<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
(X) Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 1994
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from __________ to _________
Commission File No. 1-6635
APPLIED MAGNETICS CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation 95-1950506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
75 Robin Hill Road, Goleta, California 93117
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 683-5353
(No Change)
- -------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
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 ninety days. Yes X No
- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 22,198,123 $.10 par value common stock as of February 10, 1995.
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<PAGE>
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
--------------------
The unaudited condensed consolidated financial statements included herein have
been prepared by Applied Magnetics Corporation and its subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The unaudited condensed consolidated financial statements and
selected notes included therein should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1994.
The following unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, which, in the
opinion of management, are necessary to present fairly the consolidated
financial position and results of operations for the periods presented.
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<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations - Unaudited
(In thousands except share and per share data)
<TABLE>
<CAPTION>
For the three months
ended December 31,
-------------------------
1994 1993
----------- -----------
<S> <C> <C>
Net sales $ 55,373 $ 71,244
Cost of sales 54,846 67,497
---------- ----------
Gross profit 527 3,747
---------- ----------
Research and development expenses, net 7,782 4,104
Selling, general and administrative expenses 3,516 5,290
---------- ----------
Total operating expenses 11,298 9,394
---------- ----------
Loss from operations (10,771) (5,647)
Interest income 271 284
Interest expense (994) (996)
Other income (expense), net (4) 318
---------- ----------
Loss before taxes (11,498) (6,041)
Provision for income taxes 216 204
---------- ----------
Net loss $ (11,714) $ (6,245)
========== ===========
Net loss per share: ($0.53) ($0.28)
========== ===========
Weighted average common and dilutive equivalent
shares outstanding: 22,074,285 22,079,035
========== ===========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these consolidated statements.
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<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets - Unaudited
(In thousands except share and par value data)
<TABLE>
<CAPTION>
ASSETS
December 31, September 30,
------------- -------------
1994 1994
------------- -------------
<S> <C> <C>
Current Assets:
Cash and equivalents $ 29,061 $ 20,761
Accounts receivable, net 17,516 18,720
Inventories 23,520 31,520
Prepaid expenses and other 6,314 6,879
----------- -----------
76,411 77,880
----------- -----------
Property, plant and equipment, at cost 266,042 289,362
Less-accumulated depreciation (150,979) (165,046)
----------- -----------
115,063 124,316
----------- -----------
Notes receivable, net 8,390 8,557
Other assets 9,541 9,803
----------- -----------
$ 209,405 $ 220,556
=========== ===========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 20,596 $ 20,412
Bank notes payable 46,483 46,062
Accounts payable 19,462 22,332
Accrued payroll and benefits 7,535 9,406
Other current liabilities 20,599 16,111
----------- -----------
114,675 114,323
----------- -----------
Long-term debt, net 531 677
----------- -----------
Other liabilities 7,164 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 22,194,650 as
of December 31, 1994, and 22,161,460 as of
September 30, 1994 2,219 2,216
Paid-in capital 178,552 178,481
Retained deficit (92,493) (80,779)
----------- -----------
88,278 99,918
Treasury stock, at cost (96,603 shares as of
December 31, 1994, and 92,509 as of
September 30, 1994) (830) (812)
Unearned restricted stock compensation (413) (673)
----------- -----------
87,035 98,433
----------- -----------
$ 209,405 $ 220,556
=========== ===========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial
Statements are an integral part of these consolidated balance sheets.
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<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited
(In thousands)
<TABLE>
<CAPTION>
For the three months ended
December 31,
------------------------------
1994 1993
-------------- ------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (11,714) $ (6,245)
Adjustments to derive cash flows:
Depreciation and amortization 6,544 5,229
Provision for receivable allowances and related costs 50 100
Amortization of unearned restricted stock
compensation 244 75
Other assets 186 (64)
Other liabilities 41 139
Other, net (14) 2,050
Working capital changes affecting
cash flows from operations:
Accounts receivable (1,952) 474
Other receivables - (2,196)
Inventories 5,435 4,608
Prepaid expenses and other 395 (339)
Accounts payable (1,905) 747
Accrued payroll and benefits (1,645) (3,628)
Other current liabilities (778) (1,117)
----------- -----------
Net cash flows used in operating activities (5,113) (167)
----------- -----------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (6,274) (14,336)
Proceeds from sale of businesses and real estate 18,858 -
Notes receivable 470 464
----------- -----------
Net cash flows provided by (used in) investing activities 13,054 (13,872)
----------- -----------
Cash Flows from Financing Actitivies:
Proceeds from debt 36,481 55,185
Repayment of debt (36,102) (48,714)
Proceeds from stock options exercised 72 20
----------- -----------
Net cash flows provided by financing activities 451 6,491
----------- -----------
Effect of Exchange rate Changes on Cash and Equivalents (92) 61
----------- -----------
Net Increase (Decrease) in Cash and Equivalents 8,300 (7,487)
----------- -----------
Cash and Equivalents at Beginning of Period 20,761 49,371
----------- -----------
Cash and Equivalents at End of Period $ 29,061 $ 41,884
=========== ===========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these consolidated statements.
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<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Selected Notes to Condensed Consolidated Financial Statements
Unaudited
Note A: Inventories
- --------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory costs consist of purchased materials and services, direct production
labor and manufacturing overhead expense. The components of inventory are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1994 1994
------------ -------------
<S> <C> <C>
Purchased parts and
manufacturing supplies $ 7,184 $ 9,970
Work in process 13,834 17,436
Finished goods 2,502 4,114
------- -------
$23,520 $31,520
======= =======
</TABLE>
Note B: License and Technology Development Agreements
- ------------------------------------------------------
During 1992 and 1993, the Company entered into various joint development
agreements, including a License and Technology Development Agreement with
Hitachi Metals, Ltd. ("HML") (the "HML Agreement") for the advancement of the
Company's inductive thin-film technology and the development and
commercialization of magnetoresistive ("MR") disk head products and other
agreements with certain major disk drive manufacturers for MR disk head
development. The performance schedule and development efforts related to the HML
Agreement were substantially completed by September 1994. Of the remaining
development agreements, two were substantially completed by the end of fiscal
1994, development efforts are continuing under one agreement and have been
indefinitely suspended under another agreement. Under these agreements, all cost
offsets were recognized by the end of fiscal 1994. The Company recognized $4.4
million as cost offsets against development costs incurred for the quarter ended
December 31, 1993.
The Company does not anticipate receiving any significant additional amounts of
development funding from customers or strategic partners in fiscal 1995.
Note C: Restructuring Reserve
- ------------------------------
During the three months ended December 31, 1994, costs of approximately $0.6
million were charged to the 1993 restructuring reserve related to further
consolidation of manufacturing resources.
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<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Selected Notes to Condensed Consolidated Financial Statements
Unaudited
Note D: Sale of Assets
- -----------------------
During the three months ended December 31, 1994, the Company completed the sale
of its subsidiary's facility in Singapore which had been vacated as a result of
the transfer of manufacturing operations of this subsidiary to the Company's
Malaysian facility. Sale proceeds were $4.9 million cash, which approximated
book value. The Company also completed the sale of its Tape Head subsidiary to
Seagate Technology, Inc. ("Seagate") for $21.5 million cash, of which the
Company received $14.0 million. Of the remaining funds, $1.0 million is held in
escrow as a standard hold-back, for one year, to indemnify the buyer for any
claims relating to the representations and warranties provided by the Company in
connection with the divestiture and $6.5 million is held in escrow pending the
completion of certain performance milestones pursuant to the Company's
agreements to provide certain tape-related goods and services to the buyer on an
ongoing basis. The estimated gain on this sale of $7.5 million will be
recognized as the future milestones are met and the related proceeds are
released from escrow. It is anticipated that the majority of these milestones
will be completed during the remainder of fiscal 1995.
-7-
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
During fiscal year 1994, the Company made important progress and achieved
technological improvements in a number of areas relating to its thin-film disk
head products. These gains contributed to volume production shipments of
nanoslider (50%) thin-film disk heads, and measurable success in the
implementation of fully etched air bearing ("FEAB") and other negative air
pressure disk head designs that allow certain of its products to demonstrate
improved performance. However, the Company experienced a number of difficulties
during this period, including manufacturing problems and production yield and
quality issues, which impacted shipment levels of thin-film disk heads during
fiscal 1994.
During the fourth quarter of fiscal 1994 and the first quarter of fiscal 1995,
the Company achieved certain production process improvements which resulted in
increases in thin-film disk head revenues. As process improvements continue to
increase for thin-film disk heads, the Company expects modest revenue growth
during succeeding quarters in fiscal 1995. The Company continues to make
significant progress in the development and production of MR disk heads, and
continued to ship prototype quantities of these products during the first
quarter of 1995.
NET SALES. Total net sales in the first quarter of fiscal 1995 decreased 14.2%
and 22.3%, from the fourth quarter and first quarter of fiscal 1994,
respectively. The decreases in total net sales were primarily due to the
decline in market demand for ferrite disk head products.
Net sales for thin-film disk head products in the first quarter of fiscal 1995
increased 10.3% and 28.9% from the fourth quarter and first quarter of fiscal
1994, respectively. Market demand for thin-film continues to grow as a result
of increased availability of competitively priced thin-film disk heads and
superior performance characteristics over ferrite disk heads. Net sales for
ferrite disk head products declined 59.0% and 74.1% from the fourth and first
quarters of fiscal 1994, respectively. The Company anticipates that the market
demand for ferrite disk heads will continue to decline.
The following table sets forth, for the periods indicated, net sales by product
line.
<TABLE>
<CAPTION>
For the three months ended
-----------------------------------------
December 31, September 30, December 31,
1994 1994 1993
------------ ------------- ------------
<S> <C> <C> <C>
Thin-film disk head products
Net sales $41,926 $38,023 $32,520
Percentage of total 75.7% 58.9% 45.6%
Ferrite disk head products
Net sales $ 8,984 $21,902 $34,721
Percentage of total 16.2% 33.9% 48.8%
Tape head products
Net sales $ 4,463 $ 4,635 $ 4,003
Percentage of total 8.1% 7.2% 5.6%
Total net sales $55,373 $64,560 $71,244
</TABLE>
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<PAGE>
GROSS PROFIT. The gross profit (loss) was 1.0%, (10.4%), and 5.3% for the first
quarter of fiscal 1995 and the fourth and first quarters of fiscal 1994,
respectively. The fourth quarter of fiscal 1994 included a $5.0 million
inventory reserve provision in cost of sales. Improvement during the first
quarter of fiscal 1995, as compared to the fourth quarter of fiscal 1994,
reflects production process improvements and cost reductions which more than
offset the impact of lower sales volumes.
RESEARCH AND DEVELOPMENT. Research and development expenses as a percent of net
sales, before cost offsets from various joint development agreements, were 14.1%
for the first quarter of fiscal 1995 as compared to 13.3% and 12.0% for the
fourth and first quarters of fiscal 1994, respectively. The percentage increase
in the first quarter of fiscal 1995 from the fourth and first quarters of fiscal
1994 was due to lower net sales. R&D expense during the first quarter of fiscal
1995 decreased $0.8 million from the fourth and first quarters of fiscal 1994,
as a result of the Company instituting cost reductions during the fourth quarter
of fiscal 1994 and the first quarter of fiscal 1995, in response to lower
revenues. In connection with the HML Agreement and other development agreements,
the Company recognized cost offsets of $2.7 million and $4.4 million for the
fourth and first quarters of fiscal 1994, respectively. The agreements were
substantially concluded by the end of fiscal 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of net sales were 6.3%, 9.9% and 7.4% for
the first quarter of fiscal 1995 and the fourth and first quarters of fiscal
1994, respectively. The fourth quarter of fiscal 1994 included a $1.25 million
provision representing the value of the Company's common stock which will be
distributed in settlement of a securities class action suit brought in 1993
against the Company and certain of its present and former officers. The
settlement, which was announced in November 1994, is ultimately subject to final
court approval after notice to the class members. S,G&A expenses, including the
above settlement, for the first quarter of fiscal 1995 were $2.9 million and
$1.8 million below the fourth and first quarters of fiscal 1994, respectively.
The Company benefitted from significant staff and cost reductions that were
implemented during the fourth quarter of fiscal 1994 and the first quarter of
fiscal 1995.
INTEREST EXPENSE. Interest expense in the first quarter of fiscal 1995 remained
constant to the fourth and first quarters of fiscal 1994, even though average
debt outstanding was higher, primarily as a result of lower average interest
rates on the Malaysian bank loans.
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<PAGE>
PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the
three months ended December 31, 1994 consisted primarily of foreign taxes and a
ratable portion of minimum state taxes that are expected to be paid during
fiscal year 1995.
Liquidity and Capital Resources
- -------------------------------
In fiscal 1994, lower sales volumes, manufacturing difficulties and production
yield problems, operating losses and capital expenditures resulted in a
significant reduction in the Company's cash balance to $20.8 million at
September 30, 1994. The Company implemented cost and cash expenditure controls,
negotiated accelerated payment terms with some of its key customers, sold its
Tape Head business unit to Seagate and has pursued other financial alternatives,
including new loan and credit facilities, extensions or renewals of existing
facilities, lease financing opportunities and other cash and working capital
sources.
At December 31, 1994, the Company's cash and equivalents increased to $29.1
million from $20.8 million at September 30, 1994. During the first quarter of
fiscal 1995, the Company completed two transactions that generated $18.9 million
in cash. In November, 1994, the Company sold a building in Singapore for $4.9
million, and in December, 1994, it completed the sale of its Tape Head
subsidiary to Seagate, for $21.5 million, of which the Company received $14.0
million. See Note D in the accompanying Selected Notes to Condensed Consolidated
Financial Statements. Of the available cash flows during the first quarter of
fiscal 1995, $6.3 million was used for capital expenditures and $5.1 million for
operating activities.
At December 31, 1994, total debt, including notes payable, amounted to $67.6
million, an increase of $0.5 million from the balance outstanding at September
30, 1994. At December 31, 1994, the Company had fully drawn down its unsecured
Malaysian credit facility which has no stated maturity but is callable on demand
from a bank in Malaysia where the Company has substantial manufacturing
operations. Should all or any significant portion of the Malaysian credit
facility become unavailable for any reason, the Company would need to pursue
alternative financing sources.
At December 31, 1994, the Company also had outstanding $10.0 million under a
revolving credit facility with a commercial bank. The credit facility provides
for up to $10.0 million in aggregate commitments and is supported by a letter of
credit issued for the account of HML, subject to reimbursement by the Company,
and expires on March 15, 1995. The current maturity of this credit facility was
established as a result of a one year extension to the facility and the letter
of credit issued for HML's account which had previously been agreed among the
Company, HML and the commercial bank. The Company has had some discussions with
the commercial bank and HML concerning a possible further extension of the
current maturity date. If these discussions do not result in a deferral of the
payment date beyond March 15, 1995,
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<PAGE>
the Company believes that it would have sufficient cash resources available
under the CIT Group/Business Credit, Inc. ("CIT") facility and other sources to
satisfy its payment obligations and meet its fiscal 1995 plan for anticipated
capital expenditures and other investments in advanced thin-film disk head
improvements.
At December 31, 1994, the Company also had outstanding a $10.0 million note held
by Conner Peripherals, Inc. ("Conner"), pursuant to a Note Purchase Agreement,
which is secured by accounts receivable arising from sales to Conner and by
certain capital equipment. On December 21, 1994 in connection with the
contemplated credit agreement between the Company and CIT, the Company and
Conner entered into an agreement to extend the maturity date of the Note
Purchase Agreement to the earlier of January 10, 1995 or the closing date of the
CIT Agreement. On January 11, 1995 the Company retired the debt obligation owed
to Conner.
The Company has informal understandings with some of its customers to make
payments on accelerated terms. These arrangements may be canceled at any time.
However, the liquidity risk associated with the cancellation of one or more of
these arrangements may be 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 fiscal 1995, the Company plans approximately $49.0 million in capital
expenditures relating primarily to improving thin-film production processes,
increasing thin-film production capacity and development of MR technologies.
The Company has implemented an operating and cash management plan, the objective
of which is to provide sufficient cash flows from operations to meet its
operating and capital expenditure requirements. Management believes that it
will be able to reduce its funding requirements for planned, but not committed,
capital expenditures if market demand for those products does not materialize or
declines. However, if the Company is unable to increase sales and maintain
production yields at acceptable levels in order to permit it to execute customer
orders for the new drive programs in a manner consistent with management's
intentions to return to profitability by the end of fiscal 1995, there could be
a significant adverse impact on liquidity, which would require the Company to
obtain additional capital from external sources. There are no assurances that
such sources of capital will be available or that the terms associated with
external funding sources will be satisfactory to the Company. If the Company is
unable to obtain sufficient capital, it would need to curtail its capital,
research and development and working capital expenditures which could adversely
affect the Company's future years' operations and competitive position.
-11-
<PAGE>
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
11 Statement re computation of per share information.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K. The Company filed an Interim Report on Form 8-K
dated November 8, 1994 reporting under Item 5 that the Company entered
into a definitive agreement for the sale of the Registrant's Tape Head
subsidiary to Seagate Technology, Inc., for twenty-one million five
hundred thousand dollars ($21,500,000) in cash. On January 25, 1995,
the Company also filed an Interim Report on Form 8-K dated January 16,
1995 reporting under Item 5 that the Company had concluded a Financing
Agreement with The CIT Group/Business Credit, Inc.
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<PAGE>
SIGNATURE
---------
Pursuant to the requirements 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
/s/ CRAIG D. CRISMAN
---------------------------------------
Craig D. Crisman
President and Chief Executive Officer
(Principal Financial Officer)
Dated: February 14, 1995 /s/ PETER T. ALTAVILLA
---------------------------------------
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
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<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months
December 31,
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Net loss $ (11,714) $ (6,245)
========= =========
Weighted average common shares outstanding 22,074 22,079
Dilutive common stock equivalents -- --
--------- ---------
Total weighted average common
shares outstanding 22,074 22,079
========= =========
Net loss per share $ (0.53) $ (0.28)
========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1994 and the Consolidated
Statement of Operations for the quarter ended as of December 31, 1994 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 29,061
<SECURITIES> 0
<RECEIVABLES> 17,516
<ALLOWANCES> 0
<INVENTORY> 23,520
<CURRENT-ASSETS> 76,411
<PP&E> 266,042
<DEPRECIATION> (150,979)
<TOTAL-ASSETS> 209,405
<CURRENT-LIABILITIES> 114,675
<BONDS> 0
<COMMON> 2,219
0
0
<OTHER-SE> 84,816
<TOTAL-LIABILITY-AND-EQUITY> 209,405
<SALES> 55,373
<TOTAL-REVENUES> 55,373
<CGS> 54,846
<TOTAL-COSTS> 54,846
<OTHER-EXPENSES> 11,298
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (994)
<INCOME-PRETAX> (11,498)
<INCOME-TAX> 216
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,714)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
</TABLE>
