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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, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ______________
Commission File No. 1-6635
APPLIED MAGNETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1950506
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
75 ROBIN HILL ROAD, GOLETA, 93117
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 683-5353
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, $.10 par value REGISTERED
New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
(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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OR 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 $320,730,894 AS OF DECEMBER 1, 1995.
COMMON STOCK (PAR VALUE $.10) 22,295,878
* 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 PROXY STATEMENT FOR THE REGISTRANT'S 1996 ANNUAL MEETING OF
STOCKHOLDERS, TO BE FILED PURSUANT TO REGULATION 14A WITHIN 120 DAYS FOLLOWING
THE REGISTRANT'S FISCAL YEAR ENDED SEPTEMBER 30, 1995, ARE INCORPORATED BY
REFERENCE INTO PART III ON THIS FORM 10-K.
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PART I
ITEM 1. BUSINESS
GENERAL
Applied Magnetics Corporation (the "Company" or "Applied Magnetics") was
incorporated in California in 1957 and was reincorporated in Delaware in 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 ("ferrite" or "MIG")
disk head products.
Prior to December 10, 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") for $21.5 million, pursuant to a Stock Purchase
Agreement (the "Seagate Agreement"). The Company received $14.0 million at the
closing date of the transaction, and during fiscal 1995, received $5.9 million
of $6.5 million held in escrow until the Company completed certain performance
obligations to supply tape related products and services to Seagate. An
additional $1.0 million was 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. It is anticipated that the majority of the
remaining obligations will be completed by the end of the first quarter of
fiscal 1996. 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.
Performance improvements in microprocessors, continuing proliferation of
powerful operating systems and applications software, image intensive
applications, increased home personal computer use, network connections, on-
line services and the Internet have resulted in increasing demand for greater
data storage capacity and performance in smaller form factor disk drives. In
addition, the 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 believes that, overall, the market for ferrite disk heads peaked
in 1995. However, advances in ferrite disk head technology may permit storage
capacities per disk to approach those achieved with thin film disk heads. As a
result, for certain disk drive applications, the Company's advanced ferrite
disk heads have offered the required performance while providing cost
advantages over thin film disk heads.
During fiscal 1995, market conditions in the disk drive industry served by
the Company were characterized by continued reduction of product life cycles
and intense competition. The industry product life cycle is currently running
approximately 12 to 18 months. Demand for hard disk drives exceeded prior
forecasts for a substantial portion of the year. Most drive manufacturers
experienced some shortages of key components including recording heads. The
Company was well positioned and qualified on several key volume programs that
enabled the Company to experience rapid growth in its thin film unit
shipments.
During fiscal 1994, due to lower sales volume and significant production and
quality problems, the Company experienced 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
took a number of actions
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to reverse these difficulties, improve its cash and working capital position,
reduce operating losses and return to profitability. In August 1994, the
Company engaged the consulting firm of Grisanti, Galef & Goldress, Inc.
("GG&G") to provide crisis management assistance to the Company. Mr. Craig D.
Crisman, a partner in GG&G, was appointed as the Company's Chief Executive
Officer. During fiscal 1995, the Company implemented a significant cost
reduction program that included reduction in employment, improved management
of capital expenditures, consolidation of manufacturing activities and sales
of excess properties and assets. The implementation of aggressive cash
management practices along with the Company's sale of its Tape Head business
unit to Seagate in December 1994, have, together with other cost reductions,
improved the Company's cash and working capital resources. The engagement
between the Company and GG&G was successfully completed in July 1995. Mr.
Crisman left his position with GG&G and signed a long term employment
agreement with the Company as Chairman and Chief Executive Officer.
INDUSTRY OVERVIEW
Rigid disk drives (hard disk drives) are the predominant high capacity data
storage device used in all classes of computers. Rigid disk drives typically
include one to ten disks onto and from which data is recorded and retrieved by
two to twenty recording heads. These heads are positioned by an actuator
assembly to fly within three micro inches, or less, on one or both sides of
each disk. The head (or "slider") attached to a suspension assembly comprises
a head gimbal assembly ("HGA"). Multiple HGAs, assembled together with other
components, comprise an actuator, or head stack assembly ("HSA"). The Company
supplies both HGAs and HSAs to disk drive manufacturers.
Disk drive manufacturers are constantly developing higher capacity products.
Head suppliers, such as the Company, work with the drive manufacturers to
develop customized HGAs and HSAs for each new drive program. Head suppliers
seek to have their products "designed-in" for a particular drive program, thus
becoming a primary supplier. Achieving a "primary supplier" status usually
offers a competitive advantage, manifested as higher internal yields, compared
to other head suppliers.
The Company increased the number of "primary supplier" programs during
fiscal 1995, compared to fiscal 1994. The disk head industry continues to be
highly competitive. Achieving mature, mass production status on newer
technology products as a primary supplier will be required in order for the
Company to continue the revenue and shipment volume growth rate experienced in
fiscal 1995.
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 gross margin declines.
TECHNOLOGY
Magnetic disk heads are electromechanical devices that record ("write") data
onto and retrieve ("read") data from the magnetic layers of digital data
storage disks. 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 disk. Reversing the direction of the current reverses the
polarity of the next magnetized segment of the disk as it passes by the gap of
the head, thus allowing data to be encoded as a pattern of reversing
polarities. To read data, the previously encoded disk is again 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 currents in the coil which are sensed and decoded by the drive
circuitry.
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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 data densities require that the head fly both closer to
the disk and at more uniform flying heights across the disk or, alternatively,
that the head maintain a light contact with the disk at a point near the
head's gap, with the disk sliding over this portion of the head (known as
contact recording). This is influenced by the size and mass of the head and by
its hydrodynamic air bearing 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 ferrite
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. 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 expects that on an overall basis, demand for ferrite devices will
continue to decline.
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 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.
These processes permit a greater degree of precision and repeatability,
greater miniaturization and lower mass than can easily be achieved with
ferrite production methods in which the electrical coil is usually 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 typically designed to "read" and "write" data using a single
inductive element, an MR disk head uses an inductive element to "write" data
onto the disk and a separate MR element to "read" data from the disk. The MR
read element incorporates a magnetoresistor whose electrical resistance
changes in the presence of a magnetic field. As the encoded disk 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 disk 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 disks in which linear velocities are inherently lower. MR disk
heads also allow for optimization of read and write gaps independently.
Typical inductive heads incorporate a single gap for both read and write
functions.
PRODUCTS
Thin film and MR disk heads. During fiscal 1995, the Company became
qualified and began to make volume production shipments on a number of new
disk drive programs which require nanoslider thin film products. The Company's
thin film products are produced in volume for 3.5-inch disk drives to achieve
areal densities of up to approximately 425 megabits of data per square inch of
disk surface. The thin film 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 next generation personal computers and
workstations, and represent drive applications with recording densities of up
to 850 megabits per square inch.
Development and commercialization of MR disk heads continued to be a major
focus for the Company in fiscal 1995. During fiscal 1995, the Company
continued to ship prototype and qualification samples of MR disk
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head products to selected customers for drive applications with recording
densities of up to 800 megabits per square inch and, during fiscal 1996, MR
drive applications are expected to require areal densities of more than 1,000
megabits per square inch. The Company expects to ship production quantities of
MR disk head products by the end of fiscal 1996. This will require the
Company's engineering and production resources to meet their targeted design
and process development plan, achieve "design-in" with the customer drives and
execute the production ramp.
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. Additional thin
film advances have been made in developing processes, known as "track
trimming", for defining thin film magnetic core elements that are both
narrower and of more equal width which, in turn, enhance the capability of the
head to write narrower and more densely packed tracks of data onto the disk
surface. 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 improve production yields and enhance the hydrodynamic
characteristics of the disk heads, allowing the head to fly at lower, more
uniform heights, or in light contact with the disk, thus contributing to
higher areal densities, and thereby improving the reliability of the disk
head. During fiscal 1996, the majority of the Company's customer programs will
include these design improvements. As a result, the Company's continued
shipment and revenue growth and achievement of satisfactory production yields
to increase profitability depend on the Company's ability to achieve "design-
in" status with its customers utilizing these advanced thin film heads.
Ferrite disk heads. The Company offers ferrite MIG HGAs and HSAs in the
nanoslider form factor. The use of ferrite heads in high performance disk
drives presents technological challenges. However, advances in MIG technology
have resulted in situations in which certain ferrite disk heads were more
price 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 will continue 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. The Company sold its Tape Head business unit to Seagate on
December 10, 1994. Pursuant to certain ongoing contractual arrangements, the
Company continues to sell Seagate various tape-related goods and services.
For discussion of net sales and percentage of sales by product, see "Annual
Results of Operations" under Item 7.
RESEARCH AND DEVELOPMENT
The Company commits substantial resources to technology, product and process
development in order to meet its customers' continuing demands for higher
performance disk heads for successive disk drive product families. The Company
has, on occasion, augmented its development programs with the financial and/or
technical resources of certain strategic partners as, for example, under a
License and Technology Agreement with Hitachi Metals, Ltd. ("HML") dated
December 1992 (the "HML Agreement"). Primarily, however, the Company has
engaged in its own proprietary technology development, utilizing its own
resources.
Technology development activities relate to creating technological advances
required for new product development and the advancement of production
processes required in new product manufacturing (e.g., development of smaller
form factor products, advanced coil and core structures, constant flying
height and contact recording 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. Development activities relating to advanced disk head products
are predominantly performed at the Company's
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Goleta, California location. In addition, the Company also has engineering and
technical staff located at various production operations and locations to
provide manufacturing process and integration support.
The Company's future success in achieving "design-in" positions and/or
program qualifications depends heavily on the successful and timely completion
of its product and process development efforts. While the Company is devoting
substantial resources to these efforts, there can be no assurance that the
Company will realize satisfactory product and process development results. To
the extent that the Company is unable to do so, there could be an adverse
effect on the Company's operating results.
The Company's technology development is primarily devoted to
commercialization of advanced inductive thin film disk head technology and of
MR disk head technology. Research and development expenses were $33.7 million,
$38.8 million and $32.6 million for fiscal years 1995, 1994 and 1993,
respectively, before cost offsets of $14.1 million in fiscal 1994 and $15.1
million in fiscal 1993 related to funding pursuant to the HML Agreement and
other development agreements with certain customers. No further payments were
received during fiscal 1995. The Company does not currently have any ongoing
technology development agreements which provide for it to receive any
significant payments during fiscal 1996, for research and development efforts
relating to new or advanced technology disk head products. While it may
continue to consider and pursue opportunities relating to such arrangements,
the Company believes that its existing cash resources and expected operating
results will provide sufficient financial resources, on an independent basis
to fund its ongoing research and development activities in a manner consistent
with its current operating plan.
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.
MANUFACTURING
Wafer/Slider Fabrication--Thin Film and MR Products
MR and thin film transducers are manufactured utilizing a semiconductor-like
wafer fabrication process. This process involves photolithography, vacuum
deposition, vacuum etching, plasma etching, wet chemical etching and precision
electroplating technologies. The Company's two wafer fabrication facilities
are based on 150mm (approximately six inch) diameter round substrates. In the
nanoslider form factor, approximately 8400 individual (unyielded) sliders can
be produced from one six inch wafer. During fiscal 1995, the Company closed
its three inch substrate disk head wafer fabrication operations in favor of
the higher efficiency six inch production lines. The wafer fabrication
facilities are located in two separate buildings in Goleta, California.
Completed wafers are sliced into row bars containing up to 29 transducer
sets and after testing are shipped to Penang, Malaysia for further processing.
Rows are converted into individual sliders in the Company's slider
fabrication facility in Penang, Malaysia. This process involves high precision
grinding and lapping as well as photolithography and ion milling technologies
utilized to define the critical air bearing geometries which allow the head
("slider") to fly within a few micro inches, or less, of the disk surface.
All of the aforementioned processes can be characterized as high technology
and their intrinsic yields directly define final production output and Company
revenue. Typically, new (higher performance) head designs place increasing
demands on process technology. The Company's ability to execute customer
orders hinges on its ability to maintain statistical control and ramp these
new products in light of constantly increasing technical demands from its
customer base.
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The Company believes that demand for thin film heads will continue to
increase. To meet this demand, it is critical that wafer and slider output
increase. This output increase is dependent on the Company's ability to
generate the required capital funding. If the Company is unable to obtain the
required funds in sufficient amounts and at the required times, its future
revenues could be adversely affected. See "Liquidity and Capital Resources"
under Item 7.
The Company believes that the demand for heads which fly in light contact
with the disk, and heads that are track trimmed (heads in which the elements
that define the written track width on the disk are trimmed to equal width),
will be required for most new inductive thin film products during fiscal 1996.
Developing and implementing these new processes into volume production is
critical to maintaining revenue growth.
Assembly and Test--Ferrite, Thin Film and MR Products
Ferrite sliders are purchased from outside suppliers and therefore require
only final assembly. These heads represent older technology than thin film or
MR heads and typically are used in lower performance drives in which cost is a
major factor.
The Company assembles all of its volume production of HGAs and HSAs outside
of the United States. Principal manufacturing sites are in Penang, Malaysia,
Chung-Ju, South Korea and Dublin, Ireland.
The Company also maintains contractual relationships with unaffiliated
parties that provide manufacturing space and contract labor in Malaysia and
the People's Republic of China ("PRC"). The Company plans on continuing such
relationships in the future.
During fiscal 1995, due principally to growth and intense local competition
for operators, the Company experienced a shortage of labor in both South Korea
and Malaysia. To expand the available supply of operators, the Company has
started a manufacturing operation in the PRC. This location was chosen due to
the Company's previous experience with subcontractors in the PRC and the
area's abundance of direct labor resources. The Company believes that with the
addition of the PRC facility, the assembly labor shortage issue should no
longer be a significant factor.
The Company's foreign operations can be subject to risks associated with
currency exchange fluctuations, government approvals, political instability,
currency restrictions, trade restrictions, labor unrest, changes in tariff,
and the like. Experience indicates that these factors have not produced
significant liability, but there can be no assurances that these factors will
not impact the Company's future operations.
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 and other materials used
in the manufacture of thin film disk heads and ferrite sliders. The Company
purchases suspension assemblies from Hutchinson Technology Inc.
("Hutchinson"), Magnecomp and various other manufacturers. The Company also
manufactures suspension assemblies internally. 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's
operations.
CUSTOMERS AND MARKETING
The Company's customers include, among others, Conner Peripherals Inc.
("Conner"), Maxtor Corporation ("Maxtor"), Quantum Corporation ("Quantum"),
and Western Digital Corporation. Conner and Maxtor represented approximately
41% and 19%, respectively, of net sales during the year ended September 30,
1995.
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
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addition, the customer base may become more concentrated 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. 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. Such occurrences, however, could potentially
be offset by the entry of new manufacturers in the disk drive market. See
"Competition" for further discussion.
Seagate, a major disk drive manufacturer, and Conner have recently announced
an intent to merge their companies. Seagate has a large vertical capability in
recording heads and its long term goal will likely be to supply all head
requirements for Conner products. Conner was the Company's largest customer in
fiscal 1995. The Company anticipates that revenues from Conner will decline
materially during fiscal 1996. The Company believes that it is in a position
to qualify on a sufficient number of new programs to allow an orderly
transition in its customer base. However, if the Company experiences product
"design-in" difficulties, this could have an adverse effect on the Company's
future revenues and operations.
During fiscal 1995, Maxtor experienced continuing operating losses and
announced significant actions to reorganize and consolidate its operations. In
November 1995, Maxtor announced it had approved an offer by Hyundai
Electronics America ("HEA") to acquire all of its outstanding shares. The
acquisition is subject to the approval of both the U.S. and Korean governments
and satisfaction of other normal and customary closing conditions. Maxtor has
stated that it believes the acquisition will be completed by early 1996. The
Company believes the steps Maxtor is taking are positive, but there can be no
assurances that Maxtor can close an agreement with HEA and such failure could
impact Maxtor's head consumption plans in 1996.
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 disk drives. Through
its product planning and marketing efforts, the Company seeks to identify
those disk drive programs it believes will achieve high volume in order to
concentrate 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. Historically, the Company
sold its products in Japan through its Japanese subsidiary which closed during
fiscal 1993. As of December 1992, in accordance with the HML Agreement between
it and HML, the Company granted certain exclusive marketing rights in Japan to
HML.
The Company has been successful in achieving "design-in" positions with
certain customers on certain disk drive programs. 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.
COMPETITION
The Company competes with other independent recording head suppliers, as
well as disk drive companies and systems companies that produce magnetic
recording heads used in their own products. Some systems companies that
manufacture disk drives internally, such as IBM, Fujitsu and NEC are
vertically integrated and
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produce thin film and/or MR heads for their own use. Seagate makes its thin
film disk head products available on the market to competing drive
manufacturers. All of these companies have significantly greater financial,
technical and marketing resources than the Company.
In fiscal 1994, Quantum, a major disk drive manufacturer and a significant
customer of the Company, acquired Digital Equipment Corporation's ("DEC")
inductive thin film head operations as well as controlling interest in Rocky
Mountain Magnetics, a joint venture between Storage Technology and DEC. Rocky
Mountain Magnetics is primarily engaged in the development and production of
MR disk heads. While Quantum plans to ramp up its internal head manufacturing
capacity, the Company believes that Quantum will continue to purchase a
substantial portion of its head requirements from independent recording head
suppliers.
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
as alternative sources of supply or in some cases as primary sources of supply
for discrete disk head solutions.
Read-Rite Corporation has had substantially greater sales of thin film disk
head products than the Company and is presently its largest 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.
In recent years, several large Japanese companies, each with considerably
more resources than the Company, have entered the independent head market with
considerable success. Alps Electric, Yamaha and TDK continue to aggressively
develop and market ferrite, thin film and/or MR disk heads.
The principal competitive factors in the markets the Company addresses are
price, product performance, quality, product availability, responsiveness to
customers and technological sophistication. 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
obtain new orders depends on its ability to anticipate technological changes,
develop products to meet individualized customer requirements and on timely
delivery of 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 market share by one of the Company's customers could
result in the loss of business from such customer. This loss could have a
material, adverse effect on the Company's future operations.
BACKLOG
The Company's backlog of open orders scheduled for delivery within six
months at September 30, 1995 was approximately $107.5 million compared to
approximately $64.8 million at September 30, 1994. Backlog increased year-to-
year as a result of increased customer demand for thin film disk head
products. Backlog includes only firm orders for which the customers have
released a specific purchase order and specified a delivery schedule.
The Company receives purchase orders from its customers which express the
customer's intentions to purchase, at stated unit prices, certain quantities
of products during a specified period, generally for one to two quarters.
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.
Conversely, during periods of soft demand the Company has experienced
cancellation and rescheduling of orders, reductions in quantities and
repricing as customer requirements change.
8
<PAGE>
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 claimed 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.
In previous years, particularly those in which the disk drive industry was
experiencing 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 which could adversely offset the Company's
revenues and profitability. Further, as a result of the foregoing factors, the
Company's backlog may not be indicative of product shipments in any future
period.
EMPLOYEES
As of September 30, 1995, the Company had approximately 5,500 employees of
whom approximately 800 are located in California, approximately 4,500 are
located in Asia and approximately 200 are located in Ireland. 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 past years, been affected by
labor disruptions and slow downs. The Company's production facility in
Malaysia is currently facing potential labor shortage issues, as many disk
drive and component manufacturers expand their production facilities in
Malaysia and compete for the supply of labor in that country. To protect
against potential future labor shortages, the Company opened a manufacturing
facility in Beijing, China in fiscal 1995.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing processes, product
designs, 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 be issued 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 than on patent rights.
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, nor any patents filed by the Company after July 1,
1991. While the Company has had discussions with IBM regarding extensions of
the existing licenses, there can be no guarantee that such an extension will
be successfully negotiated.
Under an agreement (the "Hutchinson Agreement") with Hutchinson, 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 have 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. 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/or to suspend the manufacture of the products
utilizing the patented invention.
9
<PAGE>
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, 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. Omega Chemical was employed by the Company for purposes
of waste chemical disposal from 1987 to 1990 and was subsequently cited for
stockpiling waste chemicals and for allowing leaking containers to contaminate
their site. Omega has declared bankruptcy and a cleanup order was issued to
the Company along with 56 other past customers of Omega. The Company's share
of the cleanup cost during 1995 was $16,000 and it is expected that further
cleanup activities involving a non-material cost to the Company will continue
for an additional one to two years.
On July 13, 1994 the California Regional Water Quality Control Board
("CRWQCB") issued a cleanup and abatement order to the Company concerning
property previously used and owned by the Company on Ward Drive in Goleta,
California. As a result of the order, the Company is required to carry out a
further environmental study seeking to determine the amount of contamination
related to chemicals used by the Company at this site. This study involves
taking a number of soil samples and sinking several test wells to test the
ground water and monitor the water's condition over a twelve month period. At
this time, the soil sample work is complete and the cost to the Company for
this study was $28,000. The study showed no metal or volatile organic compound
("VOC") contamination in the soil, but low levels of VOC contamination in the
ground water. Contamination levels revealed were higher than tests completed
in 1992. Since the Company left the premises in 1983, this implies the
contamination is from a source other than the Company. At the completion of
the study the CRWQCB will assess the need, if any, for either further
investigation or cleanup and may issue another order at that time.
SEASONALITY
Management believes that the Company's revenues are cyclical rather than
seasonal. See "Industry Overview" for further discussion.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as to the name, age, and
office(s) held by each executive officer of the Company as of December 15,
1995:
<TABLE>
<CAPTION>
NAME AGE OFFICE HELD
---- --- -----------
<S> <C> <C>
Craig D. Crisman 54 Chairman of the Board, Chief Executive
Officer, President, Chief Financial Officer,
and Secretary
John Ross 50 General Manager
Peter T. Altavilla 42 Corporate Controller
</TABLE>
10
<PAGE>
Craig Crisman became an employee of the Company on August 1, 1995, and was
elected Chairman of the Board and Secretary on November 3, 1995. Prior to that
time he was a partner of the firm of GG&G. GG&G was engaged by the Company on
August 1, 1994, to provide crisis management and turnaround services to the
Company. Mr. Crisman was elected Chief Executive Officer on August 1, 1994,
and, subsequently, was elected Director, President and Chief Financial
Officer. The turnaround engagement was determined to have been successfully
completed by July 27, 1995. During the five years preceding his appointment as
Chairman, Chief Executive Officer and as a Director of the Company, Mr.
Crisman was a partner of GG&G. In this capacity he has been engaged as a
crisis management consultant in business turnaround assignments involving a
number of different enterprises in various industries.
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.
Peter T. Altavilla has been employed by the Company for approximately eight
years. He served as Assistant Controller until August 1, 1994, when he was
elected to his present position.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal properties at
September 30, 1995 is set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
-------- ---- ------------- ------- ---------
<S> <C> <C> <C> <C>
Goleta (Santa Barbara) Headquarters, Marketing,
California office, plant manufacturing,
and warehouse research and engineering 217,000 Owned
San Jose, California Office Customer support 1,300 Leased
Penang, Malaysia Office, plant
and warehouse Manufacturing 208,000 Owned*
Chunchon and Office, plant
Chung Ju, Korea and warehouse Manufacturing 413,700 Owned
Seoul, Korea Office, plant
and warehouse Manufacturing 31,400 Leased
Republic of Singapore Office Customer support 6,000 Leased
Beijing, China Office, plant
and warehouse Manufacturing 17,000 Leased
Dublin, Ireland Office, plant
and warehouse Manufacturing 40,000 Owned
</TABLE>
- --------
*Property held as collateral for Malaysian revolving credit facility. See
Note 5 to the Notes to Consolidated Financial Statements under Item 8.
The Company owns a building in Dassel, Minnesota which is leased by the
Company to the acquiror of a subsidiary which was previously sold by the
Company.
One facility in Chunchon, comprising 120,700 square feet and one facility in
Chung Ju, comprising 93,000 square feet are being offered for sale.
The Company believes that its existing manufacturing facilities are adequate
to support customer requirements during fiscal 1996.
11
<PAGE>
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 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 was submitted to the court for preliminary
approval during December 1994. On May 31, 1995, the Court entered a judgement
dismissing the litigation as to all claims against the Company and the other
defendants, pursuant to an agreement by the parties to settle the litigation.
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, which was provided for in fiscal 1994. The
stock, along with $2.75 million from the Company's insurance carrier, will be
distributed, after court approval, to a class consisting of all persons who
purchased the Company's common stock during the period of October 22, 1992,
through October 1, 1993.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "APM". The following table sets forth for the periods indicated the
high and low closing sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ending September 30, 1994
First Quarter............................................ $6 1/2 $5 1/8
Second Quarter........................................... 7 3/8 5 1/8
Third Quarter............................................ 6 5/8 4 1/4
Fourth Quarter........................................... 5 3/8 4
Fiscal year ending September 30, 1995
First Quarter............................................ $4 3/8 $2 1/4
Second Quarter........................................... 3 7/8 2 1/2
Third Quarter............................................ 7 2 5/8
Fourth Quarter........................................... 18 3/8 7 1/8
</TABLE>
At December 15, 1995, there were approximately 1,682 record holders of the
Company's Common Stock.
There were no cash dividends paid by the Company during the fiscal years
1995 or 1994. The Company currently intends to retain any earnings for use in
its business and does not anticipate paying cash dividends in the foreseeable
future.
12
<PAGE>
APPLIED MAGNETICS CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS)
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales................... $292,600 $275,927 $335,898 $297,864 $385,053
Income (Loss) from
continuing operations...... 1,748 (52,670) (43,728) 315 (15,805)
Loss from discontinued
operations................. -- -- -- (25,422) (2,479)
Net income (loss)........... 1,748 (52,670) (43,728) (25,107) (18,284)
Net income (loss) per share:
Net income (loss) from
continuing operations.... $ 0.08 $ (2.39) $ (2.17) $ 0.02 $ (0.97)
Loss from discontinued
operations............... -- -- -- (1.53) (0.15)
Net income (loss)......... $ 0.08 $ (2.39) $ (2.17) $ (1.51) $ (1.12)
Weighted average common and
dilutive equivalent shares
outstanding: 22,472 22,082 20,156 16,604 16,294
Order backlog............... $107,466 $ 64,781 $ 77,126 $ 96,104 $113,794
Year-end employment......... 5,478 5,531 7,259 7,407 9,183
BALANCE SHEET
Working capital (1)......... $ (5,963) $(36,443) $ 33,920 $ 17,823 $ 17,677
Total assets................ 246,817 220,556 278,516 263,319 299,811
Total debt.................. 69,629 67,151 57,183 71,224 74,850
Shareholders' investment.... 103,592 98,433 151,095 124,399 150,078
</TABLE>
Note: Balance Sheet data for 1991 has not been restated for discontinued
operations.
- --------
(1) This balance includes borrowings outstanding under loan facilities with a
Malaysian bank which have been in place since June 1990, are callable on
demand, have no termination date and are guaranteed by the Company. The
balances at September 30, 1995, 1994, 1993, 1992 and 1991 were $46.9
million, $46.1 million, $35.2 million, $38.1 million and $29.4 million,
respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The Company posted a net profit in fiscal 1995, as compared to net losses
during the previous two years of the three year period ended September 30,
1995. The Company's successful turnaround is attributed to numerous factors,
including increased customer demand for its thin film products, substantial
cost reductions implemented during the last quarter of fiscal 1994, timely
production ramps on a number of qualified thin film programs and significant
technological process improvements which increased production volumes. This
growth was supported by generation of cash as a result of completion of the
sale of the Company's Tape Head business unit to Seagate and aggressive cash
management practices which included accelerated payment terms with some of the
Company's customers, completion of a secured asset-based revolving line of
credit and extension of payment on a revolving credit facility with a
commercial bank. See "Liquidity" for further discussion.
During fiscal 1995, in response to market demands occurring over the three
year period, the Company continued its shift from production of ferrite disk
heads to thin film disk heads, which offer superior performance
characteristics over ferrite disk heads and became competitively priced. The
Company furthered its technological development from the thin film microslider
to the nanoslider form factor and by the first quarter of fiscal 1995,
substantially all thin film shipments were nanoslider products. The Company
also made substantial progress in thin
13
<PAGE>
film production process improvements including conversion from 3 inch
substrate ("wafer") to 6 inch wafer fabrication (which produces more thin film
disk heads per wafer), and conversion to fully etched air bearing ("FEAB") and
negative pressure air bearing disk head designs, that allowed certain of its
products to demonstrate improved performance.
MR disk head product development continues to be critical for the Company's
future growth. The Company is committed to substantial engineering, production
process and capital investments in MR. It continued to ship prototype and
qualification samples to selected customers. The Company expects to ship
production quantities of MR disk heads by the end of fiscal 1996. See
"Products" under Item 1.
During fiscal 1994 and fiscal 1993, market demand shifted to the thin film
nanoslider form factor from the microslider form factor and from ferrite disk
heads. This unexpected rapid market transition contributed to the substantial
losses in fiscal 1994 as the Company struggled with its thin film
manufacturing process which impacted the Company's ability to quickly ramp
production to achieve desired levels of volume shipments in response to strong
market demand. The market transition impacted fiscal 1993 as the Company
sustained significant losses and recorded a $49.6 million restructuring charge
in the fourth quarter to consolidate manufacturing resources and write-down
production assets (primarily related to ferrite and thin film microslider
production) to their estimated net realizable values.
Fiscal 1993 also included completion of management's strategic plan to focus
solely on the design, manufacture and sale of magnetic recording head
products. The execution of the plan included sale of non-core businesses, a
secondary public offering, and establishing a strategic corporate relationship
with HML .
ANNUAL RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1995 1994 1993
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Thin Film Disk Head Products
Net Sales................................. $250,873 $133,909 $139,553
Percentage of Total....................... 85.7% 48.5% 41.6%
Ferrite Disk Head Products
Net Sales................................. 30,443 123,254 177,094
Percentage of Total....................... 10.4% 44.7% 52.7%
Tape Head Products
Net Sales................................. 11,284 18,764 19,251
Percentage of Total....................... 3.9% 6.8% 5.7%
-------- -------- --------
Total Net Sales............................. $292,600 $275,927 $335,898
100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
NET SALES: Net sales increased 6% from fiscal 1994 to fiscal 1995. Net sales
of thin film disk head products increased as a percentage of total net sales
from 48.5% of net sales in 1994 to 85.7% of net sales in 1995. In absolute
terms, thin film net sales increased 87.3% from 1994 to 1995. The significant
growth in thin film disk heads was attributable to achievement of production
volumes for nanoslider products and continued strong demand by certain
customers on more mature products. Thin film disk head net sales increased
quarter-to-quarter for fiscal 1995 and were $41.9 million, $57.9 million,
$71.9 million and $79.2 million, respectively. This increase during the first
two quarters was due to significant growth in thin film disk head shipments,
while the last two quarters were primarily due to the change in mix of
shipments from head gimbal assemblies ("HGAs") to head stack assemblies
("HSAs") and to a lesser extent due to growth in thin film disk head
shipments. Net sales of ferrite disk head products decreased 75.3% in fiscal
1995 from fiscal 1994. The Company attributes the decline to the market shift
to thin film disk heads that offer competitive prices and superior performance
and to the Company's decision in fiscal 1994 to focus on thin film disk head
product development. The Company believes that computer drive
14
<PAGE>
industry demand will continue to shift to thin film and MR disk heads over the
long term. As a result, over the past three fiscal years, the Company has
committed its engineering and production resources to further advancement of
thin film inductive technology. Net sales for tape head products decreased
39.9% in fiscal 1995 from fiscal 1994. Tape head products were produced by the
Company's Tape Head business unit which was sold to Seagate in December 1994.
Pursuant to the sales agreement, the Company continues to provide certain
tape-related goods and services on an ongoing basis.
Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of thin film
disk head products increased as a percent of total net sales from 41.6% in
1993 to 48.5% of net sales in 1994, but in absolute terms, net sales decreased
slightly, by 4.0%, from 1993 to 1994. The decline was caused by difficulties
experienced by the Company in achieving production volumes of nanoslider
products. Net sales of thin film disk head products for three quarters of
fiscal 1994 remained between $30.9 million and $32.5 million. In the fourth
quarter of fiscal 1994, thin film disk head shipments increased to $38.0
million as a result of improved production yields. Net sales of ferrite disk
head products decreased 30.4% from fiscal 1993 to 1994 as a result of maturing
of ferrite-based drive programs for which the Company is a supplier. Net sales
of tape head products remained flat in fiscal 1994 as compared to 1993.
GROSS PROFIT: The gross margin increased in fiscal 1995 to 13.6% as compared
to (2.2%) in fiscal 1994. The increase resulted from significantly higher
revenues due to improved production volumes generated from technological
improvements in the thin film nanoslider production processes, conversion from
the 3 inch to 6 inch wafer fabrication, and due to continued cost reductions
implemented during the last quarter of fiscal 1994.
The gross margin decreased in fiscal 1994 to (2.2%) as compared to 14.9% in
fiscal 1993. This decrease was primarily due to lower sales volumes, lower
average unit sales prices and manufacturing difficulties as the Company was
confronted with the sudden and unexpected change in market demands from the
thin film microslider to the nanoslider form factor.
RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were
$33.7 million, $38.8 million and $32.6 million for fiscal years 1995, 1994,
and 1993, respectively, before cost offsets of $14.1 million in fiscal 1994
and $15.1 million in fiscal 1993. These expenses represented 11.5%, 14.1% and
9.7% of net sales, respectively, for such periods. The cost offsets were
related to developmental funding the Company received under a License and
Technology Development Agreement with Hitachi Metals, Ltd. for the advancement
of the Company's inductive thin film technology and the development and
commercialization of MR disk head technology, and from joint product
development agreements with certain major disk drive manufacturers for MR disk
head development. Funding for these agreements was concluded by the end of
fiscal 1994.
R&D expenses decreased by $5.1 million from fiscal 1994 to 1995 as the
Company implemented cost controls during the fourth quarter of fiscal 1994 in
response to significantly lower revenues and deteriorating gross margins. R&D
expenses increased $6.2 million from fiscal 1993 to 1994 as the Company
increased its investment in the development and commercialization of MR disk
head development and continued the advancement of inductive thin film
technology.
The Company continues to invest in advanced technology products and
processes and expects that expenditures generally will increase on an absolute
dollar basis, given that the revenue base can support these expenditures. The
Company did not receive any development funding from customers and strategic
partners in fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses in absolute dollars were $7.4 million, $17.3
million, and $20.1 million in fiscal 1995, 1994 and 1993, respectively. These
expenses represented 2.5%, 6.3% and 6.0% of net sales, respectively, for such
periods. The continued decrease in SG&A expenses was primarily due to a cost
reduction program implemented during the fourth quarter of fiscal 1994 in
response to lower sales volume. The Company expects that SG&A expenses as a
percent of sales will vary from period to period depending on the level of net
sales.
SPECIAL CHARGES: There were no special charges in fiscal 1995 and 1994.
Results from fiscal 1993 include a restructuring charge of $49.6 million to
consolidate manufacturing resources and write-down manufacturing equipment to
estimated net realizable values primarily as a result of the unexpectedly
rapid market transition from ferrite and from the thin film microslider to the
nanoslider form factor.
15
<PAGE>
INTEREST INCOME AND EXPENSE: Interest income was $2.0 million in fiscal
1995, and $0.8 million in both fiscal 1994 and 1993. Interest income increased
$1.2 million in fiscal 1995 from 1994 due to higher average cash balances and
improved investment management. Interest income remained unchanged in fiscal
1994 from 1993, primarily due to similar average cash balances in both years.
Interest expense was $4.9 million, $4.2 million and $5.6 million in fiscal
1995, 1994 and 1993, respectively. Interest expense increased $0.7 million in
fiscal 1995 from 1994 primarily as a result of higher average interest rates
on the Malaysian bank loans and letter of credit and loan fees related to the
secured asset-based revolving line of credit established in January 1995.
Interest expense decreased $1.4 million in fiscal 1994 from 1993 which
included the write-off of certain loan origination expenses related to
repayment of debt from proceeds of the Company's equity offering in February
1993.
OTHER INCOME (EXPENSE): Other income of $6.3 million in fiscal 1995 included
$4.9 million income recognized as the Company completed certain performance
milestones pursuant to the sale of its Tape Head business unit to Seagate. See
Note 6 of Notes to Consolidated Financial Statements for further discussion of
the agreement. Other income in fiscal 1995 also included $1.3 million related
to sale of tooling and excess assets. Other income (expense) for fiscal 1994
and 1993 primarily consisted of foreign exchange translation and transaction
gains and losses.
PROVISION FOR INCOME TAXES: For fiscal years 1995, 1994 and 1993, the most
significant component of the provision for income taxes was foreign taxes for
which there were no foreign tax credit offsets available. See Note 3 of Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1995, in order to improve liquidity and as part of a cash
management and operating plan implemented by the Company, cost and cash
expenditure controls were established, accelerated payment terms were
negotiated with some of the Company's customers, the Tape Head business unit
was sold to Seagate and the Company completed other financings, including new
loan credit facilities, extensions or renewals of existing facilities and
lease financing. The Company expects to continue to use lease financing for
capital expenditures and anticipates that it will continue to maintain cost
and expenditure controls to provide acceptable liquidity.
As of September 30, 1995, the Company's cash and cash equivalents balance
increased to $48.2 million from $20.8 million at September 30, 1994. During
fiscal 1995, the Company generated $18.9 million from operating activities,
including $1.7 million from net income, $27.6 million from depreciation and
amortization, $23.1 million from increased accounts payable and $3.8 million
from decreased inventory, primarily offset by $17.8 million in increased
accounts receivable to support higher net sales levels. During fiscal 1995,
net cash of $4.6 million was also generated from financing activities,
primarily due to additional capital leases for equipment and proceeds from
stock options exercised. During this period, the Company used cash to make
$23.4 million in capital expenditures, primarily related to increasing thin
film disk production capacity and the development of MR disk head technology.
Additionally, the Company entered into $9.8 million of operating leases for
machinery and equipment, with terms of up to three (3) years.
The Company also generated $25.3 million in cash from the sale of businesses
and assets which were made up of the following: (1) the sale of a building in
Singapore for $4.9 million; (2) the sale of its Tape Head business unit to
Seagate for $21.5 million, of which the Company received $14.0 million at the
closing date of the transaction and $5.7 million, net of related costs, upon
completion of certain performance milestones and (3) $0.7 million for the sale
of excess machinery and equipment. See Note 6 of Notes to Consolidated
Financial Statements for discussion of the Seagate agreement.
At September 30, 1995, total debt, including notes payable, was $69.6
million, an increase of $2.4 million from the balance outstanding at September
30, 1994, primarily due to capital lease financing in Malaysia, where the
Company has substantial manufacturing operations. The Company also had fully
drawn down its unsecured Malaysian credit facilities to $46.9 million from a
bank in Malaysia. In May 1995, the Company's Malaysian subsidiary agreed with
the Malaysian bank to continue these credit facilities which have been in
place since 1990.
16
<PAGE>
The facilities are callable on demand, have no termination date, are
guaranteed by the Company, are secured by the Malaysian subsidiary's real
property holdings in Malaysia and are subject to certain covenants which
preclude the subsidiary from granting liens and security interests in other
assets. Should all or any significant portion of the Malaysian credit
facilities become unavailable for any reason, the Company would need to pursue
alternative financing sources. During fiscal 1995, the Company's Malaysian
subsidiary entered into $5.1 million in capital lease agreements for machinery
and equipment.
In January 1995, the Company retired the $10.0 million debt obligation owed
to Conner. The Company obtained a secured, asset-based revolving line of
credit of $35.0 million from CIT Group/Business Credit, Inc. ("CIT"). This
line of credit provides for borrowings up to $35.0 million based on eligible
trade receivables at various interest rates over a three year term and is
secured by trade receivables, inventories and certain other assets. As of
September 30, 1995, $7.5 million of borrowings was outstanding. The $7.5
million was fully repaid during October 1995. The balance available for
additional borrowings under this line of credit was approximately $1.3 million
at September 30, 1995 and the Company was in compliance with all financial
covenants.
In May 1995, the Company obtained an extension to March 1996, of the
maturity date on a $10.0 million revolving credit facility from a commercial
bank. This facility is secured by a letter of credit issued for the account of
HML, subject to reimbursement by the Company. The Company's reimbursement
obligation to HML is secured by a security interest and lien on certain
machinery and equipment.
The Company continues to have informal understandings with some of its
customers to make payments on accelerated terms. However, the liquidity risk
associated with the cancellation of one or more of these arrangements is
partially ameliorated by the credit available under the CIT Agreement under
which available loan proceeds could generally increase as the Company's trade
accounts receivable increase.
In 1996, the Company plans approximately $100.0 million in capital
expenditures related primarily to improving thin film production processes,
increasing thin film production volumes and development and production of MR
technologies and products. During the next twelve months, the Company believes
it will have sufficient cash flows from operations and equipment lease
financing alternatives to meet its operating and capital expenditure
requirements.
The Company's accounts receivable and inventory balances are heavily
concentrated with a small number of customers. Sales to Conner and Maxtor
accounted for 41% and 19%, respectively, for the Company's sales in 1995. If
any large customer of the Company became unable to pay its debts to the
Company, liquidity would be adversely affected.
In fiscal 1995, Conner agreed to be acquired by Seagate. The Company
anticipates that such acquisition will result in a significant decrease in the
sales volumes to Conner in fiscal 1996 and in future years. See "Customers and
Marketing" under Item 1.
The Company operates in a number of foreign countries. Purchases of certain
raw materials and certain labor costs are paid for in foreign currencies, as
well as repayments of a portion of the Company's Malaysian debt denominated in
ringgitts. The Company is not currently hedging against potential foreign
exchange risk. Fluctuations of foreign currency to the dollar could have a
significant effect on reported cash balances. The effect of foreign currency
exchange rate changes were increases of $0.1 million and $1.2 million in cash,
for fiscal 1995 and 1994, respectively.
Market and customer demand continues to be strong for the Company's thin
film disk heads. In the event that demand for the Company's products declines,
management believes that it will be able to reduce its funding requirements
for planned, but not committed, capital expenditures. However, if the Company
were unable to continue to increase sales or maintain production yields at
acceptable levels in order to permit it to execute customer orders for new
drive programs in a timely manner, there would be a significant adverse impact
on liquidity. This would require the Company to either obtain additional
capital from external sources or to curtail its capital, research and
development and working capital expenditures. Such curtailment could adversely
affect the Company's future years' operations and competitive position.
17
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
In March of 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"). This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of.
This Statement will become effective for financial statements of the Company
in the first quarter of fiscal 1997. Management has not yet determined the
impact which SFAS 121 will have on the Company's financial position and
results of operations when it is adopted.
18
<PAGE>
APPLIED MAGNETICS CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS: ----
<S> <C>
Report of Independent Public Accountants (Arthur Andersen LLP)...... F-2
Consolidated Statements of Operations for the 52 weeks ended
September 30, 1995, September 30, 1994 and September 30, 1993...... F-3
Consolidated Balance Sheets as of September 30, 1995 and September
30, 1994........................................................... F-4
Consolidated Statements of Cash Flows for the 52 weeks ended
September 30, 1995, September 30, 1994 and September 30, 1993...... F-5
Consolidated Statements of Shareholder's Investment for the 52 weeks
ended September 30, 1995, September 30, 1994 and September 30,
1993............................................................... F-6
Notes to Consolidated Financial Statements.......................... F-7
</TABLE>
F-1
<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, 1995 and 1994, and the related consolidated statements of
operations, shareholders' investment and cash flows for each of the three
years in the period ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Magnetics Corporation and subsidiaries as of September 30, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 12, 1995
F-2
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $ 292,600 $ 275,927 $ 335,898
Cost of sales............................. 252,684 281,997 286,017
---------- ---------- ----------
Gross profit (loss)..................... 39,916 (6,070) 49,881
---------- ---------- ----------
Research and development expenses......... (33,655) (24,682) (17,504)
Selling, general and administrative
expenses................................. (7,434) (17,267) (20,115)
Restructuring charge ..................... -- -- (49,600)
Interest income........................... 1,996 825 803
Interest expense.......................... (4,826) (4,216) (5,632)
Other income (expense), net............... 6,335 (160) 1,244
---------- ---------- ----------
Income (Loss) before income taxes....... 2,332 (51,570) (40,923)
Provision for income taxes................ 584 1,100 2,805
---------- ---------- ----------
Net Income (loss)....................... $ 1,748 $ (52,670) $ (43,728)
========== ========== ==========
Net income (loss) per share............. $ 0.08 $ (2.39) $ (2.17)
========== ========== ==========
Weighted average common and dilutive
equivalent shares outstanding............ 22,472,208 22,081,751 20,155,868
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statementsare an integral part
of these consolidated statements.
F-3
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 48,236 $ 20,761
Accounts receivable, less allowances of $652 in 1995 and
$3,629 in 1994.......................................... 36,571 18,720
Inventories.............................................. 32,727 31,520
Prepaid expenses and other............................... 10,411 6,879
-------- --------
127,945 77,880
-------- --------
Property, plant and equipment, at cost:
Land..................................................... 2,556 3,992
Buildings................................................ 67,314 77,745
Manufacturing equipment.................................. 146,706 163,068
Other equipment and leasehold improvements............... 29,410 30,743
Construction in progress................................. 6,967 13,814
-------- --------
252,953 289,362
Less--accumulated depreciation and amortization............ (148,636) (165,046)
-------- --------
104,317 124,316
-------- --------
Other assets............................................... 14,555 18,360
-------- --------
$246,817 $220,556
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt........................ $ 12,004 $ 20,412
Bank notes payable....................................... 54,371 46,062
Accounts payable......................................... 44,535 22,332
Accrued payroll and benefits............................. 9,361 9,406
Other current liabilities................................ 13,637 16,111
-------- --------
133,908 114,323
-------- --------
Long-term debt, net........................................ 3,254 677
-------- --------
Other liabilities.......................................... 6,063 7,123
-------- --------
Shareholders' Investment:
Preferred stock, $.10 par value, authorized 5,000,000
shares, none issued and outstanding..................... -- --
Common stock, $.10 par value, authorized 40,000,000
shares, issued 22,619,205 shares and 22,161,460 shares
at September 30, 1995 and 1994, respectively............ 2,262 2,216
Paid-in capital.......................................... 181,191 178,481
Retained deficit......................................... (79,031) (80,779)
-------- --------
104,422 99,918
Treasury stock, at cost (96,603 shares and 92,509 shares at
September 30, 1995 and 1994, respectively)................ (830) (812)
Unearned restricted stock compensation..................... -- (673)
-------- --------
103,592 98,433
-------- --------
$246,817 $220,556
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated balance sheets.
F-4
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER 30,
--------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net profit (loss)............................. $ 1,748 $ (52,670) $ (43,728)
Adjustments to derive cash flows:
Depreciation and amortization............... 27,600 23,643 29,866
Gain on sale of business and assets......... (6,109) -- --
Provision for receivable allowances......... -- 100 550
Restructuring charge........................ -- -- 49,600
Deferred tax provision...................... -- -- 1,384
Amortization of unearned restricted stock
compensation, net.......................... 721 (145) 1,225
Other assets................................ -- (4,167) (1,103)
Other liabilities........................... (1,060) (300) (3,278)
Other, net.................................. -- 1,123 303
Working capital changes affecting cash flows
from operations:
Accounts receivable........................ (17,712) 19,053 (11,562)
Other receivables.......................... -- 5,170 10,900
Inventories................................ (3,772) 10,906 (5,827)
Prepaid expenses and other................. (3,074) (305) (921)
Accounts payable........................... 23,168 (5,955) (3,007)
Accrued payroll and benefits............... 181 (2,739) 2,558
Other current liabilities.................. (2,795) (6,654) 2,424
--------- --------- ---------
Net cash flows provided by (used in)
operating activities....................... 18,896 (12,940) 29,384
--------- --------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.... (23,401) (31,452) (56,652)
Proceeds from sale of businesses and assets,
net.......................................... 25,264 3,516 15,409
Notes receivable.............................. 2,048 2,038 1,433
--------- --------- ---------
Net cash flows provided by (used) in invest-
ing activities.............................. 3,911 (25,898) (39,810)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of debt................ 160,868 142,767 107,724
Proceeds from issuance of capital lease
obligations.................................. 5,142 464 728
Repayment of debt............................. (163,705) (134,402) (127,127)
Proceeds from sale of common stock............ -- -- 66,488
Proceeds from stock options exercised......... 2,270 153 1,475
--------- --------- ---------
Net cash flows provided by financing
activities................................. 4,575 8,982 49,288
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. 93 1,246 (964)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents.................................. 27,475 (28,610) 37,898
Cash and equivalents at beginning of period... 20,761 49,371 11,473
--------- --------- ---------
Cash and equivalents at end of period......... $ 48,236 $ 20,761 $ 49,371
========= ========= =========
Supplemental Cash Flow Data:
Interest paid, net of amounts capitalized..... $ 4,827 $ 4,215 $ 4,158
========= ========= =========
Income taxes paid............................. $ 494 $ 1,025 $ 1,209
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
F-5
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ----------------
UNEARNED
RESTRICTED SHARE-
NUMBER OF PAID-IN RETAINED NUMBER OF STOCK HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT COMPENSATION INVESTMENT
---------- ------ -------- -------- --------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1992..... 16,444,323 $1,644 $109,563 $ 15,619 67,626 $(631) $(1,796) $124,399
Stock options
exercised............ 359,772 36 2,780 -- -- -- -- 2,816
Issuance of common
stock................ 5,291,070 529 65,959 -- -- -- -- 66,488
Purchase of treasury
stock, net........... -- -- -- -- 11,702 (105) -- (105)
Restricted stock
issuance, net........ 58,577 6 231 -- -- -- (237) --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- 1,225 1,225
Net loss.............. -- -- -- (43,728) -- -- -- (43,728)
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1993..... 22,153,742 2,215 178,533 (28,109) 79,328 (736) (808) 151,095
Stock options
exercised............ 26,087 3 226 -- -- -- -- 229
Purchase of treasury
stock, net........... -- -- -- -- 13,181 (76) -- (76)
Restricted stock
issuance, net........ (18,369) (2) (278) -- -- -- 280 --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- (145) (145)
Net loss.............. -- -- -- (52,670) -- -- -- (52,670)
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1994..... 22,161,460 2,216 178,481 (80,779) 92,509 (812) (673) 98,433
Stock options
exercised............ 399,773 40 2,668 -- -- -- -- 2,708
Purchase of treasury
stock, net........... -- -- -- -- 4,094 (18) -- (18)
Restricted stock
issuance, net........ 57,972 6 42 -- -- -- (48) --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- 721 721
Net income............ -- -- -- 1,748 -- -- -- 1,748
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1995..... 22,619,205 $2,262 $181,191 $(79,031) 96,603 $(830) $ -- $103,592
========== ====== ======== ======== ====== ===== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
F-6
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Applied Magnetics Corporation and its subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated. Certain 1993 and 1994 accounts have been reclassified to conform
with the 1995 presentation.
TRANSLATION OF FOREIGN CURRENCIES: Financial statements and transactions of
subsidiaries operating in foreign countries are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards No. 52. The
functional currency for all subsidiaries is the U.S. dollar. The effect of
translating assets and liabilities stated in foreign currency is included as a
component of "Other Income (Expense), net" in the Consolidated Statements of
Operations. Translation and transaction losses of $0.2 million in 1995 and
1994, and gains of $0.8 million in 1993 were included in operations.
The Company operates in a number of foreign countries. The relative impact
of foreign currency fluctuations on revenue is not significant as product
pricing is generally based on the U.S. dollar. Purchases of certain raw
materials and certain labor costs are paid for in foreign currencies.
Malaysian debt maturities are not currently hedged. As a result, effects of
currency rate fluctuations can affect results of operations. Fluctuations may
also have a significant effect on reported cash balances.
DEPRECIATION AND AMORTIZATION POLICIES: Plant and equipment are depreciated
or amortized over their estimated useful lives primarily using the straight-
line method. Estimated useful lives are as follows:
<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
$27.6 million, $23.6 million and $29.9 million in 1995, 1994 and 1993,
respectively.
The Company follows the policy of capitalizing expenditures that materially
increase asset lives. Maintenance and minor replacements are charged to
operations when incurred. Maintenance and repair expenses charged to
operations were $6.4 million, $8.7 million and $7.1 million in 1995, 1994 and
1993, respectively. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is included in operations.
The cost of buildings and equipment includes interest expense incurred prior
to the time such assets are placed in service. Interest expense of $1.0
million was capitalized in 1993. No interest was capitalized in 1995 and 1994.
CASH EQUIVALENTS: Cash equivalents consist primarily of money market
instruments maturing within 90 days that are carried at cost, which
approximates market. Cash equivalents were $43.6 million and $15.5 million at
September 30, 1995 and September 30, 1994, respectively.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-
out method) or market. Market for purchased parts and manufacturing supplies
is based on replacement costs and for other inventory classifications on net
realizable value. Inventories consist of purchased materials and services,
direct production labor and manufacturing overhead.
F-7
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES: The components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------
1995 1994
------- -------
<S> <C> <C>
Purchased parts and manufacturing supplies............... $13,036 $ 9,970
Work in process.......................................... 17,589 17,436
Finished goods........................................... 2,102 4,114
------- -------
$32,727 $31,520
======= =======
</TABLE>
REVENUE RECOGNITION AND WARRANTY POLICIES: Revenue is recognized at the time
the product is shipped to the customer. Under the Company's warranty terms,
customers are allowed to return products within the applicable warranty
periods. The Company accrues for the estimated rework and scrap costs
associated with anticipated returns. In addition, the Company reverses the net
sales and associated costs upon receipt of returned products.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Net income (loss)
per common and common equivalent share is calculated using the treasury stock
method, except in those periods where the effect of including common
equivalent shares is anti-dilutive.
RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged in basic
technology and applied research and development programs which are designed to
develop new products and product applications and related manufacturing
processes. The costs of these programs are classified as research and
development expenses and are charged to operations as incurred. Sustaining
engineering is charged to cost of sales.
OTHER LIABILITIES: Other liabilities are primarily composed of the non-
current portion of accrued expenses related to various employee compensation
plans.
INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." See Note 3.
STOCK OPTIONS: Proceeds from the sale of common stock issued upon the
exercise of stock options are credited to common stock and paid-in capital
accounts at the time the option is exercised. Income tax benefits attributable
to stock options exercised are credited to paid-in capital when realized. See
Note 4.
CONSOLIDATED STATEMENTS OF CASH FLOWS: In accordance with Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows," the Company
has selected the "indirect method" of presentation for reporting cash flows.
2. SEGMENTS OF BUSINESS
The Company operates in one market worldwide--components for the computer
peripheral industry. The Company's trade receivables are unsecured. Sales to
major customers are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
SEPTEMBER 30,
(AS A PERCENTAGE OF SALES) ----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Conner Peripherals...................................... 41% 53% 21%
Maxtor.................................................. 19% 13% 28%
All Others.............................................. 40% 34% 51%
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
F-8
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales are made by the United States operations to the following
geographic locations (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Europe........................................... $ 159 $ 1,523 $11,533
Asia............................................. 231,781 35,082 6,564
North America.................................... -- 67 --
-------- ------- -------
$231,940 $36,672 $18,097
======== ======= =======
</TABLE>
Information regarding the Company's domestic and foreign operations is as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED STATES FOREIGN TOTAL
------------- -------- --------
<S> <C> <C> <C>
1995
Net sales.............................. $271,947 $ 20,653 $292,600
======== ======== ========
Intercompany sales..................... $138,230 $213,260 $ --
======== ======== ========
Operating profit (loss)................ $ (3,608) $ 8,770 $ 5,162
Interest expense, net.................. (2,830)
--------
Income before income taxes........... $ 2,332
========
Identifiable assets.................... $165,064 $ 81,753 $246,817
======== ======== ========
1994
Net sales.............................. $ 98,680 $177,247 $275,927
======== ======== ========
Intercompany sales..................... $229,022 $220,507 $ --
======== ======== ========
Operating loss......................... $(27,162) $(21,017) $(48,179)
Interest expense, net.................. (3,391)
--------
Loss before income taxes............. $(51,570)
========
Identifiable assets.................... $141,029 $ 79,527 $220,556
======== ======== ========
1993
Net sales.............................. $159,854 $176,044 $335,898
======== ======== ========
Intercompany sales..................... $202,335 $236,317 $ --
======== ======== ========
Operating loss......................... $(32,749) $ (3,345) $(36,094)
Interest expense, net.................. (4,829)
--------
Loss before income taxes............. $(40,923)
========
Identifiable assets.................... $164,267 $114,249 $278,516
======== ======== ========
</TABLE>
F-9
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign operations primarily consist of operations in the Asia-Pacific
region. The increase in U.S. export sales to Asia and the decrease in sales of
foreign operations in fiscal 1995 was due to the closure of the Company's
production facility in Singapore in July 1994 and the transfer of sales
invoicing responsibility to the U.S. operations.
See Note 7 regarding the charges recorded in 1993 associated with
restructuring of operations. The segment of business information presented
above reflects an allocation of such restructuring charges to the location in
which restructuring costs were incurred. The amount of these charges allocated
between foreign and domestic operations were $30.0 million and $19.6 million,
respectively, in 1993.
Results of operations for United States-based operations include all
research and development expenditures, thereby causing an unfavorable
comparison with the operating results of foreign-based operations.
United States income for 1993 and 1994 include research and development cost
offsets relating to the license and technology development agreement with
Hitachi Metals, Ltd. ("HML"). See Note 9.
3. INCOME TAXES
The provision for income taxes for the years ended September 30, consists of
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ------ ------
<S> <C> <C> <C>
Federal Income Taxes
Current.............................................. $-- $ -- $ --
Deferred............................................. -- -- 1,384
State income taxes
Current.............................................. 92 211 226
Deferred............................................. -- -- --
Foreign income taxes................................... 492 889 1,195
---- ------ ------
$584 $1,100 $2,805
==== ====== ======
</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 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Income tax at the United States federal
income tax rate............................ $ 816 $(18,050) $(13,913)
State income taxes, net of federal income
tax benefit................................ 59 137 149
Foreign income taxed at lower rate.......... (2,217) (550) (1,536)
Temporary differences/net operating losses
not benefitted............................. 1,926 19,563 18,116
Other, net.................................. -- -- (11)
------- -------- --------
$ 584 $ 1,100 $ 2,805
======= ======== ========
</TABLE>
F-10
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for deferred income taxes results from temporary
differences which result from different tax bases for assets and liabilities
than their reported amounts in the financial statements. Such differences
result in recognition of income or expense in different years for tax and
financial statement purposes. The sources of these differences and the tax
effect of each at September 30, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Inventory reserves.................................... $ 1,348 $ 5,181
Restructuring & other reserves........................ 9,594 10,169
Net operating loss carryforwards...................... 32,536 24,204
Foreign tax & general business credit carryforwards... 5,442 4,763
Depreciation.......................................... (4,970) (3,396)
Other, net............................................ 2,783 1,884
-------- --------
Subtotal............................................ $ 46,733 $ 42,805
Valuation allowance................................... (46,733) (42,805)
-------- --------
Total net deferred tax asset (liability).............. $ -- $ --
======== ========
</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, 1995, the Company had total deferred tax liabilities of
$5.0 million and total deferred tax assets of $51.7 million. The Company
recorded a valuation allowance in the amount of $46.7 million against the
amount by which deferred tax assets exceed deferred tax liabilities. The
valuation reserve increased from $42.8 million at September 30, 1994 primarily
due to the current year net operating loss which cannot be recognized.
Consolidated retained deficit at September 30, 1995 included approximately
$63.9 million of accumulated earnings of foreign operations for which a
deferred tax liability has not been recognized. The additional taxes which may
become due if those earnings were to be repatriated to the United States,
after utilizing available foreign tax credits, would be approximately $20.5
million. However, the Company intends to reinvest these earnings indefinitely
in maintaining its foreign operations.
The Company had net operating loss carryforwards available for tax purposes
of approximately $79.4 million. To the extent not used, the net operating loss
carryforward expires in varying amounts beginning in 2006.
4. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS
The Company adopted stock option plans in 1988, 1992 and 1994. Incentive or
nonstatutory stock options may be granted under the 1992 and 1994 plans while
the 1988 plan is limited to nonstatutory options only. The options are issued
at exercise prices equal to the fair market value of the Common Stock at the
date of grant, and, accordingly, the Company makes no charges against income
with respect to these options. Stock option activity under the option plans
was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
OPTION
PRICE PER NUMBER OF AVAILABLE
SHARE SHARES FOR GRANT
----------- --------- ----------
<S> <C> <C> <C>
Balance at September 30, 1994.......... $5.00-13.63 1,553,502 744,288
Grants............................... $2.38- 8.88 1,090,455 (1,090,455)
Exercised............................ $3.88- 9.38 (338,236) --
Cancelled............................ $2.38-13.63 (861,520) 861,520
--------- ----------
Balance at September 30, 1995.......... $2.38-13.63 1,444,201 515,353
========= ==========
</TABLE>
F-11
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1995, 1994 and 1993, there were exercisable options
outstanding under the option plans to purchase an aggregate of 161,889,
812,002 and 591,786 shares, respectively.
The Company adopted long-term incentive plans in 1982, 1986 and 1989. Under
the 1982 and 1986 plans, options were issued at exercise prices lower than the
market value at the date of grant. The Company accrued as compensation
expense, over the life of the plans, the amount by which the market price
exceeded the exercise price at the date of grant for options outstanding and
for cash performance awards granted under the plans. At September 30, 1995, no
options to purchase Common Stock were available for future issuance under
these two plans, and nonstatutory options of 36,036 shares were outstanding at
prices from $1.90 to $2.04 per share, of which 31,248 shares were exercisable.
During 1995, options for 61,537 shares were exercised at prices from $1.30 to
$10.95 per share, and options for 16,208 shares were canceled. Under the 1989
plan, the Company grants shares of Common Stock at no cost to the
participants. These shares are subject to restrictions which prohibit selling,
transferring, assigning or otherwise disposing of the Common Stock. The
restrictions automatically expire ten years following the date of grant, or
earlier if certain performance objectives are achieved. The market value of
Common Stock issued is recorded as unearned restricted stock compensation and
shown as a separate component of shareholders' investment. This compensation
is amortized against income over the periods in which the participants perform
services. At September 30, 1995, 22,335 shares were available for future
issuance under the 1989 plan and 95,721 shares remain subject to restrictions.
During 1995, 68,000 shares were issued, 10,028 shares were canceled and
restrictions were removed from 39,049 shares under the 1989 plan. Compensation
expense recorded under the 1989 plan during 1995, 1994 and 1993 was
approximately $0.7 million, $0.2 million and $1.2 million, respectively.
In 1994, the Company adopted a non-qualified stock option plan for non-
employee directors (the "1994 Directors' Plan"). A total of 150,000 shares of
the Company's Common Stock are reserved for issuance under the 1994 Directors'
Plan. Under this plan, directors who are not employed by the Company are
granted options to purchase 5,000 shares of the Company's Common Stock upon
being elected to the board and, thereafter, such directors receive automatic
annual grants of options to acquire 5,000 shares of Common Stock on March 1 of
each year provided the person continues to serve as a director. The exercise
price of the options is set at the closing price of the common stock on the
New York Stock Exchange on the date of grant. The options granted under the
1994 Directors' Plan become exercisable in one third increments beginning on
the first anniversary following the date of grant. At September 30, 1995,
options for 25,000 shares had been granted under this plan and 5,000 shares
have been canceled.
In December 1994, the Company granted 250,000 shares of the Company's Common
Stock, at $4.125, to Grisanti, Galef and Goldress, Inc. ("GG&G"), a consulting
firm hired in August 1994 to provide the Company with crisis management and
turnaround assistance. The options would be exercisable if the turnaround
engagement was successfully completed, which the Company determined to be so,
in July 1995. The options became exercisable in whole or part and will expire
in five years. The exercise price of the options is set at the closing price
of the common stock on the New York Stock Exchange on the date of grant.
The Company has authorized a class of Preferred Stock consisting of
5,000,000 shares, $.10 par value. The Board of Directors has authority to
divide the Preferred Stock into series, to fix the number of shares comprising
any series and to fix or alter the rights, privileges and preferences of the
Preferred Stock. No shares of the Preferred Stock were outstanding at
September 30, 1995 or September 30, 1994. During 1988, the Board of Directors
declared a dividend of one Right for each outstanding share of Common Stock to
stockholders of record on November 4, 1988. Each Right entitles the holder to
buy the economic equivalent of one share of Common Stock in the form of one
one-hundredth of a share of the Preferred Stock at an exercise price of
$75.00. Under certain conditions, each Right will entitle its holder to
purchase, at the Rights exercise price, shares of the Company's Common Stock
or common stock equivalents having a market value of twice the Right's
exercise price.
F-12
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at September 30
(in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Secured revolving credit agreement, interest rate of
10.50% as of September 30, 1995...................... $ 7,500 $ --
7% secured note purchase agreement, due January 10,
1995................................................. -- 9,827
Secured revolving credit agreement due March 1996,
interest rate of 8.75% as of September 30, 1995...... 10,000 10,000
Secured Malaysian bank credit facility, interest rates
from 6.00% to 7.41% as of September 30, 1995......... 46,871 46,062
Mortgage payable, interest rate of 8.50% as of
September 30, 1995................................... 126 146
Capital leases........................................ 5,132 1,116
------- -------
69,629 67,151
Less--current portion, including bank notes payable... (66,375) (66,474)
------- -------
$ 3,254 $ 677
======= =======
</TABLE>
The aggregate principal payments of bank notes payable and long-term debt
for the years subsequent to September 30, 1995 are: 1996--$66.4 million,
1997--$1.9 million, 1998--$1.3 million.
In January 1995, the Company retired the $10.0 million debt obligation owed
to Conner Peripherals Inc.
The Company obtained a secured, revolving line of credit from CIT
Group/Business Credit, Inc. ("CIT"). This line of credit provides for
borrowings up to $35.0 million based on eligible trade receivables at various
interest rates over a three-year term and is secured by trade receivables,
inventories and certain other assets. As of September 30, 1995, $7.5 million
of borrowings was outstanding. The interest rate for the amounts outstanding
under the credit facility at September 30, 1995 was 10.5%. The balance
available for additional borrowings under this line of credit was
approximately $1.3 million at September 30, 1995 and the Company was in
compliance with all financial covenants. At September 30, 1995, $4.0 million
of standby letters of credit have been issued on behalf of the Company under
this facility. The $7.5 million of borrowings was fully repaid during October
1995.
The Company has a $10.0 million revolving credit facility from a commercial
bank which is supported by a letter of credit issued for the account of HML,
subject to reimbursement by the Company and the liens in favor of HML on
certain of the Company's manufacturing equipment. At September 30, 1995, the
interest rate on the facility was 8.75%. The credit facility expires in March,
1996.
The Company's Malaysian subsidiary has loan facilities with a Malaysian bank
which have been in place since June 1990, are callable on demand, have no
termination date and are guaranteed by the Company. In May 1995, the Company
and the Malaysian bank amended these credit facilities to include a security
interest in the Company's real property holdings in Malaysia and to include
certain covenants which preclude the Company from granting liens and security
interests in other assets in Malaysia. The Company was in compliance with all
financial covenants under this facility at September 30, 1995. The interest
rates outstanding on these loan facilities ranged from 5.2% to 7.6% at
September 30, 1995 and had a weighted average interest rate of 6.7%. The
Company intends to continue its practice of repaying maturities with new
borrowings under the facilities.
F-13
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SALE OF ASSETS
During the first quarter of fiscal 1995, the Company completed the sale of a
facility in Singapore and received proceeds of $4.9 million in cash, which
approximated book value.
In December 1994, the Company sold its Tape Head business unit and agreed to
perform certain services and to produce certain tape heads for Seagate
Technology Inc., for $21.5 million in cash, of which the Company received
$19.9 million during fiscal 1995. The Company recorded a gain of $5.7 million,
net of related expenses, during the year ended September 30, 1995. It is
estimated that certain of the remaining performance milestones will be
completed by the end of the first quarter of fiscal 1996 and the remaining
cash will be collected.
7. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $49.6 million in 1993 to
consolidate manufacturing resources and write-down equipment to estimated net
realizable values primarily as a result of the unexpectedly rapid market
transition from ferrite to thin film and from the thin film microslider to the
nanoslider form factor. The Company charged costs against these reserves of
$38.4 million, $5.1 million and $1.0 million in 1993, 1994, and 1995,
respectively. The balance of the 1993 restructuring charge of $5.1 million is
included as a component of Other Current Liabilities in the accompanying
Consolidated Balance Sheet at September 30, 1995. This reserve has been
assigned to adjust the carrying value of facilities in Asia and other assets
identified for disposal at the time of restructuring to estimated realizable
value.
8. COMMITMENTS AND CONTINGENCIES
A portion of the Company's facilities and equipment are leased under non-
cancelable operating leases and certain equipment is leased under capitalized
leases. The terms of the leases for facilities and equipment expire over the
next three years with renewal options in certain instances. Future minimum
lease payments under capital and operating leases as of September 30, 1995 are
as follows (in thousands):
<TABLE>
<CAPTION>
LEASES
------------------
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1996................................................... $ 2,553 $10,939
1997................................................... 2,055 7,874
1998................................................... 1,206 3,311
1999................................................... 22 21
2000................................................... -- --
------- -------
Total minimum payments................................. $ 5,836 $22,145
------- -------
Less imputed interest.................................. (705)
-------
Present value of payments under capital leases......... 5,131
Less current portion................................... (1,984)
-------
Long-term lease obligations............................ $ 3,147
=======
</TABLE>
Manufacturing and other equipment at September 30, 1995 include assets under
capitalized leases of $6.0 million, with related accumulated depreciation of
$1.4 million.
Total rental expense, net of sublease rental income, for the years ended
September 30, 1995, 1994, and 1993, including items on a month-to-month basis,
was approximately $10.2 million, $3.6 million and $4.0 million, respectively.
The Company does not have a post-retirement benefits program. As a result,
no corresponding accrual has been reflected on the accompanying Consolidated
Balance Sheets.
F-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 18, 1994, the Company announced that it had entered into an
agreement to dismiss the 1993 securities class action suit brought against the
Company and certain former Company Officers in U.S. District Court for the
Central District of California. On May 31, 1995, the Court entered into a
judgement dismissing the litigation as to all claims against the Company and
the other defendants, pursuant to an agreement by the parties to settle the
litigation. The terms of this settlement have not yet been completely ratified
by the plaintiffs. The Company will not be required to make any cash payments
but will issue to plaintiffs shares of its common stock having an aggregate
value of $1.25 million, which was provided for in fiscal 1994. The stock,
along with $2.75 million from the Company's insurance carrier, will be
distributed, after court approval, to a class consisting of all persons who
purchased the Company's common stock during the period of October 22, 1992
through October 1, 1993.
In addition, the Company or its subsidiaries are defendants in a number of
other cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion
of management, the resolutions of these matters will not have a material
effect on the Company's financial position or results of operations.
9. LICENSE AND TECHNOLOGY DEVELOPMENT AGREEMENTS
In September, 1992, the Company entered into a license and technology
development agreement with HML (the "HML Agreement") to further the
development and marketing of advanced magnetic recording disk head
technologies and products. During fiscal 1993 and 1994, HML paid the Company
$35.0 million, net of $1.0 million in foreign withholding taxes, and supplied
additional technical resources in exchange for certain licenses covering
existing technology and future technology developed by the companies under the
joint development activities contemplated by the Agreement. The combined
technical and financial resources of the Company and HML focused on the
improvement of the Company's inductive thin film disk head business and the
development and commercialization of MR thin film disk head products. HML has
the rights to manufacture products based on this technology and has certain
marketing and distribution rights for certain disk head products and markets.
HML also provided a guarantee for the extension of the Company's existing
$10.0 million revolving credit facility to March 1996.
During fiscal 1993, the Company entered into additional technology
development agreements (the "Development Agreements") with four major domestic
disk drive companies relating to the development of MR thin film disk head
products and technology. During fiscal 1994, the joint development efforts
under one of these Development Agreements were suspended and, under the
remaining Development Agreements, funding of up to an aggregate of $3.1
million was paid to the Company from inception of these programs through the
first quarter of fiscal 1994. During each of fiscal years 1994 and 1993 the
Company recognized as income, funding under the HML Agreement and the
Development Agreements in the amounts of $14.1 million and $15.1 million,
respectively. Funding was completed by the end of fiscal 1994.
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. 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>
1995
Net sales........................ $ 55,373 $64,919 $ 79,860 $ 92,448
Gross profit (loss) (1).......... (794) 5,123 16,406 19,181
Net income (loss)................ (11,714) (2,691) 6,721 9,432
Net income (loss) per share $ (0.53) $ (0.12) $ 0.30 $ 0.40
Weighted average common and
dilutive equivalent shares
outstanding 22,074 22,100 22,666 23,577
1994
Net sales........................ $ 71,244 $69,834 $ 70,289 $ 64,560
Gross profit (loss) (1).......... 2,686 2,011 (2,723) (8,044)
Net loss......................... (6,245) (9,375) (16,505) (20,545)
Net loss per share $ (0.28) $ (0.42) $ (0.75) $ (0.93)
Weighted average common and
dilutive equivalent shares
outstanding 22,079 22,087 22,081 22,080
</TABLE>
- --------
(1) Prior year quarterly G&A expense amounts have been reclassified to cost of
sales to conform with fiscal 1995 presentation.
F-16
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE--None
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the
Commission in connection with the 1996 Annual Meeting of Stockholders ("the
Proxy Statement").
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning Directors of the Company appears in the Company's
Proxy Statement, under Item 1 "Election of Directors". This portion of the
Proxy Statement is incorporated herein by reference.
(b) For information with respect to Executive Officers, see Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's Proxy
Statement, under the caption "Executive Compensation", and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management appears in the Company's Proxy Statement, under Item 1
"Election of Directors", and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Company's Proxy Statement, under Item 1 "Election of
Directors", and is incorporated herein by reference.
I-1
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following documents are filed as part of this Report:
Financial Statements--See Index to Consolidated Financial Statements at
Item 8 on F-1 of this Report.
(2) Supplemental Schedule:
Report of Arthur Andersen LLP
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements
or notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3 Certificate of Incorporation and Bylaws (1) Amended and Restated
Bylaws (2) Amendment to Bylaws dated June 14, 1989(3) Certificate of
Incorporation (as amended) (4)
4 Instruments defining the rights of securities holders including
indentures Rights Agreement, dated as of October 19, 1988, between
Applied Magnetics Corporation and First Interstate Bank of California,
as Rights Agent (2)
10 (a) Applied Magnetics Corporation 1982 Long-Term Incentive Plan (5)
(b) Applied Magnetics Corporation Nonstatutory Stock Option Plan (6)
(c) Applied Magnetics Corporation 1986 Long-Term Incentive Plan (6)
(d) Applied Magnetics Corporation 1988 Stock Option Plan (7)
(e) Applied Magnetics Corporation 1989 Long-Term Incentive Plan (8)
(f) Loan Agreement dated February 13, 1992 between Applied Magnetics
Corporation and Union Bank, N.A., as amended (9)
(g) License and Technology Development Agreement dated as of September 25,
1992, between Applied Magnetics Corporation and Hitachi Metals, Ltd.
(9)
(h) Deeds of Trust naming as beneficiary Hitachi Metals, Ltd. to secure
the Company's obligations under a letter agreement dated March 24,
1995 (15)
(i) Applied Magnetics Corporation 1992 Stock Option Plan (9)
(j) Financing Agreement dated January 11, 1995 between the Company and CIT
Group/Business Credit, Inc. (14)
(k) Letter Agreement between Registrant and Hitachi Metals, Ltd. Dated May
30, 1995 extending maturity date of Letter of Credit to April 12, 1996
(16)
(l) Purchase Agreement between the Company and Delta Bravo, Inc. For the
purchase of capital stock of Magnetic Data, Inc., a Delaware
Corporation and Brumko Magnetic Corp., a Nebraska Corporation (10)
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(m) Security Agreement between Registrant and Hitachi Metals, Ltd. dated
May 30, 1995 (16)
(n) Cross License and Joint Research and Development Agreement effective
as of November 5, 1993, between the Company and Hutchinson Technology
Incorporated (11)
(o) Applied Magnetics Corporation 1994 Employee Stock Option Plan (12)
(p) Applied Magnetics Corporation 1994 Nonemployee Director's Stock Option
Plan (12)
(q) Letter Agreement dated February 8, 1994 between the Company and O.M.
Fundingsland, formerly Executive Vice President of the Company (12)
(r) Letter Agreement dated January 12, 1994 between the Company and Louis
W. Rayer, formerly Vice President of the Company (12)
(s) Retention Agreement dated January 2, 1994, between the Company and
Raymond P. Le Blanc, Vice President, Secretary and General Counsel
of the Company (12)
(t) Letter Agreement dated as of November 14, 1994, between the Company
and the CIT Group/Business Credit, Inc. (13)
(u) Stock Purchase Agreement by and among the Company, Seagate Technology,
Inc. and Applied Tape Technology, Inc. (13)
(v) Letter Agreement dated September 12, 1994, between the Company and
William R. Anderson (13)
(w) Letter Agreement dated June 21, 1994 , between the Company and Dr.
Richard D. Balanson (13)
(x) Letter Agreement dated September 12, 1994, between the Company and
Kathryn E. Gehrke (13)
(y) Letter Agreement dated August 1, 1994, between the Company and
Grisanti, Galef & Goldress, Inc. (13)
(z) Offer letter dated April 19, 1995 between Maybank Banking Berhad and
Applied Magnetics (M) Sdn Bhd. for extension of Credit Facility (16)
(aa) Corporate Guarantee of the Registrant dated June 8, 1995 in favor of
Maybank Banking Berhad (16)
(bb) Employment Agreement between Craig D. Crisman and the Company dated
August 1, 1995
(cc) Letter Agreement dated July 19, 1995, between the Company and Raymond
P. Le Blanc
(dd) 1995 Key Management Incentive Bonus Plan dated March 16, 1995
11 Statement re computation of per share earnings.
13 Annual Report to Shareholders. Integrated with Form 10-K
21 Subsidiaries of the registrant. Incorporated by reference on Form 10-K
dated December 29, 1994
22 Published report regarding matters submitted to vote of security
holders. None
23 Consent of experts and counsel. Consent of Arthur Andersen LLP dated
December 20, 1995.
24 Power of Attorney. None
27 Financial Data Schedule
28 Information from reports furnished to state insurance regulatory
authorities. None
(1) Filed an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-13653) filed on April 21, 1987, and incorporated
herein by reference
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 19, 1988, and incorporated herein by reference
(3) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q
dated May 4, 1989 and incorporated herein by reference
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(4) Filed as an exhibit to the Corporation's Quarterly Report on Form
10-Q dated May 4, 1989 and incorporated herein by reference
(5) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on January 27, 1983, and
incorporated herein by reference
(6) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on December 23, 1985, and
incorporated herein by reference
(7) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on January 7, 1988, and
incorporated herein by reference
(8) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on December 30, 1988 and
incorporated herein by reference
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
dated December 22, 1992, as amended by Form 8, filed February 12,
1993 and incorporated herein by reference
(10) Filed as an exhibit to the Company's Report on Form 10-Q dated May
14, 1993 and incorporated herein by reference
(11) Filed as an exhibit to the Company's Current Report on Form 8-K
dated December 2, 1993 and incorporated herein by reference
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
dated March 31, 1994, and incorporated herein by reference
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K
dated December 29, 1994
(14) Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 20, 1995 and incorporated by reference
(15) Filed as an exhibit to the Company's Report on Form 10-Q dated May
15, 1995 and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Report on Form 10-Q dated
August 15, 1995 and incorporated herein by reference.
(b) Report on Form-8K. None
(c) Exhibits. The exhibits listed (a) (2) above are submitted as a
separate section of this report
(d) The individual financial statements of the registrant have been
omitted since the registrant is primarily an operating company and
all subsidiaries are included in the consolidated financial
statements.
</TABLE>
I-4
<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: /s/ Craig D. Crisman Date: December 21, 1995
---------------------------------
Craig D. Crisman
Chairman of the Board, Chief Executive
Officer and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Peter T. Altavilla Date: December 21, 1995
---------------------------------
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/ Craig D. Crisman December 21, 1995
- -------------------------------------
Craig D. Crisman, Chairman of the Board,
Chief Executive Officer, and Chief Financial Officer
/s/ Harold R. Frank December 21, 1995
- -------------------------------------
Harold R. Frank, Director and Chairman Emeritus
/s/ R.C. Mercure, Jr. December 21, 1995
- -------------------------------------
R.C. Mercure, Jr., Director
/s/ Herbert M. Dwight, Jr. December 21, 1995
- -------------------------------------
Herbert M. Dwight, Jr., Director
/s/ Jerry E. Goldress December 21, 1995
- -------------------------------------
Jerry E. Goldress, Director
I-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Applied Magnetics Corporation
included in this Form 10-K and have issued our report thereon dated December
12, 1995. Our audits were made for the purposes of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule listed
in Item 14 (a) (2) is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
December 12, 1995
I-6
<PAGE>
SCHEDULE II
APPLIED MAGNETICS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BALANCE AT AT END
BEGINNING OF
CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS OTHER (A) PERIOD
-------------- ---------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1993
Allowance for doubtful col-
lection:
Accounts Receivable........ $ 1,958 $ 550 $ (5) $ 739 $ 3,242
Notes Receivable........... 2,559 12,009 (3,261) -- 11,307
Year Ended September 30, 1994
Allowance for doubtful
collection:
Accounts Receivable........ $ 3,242 $ 100 $ (28) $ 315 $ 3,629
Notes Receivable........... 11,307 1,878 -- -- 13,185
Year Ended September 30, 1995
Allowance for doubtful
collection:
Accounts Receivable........ $ 3,629 $ -- $ 268 $(3,245) $ 652
Notes Receivable........... 13,185 1,229 -- 3,245 17,659
</TABLE>
- --------
(A) In 1993 and 1994 this amount represents recoveries of accounts previously
written off. In 1995 the Company determined that its allowance for
doubtful trade receivables was in excess of the amount needed and it
transferred this excess to its allowance for notes receivable where it was
required.
I-7
<PAGE>
EXHIBIT 10(bb)
EMPLOYMENT AGREEMENT
--------------------
This AGREEMENT, made effective as of August 1, 1995, between Applied
Magnetics Corporation, a Delaware corporation (the "Company"), a corporation
having its principal office at 75 Robin Hill Road, Goleta, California 93117, and
Craig D. Crisman ("Executive").
RECITALS
--------
The Company desires to engage the services and employment of Executive
on its own behalf and on behalf of its affiliated companies for the period
provided in this Agreement, and Executive is willing to accept employment by the
Company on a full-time basis for such period, upon the terms and conditions
hereinafter set forth.
The execution of this Agreement has been duly authorized by the Board
of Directors of the Company ("Board"), and the terms of compensation contained
herein have been approved by the Stock Option and Compensation Committee of the
Board (the Committee").
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereto agree as follows:
1. Employment. The Company agrees to employ Executive and Executive
----------
agrees to accept employment by the Company, for the period stated in paragraph 3
hereof and upon the other terms and conditions herein provided.
2. Position and Responsibilities. During the period of his
-----------------------------
employment hereunder, Executive agrees to serve the Company and the Company
shall employ Executive as President and Chief Executive Officer of the Company.
Executive shall be elected to the office of Chairman of the Board prior to the
1996 Annual Meeting of Stockholders.
3. Terms and Duties.
----------------
(a) Term of Employment. The period of Executive's employment
------------------
under this Agreement shall commence on the date of this Agreement and shall
continue through July 31, 2000 (the "Term").
(b) Duties. During the Term and except for illness, reasonable
------
vacation periods, and reasonable leaves of absence, Executive shall devote his
best efforts and all his business time, attention, skill and efforts to the
business and affairs of the Company and its affiliated companies, as such
business and affairs now exist and as they may be hereafter changed or added to,
under and pursuant to the general direction of the Board; provided, however,
that, with the approval of the Board, Executive may serve, or continue to serve,
on the boards of directors of and hold any other offices or positions in,
companies or organizations which, in such Board's judgment, will not present any
conflict of interest with the Company or any of its subsidiaries or affiliates
or divisions, or materially affect the performance of Executive's duties
pursuant to this Agreement. The Company shall retain full direction and control
of the means and methods by which Executive performs the services for which he
is employed hereunder. The services which are to be employed by Executive
hereunder are to be rendered in the State of California, or in such other place
or places in the United States or elsewhere as may be determined from time to
time by the Board, but are to be rendered primarily at the headquarters of the
Company in the State of California.
4. Compensation and Reimbursement of Expenses; Other Benefits.
----------------------------------------------------------
(a) Compensation. The Company shall compensate Executive during
------------
the term of this Agreement as follows:
(i) Base Salary. Executive shall be paid a base salary,
-----------
adjusted as provided in Section 4(a)(iv), ("Base Salary") of not less than Three
Hundred Seventy-Five Thousand Dollars ($375,000) per year in installments
consistent with the Company's usual practices;
(ii) Individual Bonuses and Stock Benefit.
------------------------------------
1
<PAGE>
Executive shall participate in an incentive compensation plan to be devised by
the Board commencing with fiscal 1996. He shall also be granted nonqualified
options to purchase 300,000 shares of the Company's common stock under the
Company's existing stock option plans that have been registered with the
Securities and Exchange Commission. Such options shall be granted on the
effective date of this agreement and shall bear an exercise price equal to the
fair market price of the Company's common stock on the New York Stock Exchange
as of the close of trading on such date. Such options shall be subject to
appropriate adjustments for stock dividends, stock splits, recapitalizations,
mergers, combinations and the like. Such options shall become exercisable over a
period of three years, with options to purchase 100,000 shares becoming
exercisable on the first anniversary date of this agreement, an additional
100,000 on the second anniversary date of this agreement, and the final 100,000
on the third anniversary date of this agreement.
(iii) Other Benefits. During the period of employment under this
--------------
Agreement, Executive shall be entitled to receive all other benefits of
employment generally available to other members of the Company's management and
those benefits for which key executives are or shall become eligible;
(iv) Base Salary Review. The Company agrees to review
------------------
Executive's Base Salary within twelve (12) months after his date of employment
and annually thereafter, or within the time period prescribed in salary
administration practices applied to all officers of the Company.
(b) Reimbursement of Expenses. The Company shall pay or
-------------------------
reimburse Executive for all reasonable travel and other expenses incurred by
Executive in performing his obligations under this Agreement. The Company
further agrees to furnish Executive with such assistance and office
accommodations as shall be suitable to the character of Executive's position
with the Company and adequate for the performance of his duties hereunder.
5. Benefits Payable Upon Disability or Death.
-----------------------------------------
(a) Disability. If during the Term Executive should fail to
----------
perform his duties hereunder on account of illness or other incapacity which the
Board shall in good faith determine renders Executive incapable of performing
his duties hereunder, and such illness or other incapacity shall continue for a
period of more than 6 months, the Company shall have the right, upon written
notice to Executive to terminate this Agreement. Executive shall be entitled to
disability payments and coverage upon the basis available to Company employees
under, and subject to the terms and provisions of, disability benefit plans of
Company which may from time to time be in effect and applicable to employees.
(b) Death. If Executive shall die during the Employment Term,
-----
the employment of Executive shall thereupon terminate and all options
exercisable by Executive at the time of his death shall remain exercisable for a
period of 180 days thereafter.
(c) Other Benefits. The provisions of this Section 5 shall not
--------------
affect the entitlements of Executive's heirs, executors, administrators,
legatees, beneficiaries or assigns under any employee benefit plan, fund or
program of the Company.
6. Obligations of Executive During and After Employment.
------------------------------------------------------
(a) Executive agrees that during the term of his employment
under this Agreement, he will engage in no other business activities, directly
or indirectly, which are or may be competitive with or which might place him in
a competing position to that of the Company, or any affiliated company, without
the written consent of the Board.
(b) Executive realizes that during the course of his employment
he will have produced and/or have access to confidential information, records,
notebooks, data, formulae,
2
<PAGE>
specifications, trade secrets, customer lists, inventions and processes of
Company and its affiliated companies. Therefore, during or subsequent to his
employment by Company, or by an affiliated company, Executive agrees to hold in
confidence and not directly or indirectly to disclose or use or copy or make
lists of any such information, except to the extent authorized by the Company in
writing. All records, files, drawings, documents, equipment, and the like, or
copies thereof, relating to the Company's business, or the business of an
affiliated company, which Executive shall prepare, or use, or come into contact
with, shall be and remain the sole property of Company, or of an affiliated
company, and shall not be removed from the Company's or the affiliated Company's
premises without its written consent, and shall be promptly returned to the
Company upon termination of the Executive's employment with the Company and its
affiliated companies.
7. Termination By Company.
----------------------
(a ) Termination For Cause. Except as otherwise provided
---------------------
herein, the Company may terminate the employment of Executive "for Cause" at any
time upon written notice to Executive specifying the cause of termination. If
terminated pursuant to this Section 7(a), the then current Base Salary shall be
paid on a prorated basis to the date of termination. For purposes of this
Agreement, "for Cause" shall mean the discharge resulting from a determination
by the Company that Executive (i) has been convicted of a crime involving moral
turpitude, including fraud, theft or embezzlement, (ii) has failed or refused
(in a material respect) to follow reasonable policies or directives established
by the Board which failure or refusal continues for ten (10) days following
written notice thereof to Executive, (iii) has willfully and persistently failed
to attend to material duties or obligations imposed on him under this Agreement
which failure continues for ten (10) days following written notice thereof to
Executive, or (iv) has continued to engage, after ten (10) days written notice,
in any act that constitutes a breach of his fiduciary duties to, or involves a
conflict of interest with, the Company or involves a usurpation of a material
opportunity of the Company. A termination by the Company under this Section 7(a)
shall not prejudice any remedy to which the Company may be entitled either at
law, in equity, or under this Agreement.
(b) Termination Without Cause. The Company may terminate the
-------------------------
employment of Executive without cause at any time upon written notice to
Executive; provided, however, that the Company shall be obligated to pay
Executive, as severance, an amount equal to the greatest Base Salary payable
during the Term for a period of one year following the date of termination, and
the Committee shall accelerate the exercise dates of all stock options then held
by the Executive to the date of termination. Such options shall remain
exercisable for 180 days following the termination date.
8. Termination by Executive.
------------------------
(a) Termination For Good Reason. If Executive terminates his
---------------------------
employment hereunder for Good Reason (as hereinafter defined), he shall be
entitled to the benefits set forth herein applicable to termination without
Cause as set forth in Section 7(b) hereof. For the purposes of this Agreement,
Good Reason" shall mean:
(i) assignment to the Executive of duties inconsistent with his
responsibilities as they existed on the date of this Agreement, a substantial
alteration in the title of Executive (so long as the existing corporate
structure of the Company is maintained) or substantial alteration in the status
of Executive in the Company organization;
(ii) reduction by the Company in the Executive's Base Salary;
(iii) failure by the Company to continue in effect, without
substantial change, any benefit plan or arrangement in which Executive was
participating or the taking of any action by the Company which would adversely
affect the Executive's participation in or materially reduce his benefits under
any benefit plan, unless all other key executives are similarly affected; or
3
<PAGE>
(iv) any material breach by the Company of any provision of this
Agreement without the Executive having committed any material breach of his
obligations hereunder, which breach is not cured within ten (10) days following
written notice thereof to the Company of such breach.
(b) Termination Without Good Reason. If Executive terminates his
-------------------------------
employment hereunder without Good Reason his then current Base Salary shall be
paid on a prorated basis to the date of the termination, but no incentive
compensation shall be payable for the year in which such termination takes
place.
9. Termination After Corporate Changes. An acquisition of
-----------------------------------
the Company during the Term by merger, sale of all or substantially all of the
Company's assets, or purchase of 51% or more of the voting stock of the Company,
or other reorganization resulting in a change of a majority or more of the
ownership of the Company's voting stock shall be deemed to be, and shall be
referred to as, a "Change of Control" whether or not such Change of Control was
caused or could have been prevented by acts of the Company, and whether or not
in each case Executive shall have voted for such Change of Control as a director
or shareholder or consented thereto expressly or in writing. If, following a
Change of Control Executive shall (i) resign after giving the Company not less
than 60 days written notice or (ii) have been terminated, Executive shall be
entitled to the greater of (aa) the benefits set forth herein applicable to
termination without cause as set forth in Section 7(b) hereof, or (bb) the
greatest Base Salary paid to Executive during the Term for the balance of the
Term. Notwithstanding the foregoing, in the event that any payment to Executive
under this Agreement would be nondeductible by the Company in whole or in part
on account of Section 280G of the Internal Revenue Code of 1986, as amended, the
amount of such payment shall be reduced (but not below zero) until no portion of
such amount would be nondeductible under Section 28OG.
10. Company's Insurance on Executive. The Company may secure in
--------------------------------
its own name, or otherwise, and at its own expense, life, health, accident and
other insurance covering Executive, or Executive and others. Executive agrees
to assist the Company in procuring such insurance by submitting to the usual and
customary medical and other examinations and by signing, as the insured, such
applications and other instruments in writing as may be reasonably required by
the insurance companies to which application is made for such insurance.
Executive agrees that he shall have no rights, title or interest in or to any
insurance policies or the proceeds thereof which the Company may so elect to
take out or to continue on his life.
ll. No Obligation to Mitigate Damages.
---------------------------------
(a) Executive shall not be required to mitigate damages or the
amount of any payment provided for under this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment provided for under
this Agreement be reduced by any compensation earned by Executive as a result of
employment by another employer or by payment to him of retirement benefits after
the date of termination of his employment.
(b) The provisions of this Agreement, and any payment provided
for hereunder, shall not reduce any amounts otherwise payable, or in any way
diminish Executive's existing rights, or rights which would accrue solely as a
result of the passage of time, under any benefit plan, employment agreement or
other contract, plan or arrangement, except that the provisions of Section 9 of
this Agreement and any payment provided for thereunder, shall be in lieu of
payments otherwise due to Executive under any provision of Sections 7 and 8
hereof.
12. Arbitration. Any dispute, controversy or claim arising
-----------
under or in connection with this Agreement, or the breach hereof, shall be
settled exclusively by arbitration in accordance with the Commercial Arbitration
Rules of the American Arbitration Association then in effect. Judgment upon
4
<PAGE>
the award rendered by the Arbitrator(s) may be entered in any court having
jurisdiction thereof. Any arbitration held pursuant to this Section 12 shall
take place in Santa Barbara County, California.
13. Notice. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company:
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, California 93117
Attention: Harold R. Frank
If to the Executive:
Craig D. Crisman
291 32nd Avenue
San Francisco, California 94121
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
14. Non-Waiver. Complete Agreement. Governing Law. No provisions
----------------------------------------------
of this Agreement may be modified, waived or discharged except in writing signed
by both parties. No waiver by either party at any time of any breach by the
other party of, or compliance with, any condition or provision of this Agreement
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior to subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by either party which are not set forth expressly in this
Agreement. This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
15. Legal Fees and Expenses. The Company shall pay all reasonable
-----------------------
legal fees and expenses which Executive may incur as a result of the Company's
contesting the validity, enforceability or Executive's good faith interpretation
of, or good faith determination under, this Agreement; provided, however, that
the Company shall not pay any legal fees and expenses incurred by Executive in
contesting the termination of Executive's employment for Cause or asserting that
his termination was for Good Reason if, as a result of such contest, it is
determined that the Executive was in fact terminated for Cause, or that he did
not terminate his employment for Good Reason.
16. Severability. The invalidity or unenforceability of any
------------
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
17. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together shall constitute one and the same instrument.
5
<PAGE>
IN WITNESS WHEREOF, the Executive and the Company (pursuant to a
resolution of its Board adopted at a duly constituted meeting) have executed
this Agreement, effective as of the date first above written.
APPLIED MAGNETICS CORPORATION,
a Delaware corporation
By __________________________________
Harold R. Frank
Chairman, Emeritus
_____________________________________
Craig D. Crisman,
Chairman and Chief Executive Officer
6
<PAGE>
EXHIBIT 10(cc)
TERMINATION AGREEMENT AND RELEASE
---------------------------------
This Termination Agreement and Release, executed as of this l9th day of July
1995, is by and between Raymond P. Le Blanc (hereinafter referred to as
"Employee") and Applied Magnetics Corporation, a Delaware corporation
(hereinafter referred to as "Employer").
Recitals
--------
A. Employee is currently serving as Vice President, Secretary and
General Counsel of Employer and has management responsibilities for Employer's
Legal Department.
B. Employer has decided to discontinue its Legal Department,
eliminate the position of General Counsel and to procure legal services from
other sources.
C. Employee and Employer desire to resolve all claims by Employee
and to reach a mutual understanding and acceptance of the terms and conditions
related to the termination of Employee's employment with Employer.
Agreement
---------
NOW, THEREFORE in consideration of the mutual promises and covenants
herein contained it is hereby agreed as follows:
1. Employee will be terminated from employment by Employer
effective March 1, 1996 ("Termination Date"). Employee will cease to be an
officer of Employer and its subsidiary and affiliated corporations and entities
as of the date hereof and except as otherwise expressly provided herein is
relieved of his duties and responsibilities as an officer and employee of
Employer. Employee shall also no longer be considered by Employer to be a
"reporting person" for purposes of Rule 16b promulgated under the Securities and
Exchange Act of 1934, as amended. Employee agrees that from the date of this
Agreement to the Termination Date he will be available to respond to inquiries
from Employer regarding information he obtained while an employee of Employer,
provided that the time spent by Employee on such matters during that period
shall not exceed four (4) hours per month, unless the parties agree otherwise in
writing. In the event the Employer utilizes the services of Employee in excess
of four (4) hours per month prior to the Termination Date and at any time after
the Termination Date, Employee shall charge Employer for such time and Employer
shall pay for such time, at his normal hourly rate of $250 and for reasonable
costs and expenses. Employer will promptly cause a person other than Employee to
be designated as Employer's agent for service of process in each jurisdiction
where Employer is qualified to conduct business and Employee is hereby relieved
of any and all duties as agent for service process.
2. Employee will not report to work at any of Employer's
facilities. He will, however, remain on employee status to and including the
Termination Date subject to the provisions of paragraph 1 above. At no time from
and after the date of this Agreement shall Employee be authorized to represent
or bind Employer or any of its subsidiary or affiliated corporations or entities
in any way, or incur any reimbursable business expenses, unless expressly
authorized in advance in writing by the Chief Executive Officer of Employer.
During the period from the date hereof to the Termination Date, Employer shall
provide to Employee during normal business hours reasonable secretarial support
(but not office space) to assist Employee in his efforts to seek other
employment. Employee shall be kept in Employer's voice mail system until March
1, 1996.
3. During the period from the date of this Agreement to and
including the Termination Date, Employer will pay to Employee $3,269.20 per week
in accordance with Employer's standard payroll practices. Employee, or his
heirs or personal representative in the case of death or disability shall be
paid said salary, and shall receive the benefits referred to in paragraph 4
below, except as otherwise expressly provided therein, even in the event
Employee dies or becomes disabled (as defined in section 1.6 of the Retention
Agreement), is employed by another entity, he establishes his own law practice
or otherwise becomes self-employed, provided,
1
<PAGE>
however, upon occurrence of any of these events he shall cease to be an employee
of Employer. Employer may deduct from said salary all customary and usual
payroll deductions, including contributions to Employer's 401(k) Plan in an
amount consistent with Plan limitations. Notwithstanding the foregoing, in the
event Employee is not employed by a third party or has not established his own
law practice or otherwise become self-employed by October 1, 1996, commencing on
that date, Employer agrees to pay Employee $3,269.20 per week, provided that
such obligation shall cease on the earliest to occur of (i) Employee becoming
employed by another entity, (ii) Employee establishing his own law practice or
otherwise becoming self-employed, or (iii) April 1, 1997.
4. Employer will continue Employee's current group insurance, or
the equivalent thereof (including group medical, dental, long-term disability,
vision, basic life insurance, supplemental life insurance coverage, health care
spending account, and 401(k) plan), including dependent coverage as applicable,
through the Termination Date. From and after the date of this Agreement,
Employee will not be entitled to participate in any other employee benefit plans
of Employer except those specifically listed above, and Employee will not accrue
any vacation or paid time off or personal time, provided, however, that if it
should at any time be determined that Employee has accrued vacation/personal
time during the period from the date of this Agreement to the Termination Date,
the payments referred to in paragraph 3 above shall be deemed to include payment
in full for any accrued vacation/personal time. Commencing on March 1, 1996,
Employer agrees to reimburse Employee for COBRA premiums on the Employer's
regular group medical, dental and vision policies for a period of 18 months,
provided that in the event Employee becomes covered under plans offered by
another employer, generally comparable to the group plans provided by Employer,
prior to the expiration of the obligation of Employer to make such
reimbursements, the obligation of Employer to make such reimbursements shall
immediately cease. Reimbursement will be made within ten (10) days of receipt
by Employer of an invoice from Employee reflecting COBRA premium payments made.
5. Stock options providing for the purchase of 39,818 shares of the
Common Stock of Employer heretofore granted to Employee and as reflected on
Exhibit "A" attached hereto, and not vested are hereby deemed to be fully vested
as of the date hereof and shall be exercisable up to the Termination Date.
Employer represents that the acceleration of the exercisability of such stock
options does not require any amendments to any of the stock option plans
pursuant to which such options were granted and will hold Employee harmless and
indemnify him for any loss, damage, cost or expense suffered or incurred by
Employee in connection with any breach of this representation. So long as
employer is not in breach of the foregoing indemnification obligation, Employee
agrees (i) not to claim or assert that such acceleration requires any such
amendment to any such stock option plan, and (ii) to waive all rights with
respect to any such claim or assertion, or any cause of action relating thereto
(other than rights to the indemnification described in the immediately preceding
sentence).
6. For and in consideration of all claims that Employee has or may
have against Employer for emotional distress, personal injury or other tort
damages Employee claims to have suffered as a consequence of his termination,
Employer agrees to pay to Employee a sum equal to the current outstanding
principal balance under the Company Loan, as hereinafter defined (together with
any and all interest due thereunder), plus an amount equal to the closing price
of the Employers' Common Stock as reported on the New York Stock Exchange on the
date of this Agreement multiplied by 7,500, which shall be payable as follows:
(a) Employer's agreement, effective as of the date of this
Agreement to forgive, release, cancel and discharge all remaining indebtedness
due by Employee under the Company Loan; and
(b) Employer's agreement to release all restrictions against
the transfer, sale or hypothecation imposed by Employer on all shares of the
Common Stock of Employer issued to Employee under Employer's 1989 Amended and
Restated Long Term Incentive Plan ("Restricted Shares").
Upon execution of the Agreement, the Employer will deliver to Employee the
original Executive Note as hereinafter defined, marked "Canceled" and a full and
complete reconveyance of the Deed of Trust in recordable form and shall also
furnish to the Employer's Transfer Agent, First Interstate Bank of California,
written, irrevocable instructions to the effect that all restrictions
2
<PAGE>
shall be immediately removed from the Restricted Shares and that such shares may
be transferred free and clear of such restriction and to the extent the
Restricted Shares are free of restrictions on sale provided under Rule 144
promulgated under the Securities Act of 1933, as amended, free of any
restrictive legends or stop codes. The consideration payable to Employee shall
not be reflected in his W-2 income, shall not be subject to withholding taxes or
other payroll deduction and shall not be reported on Form 1099. As used herein,
the term "Company Loan" shall mean that certain loan, with a current outstanding
principal balance of $60,000, made by Employer to Employee and represented by
(a) that certain Promissory Note dated January 10, 1994 (the "Executive Note")
and (b) a deed of trust dated January 10, 1994, on that certain improved real
property located at 2225 St. James Drive, Santa Barbara, California ("Deed of
Trust").
7. Employer, shall at its cost, provide to Employee the
outplacement services of Drake, Beam, Morin, Inc. Pursuant to that firm's
Executive Six Month Program, such services to be provided at a Los Angeles area
office of that firm.
8. Employee shall be entitled to take title to the furniture in his
current office which consists of a desk, chair, filing cabinets, personal
computer, meeting table and chairs and book shelf, as well as the legal
reference materials located in Employer's "Law Library", including the book
shelves holding such materials, which are hereby conveyed to the Employee on an
"AS IS, WHERE IS" basis without any warranties either express or implied. Such
furniture must be removed from Employer's premises at Employee's cost on or
before July 28, 1995. Employee will be granted access to the premises to remove
above mentioned items.
9. Employee agrees that he has heretofore received payment in full
for any and all (i) paid time off (PTO) accrued to the date of this Agreement,
(ii) salary and other compensation through the date of this Agreement, and (iii)
outstanding business expenses incurred prior to the date of this Agreement.
10. In consideration of the above, Employee for and on behalf of
himself, his spouse, descendants, ancestors, dependents, heirs, executors,
administrators, assigns and successors, and each of them, hereby covenants not
to sue and fully, forever and irrevocably releases, discharges and acquits
Employer its subsidiaries and affiliates, and each of them, and their respective
officers, directors, shareholders, employees, agents, affiliates and attorneys
and their respective heirs, representatives, successors and assigns, and each of
them (hereinafter collectively referred to as the "Employer Releases") from any
and all actions, causes of action, debts, agreements, promises, liabilities,
claims, damages or demands of any kind or nature whatsoever, that Employee has
had, may have had, or now has, or hereafter can, shall or may have against the
Employer Releases, and each of them, for or by reason of any matter, cause or
thing whatsoever, through and including the date hereof, including specifically,
but not exclusively and without limiting the generality of the foregoing,
employment of Employee by Employer and the termination thereof, and any and all
forms of compensation or reimbursement, including any incentive awards or
bonuses, relating to such employment, any claim for worker's compensation or any
claim under or pursuant to that certain Retention Agreement, dated as of January
2, 1994, by and between Employer and Employee (the "Retention Agreement").
Notwithstanding the foregoing, nothing contained herein shall be construed as a
waiver, release or discharge of any rights which Employee may have (i) to
indemnification under and subject to the provision of Article VII of the By-Laws
of Employer, (ii) under either Delaware General Corporation Law 145, or
California Labor Code 2802, or (iii) under the Company's directors' and
officers' liability insurance policies.
11. In consideration of the above, Employer, for and behalf of
itself, its subsidiaries and affiliates, and each of them and their respective
officers, directors, shareholders, partners, employees, agents, affiliates and
attorneys, and their respective heirs, representatives, successors and assigns,
and each of them hereby fully, forever, and irrevocably releases, discharges and
acquits Employee, his spouse, descendants, ancestors, dependents, heirs,
executors, administrators, assigns and successors, and each of them ("Employee
Releasees"), from any and all actions, causes of action, debts, agreements,
promises, liabilities, claims, damages or demands of any kind or nature
whatsoever, that Employer has had, may have had, or now has, or hereafter can,
shall or may have against Employee Releasees, and each of them, for or by reason
of any matter, cause or thing whatsoever, through and including the date hereof,
including specifically, but not exclusively and without limiting the generality
of the foregoing, any liability arising out or in connection with the employment
of Employee by Employer. Notwithstanding the foregoing, nothing contained herein
shall be construed as a waiver, releasee or discharge of any
3
<PAGE>
rights which Employer may have in connection with any act or omission by
Employee at any time which constituted misappropriation, selfdealing, fraud or
intentional or willful misconduct of any nature.
12. It is understood and agreed that the releases set forth in
paragraphs 10 and 11 above, respectively, are intended as and shall be deemed to
be full and complete releases of any and all claims that Employee may or might
have against the Employer Releasees, or any of them, or, except as noted in
paragraph 11 above, that Employer may have against Employee Releasees, or any of
them, arising out of any act, omission or occurrence to date and said releases
are intended to cover and do cover any and all future damages and Claims not now
known to Employee or Employer or which may later develop or be discovered,
including all causes of action therefor and arising out of or in connection with
any occurrence to date.
13. The parties hereto each hereby represent and warrant that they
are aware of the provisions of Section 1542 of the Civil Code of the State of
California, which section reads as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
The provisions of Section 1542 are hereby expressly waived by each party hereto.
Each party hereto similarly expressly waives any and all rights and benefits
conferred by any law of any state or territory of the United States or of any
foreign country, or principle of common law, which is similar, comparable or
equivalent to Section 1542 of the California Civil Code. Nothing herein,
however, shall be deemed to release any claim by either party hereto which
arises out of the nonperformance or breach of any of the terms and conditions
contained herein. Notwithstanding the foregoing, nothing herein contained shall
limit the right of either party hereto to enforce the provisions of this
Agreement.
14. Employee expressly acknowledges and agrees that, by entering
into this Agreement, he is waiving any and all rights or claims that he may have
arising under the Age Discrimination in Employment Act of 1967, as amended,
which have arisen on or before the date of execution of this Agreement.
Employee further expressly acknowledges and agrees that:
(a) In return for this Agreement, he will receive compensation
beyond that which he was already entitled to receive before entering into this
Agreement;
(b) He is hereby advised in writing by this Agreement to consult
with an attorney before signing this Agreement;
(c) He was given a copy of this Agreement on July 19, 1995, and is
informed by this Agreement that he has 21 days within which to consider the
Agreement; and
(d) He is hereby advised that he has seven (7) days following the
date of execution of this Agreement in which to revoke this Agreement. Any
revocation of this Agreement must be in writing and hand delivered during the
revocation period. This Agreement will become effective and enforceable seven
days following execution by Employee unless it is revoked during the seven-day
period.
Notwithstanding subparagraph (c) above, Employee, with full knowledge of his
rights, waives the period of twenty-one (21) days within which to consider this
Agreement.
15. Employer and Employee each promise to maintain this Agreement in
strict confidence and to make no disclosure of the terms of this settlement to
any third party, except attorneys for the parties, Employer's accountants,
Employee's family members, Employee's tax accountant, banks or other lenders to
whom Employee may be indebted or from whom Employee may seek to obtain credit,
and subject to the consent of Employer, which will not be unreasonably withheld,
the non-financial portions of this Agreement may be made available to potential
employers of Employee. If requested either party may make this Agreement
available to
4
<PAGE>
governmental tax authorities and as may be required by law, provided, however,
that nothing herein contained shall prohibit Employee from disclosing the terms
of this Agreement as may be required by law in order to assert a claim for
unemployment insurance benefits, provided, however, that the foregoing shall in
no way limit the effect of the releases set forth above.
16. It is hereby agreed that both parties to this Agreement shall
refrain from making any disparaging remarks about the other party to this
Agreement (including disparaging remarks by the directors and executive officers
of Employer, but excluding any such remarks by the other employees of Employer)
and shall further refrain from interfering or causing others to interfere in the
business or affairs of the other party.
17. Employee agrees to return all Employer property in his
possession to Employer on or before the date hereof, including but not limited
to company-issued credit cards and office keys. Employee acknowledges that he
has heretofore entered into a Confidentiality and Assignment Agreement
("Confidentiality Agreement") with the Employer. The Confidentiality Agreement
and Section 12 of the Retention Agreement are each by this reference
incorporated herein in their entirety and are made a part of this Agreement.
Employee agrees and acknowledges that, as an employee of Employer, he is obliged
to comply with Employer's policies and procedures with respect to confidential,
proprietary and non-public information. Employee agrees that he will not,
without the Employer'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
information which is subject to the Confidentiality Agreement or Section 12 of
the Retention Agreement. Employee understands and agrees that any material
disclosure in contravention of the foregoing may release Employer from any
obligations it may have to Employee under this Agreement.
18. This Agreement supersedes any prior written, oral or implied
agreement between the parties hereto regarding the subject matter hereof,
particularly including, but not limited to, the Retention Agreement, which shall
in all respects, except Section 12 thereof which shall remain binding on
Employee and which is hereby incorporated herein by reference, be deemed null
and void effective as of the date hereof. This Agreement may only be amended by
a written agreement signed by the parties hereto.
19. Employee agrees and understands that the execution of this
Agreement shall not constitute or be construed as an admission by Employer of
any liability to or of the validity of any claim whatsoever by Employee.
20. Employer agrees and understands that the execution of this
Agreement shall not constitute or be construed as an admission by Employee of
any liability to or of the validity of any claim whatsoever by Employer.
21. Employer and Employee acknowledge that they have been advised to
obtain and have obtained the advice of legal counsel of their choice (in the
case of Employer, someone other than Employee) regarding their execution of this
Agreement.
22. Employee hereby represents and agrees that in entering into this
Agreement he has relied solely upon his own judgment, belief and knowledge and
that, except as set forth herein, no statement made by or on behalf of Employer
has in any way influenced him in such regard.
23. Employer hereby represents and agrees that in entering into this
Agreement it has relied solely upon its own judgment, belief and knowledge and
that, except as set forth herein, no statement made by or on behalf of Employee
has in any way influenced it in such regard.
24. Each party hereto represents and warrants to the other party
hereto that he or it has not assigned any claim he or it may or might have
against the other party to any third party.
25. This Agreement shall inure to the benefit of and be binding upon
each of the parties hereto and their respective successors and assigns. This
Agreement is in the nature of a personal services contract and may not be
assigned by Employee without the prior written consent of Employer. Any
assignment by Employee without Employer's consent shall be null and void.
5
<PAGE>
This Agreement constitutes the entire agreement and understanding between the
parties hereto with respect to the subject matter hereof and may be amended only
by a written instrument executed by both parties hereto.
26. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
27. If either party files any action or brings any proceeding
against the other arising out of this Agreement, the prevailing party in any
such action or proceeding shall be entitled to recover as an element of his or
its costs of suit, and not as damages, reasonable attorneys' fees to be fixed by
the court.
28. The parties hereto acknowledge that the payments, benefits and
other accommodations provided for in this Agreement are not intended to and do
not establish any severance or termination allowance policy, plan or procedure
of Employer.
29. Employer represents that the material terms and conditions
contained herein have been approved by the Board of Directors of Employer.
30. It is agreed by each of the parties hereto that they have read
the above and fully understand the terms of this Agreement which they
voluntarily executed in good faith and deemed to be a full and equitable
settlement of this matter.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
__________________________________
Raymond P. Le Blanc
APPLIED MAGNETICS CORPORATION
By_________________________________
Craig D. Crisman, Chairman and
Chief Executive Officer
6
<PAGE>
Exhibit A
LeBlanc Stock Option Analysis
<TABLE>
<CAPTION>
Accelerated Cash Value Total
Option Shares Option of Option Cash
Number Grant date Vested Price Per Share Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
I-0641 Oct-94 5000 $3.875 $3.38 $16,875
LB0001 Sep-94 1113 $4.250 $3.00 $ 3,339
S-0012 Feb-94 20000 $5.125 $2.13 $42,500
I-0629 Oct-93 7800 $5.875 $1.38 $10,725
A-0379 Oct-93 2200 $5.875 $1.38 $ 3,025
LT-0008 June-82 3705 $1.296 $5.95 $22,061
TOTALS 39818 $98,525
</TABLE>
Shares With Accelerated Vesting as of July 17, 1995
Assumes a Stock Price of $7.25
7
<PAGE>
EXHIBIT 10(dd)
CONFIDENTIAL MEMORANDUM
To: (First Name) (Last Name)
From: Craig Crisman
Date: March 16, 1995
Subject: Key Management Incentive Cash Bonus Plan
______________________________________________________________________________
It is the company's total compensation philosophy to provide key employees such
as yourself with competitive compensation comprised of three components. These
components are base cash compensation, incentive cash bonus compensation, and
incentive stock options and/or restricted grants. This memo is intended to
provide you with information about the Company's Key Management Incentive Cash
Bonus Plan. The Board of Directors has approved you as a participant in this
Plan for Fiscal Year 1995. The details of this Plan are as follows:
The pool of available money to distribute to participants will be determined
according to the following schedule:
FY 1995 PRE-TAX EARNINGS CASH BONUS POOL
($ 8,000,000) $ 0
($ 2,500,000) $ 270,000
$ 3,000,000 $ 540,000
$ 8,500,000 $ 810,000
$14,000,000 $1,080,000
- ---------------------------------------------
The following assumptions will be in effect for The Fiscal Year 1995 Key
Management Incentive Cash Bonus Plan:
1. FY 1995 Pre-Tax Earnings will be subject to the following rules:
. Gains and/or losses on the sale of assets will not be included,
. Increases and/or decreases in reserves will not be included, and
. Tape Division milestones which are met will not be included,
milestones which are not met will be included.
2. Payout will be made at the conclusion of the Annual Fiscal Year Audit and
upon approval of the Compensation Committee of the Board of Directors.
3. Individual bonus distributions will be determined by Craig Crisman based on
input from participants.
4. To receive a payout, participants must be employees of the Company for the
entire Fiscal Year and active employees with the Company on the payout
distribution date. There is no guarantee of payment under this plan.
<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, 1995
-------------------------------------------------------
Primary earnings Fully diluted
per share earnings per share
<S> <C> <C>
Net income $ 1,748 $ 1,748
======== =======
Weighted average common shares outstanding 22,311 22,311
Dilutive common stock equivalents 161 308
-------- -------
Total weighted average common
shares outstanding 22,472 22,619
======== =======
Net income per share $ .08 $ .08
======== =======
</TABLE>
Since fully diluted earnings per share does not reduce the Company's earnings
per share by more than 3% of primary earnings per share, the Company has
reflected primary earnings per share on the Consolidated Statement of Operations
for the fiscal year ended September 30, 1995.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included 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, 33-58200, 33-59391 and 33-59393).
ARTHUR ANDERSEN LLP
Los Angeles, California
December 20, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains a summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1995 and the Consolidated
Statement of Operations for the year ended as of September 30, 1995 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 48,236
<SECURITIES> 0
<RECEIVABLES> 36,571
<ALLOWANCES> 0
<INVENTORY> 32,727
<CURRENT-ASSETS> 127,945
<PP&E> 252,953
<DEPRECIATION> (148,636)
<TOTAL-ASSETS> 246,817
<CURRENT-LIABILITIES> 133,908
<BONDS> 0
<COMMON> 2,262
0
0
<OTHER-SE> 101,330
<TOTAL-LIABILITY-AND-EQUITY> 246,817
<SALES> 292,600
<TOTAL-REVENUES> 292,600
<CGS> 252,684
<TOTAL-COSTS> 252,684
<OTHER-EXPENSES> 41,089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,826
<INCOME-PRETAX> 2,332
<INCOME-TAX> 584
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,748
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0
</TABLE>
