and bonds in force with respect to
Seller showing for each such policy or bond: (i) the owner, (ii) the coverage of
such policy or bond, (iii) the premium, (iv) the name of the insurer, and (v)
the termination date of the policy or bond.
SECTION 5.21 Restrictions on Business Activities. Except for this
Agreement and the transactions contemplated hereby, there is no agreement,
judgment, injunction, order or decree binding upon Seller which has or could
reasonably be expected to have the effect of prohibiting or materially impairing
the operations of the Tape Head Division as they are presently being conducted,
any acquisition of property by the Tape Head Division or the conduct of the
Business as currently conducted by Seller.
SECTION 5.22 Customs. Seller has not violated in any material
respect any United States and foreign import and export control laws and
regulations, exports licensing laws and regulations and customs regulations
applicable to Seller. Seller has not during the past four (4) years been cited
by the United States Department of Commerce, the United States Customs Service
or any other relevant Governmental Entity for any material violation of United
States laws or regulations relating to importing or exporting of products,
materials or services. All Tape Heads and related components imported into the
United States or any other country by Seller ("Imported Goods") have been
properly valued and classified, in all material respects, in accordance with
applicable tariff laws, rules and regulations and all proper duties, tariffs or
excise taxes have been paid with respect to the Imported Goods. No penalties
have been assessed, asserted or claimed with respect to such Imported Goods.
All Imported Goods have been properly marked as to country of origin, content
and material. All claims for drawback with respect to Imported Goods have been
validly filed and are not subject to challenge, or if challenged, will not have
a material effect on the business
SECTION 5.23 Product Warranty. Each Tape Head product manufactured,
sold, and delivered by the Tape Head Division has been in conformity, in all
materials respects, with all express and implied warranties, if any, with
respect to such products, and the Tape Head Division has no liability (and there
is to the Seller's knowledge, no basis for any present or future claim or demand
against any of them giving rise to any liability) for replacement or repair
thereof or other damages in connection therewith, subject only to the reserve
for product warranty claims set forth in the August Balance Sheet, as such
reserve may be adjusted for the passage of time through the Closing Date. No
Tape Head product manufactured, sold, leased, or delivered by the Tape Head
Division is subject to any guaranty, warranty, or other indemnity beyond the
applicable standard terms and conditions of sale, lease or license, a summary of
such standard terms and conditions being set forth at Schedule 5.23 of the
Disclosure Schedule. A summary of the Tape Head Division's policies regarding
customer credits and product returns has also been set forth at Schedule 5.23 of
the Disclosure Schedule. Schedule 5.23 of the Disclosure Schedule also sets
forth a schedule of those product returns which have been authorized by Seller
and which are pending as of the date hereof.
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SECTION 5.24 Disclosure. No representation or warranty made by
Seller in this Agreement or any ancillary agreements contemplated by Article
VIII of this Agreement, nor any financial statement, certificate, schedule or
exhibit which is either attached to this Agreement or that is prepared and
furnished by Seller pursuant hereto, contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
necessary to make the statements or facts contained herein or therein not
misleading in light of the circumstances under which they were furnished. There
is no event, fact or condition known to Seller that materially and adversely
affects the Business, or that reasonably could be expected to do so, that has
not been set forth in, or is not contemplated by, this Agreement or in the
Disclosure Schedules.
SECTION 5.25 Undisclosed Liabilities. There are no liabilities of
the Tape Head Division of any kind whatsoever, including liabilities that may
arise by reason of the transactions contemplated by this Agreement, that are
material to the Business (and, to the best knowledge of Seller, there is no
basis for any present or future charge, complaint, action, suit, proceeding,
hearing, investigation, claim, or demand against the Tape Head Division giving
rise to any such liability), except for (i) liabilities disclosed or provided
for in the August Balance Sheet, (ii) liabilities under the Contracts, (iii)
liabilities which have arisen after the date of the August Balance Sheet in the
ordinary course of business and which are not material in amount in the
aggregate, and (iv) Excluded Liabilities.
SECTION 5.26 Bulk Sales Compliance. Consummation of the
transactions contemplated by this Agreement does not constitute a "bulk sale" or
"bulk transfer" under any applicable bulk sale or transfer laws of the state of
California.
SECTION 5.27 Brokers, Finders. The transactions contemplated hereby
were not submitted to Seller by any broker, finder or other person entitled to a
commission, fee, or like payment thereon, and were not, with the consent of
Seller, submitted to Buyer by any broker, finder or other person, and, except as
set forth in an agreement dated as of October 15, 1993 between Seller and Lehman
Bros, Inc. (the "Lehman Agreement") the actions of Seller have not given rise to
any claim by any person for a commission, fee or like payment against any of the
parties hereto or the Tape Head Division Assets and Seller agrees to bear all
costs and expenses relating to commissions, taxes and like payments that may be
payable by it pursuant to the Lehman Agreement.
ARTICLE VI
PRE-CLOSING COVENANTS
The parties hereto agree as follows with respect to the period between
the date of this Agreement and the Closing:
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SECTION 6.01 General Covenants. Each of the parties hereto will use
its best efforts to take all action and to do all things necessary, proper, or
advisable to consummate and make effective the transactions contemplated by this
Agreement (including satisfying the closing conditions set forth in Article VIII
below).
SECTION 6.02 Notices and Consents. Seller will give any notices to
third parties and use its best efforts to obtain those third-party consents
described as necessary in this Agreement or the Disclosure Schedules. Each of
the parties hereto will take any additional action that may be necessary,
proper, or advisable in connection with any notices to, filings with, and
authorizations, consents, and approvals of governments, governmental agencies,
and third parties that it may be required to give, make, or obtain.
SECTION 6.03 Operation of Business. Except as set forth in this
Agreement and the transactions contemplated hereby, Seller will not engage in
any practice, take any action, embark on any course of inaction, or enter into
any transaction in connection with the Business outside the ordinary course of
business. Specifically, but without intending to limit the foregoing, Seller
shall not (a) transfer or take any steps to transfer Seller's SCS or 13GB assets
or processes relating thereto from the Santa Maria Facility nor (b) increase the
salary, wages or benefits of any Division Employees other than nominal wage
increases except with the prior approval of the Buyer, which approval will not
be unreasonably withheld.
SECTION 6.04 Preservation of Business. Except as set forth in this
Agreement and the transactions contemplated hereby, Seller will keep the
Business and the Tape Head Division Assets substantially intact, including its
present operations, physical facilities, working conditions, and relationships
with lessors, licensors, suppliers, customers, agents, management and employees.
If Seller becomes aware of a material deterioration in the relationship with any
material customer or supplier or Seller's employees listed in Exhibit 8.01F, it
will promptly bring such information to the attention of Buyer in writing and,
if requested by Buyer, will exert its best efforts to restore the relationship.
SECTION 6.05 Compliance with Obligations. Seller shall comply with
(i) all material federal, state, local and foreign laws, rules and regulations
applicable to the Tape Head Division Assets or the Business, (ii) all material
agreements and obligations, including its charter and bylaws, by which it, or,
in the case of agreements and obligations, the Tape Head Division or the Tape
Head Division Assets, are bound, and (iii) all decrees, orders, writs,
injunctions, judgments, statutes, rules and regulations applicable to the
Business or the Tape Head Division Assets.
SECTION 6.06 Access to Financial, Operation, Technical and
Scientific Information. Subject to the provisions of the Confidentiality
Agreement between Seller and Buyer (the "Confidentiality Agreement") described
in Section 7.04 hereof, Seller will give Buyer, its counsel, financial advisors,
lenders, auditors and other authorized agents and representatives reasonable
access during normal business hours to the offices, properties,
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books and records of the Tape Head Division, will furnish to Buyer, its counsel,
financial advisors, lenders, auditors and other authorized agents and
representatives such financial and operating data and all other scientific and
technical information as such persons may reasonably request (including, without
limitation, Seller's personnel records, retirement plans, employment agreements,
leases and contracts with suppliers and customers) and will instruct Seller's
employees, counsel and financial advisors to cooperate with Buyer in its
investigation of the Business; provided that no investigation pursuant to this
Section shall affect any representation or warranty given by Seller to Buyer
hereunder.
SECTION 6.07 Notice of Developments. Seller will give prompt
written notice to Buyer of any material development affecting the assets,
liabilities, business, financial conditions, operations, results of operations,
or future prospects of Business which becomes known to Seller. Each party
hereto will give prompt written notice to the other of any material development
affecting the ability of the parties to consummate the transactions contemplated
by this Agreement. No disclosure by any party pursuant to this Section 6.07
shall, however, be deemed to amend or supplement the Disclosure Schedules or to
prevent or cure any misrepresentation, breach of warranty, or breach of
covenant.
SECTION 6.08 Exclusivity. Neither Seller nor its affiliates or
officers, directors, employees, investment bankers or other representatives and
agents will directly or indirectly, (i) take any action to solicit, initiate or
encourage the making of any Acquisition Proposal (as defined below) or (ii)
subject to the fiduciary duties of Seller's Board of Directors, after receiving
the advice of counsel, engage in negotiations with, or disclose any non-public
information relating to the Business or afford access to the properties, books
or records of the Business to, any person or entity that Seller knows or has
reason to know may be considering making, or has made, an Acquisition Proposal.
Seller is not presently considering any Acquisition Proposal other than Buyer's.
Seller will not, on its own behalf or through its agents, directors or
employees, individually or collectively, directly or indirectly, enter into any
agreement to merge or consolidate with, or sell a substantial portion of the
Tape Head Division Assets or any equity interest in any entity presently formed
or to be formed to hold the Tape Head Division Assets to, any person or entity.
Seller will immediately notify Buyer orally and in writing after receipt of any
Acquisition Proposal or any request for non-public information relating to the
Business or for access to the properties, books or records of the Tape Head
Division by any person or entity that Seller knows or has reason to know may be
considering making, or has made, an Acquisition Proposal, and will keep Buyer
informed of any such Acquisition Proposal or request. No party shall without
the prior written consent of the other parties issue any public statement or
communication regarding any Acquisition Proposal unless such party is advised by
counsel that disclosure thereof is required by law. As used in this Agreement,
the term "Acquisition Proposal" means any offer or proposal for, or any
indication of interest in, a merger or other business combination involving the
Tape Head Division or the acquisition of a substantial equity interest in any
entity presently formed or to be formed to hold the Tape Head Division Assets,
or an acquisition of a substantial portion of the Tape Head Division Assets,
other than the transactions contemplated hereby.
23.
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SECTION 6.09 Buyer to Offer Employment.
(a) With respect to all Division Employees who are employed by Seller
on the Closing Date, Buyer shall cause ATTI to offer employment, effective as of
the close of business on the Closing Date, with a level of compensation and on
other terms and conditions of employment similar to each such employee's
existing arrangements with Seller. Such offers of employment may, however, be
conditioned upon the execution of a proprietary information and inventions
agreement that is in form satisfactory to Buyer. Division Employees who are
offered employment by ATTI shall be offered the opportunity to participate in
Buyer's existing employee benefit plans to the extent that similarly situated
employees of Buyer are permitted to participate in such plans.
(b) Except as otherwise contemplated by the Administrative Services
Agreement described in Section 8.01(1) below, (i) effective at the close of
business on the Closing Date, all Division Employees who accept ATTI's offer of
employment shall cease to be covered by Seller's employee welfare benefit plans,
including plans, programs, policies and arrangements which provide medical and
dental coverage, life and accident insurance and disability coverage
(collectively, "Welfare Plans") except to the extent, if any, that such Division
Employees may have continuing rights or benefits under such Welfare Plans,
pursuant to the terms and conditions of such Welfare Plans, subsequent to the
Closing Date; and (ii) Seller shall retain the responsibility for all Welfare
Plans claims incurred by all employees of the Seller (and their dependents) on
or prior to the Closing Date. A summary of such Welfare Plans is set forth as
Schedule 6.09 of the Disclosure Schedule. As soon as practicable after the
Closing Date, Seller shall cause the account balances of those Division
Employees who accept ATTI's offer of employment under the Seller's 401(k) plan
to be transferred to an appropriate qualified plan of Buyer.
(c) Seller shall pay those employees of Seller at the Santa Maria
Facility all wages to which they are entitled through the Closing Date. Such
payment shall be made by Seller on the next regularly scheduled payroll payment
date following the Closing Date.
(d) Effective as of the Closing Date, ATTI shall assume all liability
for and thereafter have sole responsibility for all vacation time accrued for
all Division Employees who accept ATTI's offer of employment. Seller agrees
that it shall, if requested by Buyer in writing, solicit from those Division
Employees who have accepted offers of employment from ATTI consents concerning
transfer of accrued but unpaid vacation time from Seller to ATTI.
(e) Other than as set forth herein, Buyer shall have no obligation
to any employees of Seller.
24.
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SECTION 6.10 Title Insurance. Within 15 business days after the date
of this Agreement, Seller shall, at Buyer's expense by Continental Land Title
Company ("Title Company") cause a preliminary report for an American Land Title
Association ("ALTA") Owners Policy of title insurance to be issued, in an amount
to be specified by Buyer in writing within five (5) days following the date of
this Agreement, for the real property comprising the Santa Maria facility. If
such surveys and reports shall reveal any exception to or defect in title
inconsistent with the representations set forth in Section 5.11 (an
"Exception"), Seller shall promptly advise Buyer of such Exception and the
parties shall negotiate in good faith to resolve the same or make appropriate
adjustments to this Agreement. If the parties are unable to resolve the matter
prior to Closing, then Buyer may elect either (i) to proceed with Closing, in
which case the Exception shall be deemed included in the Disclosure Schedules
and waived by Buyer, or (ii) to terminate this Agreement.
SECTION 6.11 Other Insurance. Effective as of the Closing, Seller
shall cause Buyer to be named as an additional named insured on all of Seller's
presently maintained insurance policies relating to the Tape Head Division
(other than those relating to employee benefits) and shall assign to Buyer all
of Seller's rights and benefits under all of Seller's past and present insurance
policies (other than those relating to employee benefits), except as such rights
and benefits may relate to coverages for Retained Assets and Excluded
Liabilities. Seller shall grant to Buyer the right and power to control the
administration of such policies, including the decision as to whether to make
claims thereunder and the timing thereof. Seller shall, however, retain all
right and power to control the administration of such policies as they relate to
coverage for any of the Retained Assets and Excluded Liabilities.
SECTION 6.12 Modification and Termination of Existing Agreements.
The parties acknowledge that it is a condition to Closing that (i) the 3M
Agreement be modified in a manner reasonably satisfactory to Buyer, (ii) the STK
Agreement be terminated in a manner reasonably satisfactory to Buyer and Seller
and (iii) Seller shall have obtained such releases and waivers as it considers
necessary and appropriate from certain parties to those agreements, commitments
and contracts listed in Schedule 5.05 that are not being assumed by Buyer
pursuant to Section 1.03 hereof. Seller shall use its reasonable best efforts
to cause the foregoing to occur as soon after the date hereof as practicable.
Buyer agrees to take all reasonable steps to facilitate this process such that
it may proceed in an expeditious manner; provided that such commitment on the
part of Buyer shall not require Buyer to expend any additional sums other than
those expressly provided for under this Agreement and other than those amounts
that, including outside counsel fees, Buyer may be required to spend in
allocating time and internal resources in satisfying such commitment.
25.
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ARTICLE VII
POST-CLOSING COVENANTS
The parties hereto agree as follows with respect to the period
following the Closing:
SECTION 7.01 General.
(a) In case at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, each of the
parties will take such further action (including the execution and delivery of
such further instruments and documents) as any other party reasonably may
request, all at the sole cost and expense of the requesting party (unless the
requesting party is entitled to indemnification therefor under Article IX
below). Seller acknowledges and agrees that, subject to the provisions of
Section 1.02(x) hereof, from and after the Closing Buyer will be entitled to
possession of all documents, books, records, agreements, and financial data of
any sort relating to the Tape Head Division. Seller shall approve, in writing,
a written request by ATTI to IBM pursuant to Section 3.2 of the IBM Agreement.
(b) Seller and Buyer shall reasonably cooperate to maintain the full
force and effect of all sales and supply contracts and agreements between the
Tape Head Division and all third parties under which Seller or any entity
affiliated with Seller has obligations which continue after the Closing Date.
Seller agrees to transfer promptly orders for and correspondence and inquiries
related to Tape Head Division products which it receives on or after the Closing
Date to Buyer.
SECTION 7.02 Litigation Support. In the event and for so long as
any party hereto actively is contesting or defending against any charge,
complaint, action, suit, proceeding, hearing, investigation, claim, or demand in
connection with (i) any transaction contemplated under this Agreement or (ii)
any fact, situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Tape Head Division, each of the other parties
will cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending party (unless the
contesting or defending party is entitled to indemnification therefor under
Article IX below).
SECTION 7.03 Transition. Except as set forth in this Agreement and
the transactions contemplated hereby, Seller will not take any action that
primarily is designed or intended to have the effect of discouraging any lessor,
licensor, customer, supplier, or other business associate of Seller from
maintaining the same business relationships with the Tape Head Division and ATTI
after the Closing as it maintained with the Tape Head
26.
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Division prior to the Closing. Seller will refer all customer inquiries
relating to the Business to Buyer from and after the Closing.
SECTION 7.04 Confidentiality. Each party hereto will treat and hold
as confidential, in accordance with and subject to the terms of a
Confidentiality Agreement, to be dated as of the date of this Agreement and in
substantially the form of that attached as Exhibit 7.04 (the "Confidentiality
Agreement") all such Confidential Information (as defined in the Confidentiality
Agreement), refrain from using any of the Confidential Information except as
permitted in this Agreement and the Confidentiality Agreement.
ARTICLE VIII
CONDITIONS TO OBLIGATION TO CLOSE
SECTION 8.01 Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the transactions to be performed by it in connection with
the Closing is subject to satisfaction of each of the following conditions (any
one or more of which may be waived by Buyer, but only in a writing signed by
Buyer):
(a) Accuracy of Representations and Warranties. The representations
and warranties set forth in Articles V shall be true and correct in all material
respects at and as of the Closing Date.
(b) Compliance with Covenants. Seller shall have performed and
complied with all of its covenants hereunder in all material respects through
the Closing.
(c) Consents. Seller shall have procured all of the third-party
consents, assignments, waivers or authorizations required by Buyer pursuant to
Section 6.02.
(d) Legal Proceedings. No action, suit, or proceeding shall be filed
before any court or quasi-judicial or administrative agency of any federal,
state, local or foreign jurisdiction wherein an unfavorable judgment, order,
decree, stipulation, injunction or charge would (i) prevent consummation of any
of the transactions contemplated by this Agreement, (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation, or (iii) affect adversely the right of Buyer to own, operate, or
control ATTI Shares or the Business (and no such judgment, order, decree,
stipulation, injunction or charge shall then be in effect).
(e) No Material Adverse Change. There shall have been no material
adverse change in the assets, liabilities, business, financial condition,
operations, results of operations or future prospects of the Business since the
August Balance Sheet Date.
27.
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(f) Certificate of Satisfaction. Seller shall have delivered to Buyer
a certificate (without additional qualifications as to knowledge or materiality
or otherwise) to the effect that each of the conditions specified above in
subsections (a)-(e) is satisfied in all respects except that with respect to the
condition set forth in subsection (d) above, Seller need only certify that no
such action, suit or proceeding shall have been filed against Seller).
(g) HSR Act Compliance. The applicable waiting period under the
HSR Act shall have expired or been terminated.
(h) Manufacturing Agreement. A Manufacturing Agreement, in a form
reasonably satisfactory to Buyer and Seller substantially embodying those key
terms described at Exhibit 8.01A, with such revisions to the pricing terms, if
any, as the Buyer and Seller shall agree to, shall have been duly executed by
Seller and ATTI, and such agreement shall remain in full force and effect.
(i) Non-Competition Agreement. A Non-Competition Agreement, in a form
reasonably satisfactory to Buyer and Seller substantially embodying those key
terms described at Exhibit 8.01B shall have been duly executed by Seller, and
such agreement shall remain in full force and effect.
(j) License Agreement. A License Agreement, in a form reasonably
satisfactory to Buyer and Seller substantially embodying those key terms
described at Exhibit 8.01C, shall have been duly executed by Seller and ATTI,
and such agreement shall remain in full force and effect.
(k) Wafer Supply Agreement. A Wafer Supply Agreement, in a form
reasonably satisfactory to Buyer and Seller substantially embodying those key
terms described at Exhibit 8.01D, with such revisions to the pricing terms, if
any, as the Buyer and Seller shall agree to, shall have been duly executed by
Seller and ATTI, and such agreement shall remain in full force and effect.
(l) Administrative Services Agreement. An Administrative Services
Agreement, in a form reasonably satisfactory to Buyer and Seller substantially
embodying those key terms described at Exhibit 8.01E shall have been duly
executed by Seller and ATTI, and such agreement shall remain in full force and
effect.
(m) Escrow Agreement. The Escrow Agreement contemplated by Section
9.03 shall have been duly executed by Seller, Buyer and the Escrow Agent, and
such agreement shall remain in full force and effect.
(n) Modification of 3M Agreement. The 3M Agreement shall have been
modified in a manner reasonably satisfactory to Buyer, which modification shall
include at a minimum a release of all Liens presently held by 3M on certain of
the Tape Head Division Assets, and such modification shall remain in full force
and effect.
28.
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(o) Termination of STK Agreement. The STK Agreement shall have been
terminated in a manner reasonably satisfactory to Buyer.
(p) Retention of Key Employees. Buyer shall be reasonably satisfied
in good faith that the key employees of the Tape Head Division listed in Exhibit
8.01F will not terminate their employment with ATTI following the Closing and
Seller shall certify that it has no knowledge that any of such employees intends
to terminate their employment with ATTI following the Closing.
(q) Title Policies. Buyer shall have been furnished with evidence
that the Title Company is prepared to issue at the Closing its ALTA policy of
title insurance in an amount, to be specified by Buyer in writing within five
(5) days following the date of this Agreement, insuring that fee simple title to
the Santa Maria Facility is vested in ATTI as of the Closing Date free and clear
of all encroachments and of all other matters affecting title except for the
Lien of non-delinquent property taxes for the current year.
(r) Approval of Formation of New Subsidiary. Buyer and its counsel
shall be reasonably satisfied (i) with the form and substance of the
documentation employed to convey the Tape Head Division Assets to ATTI and cause
ATTI to assume the Assumed Liabilities, and (ii) that at the time of Closing
ATTI meets the requirements of the "Operating Subsidiary" contemplated by
Section 3.2 of the Agreement dated as of July 1, 1986 between International
Business Machines Corporation and Seller.
(s) Legal Opinion. To the extent deemed necessary by Buyer, Buyer
shall have received from counsel to the Seller an opinion with respect to the
matters set forth in Exhibit 8.01G attached hereto, addressed to Buyer and dated
as of the Closing Date.
(t) Resignations of Officers and Directors. To the extent deemed
necessary by Buyer, Buyer shall have received the resignations, effective as of
the Closing, of each director and officer of ATTI other than those whom Buyer
shall have specified in writing at least two business days prior to the Closing.
(u) Patent License Agreement. A Patent License Agreement in
substantially the form of that described at Exhibit 8.01H shall have been duly
executed by Buyer and Seller and such agreement shall remain in full force and
effect.
(v) Credit Facilities. At Closing, Seller shall have either (1)
entered into either separately or together with one or more of its subsidiaries
other than ATTI (i) one or more loans, credit agreements, notes, note purchase
agreements, debentures, conditional sale or other title-retention agreements
with respect to property acquired or to be acquired, capital leases, equipment
lease financing arrangements, sale-leaseback arrangements or other obligations
or instruments of indebtedness, (herein collectively "Indebtedness"), (ii) any
replacements, extensions, refinancings, substitutions or renewals
29.
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("Refinancing") of Indebtedness currently owed by Seller or any of its
subsidiaries (other than the credit facilities currently in place between
Seller's subsidiary, Applied Magnetics Malaysia, Sdn. Bhd. and Malaysian Bank
Berhad, and the Revolving Credit Facility dated February 13, 1992, as amended
between Seller and Union Bank, except that increases in such facilities shall be
construed as Refinancing to the extent of such increases), or (iii) any
combination of Indebtedness or Refinancings which, individually or in the
aggregate, reflect contractually available credit, loan or financing amounts of
not less than $35,000,000 with maturities, termination dates or term expirations
(except as affected by events of default or by refinancing, repayment or
voluntary termination by AMC) not earlier than twelve (12) months following the
Closing Date; or (2) Seller and Buyer shall enter into a Security Agreement in
substantially the form of that attached hereto as Exhibit 8.01I and Seller shall
provide one or more commitment letters or letters of intent ("Commitments") with
respect to prospective Indebtedness or Refinancing, or any combination thereof,
which reflect non-binding, unexpired commitments for credit, loan or financing
amounts in an aggregate of not less than $35,000,000 with maturities,
termination dates or term expirations (except as affected by events of default,
or by refinancing, repayment or voluntary termination by AMC) not earlier than
twelve (12) months following the Closing Date. Such Indebtedness, Refinancings
and Commitments may be secured or unsecured and, if secured, by any or all
properties, of whatever kind, nature or location, or assets of whatever kind,
nature or location, of Seller or any one or more of its subsidiaries, including,
but not necessarily limited to, the purchase consideration payable by Buyer
under this Agreement and may be on such terms, covenants and conditions as
Seller, in its sole discretion, determines.
SECTION 8.02 Conditions to Obligation of Seller. The obligation of
Seller to consummate the transactions to be performed by them in connection with
the Closing is subject to satisfaction of each of the following conditions (any
one or more of which may be waived by Seller, but only in a writing signed by
Seller):
(a) Accuracy of Representations and Warranties. The representations
and warranties set forth in Article IV shall be true and correct in all material
respects at and as of the Closing Date.
(b) Compliance with Covenants. Buyer shall have performed and
complied with all of its covenants hereunder in all material respects through
the Closing.
(c) Legal Proceedings. No action, suit, or proceeding shall be filed
before any court or quasi-judicial or administrative agency of any federal,
state, local or foreign jurisdiction wherein an unfavorable judgment, order,
decree, stipulation, injunction or charge would (i) prevent consummation of any
of the transactions contemplated by this Agreement or (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation (and no such judgment, order, decree, stipulation, injunction or
charge shall then be in effect).
30.
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(d) Certificate of Satisfaction. Buyer shall have delivered to Seller
a certificate (without qualification as to knowledge or materiality or
otherwise) to the effect that each of the conditions specified above in
subsections (a)-(c) is satisfied in all respects (except that with respect to
the condition set forth in subsection (c) above Buyer need only certify that no
such action, suit or proceeding shall have been filed against Buyer).
(e) HSR Act Compliance. The applicable waiting period under the
HSR Act shall have expired or been terminated.
(f) Legal Opinion. To the extent deemed necessary by Seller, Seller
shall have received from counsel to Buyer an opinion with respect to the matters
set forth in Exhibit 8.02A attached hereto, addressed to Seller and dated as of
the Closing Date.
(g) Escrow Agreement. The Escrow Agreement contemplated by Section
9.03 shall have been duly executed by Seller, Buyer and the Escrow Agent, and
such agreement shall remain in full force and effect.
(h) Guaranty. A Guaranty in a form reasonable satisfactory to Buyer
and Seller substantially embodying those key terms described at Exhibit 8.02B
shall have been executed by Buyer and shall remain in full force and effect.
(i) Manufacturing Agreement. The Manufacturing Agreement contemplated
by Section 8.01(h), with such revisions to the pricing terms, if any, as the
Buyer and Seller shall agree to, shall have been duly executed by Seller and
ATTI, and such agreement shall remain in full force and effect.
(j) License Agreement. The License Agreement contemplated by Section
8.01(j) shall have been duly executed by Seller and ATTI, and such agreement
shall remain in full force and effect.
(k) Wafer Supply Agreement. The Wafer Supply Agreement contemplated
by Section 8.01(k), with such revisions to the pricing terms, if any, as the
Buyer and Seller shall agree to, shall have been duly executed by Seller and
ATTI, and such agreement shall remain in full force and effect.
(l) Patent License Agreement. A Patent License Agreement in
substantially the form of that described at Exhibit 8.01H shall have been duly
executed by Buyer and Seller and such agreement shall remain in full force and
effect.
(m) Opinion of Investment Advisors. The Seller shall have received an
opinion from its financial advisors as to the fairness, from a financial point
of view, of the transaction contemplated by this Agreement.
31.
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(n) Modification of 3M Agreement. The 3M Agreement shall have been
modified in a manner reasonably satisfactory to Seller, which modification shall
include at a minimum a release of all Liens presently held by 3M on certain of
the Tape Head Division Assets, and such modification shall remain in full force
and effect.
(o) Termination of STK Agreement. The STK Agreement shall have been
terminated in a manner reasonably satisfactory to Seller.
(p) Releases. Seller shall have obtained the releases or waivers
contemplated under Section 6.12(iii) hereof.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 Survival. The representations, warranties, covenants
and agreements of Seller and of Buyer shall survive the Closing without regard
to any investigations made by the Seller or Buyer, as the case may be, or any
knowledge by either of any breach of any such representations, warranties,
covenants or agreements; provided, however, that all representations,
warranties, covenants and agreements of Seller other than the representations
and warranties set forth in Sections 5.11, 5.14, 5.17 and 5.19, in respect of
which Buyer has not given written notice to Seller of an Indemnification Event
(as defined below in Section 9.02) shall automatically terminate on the second
anniversary of the Closing Date. The representations and warranties set forth
in Sections 5.11, 5.17 and 5.19 shall survive the Closing and continue in full
force and effect forever thereafter. The representation and warranty set forth
in Section 5.14 shall survive the Closing and continue in full force and effect
until the expiration of the relevant periods for assessment of Tax (including
any extensions granted or consented to) under applicable Tax statutes. Upon the
giving of any notice referred to in the first sentence of this Section, any
representations, warranties, covenants and agreements (even those not expressly
indicated in the notice) relating to any such Indemnification Event will
continue to survive in respect of any such Indemnification Event until final
resolution, including the expiration of all relevant appeals and appeals
periods.
SECTION 9.02 Indemnification Provisions for Benefit of Buyer.
(a) Subject to the limitations hereinafter set forth, Seller hereby
agrees to indemnify and to hold Buyer and ATTI harmless from and against any and
all causes of action, demands, suits, claims (whether such claims are brought by
Buyer or ATTI, or brought by any third party against Buyer or ATTI), damages,
assessments, losses, liabilities, costs and expenses (including legal and
accounting fees and costs and costs of defense or in enforcing any of its rights
hereunder and interest and penalties), together with interest from the date on
which a claim hereunder shall be made (collectively, "Damages"), which arise out
of breaches of any representations, warranties, covenants or agreements of
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Seller in this Agreement or in any Exhibit, Schedule, certificate, list or other
instrument delivered pursuant hereto (collectively, the "Indemnification
Events"); provided, that in no event shall Seller be liable for any
Indemnification Event of which written notice is not given by Buyer or ATTI to
Seller on or prior to the second anniversary of the Closing Date (except with
respect to Indemnification Events arising out of breaches of the representations
and warranties set forth in Sections 5.11, 5.14, 5.17 and 5.19).
(b) Seller shall defend and indemnify Buyer and ATTI from and against
all Excluded Liabilities, including the entirety of any Damages Buyer or ATTI
may suffer following the Closing resulting from or arising out of any Excluded
Liability.
SECTION 9.03 Cash Escrow.
(a) On the Closing Date, $7,500,000 of the Purchase Price shall be
deposited in escrow (the "Escrow Deposit") with an escrow agent to be mutually
selected by Buyer and seller prior to Closing (the "Escrow Agent"), subject to
and in accordance with all the terms and conditions of an Escrow Agreement to be
entered into among Buyer, Seller, ATTI and the Escrow Agent on or prior to the
Closing Date, which shall be in substantially the form attached hereto as
Exhibit 9.03 (the "Escrow Agreement"). Buyer and ATTI may obtain recovery from
and for any and all Damages resulting from or arising out Indemnification Events
contemplated by Section 9.02 above (collectively, "Escrow Claim Events") with
respect to up to $1,000,000 of the Escrow Deposit (the "Claims Deposit") which
shall be held by the Escrow Agent in the Indemnity Account, as provided in the
Escrow Agreement; provided that in no event shall there by any such recovery by
Buyer from the Indemnity Account in respect of which a written claim against
such Claims Deposit is not made by Buyer or ATTI before the first anniversary of
the date of this Closing Date, all as more fully provided in the Escrow
Agreement. All fees charged by the Escrow Agent in connection with the
administration of the Escrow Deposit shall be borne by Buyer.
(b) In addition to the foregoing, in the event that Buyer shall suffer
any Damages following the Closing resulting from or arising out of any Retained
Liability, Buyer shall be entitled to recover such amount of Damages from the
Indemnity Account.
SECTION 9.04 Indemnification Provisions for Benefit of Seller.
Buyer shall defend and indemnify Seller from and against all Assumed
Liabilities, including the entirety of any Damages Seller may suffer following
the Closing resulting from or arising out of any Assumed Liability.
SECTION 9.05 Other Indemnification Provisions. The foregoing
indemnification provisions are in addition to, and not in derogation of, any
statutory or common law remedy any party may have for breach of representation,
warranty, or covenant. The amount of the Escrow Fund shall in no way be deemed
to limit the indemnification rights of Buyer under Section 9.02.
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SECTION 9.06 Matters Involving Third Parties. If any third party
shall make a claim against any party hereto (the "Indemnified Party") with
respect to any matter which may give rise to a claim for indemnification against
the other party hereto (the "Indemnifying Party") under this Article IX, then
the Indemnified Party shall notify the Indemnifying Party thereof promptly;
provided, however, that no delay on the part of the Indemnified Party in
notifying the Indemnifying Party shall relieve the Indemnifying Party from any
liability or obligation hereunder unless (and then solely to the extent) the
Indemnifying Party is prejudiced by such delay. The Indemnifying Party shall
defend the Indemnified Party against the claim with counsel of its choice
reasonably satisfactory to the Indemnified Party. The Indemnified Party may
retain separate co-counsel at its sole cost and expense (except that the
Indemnifying Party will be responsible for the fees and expenses of the separate
co-counsel to the extent the Indemnified Party reasonably concludes that the
counsel the Indemnifying Party has selected has a conflict of interest and
except that the Indemnifying Party will be responsible for fees and expenses of
Indemnified Party incurred pursuant to the last sentence of this Section).
Neither party will consent to the entry of any judgment or enter into any
settlement with respect to the matter without the written consent of the other
party (not to be withheld unreasonably). The Indemnified Party shall cooperate
with the Indemnifying Party in connection with the Indemnifying Party's defense
of the claim, including but not limited to testifying in court with respect to
the claim and making available to the Indemnifying Party all of the Indemnified
Party's books and records with respect to the claim. The Indemnifying Party
will not, without the written consent of the Indemnified Party (not to be
withheld unreasonably), consent to the entry of any judgment with respect to the
claim, or enter into any settlement which does not include a provision whereby
the plaintiff or claimant in the claim releases the Indemnified Party from all
Liability with respect thereto. In the event the Indemnifying Party fails to
notify the Indemnified Party within 15 days after the Indemnified Party has
given notice of the claim that the Indemnifying Party is assuming the defense
thereof, the Indemnified Party may defend against, or enter into any settlement
with respect to, the claim in any manner it reasonably may deem appropriate, in
which event the Indemnifying Party shall be obligated to reimburse the
Indemnified Party for all the Indemnified Party's costs and expenses in
connection therewith.
SECTION 9.07 Limitations. The entitlement of Buyer and ATTI to
indemnification from Seller with respect to Indemnification Events pursuant to
Section 9.02 shall be effective with respect to an Indemnification Event (or, if
more than one Indemnification Event is asserted, with respect to all such
Indemnification Events) only to the extent the aggregate amount of Damages
exceeds one hundred thousand dollars ($100,000.00), in which event Buyer and
ATTI shall be entitled to make a claim for all such Damages including the
initial one hundred thousand dollars ($100,000.00). Further, to the extent any
Indemnification Event occurs with respect to Section 5.07 and as to which Buyer
has made a proper and timely claim for Damages and has received payment or
distribution from or on behalf of Seller or Escrow Holder, Buyer shall assign,
transfer, and convey or cause ATTI to assign transfer and to Seller all rights,
title and interest in and to the account(s) receivable giving rise to such
Indemnification Event, including all rights to make
34.
<PAGE>
demand for and to commence, sue, prosecute, settle, compromise and otherwise
proceed against the account debtor. Buyer and ATTI may not claim as Damages
under this Section 9.07 any amounts which have been reflected in a post-Closing
adjustment to Buyer pursuant to Section 2.04(b) and any amounts which are
reimbursed under Seller's insurance policies as provided in Section
1.01(a)(vii).
ARTICLE X
TERMINATION
SECTION 10.01 Termination of Agreement. Certain of the parties
hereto may terminate this Agreement as provided below:
(a) Buyer and Seller may terminate this Agreement by mutual written
consent of Buyer and Seller at any time prior to the Closing;
(b) Buyer may terminate this Agreement by giving written notice to
Seller at any time prior to the Closing in the event Seller is in breach, and
Seller may terminate this Agreement by giving written notice to Buyer at any
time prior to the Closing in the event Buyer is in breach, of any
representation, warranty or covenant contained in this Agreement in any material
respect, and such breach has not been promptly cured after notice (in reasonable
detail) to the breaching party; or
(c) Either Buyer or Seller may terminate this Agreement by giving
written notice to the other at any time prior to the Closing if the Closing
shall not have occurred on or before December 31, 1994; provided, however, that
the right to terminate this Agreement under this subsection (c) shall not be
available to any party whose breach or failure to fulfill any obligation under
this Agreement shall have been the substantial cause of the failure of the
Closing to occur by such date.
SECTION 10.02 Effect of Termination. In the event of termination of
this Agreement as provided above, this Agreement shall forthwith become void,
and there shall be no liability hereunder on the part of either Buyer or Seller,
except that the agreements set forth in Section 7.04 shall survive the
termination hereof; provided, however, that upon such termination each party
shall be entitled to any remedies at law or in equity in the event of a breach
of this Agreement by the other party.
ARTICLE XI
MISCELLANEOUS
SECTION 11.01 Expenses. Each of the parties hereto will bear its own
costs and expenses (including legal fees and expenses) incurred in connection
with this Agreement and the transactions contemplated hereby. Seller agrees and
acknowledges that ATTI will not bear any of Seller's costs and expenses
(including any of its legal fees and
35.
<PAGE>
expenses) in connection with the negotiation and execution of this Agreement or
any of the transactions contemplated hereby.
SECTION 11.02 Press Releases and Announcements. No party hereto
shall issue any press release or announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of the
other party; provided, however, that any party may make any public disclosure it
believes in good faith, after receiving the advice of counsel, is required by
law or regulation (in which case the disclosing party will advise the other
parties prior to making the disclosure).
SECTION 11.03 No Third-Party Beneficiaries. This Agreement shall not
confer any rights or remedies upon any person other than the parties and their
respective successors and permitted assigns.
SECTION 11.04 Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire agreement among the parties
and supersedes any prior understandings, agreements, or representations by or
among the parties, written or oral, that may have related in any way to the
subject matter hereof.
SECTION 11.05 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the parties named herein and their
respective heirs, executors, administrators, successors and permitted assigns.
No party may assign either this Agreement or any of such party's rights,
interests, or obligations hereunder without the prior written approval of each
other party hereto; provided, however, that Buyer may (i) assign any or all of
its rights and interests hereunder to one or more of its affiliates and (ii)
designate one or more of its affiliates to perform its obligations hereunder (in
any or all of which cases Buyer nonetheless shall remain liable and responsible
for the performance of all of its obligations hereunder). As used herein,
affiliates shall mean as to any party, any parent or subsidiary of such party or
any entity in which such party has a controlling interest.
SECTION 11.06 Headings. The section headings contained in this
Agreement are inserted for convenience only and shall not affect in any way the
meaning or interpretation of this Agreement.
SECTION 11.07 Notices. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by registered or certified mail, return
receipt requested, postage prepaid, and addressed to the intended recipient as
set forth below:
36.
<PAGE>
If to Buyer or ATTI: Seagate Technology, Inc.
920 Disc Drive
Scotts Valley, CA 95066
Attn: Chief Financial Officer
Telecopy: (408) 438-2957
With a copy to: Brobeck, Phleger & Harrison
One Market Plaza
Spear Street Tower
San Francisco, CA 94105
Attn: William L. Hudson, Esq.
Telecopy: (415) 442-1010
If to Seller: Applied Magnetics Corporation
75 Robin Hill Road
Goleta, CA 93117
Attn: General Counsel
Telecopy: (805) 967-2677
Any party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the individual
for whom it is intended. Any party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other parties notice in the manner herein set forth.
SECTION 11.08 Interpretation. The English language text, and the
American usage thereof, shall control the interpretation of this Agreement and
all other writings among Buyer, Seller and ATTI.
SECTION 11.09 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of California
(without reference to its conflicts of law rules).
SECTION 11.10 Amendments and Waivers. No amendment of any provisions
of this Agreement shall be valid unless the same shall be in writing and signed
by each party hereto. No waiver by any party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
37.
<PAGE>
SECTION 11.11 Severability. Any term or provision of this Agreement
that is invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision in
any other situation or in any other jurisdiction.
SECTION 11.12 Specific Performance. Each of the parties acknowledges
and agrees that the other parties would be damaged irreparably in the event any
of the provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the parties
agrees that the other parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in addition to
any other remedy to which they may be entitled, at law or in equity.
SECTION 11.13 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
\\\
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[Signature Page Follows]
38.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
APPLIED MAGNETICS CORPORATION
By: ______________________________
Craig D. Crisman
Chief Executive Officer
SEAGATE TECHNOLOGY, INC.
By: ______________________________
Title:
APPLIED TAPE TECHNOLOGY, INC.
dba SEAGATE TAPE TECHNOLOGY,
INC.
By: _______________________________
Title: President, General Manager
39.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
APPLIED MAGNETICS CORPORATION
By:__________________________
Title:
SEAGATE TECHNOLOGY, INC.
By:__________________________
Title: SENIOR VICE PRESIDENT,
CORPORATE DEVELOPMENT
APPLIED TAPE TECHNOLOGY INC.
dba SEAGATE TAPE TECHNOLOGY,
INC.
By:__________________________
Title:
39A
<PAGE>
[APPLIED MAGNETICS CORPORATION LOGO AND LETTERHEAD]
EXHIBIT 10(v)
-------------
September 12, 1994
Mr. William R. Anderson
1000 Veronica Springs Road
Santa Barbara, CA 93105
Dear Bill:
This letter confirms the agreement that has been reached between you and Applied
Magnetics Corporation (the "Company") regarding your resignation as an officer
and director of the Company and the termination of your employment relationship
with the Company. Subject to the terms and conditions set forth herein and in
consideration of the agreements, promises, representations, releases and
payments described herein, you and the Company agree as follows:
1. Definitions. Except as otherwise provided, capitalized terms used in this
agreement shall have the following definitions:
1.1 "Resignation Date" shall mean September 12, 1994.
1.2 "Termination Date" shall mean October 5, 1994.
1.3 "1982 Plan" shall mean the Company's 1982 Long Term Incentive Plan.
1.4 "1989 Plan" shall mean the Company's Amended and Restated 1989 Long
Term Incentive Plan.
1.5 "Restricted Stock" and "Restrictions" shall have the meanings ascribed
to such terms under the 1989 Plan.
1.6 "Interested Litigation" shall mean commercial and other disputes,
controversies and lawsuits which relate to or involve your former
duties and responsibilities as an employee and/or officer of the
Company in which (a) you are named in a complaint, cross-complaint or
counter claim as a defendant, together with the Company, any of its
subsidiaries, or any officers, directors or employees of the Company
or such subsidiaries, (b) allegations, claims or charges that have
been made or threatened against you and/or the Company (or any of its
subsidiaries) which relate to or involve your former, current or
future duties as a director, employee or officer of the Company (or
any such subsidiaries),
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 2
or (c) you are or may be either (i) entitled to indemnification from
the Company pursuant to its By-Laws or the Delaware General
Corporations Law or (ii) entitled to coverage under one or more
directors' and officers' or other insurance policies maintained at any
time by the Company.
1.7 "PTO" shall mean the Company's Paid Time Off practices and policies.
1.8 "Consulting Services" shall have the meaning set forth in Section 6
hereof.
1.9 "Consulting Term" shall mean the period commencing October 2, 1994 and
expiring September 30, 1996.
2. Resignation. Effective as of the Resignation Date (a) you resigned as
President and Chief Operating Officer and as a member of the Board of
Directors of the Company, (b) you have resigned as an officer and member of
the boards of directors of any and all subsidiaries of the Company and (c)
your resignations have been accepted.
3. Termination of Employment. Effective as of the Termination Date, your
employment relationship with (a) the Company and (b) any and all
subsidiaries of the Company (to the extent there are any such employment
relationships) will terminate.
4. Responsibilities. As of the close of business on the Resignation Date, you
have been relieved of your responsibilities and duties as President and
Chief Operating Officer of the Company and in connection with your
management and supervision of the general management activities and
functions over which you have previously exercised management control and
direction.
During the period September 13, 1994 through the Termination Date, you will
continue to be employed by the Company and the Company will continue to pay
you your current salary ($5,769.23 per week) in accordance with the
Company's usual and customary payroll practices.
5. Benefit/Compensation Plans. As of the Termination Date, all of your rights
to participate in the Company's employee benefit plans (including, but not
limited to group medical, life and disability insurance plans, Stock
Option, Cash Profit Sharing, Stock Purchase and other plans) will
terminate, except as follows:
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 3
5.1 Group Medical Insurance. You will be entitled to continue
participation in the Company's group medical insurance plan under
COBRA should you elect to do so, subject to the terms and conditions
of the plan and payment by you of the applicable premiums. If you are
interested in making such an election, please contact Human Resources.
5.2 1982 Plan and 1992 and 1994 Stock Option Plans ("Option Plans"). You
will, for a period of ninety (90) days following the Termination Date,
be permitted to exercise the option installments which became
exercisable on or before the Termination Date (to the extent you have
not previously exercised such option installments) subject, however,
to the terms and conditions of the Option Plans. All option
installments which become exercisable under the Option Plans after the
Termination Date will be forfeited.
5.3 PTO Benefits. On the Termination Date, the Company will pay to you
all accrued and unpaid/unused PTO benefits (payable at your salary
rate in effect as of August 31, 1994).
5.4 Secretarial Support. During the 90 day period commencing on the
Termination Date the Company will make available to you an office at
the Company's facility in Goleta, California, and access to voice mail
messages and limited secretarial support to provide phone answering
and mail sorting services to you in connection with your Consulting
Services and your efforts to obtain employment elsewhere.
5.5 1989 Plan. You have been issued and there are outstanding in your
name 11,549 shares (the "Shares") of Restricted Stock under the terms
of the 1989 Plan. As of the Termination Date the Restrictions
applicable to the Shares (as to which Restrictions have not already
been removed) shall be removed.
6. Consulting Services. As used in this Agreement, "Consulting Services"
shall mean advice, counsel and assistance in connection with (a) providing
information and advice to members of the Company's senior management staff
as part of and in connection with the transfer of projects, assignments,
duties and responsibilities formerly performed or managed by you or under
your direction; (b) the development and implementation of plans and efforts
involving the Company's Tape Head Division, including, but not limited to,
the possible sale of the business and assets of the Tape Head Division; (c)
preparation and support relating to the Company's participation in the AEA
Monterey Financial
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 4
Conference during October, 1994; (d) the development and implementation of
proposals and plans to obtain funding, through debt or equity securities or
other means, to support or assist the Company in financing its ongoing
magnetoresistive ("MR") thin film disk head products; and (e) analysis and
development of strategic alternatives involving the Company's subsidiary,
Applied Magnetics Ireland, Ltd., Inc.
6.1 You shall be paid the sum of $600,000 payable in 24 equal monthly
installments of $25,000 each, without interest (the "Installment
Payments"), per month during the Consulting Term at the beginning of
each month commencing October 5, 1994. During the 90 day period
commencing on the Termination Date, you will be expected to
concentrate your Consulting Services and to dedicate between 20 and 40
hours per week of your services on the projects described above which
the Company expects to conclude within that period. Thereafter, any
projects that are assigned to you or as to which you are requested to
provide Consulting Services will be (a) provided pursuant to paragraph
6.4 hereof on a case-by-case basis subject to your availability and
mutually acceptable scheduling; and (b) compensated on the basis of an
appropriate hourly or daily rate in addition to the Installment
Payments, such hourly or daily rate to be subject to the mutual
agreement of you and the Company.
6.2 The Company will reimburse you for actual and reasonable out-of-pocket
costs paid by you for telephone, travel, lodging, and other similar
expenses incurred by you in the course of your providing Consulting
Services under this engagement. You will be expected to comply with
the Company's policies, practices and procedures regarding these
expenses. Travel to foreign destinations in connection with
Consulting Services must be approved, in advance, by the Chief
Executive Officer. We will reimburse you for these expenses and for
any hourly or daily fees that become due and payable to you under
Section 6.1 hereof upon receipt of a written statement or invoice
explaining, in reasonable detail, the nature and amount of the expense
incurred and services rendered and the date or dates on which such
travel occurred or services were rendered. Such statement should be
submitted on a monthly basis and should be accompanied by receipts for
any expense items exceeding $25.00.
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 5
6.3 The Consulting Term may be terminated at any time after January 1,
1995, by the Company, at its convenience, provided, however, that if
the Company so terminates this consulting arrangement, it shall
deliver written notice thereof to you and it shall pay to you an
amount equal to the Installment Payments set forth in paragraph 6.1
hereof multiplied by the number of calendar months remaining in the
Consulting Term after delivery of the Company's termination notice to
you. The payment required under clause (b) of this Section 6.3 shall
be in a lump sum payment within 30 days after the effective date of
termination.
6.4 All instructions, interpretations, work schedules and other related
matters concerning this consulting arrangement shall be determined by
the Company's Chief Executive Officer or such other person or persons
as may be designated by the Chief Executive Officer.
6.5 The Standard Terms and Conditions attached as Exhibit A are
incorporated herein by reference.
7. Litigation Support. The Company is involved, and may in the future be
involved, in certain commercial and other disputes, controversies and
lawsuits which relate to or involve your former duties and responsibilities
as an employee, officer or director of the Company (herein "Company
Litigation"). You agree to cooperate in all reasonable respects with the
Company and its attorneys in connection with the Company's prosecution or
defense of or response to the Company Litigation including, for example,
making yourself available to the Company's representatives and to the
Company's attorneys for purposes of conferences, meetings, compilation and
communication of records and facts, and appearing as a witness or
prospective witness in connection with deposition or other testimony that
may be required in connection with such defense. It is our expectation
that you will do this on a basis which will be at such times and places
that are mutually convenient to you, the Company, the Company's attorneys
and plaintiff's attorneys. You agree to exert your best reasonable efforts
to obtain such consent. The Company will reimburse you for all travel and
other reasonable out-of-pocket expenses relating to your attendance at
conferences, meetings, depositions and the like relating to the Company
Litigation. Travel and lodging arrangements will be consistent with the
Company's then current practices regarding selection and class of travel
and accommodations and are to be made through the Company's travel
department. In connection with your involvement in the defense of the
Company Litigation you also understand and agree that the matters that you
discuss with the Company and its attorneys are likely to be of a
confidential and
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 6
privileged nature and you agree to comply with all instructions and advice
provided to you by the Company and its attorneys with respect to the
confidential and privileged nature of such communications. You will not be
entitled to receive from the Company any additional compensation or payment
in connection with the litigation support to be provided by you pursuant to
this agreement so long as the Company Litigation for which your services
are required or requested involves matters or actions which constitute
Interested Litigation. If the Company Litigation as to which you provide
support and assistance involves matters or disputes other than Interested
Litigation, you will be compensated at an agreed hourly consulting rate.
8. Release. You acknowledge and agree that this letter agreement constitutes
a full and complete settlement, release and discharge of any and all claims
that you may have against the Company or any of its agents, officers,
directors, employees, stockholders, subsidiaries and affiliates
(collectively the "AMC Group") for fault, wrongdoing or liability of
whatsoever nature arising from or in connection with your employment
relationship with the Company or any member of the AMC Group or the
termination of that relationship. No covenants, terms or conditions hereof
shall be deemed an admission by the Company or any member of the AMC Group
in connection with or otherwise arising from your employment relationship
with the Company or any members of the AMC Group or the termination of such
employment relationship. Subject to the provisions set forth herein, you
hereby fully release the Company and each member of the AMC Group and their
respective agents, officers, directors, servants, stockholders, employees,
representatives, assigns and successors from all rights, claims, demands,
causes, liabilities and actions of any nature whatsoever, known or unknown,
fixed or contingent, suspected or unsuspected, which you now have, hold or
claim to own, arising out of, or in any way connected with or relating to
your employment with the Company or any member of the AMC Group, or the
termination of any such employment, including, but not necessarily limited
to: rights, claims, demands, allegations, causes or liabilities relating
to, arising from, connected with allegations or assertions of wrongful
discharge, unjust dismissal, the California Fair Employment and Housing
Act, impairment of economic ability, breach of implied covenants of good
faith and fair dealing, emotional distress, personal injury or other tort
(collectively the "Released Claims"); provided, however, that nothing
contained herein shall be construed as a release or discharge of: (i) any
rights to indemnification under and subject to the provisions of Article
VII of the By-Laws of the Company, a copy of which has been furnished to
you, (ii) any rights under California Labor Code (S)2802, or (iii) any
rights under the Company's Directors' and Officers' Insurance Policy and
Company
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 7
Reimbursement Policy No. 440-99-28 with National Union Fire Insurance
Company, subject, however, to the terms, conditions, limitations and
exclusions set forth in such policy. You further acknowledge and agree
that this release constitutes a release and discharge of known and unknown
claims and that you hereby expressly waive the benefits of California Civil
Code (S)1542 which provides in part that:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his/her favor at the time of
executing the release, which if known by him/her must have materially
affected his/her settlement with the debtor."
You hereby waive and relinquish benefits which you may have under Section
1542 and acknowledge that you may hereafter discover facts in addition to
or different from those which you now know or believe to be true with
respect to the Released Claims, but it is your intention to fully and
finally and forever settle and release any and all matters, disputes and
differences, known or unknown, suspected and unsuspected, which now exist,
may exist or heretofore have existed between you and the Company.
Nothing contained herein shall be deemed an admission by the Company of any
liability in connection with or arising from the Released Claims.
9. Confidentiality. You acknowledge that you have entered into a
Confidentiality and Assignment Agreement ("Confidentiality Agreement") with
the Company and that, as an employee and officer of the Company, you are
obliged to comply with the Company's policies and procedures with respect
to confidential, proprietary and non-public information. You also
acknowledge that during the term of your employment with the Company, you
have had access to and knowledge of sensitive, confidential and proprietary
information and data including, without limitation, financial information,
business plans and strategic information (such as, but not limited to
plans, prospects and considerations regarding resource planning, corporate
financial strategies, possible credit and financing agreements, capital
formation strategies, operations and financial projections and forecasts,
merger, acquisition and corporate partnering strategies) identification of
executives, managers and employees of the Company, including their specific
skills, knowledge, compensation and other data (collectively "Confidential
Information").
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 8
You agree that you will not, without the Company's prior written consent,
at any time after the date of this letter, divulge, furnish or make
accessible to anyone or use in any way, any of such Confidential
Information in any manner which would injure the Company or interfere with
its contractual relations. You further agree that you will refrain from
any acts or omissions that would reduce the value of such Confidential
Information to the Company, including, but not necessarily limited to, any
conduct or activity which would cause disruption, damage or otherwise
impair or interfere with the Company's business by interfering with or
raiding its employees, soliciting employees to leave the Company to accept
employment with, or provide personal services to, any other firm or
Company, or by disrupting its relationships with its employees, customers,
vendors, agents, representatives or otherwise.
You and the Company agree to keep this letter agreement, including the
existence and contents hereof, in confidence and not to disclose the same
or any of its terms to any third party without the written consent of the
other. However, nothing contained herein shall prevent (a) either party
from disclosing this letter agreement or the terms thereof to their
respective accountants and attorneys and, in the case of the Company, to
its employees and directors who have a need to know of the existence and
contents hereof; (b) you from disclosing the terms of this letter agreement
to your spouse or to banks or other financial institutions in connection
with your obtaining loans or credit from such entities provided that you
shall first advise those firms of the confidential nature of this letter
agreement; or (c) the Company from disclosing either (i) the termination of
your employment relationship with the Company, or (ii) the terms and
conditions of this letter agreement or from filing copies of this letter
agreement with any state or federal regulatory agencies, including the
Securities and Exchange Commission, if such disclosure or filing of copies
is considered by the Company as necessary or appropriate to comply with
federal or state securities laws or regulations or other legal or
regulatory requirements.
10. General Provisions
------------------
10.1 Governing Law/Entire Agreement. This letter agreement, which is made
under and shall be governed by the laws of the state of California,
contains the entire agreement of the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings
with respect to such subject matter, and there are no other
agreements, representations, or warranties relating to the subject
matter of this letter agreement that are not set forth herein.
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 9
10.2 Successors and Assigns. This agreement shall extend to and be binding
upon you and your legal representatives, heirs, beneficiaries and
distributees, and the Company's obligations to make the Installment
Payments under Section 6.1 hereof shall survive your death and be
payable to your legal representatives, heirs or beneficiaries. No
amendment, waiver or modification of this agreement, or any of the
terms or conditions hereof, shall be deemed effective unless made in
writing and signed by you and an officer of the Company.
10.3 Representation by Counsel. The Company has not furnished legal
representation to you in connection with this agreement but has been
represented by its counsel. The Company and its counsel have advised
you that you may seek independent counsel in connection with this
agreement and you have been afforded the opportunity to do so.
10.4 Resignations. You agree to execute and deliver such letters and other
documents as the Company may reasonably request confirming your
resignation, as of the Resignation Date or such other date as may be
requested by the Company, as an officer or director of the Company or
any of the Company's directly or indirectly owned subsidiaries.
10.5 Payroll Withholdings, etc. All amounts payable to you hereunder prior
to the Termination Date shall be paid in accordance with the Company's
normal payroll practices and shall be subject to usual and customary
payroll deductions for federal and state withholding taxes, and the
like. The Company will not withhold usual and customary federal and
state withholding taxes from the consulting fees payable hereunder on
the understanding that you will be solely responsible for the income
taxes attributable to such fees.
11. Acceptance, Time to Execute and Return Agreement and Release. All of the
Company's duties and obligations, and your rights, hereunder are subject to
the express condition precedent that you sign this letter agreement and
return the signed copy to me or Mr. Raymond P. Le Blanc on or before 6:00
p.m., October 3, 1994.
<PAGE>
Mr. William R. Anderson
September 12, 1994
Page 10
I am pleased that we were able to conclude this in a professional and
cooperative manner. If the provisions of this letter are acceptable, please
sign and return the enclosed copy in accordance with paragraph 11 above.
Yours very truly,
APPLIED MAGNETICS CORPORATION
Craig D. Crisman
President & Chief Executive Officer
ACKNOWLEDGED AND ACCEPTED
this 28th day of September, 1994.
- - ------------------------------
William R. Anderson
<PAGE>
EXHIBIT A
=========
APPLIED MAGNETICS CORPORATION
STANDARD TERMS AND CONDITIONS
FOR CONSULTING SERVICES
Letter Agreement Dated : September 12, 1994 ("Agreement")
Consultant : William R. Anderson ("Consultant")
1. Definitions. Capitalized terms used in this Exhibit have the same meanings
as are set forth in the Agreement.
2. No Agency. Consultant is not an agent of the Company and nothing contained
herein shall be deemed to create or imply a principal agent, employer-
employee or similar relationship between Consultant and the Company.
Consultant agrees not to enter into any contract or agreement, expressed or
implied, oral or in writing, on behalf of the Company or any of its
subsidiaries, including, but not limited to, any agreement or contract
relating to the purchase or sale of any facilities, operations, divisions,
subsidiaries or business units of the Company or of any goods, supplies,
materials or services on behalf of the Company without prior written
authorization to do so and shall not have and does not have any authority
to bind the Company for the sale, purchase or lease of any property,
equipment, materials, supplies or services nor shall Consultant have any
authority to commit the Company in any manner whatsoever.
3. Independent Contractor. In rendering services hereunder, Consultant shall
be responsible for all costs and expenses in connection with any travel
required by him unless otherwise expressly agreed to by the Company. In
performing the Consulting Services hereunder, Consultant is to be
considered as an independent contractor and not as an employee of the
Company. As such, Consultant shall be wholly responsible for payment of
federal and state taxes, insurance and such other benefits as may be
required by the laws and regulations of any federal, state or municipal
governments or any political subdivisions thereof. Except as otherwise set
forth in the Letter Agreement, Consultant is not eligible for and shall not
be covered by any of the Company's group insurance plans or other employee
benefits.
4. Rights in Data. Any and all documentation, sketches, drawings,
specifications, computer programs (including source and object codes) or
other information or data in tangible or intangible form, graphic or
otherwise, which is or may be generated by Consultant in the performance
under this Agreement shall be and remain the sole property of the Company.
<PAGE>
5. Intellectual Property Assignment. Consultant agrees to transfer and assign
to the Company all right, title, and interest in and to all inventions or
discoveries that he may conceive or develop, either alone or jointly with
others, in rendering the Consulting Services hereunder and to sign all
papers and perform all lawful acts which the Company deems necessary or
advisable for the preparation, prosecution, issuance, procurement and/or
maintenance of patent application and patents in the U.S. or foreign
countries and assignments thereof to the Company or its nominees.
6. Third Party Information. Consultant agrees to dedicate and use, in the
performance of his services hereunder, his general and specific knowledge,
skills, experience and education. Consultant further agrees not to
participate in any activity or conduct involving misappropriation of trade
secrets or proprietary information belonging to third parties or any
disclosure or use of confidential or proprietary information of third
parties in violation of any third party rights. Consultant hereby
represents and warrants that he has not and will not, without proper
authorizations and consents, disclose to the Company, induce the Company to
use or solicit other persons to disclose to the Company any trade secrets,
confidential information or other material owned by other parties.
7. Computer Programs and Software. Consultant agrees to preserve as
confidential all computer programs which relate to the Company's business
and technology which it may have access to or use during the term of this
Agreement and to use such programs only within the scope of the services to
be provided by Consultant. All such computer programs are made available
to Consultant solely on the basis of his relationship with the Company and
solely for the purpose of performing services under the Agreement.
Consultant will not without written authority from the Company: (i) use,
print, copy, provide or otherwise make available, in whole or in part, any
portion of such computer programs, or (ii) reconstruct in whole or in part
the object code, source code or algorithms contained in such computer
programs.
All copyrights, copyright registrations and copyrightable subject matter
related to such computer programs or resulting from services provided by
Consultant for or on behalf of the Company or based on the Company's
information, are hereby irrevocably assigned, set over, sold and
transferred to the Company.
Any and all codes, procedures, password combinations or similar devices or
arrangements for accessing (by manual, electronic, telecommunication or
other means), the Company's telecommunications, E-mail or computer data
processing systems which are furnished to Consultant by the Company, or
which are otherwise disclosed or made known to Consultant in the scope of
Consultant's duties, are considered confidential to the Company; shall be
and remain the sole and exclusive property of the Company; and shall not be
disclosed to any other person or used in any manner whatsoever, except for
the purpose of performing services.
<PAGE>
[APPLIED MAGNETICS LOGO AND LETTERHEAD]
Exhibit 10(w)
-------------
June 21, 1994
Dr. Richard D. Balanson
2280 Ortega Ranch Road
Santa Barbara, CA 93108
Re: Resignation - Employment Termination
(407:94\RPL:sj)
Dear Rich:
This will confirm the substance of our discussions on June 20, 1994 with respect
to the termination of your employment relationship with Applied Magnetics
Corporation (the "Company") and your resignation as President and Chief
Operating Officer of the Company.
1. Resignation/Termination of Employment
-------------------------------------
This will confirm that the Company has received your voluntary resignation
from the Company under your letter of June 15, 1994. This will also confirm
that at its meeting on June 16, 1994, the Board of Directors accepted this
resignation and, therefore, your services as President and Chief Operating
Officer of the Company and your employment relationship with the Company have
terminated as a result of your voluntary resignation effective as of June 17,
1994 (the "Effective Date"). You will be paid your current salary through the
Effective Date together with all accrued paid time off benefits through that
date.
2. Employment Agreement
--------------------
Reference is made to that certain Employment Agreement between you and the
Company dated October 30, 1992 ("Employment Agreement"). Except as otherwise
defined herein, capitalized terms used in this letter will have the same meaning
as those which are defined in the Employment Agreement.
2.1 Company Loan. You and the Company acknowledge and agree that, as a
result of your voluntary termination from the Company, you are
obligated, under the provisions of Section 4 of the Employment
Agreement, to pay to the Company on or before June 21, 1994, the
remaining outstanding principal amount due under the October Note
(namely, $250,000), plus
<PAGE>
Dr. Richard D. Balanson
Re: Resignation - Employment Termination
June 20, 1994
Page 2
interest accrued thereon in the total aggregate amount, through June
16, 1994. For purposes of convenience, the principal and interest now
due under the October Note is herein referred to as the "Balanson
Debt". Without either (a) prejudicing its rights under the Employment
Agreement or the October Note or (b) waiving any of its rights under
the Employment Agreement or the October Note, the Company hereby
agrees to grant you an extension of time until July 31, 1994, to pay
in full and satisfy the Balanson Debt, plus all interest that
continues to accrue on the unpaid principal portion from June 17, 1994
in accordance with the terms of the October Note.
2.2 Restricted Shares Under 1989 Plan. You acknowledge that there are
still outstanding 12,500 shares of Restricted Stock which had been
previously issued to you under the 1989 Plan and which are subject to
Restrictions pursuant to such plan. You acknowledge and affirm that
by virtue of your voluntary resignation you will forfeit all right,
title or interest in such shares that you may have and the Company
shall have no further or continuing liability to you or your
successors and assigns in connection therewith.
2.3 Stock Option Grants. To the extent, if any, that stock options to
acquire the Company's Common Stock, which have primarily been issued
to you under the Company's 1992 and 1994 Stock Option Plans ("Option
Plans"), have become exercisable, under the terms of the Option Plans,
on or before the Effective Date (herein "Exercisable Options") you may
exercise such Exercisable Options, in accordance with the terms of the
Option Plans within 90 days following the Effective Date. All other
options are forfeit.
2.4 Payment Without acknowledging any liability to you in connection with
your separation, the Company will pay to you, on or before June 23,
1994 an amount equal to your normal salary, at your current rate, from
the period June 17, 1994 through July 29, 1994.
3. Litigation Support. The Company is involved, and may in the future be
involved, in certain commercial and other disputes, controversies and lawsuits
which relate to or involve your former, current or future duties and
responsibilities as an employee or officer of the Company (herein "Company
Litigation"). In consideration of the payments and forbearances provided
herein, you agree to cooperate in all reasonable respects with the Company and
its attorneys in connection with the Company's prosecution, defense or response
of the Company Litigation including, for example, making yourself available to
the Company's representatives and to the Company's attorneys for purposes of
<PAGE>
Dr. Richard D. Balanson
Re: Resignation - Employment Termination
June 20, 1994
Page 3
conferences, meetings, compilation and communication or records and facts, and
appearing as a witness or prospective witness in connection with deposition or
other testimony that may be required in connection with such defense. It is our
expectation that you will do this on a basis which will be at such times and
places that are mutually convenient to you, the Company, the Company's attorneys
and plaintiff's attorneys. The Company will reimburse you for all travel and
other reasonable out-of-pocket expenses relating to your attendance at
conferences, meetings, depositions and the like relating to the Company
Litigation. Travel and lodging arrangements will be consistent with the
Company's then current practices regarding selection and class of travel and
accommodations and are to be made through the Company's travel department. In
connection with your involvement in the defense of the Company Litigation you
also understand and agree that the matters that you discuss with the Company and
its attorneys are likely to be of a confidential and privileged nature and you
agree to comply with all instructions and advice provided to you by the Company
and its attorneys with respect to the confidential and privileged nature of such
communications. You will not be entitled to receive from the Company any
additional compensation or payment in connection with the litigation support to
be provided by you pursuant to this agreement so long as the Company Litigation
for which your services are required or requested involve matters or actions in
which (a) you are named in a complaint, cross-compliant or counter claim as a
defendant, together with the Company, any of its subsidiaries, or any officers,
directors or employees of the Company or such subsidiaries, (b) allegations,
claims or charges have been made or threatened against you and/or the Company
(or any of its subsidiaries)which relate to or involve your former, current or
future duties as an employee or officer of the company, or (c) you are or may be
either (i) entitled to indemnification from the Company pursuant to the Bylaws
of the Delaware General Corporations Law or (ii) entitled to coverage under one
or more directors' and officers' or other insurance policies maintained at any
time by the Company (herein, collectively, "Interested Litigation").
4. NonCompete The Company confirms that, in as much as your termination is a
voluntary termination, it does not have the right to impose the non-competition
provisions under paragraph 8.3 of the Employment Agreement and does not intend
to exercise such rights. Nonetheless, the Company does not waive any rights to
enforce any obligations and duties you may have to the Company to keep in
confidence and not disclose or use without the Company's consent any
confidential or proprietary information of AMC.
<PAGE>
Dr. Richard D. Balanson
Re: Resignation - Employment Termination
June 20, 1994
Page 4
If you are in agreement with the provisions of this Letter Agreement, please
sign and return the enclosed copy of this letter.
Yours very truly,
William R. Anderson
President and Chief Executive Officer
ACKNOWLEDGED AND UNDERSTOOD:
/s/ Richard D. Balanson
- - ----------------------------
Richard D. Balanson, PhD.
<PAGE>
Richard Balanson
#11299
[LOGO OF APPLIED MAGNETICS CORPORATION]
This booklet contains the following documents:
. CONFIDENTIALITY AND ASSIGNMENT AGREEMENT
. FACILITY ACCESS PROCEDURE
. CONFLICT OF INTEREST EMPLOYMENT QUESTIONNAIRE
Please take your time to read and review the enclosed material carefully. If you
have any questions, feel free to ask the Human Resources Representative for
clarification at this time. It is a condition of employment with Applied
Magnetics Corporation and/or any of its subsidiaries (the "Company") that this
booklet be completed and signed by each employee. Nothing contained in this
booklet shall be deemed to create a contract of employment for any specific term
or to modify the Company's policy that it and its employees have the right to
terminate employment with or without cause and with or without notice at any
time. No manager, supervisor, or representative, other than the Company's
President or any Executive Vice President, has any authority to enter into an
agreement with any employee or to make any representation which is contrary to
this policy.
For future reference, copies of the enclosed material will be provided upon
request following review and completion of the agreements and questionnaire.
CONFIDENTIALITY AND ASSIGNMENT AGREEMENT
For and in consideration of my employment and the salary and/or wages paid by
the Company, I ("Employee") agree as follows:
1. CONFIDENTIALITY
A. I will regard and preserve as confidential all trade secrets and
information, data, material and know-how relating to the Company's business
(collectively "Company Information") as to which I may have access from Company
specifications, data, computer programs, drawings, reproductions, and other
information sources of any kind and I will not, without written authority from
the Company to do so, disclose to others or myself use, either during my
employment or thereafter, except for the purpose of performing my duties as an
employee, Company Information, whether or not developed, invented, devised,
discovered, or originated by me; and I will not take or retain any Company
Information or any other property of the Company including but not limited to
specifications, drawings, blueprints, reproductions or other documents or
things.
B. The obligations set forth in paragraph 1A shall also apply to trade
secrets, information, data and know-how belonging to third parties in the
Company's possession. These obligations apply not only to technical information,
but also to any business information that the Company treats as confidential.
Any information of the Company which is not readily available to the public
shall be considered to be a trade-secret unless the Company advises me
otherwise.
2. THIRD PARTY INFORMATION
I agree that I will not, without proper authorization, disclose to the
Company, induce the Company to use or solicit other persons to disclose to the
Company any trade secrets, confidential information or other material owned by
other parties. The term "other parties" includes but is not limited to former
employers.
3. INVENTIONS-PATENT ASSIGNMENT
A. The term "Invention" means any new and novel art, machine, manufacture,
method, process, apparatus, composition of matter, design or configuration of
any kind, patentable or unpatentable, conceived, made, produced, or discovered,
or any improvements thereon. The term "patent" includes utility or design
patents.
-5-
<PAGE>
B. All Inventions conceived or made by me during the term of my employment,
either alone or with others, shall be and are the sole property of the Company
and all right, title and interest therein are hereby assigned by me to the
Company. This provision does not apply to any invention for which no equipment,
supplies, facilities, property or trade secret information of the Company was
used and which was developed entirely on my own time and (i) which does not
relate either to the business of the Company or to the Company's actual or
demonstrably anticipated research and development, or (ii) which does not
result from any work performed by me for the Company.
C. I will disclose promptly and in writing to the Company all inventions
made by me and, with respect to those inventions which are subject to this
Agreement, I agree not to disclose the same to others without the prior written
consent of the Company. I will, at any time, upon request of the Company,
execute specific assignments of all title in any of said inventions as well as
execute all papers and perform all lawful acts which are reasonably necessary to
enable the Company to secure patents in the United States and/or foreign
countries for said inventions. Should the Company require my assistance after
termination of my employment, I shall be compensated for my time actually spent
in providing that assistance at an hourly rate equivalent to my salary or wages
during the last period of my employment with the Company.
D. For purposes of this Agreement, an invention is deemed to have been made
during the term of my employment if, during such term, the invention was
conceived or first actually reduced to practice, and I agree that any patent
application filed by me or in my behalf, either alone or with others, within one
year after termination of my employment shall be presumed to relate to an
invention which was made during the term of my employment unless I can provide
evidence to the contrary.
E. THIS AGREEMENT DOES NOT APPLY TO ANY INVENTION WHICH QUALIFIES FULLY
UNDER THE PROVISIONS OF SECTION 2870 OF THE CALIFORNIA LABOR CODE, A COPY OF
WHICH IS AVAILABLE FROM THE COMPANY ON REQUEST.
4. COMPUTER PROGRAMS
A. I agree to regard and preserve as confidential all computer programs
which relate to the Company's business, including its technical, commercial,
financial, and research and development activities, whether owned by the Company
or by third parties and in the possession of the Company, to which I may have
access during my employment. I further agree to keep in confidence all such
computer programs created by me (either alone or with others) within the scope
of my employment or based upon any information that I receive from the Company.
B. I understand that all such computer programs are made available to me
solely on the basis of my employment relationship with the Company and solely
for the purpose of performing my duties as an employee. I also agree that I will
not without written authority from the Company: (i) use, print, copy, provide or
otherwise make available, in whole or in part, any portion of such computer
programs, (ii) reconstruct in whole or in part the object code, source code or
algorithms contained in such computer programs.
C. All copyrights, copyright registrations and copyrightable subject matter
related to such computer programs or resulting from my services during
employment with the Company or based on the Company's information, including the
right to secure any copyright worldwide in the name of the Company, or
otherwise, in any medium, and to hold those copyrights shall be the sole and
exclusive property of the Company and all of the same, together with all rights,
title and interest therein, are hereby irrevocably assigned, setover, sold and
transferred to the Company.
D. Any and all codes, procedures, passwords, combinations or similar
devices or arrangements for accessing (by manual, electronic, telecommunication
or other means) the Company's computer systems or computer networks or any other
information stored in the Company's computer data processing systems (herein
"Access Codes") which are furnished to me by the Company or which are otherwise
disclosed or made known to me in the scope of my employment are considered
confidential to the Company; shall be and remain the sole and exclusive property
of the Company; and shall not be disclosed to any other person or used in any
manner whatsoever, except for the purpose of performing my duties as an
employee, without written authority from the Company.
5. GENERAL
To the extent reasonably possible, the provisions of this Agreement shall
inure to the benefit of and be binding upon the heirs, personal representatives,
successors, and assigns of the parties hereto. This Agreement shall be governed
by the laws of the State of California.
Dated: 3/2/92 Signature of Employee: /s/ Richard Balanson
--------------- ---------------------
<PAGE>
FACILITY ACCESS PROCEDURES
The continued growth and success of our Company depends to a large degree upon
our ability to safeguard our property, techniques, and inventions. A primary
means of preventing security losses is to restrict unauthorized access to the
Company's facilities including its Computer Systems and Networks.
1. Identification Badge Procedure
To aid in controlling unauthorized visitors, each Company employee shall display
and wear his or her identification badge upon entering, and while located in,
each Company facility. The badge must be displayed, picture facing out, and in a
manner in which it is readily visible when facing the viewer.
All authorized visitors will also be provided with special identification badges
which must be worn and displayed while visiting the Company's facilities. Under
no circumstances are any persons to enter Company research, design or production
areas without an identification badge.
Every employee should be alert to anyone in Company facilities who does not have
an identification badge, and report this fact to his or her Supervisor/Manager,
or a Security Officer.
If an employee forgets to bring his or her badge to work, such employee must
report to the Security Desk to be issued a temporary pass before entering his or
her work area. Temporary passes must be signed and dated for each day's work.
Each employee must take every reasonable precaution to prevent the loss of
Company identification badges. When not at work, the badge should be kept in a
safe place in the home. A lost badge must be reported to the Security Office as
soon as the loss is discovered. Requests for replacement badges will be honored
by the Security Office. However, frequent requests for replacement may be
subject to assessment of a replacement charge.
2. Computer Access Procedure
Access to and communication with the Company's computer systems and computer
networks and use of Company computer program is limited only to those employees
who are furnished an "Access Code" which for purposes hereof means any code,
procedure, password, combination or similar device or arrangement for accessing,
communicating with, storing information in or retrieving information from any of
the Company's computer systems or computer networks.
Access Codes are the property of the Company and assignment of such an Access
Code to an employee shall be solely for the purpose of permitting employee to
perform his or her specific employment duties during the term of employment. If
limited to use on any specific terminal or other peripheral device at the time
of assignment, such Access Code shall be restricted solely to use on or in
connection with the operation of the specifically assigned equipment.
Each employee to whom an Access Code is assigned shall keep the same in
confidence and shall not use or disclose such Access Code except in the
performance of his or her specific duties as an employee or as otherwise
permitted in writing by the Company. Further, each such employee must take every
reasonable precaution to prevent the loss or inadvertent disclosure of such
Access Code, shall immediately notify the Company of any such loss or
inadvertent disclosure and shall immediately discontinue the use thereof if so
instructed by the Company or upon termination of employment for any reason.
I understand that intentionally accessing a computer system for fraudulent
purposes may be punishable as a felony under the laws of the state of California
or other states in which the Company's operations are conducted.
I have read and understand the Facility Access Procedures set forth herein.
Richard Balanson
------------------------------------------
Signature
3/1/92
------------------------------------------
Date
<PAGE>
CONFLICT OF INTEREST EMPLOYMENT QUESTIONNAIRE
The following questions have been prepared to assist you in determining the
nature and extent of any outside interest you may have which might involve
actual or potential conflicts of interest with the affairs of Applied Magnetics
Corporation (the "Company") as described in its Conflict of Interest Policy
Statement. Please read each question carefully. In the event that you have any
doubt as to the meaning of a question, you should answer that question to the
best of your ability and list the reasons why you are in doubt in the Comments
Section.
1. Are you or your spouse, or any of your dependent children presently (or has
any such person been during the past two years) an officer, director,
employee or consultant of, or otherwise employed or retained by, any
supplier, customer or competitor of the Company? [X] YES [_] NO
2. Are you or your spouse, or any of your dependent children or any trust of
which you are trustee or in which you have substantial beneficial interest or
any corporation or other entity in which you have a substantial ownership
interest:
(a) The owner, directly or indirectly of any position with a supplier,
customer or competitor of the Company which is in excess of 1% of the issued
and outstanding shares of any class of any such company (or of the total
equity interest, in the case of a partnership of proprietorship)?
[_] YES [X] NO
(b) Engaged directly or indirectly in any business venture or dealings or
transactions of any nature whatsoever with any supplier, customer or
competitor of the Company or with any employee, agent or representative of
such supplier, customer or competitor? [_] YES [X] NO
(c) Engaged in any other business activity not within the scope of the
foregoing questions which might affect your performance for the Company?
[_] YES [X] NO
If at any time during my employment with the Company my circumstances change in
regard to any of the foregoing questions, I hereby agree that I will immediately
inform my supervisor or manager.
Date 3/1/92 Signature /s/ Richard Balanson
________________ _______________________________
If the answer to any question is "Yes", please fill in the appropriate section
on the reverse of this page and sign again at the bottom.
<PAGE>
COMMENTS/EXCEPTIONS TO CONFLICTS OF INTEREST
EMPLOYMENT QUESTIONNAIRE
Date:____________ By:_________________________________________________________
Employee's Signature
-9-
<PAGE>
[APPLIED MAGNETICS CORPORATION LETTERHEAD]
EXHIBIT 10(x)
--------------
September 12, 1994
Mrs. Kathryn E. Gehrke
965 Via Fruteria
Santa Barbara, CA 93110
Dear Kathryn:
This letter confirms the agreement that has been reached between you and Applied
Magnetics Corporation (the "Company") regarding your resignation as an officer
of the Company and certain changes in your employment relationship with the
Company. Subject to the terms and conditions set forth herein and in
consideration of the agreements, promises, representations, releases and
payments described herein, you and the Company agree as follows:
1. Definitions. Except as otherwise provided, capitalized terms used in this
agreement shall have the following definitions:
1.1 "Retention Agreement" shall mean that certain Retention Agreement
between you and the Company dated as of November 3, 1993.
1.2 "Executive Note" shall have the meaning set forth in the Retention
Agreement.
1.3 "Resignation Date" shall mean August 16, 1994.
1.4 "Leave Period" shall mean the period commencing on the Resignation
Date and ending November 30, 1994.
1.5 "Employment Period" shall mean the period commencing on December 1,
1994, and ending on the Termination Date.
1.6 "Termination Date" shall mean May 31, 1995, or such earlier date as
may be established, pursuant to Section 4.6 hereof, by either you or
the Company as the date on which your employment with the Company
terminates.
1.7 "1989 Plan" shall mean the Company's Amended and Restated 1989 Long
Term Incentive Plan.
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 2
1.8 "Severance Claim" shall mean the claim referred to in Section 5.3 of
this agreement.
1.9 "Full Time Employment" shall mean providing personal services as an
employee, officer or director of any person, corporation, partnership
or other form of business, commercial or professional enterprise
(other than AMC or any of its subsidiaries) under terms involving a
regular work schedule of not less than thirty (30) hours per week.
2. Retention Agreement; Rescission and Termination. You and the Company agree
that the Retention Agreement is hereby fully and completely rescinded,
terminated and canceled in all respects whatsoever and that both you and
the Company are fully and completely released and discharged from their
respective obligations and duties thereunder.
3. Resignation as Officer. This will confirm that subject to the terms and
conditions of this agreement and in consideration of the agreements,
promises and representations set forth herein, effective as of the
Resignation Date (a) you have submitted your resignation as Vice President,
Chief Financial Officer and Treasurer of the Company, (b) you have advised
the Company that you are pursuing other employment and (c) your resignation
as Vice President, Chief Financial Officer and Treasurer has been accepted
by the Company.
4. Leave of Absence/Responsibilities. Except as set forth in this paragraph
and in paragraphs 7 and 9 hereof, as of August 16, 1994, you have been
relieved of your responsibilities and duties as Vice President, Chief
Financial Officer and Treasurer and in connection with your management and
supervision of the financial management, accounting and fiscal activities
and other functions and projects over which you have previously exercised
management control and direction and, further, that as of August 17, 1994,
you are no longer serving as the Company's Principal Financial Officer for
purposes of the rules and regulations promulgated under the Federal
Securities Laws.
4.1 During the Leave Period, you will be on paid leave of absence and the
terms of your employment shall be as follows:
A. You will be available, on an occasional basis, to provide
personal services consisting of advice and assistance relating to
the transition of your former duties.
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 3
B. You will inform the Company promptly upon your accepting Full
Time Employment.
C. Should you start Full Time Employment with another firm prior to
November 30, 1994, such employment will not affect your continued
status as an employee of the Company or the Company's obligations
under subparagraph D below, provided that you have not otherwise
materially breached any of your obligations and duties to the
Company.
D. The Company will continue to pay you your current salary
($3,076.92 per week) in accordance with the Company's usual and
customary payroll practices.
4.2 During the Leave and Employment Periods, the Company will make
available to you access to voice mail messages and limited secretarial
support to provide phone answering and mail sorting services to you in
connection with your efforts to obtain employment elsewhere.
4.3 During the Employment Period, and provided you have not commenced Full
Time Employment, you will continue to be employed by the Company and
will be expected to work on temporary assignments in the Santa Barbara
area, in matters consistent with your skills and experience, under the
direction of certain officers or managers of the Company from time to
time and the terms of your employment shall be as follows:
A. You will be paid a salary at the rate of $1,538.46 per week in
accordance with the Company's usual and customary payroll
practices.
B. During the Employment Period your employment will be that of a
twenty (20) hour per week part-time employee with work schedule
arrangements to be agreed between you and the Chief Executive
Officer, the President or such other Company officer or member of
management as the Chief Executive Officer or President may
designate.
C. You will inform the Company promptly upon your accepting Full
Time Employment with another firm.
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 4
4.4 You will continue to accrue paid time off ("PTO") benefits during the
Leave and Employment Periods so long as you continue to be employed by
the Company. On the Termination Date, the Company will pay to you all
accrued and unpaid/unused PTO benefits (payable at your salary rate in
effect as of the Resignation Date).
4.5 Your employment by the Company during the Leave and Employment Periods
shall be subject to the same policies, practices and procedures that
applied to your status as an employee prior to the date hereof,
including, but not limited to, (a) your continuing obligations to
perform your duties and responsibilities diligently and in a
professional and loyal manner in accordance with the Company's
policies and your general and specific obligations as an employee,
including, for example, duties concerning the preservation and
protection of confidential information and refraining from
participating in any conduct, activities, relationships or investments
which conflict with the interests of the Company, or which compete
with the business and operations of the Company, and (b) the at-will
nature of your employment relationship with the Company and, subject
to the provisions of paragraph 4. 6 below, the rights of both
you and the Company to terminate this employment relationship with or
without notice or cause.
4.6 Either the Company or you may terminate your employment during either
the Leave or Employment Periods subject to the following:
A. If your employment during the Leave Period is terminated (i) by
you, the Company shall be obliged to continue making salary
payments to you in accordance with Section 4.1E hereof, the
Termination Date shall be November 30, 1994, you will be paid all
accrued and unpaid PTO benefits on such date, and the Company
shall have no further or continuing liability to you after such
date except for the obligation to reimburse you for uninsured
medical expenses as described in Section 5.1 hereof; or (ii) by
the Company, the Company shall be obliged to continue making
salary payments to you in accordance with Section 4.1E, the
Termination Date shall be November 30, 1994, the Company shall
pay to you all accrued and unpaid PTO benefits plus the sum of
$46,000 and the Company shall have no further or continuing
obligation or liability to make additional payments to you except
for the obligation to reimburse you for uninsured medical
expenses as described in Section 5.1 hereof.
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 5
B. If your employment relationship is terminated during the Employment
Period: (i) by the Company, the Company will pay to you an amount equal
to the number of full weeks remaining from the date of such termination
to May 31, 1995, multiplied by $1,769.22 (ii) by you, from and after
such termination, you will forfeit, will not be entitled to receive and
hereby release and discharge the Company from, any continuing obligation
to pay to you any further or continuing weekly or other salary.
C. For purposes of clauses 4.6A(i) and 4.6B(ii) above, if you commence Full
Time Employment during the Leave Period or the Employment Period, as the
case may be, your employment shall be deemed to have been terminated by
you.
5. Benefit/Compensation Plans. As of the Resignation Date, all of your rights
under the 1989 Plan shall expire and all Restricted Stock Grants previously
issued to you under this Plan which are subject to Restrictions (as defined
in the 1989 Plan) are forfeited. As of the Termination Date, all of your
rights to participate in the Company's employee benefit plans (including,
but not limited to group medical, life and disability insurance plans,
Stock Option, Cash Profit Sharing, Stock Purchase and other plans) will
terminate, except as follows:
5.1 Group Medical Insurance. You will be entitled to continue
participation in the Company's group medical insurance plan under
COBRA should you elect to do so, subject to the terms and conditions
of the plan and payment by you of the applicable premiums. If you are
interested in making such an election, please contact Human Resources.
We will reimburse you for the uninsured portion of medical costs
incurred by, and provided to you, during the Leave Period; provided,
however, that (a) the Company's reimbursement obligation shall not
exceed $6,000 in the aggregate, and (b) neither such reimbursement nor
the Company's agreement to reimburse shall be deemed an admission on
the Company's part that it is liable for these costs. Bills and
statements with respect to these costs shall be submitted to the
Company (Attention: General Counsel) on or before January 30, 1995.
5.2 1992 and 1994 Stock Option Plans ("Option Plans"). You will, for a
period of ninety (90) days following the Termination Date, be
permitted to exercise the option installments which became exercisable
on or before the Termination Date (to the extent you have not
previously exercised such option installments) subject, however, to
the terms and conditions
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 6
of the Option Plans. All option installments which become exercisable
under the Option Plans after the Termination Date will be forfeited.
5.3 Retention Agreement Payments. Without limiting the generality of any
release, discharge or rescission made, executed or provided by you, or
agreed by you to be made, executed or provided, under this letter
agreement, in consideration of the agreements, promises and covenants
of the Company, including, but not limited to, the loan forgiveness
provisions of paragraph 6, below, you hereby agree that you hereby
waive, release and discharge the Company from any obligation or duty
to pay to you either (i) the aggregate amount of $366,666 (the
"Severance Claim") which you have alleged is due you from the Company
as the Minimum Bonus and other payments under Section 6.2(b) and
6.2(c) of the Retention Agreement or (ii) any other severance or other
payment in connection with, arising from or relating to the
termination of your employment with the Company.
6. Loan Forgiveness. You and the Company acknowledge that the Company has
loaned to you the principal sum of $150,000 pursuant to the Executive Note.
For and in consideration of the agreements, rescissions, releases, waivers
and discharges provided by you hereunder, including, but not limited to,
those set forth in Section 5.3 hereof, the Company agrees that upon your
acceptance of this letter agreement in the manner provided below, the
obligations to pay the Executive Note shall be completely forgiven and
discharged and the Company will, as promptly as practicable, execute and
deliver to you the Executive Note marked "canceled" and a reconveyance of
the Deed of Trust securing such Executive Note.
7. Litigation Support. It is acknowledged that the Company is involved, and
may in the future be involved, in certain commercial and other disputes,
controversies and lawsuits which relate to or involve your former, current
or future duties and responsibilities as an employee and/or officer of the
Company (herein "Company Litigation"). You agree to cooperate in all
reasonable respects with the Company and its attorneys in connection with
the Company's prosecution or defense of or response to the Company
Litigation including, for example, making yourself available to the
Company's representatives and to the Company's attorneys for purposes of
conferences, meetings, compilation and communication of records and facts,
and appearing as a witness or prospective witness in connection with
deposition or other testimony that may be required in connection with such
defense. It is our expectation that you will do this on a basis which will
be at such times and places that are mutually convenient to
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 7
you, the Company, the Company's attorneys and plaintiff's attorneys. We
understand that attendance at such conferences, meetings, depositions, etc.
may otherwise require taking time off from any new job you may secure, and
we acknowledge that your availability will be contingent upon your
obtaining consent from any new employer to take such time off. You agree
to exert your best reasonable efforts to obtain such consent. The Company
will reimburse you for all travel and other reasonable out-of-pocket
expenses relating to your attendance at conferences, meetings, depositions
and the like relating to the Company Litigation. Travel and lodging
arrangements will be consistent with the Company's then current practices
regarding selection and class of travel and accommodations and are to be
made through the Company's travel department. In connection with your
involvement in the defense of the Company Litigation you also understand
and agree that the matters that you discuss with the Company and its
attorneys are likely to be of a confidential and privileged nature and you
agree to comply with all instructions and advice provided to you by the
Company and its attorneys with respect to the confidential and privileged
nature of such communications. You will not be entitled to receive from
the Company any additional compensation or payment in connection with the
litigation support to be provided by you pursuant to this agreement so long
as the Company Litigation for which your services are required or requested
involve matters or actions in which (a) you are named in a Complaint,
Cross-Complaint or counter claim as a defendant, together with the Company,
any of its subsidiaries, or any officers, directors or employees of the
Company or such subsidiaries, (b) allegations, claims or charges that have
been made or threatened against you and/or the Company (or any of its
subsidiaries) which relate to or involve your former, current or future
duties as an employee or officer of the Company, or (c) you are or may be
either (i) entitled to indemnification from the Company pursuant to the By-
Laws or the Delaware General Corporations Law or (ii) entitled to coverage
under one or more directors' and officers' or other insurance policies
maintained at any time by the Company herein (collectively, "Interested
Litigation"). If the Company Litigation as to which you provide support
and assistance involves matters or disputes other than Interested
Litigation, you will be compensated at an hourly rate of $50.00 for each
hour of service provided by you at the request of the Company to the
extent, and only to the extent, that such service exceeds twenty (20) hours
in any calendar quarter.
8. Release. You acknowledge and agree that this letter agreement constitutes
a full and complete settlement, release and discharge of any and all claims
that you may have against the Company or any of its agents, officers,
directors, employees, stockholders, subsidiaries and affiliates
(collectively the "AMC
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 8
Group") for fault, wrongdoing or liability of whatsoever nature arising
from or in connection with your employment relationship with the Company or
any member of the AMC Group or the termination of that relationship. No
covenants, terms or conditions hereof shall be deemed an admission by the
Company or any member of the AMC Group in connection with or otherwise
arising from your employment relationship with the Company or any members
of the AMC Group or the termination of such employment relationship.
Subject to the provisions set forth herein, you hereby fully release the
Company and each member of the AMC Group and their respective agents,
officers, directors, servants, stockholders, employees, representatives,
assigns and successors from all rights, claims, demands, causes,
liabilities and actions of any nature whatsoever, known or unknown, fixed
or contingent, suspected or unsuspected, which you now have, hold or claim
to own, arising out of, or in any way connected with or relating to the
Retention Agreement and to your employment with the Company or any member
of the AMC Group, or the termination of any such employment, including, but
not necessarily limited to: (a) the Severance Claims, (b) any rights,
claims, demands, allegations, causes or liabilities relating to, arising
from, connected with or relating to the Retention Agreement, or (c)
wrongful discharge, unjust dismissal, the California Fair Employment and
Housing Act, impairment of economic ability, breach of implied covenants of
good faith and fair dealing, emotional distress, personal injury or other
tort (collectively the "Released Claims"); provided, however, that nothing
contained herein shall be construed as a release or discharge of: (i) any
rights to indemnification under and subject to the provisions of Article
VII of the By-Laws of the Company, a copy of which has been furnished to
you, (ii) any rights under California Labor Code (S)2802, or (iii) any
rights under the Company's Directors' and Officers' Insurance Policy and
Company Reimbursement Policy No. 440-99-28 with National Union Fire
Insurance Company, subject, however, to the terms, conditions, limitations
and exclusions set forth in such policy. You further acknowledge and agree
that this release constitutes a release and discharge of known and unknown
claims and that you hereby expressly waive the benefits of California Civil
Code (S)1542 which provides in part that:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his/her favor at the time of
executing the release, which if known by him/her must have materially
affected his/her settlement with the debtor."
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 9
You hereby waive and relinquish benefits which you may have under Section
1542 and acknowledge that you may hereafter discover facts in addition to
or different from those which you now know or believe to be true with
respect to the Released Claims, but it is your intention to fully and
finally and forever settle and release any and all matters, disputes and
differences, known or unknown, suspected and unsuspected, which now exist,
may exist or heretofore have existed between you and the Company.
To the extent that, after the execution of this agreement, any claim or
action including but not limited to any claim under 11 U.S.C. (S)(S) 544,
547 or 548, California Civil Code (S)3439.01, et seq or any other provision
relating to bankruptcy or insolvency claims, the effect of which is to set
aside or avoid a fraudulent transfer, preference payment or other
consideration made to or received by you in connection with this Agreement
or the transactions contemplated hereunder ("Avoidance Actions") is brought
by or for the benefit of the Company or any of its creditors, past, present
or future, or any trustee in bankruptcy or receiver acting for the estate
of the Company, the Severance Claim (together with any other claims that
you may have against the Company or any trustee in bankruptcy or receiver
acting for the estate of the Company as a result of such Avoidance Actions)
may be interposed by you in defense of such Avoidance Actions, may be used
in settlement thereof and may be asserted against the settlement thereof
and may be asserted against the plaintiffs in such Avoidance Actions as a
claim against the Company or its estate and for all such purposes, but only
such purposes, shall not be deemed to have been released, settled or
compromised.
Nothing contained herein shall be deemed an admission by the Company of any
liability in connection with or arising from the Released Claims.
9. Confidentiality. You acknowledge that you have entered into a
Confidentiality and Assignment Agreement ("Confidentiality Agreement") with
the Company and that, as an employee and officer of the Company, you are
obliged to comply with the Company's policies and procedures with respect
to confidential, proprietary and non-public information. You also
acknowledge that during the term of your employment with the Company, you
have had access to and knowledge of sensitive, confidential and proprietary
information and data including, without limitation, financial information,
business plans and strategic information (such as, but not limited to
plans, prospects and considerations regarding resource planning, corporate
financial strategies, possible credit and financing agreements, capital
formation strategies, operations and financial projections and forecasts,
merger, acquisition and corporate partnering
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 10
strategies) identification of executives, managers and employees of the
Company, including their specific skills, knowledge, compensation and other
data (collectively "Confidential Information").
You agree that you will not, without the Company's prior written consent,
at any time after the date of this letter, divulge, furnish or make
accessible to anyone or use in any way, any of such Confidential
Information in any manner which would injure the Company or interfere with
its contractual relations. You further agree that you will refrain from
any acts or omissions that would reduce the value of such Confidential
Information to the Company, including, but not necessarily limited to, any
conduct or activity which would cause disruption, damage or otherwise
impair or interfere with the Company's business by interfering with or
raiding its employees, soliciting employees to leave the Company to accept
employment with, or provide personal services to, any other firm or
Company, or by disrupting its relationships with its employees, customers,
vendors, agents, representatives or otherwise.
You and the Company agree to keep this letter agreement, including the
existence and contents hereof, in confidence and not to disclose the same
or any of its terms to any third party without the written consent of the
other. However, nothing contained herein shall prevent (a) either party
from disclosing this letter agreement or the terms thereof to their
respective accountants and attorneys and, in the case of the Company, to
its employees and directors who have a need to know of the existence and
contents hereof; (b) you from disclosing the terms of this letter agreement
to your spouse or to banks or other financial institutions in connection
with your obtaining loans or credit from such entities provided that you
shall first advise those firms of the confidential nature of this letter
agreement; or (c) the Company from disclosing either (i) the termination of
your employment relationship with the Company, or (ii) the terms and
conditions of this letter agreement or from filing copies of this letter
agreement with any state or federal regulatory agencies, including the
Securities and Exchange Commission, if such disclosure or filing of copies
is considered by the Company as necessary or appropriate to comply with
federal or state securities laws or regulations or other legal or
regulatory requirements.
10. General Provisions
------------------
10.1 Governing Law/Entire Agreement. This letter agreement, which is made
under and shall be governed by the laws of the state of California,
contains the entire agreement of the parties relating to the subject
matter hereof and supersedes all prior agreements and understandings
with
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 11
respect to such subject matter, and there are no other agreements,
representations, or warranties relating to the subject matter of this
letter agreement that are not set forth herein.
10.2 Successors and Assigns. This agreement shall extend to and be binding
upon you and your legal representatives, heirs, beneficiaries and
distributee, and no amendment, waiver or modification of this
agreement, or any of the terms or conditions hereof, shall be deemed
effective unless made in writing and signed by you and an officer of
the Company.
10.3 Representation by Counsel. The Company has not furnished legal
representation to you in connection with this agreement but has been
represented by its counsel. The Company and its counsel have advised
you that you may seek independent counsel in connection with this
agreement and you have been afforded the opportunity to do so, and
have in fact consulted with independent legal counsel, prior to your
execution of this agreement.
10.4 Resignations. You agree to execute and deliver such letters and other
documents as the Company may reasonably request confirming your
resignation, as of the Resignation Date or such other date as may be
requested by the Company, as an officer or director of the Company or
any of the Company's directly or indirectly owned subsidiaries.
10.5 Payroll Withholdings, etc. All amounts payable to you hereunder shall
be paid in accordance with the Company's normal payroll practices and
shall be subject to usual and customary payroll deductions for federal
and state withholding taxes, and the like. You acknowledge that the
loan forgiveness provisions of this letter agreement will result in
taxable income to you and will be reflected in your W-2 income for
1994. The Company will withhold from your final paycheck during the
Leave Period an amount sufficient to cover FICA withholding
obligations (1.45%) of the income attributable to the loan
forgiveness. The Company will not withhold usual and customary
federal and state withholding taxes from this amount on the
understanding that you will be solely responsible for the income taxes
attributable to this amount.
<PAGE>
Mrs. Kathryn E. Gehrke
September 12, 1994
Page 12
11. Acceptance, Time to Execute and Return Agreement and Release. All of the
Company's duties and obligations, and your rights, hereunder are subject to
the express condition precedent that you sign this letter agreement and
return the signed copy to me or Mr. Raymond P. Le Blanc on or before 6:00
p.m., September 13, 1994.
12. Certification. In accordance with the provisions of Section 8 of the
Retention Agreement, the officer executing this letter agreement on behalf
of the Company hereby certifies that the termination and rescission of the
Retention Agreement has been approved by a Disinterested Board.
I am pleased that we were able to conclude this in a professional and
cooperative manner. If the provisions of this letter are acceptable, please
sign and return the enclosed copy in accordance with paragraph 11 above.
Yours very truly,
APPLIED MAGNETICS CORPORATION
William R. Anderson
President & Chief Operating Officer
ACKNOWLEDGED AND ACCEPTED
this 13 day of September, 1994.
- - --------------------------------
Kathryn E. Gehrke
<PAGE>
[Applied Magnetics Corporation Letterhead]
EXHIBIT 10(y)
-------------
August 1, 1994
Grisanti, Galef & Goldress, Inc.
987 Tahoe Boulevard, Suite 206
Incline Village, Nevada 89451
Attention: Mr. Craig Crisman
Gentlemen:
This will confirm the understanding and agreement between Grisanti, Galef &
Goldress, Inc., a Nevada corporation ("GGG") and Applied Magnetics Corporation
(the "Company") as follows:
1. ENGAGEMENT. The Company hereby engages GGG to provide executive management
consulting services to implement a strategic plan in an effort to turn
around the Company, conserve and increase its cash and working capital and
return it to profitability. It is expected that GGG will retain the
services of Mr. Craig Crisman as the principal, lead consultant to provide
these services, that Mr. Crisman will devote his full-time attention and
efforts to this engagement and that his specific responsibilities will
include:
. Review of financial and operating policies and practices, including
overhead and S,G&A expense structure, R&D expenses and all cash out
flows
. Analysis of asset redeployment opportunities
. Analysis of relationships with present and potential lenders, present
and potential credit arrangements and other sources for obtaining
additional financing
. Assistance in negotiating/implementing pending or additional financing
arrangements
. Consideration of restructuring and reorganization alternatives
. Implementation of pending strategic partnering alternatives
. Development of new partnering/strategic options
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 2
. Consideration of exit/contingency strategies such as debtor protection
alternatives
This engagement shall not preclude the Company from employing or engaging
its officers, employees, attorneys and accountants, on usual and customary
terms, to provide advisory services and participate in these and other
matters.
2. APPOINTMENT. Mr. Crisman is hereby appointed to the office of Chief
Executive Officer of the Company, to serve at the pleasure of the Board of
Directors subject, solely, to the control of the Board of Directors and not
to any other officers or employees of the Company. In this capacity Mr.
Crisman will be expected to serve as the Company's principal executive
officer, and subject to the confidentiality provisions set forth below,
will have access to the Company's books, records, accounts, financial
statements and files, including, but not limited to, personnel, payroll and
human resources records as may be reasonable and appropriate in connection
with this appointment.
3. TERM, TERMINATION. GGG's engagement and Mr. Crisman's appointment as Chief
Executive Officer shall commence on August 2, 1994, or as soon thereafter
as is practicable and shall continue at the pleasure of the Board and the
Board of Directors may at any time, by resolution adopted at a meeting or
by written consent without meeting, terminate this engagement with or
without notice or cause and remove Mr. Crisman as Chief Executive Officer
with or without notice or cause. The Company will deliver or cause to be
delivered to GGG a certified copy of such Board resolution as promptly as
practicable following the effective date of the termination of this
engagement or the removal of Mr. Crisman as Chief Executive Officer, but
the failure to so deliver this resolution shall not affect the termination
of this engagement. GGG may terminate this engagement at any time upon
delivery of written notice to AMC.
4. ACCESS TO INFORMATION. The Company shall (a) furnish to GGG and Mr.
Crisman information relating to parties with whom the Company has had
discussions or contacts prior to or during the term of this engagement
concerning the Company's efforts to obtain financing and/or strategic
partnering arrangements and the status of these efforts and discussions,
and (b) make available to GGG and Mr. Crisman all information concerning,
the business, assets, operations, financial condition and prospects of the
Company which GGG and Mr. Crisman reasonably request in connection with the
performance of their obligations hereunder. To the Company's knowledge,
all
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 3
such information shall be complete and accurate in all material respects
and, while GGG and Mr. Crisman shall be entitled to rely upon the accuracy
and completeness of all such information without independent verification,
neither shall make any representations or warranties on behalf of the
Company which are inconsistent with or would, under the circumstances, be
misleading.
5. CONFIDENTIALITY. In connection with GGG's engagement, GGG and Mr. Crisman
will have access to and the Company is willing to disclose certain
information it considers proprietary and confidential. Accordingly, GGG
and Mr. Crisman hereby agree as follows:
5.1 "Confidential Information" shall mean any information concerning the
Company (whether prepared by the Company, its advisors or otherwise
and irrespective of the form of communication) which has been or will
be furnished to GGG or to Mr. Crisman or other consultants, agents or
employees of GGG (collectively "GGG's Representatives") by or on
behalf of the Company, including, without limitation, the information
described in paragraph 4 above and the following information:
data, information, documents and other material relating to the
business, assets, properties and operations of the Company,
including, but not necessarily limited to, (a) historical
financial information, (b) future projections and forecasts
concerning revenues, profits, gross margins, assets, net worth,
market share and the like, (c) technical, marketing and other
information concerning new products under development or
contemplated by the Company, (d) descriptions of the experience,
job responsibilities, salaries and compensation of key
management, technical and other employees, (e) sales and
marketing operations and plans, (f) information and data
concerning projects, services, processes, specifications,
technology, research, know-how, engineering drawings, sketches,
plants, facilities, personnel and management, (g) information and
data regarding the Company's current efforts to enter into a
strategic partnering arrangement ("Partnership Transaction"),
with one or more other companies or enterprises, to provide
funding through an equity investment or acquisition or merger, to
assist the Company in the development and commercialization of
new, advanced products and technology, including, but not limited
to, the identity of potential
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 4
partners and the terms, conditions and other provisions with
respect to a possible Partnership Transaction, and (h)
information regarding actual, threatened or pending disputes,
lawsuits, claims and other legal or regulatory proceedings
involving the Company.
The term "Confidential Information" shall be deemed to include all
notes, analyses, computations, studies, interpretations or other
documents prepared by GGG or GGG's Representatives which contain,
reflect or are based upon, in whole or in part, the information
furnished to GGG or its Representatives pursuant hereto. The term
"Confidential Information" does not include information which (i) is
or becomes generally available to the public other than as a result of
a disclosure by GGG or its Representatives, (ii) was within GGG's
possession prior to its being furnished to GGG by or on behalf of the
Company pursuant hereto, provided that the source of such information
was not known by GGG to be bound by a confidentiality agreement with,
or other contractual, legal or fiduciary obligation of confidentiality
to, the Company or any other party with respect to such information or
(iii) becomes available to GGG on a non-confidential basis from a
source other than the Company or any Company Representatives (as
defined in paragraph 5.2), provided that such source is not bound by a
confidentiality agreement with, or other contractual, legal or
fiduciary obligation of confidentiality to, the Company or any other
party with respect to such information.
5.2 GGG agrees to keep in confidence all Confidential Information which is
received by GGG or GGG's Representatives from the Company or from the
Company's attorneys, accountants, investment bankers, or financial
advisors (herein "Company Representatives"). GGG also agrees that,
unless it has obtained the prior written consent of the Company, it
will neither (a) use such Confidential Information for any purpose
except solely for the purposes of performing the services contemplated
under this Agreement nor (b) disclose any Confidential Information
received by it from the Company or the Company's Representatives to
any third party or to any person or persons other than GGG's
Representatives who have a need to know such Confidential Information
for the purposes contemplated by this Agreement, and who agree to keep
such information confidential and who are provided with a copy of this
letter agreement and agree to be bound by the terms hereof to the same
extent as if they were parties hereto. In any event, GGG shall be
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 5
responsible for any breach of this Agreement by any of its
Representatives and GGG agrees, at its sole expense, to take all
reasonable measures (including, but not limited to, court proceedings)
to restrain GGG's Representatives from prohibited or unauthorized
disclosure or use of the Confidential Information.
5.3 In the event that GGG or any of its Representatives are requested or
required (by deposition, interrogatories, requests of information or
documents in legal proceedings, subpoena, civil investigative demand
or other similar process) to disclose any of the Confidential
Information, GGG shall provide the Company with prompt written notice
of any such request or requirement so that the Company may seek a
protective order or other appropriate remedy and/or waive compliance
with the provisions of this letter agreement. If, in the absence of a
protective order or other remedy or the receipt of a waiver by the
Company, GGG or any of its Representatives are nonetheless in the
written opinion of GGG's counsel, legally compelled to disclose
Confidential Information to any tribunal or else stand liable for
contempt or suffer other censure or penalty, GGG or its Representative
may, without liability hereunder, disclose to such tribunal only that
portion of the Confidential Information which such counsel advises is
legally required to be disclosed, provided that GGG exercises its best
efforts to preserve the confidentiality of this Confidential
Information, including, without limitation, by cooperating with the
Company to obtain an appropriate protective order or other reliable
assurance that confidential treatment will be accorded the
Confidential Information by such tribunal.
6. COMPENSATION. As compensation for the services rendered by GGG hereunder,
the Company shall pay GGG as follows:
(a) a monthly fee of $70,000 which shall be paid, in advance, at the
beginning of each month during the Term of this engagement; provided,
however, that the first such payment shall be paid not later than
seven (7) days after the commencement of the Term;
(b) a success fee, the amount, terms, conditions and method (e.g. cash,
equity, options, etc.) of payment, and the quantifiable performance
measures of which shall be agreed between GGG and the Company's Board
of Directors within sixty days following the date hereof; and
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 6
(c) the Company shall pay an advance of $5,000 against out-of-pocket
expenses promptly after execution of this Agreement and, thereafter,
shall reimburse GGG for reasonable out-of-pocket travel and lodging
expenses incurred in connection with this engagement promptly
following receipt of expense reports, accompanied by appropriate
invoices, receipts and statements explaining in reasonable detail the
date, amount and nature of such expenses.
7. OTHER CONSULTANTS/PROFESSIONALS. It is contemplated that, in performing
its service under this Agreement, GGG will retain the services of other
consultants, advisors, employees and independent contractors ("Other
Professionals") with expertise, skills and knowledge of turnaround matters
and in advising financially distressed companies, including, in
particular, persons with professional, financial and accounting experience.
GGG represents and covenants that it will engage only such Other
Professionals who have the necessary skills, qualifications and
professional experience required for this engagement. GGG will (a) use its
best efforts to consult, in advance, with the Board of Directors prior to
engaging Other Professionals, (b) assume all responsibility for recruiting,
hiring, employing and engaging Other Professionals (c) pay and be
responsible for all salaries, wage expenses, benefits (including life,
medical, health and workers compensation insurance benefits, if any) due or
to become due to such Other Professionals at no additional cost or expense
to the Company (and indemnify the Company for any claims made against it by
Other Professionals with respect to these matters) and (d) be responsible
for the management and direction of such Other Professionals.
8. INDEMNIFICATION. The Company shall indemnify GGG and Mr. Crisman
("Indemnified Parties") and hold such Indemnified Parties harmless against
any and all losses, claims, damages or liabilities to which they may become
subject arising in any manner out of or in connection with the rendering of
services by GGG hereunder, unless it is finally judicially determined that
such losses, claims, damages or liabilities resulted directly from the bad
faith, negligence or willful misconduct of any Indemnified Parties or from
failure to perform any obligation to the Company hereunder.
If any lawsuit, claim or proceeding (including any investigation) shall be
brought or asserted against an Indemnified Party in respect of which
indemnity may be sought from the Company, such Indemnified Party shall
promptly notify the Company in writing and the Company shall assume the
defense thereof, including the employment of counsel and the payment of all
expenses. An Indemnified Party shall have the right to employ separate
counsel in any such
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 7
action and to participate in the defense thereof, but the fees and expenses
of such counsel shall be at its expense unless (i) the Company has agreed
in writing to pay such fees and expenses, (ii) the Company shall have
failed promptly to assume the defense of such action or proceeding and
employ counsel reasonably satisfactory to the Indemnified Party in any such
action or proceeding or (iii) the named parties to any such action or
proceeding include the Indemnified Party and the Company and the
Indemnified Party shall have been advised by counsel that there may be one
or more legal defenses available to the Indemnified Party which are
different from or additional to those available to the Company, in which
case, if the Indemnified Party notifies the Company in writing that it
elects to employ separate counsel at the expense of the Company, the
Company shall not have the right to assume the defense of such action or
proceeding on behalf of the Indemnified party; it being understood,
however, that the Company shall not, in connection with any one such
lawsuit, claim or proceeding, or separate but substantially similar or
related lawsuits, claims or proceedings in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses or more than one separate firm of attorneys.
9. EMPLOYMENT OF OTHER PROFESSIONALS. In the event that an offer of
employment is made by the Company to, and accepted by, any Other
Professionals within one year following the termination of this engagement,
the Company agrees to pay a fee to GGG in an amount equal to thirty-five
percent (35%) of the first year's annual salary, plus any cash incentive
bonus, paid to such person by the Company.
10. GENERAL.
10.1 GGG and the Company are independent contractors and nothing contained
herein shall be deemed to create the relationship of principal and
agent between GGG and the Company nor shall this Agreement create the
relationship of employer and employee between the Company and Mr.
Crisman, any Other Professional, or any other person engaged by GGG to
provide services hereunder. Neither GGG nor the Company shall have
the right to make a commitment or enter into any agreement or contract
on behalf of the other. This Agreement does not create any "finder",
broker, commission agent or similar relationship between GGG and the
Company and the Company shall not be obligated to GGG for any
commission, broker or agent fees or similar compensation, fees,
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 8
expenses or costs as a result of this Agreement or the Credit
Transaction.
10.2 No licenses or rights, patent or otherwise, are granted by this
Agreement or by any disclosure hereunder. This Agreement constitutes
the entire agreement of the parties with respect to the subject matter
hereof.
10.3 This Agreement has been entered into as of the day and year first
above written, in Santa Barbara, California, United States of America,
and shall be governed by the laws of that State. No waiver of any
breach or default hereunder shall be considered valid unless in
writing and signed by the party granting such waiver and no such
waiver shall be deemed a waiver of any other or subsequent breach or
default.
10.4 GGG hereby acknowledges that it is aware and agrees that it will
advise its Representatives who may have knowledge of this Agreement or
of the fact that the United States securities laws prohibit any person
who has material, nonpublic information, concerning, for example, the
information which may be disclosed to or made available to GGG or its
Representatives under this Agreement from (a) purchasing or selling
the Company's securities, or (b) communicating such information to any
other person for that purpose. GGG agrees to indemnify and hold the
Company harmless from any and all costs, liabilities and expenses
relating to any charges, complaints, suits, investigations, or other
proceedings brought or threatened against the Company in any Court or
by any regulatory agency arising from or relating to any violation by
GGG or its Representatives of these prohibitions.
10.5 GGG and Mr. Crisman also acknowledge that by virtue of his appointment
as Chief Executive Officer he will have certain obligations and
responsibilities under the United States Securities Laws, including,
particularly, certain reporting obligations under the provisions of
Section 16(a) of the Securities Exchange Act of 1934. It is expected
that GGG and Mr. Crisman will fully comply with these duties and
obligations.
10.6 The invalidity or unenforceability of any provision of this Agreement
shall not affect the validity or enforceability of any other
provisions of this Agreement which shall remain in full force and
effect.
<PAGE>
Grisanti, Galef & Goldress, Inc.
August 1, 1994
Page 9
11. PRIVILEGED INFORMATION. Notwithstanding the Company's agreements in this
letter to provide GGG with information, data, records, files and the like,
the Company shall not be required to deliver or make available any such
information to GGG or GGG's Representatives, if in the opinion of the
Company's counsel, any attorney-client or attorney work-product privilege
would be jeopardized or lost.
If the foregoing correctly sets forth the understanding and agreement between
you and the Company, please so indicate in the space provided for that purpose
below, whereupon this letter shall constitute a binding agreement as of the date
first above written.
APPLIED MAGNETICS CORPORATION
By:_____________________________
William R. Anderson
Chief Executive Officer
AGREED:
GRISANTI, GALEF & GOLDRESS, INC.
By _____________________________
Its Partner
-----------------------------
<PAGE>
Exhibit 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Fiscal Year Ended
September 30, 1994
-------------------------
<S> <C>
Net loss $ (52,670)
=========
Weighted average common shares outstanding 22,082
Dilutive common stock equivalents --
---------
Total weighted average common
shares outstanding 22,082
---------
Net loss per share $ (2.39)
=========
</TABLE>
<PAGE>
FORM 10-K
EXHIBIT 13
==========
ANNUAL REPORT
APPLIED MAGNETICS CORPORATION
[INSERT HERE EDGARIZED VERSION OF ANNUAL REPORT]
<PAGE>
1994 ANNUAL REPORT
[LOGO OF APPLIED MAGNETICS CORPORATION]
<PAGE>
COMPANY PROFILE
Founded in 1957, Applied Magnetics Corporation is a leading independent
supplier of magnetic recording heads for disk drive applications for the
worldwide data storage segment of the computer industry. Applied Magnetics is
among the largest independent suppliers of inductive thin-film and ferrite
disk heads. In addition, the Company has made significant progress in the
development of magnetoresistive (MR) thin-film disk heads. The Company's
customers include most major disk and tape drive manufacturers and several
computer systems companies.
Applied Magnetics operates in five countries and employs approximately 5,500
persons worldwide. The Company's stock is listed on the New York Stock
Exchange and trades under the symbol APM.
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
COMPARATIVE HIGHLIGHTS
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS)
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales................... $275,927 $335,898 $297,864 $385,053 $304,465
Income (Loss) from
continuing operations...... (52,670) (43,728) 315 (15,805) (8,218)
Loss from discontinued
operations................. -- -- (25,422) (2,479) (1,802)
Net loss.................... (52,670) (43,728) (25,107) (18,284) (10,020)
Net income (loss) per share:
Net income (loss) from
continuing operations.... $ (2.39) $ (2.17) $ 0.02 $ (0.97) $ (0.51)
Loss from discontinued
operations............... -- -- (1.53) (0.15) (0.11)
Net loss.................. $ (2.39) $ (2.17) $ (1.51) $ (1.12) $ (0.62)
Weighted average common and
dilutive equivalent shares
outstanding: 22,082 20,156 16,604 16,294 16,038
Order backlog............... $ 64,781 $ 77,126 $ 96,104 $113,794 $166,575
Year-end employment......... 5,531 7,259 7,407 9,183 10,868
BALANCE SHEET
Working capital............. $(36,443) $ 33,920 $ 17,823 $ 17,677 $ 71,778
Total assets................ 220,556 278,516 263,319 299,811 326,893
Total debt.................. 67,151 57,183 71,224 74,850 92,267
Shareholders' investment.... 98,433 151,095 124,399 150,078 166,833
</TABLE>
Note: Balance Sheet data for 1990 and 1991 have not been restated for
discontinued operations.
<PAGE>
LETTER TO SHAREHOLDERS
1994 was a very difficult and trying year for Applied Magnetics. We entered
the year after having announced a restructuring charge of approximately $50.0
million for the fiscal year ended September 30, 1993 and our expectations that
the Company would not return to profitability until the latter half of fiscal
1994.
Regrettably, the Company has not yet returned to profitability. For the year
ended September 30, 1994, sales were $275.9 million down 17.9% from the
preceding fiscal year's revenues of $335.9 million. Our net loss for 1994 was
$52.7 million or $2.39 per share as compared to a net gain of $5.2 million or
$0.26 per share, excluding restructuring charges, for the preceding year.
During 1994, the Company began to make volume production shipments for a
number of new disk drive programs some of which utilize thin-film nanoslider
(50%) disk head products. We also achieved some successes in obtaining
"design-in" positions on new programs and made important progress in the
design and development of new products. However, we also experienced
manufacturing difficulties and production yield problems and difficulties in
implementing a cost effective transition of some programs from the
developmental stage to the volume production level. These problems and
difficulties resulted in significant operating losses, negative cash flows and
a deteriorating financial condition.
In response to these developments your Board of Directors took a number of
actions. Qualified investment bankers were engaged to assist in exploring
various strategic alliance options to maximize shareholder value. Significant
cost reductions and cost controls were implemented including substantial
reductions in the employment force, salary reductions and curtailment of
capital expenditures. Substantial changes in the executive management team
have been made and, in August, an experienced crisis management firm was
retained to provide turnaround assistance and to assist in efforts designed to
maintain Applied Magnetics' viability and ultimately return the Company to
profitability.
Aggressive cash management practices have improved the Company's cash
position. Production yields have improved. In addition, the Company recently
concluded the sale of its Tape Head business unit to Seagate Technology, Inc.
for $21.5 million cash of which $6.5 million will be held in escrow pending
completion by the Company of certain performance requirements under its
contractual arrangements with the Tape Head unit. Most of these performance
requirements are scheduled for completion within twelve (12) months following
the sale of this business unit. An additional $1.0 million is being held in
escrow as a standard hold-back to cover potential claims of the buyer under
certain representations and warranties made by the Company in connection with
the sale.
Many of the steps were painful but necessary in order to assure the
Company's continued viability. Moreover, positive developments have resulted.
The Company believes that it has made substantial achievements in certain
technology areas, particularly in the implementation of integrated slider
fabrication and air bearing surface processes, and that it continues to be a
leading contender for the supply of MR disk heads.
We expect fiscal 1995 will be a rebuilding process for Applied Magnetics. We
will continue to manage cash and working capital resources, control costs,
work towards improvement of our manufacturing processes and production yields
and reduce cycle times throughout the product-development-to-volume-production
process.
Market shifts and product mix changes will continue. Overall, we continue to
expect that sales of ferrite disk heads will decline. However, on a case-by-
case basis there will be some demand for these products, as an alternative to
thin film disk heads, for selective disk drive applications. The Company will
continue to evaluate these opportunities on the basis of, among other things,
its capabilities, resources and profitability objectives.
Technological challenges relating to new generations of designs for thin-
film disk heads and the continued development of MR disk heads will continue
to arise. However, the Company believes that its expertise, capabilities and
resources and, in the case of MR, its substantial investment in this
technology, will enable it to respond to these developments.
2
<PAGE>
Despite these achievements and the other steps we have taken, the turnaround
is not yet complete. The Company's successful return to profitability depends
on its ability to show continuous improvement in its manufacturing processes
and sustained increases in thin film disk head production volumes. The
accomplishments that have been made over the last year reflect the confidence
and support of our customers and suppliers and the dedication and commitment
of many hard working employees under difficult circumstances. It is our belief
that these accomplishments, the continued dedication of loyal and competent
employees and the support of our shareholders, customers and suppliers will
continue to make Applied Magnetics an acknowledged leader in customer service,
quality, technology and cost.
Dedication and loyalty are qualities that have been demonstrated by many
Company employees and representatives, including William E. Terry who served
as a member of your Board of Directors for over twenty years before resigning
on December 28, 1994. He informed the Board that, as a retired director and
executive officer of Hewlett-Packard Co., he continues to have certain
obligations to his former employer which recently announced the formation of a
joint venture to pursue development of MR disk heads. Because Applied
Magnetics is also engaged in the development of these products, Mr. Terry felt
that it was appropriate for him to withdraw from the Company's Board. Mr.
Terry's resignation was understandable but nevertheless accepted with regret.
While he will be missed, we are grateful for the many years of loyal and
dedicated service, valuable counsel and guidance that he has provided to the
Company.
Craig D. Crisman
President and Chief Executive
Officer
3
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
1994
Net sales...................... $71,244 $69,834 $ 70,289 $ 64,560
Gross profit (loss)............ 3,747 3,342 (1,263) (6,689)
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
1993
Net sales...................... $74,556 $86,871 $ 97,351 $ 77,120
Gross profit................... 14,020 17,138 19,548 5,614
Net income (loss).............. 2,133 3,614 7,310 (56,785)(a)
Net income (loss) per share:
Primary...................... 0.13 0.18 0.33 (2.57)
Fully diluted................ 0.12 0.17 0.31 (2.57)
Weighted average common and
dilutive equivalent shares
outstanding:
Primary...................... 17,003 20,623 22,486 22,059
Fully diluted................ 17,472 21,488 23,365 22,059
</TABLE>
- - --------
(a) The results for the three months ended September 30, 1993 reflect charges
of $10.0 million taken by the Company in relation to anticipated costs of
further consolidating manufacturing resources and a non-cash charge
of$39.6 million to write-down manufacturing equipment to its estimated net
realizable value as a result of the unexpected rapid market transition
from ferrite to thin-film and from thin-film microslider ("70%") to the
nanoslider ("50%") form factor.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Over the three year period ended September 30, 1994, the Company has
experienced a decline in its ferrite disk head business that was more rapid
and more severe than had been expected and, correspondingly, a faster and more
expansive growth in demand for thin-film disk head products. During these
years the Company was also confronted with a sudden and unexpected change in
market demands from the thin-film microslider (70%) to nanoslider (50%) form
factor. It has made substantial efforts and significant investments in its
attempts to respond to these developments. During this period, the Company
also attempted to develop, refine and bring to production no less than six
different generations of new or advanced thin-film disk head designs and
related manufacturing and production processes. It has also made significant
commitments to the development of designs, processes and equipment for the
production of magnetoresistive ("MR") disk heads, having invested an aggregate
of approximately $33.6 million in this technology in fiscal years 1993 and
1994. Significant price erosion in the magnetic recording head segment of the
market also occurred during this three year period as did oversupply
conditions which resulted in major order cancellations and reschedules.
The Company has made important progress and valuable technological
improvements in a number of areas relating to its disk head products over this
period. It has achieved volume production shipments of nanoslider thin-film
disk heads. Most recently, it has achieved measurable success in being able to
offer fully etched air bearing ("FEAB") and other negative air pressure
bearing disk head designs that allow certain of its products to demonstrate
improved performance. Although the shipment levels of thin-film disk heads in
the first three quarters of fiscal 1994 were comparatively flat, increases in
these shipments were reflected in the fourth quarter of 1994 and the Company
expects continuing, modest revenue growth in these products in 1995.
Additionally, it has shipped prototype quantities of MR disk heads.
However, the Company experienced a number of difficulties over this period,
including manufacturing problems, production yield and quality issues and in
each of the fiscal years ended September 30, 1992, 1993 and 1994, the Company
sustained significant losses. The loss in fiscal 1992 resulted from charges of
$23.0 million for discontinued operations and $18.0 million for restructuring.
These charges were taken in connection with a comprehensive strategic
financial planning and operating plan announced in June, 1992. As part of the
plan, management decided to focus the Company's business solely on the design,
manufacture and sale of magnetic recording head products for disk and tape
drive applications. Management committed to focus capital expenditures on
thin-film disk head production and MR disk head technology.
The execution of the strategic plan, completed in 1993, included the sale of
non-core businesses, establishing strategic corporate relationships with
Hitachi Metals, Ltd. ("HML") and Conner Peripherals, Inc. ("Conner") and a
secondary public offering of common stock. The loss in fiscal 1993 resulted
from a restructuring charge of $49.6 million taken in the fourth quarter in
response to significant order cancellations and reschedules received in
September 1993 and related product and technology transitions, particularly
the unexpectedly rapid market transition from ferrite to thin-film and from
the thin-film microslider ("70%") to the nanoslider ("50%") form factor. The
restructuring charge included anticipated costs of further consolidating
manufacturing resources and a non-cash charge of $39.6 million to write-down
production assets (primarily related to ferrite and thin-film microslider
production) to their estimated net realizable values.
During fiscal 1994, the market demand for nanoslider products continued to
increase. The Company achieved some successes in obtaining "design in"
positions on a number of new programs and made important progress in the
design and production of new, advanced thin-film disk heads. However, in
connection with some of these programs, it also experienced manufacturing
difficulties and production yield problems which impacted the Company's
ability to quickly ramp production of thin-film disk heads to achieve desired
levels of volume shipments of these products in response to strong market
demand. These problems and difficulties resulted in operating losses and
negative cash flows for fiscal 1994.
5
<PAGE>
ANNUAL RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Thin-Film Disk Head Products
Net sales................................. $133,909 $139,553 $ 43,027
Percentage of total....................... 48.5% 41.6% 14.4%
Ferrite Disk Head Products
Net sales................................. 123,254 177,094 234,589
Percentage of total....................... 44.7% 52.7% 78.8%
Tape Head Products
Net sales................................. 18,764 19,251 20,248
Percentage of total....................... 6.8% 5.7% 6.8%
-------- -------- --------
Total Net Sales............................. $275,927 $335,898 $297,864
======== ======== ========
</TABLE>
NET SALES: Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of
thin-film disk head products increased as a percentage of total net sales from
41.6% of net sales 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 for nanoslider products. Net sales of thin-film disk head products for
the first three quarters of fiscal 1994 were $32.5 million, $30.9 million, and
$32.5 million, respectively. In the fourth quarter of fiscal 1994, thin-film
shipments increased to $38.0 million as a result of improved production
yields. Net sales of ferrite disk head products decreased 30.4% in fiscal 1994
from the preceding year as a result of the continued maturing of the ferrite-
based disk drive programs for which the Company is a supplier and the
increased availability of competitively priced thin-film disk heads. Net sales
of the Company's tape head products remained flat in fiscal 1994 as compared
to 1993. Tape head products were produced by the Company's Tape Head business
unit which was sold to Seagate Technology, Inc. ("Seagate") on December 10,
1994.
Net sales increased 12.8% from fiscal 1992 to 1993. Net sales of thin-film
disk head products increased 224.3% in fiscal 1993 as a result of increased
market acceptance of the Company's thin-film microslider products and the
Company's ability to deliver these products in volume. Net sales in ferrite
disk head products decreased 24.5% from fiscal 1992 to 1993 as a result of
maturing ferrite-based disk drive programs for which the Company is a
supplier. Net sales of tape head products declined modestly in fiscal 1993 as
compared to 1992.
GROSS PROFIT: The gross margin (loss) was (0.3%) in fiscal 1994, 16.8% in
fiscal 1993 and 19.0% in fiscal 1992. The gross margin decline in fiscal 1994
was primarily due to lower sales volume, lower average unit sales prices and
manufacturing difficulties. The gross margin decline from fiscal 1992 to 1993
reflected the order cancellations and reschedules which occurred in September
1993 which led to a sharp decline in fourth quarter sales and related charges
to inventory reserves. The gross margin for the nine months ended June 30,
1993, was 19.6%.
RESEARCH AND DEVELOPMENT: Research and development expenses, net of cost
offsets recognized from development funding received under various joint
development agreements, increased by $7.2 million from fiscal 1993 to 1994.
The Company continues to invest in advanced technology products and processes.
The joint development agreements include a License and Technology Development
Agreement with Hitachi Metals, Ltd. ("HML") (the "HML Agreement") for the
advancement of the Company's inductive thin-film technology and the
development and commercialization of MR disk head products and joint product
development agreements with certain major disk drive manufacturers for MR disk
head development. Under these agreements, the Company recognized $14.1 million
and $15.1 million in fiscal years 1994 and 1993, respectively, as offsets to
research and development expenses. The development effort under two of the
Company's agreements with disk drive companies was completed or substantially
completed by the end of fiscal 1994; development efforts are continuing under
one agreement and have been indefinitely suspended under another agreement.
The Company does not anticipate receiving any significant amount of
development funding from customers and strategic partners in fiscal 1995.
However, the Company may enter into additional
6
<PAGE>
collaborative development programs in the future. Research and development
expenses decreased by $6.6 million from fiscal 1992 to 1993.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses decreased in absolute dollars by 15.4% to $22.5 million
in fiscal 1994, while increasing slightly as a percentage of sales to 8.1% from
7.9%, reflecting the lower net sales in fiscal 1994. The decrease in dollar
amount was primarily as a result of staff and salary reductions and cost
controls initiated in response to lower sales volume. Selling, general and
administrative expenses increased in dollar amount by 4.2% to $26.6 million
from fiscal 1992 to 1993, primarily as a result of higher general and
administrative costs incurred to support the Company's growth in offshore
production operations.
SPECIAL CHARGES: There were no special charges taken in fiscal 1994. Results
for fiscal 1993 include a restructuring charge of $49.6 million which included
$10.0 million related to anticipated costs of further consolidating
manufacturing resources and $39.6 million related to the write-down of
manufacturing equipment to estimated net realizable values primarily as a
result of the unexpectedly rapid market transition from ferrite to thin-film
and from the thin-film microslider to the nanoslider form factor. Results for
fiscal 1992 include a charge for discontinued operations of $23.0 million and a
restructuring charge of $18.0 million related to costs associated with
continued consolidation and streamlining of the Company's continuing operations
and write-offs of certain equipment and tooling.
The Company also recognized a recovery of $7.7 million in 1992 related to bad
debt provisions taken in prior years. The primary source of the recovery was
proceeds from the sale of approximately 499,000 shares of Maxtor Corporation
common stock which were received as part of a debt settlement agreement with
Maxtor. Maxtor acquired the assets of MiniScribe Corporation, a former trade
debtor of the Company that filed for bankruptcy protection in 1990. In
addition, the Company recognized income from the licensing of technology to HML
in the amount of $10.0 million. See Note 6 of Notes to Consolidated Financial
Statements for further discussion on restructuring charges, provisions for
customer bankruptcies and related recoveries. See Note 2 of Notes to
Consolidated Financial Statements for segment of business information which
allocated non-recurring items between foreign and domestic operations, on the
basis of the location in which the original sale was recorded for customer
bankruptcy charges and in the respective locations in which restructuring costs
were incurred.
INTEREST INCOME AND EXPENSE: Interest income remained unchanged in fiscal
1994 from 1993, primarily due to similar average cash balances in both years.
Interest income increased $0.6 million in fiscal 1993 from fiscal 1992,
primarily as a result of investment of a portion of the proceeds from the
public offering of common stock in February 1993. Interest expense decreased
$1.4 million in fiscal 1994 from fiscal 1993 which included the write-off of
certain loan origination expenses related to repayment of debt from the
proceeds of the Company's equity offering in February, 1993. Interest expense
decreased $0.3 million in fiscal 1993 from 1992 primarily as a result of lower
average debt outstanding during fiscal 1993.
OTHER INCOME (EXPENSE): Other income (expense) primarily consisted of foreign
exchange translation and transaction gains and losses.
PROVISION FOR INCOME TAXES: For each of fiscal years 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.
7
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The manufacture of recording heads, particularly thin-film and MR disk
heads, is capital intensive. In fiscal 1994, revenues fell below 1993 volumes,
and the Company experienced manufacturing difficulties and production yield
problems. These factors combined to reduce the Company's cash balance from
$49.4 million at September 30, 1993, to $20.8 million at September 30, 1994.
In addition, as a result of significant operating losses and capital
expenditures during fiscal 1994, at September 30, 1994 the Company had a
negative working capital of $36.4 million as compared to a positive working
capital of $33.9 million at September 30, 1993.
As a result, the Company's ability to make major capital investments in
equipment, tooling and facilities to support improvements and investments in
its thin-film disk head products and technology has been constrained. The
Company has, however, successfully managed its working capital to make
selected capital expenditures during this period. In response to these
developments, and in connection with the management changes implemented in the
fourth quarter of fiscal 1994, the Company implemented cost and cash
expenditure controls that included staff reductions and aggressive cash
management practices.
The Company has also negotiated accelerated payment terms with some of its
key customers and is pursuing other financing alternatives, including new loan
and credit facilities, extensions or renewals of existing facilities, lease
financing opportunities and other cash and working capital sources.
During fiscal 1994, the Company experienced a net use of cash in the amount
of $12.9 million for operating activities which included receipt of $15.9
million of joint development funding received under the HML and other
development agreements, and decreases in accounts receivable and inventory of
$19.1 million and $10.9 million, respectively. During fiscal 1994, net cash
from financing activities was $9.0 million, primarily from utilization of the
Company's unsecured credit facility with a Malaysian bank. During this period,
the Company made capital expenditures of $31.5 million, primarily related to
increasing thin-film disk head production capacity and to development of MR
disk head technology. Additionally, the Company entered into $12.0 million of
operating leases with terms of up to three (3) years.
At September 30, 1994, total debt, including notes payable, was $67.2
million, an increase of $10.0 million from the balance outstanding at
September 30, 1993. The Company had fully drawn down its unsecured Malaysian
credit facility to $46.1 million, which has no stated maturity but is callable
on demand from a bank in Malaysia where the Company has substantial
manufacturing operations. The Company also had outstanding $10.0 million under
a revolving credit facility with a commercial bank. The credit facility
provides for up to $10.0 million in aggregate commitments, is supported by a
letter of credit issued for the account of HML, subject to reimbursement by
the Company and the interest rate under this credit facility was 5.4% for the
year ended September 30, 1994. This credit facility was amended to extend the
maturity to March 15, 1995. All other terms of the facility remain unchanged.
The Company also had outstanding a $10.0 million note with Conner, pursuant
to a Note Purchase Agreement, which is secured by accounts receivable arising
from sales to Conner and by certain capital equipment. The underlying loan,
which matures December 31, 1994, is convertible, at Conner's election at any
time, into shares of the Company's Common Stock at a conversion price of
$10.25 per share. Interest expense on the underlying loan was prepaid at
issuance, resulting in net proceeds to the Company of approximately $8.6
million. On December 21, 1994, in connection with the contemplated credit
agreement between the Company and The CIT Group/Business Credit, Inc. ("CIT"),
described below, the Company and Conner entered into an agreement to extend
the maturity date of the Note Purchase Agreement to the earlier of January 10,
1995, or the closing date of the CIT credit agreement. See Note 5 of Notes to
Consolidated Financial Statements.
In 1995, the Company plans approximately $49.0 million in capital
expenditures relating primarily to improving thin-film production processes,
increasing thin film production capacity and development of MR technologies.
During the next twelve months, the Company believes that additional sources of
capital will be required in order to fund the planned production ramp-up of
thin-film and MR disk heads and to maintain planned levels of research and
development and capital expenditure levels required for these disk head
technologies. The Company has implemented an operating and cash management
plan, the objective of which is to provide sufficient cash flows from
operations to meet its operating
8
<PAGE>
and capital expenditure requirements consistent with management's intentions
to return the Company to profitability by the end of fiscal 1995. Management
believes that it will be able to reduce its funding requirements for planned
but not committed capital expenditures if market demand for those products
does not materialize or declines. However, if the Company is unable to
increase sales and maintain production yields at acceptable levels in order to
permit it to execute customer orders for the new drive programs in a manner
consistent with management's intentions to return to profitability by the end
of fiscal 1995, there could be a significant adverse impact on liquidity,
which would require the Company to obtain additional capital from external
sources. There are no assurances that such sources of capital will be
available or that the terms associated with external funding sources will be
satisfactory to the Company. If the Company is unable to obtain sufficient
capital, it would need to curtail its capital, research and development and
working capital expenditures which would adversely affect the Company's future
years' operations and competitive position.
The Company's accounts receivable and inventory balances are heavily
concentrated with a small number of customers. Sales to Conner, Maxtor,
Quantum and IBM accounted for 53%, 13%, 10% and 10%, respectively, of the
Company's sales in 1994. If any large customer of the Company became unable to
pay its debts to the Company, liquidity would be adversely affected. Further,
while management has not been informed of any facts or circumstances
suggesting that the Malaysian bank intends, during fiscal 1995, to cease
making the Malaysian Credit Facility available, should the bank decide, for
any reason, to make all or any significant portion unavailable in fiscal 1995,
the Company would need to pursue alternative financing sources. Moreover, the
Company has reached informal agreements and understandings with some of its
customers to make payments on accelerated terms. Generally, these arrangements
may be canceled at any time and the customers could revert to payments in
accordance with usual and customary terms. Should one or more of these
customers determine that all or a significant portion of the Company's trade
accounts which are currently being paid on accelerated terms should revert to
standard terms, there could be a significant impact on liquidity unless the
Company has been able to obtain additional or supplementary sources of
capital. However, this liquidity risk may be partially ameliorated by the
credit available under the contemplated CIT Credit Facility under which
available loan proceeds could generally increase as the Company's trade
accounts receivable increase. See "Recent Developments".
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. Raw material purchases in yen are selectively hedged. The Malaysian
debt maturities are also hedged. The Company effects these hedges primarily
with forward contracts in order to reduce the effects of currency rate
fluctuations on its results of operations. However, such fluctuations can have
a significant effect on reported cash balances. The effect of foreign currency
exchange rate changes was a $1.2 million increase in fiscal 1994, and a $1.0
million decrease in fiscal 1993 in cash and equivalents held in foreign
currency.
RECENT DEVELOPMENTS
As a result of its deteriorating financial condition, operating losses and
declining revenues, during fiscal 1994 and continuing into 1995, the Company
took a number of actions intended to assure the Company's survivability, to
maximize shareholder value and to set the Company on a course leading to a
return to profitability. In June, 1994, the Company announced that it had
retained Lehman Brothers, Inc. as financial advisors to assist in exploring
strategic alliances and other opportunities to maximize shareholder value and,
in August, it announced that it had engaged Grisanti, Galef & Goldress, Inc.
("GG&G") a consulting firm with considerable crisis management and turn-around
experience, to assist the Company in its efforts to conserve and generate cash
and working capital, reduce costs, stem operating losses and return to
profitability. Further, Mr. Craig D. Crisman, a partner in GG&G, was appointed
as President and Chief Executive Officer and as a member of the Board of
Directors of the Company.
Substantial changes in the Company's executive management team have been
implemented and significant reductions in the Company's employment force have
taken place. In November, 1994, the Company announced and on December 10,
1994, it completed the sale of its Tape Head business unit to Seagate for
$21.5 million of which the Company has received $14.0 million. Of the
remaining funds, $1.0 million is held in escrow as a standard hold-back, for
one year, to indemnify the buyer for any claims relating to the
representations and warranties provided by the Company in connection with the
divestiture and $6.5 million is held in escrow pending the completion by the
Company of certain performance milestones, most of which are scheduled for
completion within twelve (12) months following
9
<PAGE>
the sale of this business unit under the Company's agreements to provide
certain tape-related goods and services to the buyer following the sale. The
Company believes that all or substantially all the funds being held in escrow
will eventually be distributed to it. However, if for any reason claims are
made by, and resolved in favor of, the buyer to the extent that all or a
significant portion of the escrowed funds are not distributed to the Company,
this could have an adverse impact on the Company's liquidity.
In November, 1994, the Company also announced that it had entered into a
commitment letter with theCIT Group/Business Credit, Inc. ("CIT") for an
asset-based credit facility of up to $35.0 million. The closing of the
transaction, which is subject to preparation and execution of definitive loan
documentation and certain other closing conditions, is expected to occur in
early January, 1995.
In November, 1994, the Company also announced that it entered into an
agreement to dismiss a securities class action suit brought against it and
several present and former officers in U.S. District Court for the Central
District of California. No findings or admissions of liability on the part of
the Company or the named defendants have been made and the Company will not
have to make any cash payments to resolve the suit. Moreover, it will not have
to undergo protracted and expensive litigation to defend the case. The
agreement is subject to the terms of a definitive written agreement which is
to be submitted to the court for preliminary approval. Under the terms of the
settlement, the Company will contribute shares of its common stock having an
aggregate value of $1.25 million.
The Company has also implemented consolidations of manufacturing operations
at several domestic and foreign facilities which have resulted in cost
reductions and the sale or expected sale of excess properties and assets.
Moreover, the Company has implemented aggressive cash management practices and
operating plans for fiscal 1995, that are being closely managed.
On the basis of these actions and other continuing management actions that
are being taken to reduce costs, limit and control capital expenditures,
achieve operational objectives and manage cash and working capital resources,
the Company's objective is to return to profitability by the end of fiscal
1995, provided there are no significant external adverse developments
including, but not limited to, market conditions similar to those experienced
in fiscal 1993, major consolidation of customers or competitors, significant
and unanticipated technological developments or other considerations.
CLOSING SALES PRICES OF APPLIED MAGNETICS CORPORATION STOCK
<TABLE>
<CAPTION>
1994 1993
----------- ------------
HIGH LOW HIGH LOW
----- ----- ------ -----
<S> <C> <C> <C> <C>
First quarter.............. 6 1/2 5 1/8 11 3/8 5 3/4
Second quarter............. 7 3/8 5 1/8 14 3/4 9 7/8
Third quarter.............. 6 5/8 4 1/4 11 3/4 8 1/2
Fourth quarter............. 5 3/8 4 11 1/4 6 7/8
</TABLE>
10
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30
----------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Net sales.................................. $ 275,927 $ 335,898 $ 297,864
Cost of sales.............................. 276,790 279,578 241,296
---------- ---------- ----------
Gross profit (loss)...................... (863) 56,320 56,568
---------- ---------- ----------
Research and development expenses.......... (24,682) (17,504) (24,100)
Selling, general and administrative
expenses.................................. (22,474) (26,554) (25,489)
Restructuring charge and provisions for
customer bankruptcies, net of recoveries.. -- (49,600) (10,290)
License fee income......................... -- -- 10,000
Interest income............................ 825 803 221
Interest expense........................... (4,216) (5,632) (5,957)
Other income (expense), net................ (160) 1,244 (69)
---------- ---------- ----------
Income (Loss) from continuing operations
before income taxes..................... (51,570) (40,923) 884
Provision for income taxes................. 1,100 2,805 569
---------- ---------- ----------
Income (Loss) from continuing operations... (52,670) (43,728) 315
Discontinued operations, net of related
income taxes:
Loss from operations..................... -- -- (2,422)
Loss on disposal......................... -- -- (23,000)
---------- ---------- ----------
Loss from discontinued operations.......... -- -- (25,422)
---------- ---------- ----------
Net loss................................... $ (52,670) $ (43,728) $ (25,107)
========== ========== ==========
Net income (loss) per share:
Income (Loss) from continuing operations. $ (2.39) $ (2.17) $ 0.02
Loss from discontinued operations........ -- -- (1.53)
---------- ---------- ----------
Net loss................................. $ (2.39) $ (2.17) $ (1.51)
========== ========== ==========
Weighted average common and dilutive
equivalent shares outstanding: 22,081,751 20,155,868 16,604,017
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
11
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30
------------------
1994 1993
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ($15,512 in 1994 and $27,110 in
1993)................................................... $ 20,761 $ 49,371
Accounts receivable, less allowances of $3,629 in 1994
and $3,242 in 1993...................................... 18,720 37,873
Inventories, at lower of cost (first-in, first-out) or
market.................................................. 31,520 42,426
Prepaid expenses and other............................... 6,879 12,698
-------- --------
77,880 142,368
-------- --------
Property, plant and equipment, at cost:
Land..................................................... 3,992 4,102
Buildings................................................ 77,745 69,807
Manufacturing equipment.................................. 163,068 147,517
Other equipment and leasehold improvements............... 30,743 28,690
Construction in progress................................. 13,814 21,316
-------- --------
289,362 271,432
Less--accumulated depreciation and amortization............ (165,046) (152,024)
-------- --------
124,316 119,408
-------- --------
Notes receivable, net...................................... 8,557 9,630
Other assets............................................... 9,803 7,110
-------- --------
$220,556 $278,516
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt........................ $ 20,412 $ 10,435
Bank notes payable....................................... 46,062 35,198
Accounts payable......................................... 22,332 28,287
Accrued payroll and benefits............................. 9,406 12,145
Other current liabilities................................ 16,111 22,383
-------- --------
114,323 108,448
-------- --------
Long-term debt, net........................................ 677 11,550
-------- --------
Other liabilities.......................................... 7,123 7,423
-------- --------
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 22,161,460 shares in 1994
and 22,153,742 shares in 1993........................... 2,216 2,215
Paid-in capital.......................................... 178,481 178,533
Retained earnings (deficit).............................. (80,779) (28,109)
-------- --------
99,918 152,639
Treasury stock, at cost (92,509 in 1994 and 79,328 shares
in 1993).................................................. (812) (736)
Unearned restricted stock compensation..................... (673) (808)
-------- --------
98,433 151,095
-------- --------
$220,556 $278,516
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated balance sheets.
12
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER
30
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss...................................... $ (52,670) $ (43,728) $ (25,107)
Adjustments to derive cash flows:
Depreciation and amortization............... 23,643 29,866 25,714
Provision for receivable allowances and
related costs.............................. 100 550 889
Estimated loss on disposal of discontinued
operations................................. -- -- 23,000
Restructuring charges....................... -- 49,600 18,000
Deferred tax provision (benefit)............ -- 1,384 (858)
Amortization of unearned restricted stock
compensation, net.......................... (145) 1,225 839
Other assets................................ (4,167) (1,103) (384)
Other liabilities........................... (300) (3,278) 667
Net assets of discontinued operations....... -- (501) (1,244)
Other, net.................................. 1,123 804 1,091
Working capital changes affecting cash flows
from operations:
Accounts receivable........................ 19,053 (11,562) 10,756
Other receivables.......................... 5,170 10,900 (16,070)
Inventories................................ 10,906 (5,827) 13,130
Prepaid expenses and other................. (305) (921) (2,189)
Accounts payable........................... (5,955) (3,007) (285)
Accrued payroll and benefits............... (2,739) 2,558 727
Deferred income............................ (3,383) 3,383 --
Other current liabilities.................. (3,271) (959) (14,663)
--------- --------- ---------
Net cash flows (used in) provided by
operating activities....................... (12,940) 29,384 34,013
--------- --------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.... (31,452) (56,652) (26,950)
Proceeds from sale of businesses and assets... 3,516 15,409 575
Notes receivable.............................. 2,038 1,433 --
Net investing activities of discontinued
operations................................... -- -- (2,861)
--------- --------- ---------
Net cash flows used in investing activities.. (25,898) (39,810) (29,236)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from debt............................ 143,231 108,452 113,470
Repayment of debt............................. (134,402) (127,127) (115,632)
Proceeds from sale of common stock............ -- 66,488 --
(Purchase) Issuance of treasury stock, net.... (76) (105) 66
Proceeds from stock options exercised,
including tax benefit........................ 229 1,580 321
Net financing activities of discontinued
operations................................... -- -- 1,224
--------- --------- ---------
Net cash flows provided by (used in)
financing activities....................... 8,982 49,288 (551)
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. 1,246 (964) 3,308
--------- --------- ---------
Net (decrease) increase in cash and
equivalents.................................. (28,610) 37,898 7,534
Cash and equivalents at beginning of period... 49,371 11,473 3,939
--------- --------- ---------
Cash and equivalents at end of period......... $ 20,761 $ 49,371 $ 11,473
========= ========= =========
Supplemental Cash Flow Data:
Interest paid, net of amounts capitalized..... $ 4,215 $ 4,158 $ 6,622
========= ========= =========
Income taxes paid............................. $ 1,025 $ 1,209 $ 1,843
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
13
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ----------------
UNEARNED
RETAINED CUMULATIVE RESTRICTED
NUMBER OF PAID-IN EARNINGS TRANSLATION NUMBER OF STOCK
SHARES AMOUNT CAPITAL (DEFICIT) ADJUSTMENT SHARES AMOUNT COMPENSATION
---------- ------ -------- --------- ----------- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1991..... 16,456,575 $1,646 $109,919 $ 40,726 $1,798 73,119 $(697) $(3,314)
Stock options
exercised............ 40,048 4 317 -- -- -- -- --
Purchase of treasury
stock, net........... -- -- -- -- -- (5,493) 66 --
Restricted stock
issuance, net........ (52,300) (6) (673) -- -- -- -- 679
Amortization of
unearned restricted
stock compensation... -- -- -- -- -- -- -- 839
Translation
adjustment........... -- -- -- -- (1,798) -- -- --
Net loss.............. -- -- -- (25,107) -- -- -- --
---------- ------ -------- -------- ------ ------ ----- -------
Balance,
September 30, 1992..... 16,444,323 1,644 109,563 15,619 -- 67,626 (631) (1,796)
Stock options
exercised............ 359,772 36 2,780 -- -- -- -- --
Stock offering........ 5,291,070 529 65,959 -- -- -- -- --
Purchase of treasury
stock, net........... -- -- -- -- -- 11,702 (105) --
Restricted stock
issuance, net........ 58,577 6 231 -- -- -- -- (237)
Amortization of
unearned restricted
stock compensation... -- -- -- -- -- -- -- 1,225
Net loss.............. -- -- -- (43,728) -- -- -- --
---------- ------ -------- -------- ------ ------ ----- -------
Balance,
September 30, 1993..... 22,153,742 2,215 178,533 (28,109) -- 79,328 (736) (808)
Stock options
exercised............ 26,087 3 226 -- -- -- -- --
Purchase of treasury
stock, net........... -- -- -- -- -- 13,181 (76) --
Restricted stock
issuance, net........ (18,369) (2) (278) -- -- -- -- 280
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- -- (145)
Net loss.............. -- -- -- (52,670) -- -- -- --
---------- ------ -------- -------- ------ ------ ----- -------
Balance,
September 30, 1994..... 22,161,460 $2,216 $178,481 $(80,779) $ -- 92,509 $(812) $ (673)
========== ====== ======== ======== ====== ====== ===== =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
14
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
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 1992 and 1993 accounts have been reclassified to conform
with 1994 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 1994, gains
of $0.8 million in 1993 and losses of $0.1 million in 1992 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, as are
repayments of the Company's Malaysian debt denominated in ringgitts.
Raw material purchases in yen are selectively hedged. The Malaysian debt
maturities are also hedged. The Company effects these hedges primarily with
forward contracts in order to reduce the effects of currency rate fluctuations
on its results of operations. However, such fluctuations can have a
significant effect on reported cash balances.
Gains and losses on these contracts are deferred and recognized as part of
the specific transaction hedged. The cash flow from such contracts is
classified in the same category as the transaction hedged in the Consolidated
Statements of Cash Flows. The market value of contracts held at September 30,
1994 was $38.1 million which approximated cost.
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:
<TABLE>
<S> <C>
Buildings................................ 15-50 Years
Manufacturing equipment.................. 2-5 Years
Other equipment.......................... 1-5 Years
Leasehold improvements................... Term of Lease
</TABLE>
Depreciation and amortization expense from continuing operations amounted to
$23.6 million, $29.9 million and $25.7 million in 1994, 1993 and 1992,
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 $8.7 million, $7.1 million and $5.1 million in 1994, 1993 and
1992, 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 and $0.9 million was capitalized in 1993 and 1992, respectively. No
interest was capitalized in 1994.
15
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CASH EQUIVALENTS: Cash equivalents consist primarily of money market
instruments maturing within 90 days that are carried at cost, which
approximates market.
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.
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.
RETAINED (DEFICIT) EARNINGS: Retained (deficit) earnings are also charged
for the amount paid in excess of par value for stock that is repurchased and
retired. Cumulative charges to retained deficit for stock dividends and
repurchases amounted to $38.3 million at September 30, 1994.
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 StandardsNo. 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.
Consolidated net sales of 10% or more were made to four customers in 1994
(53%, 13%, 10% and 10%), four customers in 1993 (28%, 21%, 18% and 17%), and
two customers in 1992 (34% and 27%). Two of these customers accounted for more
than 10% of consolidated net sales in 1994, 1993, and 1992, and two customers
accounted for more than 10% of consolidated net sales in 1994 and 1993. Net
sales to the Company's ten largest customers represented approximately 99%,
98% and 96% of net sales in 1994, 1993 and 1992, respectively. The Company's
trade receivables are unsecured and are primarily due from the above
customers.
16
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales are made by the United States operations to the following
geographic locations:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Europe......................................... $ 1,523 $ 11,533 $ 50,682
Asia........................................... 35,082 6,564 15,271
South America.................................. 67 -- 5,820
-------- -------- --------
$36,672 $18,097 $71,773
======== ======== ========
</TABLE>
Information regarding the Company's domestic and foreign operations is as
follows:
<TABLE>
<CAPTION>
UNITED STATES FOREIGN TOTAL
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
1994
Net sales.............................. $ 98,680 $177,247 $275,927
======== ======== ========
Loss from operations before interest,
general corporate expenses and income
taxes................................. $(27,242) $(18,748) $(45,990)
Interest income........................ 739 86 825
Interest expense....................... (1,841) (2,375) (4,216)
General corporate expenses............. (1,420) (609) (2,029)
Other income (expense)................. (1,690) 1,530 (160)
-------- -------- --------
Loss from operations before income
taxes................................. $(31,454) $(20,116) $(51,570)
======== ======== ========
Identifiable assets.................... $141,029 $ 79,527 $220,556
======== ======== ========
1993
Net sales.............................. $159,854 $176,044 $335,898
======== ======== ========
Loss from operations before interest,
general corporate expenses and income
taxes................................. $(31,445) $ (4,697) $(36,142)
Interest income........................ 759 44 803
Interest expense....................... (2,413) (3,219) (5,632)
General corporate expenses............. (597) (599) (1,196)
Other income (expense)................. (707) 1,951 1,244
-------- -------- --------
Loss from operations before income
taxes................................. $(34,403) $ (6,520) $(40,923)
======== ======== ========
Identifiable assets.................... $164,267 $114,249 $278,516
======== ======== ========
1992
Net sales.............................. $203,090 $ 94,774 $297,864
======== ======== ========
Income from continuing operations
before interest, general corporate
expenses and income taxes............. $ 5,326 $ 2,812 $ 8,138
Interest income........................ 191 30 221
Interest expense....................... (3,254) (2,703) (5,957)
General corporate expenses............. (847) (602) (1,449)
Other income (expense)................. (975) 906 (69)
-------- -------- --------
Income from continuing operations
before income taxes................... $ 441 $ 443 $ 884
======== ======== ========
Identifiable assets.................... $160,241 $103,078 $263,319
======== ======== ========
</TABLE>
17
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign operations primarily consist of operations in the Asia-Pacific
region.
See Note 6 regarding charges recorded in 1993 and 1992 associated with
restructuring of operations and customer bankruptcies. The segment of business
information presented above reflects an allocation of such restructuring
charges to the location in which restructuring costs were incurred and an
allocation of the customer bankruptcy charges on the basis of the location in
which the original sale was recorded. The amounts of these charges allocated
between foreign and domestic operations were $30.0 million and $19.6 million,
respectively, in 1993, and $11.3 million and$6.7 million, respectively, in
1992.
Results of operations for United States-based operations include substantial
research and development expenditures which are not allocated directly to
foreign operations. Foreign operations incur relatively minor amounts of
research and development expenditures, thereby causing a favorable comparison
with the operating results of United States-based operations.
License fee income and research and development cost offsets relating to the
license and technology development agreement with Hitachi Metals, Ltd. ("HML")
have been included as United States income. See Note 9.
3. INCOME TAXES
The provision for income taxes for the years ended September 30, were as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal income taxes
Current........................................... $ -- $ -- $ --
Deferred.......................................... -- 1,384 (858)
State income taxes
Current........................................... 211 226 44
Deferred.......................................... -- -- --
Foreign income taxes................................ 889 1,195 1,383
------ ------ ------
$1,100 $2,805 $ 569
====== ====== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at the United States Federal
income
tax rate..................................... $(18,050) $(13,913) $ 301
State income taxes, net of Federal income tax
benefit..................................... 137 149 135
Foreign income taxed at lower rate........... (550) (1,536) (4,029)
Temporary differences/net operating losses
not benefitted.............................. 19,563 18,116 4,143
Other, net................................... -- (11) 19
-------- -------- ------
$ 1,100 $ 2,805 $ 569
======== ======== ======
</TABLE>
18
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company elected early adoption of Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes", which requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. The adoption of SFAS 109 did not have a material effect on the
1992 consolidated financial statements. The provision (benefit) for deferred
income taxes results from temporary differences which consisted of 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, 1994
and 1993 were as follows:
<TABLE>
<CAPTION>
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred compensation................................. $ 1,032 $ 1,446
Inventory reserves.................................... 5,181 7,214
Restructuring & other reserves........................ 10,169 11,091
Net operating loss carryforwards...................... 24,204 19,630
Foreign tax & general business credit carryforwards... 4,763 4,051
Depreciation.......................................... (3,396) (2,340)
Other, net............................................ 852 (137)
-------- --------
Subtotal............................................ $ 42,805 $ 40,955
Valuation allowance................................... (42,805) (40,955)
-------- --------
Total net deferred tax asset (liability).............. $ -- $ --
======== ========
</TABLE>
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, 1994, the Company had total deferred tax liabilities of
$3.4 million and total deferred tax assets of $46.2 million. The Company
recorded a valuation allowance in the amount of $42.8 million against the
amount by which deferred tax assets exceed deferred tax liabilities. The
valuation reserve increased from $41.0 million as of September 30, 1993
primarily due to the current year temporary differences.
Consolidated retained deficit at September 30, 1994 included approximately
$56.9 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 $18.3 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 $64.1 million, of which $23.8 million, $24.0 million and $16.3
million will expire in 2006, 2008 and 2009, respectively.
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 plan while
the 1988 plan is limited to nonstatutory options only. At September 30, 1994,
the Company had reserved 744,288 shares of its $.10 par value Common Stock
(Common Stock) for future issuance under these plans. 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. At September 30, 1994, options for 1,553,502 shares
under these three plans were outstanding at prices from $5.00 to $13.63 per
share, of which options for 812,002 shares were exercisable. During 1994, 2,625
options were exercised and options for 672,959 shares were canceled or expired
under these plans.
19
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1994, no
options to purchase Common Stock were available for future issuance under
these two plans, and nonstatutory options of 113,781 shares were outstanding
at prices from $1.30 to $10.95 per share, 87,228 shares of which were
exercisable. During 1994, options for 23,162 shares were exercised at prices
from $1.30 to $2.04 per share, and options for 13,297 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, 1994, 80,307 shares were available for future
issuance under the 1989 plan and 76,798 shares remain subject to restrictions.
During 1994, 40,000 shares were issued, 58,369 shares were canceled and
restrictions were removed from 63,183 shares under the 1989 plan. Compensation
expense recorded under the three plans during 1994, 1993 and 1992 was
approximately$0.2 million, $1.2 million and $0.8 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 as 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, 1994,
options for 15,000 shares had been granted under this plan. The Company's 1988
Directors' Stock Option Plan was suspended in 1994.
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, 1994 or September 30, 1993. 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.
20
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
7% secured note purchase agreement, due January 10, 1995. $ 9,827 $ 9,165
Unsecured revolving credit agreement due March, 1995,
interest rate of 5.4% as of September 30, 1994........... 10,000 10,000
Unsecured Malaysian bank credit facility, interest rates
from 4.0% to 6.6% as of September 30, 1994............... 46,062 35,198
Mortgage payable, interest rate of 8.50% as of September
30, 1994................................................ 146 1,691
Capital leases, interest rates from 9.50% to 13.30%...... 1,116 1,129
------- -------
67,151 57,183
Less--current portion, including bank notes payable...... 66,474 45,633
------- -------
$ 677 $11,550
======= =======
</TABLE>
The aggregate principal payments of bank notes payable and long-term debt
for the years subsequent to September 30, 1994 are: 1995--$66.6 million,
1996--$0.4 million, 1997--$0.1 million, 1998--$0.1 million.
In December, 1992, the Company entered into a $10.0 million note purchase
agreement with Conner Peripherals, Inc. ("Conner"). The agreement is secured
by accounts receivable arising from purchase orders placed with the Company by
Conner and by certain capital equipment. The underlying loan, which matures in
December 1994, is convertible, at Conner's election at any time, into shares
of the Company's $.10 par value Common Stock at a conversion price of $10.25
per share. Interest expense was prepaid at issuance, resulting in net proceeds
of approximately $8.6 million. The loan does not contain financial covenants.
On December 21, 1994, in connection with the contemplated credit agreement
between the Company and The CIT Group/Business Credit, Inc. ("CIT"), described
herein, the Company and Conner entered into an agreement to extend the
maturity date of the Note Purchase Agreement to the earlier of January 10,
1995, or the closing date of the CIT credit agreement.
In October, 1992 the Company obtained an extension of the maturity date on a
$10.0 million revolving credit facility from a commercial bank. This credit
facility provides for up to $10.0 million in aggregate commitments and is
supported by a letter of credit issued for the account of HML, subject to
reimbursement by the Company. The interest rate for the amounts outstanding
under the credit facility was 5.4% for fiscal 1994. The credit facility was
amended to extend the maturity for one year. All amounts outstanding must be
repaid on March 15, 1995. The credit facility does not contain financial
covenants.
The Company's Malaysian subsidiary has unsecured loan facilities with a
Malaysian bank which has been in place since June, 1990, is callable on
demand, has no termination date, and is guaranteed by the Company. The export
credit/bankers' acceptance facility is denominated in Malaysian ringgitt, the
Onshore Foreign Currency Loan is denominated in U.S. dollars, and the combined
facilities provide up to approximately $47 million in financing which is
subject to the Company generating sufficient export volumes. The export credit
facility bears interest at a rate subsidized by the Malaysian government which
at September 30, 1994 was 4.0% and had an outstanding balance of approximately
$19.6 million. If not subsidized, the entire facility would bear interest at
market rates. The bankers' acceptance facility bears interest at current
market rates for bankers' acceptances, which at September 30, 1994, ranged
from 5.2% to 5.5%, and had an outstanding balance of approximately $17.9
million. The Onshore Foreign Currency Loan bears interest at Singapore
interbank offered rates ("SIBOR") plus 1.25%, which at September 30, 1994,
ranged from 5.8% to 6.6%, and had an outstanding balance of approximately $8.6
million. The Company anticipates continuing to qualify for
21
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the subsidy. At September 30, 1994, $46.1 million was outstanding and payable
during the first and second quarters of fiscal 1995 and the subsidiary had
sufficient export volumes to access the entire amount of the credit facility.
The Company's practice is to repay maturities with new borrowings under the
facility and anticipates that its ability to do so will continue throughout
fiscal 1995. The Company classifies the debt as current due to the short-term
nature of the individual maturities.
6. RESTRUCTURING CHARGE AND CUSTOMER RECEIVABLES
The Company recorded restructuring charges of $18.0 million and $49.6
million in 1992 and 1993, respectively. The 1992 charge related to costs
associated with continued consolidation and streamlining of the Company's
business group organization and operating locations, production
reorganization, training and severance which, collectively, totaled $8.0
million and the write-off of equipment and tooling of $10.0 million made
obsolete primarily as a result of the Company's decision to focus on its core
business of designing, manufacturing and marketing magnetic recording heads.
The restructuring activity related to the 1992 charge was substantially
completed by June 30, 1993. The 1993 charge included $10.0 million related to
anticipated costs of further consolidating manufacturing resources and $39.6
million related to the write-down of equipment to estimated net realizable
value as a result of various factors particularly the unexpectedly rapid
market transition from ferrite to thin-film and from the thin-film microslider
to the nanoslider form factor. The Company charged costs against these
reserves of $13.0 million, $43.4 million and $5.1 million in 1992, 1993, and
1994, respectively. During fiscal 1994, the Company transferred manufacturing
operations of its subsidiary, Applied Magnetics Singapore, Pte. ("AMS") to the
Company's Malaysian facility and made AMS its primary customer support center
for Southeast Asia. The Company also reduced its domestic workforce, in non-
production functions, by approximately 30%. The costs associated with these
actions were provided for in the fiscal 1993 restructuring charge. The balance
of the 1993 restructuring charge of $6.1 million is included as a component of
Other Current Liabilities in the accompanying Consolidated Balance Sheet at
September 30, 1994. This amount will be used to offset restructuring costs
expected to be incurred in fiscal 1995.
The Company provided allowances for doubtful collections and related
contingencies in the amounts of$15.5 million and $6.5 million in 1990 and
1991, respectively, and recorded recoveries related to such charges of$7.7
million in 1992. The charges related to the bankruptcy filings of several of
the Company's customers. The primary source of the 1992 recoveries related to
the proceeds from the sale of approximately 499,000 shares of Maxtor
Corporation ("Maxtor") common stock. The Maxtor shares were received as a part
of a debt settlement agreement with Maxtor, the successor to the assets of
MiniScribe Corporation, which filed for protection under the Bankruptcy Code
in 1990.
7. COMMITMENTS
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 five years with renewal options in certain instances.
22
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under capital and operating leases as of
September 30, 1994 are as follows:
<TABLE>
<CAPTION>
LEASES
-----------------
CAPITAL OPERATING
------- ---------
(IN THOUSANDS)
<S> <C> <C>
1995.................................................... $ 670 $ 7,104
1996.................................................... 529 6,921
1997.................................................... 115 4,672
1998.................................................... 0 1,783
1999.................................................... 0 21
------ -------
Total minimum payments.................................. 1,314 $20,501
=======
Less imputed interest................................... 199
------
Present value of payments under capital leases.......... $1,115
Less current portion.................................... 565
------
Long-term lease obligations............................. $ 550
======
</TABLE>
Manufacturing and other equipment at September 30, 1994 include assets under
capitalized leases of $1.9 million with related accumulated amortization of
$0.9 million.
Total rental expense, net of sublease rental income, for the years ended
September 30, 1994, 1993, and 1992, including items on a month-to-month basis,
was approximately $3.6 million, $4.0 million and $3.4 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.
Post employment benefits provided by the Company are not material.
8. DISCONTINUED OPERATIONS
In June, 1992, the Company developed plans to divest its non-core
businesses. Based on the estimated proceeds to be received upon completion of
these divestiture plans and estimated operating losses through the expected
disposition dates. The Company recorded a charge for discontinued operations
of $23.0 million in fiscal 1992. All sales were completed in fiscal 1993,
thereby completing the disposition of the Company's discontinued operations.
The Company incurred a loss from operations from the measurement date (June
30, 1992) to September 30, 1993 of $959,000 which was charged to the reserve.
During fiscal 1993, the Company completed the sale of its Magnetic Data,
Inc. ("MDI") and Brumko Magnetics ("Brumko") subsidiaries to Delta Bravo,
Inc., a privately owned company. The Company also sold its Optical Products
Division ("OPD") to Most, Inc. ("MOST"), a majority-owned subsidiary of
Nakamichi Corporation Japan. The sales proceeds for these transactions
consisted of cash of $3.9 million and three promissory notes and securities
which notes were recorded at their aggregate face value of $17.8 million. One
of the notes bears interest at a rate of 10.0%, with accrued interest and
principal due at maturity in 1996. The second note bears interest at a rate of
8.0%, with interest payable quarterly, and the principal due at maturity in
2000. The third note bears interest at a rate of 8.0%, with interest payable
quarterly, and the principal payable from 1995 to 1998. Sales proceeds
approximated the carrying value of the assets sold.
23
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In March, 1992, the Company sold the business and assets of its Test Systems
and Instrumentation Division ("Division") and, as consideration received the
buyer's promissory notes and common stock. The notes were secured by the
assets sold by the Company and were valued at their estimated realizable
value, $1.8 million, which approximated the carrying value of the assets sold.
In 1993, the buyer defaulted under the notes and in connection with the
exercise by the Company of its rights as a secured creditor, the Company
transferred certain assets of the Division to Cambrian Systems, Inc., an
unrelated third party, in exchange for certain royalty payment obligations.
In November, 1991 the Company completed the sale of its Nortronics Company,
Inc. ("Nortronics") subsidiary. Prior to the sale, Nortronics distributed to
the Company, in the form of a dividend, two facilities, with a book value of
$3.8 million. The Company classified the net book value of the facilities in
Other Assets on the accompanying Consolidated Balance Sheet as of September
30, 1993. The sale was for $1.9 million, consisting of cash and a$1.25 million
secured note receivable, bearing interest at 8.0%, and payable through 2001.
Sale proceeds approximated the Company's investment in Nortronics. In
September, 1994, one facility was sold for $2.5 million in cash and a$0.5
million secured note receivable, bearing interest at 8.0% and payable through
October, 1999; the other facility is currently leased under a long-term lease
to the current owners of Nortronics. The Company has classified the net book
value of the remaining facility in Other Assets on the accompanying
Consolidated Balance Sheet as of September 30, 1994.
Operating results of discontinued operations for the years ended September
30, 1993 and 1992 reflected net sales of $26.7 million and $69.2 million,
respectively. For fiscal year 1993, no income or loss was recognized from
discontinued operations. Operating results for discontinued operations for the
year ended September 30, 1992 reflected a loss of $2.4 million.
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. Under the HML Agreement, received. In addition, HML
agreed to pay the Company $25.0 million, net of $1.0 million in foreign
withholding taxes, and to supply 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 will have rights to manufacture products based on
this technology and will have 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, 1995.
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.
10. SUBSEQUENT EVENTS
SALE OF TAPE SUBSIDIARY: On November 8, 1994, the Company announced that it
had entered into an agreement to sell its tape head subsidiary to Seagate
Technology, Inc. ("Seagate") for $21.5 million cash, of which the Company has
received $14.0 million. Of the remaining funds, $1.0 million is held in escrow
as a standard hold-back, for one year,
24
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to indemnify the buyer for any claims relating to the representations and
warranties provided by the Company in connection with the divestiture and $6.5
million is held in escrow pending the completion by the Company of certain
performance milestones under the Company agreements to provide certain tape-
related goods and services to the buyer following the sale. This transaction
closed on December 10, 1994. This sale is consistent with the Company's
objective of focusing its efforts and resources on its core business, ferrite,
thin-film and MR disk head products.
NEW CREDIT FACILITY: On November 15, 1994, the Company announced that it had
entered into a commitment letter with The CIT Group/Business Credit, Inc.
("CIT"), under which the Company will be provided secured financing, in the
form of a revolving line of credit, for up to $35.0 million. The amount
available for borrowing at any time under the facility will be subject to
certain asset ratios and other considerations. The closing of the transaction
is expected to be completed by early January, 1995.
SETTLEMENT OF CLASS ACTION LAWSUIT: 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 present and former
Company officers in U.S. District Court for the Central District of
California. Settlement of the suit is subject to the terms of a definitive
agreement which is expected to be submitted to the court for preliminary
approval during December, 1994. The settlement is ultimately subject to final
court approval after notice to the class members of the terms. Under the terms
of this settlement, the Company will not be required to make any cash payments
but will contribute shares of its common stock having an aggregate value of
$1.25 million. 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. The accompanying
consolidated financial statements reflect a provision for the value of the
common stock which will be issued by the Company.
25
<PAGE>
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, 1994 and 1993, and the related consolidated statements of operations,
shareholders' investment and cash flows for each of the three years in the
period ended September 30, 1994. 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, 1994 and 1993, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1994, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 22, 1994
26
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
BOARD OF DIRECTORS CORPORATE HEADQUARTERS
Harold R. Frank Applied Magnetics Corporation
Chairman of the Board 75 Robin Hill Road
Goleta, California 93117
Craig D. Crisman Telephone (805) 683-5353
President, Chief Executive Officer Fax (805) 967-8227
and Chief Financial Officer
Herbert M. Dwight, Jr. COMPANIES AND LOCATIONS
President, Optical Coating Laboratory,
Inc. Applied Magnetics Corporation
Goleta, California
Dr. R.C. Mercure, Jr.
Professor and Director, Applied Magnetics Ireland, Ltd. Inc.
Engineering Management Program, Dublin, Ireland
University of Colorado at Boulder
Applied Magnetics Korea, Ltd.
Seoul, Korea
EXECUTIVE OFFICERS
Applied Magnetics (Singapore) Pte Ltd.
Harold R. Frank Singapore
Chairman of the Board
Applied Magnetics (Malaysia) Sdn. Bhd.
Craig D. Crisman Penang, Malaysia
President, Chief Executive Officer
and Chief Financial Officer
TRANSFER AGENT AND REGISTRAR
Raymond P. Le Blanc
Vice President, Secretary and General First Interstate Bank of California
Counsel Post Office Box 3667, Terminal Annex
Los Angeles, California 90051
Peter T. Altavilla
Corporate Controller
AUDITORS
John E. Ross
General Manager, Wafer Fabrication Arthur Andersen LLP
633 West Fifth Street
Los Angeles, California 90071
COMMON STOCK
Symbol: APM
Listed: New York Stock Exchange
<PAGE>
APPLIED MAGNETICS
CORPORATION
75 Robin Hill Road
Goleta, California 93117
(805) 683-5353
APPLIED MAGNETICS is a registered trademark of Applied Magnetics
Corporation in the United States and other countries.
<PAGE>
FORM 10-K
EXHIBIT 21
==========
SUBSIDIARIES OF THE REGISTRANT
Applied Magnetics Ireland, Ltd., Inc.
Applied Magnetics Korea, Ltd.
Applied Magnetics (Singapore) Pte. Ltd.
Applied Magnetics (Malaysia) Sdn. Bhd.
<PAGE>
FORM 10-K
EXHIBIT 23
==========
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in or incorporated by reference in this Form 10-K, into
the Company's previously filed Registration Statements on Form S-8 (File Nos.
2-63785, 2-86527, 33-6873, 33-17944, 33-22040, 33-24509, 33-28600 and 33-58200).
ARTHUR ANDERSEN LLP
Los Angeles, California
December 27, 1994
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