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 June 29, 1996
( ) 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: 23,190,746 $.10 par value common stock as of August 12, 1996.
1
<PAGE>
PART 1. 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, 1995, as amended by Amendment No. 1 on Form 10-K dated June 11, 1996.
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.
2
<PAGE>
<TABLE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations - Unaudited
(In thousands except share and per share data)
<CAPTION>
For the three months ended For the nine months ended
June 29, June 30, June 29, June 30,
-------- -------- -------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 74,037 $ 79,860 $ 255,452 $ 200,152
Cost of sales 56,155 63,454 188,759 179,417
------ ------ ------- -------
Gross profit 17,882 16,406 66,693 20,735
------ ------ ------ ------
Research and development expenses 12,374 8,612 39,661 23,679
Selling, general and administrative expenses 1,712 1,921 5,273 5,770
----- ----- ----- -----
Total operating expenses 14,086 10,533 44,934 29,449
------ ------ ------ ------
Income (Loss) from operations 3,796 5,873 21,759 (8,714)
Interest income 1,576 423 2,683 1,092
Interest expense (3,128) (1,352) (5,847) (3,432)
Other income, net 295 1,822 1,951 3,814
------ ------ ------ ------
Income (Loss) before taxes 2,539 6,766 20,546 (7,240)
Provision for income taxes 189 45 472 444
------ ------ ------ ------
Net income (loss) $ 2,350 $ 6,721 $ 20,074 $ (7,684)
====== ====== ====== ======
Net income (loss) per share: $ 0.10 $ 0.30 $ 0.84 ($0.35)
====== ====== ====== ======
Weighted average common and dilutive equivalent
shares outstanding: 24,039,048 22,304,211 23,902,370 22,181,365
========== ========== ========== ==========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
3
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets - Unaudited
(In thousands except share and par value data)
June 29, September 30,
-------- -------------
1996 1995
ASSETS ---- ----
Current Assets:
Cash and cash equivalents $ 116,681 $ 48,236
Accounts receivable, net 36,607 36,571
Inventories 36,560 32,727
Prepaid expenses and other 8,803 10,411
------- -------
198,651 127,945
------- -------
Property, plant and equipment, at cost 283,160 252,953
Less-accumulated depreciation (149,369) (148,636)
------- -------
133,791 104,317
------- -------
Other assets 17,414 14,555
------- -------
$ 349,856 $ 246,817
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 1,980 $ 12,004
Bank notes payable 45,789 54,371
Accounts payable 29,472 44,535
Accrued payroll and benefits 9,506 9,361
Other current liabilities 15,570 13,637
------- -------
102,317 133,908
------- -------
Long-term debt, net 116,732 3,254
------- -------
Other liabilities 4,516 6,063
------- -------
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 23,190,746 and 22,619,205
shares at June 29, 1996 and September 30, 1995,
respectively 2,319 2,262
Paid-in capital 184,123 181,191
Retained deficit (58,957) (79,031)
------- -------
127,485 104,422
Treasury stock, at cost (116,995 shares as of
June 29, 1996, and 96,603 as of
September 30, 1995) (1,194) (830)
------- -------
126,291 103,592
------- -------
$ 349,856 $ 246,817
========= =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated balance sheets.
4
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<TABLE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited
(In thousands)
<CAPTION>
For the nine months ended
June 29, June 30,
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 20,074 $ (7,684)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 20,958 20,339
Gain on sale of business and assets -- (5,109)
Provision for receivable allowances and related costs -- 50
Amortization of unearned restricted stock compensation -- 673
Other assets 303 4,723
Other liabilities (1,547) (369)
Other, net 658 23
Working capital changes affecting cash flows from operations:
Accounts receivable (36) (24,497)
Inventories (3,833) (7,215)
Prepaid expenses and other 670 (1,418)
Accounts payable (15,063) 26,259
Accrued payroll and benefits 210 287
Other current liabilities 1,933 (3,199)
------ ------
Net cash provided by operating activities 24,327 2,863
------ ------
Cash flows from investing activities:
Additions to property, plant and equipment (50,349) (13,953)
Proceeds from sale of business and assets, net -- 24,264
Repayment of notes receivable 1,124 1,740
------ ------
Net cash provided by (used in) investing activities (49,225) 12,051
------ ------
Cash flows from financing actitivies:
Proceeds from issuance of convertible subordinated debentures 115,000 --
Proceeds from issuance of debt 104,481 126,012
Repayment of debt (124,494) (126,180)
Payment of debt issuance costs (4,064) --
Purchase of treasury stock (364) --
Proceeds from stock options exercised 2,924 238
------ ------
Net cash provided by financing activities 93,483 70
------ ------
Effect of exchange rate changes on cash and cash equivalents (140) 1,385
------ ------
Net increase in cash and cash equivalents 68,445 16,369
------ ------
Cash and cash equivalents at beginning of period 48,236 20,761
------ ------
Cash and cash equivalents at end of period $ 116,681 $ 37,130
========= =========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
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<PAGE>
Selected Notes to Condensed Consolidated Financial Statements
Unaudited
(June 29, 1996)
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):
June 29, September 30,
1996 1995
---- ----
Purchased parts and
manufacturing supplies $ 9,005 $13,036
Work in process 23,629 17,589
Finished goods 3,926 2,102
------- -------
$36,560 $32,727
Note B: Sale of Assets
- ----------------------
During the first quarter of fiscal 1996, the Company received final payment of
$1.3 million related to the completion of certain milestones and release of the
escrow holdback in connection with the sale of the Company's Tape Head business
unit to Seagate Technology, Inc. ("Seagate") in December 1994. This completed
the sale to Seagate.
Note C: Long Term Debt
- ----------------------
On March 22, 1996, the Company completed the sale, in an offshore offering and
in a concurrent private placement in the United States, of $115.0 million of its
7.0% Convertible Subordinated Debentures (the "Convertible Debentures") due in
2006. The net proceeds were used to retire a $10.0 million line of credit
maturing March 29, 1996. The balance of the proceeds are being used for working
capital and other general corporate purposes, including capital expenditures.
Of the $115.0 million debt, $22.0 million of the Convertible Debentures may be
converted, at any time after May 1, 1996, at a conversion price of $18.60 per
share. The remaining $93.0 million of Convertible Debentures may be converted at
the same price, at any time after March 22, 1997.
6
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Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------
During fiscal 1995, and through the second quarter of fiscal 1996, strong
customer demand and stable production yields for the Company's nanoslider form
factor thin film disk head products resulted in consecutive quarterly growth in
net sales and improved gross profit for those products. At the end of the second
quarter and during April and May of the third quarter of fiscal 1996 the Company
increased its production ramp for more advanced thin film products and
experienced lower yields, which is typical during initial production of newer
products. In June 1996, production yields and volumes for the advanced thin film
technology products returned to profitable levels.
Engineering research and product development efforts continue on
magnetoresistive ("MR") disk heads. The Company has been shipping low volumes of
production MR disk heads to certain of its customers.
Recent improvements in production yields and favorable customer demand for the
Company's advanced thin film and MR disk head products position the Company to
meet its customers' requirements for the coming quarter and the next fiscal
year.
The following table sets forth, for the periods indicated, net sales by product
line.
For the three For the nine
months ended months ended
--------------------- ---------------------
June 29, June 30, June 29, June 30,
1996 1995 1996 1995
---- ---- ---- ----
Thin-film disk head products
Net sales $ 52,858 $ 54,741 $180,019 $139,237
Percentage of total 71.4% 68.5% 70.5% 69.6%
Ferrite disk head products
Net sales $ 12,249 $ 3,900 $ 40,545 $ 12,656
Percentage of total 16.5% 4.9% 15.9% 6.3%
Other products
Net sales $ 8,930 $ 21,219 $ 34,888 $ 48,259
Percentage of total 12.1% 26.6% 13.6% 24.1%
Total net sales $ 74,037 $ 79,860 $255,452 $200,152
Three Months Ended June 29, 1996
- --------------------------------
NET SALES. Net sales in the third quarter of fiscal 1996 decreased 7.3% from the
third quarter of fiscal 1995. Thin film disk head net sales decreased 3.4% for
the comparable periods. Lower thin film sales revenue resulted from low
production yields in April and May associated with the ramp of new advanced thin
film technology products. Ferrite disk head net sales increased significantly
for the comparable periods due to increased business from one customer. Future
ferrite business is expected to decrease beginning in the fourth quarter of
fiscal 1996. This volume is expected to be replaced by advanced thin film and MR
technology products. Other net sales primarily include tape head products and
disk head products for which the Company only performs head stack assembly
("HSA") functions using thin film and MR disk heads purchased from other
manufacturers. Other net sales decreased 57.9% for the comparable periods due to
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a decrease in assembly of thin film HSA's which had significantly lower gross
margins than the Company's manufactured disk heads and, to a lesser extent, a
decrease in tape head product sales.
GROSS PROFIT. As a percentage of net sales, gross profit was 24.2% and 20.5% for
the third quarter of fiscal 1996 and the third quarter of fiscal 1995,
respectively. The increase in gross profit for the comparable periods was
primarily due to changes in product mix. The Company achieved higher gross
profit on certain of the Company's thin film disk head products it manufactures
as compared to certain of the products for which the Company only performs the
HSA assembly functions.
RESEARCH AND DEVELOPMENT. Research and development expenses ("R&D") as a percent
of net sales was 16.7% and 10.8% for the third quarter of fiscal 1996 and the
third quarter of fiscal 1995, respectively. R&D expenses for the comparable
periods increased $3.8 million as the Company focused on advanced thin film
inductive technology and MR process and product development.
INTEREST INCOME AND EXPENSE. Interest income in the third quarter of fiscal 1996
increased $1.2 million compared to the third quarter of fiscal 1995 due to
higher cash balances. Interest expense for the comparable periods increased $1.8
million due to higher average debt outstanding. Increases in both categories
were primarily a result of the Company's March 1996 issuance of $115.0 million
7% Convertible Subordinated Debentures due in 2006.
OTHER INCOME AND EXPENSE. Other income and expense in the third quarter of
fiscal 1996 decreased $1.5 million compared to the third quarter of fiscal 1995.
The prior fiscal year quarter included $1.9 million of income recognized as the
Company completed certain performance milestones related to the sale of the
Company's Tape Head business unit to Seagate. Other income and expense for the
current fiscal quarter and the balance of the prior year fiscal quarter was
primarily foreign exchange gains and losses.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the
three months ended June 29, 1996, primarily related to federal alternative
minimum taxes, state minimum taxes and foreign taxes.
Nine Months Ended June 29, 1996
- -------------------------------
NET SALES. Net sales for the nine months ended June 29, 1996 increased 27.6%
from the same period in the prior fiscal year primarily as a result of a 29.3%
increase in thin film disk head net sales due to the Company's continued volume
production on qualified customer programs. Ferrite disk head net sales increased
significantly for the comparable periods primarily due to business from one
customer. Other net sales decreased 27.7% for the comparable periods primarily
due to decreases in assembly of thin film HSA's using disk heads purchased from
other manufacturers.
GROSS PROFIT. As a percentage of net sales, gross profit was 26.1% and 10.4% for
the nine months ended June 29, 1996 and June 30, 1995, respectively. The gross
profit improvement was attributed primarily to significant production process
improvements on thin film disk head products during the second half of fiscal
1995 that continued through the first half of fiscal 1996. Gross profit also
improved for the comparable periods as a result of changes in product mix.
Certain of the Company's thin film disk head products experienced higher gross
margins as compared to certain of the products for which the Company only
performs the HSA assembly functions. However, the gross profit percentage in the
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third quarter was 24.2% as compared to 26.9% for the first half of fiscal 1996.
The reason for this decline was the lower yields in April and May on more
advanced thin film technology products.
RESEARCH AND DEVELOPMENT. R&D expenses as a percent of net sales was 15.5% and
11.8% for the nine months ended June 29, 1996 and June 30, 1995, respectively.
Expenses in dollars for the comparable periods increased $16.0 million as the
Company focused on advanced thin film inductive technology and MR process and
product development. It is expected that R&D expenditures in absolute dollars
will continue at similar levels as the Company continues to invest in advanced
technology products and processes, provided that the Company's projected revenue
base can support these expenditures.
INTEREST INCOME AND EXPENSE. Interest income for the nine months ended June 29,
1996 increased $1.6 million compared to nine months ended June 30, 1995 due to
higher average cash balances. Interest expense for the comparable periods
increased $2.4 million due to higher average debt outstanding. Increases in both
categories were primarily a result of the Company's March 1996 issuance of
$115.0 million 7% Convertible Subordinated Debentures due in 2006.
OTHER INCOME AND EXPENSE. Other income for the nine months ended June 29, 1996
decreased $1.9 million compared to the nine months ended June 30, 1995. Other
income for the comparable periods included $1.3 million and $3.9 million,
respectively, as the Company completed certain performance milestones related to
the Seagate agreement. The balance of other income and expense during the
comparable periods was primarily attributed to foreign exchange gains and
losses.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the
nine months ended June 29, 1996, primarily related to federal alternative
minimum taxes, state minimum taxes and foreign taxes.
Liquidity and Capital Resources
- -------------------------------
At June 29, 1996, the Company's cash and equivalents increased to $116.7 million
from $48.2 million at September 30, 1995. During the nine months ended June 29,
1996, the Company generated $24.3 million from operating activities, comprised
primarily of the net effect of the following: i) $20.1 million from net income
which included $21.0 million of depreciation and amortization expense; (ii)
increase in inventories of $3.8 million as the Company began production ramp of
advanced thin film technology and MR products and (iii) decrease in the accounts
payable balance of $15.1 million primarily due to lower levels of net sales
during the third quarter of fiscal 1996 and reduced business with one supplier
that previously had been given extended payment terms. Inventories increased
slightly while accounts payable decreased. Increased thin film and MR disk head
inventories more than offset the decrease in ferrite disk head inventories,
which typically have relatively higher purchased material content.
In March 1996, the Company completed the sale, in an offshore offering and in a
concurrent private placement in the United States, of $115.0 million of 7.0%
Convertible Subordinated Debentures due in 2006. Net proceeds of $111.3 million
were used to retire a $10.0 million line of credit maturing March 29, 1996. As a
result, total debt at June 29, 1996, including notes payable, amounted to $164.5
million, a net increase of $94.9 million from the balance outstanding at
September 30, 1995. The balance available for borrowings under the CIT line of
credit was approximately $22.5 million at June 29, 1996. Also at that date, the
Company's Malaysian subsidiary had drawn down $45.8 million of its credit
9
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facility which has been in place since June 1990. The credit facility is
callable on demand, has no termination date, is guaranteed by the Company, is
secured by the Company's real property holdings in Malaysia and includes certain
covenants which preclude the Company from granting liens and security interests
in other assets in Malaysia. 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. Additional borrowings available
under this facility were approximately $2.0 million at June 29, 1996.
During fiscal 1996 the Company plans a total of approximately $110 million in
new capital expenditures, including equipment to be obtained through operating
leases, during fiscal 1996 primarily to continue to improve thin film production
processes, increase thin film production volumes and continue development and
production of MR technologies and products. Capital expenditures for the nine
months ended June 29, 1996 were $50.3 million. In addition, the Company leased
$19.8 million of production equipment through operating leases. During the next
twelve months, the Company believes it will have sufficient cash flows from
operations and equipment lease financing alternatives to meet its operating and
capital expenditure requirements.
Customer demand continues to be strong for the Company's thin film and MR disk
heads. In the event that demand for the Company's products declines, management
believes that it will be able to reduce its funding requirements for planned,
but not committed, capital expenditures. However, if the Company were unable to
continue to maintain production yields at acceptable levels in order to permit
it to execute customer orders for new drive programs in a timely manner, there
could be an adverse impact on liquidity. Given its current liquidity position,
the Company believes it would not require additional external financing during
the next twelve months even if production yields could not be maintained at
acceptable levels. However, in such event, capital expenditures, research and
development or working capital expenditures may be curtailed. Such curtailment
could, if severe, adversely affect the Company's future years' operations and
competitive position.
10
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description
------ -----------
11 Statement re computation of per share
information.
27 Financial Data Schedule
(b) Reports on Form 8-K. Report on Form 8-K dated August 1, 1996 was filed
by the Company with respect to the non-judicial foreclosure following a breach
of stock pledge by a third party, whereby the Company acquired 75% of the
outstanding common stock of Delta Bravo, Inc., a Delaware Corporation ("DBI"),
in satisfaction of approximately $2.5 million of debt owed by DBI to the
Registrant.
11
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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
Dated: August 13, 1996 /s/Craig D. Crisman
-------------------
Craig D. Crisman
Chairman of the Board and Chief
Executive Officer
(Principal Financial Officer)
Dated: August 13, 1996 /s/Peter T. Altavilla
---------------------
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
12
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EXHIBIT INDEX
-------------
Exhibit
Number Description Page
- ------ ----------- ----
11 Statement re computation of per share
information 14
27 Financial Data Schedule 15
13
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EXHIBIT 11
<TABLE>
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
----------------------------------------------
(in thousands except per share data)
<CAPTION>
For the three months ended For the nine months ended
June 29, 1996 June 29, 1996
Unaudited Unaudited
-------------------------- -------------------------
Primary earnings Fully diluted Primary earnings Fully diluted
per share earnings per share per share earnings per share
<S> <C> <C> <C> <C>
Net income $ 2,350 $ 2,350 $20,074 $20,074
======= ======= ======= =======
Weighted average common shares outstanding 22,970 22,970 22,832 22,832
Dilutive common stock equivalents 1,069 1,062 1,070 1,101
------- ------- ------- -------
Total weighted average common
shares outstanding 24,039 24,032 23,902 23,933
======= ======= ======= =======
Net income per share $ 0.10 $ 0.10 $ 0.84 $ 0.84
======= ======= ======= =======
</TABLE>
Since fully diluted earnings per share does not reduce the Company's earnings
per share by more than 3% of primary earnings per share, the Company has
reflected primary earnings per share on the Consolidated Statement of Operations
for the three months and nine months ended June 29, 1996.
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of June 29, 1996 and the Consolidated Statement
of Operations for the nine months ended as of June 29, 1996 and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 116,681
<SECURITIES> 0
<RECEIVABLES> 36,607
<ALLOWANCES> 0
<INVENTORY> 36,560
<CURRENT-ASSETS> 198,651
<PP&E> 283,160
<DEPRECIATION> (149,369)
<TOTAL-ASSETS> 349,856
<CURRENT-LIABILITIES> 102,317
<BONDS> 0
0
0
<COMMON> 2,319
<OTHER-SE> 123,972
<TOTAL-LIABILITY-AND-EQUITY> 349,856
<SALES> 255,452
<TOTAL-REVENUES> 255,452
<CGS> 188,759
<TOTAL-COSTS> 188,759
<OTHER-EXPENSES> 44,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,847
<INCOME-PRETAX> 20,546
<INCOME-TAX> 472
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,074
<EPS-PRIMARY> 0.84
<EPS-DILUTED> 0.84
</TABLE>
