<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
AMENDMENT NO. 1
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 17, 1996
APPLIED MAGNETICS CORPORATION
(Exact name of registrant as specified in its charter)
------------------------------------------------------
Delaware 1-6635 95-1950506
-------- ------ ----------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation) Number)
Registrant's telephone number, including area code:
(805) 683-5353
--------------
The purpose of this Amendment is to amend Item 7 of Applied Magnetics
Corporation's Current Report on Form 8-K for July 17, 1996 to add Financial
Statements of Delta Bravo, Inc. and subsidiaries.
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ITEM 7 FINANCIAL STATEMENT AND EXHIBITS
- ------------------------------------------------------------
(a) Financial statements of businesses acquired.
YEAR ENDED DECEMBER 31, 1995
- ----------------------------
Report of Independent Public Accountants
(Arthur Anderson LLP)..............................................6
Consolidated Balance Sheet as of December 31, 1995.......................7
Consolidated Statement of Operations for the
Year Ended December 31, 1995.......................................9
Consolidated Statement of Shareholders' Deficiency
for the Year Ended December 31, 1995...............................10
Consolidated Statement of Cash Flows for the
Year Ended December 31, 1995.......................................11
Notes to Consolidated Financial Statements...............................13
YEAR ENDED DECEMBER 31, 1994
- ----------------------------
Report of Independent Public Accountants
(Deloitte & Touche LLP)............................................25
Consolidated Balance Sheet as of December 31, 1994.......................26
Consolidated Statement of Operations for the
Year Ended December 31, 1994.......................................28
Consolidated Statement of Shareholders' Deficiency
for the Year Ended December 31, 1994...............................29
Consolidated Statement of Cash Flows for the
Year Ended December 31, 1994.......................................30
Notes to Consolidated Financial Statements...............................32
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SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
APPLIED MAGNETICS CORPORATION
-----------------------------
Date: September 26, 1996 By: /S/ Craig D. Crisman
-------------------------
Craig D. Crisman
Chief Executive Officer
Chief Financial Officer
(Principal Financial Officer)
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE YEAR ENDED
DECEMBER 31, 1995
TOGETHER WITH INDEPENDENT AUDITORS' REPORT
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CONTENTS
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of December 31, 1995
Consolidated Statement of Operations for the year ended December 31, 1995
Consolidated Statement of Shareholders' Deficiency for the year ended
December 31, 1995
Consolidated Statement of Cash Flows for the year ended December 31, 1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Delta Bravo, Inc. and Subsidiaries:
We have audited the consolidated balance sheet of DELTA BRAVO, INC. AND
SUBSIDIARIES (the "Company") as of December 31, 1995, and the related
consolidated statement of operations, shareholders' deficiency, and cash flows
for the year then ended. 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 audit. We did not audit the financial
statements of Magnetic Data Belgium, N.V., and AM Belgium, N.V. wholly-owned
subsidiaries, which statements reflect total assets and revenues constituting 36
percent and 30 percent in 1995, respectively, of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Magnetic Data Belgium, N.V. and AM Belgium, N.V., is based solely on the
report of the other auditors.
We conducted our audit 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 audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Delta Bravo, Inc. and Subsidiaries
as of December 31, 1995, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
As discussed in Note 1, the Company has adopted Statement of Financial
Accounting Standards No. 121 effective December 31, 1995.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, working capital deficiency, shareholders' deficiency and debt
covenant violations raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
September 19, 1996
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
ASSETS
CURRENT ASSETS:
Cash $ 484,000
Accounts receivable, less allowance for
doubtful accounts of $382,000 7,330,000
Inventories, net 3,839,000
Other 535,000
-----------
Total current assets 12,188,000
-----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 2,879,000
Leasehold improvements 1,611,000
Manufacturing equipment 5,409,000
Office equipment 945,000
-----------
Total property, plant and equipment 10,844,000
-----------
Less accumulated depreciation and amortization 3,526,000
-----------
Total property, plant and equipment, net 7,318,000
-----------
OTHER ASSETS:
Intangibles assets, net -
Other 159,000
-----------
Total other assets 159,000
-----------
TOTAL $19,665,000
===========
The accompanying notes are an integral part of this
consolidated balance sheet.
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1995
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term borrowings $ 5,767,000
Current portion of debt 20,203,000
Accounts payable 3,195,000
Accrued payroll and related costs 1,575,000
Income taxes payable 50,000
Accrued interest 2,005,000
Other current liabilities 3,983,000
-----------
Total current liabilities 36,778,000
-----------
LONG-TERM LIABILITIES:
Debt, less current portion 211,000
-----------
Total liabilities 36,989,000
COMMITMENTS
Redeemable Preferred stock, $100 par value;
200,000 shares authorized;
112,526 issued and outstanding;
liquidation value $12,765,000 8,760,000
SHAREHOLDERS' DEFICIENCY:
Common stock:
Class A, without par value; 10,000 shares
authorized; 1,333 issued and outstanding 1,000
Class B, without par value; 5,000 shares
authorized; none issued and outstanding
Cumulative foreign currency translation
adjustment 272,000
Accumulated deficit (26,357,000)
------------
Total shareholders' deficiency (17,324,000)
------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 19,665,000
============
The accompanying notes are an integral part of this
consolidated balance sheet.
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
NET SALES $45,855,000
COST OF SALES 40,410,000
-----------
GROSS PROFIT 5,445,000
-----------
OPERATING EXPENSES:
Product development and engineering 472,000
Selling 3,228,000
General and administrative 5,947,000
Amortization of intangible assets 6,883,000
Restructuring costs 80,000
-----------
Total operating expenses 16,610,000
-----------
LOSS FROM OPERATIONS 11,165,000
OTHER INCOME (EXPENSE):
Interest expense (3,629,000)
Other 48,000
-----------
Total other expense (3,581,000)
-----------
LOSS BEFORE INCOME TAX EXPENSE 14,746,000
INCOME TAX EXPENSE 21,000
-----------
NET LOSS $14,767,000
===========
PREFERRED DIVIDENDS 623,000
-----------
NET LOSS-COMMON SHAREHOLDER $15,390,000
===========
PER SHARE DATA:
Weighted average of common shares outstanding 1,333
===========
NET LOSS PER COMMON SHARE $ 11,545
===========
The accompanying notes are an integral part of these
consolidated financial statements.
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
YEAR ENDED DECEMBER 31, 1995
Total
Common Stock Cumulative Shareholders
--------------- Accumulated Translation Equity/
Shares Amount Deficit Adjustments Deficiency
------ ------ ----------- ----------- ------------
BALANCE,
JANUARY 1, 1995 1,333 $1,000 $(10,967,000) $(425,000) $(11,391,000)
Dividends accreted (623,000) (623,000)
Translation adjustment 697,000 697,000
Net loss (14,767,000) (14,767,000)
----- ------ ------------ --------- ------------
BALANCE,
DECEMBER 31, 1995 1,333 $1,000 $(26,357,000) $ 272,000 $(26,084,000)
===== ====== ============= ========= ============
The accompanying notes are an integral part of these consolidated financial
statements.
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DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(14,767,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 2,024,000
Write-off of unutilized fixed assets 946,000
Amortization of intangible assets 6,883,000
Interest accrued and accreted 1,727,000
Exchange rate effect on operating activities 316,000
Gain on disposal of fixed assets (18,000)
Restructuring charge 80,000
Changes in operating assets and liabilities:
Accounts receivable (1,008,000)
Inventories 3,344,000
Other current assets 409,000
Other assets 134,000
Accounts payable (431,000)
Accrued payroll and related costs (89,000)
Other current liabilities (193,000)
-----------
Net cash used in operating activities (643,000)
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (772,000)
Proceeds from sale of fixed assets 62,000
------------
Net cash used in investing activities (710,000)
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in notes payable 336,000
Payments on notes payable (582,000)
Net increase on line of credit 858,000
------------
Net cash provided by financing activities 612,000
------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (112,000)
------------
NET DECREASE IN CASH (853,000)
CASH AS OF JANUARY 1, 1995 1,337,000
------------
CASH AS OF DECEMBER 31, 1995 $ 484,000
============
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,579,000
=============
Income taxes $ 28,000
=============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Dividends accreted on preferred stock $ 623,000
Purchase of equipment by capital leases 117,000
The accompanying notes are an integral part of these
consolidated financial statements.
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DELTA BRAVO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Delta Bravo, Inc. and its subsidiaries ("DBI" or the "Company") manufacture and
perform repair and restoration services for disk drives and other computer
peripheral equipment. The Company's operations are principally conducted within
North America and Western Europe and the Company routinely grants credit to its
customers throughout these regions. Such customers are primarily in the computer
or computer peripheral industries.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements present the accounts of the Company and
its subsidiaries, all of which are wholly-owned. Significant intercompany
accounts and transactions have been eliminated in consolidation. The Company's
subsidiaries are Magnetic Data, Inc. and Brum-Ko Magnetics Corporation. Magnetic
Data, Inc. owns 100% of the following subsidiaries:
Magnetic Data Belgium, N.V. AM Belgium, N.V.
Magnetic Data United Kingdom, Ltd. Magnetic Data Inc., California
Magnetic Data Inc., France, S.A.R.L. Magnetic Data Inc., Minnesota
Magnetic Data Inc., Germany GmbH
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
GOING CONCERN
The consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company incurred a loss of $14,767,000 in 1995, has a
shareholder's deficiency of $17,324,000, and a working capital deficiency of
$26,084,000 at December 31, 1995, and is not in compliance with its borrowing
agreements. The working capital deficiency at December 31, 1995 was primarily
the result of the current classification of the Company's notes payable to AMC
resulting from the Company defaulting on its debt commitments, including
violations of certain debt covenants. See Notes 4 and 5.
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Management's focus is to improve the operating units' profitability through
increased sales activity in targeted areas and aggressive cost reduction
programs to ensure the Company's ability to meet its financial obligations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates cost
determined on a first-in, first-out (FIFO) basis, or market. Inventories consist
of purchased materials, direct production labor and manufacturing overhead.
PROPERTY, PLANT AND EQUIPMENT
Purchases of property, plant and equipment are recorded at cost or, in the case
of equipment under capital leases, the present value of future lease payments;
and through a business combination, at its respective fair market values.
Maintenance, repairs and minor tooling costs are expensed as incurred.
Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the assets. Estimated useful lives are as follows:
Buildings 20-30 years
Leasehold Improvements 3-10 years
Manufacturing Equipment 2-10 years
Office Equipment 3-10 years
ADOPTION OF ACCOUNTING PRINCIPLE
In 1995, the Company adopted Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed of" (SFAS No. 121). SFAS No. 121 requires that long lived assets and
certain identifiable intangibles to be held and used by the entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As a result of this review,
Management wrote off fixed assets of $946,000 which will not be used in future
operations and also wrote off certain intangible assets as described below.
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INTANGIBLE ASSETS
Intangible assets consisted of goodwill, client lists, reverse engineered
products, and trademarks acquired by the Company. The Company reviews the
carrying value of all intangible assets on a regular basis, and if future cash
flows are believed insufficient to recover the remaining carrying value of an
intangible asset, the carrying value is written down in the period the
impairment is identified to its future recoverable value.
In fiscal year 1995 management performed a detailed evaluation and analysis of
the carrying value of all intangible assets and determined, based on the extent
of recent losses, the resulting accumulated deficits, working capital
deficiencies and anticipated future operating strategies and results that these
assets have lost their carrying value. Accordingly, all intangibles were written
off at December 31, 1995.
REVENUE RECOGNITION
Revenue is generally recognized upon shipment of product.
PRODUCT DEVELOPMENT AND ENGINEERING
Costs incurred by the Company in the design, maintenance or refinement of its
existing product line and new product research and development are expensed when
incurred.
Total research and development expenses were approximately $472,000 in 1995.
RESTRUCTURING COSTS
In December 1995 the Company recorded a restructuring charge of $80,000 for the
planned closing of one of its European sales offices.
INCOME TAXES
The Company's income tax provision/benefit has been determined under Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
Statement requires an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income taxes result from temporary
differences in the recognition of revenues and expenses for financial and income
tax reporting purposes. Valuation allowances have been established to reduce
deferred tax assets to the amount expected to be realized. See Note 8.
FOREIGN CURRENCY TRANSLATION
Foreign assets and liabilities are translated to their United States dollar
equivalents based on rates of exchange prevailing at the end of each respective
period. Income statement information is translated using the average rate for
the year. Gains and losses resulting from foreign currency transactions, other
than those directly related to intercompany loans between the Company's foreign
and domestic entities, are included in the consolidated statements of
operations. Gains and losses resulting from translation of foreign financial
statements and from foreign currency translations on intercompany loans are
included as a separate component of shareholders' deficiency.
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2. INVENTORIES
Inventories consist of the following at December 31, 1995:
Raw materials $ 5,389,000
Work in process 1,341,000
Finished goods 2,353,000
Less reserves for obsolescence (5,244,000)
------------
Total $ 3,839,000
============
3. SEGMENTS OF BUSINESS
The Company operates in one business segment, computer disk drive refurbishment
and repair. Total foreign sales were $16,038,000 in 1995. Of this amount sales
by operations in the United States to customers in other countries were
$1,678,000. Sales by operations in Europe to customers in the United States
were $279,000.
Identifiable assets, capital expenditures, pre-tax operating loss,
and depreciation and amortization are as follows as of and for the year
ended December 31, 1995:
Identifiable assets:
United States $12,917,000
Europe 6,748,000
-----------
Total $19,665,000
===========
Capital expenditures:
United States $ 640,000
Europe 132,000
-----------
Total $ 772,000
===========
Pre-tax operating loss:
United States $14,428,000
Europe 318,000
-----------
Total $14,746,000
===========
Depreciation and amortization:
United States $ 8,647,000
Europe 260,000
-----------
Total $ 8,907,000
===========
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4. SHORT TERM BORROWINGS
The Company has a line of credit (the "credit line") that is secured by accounts
receivable and inventories of its domestic operating subsidiaries, which expires
on March 18, 1997. The credit line allows borrowings equal to 85% of qualified
accounts receivable and 20% of inventory with an $8,000,000 maximum. At December
31, 1995, outstanding borrowings under the credit line were $4,167,000, with
availability of approximately $400,000 based upon December 31, 1995 accounts
receivable and inventory balances. The credit line bears interest at the prime
commercial interest rate (8.25% at December 31, 1995) plus 2.5%. The Company is
required to meet certain financial covenants under the terms of the credit line
agreement. These covenants include, among other things, minimum levels of
domestic working capital and net worth requirements. The Company was not in
compliance with these covenants of the credit line as of December 31, 1995.
The Company also maintains a credit line ("foreign line") with a Belgian
financial institution in the amount of $37,500,000 Belgian Francs (US$1,275,000
based upon year-end exchange rates), which is secured by accounts receivable and
inventories of its foreign operating subsidiaries. At December 31, 1995,
approximately $47,000,000 Belgian Francs (US$1,600,000) were outstanding. The
Company has the authorization to pass the credit line, but only for a few days.
The foreign line is renegotiated every six months, and the interest rate is
adjusted to current rates (6.70% at December 31, 1995). The foreign line also
requires, among other requirements, the Company's foreign subsidiaries to
maintain certain solvency and working capital ratios. At December 31, 1995 the
Company was not in compliance with the required ratios; however, the Belgian
financial institution has agreed to extend the line through December 1996, and
on a month-to-month basis thereafter.
5. DEBT
Debt consists of the following:
Note payable to Applied Magnetics Corporation ("AMC"),
principal and interest (at 10%), due March 18, 1996.
Due to debt covenant violations, the note is due and
payable on demand. The note is secured by real and
personal property, stock pledged of DBI and
outstanding stock of domestic subsidiaries, and
guaranteed by the Company and the then majority
shareholder $ 5,150,000
Note payable to AMC, with interest payable quarterly
at the stated rate of 8%, unpaid interest and
principal due March 18, 2000. Due to debt covenant
violations, and default in interest payments, the
note is due and payable on demand. The note
is secured by real and personal property, stock
pledged of DBI and outstanding stock of domestic
subsidiaries, and guaranteed by the Company and
the then majority shareholder 13,200,000
Notes payable to vendor payable in various installments.
Due to default in the installment payments, the
notes are classified as current. 1,729,000
Note payable to vendor, interest at 3.67%, principal
and interest payable bi-weekly in the amount of
$12,500 with final payment due in March 1996 $ 56,000
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Capitalized lease obligations, secured by related
equipment, interest at 8.9% to 12%, due in
monthly installments through
August, 2000. See Note 6 279,000
------------
Total debt 20,414,000
Current portion of debt 20,203,000
------------
Debt, less current portion $ 211,000
============
The Company is required to meet certain financial covenants under the terms of
the notes payable to AMC. These covenantsinclude, among other things, a maximum
debt to equity ratio, minimum net worth requirements and specified levels of
working capital. The Company was not in compliance with certain of these
covenants at December 31, 1995. In addition, the Company defaulted on its
interest payment due to AMC on October 1, 1995. Also, during fiscal year 1995,
the Company was found by a Delaware Court to be in default with its obligations
to AMC as a result of violating its Pledge Agreement with AMC. Upon occurrence
of an event of default, all outstanding secured obligations owed by the Company
to AMC are automatically accelerated; and become due and payable upon demand.
Accordingly, the notes payable to AMC have been classified as current in the
accompanying financial statements.
The aggregate maturities of debt for the years subsequent to December 31,
1995 (exclusive of capital lease obligations) are as follows:
1996 $20,135,000
1997 -
1998 -
1999 -
2000 -
Thereafter -
-----------
Total $20,135,000
===========
6. LEASE COMMITMENTS The Company leases various equipment and building
facilities under capital and operating leases. Rent expense for the year ended
December 31, 1995 was $1,315,000. Future minimum rental payments under these
leases with an initial term of one year or more are as follows: CAPITAL
OPERATING LEASES LEASES
1996 $ 93,000 $1,291,000
1997 93,000 1,272,000
1998 82,000 1,244,000
1999 53,000 1,229,000
2000 19,000 1,226,000
Thereafter 423,000
-------- ----------
Total minimum lease payments 340,000 $6,685,000
==========
Amount representing interest (61,000)
--------
Present value of net minimum lease payments $279,000
=========
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7. CAPITAL STOCK
PREFERRED STOCK
The Company issued 112,526 shares of convertible preferred stock to AMC with a
face value of $11,253,000 on March 18, 1993 in connection with the acquisition
of its subsidiaries Magnetic Data, Inc. and Brum-ko Magnetics Corporation. A
summary of AMC's preferred stock rights is as follows:
o Cumulative 7.5% dividend payable semi-annually.
o Preferential rights on liquidation.
o Mandatory redemption right commencing in the year 2000.
o Convertible into one share of common stock for each 225.052
shares of preferred.
The preferred stock has been valued at its fair market value on the acquisition
date using the discounted cash flow method and assuming a fair market rate of
return for the security of 16%. Accordingly, the Company is accreting dividends
on an annual basis so as to adjust the carrying value of the security to its
face value upon its redemption dates which commence in the year 2000. As of
December 31, 1995, total dividends accreted amount to $1,869,000.
STOCK OPTIONS
The Company's subsidiary, Magnetic Data, Inc. ("MDI"), has two stock option
plans, which were established in 1988 and 1992. Under the stock option plans,
MDI may issue nonqualified and incentive stock options to officers, directors
and other employees to purchase Class A common stock of MDI at a price that is
not less than 100% of the fair market value at the date of grant. The right to
exercise the options vest 25% a year, beginning on the first anniversary of the
grant, and the options expire no later than ten years after the date of grant.
There are 620,000 shares authorized for grant under the plans. As of December
31, 1995, 90,400 shares are exercisable. The following table summarizes the
stock option activity:
RANGE OF OPTION
SHARES PRICES PER SHARE
Outstanding at January 1, 1995 158,900 $6.25-$6.50
Options canceled (68,500) $6.25-$6.50
--------
Outstanding at December 31, 1995 90,400
========
8. INCOME TAXES
The income tax expense consists of the following:
Current:
Federal $ -
State 21,000
Foreign -
-------
Total $21,000
=======
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For federal income tax purposes, the Company has domestic net operating loss
carryforwards totaling approximately $17.8 million at December 31, 1995,
expiring between 1998 and 2010; and foreign net operating loss carryforwards of
approximately $4.1 million at December 31, 1995, which do not expire.
Deferred income taxes reflect the tax effects of: temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes and operating loss carryforwards.
The tax effects of significant items comprising the Company's net deferred
income tax assets are net operating loss carryforwards, certain accrued costs,
depreciation, inventory reserves, and by differences between the book and tax
basis of property and the amortization of intangibles. The Company has provided
a valuation allowance for the excess benefits of the operating loss and other
deferred tax assets, since realization of these assets cannot be assured.
As of December 31, 1995 the deferred income taxes consists of the following:
FEDERAL STATE
Deferred taxes:
Operating loss carryforward $ 6,252,656 $ 1,250,531
Reserve for inventory obsolescence 3,628,991 725,798
Accruals and other costs 822,578 164,516
Differences between book and tax
basis of property 44,984 8,997
------------ -----------
Total deferred taxes 10,749,209 2,149,842
Valuation allowance (10,749,209) (2,149,842)
------------ -----------
Deferred income taxes $ - $ -
============ ===========
Reconciliation of the actual provision (benefit) for income taxes to the income
tax calculated at the United States Federal rates for continuing operations is
as follows:
Income tax (benefit) at the United States Federal income tax rate (34)%
Temporary differences/net operating losses not benefitted 34
----
- %
====
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The consolidated effective tax rate may differ from the U.S. statutory rates
primarily due to the Company and its consolidated foreign subsidiaries, each
filing separate income tax returns in their respective countries. As a result,
the losses of one company cannot be offset against the taxable income of other
companies.
The undistributed earnings of foreign subsidiaries (amounting to approximately
$500,000) are considered to be indefinitely reinvested in the subsidiaries.
Therefore, the Company has not provided for incremental United States income or
foreign withholding taxes on such undistributed earnings or the entity
adjustment from foreign currency translation.
9. RETIREMENT SAVINGS PLAN
The Company has a qualified retirement plan under the provisions of Section
401(k) of the Internal Revenue Code, in which eligible employees may
participate. Substantially all participants in this plan are able to defer
compensation up to the annual maximum amount allowable under Internal Revenue
Service regulations. Additionally, the Company may match employees'
contributions with discretionary amounts as may be determined by the Board of
Directors. The Board of Directors did not authorize any matching contributions
in fiscal year 1995.
10. RELATED PARTY TRANSACTIONS
Included in the current portion of long-term debt at December 31, 1994 was an
amount due to two individuals who claim to be minority shareholders totaling
$50,000, which is unsecured and due upon demand. On August 14, 1995, these
individuals demanded payment on the note and were paid by the Company.
Accordingly, the amount reflected in the balance sheet at December 31, 1995 is
zero. Included in the current portion of debt are amounts due to Applied
Magnetics Corporation ("AMC"), the sole preferred stock shareholder, in the
aggregate amount of $18,350,000. Also included in accrued interest is $1,963,000
related to the AMC notes and $500,000 in other current liabilities relating to
legal costs incurred by AMC in exercising its right of default. Such costs are
to be reimbursed to AMC under the terms of the note agreements.
The Company had purchased products and services from AMC totaling $5,000. In
addition, the Company made interest payments to AMC of $792,000. Included in
other current assets at December 31, 1994 was a deposit to AMC totaling $300,000
under a debt refinancing proposal. This proposal expired in 1995 and the deposit
was forfeited to AMC. Accordingly, the amount was expensed in 1995 by the
Company.
11. SUBSEQUENT EVENTS
On July 17, 1995, the then majority shareholder entered into several agreements,
including a Voting Trust Agreement, with a third party which, among other
things, purported to transfer certain rights (including voting rights) to such
third person. The agreements also provided for the transfer of ownership of a
majority of the common stock to this same individual upon the occurrence of
certain events, including the consent of AMC, the holder of the long- and
short-term notes, which are secured by a pledge of the shares involved.
-21-
<PAGE>
Subsequently, individuals who claim to be minority shareholders instituted an
action seeking emergency restraint of any change in ownership or management of
the Company and for an adjudication that the then majority shareholder's actions
violated his obligations under a pre-existing agreement to transfer his stock to
the claimed minority shareholders.
The Company is currently a defendant in that action, in which the claimed
minority shareholders primarily seek damages from the former majority
shareholder. While the claimed minority shareholders have not yet asserted
damage claims against the Company, the Company anticipates that they may amend
the action to seek damages on various theories. The Company intends to
counterclaim against the claimed minority shareholders for, among other things,
breach of fiduciary duty, and to challenge the validity of the purported
issuance of any shares of the Company's stock to the claimed minority
shareholders. As the ultimate outcome of this matter is not presently
determinable, no provision for any loss that may result upon resolution of this
matter has been made in the accompanying financial statements.
On August 16, 1995, a Special Shareholder Meeting was held at which the then
majority shareholder attempted to remove current directors and elect a new
Board. Both the claimed minority shareholders and AMC objected to these actions
as illegal and invalid and refused to recognize the new Board.
On August 17, 1995, AMC, whose long-term notes were secured by the then majority
shareholders' common stock, issued a Notice of Default, claiming that the
majority shareholder's actions in attempting to transfer stock, or any stock
rights, violated the Pledge Agreement pertaining to that stock. Shortly
thereafter, AMC asserted a default-based right to vote the majority shares,
signed a written Consent in Lieu of Shareholder's meeting, to remove the current
Board and elect a third Board of Directors.
On August 22, 1995, AMC filed an action in a Delaware Court seeking an
adjudication that a default had occurred and that its newly elected Board was
the valid Board of Directors. A trial on that matter was held November 27, and
29, 1995. The Court subsequently ruled that a default had occurred and that the
board elected by AMC was the Company's valid Board of Directors.
On July 17, 1996, a foreclosure sale arising out of the default was held for all
of the then majority shareholder's stock in the Company. At the sale, AMC bid a
portion of the debt owed to it by the Company under the notes and acquired all
of the former majority shareholder's shares in the Company.
In 1996, the Company engaged the consulting firm of Grisanti, Galef & Goldress,
Inc. ("GG&G") to provide crisis management assistance to the Company. Mr. Brian
R. Stone of GG&G was appointed as the Company's Chief Executive Officer.
The Company's management is currently evaluating the recoverability of its
investment in its foreign subsidiaries if it were to be sold. The financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset or liability amounts or the amounts and
classification of results of operations that might be necessary pending the
outcome of this evaluation.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
Year Ended December 31, 1994 and
Independent Auditors' Report
-23-
<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
PAGE
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of December 31, 1994 2
Consolidated Statement of Operations for the
Year Ended December 31, 1994 3
Consolidated Statement of Shareholders' Deficiency for the
Year Ended December 31, 1994 4
Consolidated Statement of Cash Flows for the
Year Ended December 31, 1994 5-6
Notes to Consolidated Financial Statements 7-15
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<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of
Delta Bravo, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheet of Delta Bravo, Inc.
and subsidiaries (the "Company") as of December 31, 1994, and the related
consolidated statements of operations, shareholders' deficiency, and cash flows
for the year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31,
1994, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's recurring losses from
operations, working capital deficiency, shareholders' deficiency and debt
covenant violations raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
As discussed in Note 12 to the consolidated financial statements, subsequent to
December 31, 1994 Applied Magnetics Corporation, after issuing a Notice of
Default under a stock pledge agreement, acquired through a foreclosure sale, the
majority shareholder's stock in the Company on July 17, 1996.
Deloitte & Touche LLP
Los Angeles, California
May 24, 1995 (Except for Note 12, as to
which the date is July 17, 1996)
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
- -------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash $ 1,337,000
Accounts receivable, less allowance for
doubtful accounts of $356,000 (Note 4) 6,322,000
Inventories (Notes 2 and 4) 7,184,000
Other (Note 10) 944,000
-----------
Total current assets: 15,787,000
PROPERTY, LAND AND EQUIPMENT (Note 5):
Land and buildings 2,879,000
Leasehold improvements 1,581,000
Manufacturing equipment 7,241,000
Office Equipment 797,000
---------
Total property, plant and equipment 12,498,000
Less accumulated depreciation and amortization 3,500,000
Total property, plant and equipment, net 8,998,000
------------
OTHER ASSETS:
Intangible assets, net (Note 3) 6,883,000
Other 293,000
-------------
Total other assets 7,176,000
TOTAL $31,961,000
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term borrowings (Note 4) $ 4,909,000
Current portion of long-term debt (Notes 5 and 10) 19,309,000
Accounts Payable 3,626,000
Accrued payroll and related costs 1,664,000
Income taxes payable (Note 8) 50,000
Other current liabilities 4,395,000
-----------
Total current liabilities 33,953,000
LONG-TERM LIABILITIES-
Long-term debt, less current portion
(Notes 5 and 10) 1,262,000
-------------
COMMITMENTS AND CONTINGENCIES (Notes 6 and 9)
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<PAGE>
REDEEMABLE PREFERRED STOCK, $100 par value;
200,000 shares authorized; 112,526.13 issued and
outstanding; liquidation value $12,765,000 (Note 7) 8,137,000
-------------
SHAREHOLDERS' DEFICIENCY (Notes 5 and 7):
Common stock:
Class A, without par value; 10,000 shares
authorized; 1,333 issued and outstanding 1,000
Class B, without par value; 5,000 shares
authorized; none issued and outstanding (425,000)
Cumulative foreign currency translation
adjustment (10,967,000)
-----------
Total shareholders' deficiency (11,391,000)
TOTAL $ 31,961,000
=============
See notes to consolidated financial statements.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
NET SALES (Note 10) $ 51,596,000
COST OF SALES (Note 10) 41,710,000
------------
GROSS PROFIT 9,886,000
OPERATING EXPENSES:
Product development and engineering 759,000
Selling 3,944,000
General and administrative (Note 10) 5,640,000
Amortization of intangible assets 1,120,000
Restructuring costs 361,000
------------
Total operating expenses 11,824,000
LOSS FROM OPERATIONS
OTHER EXPENSES:
Interest expense (Notes 4, 5 and 10) 2,472,000
Other expense 1,000
------------
Total other expenses 2,473,000
LOSS BEFORE INCOME TAX BENEFIT (4,411,000)
INCOME TAX BENEFIT (Note 8) 5,000
------------
NET LOSS $ (4,406,000)
============
See notes to consolidated financial statements
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1994
TOTAL
CUMULATIVE SHAREHOLDERS'
COMMON STOCK ACCUMULATED TRANSLATION EQUITY/
SHARES AMOUNT DEFICIT ADJUSTMENTS DEFICIENCY
BALANCE,
JANUARY 1, 1994 1,333 $ 1,000 $ (5,937,000) $ (733,000) $ (6,669,000)
Dividend accreted (624,000) (624,000)
Translation
adjustment 308,000 308,000
Net loss (4,406,000) (4,406,000)
----- -------- ---------- ------------ -------------
BALANCE,
DECEMBER 31, 1994 1,333 $ 1,000 $(10,967,000) $ (425,000) $(11,391,000)
====== ======= ============ ============ =============
See notes to consolidated financial statements
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
CASH FL0WS FROM OPERATING ACTIVITIES:
Net loss $(4,406,000)
Adjustments to reconcile loss to net cash provided
by operating activities:
Depreciation 1,912,000
Amortization of intangible assets 1,120,000
Interest accrued and accreted 723,000
Exchange rate effect on operating activities 154,000
Gain on disposal of fixed assets (5,000)
Restructuring charge 350,000
Changes in operating assets and liabilities:
Accounts receivable 479,000
Inventories 1,077,000
Other current assets (156,000)
Other assets 172,000
Accounts payable (396,000)
Accrued payroll and related costs 133,000
Income taxes payable 34,000
Other current liabilities (204,000)
-----------
Net cash provided by operating activities 987,000
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (785,000)
Proceeds from sale of fixed assets 5,000
Net cash used in investing activities (780,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase to notes payable 3,000
Payments on notes payable (1,699,000)
Net reductions on line of credit (348,000)
-----------
Net cash provided by financing activities 2,044,000
-----------
EFFECT OF EXCHANGE RATES CHANGES ON CASH 1544,000
-----------
NET DECREASE IN CASH (1,683,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,020,000
-----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,337,000
-----------
See notes to consolidated financial statements. (Continued)
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1994
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION
Cash paid during the year for:
Interest $1,608,000
----------
Income taxes $ 7,000
----------
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of inventories and equipment
by notes payable $1,464,000
Dividends accreted on preferred stock 624,000
Purchase of equipment by capital leases 213,000
Amounts receivable on the transfer of
certain assets and liabilities to
a company 100% owned by a shareholder 204,000
Notes payable to shareholders for deposits
to a creditor 50,000
See notes to consolidated financial statements.
(Concluded)
-31-
<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY - Delta Bravo, Inc. and its subsidiaries ("DBI" or the
"Company") manufacture and provide repair and restoration of disk drives and
other computer peripheral equipment. The Company's operations are principally
conducted within North America and Western Europe and the Company routinely
grants credit to its customers throughout these regions. Such customers are
primarily in the computer or computer peripheral industries.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements present the
accounts of the Company after elimination of all material intercompany accounts
and transactions. At December 31, 1994, the Company included its subsidiaries
known as Magnetic Data, Inc. and Brum-Ko Magnetics Corporation. These
subsidiaries are 100% owned by DBI. Magnetic Data, Inc. owns 100% of the
following subsidiaries:
Magnetic Data Belgium, N.V. AM Belgium, N.V.
Magnetic Data United Kingdom, Ltd. Magnetic Data Inc., California
Magnetic Data Inc., France, S.A.R.L. Magnetic Data Inc., Minnesota
Magnetic Data Inc., Germany GmbH
GOING CONCERN - The consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
financial statements, the Company incurred a loss of $4,406,000 in 1994, has an
accumulated deficit of $10,967,000, a shareholders' deficiency of $11,391,000, a
working capital deficiency of $18,166,000 at December 31, 1994, and is not in
compliance with its borrowing agreements. The working capital deficiency at
December 31, 1994 was primarily the result of the current classification of the
Company's notes payable to AMC resulting from the Company's violation of certain
of its debt covenants (see Notes 4 and 5).
Management of the Company has been discussing with its major creditor, preferred
stock shareholder and certain potential investors various options in order to
restructure the debt of the Company. These efforts have been complicated by
certain events, including those disclosed in Note 12. However, pending the
resolution of the shareholder disputes, it remains management's focus to improve
the operating units' profitability through increased sales activity and
aggressive cost reduction programs to ensure the Company's ability to meet its
financial obligations. Management anticipates resolution of the issues described
in Note 12 by the end of the third quarter and believes that a debt
restructuring will be completed by the end of 1995, which will enable the
Company to obtain additional funds and significantly improve its financial
condition.
If the Company is unable to successfully complete a debt restructuring or obtain
funding from other sources, the Company may not be able to continue as a going
concern. The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
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<PAGE>
CASH EQUIVALENTS - The Company considers all short-term investments purchased
with maturities of 90 days or less to be cash equivalents.
INVENTORIES - Inventories are stated at the lower of standard cost, which
approximates cost determined on a first-in, first-out (FIFO) basis, or market.
PROPERTY, PLANT AND EQUIPMENT - Purchases of property, plant and equipment are
recorded at cost or, in the case of equipment under capital leases, the present
value of future lease payments and through a business combination at its
respective fair market values. Maintenance, repairs and minor tooling are
expensed as incurred. Depreciation and amortization are computed on the
straight-line method over the estimated useful lives of the assets, which range
from 4 to 25 years.
INTANGIBLE ASSETS - Intangible assets consist of goodwill, client lists, reverse
engineered products, and trademarks acquired by the Company. Goodwill represents
the excess of cost over the fair market value of assets acquired and is
amortized on the straight-line method over a period of fifteen years. The fair
market value of client lists and trademarks are amortized on the straight-line
method over a period of ten years. The fair market value of reverse engineered
products are amortized on the straight-line method over a period of five years.
The Company reviews the carrying value of all intangible assets on a regular
basis, and if future cash flows are believed insufficient to recover the
remaining carrying value of an intangible asset, the carrying value is written
down in the period the impairment is identified to its future recoverable value.
REVENUE RECOGNITION - Revenue is generally recognized upon shipment of product.
PRODUCT DEVELOPMENT AND ENGINEERING - Costs incurred by the Company in the
design, maintenance or refinement of its existing product line and new product
research and development are expensed when incurred. Total research and
development expenses were approximately $67,000 for the year ended December 31,
1994.
RESTRUCTURING COSTS - During December, 1994, management made the decision to
restructure part of its operations. The restructuring charge, which related
almost entirely to facility shut down costs, was accrued as of December 31,
1994.
INCOME TAXES - The Company's income tax provision/benefit has been determined
under Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." This Statement requires an asset and liability approach to
financial accounting and reporting for income taxes. Deferred income taxes
result from temporary differences in the recognition of revenues and expenses
for financial and income tax reporting purposes. Valuation allowances are
established when necessary to reduce deferred `tax assets to the amount expected
to be realized.
FOREIGN CURRENCY TRANSLATION - Foreign assets and liabilities are translated to
their United States dollar equivalents based on rates of exchange prevailing at
the end of each respective period. Income statement information is translated
using the average rate for the year. Gains and losses resulting from foreign
currency transactions, other than those directly related to intercompany loans
between the Company's foreign and domestic entities, are included in the
consolidated statements of income. Gains and losses resulting from translation
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<PAGE>
of foreign financial statements and from foreign currency translations on
intercompany loans are included as a separate component of shareholders'
deficiency.
2. INVENTORIES
Inventories consist of the following at December 31, 1994:
Raw materials and other $ 7,681,000
Work in process 1,408,000
Finished goods 1,476,000
Less reserves for obsolescence (3,381,000)
-----------
Total $ 7,184,000
-----------
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1994:
GROSS ACCUMULATED NET
AMOUNT AMORTIZATION AMOUNT
---------- ------------ -----------
Goodwill $ 3,204,000 $ (410,000) $ 2,794,000
Reverse engineered products 3,240,000 (1,242,000) 1,998,000
Client lists 1,620,000 (310,00) 1,310,000
Trademarks 966,000 (185,00) (781,000)
----------- ----------- -----------
Total $ 9,030,000 $(2,147,000) $ 6,883,000
=========== =========== ===========
4. SHORT-TERM BORROWINGS
The Company has a line of credit (the "credit line") that is secured by accounts
receivable and inventories of its domestic operating subsidiaries, and which
expires on February 18, 1996. The credit line allows borrowings equal to 80% of
qualified accounts receivable and 20% of inventory with a $8,000,000 maximum. At
December 31, 1994, outstanding borrowings under the credit line were $3,509,000,
with availability of up to $3,839,000. The credit line bears interest at the
prime commercial interest rate (8.5% at December 31, 1994) plus 2.5%. The credit
line requires the Company, among other things, to maintain a consolidated
domestic net worth of at least $2,750,000 and domestic working capital of not
less than $5,000,000. The Company was not in compliance with these provisions of
the credit line as of December 31, 1994.
The Company also maintains a credit line ("foreign line") with a Belgian
financial institution in the amount of $1,400,000, which is secured by accounts
receivable and inventories of its foreign operating subsidiaries. The foreign
line is renegotiated every six months, and the interest rate is adjusted to
current rates (7.75% at December 31, 1994). The foreign line also requires the
Company's foreign subsidiaries to maintain certain solvency and working capital
ratios. At December 31, 1994 the Company was not in compliance with the required
solvency ratio; however, the Belgian financial institution has agreed to extend
the line through June 1995, and on a month-to-month basis thereafter.
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<PAGE>
5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1994:
Note payable to Applied Magnetics Corporation
("AMC"), principal and accrued interest (at 10%),
due March 18, 1996. Accrued interest of $921,000
is included in the note balance at December 31,
1994. Secured by real and personal property, stock
pledged of DBI and outstanding stock of domestic
subsidiaries, and guaranteed by the Company and
the majority shareholder $ 6,071,000
Present value of note payable to AMC, with fact
value of $13,200,000, discounted at a 10% interest
rate, interest paid quarterly at the stated rate of
8%, unpaid interest and principal due March 18, 2000.
Secured by real and personal property, stock pledged
of DBI and outstanding stock of domestic subsidiaries,
and guaranteed by the Company and the majority stock
holder 12,259,000
Note payable to related party, 9.0% interest, principal
and interest payable monthly in various amounts with
the final payment due on March 15, 1995. Secured by
Brum-ko Magnetics Corporation stock 203,000
Present value of note payable to vendor in the amount
of $1,200,000, interest imputed at 10.5%, payable in
various installments with final payment due July 1,
1997 957,000
Present value of note payable to vendor in the
amount of $574,000, interest imputed at 10.5%,
payable in various installments with final payment
due November 1, 1997 475,000
Note payable to vendor, interest at 3.67%,
principal and interest payable monthly in the
amount of $35,000 with final payment due on
November 1, 1995 354,000
Capitalized lease obligations, secured by related
equipment, interest at 8.9% to 12%, due in monthly
installments through October, 1999 (Note 6) 199,000
Unsecured promissory note to shareholder, with no stated
interest, due on demand 50,000
Other 3,000
Total long-term debt 20,571,000
Current portion of long-term debt (19,309,000)
-------------
Long-term debt, less current portion $ 1,262,000
=============
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<PAGE>
The Company is required to meet certain financial covenants under the terms of
the notes payable to AMC. These covenants include a maximum debt to equity
ratio, net worth requirements and specified levels of working capital. The
Company was not in compliance with certain of these covenants at December 31,
1994. Management believes it may not be in default of any of these covenants
because of certain matters related to the original acquisition of Magnetic Data,
Inc. and Brum-ko Magnetics Corporation from AMC. However, as these matters have
not been resolved with AMC, the notes payable have been classified as current in
the accompanying financial statements.
The aggregate maturities of long-term debt for the years subsequent to December
31, 1994 (exclusive of capital lease obligations) are as follows:
1995 $19,269,000
1996 634,000
1997 469,000
1998
1999
Thereafter -----------
Total $20,372,000
-----------
6. LEASE COMMITMENTS
The Company leases various equipment and building facilities under capital and
operating leases. Future minimum rental payments under these leases with an
initial term of one year or more are as follows:
CAPITAL OPERATING
LEASES LEASES
1995 $ 58,000 $1,799,000
1996 57,000 1,696,000
1997 57,000 1,536,000
1998 47,000 1,487,000
1999 26,000 1,490,000
Thereafter 1,094,000
---------- ----------
Total minimum lease payments 245,000 $9,102,000
-----------
Amount representing interest (46,000)
Present value of net minimum lease payments $ 199,000
==========
Rent expense for the year ended December 31, 1994 was $1,560,000.
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<PAGE>
7. CAPITAL STOCK
PREFERRED STOCK - The Company issued 112,526.13 shares of convertible preferred
stock with a face value of $11,253,000 on March 18, 1993 in connection with the
acquisition of its subsidiaries Magnetic Data, Inc. and Brum-ko Magnetics
Corporation. A summary of the preferred stock rights is as follows: o Cumulative
7.5% dividend payable semi-annually.
o Preferential rights on liquidation.
o Required redemption right commencing in the year 2000.
o Convertible into one share of common stock for each 225.052 shares
of preferred.
The preferred stock has been valued at its fair market value on the acquisition
date using the discounted cash flow method and assuming a fair market rate of
return for the security of 16%. Accordingly, the Company is accreting dividends
on an annual basis so as to adjust the carrying value of the security to its
face value upon its redemption dates which commence in the year 2000. At
December 31, 1994, total dividends accreted amount to $1,246,000.
STOCK OPTIONS - The Company's subsidiary, Magnetic Data, Inc. ("MDI"), has two
stock option plans, which were established in 1988 and 1992. Under the stock
option plans, MDI may issue nonqualified and incentive stock options to
officers, directors and other employees to purchase Class A common stock of MDI
at a price that is not less than 100% of the fair market value at the date of
grant. The right to exercise the options vest a 25% a year, beginning on the
first anniversary of the grant, and the options expire no later than ten years
after the date of grant. There are 620,000 shares authorized for grant under the
plans. As of December 31, 1994, 157,650 shares are exercisable. The following
table summarizes the stock option activity:
RANGE OF OPTION
SHARES PRICES PER SHARE
Outstanding at January 1, 1994 168,100 $6.25 - $6.50
Options canceled (9,200) 6.25 - 6.50
---------
Outstanding at December 31, 1994 158,000 $6.25 - $6.50
=========
8. INCOME TAXES
The income tax benefit for the year ended December 31, 1994 consists of the
following:
Current:
Federal $ (58,000)
State 3,000
Foreign 50,000
-----------
Total $ (5,000)
==========
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<PAGE>
For federal income tax purposes, the Company has domestic net operating loss
carryforwards totaling approximately $9,700,000 at December 31, 1994 expiring
between 1998 and 2008 and foreign net operating loss carryforwards totaling
$3,700,000 at December 31, 1994, which do not expire. Deferred income taxes
reflect the tax effects of: A) temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes and B) operating loss carryforwards. The
tax effects of significant items comprising the Company's deferred income tax
assets are net operating loss carryforwards, certain accrued costs,
depreciation, and inventory reserves, offset by differences between the book and
tax basis of property and the amortization of intangibles. The Company has
provided a valuation allowance for the excess benefits of the operating loss and
other deferred tax assets, since realization of these assets cannot be assured.
FEDERAL STATE FOREIGN
Deferred tax assets:
Operating loss carryforward $ 3,305,000 $ 661,000 $ 1,486,000
Reserve for inventory obsolescence 1,107,000 319,000
Accruals and other costs 1,362,000 393,000
Differences between book and tax
Basis of property 168,000 49,000
----------- -----------
Total deferred tax assets: 5,942,000 1,422,000 1,486,000
----------- ----------- -----------
Deferred tax liabilities:
Differences between book and tax
basis of property (1,369,000)
Intangibles (1,390,000) (401,000)
----------- -----------
Total deferred tax liabilities (1,390,000) (401,000) (1,369,000)
----------- -----------
Net deferred tax assets 4,552,000 1,021,000 117,000
Valuation allowance (4,552,000) 1,021,000 (117,000)
----------- ----------- -----------
Deferred income taxes $ -- $ -- $ --
----------- ----------- -----------
The consolidated effective tax rate may differ from the U.S. statutory rates
primarily due to the Company and its consolidated foreign subsidiaries, each
filing separate income tax returns in their respective countries. As a result,
the losses of one company cannot be offset against the taxable income of other
companies.
The following is a reconciliation of the effective tax rate to the federal
statutory rate for the year ended December 31, 1994:
Statutory rate 35%
Goodwill (8)
Foreign income tax (3)
Tax benefit limitation of loss carryforwards (24)
---
Effective tax rate - %
====
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The undistributed earnings of foreign subsidiaries (amounting to approximately
$1,300,000) are considered to be indefinitely reinvested in the subsidiaries.
Therefore, the Company has not provided for incremental United States income or
foreign withholding taxes on such undistributed earnings or the equity
adjustment from foreign currency translation.
9. RETIREMENT SAVINGS PLAN
The Company has a qualified retirement plan under the provisions of Section
401(k) of the Internal Revenue Code, in which eligible employees may
participate. Substantially all participants in this plan are able to defer
compensation up to the annual maximum amount allowable under Internal Revenue
Service regulations. Additionally, the Company may match employees'
contributions with discretionary amounts as may be determined by the Board of
Directors. The Board of Directors did not authorize any matching contributions
in fiscal 1994.
10. RELATED PARTY TRANSACTIONS
Included in the current portion of long-term debt is an amount due to two
shareholders totaling $50,000, which is unsecured and due upon demand. Also
included in long-term debt are amounts due to Applied Magnetics Corporation
("AMC"), the sole preferred stock shareholder, in the aggregate amount of
$18,797,000 (see Note 5).
During 1994, the Company had sales in the amount of $353,000 to AMC and
purchased products and services from AMC totaling $3,124,000. The Company also
incurred royalty charges of $157,000 with AMC in 1994, of which $123,000 was
still outstanding at year end. In addition, the Company made interest payments
to AMC during 1994 of $2,314,000. Additionally, included in other current assets
are a deposit to AMC totaling $300,000 under a debt refinancing proposal.
Two companies owned by the Company's majority shareholder are indebted to the
Company as a result of the net transfer of certain assets to one company in 1994
and expenditures paid on behalf of the other company in previous years totaling
$198,000 and $218,000, respectively. As a result of the Company's concern over
the collectibility of the amount due from the affiliated entities, the Company
has taken a charge in the accompanying financial statements in the amount of
$416,000 to establish a reserve against the receivable. The charge has been
included in general and administrative expenses.
11. BUSINESS SEGMENT INFORMATION
The Company operates in one business segment consisting of the manufacture and
repair of disk drives and other computer peripheral equipment for the computer
industry. Manufacturing and repair operations are located in the United States
and Western Europe. The following table summarizes the Company's operations in
these two locations:
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<PAGE>
DOMESTIC FOREIGN TOTAL
Sales to unaffiliated customers:
Domestic $31,495,000 $51,596,000
Foreign 2,764,000 $17,337,000
----------- -----------
Total sales $34,258,000 $17,337,000 $51,596,000
=========== =========== ===========
Intercompany sales:
Domestic $ 677,000 $ 677,000
Foreign 2,284,000 $ 59,000 2,343,000
----------- ----------- -----------
Total Sales $ 2,961,000 $ 59,000 $ 3,020,000
=========== =========== ===========
Operating Loss $ 1,290,000 $ 648,000 $ 1,938,000
Net Loss $ 3,618,000 $ 788,000 $ 4,406,000
Identifiable assets $20,148,000 $11,813,000 $31,961,000
Intersegment sales between geographic areas are accounted for at prices which,
in general, provide a profit after coverage of all manufacturing costs.
The Company had sales to two significant customers that accounted for 17% and
11% of the Company's total sales for the year ended December 31, 1994.
12. SUBSEQUENT EVENTS
On July 17, 1995, the majority shareholder entered into several agreements,
including a Voting Trust Agreement, with a third party which, among other
things, purported to transfer certain rights (including voting rights) to such
third person. The agreements also provided for the transfer of ownership of a
majority of the common stock to this same individual upon the occurrence of
certain events, including the consent of the holder of the long- and short-term
notes, which are secured by a pledge of the shares involved.
Subsequently, the minority shareholders instituted an action seeking emergency
restraint of any change in ownership or management of the Company and for an
adjudication that the majority shareholder's actions violate his obligations
under a pre-existing agreement to transfer his stock to the minority
shareholders.
The Company is currently a defendant in that action, in which the minority
shareholders primarily seek damages from the former majority shareholder. While
the minority shareholders have not yet asserted damage claims against the
Company, the Company anticipates that they may amend the action to seek damages
on various theories. The Company intends to counterclaim against the minority
shareholders for, among other things, breach of fiduciary duty, and to challenge
the validity of the purported issuance of any shares of the Company's stock to
the minority shareholders. As the ultimate outcome of this matter is not
presently determinable, no provision for any loss that may result upon
resolution of this matter has been made in the accompanying financial
statements.
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<PAGE>
On August 16, 1995, a Special Shareholder Meeting was held at which the majority
shareholder attempted to remove current directors and elect a new Board. Both
the minority shareholders and AMC, as the preferred shareholder and holder of
the long-term notes, objected to these actions as illegal and invalid and
refused to recognize the new Board.
On August 17, 1995, AMC, whose long-term notes were secured by the majority
shareholders' common stock, issued a Notice of Default, claiming that the
majority shareholder's actions in attempting to transfer stock, or any stock
rights, violated the Pledge Agreement pertaining to that stock. Shortly
thereafter, AMC asserted a default-based right to vote the majority shares,
signed a written Consent in Lieu of Shareholder's meeting, to remove the current
Board and elect a third Board of Directors. On August 22, 1995, AMC filed an
action in a Delaware Court seeking an adjudication that a default had occurred
and that its newly elected Board was the valid Board of Directors. A trial on
that matter was held November 27, and 29, 1995. The Court subsequently ruled
that a default had occurred and that the board elected by AMC was the Company's
valid Board of Directors.
On July 17, 1996, a foreclosure sale arising out of the default was held for all
of the majority shareholder's stock in the Company. At the sale, AMC bid a
portion of the debt owed to it by the Company under the notes and acquired all
of the former majority shareholder's shares in the Company. In 1996, the Company
engaged the consulting firm of Grisanti, Galef & Goldress, Inc. ("GG&G") to
provide crisis management assistance to the Company. Mr. Brian R. Stone of CCC&G
was appointed as the Company's Chief Executive Officer.
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