<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-K/A NO. 1
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended September 30, 1995
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from ______________ to ______________
Commission File No. 1-6635
APPLIED MAGNETICS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-1950506
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
75 ROBIN HILL ROAD, GOLETA, 93117
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 683-5353
THE PURPOSE OF THIS AMENDMENT IS TO AMEND THE FOLLOWING ITEMS OF
REGISTRANT'S ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED SEPTEMBER 30, 1995
AS FOLLOWS:
PART I
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations
To revise and restate the second to last sentence of the paragraph
under the caption "Selling, General and Administrative Expenses."
To revise and restate the paragraph under the caption "Special
Charges."
To correct the second paragraph under the caption "Liquidity and
Capital Resources."
Item 8 Financial Statements and Supplementary Data
To revise and restate Note 7 to the Consolidated Financial Statements.
To add a new Note 11 to the Consolidated Financial Statements.
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K.
To revise Schedule II Valuation and Qualifying Accounts.
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<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The Company posted a net profit in fiscal 1995, as compared to net losses
during the previous two years of the three year period ended September 30,
1995. The Company's successful turnaround is attributed to numerous factors,
including increased customer demand for its thin film products, substantial
cost reductions implemented during the last quarter of fiscal 1994, timely
production ramps on a number of qualified thin film programs and significant
technological process improvements which increased production volumes. This
growth was supported by generation of cash as a result of completion of the
sale of the Company's Tape Head business unit to Seagate and aggressive cash
management practices which included accelerated payment terms with some of the
Company's customers, completion of a secured asset-based revolving line of
credit and extension of payment on a revolving credit facility with a
commercial bank. See "Liquidity" for further discussion.
During fiscal 1995, in response to market demands occurring over the three
year period, the Company continued its shift from production of ferrite disk
heads to thin film disk heads, which offer superior performance
characteristics over ferrite disk heads and became competitively priced. The
Company furthered its technological development from the thin film microslider
to the nanoslider form factor and by the first quarter of fiscal 1995,
substantially all thin film shipments were nanoslider products. The Company
also made substantial progress in thin
13
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film production process improvements including conversion from 3 inch
substrate ("wafer") to 6 inch wafer fabrication (which produces more thin film
disk heads per wafer), and conversion to fully etched air bearing ("FEAB") and
negative pressure air bearing disk head designs, that allowed certain of its
products to demonstrate improved performance.
MR disk head product development continues to be critical for the Company's
future growth. The Company is committed to substantial engineering, production
process and capital investments in MR. It continued to ship prototype and
qualification samples to selected customers. The Company expects to ship
production quantities of MR disk heads by the end of fiscal 1996. See
"Products" under Item 1.
During fiscal 1994 and fiscal 1993, market demand shifted to the thin film
nanoslider form factor from the microslider form factor and from ferrite disk
heads. This unexpected rapid market transition contributed to the substantial
losses in fiscal 1994 as the Company struggled with its thin film
manufacturing process which impacted the Company's ability to quickly ramp
production to achieve desired levels of volume shipments in response to strong
market demand. The market transition impacted fiscal 1993 as the Company
sustained significant losses and recorded a $49.6 million restructuring charge
in the fourth quarter to consolidate manufacturing resources and write-down
production assets (primarily related to ferrite and thin film microslider
production) to their estimated net realizable values.
Fiscal 1993 also included completion of management's strategic plan to focus
solely on the design, manufacture and sale of magnetic recording head
products. The execution of the plan included sale of non-core businesses, a
secondary public offering, and establishing a strategic corporate relationship
with HML .
ANNUAL RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
----------------------------
1995 1994 1993
(IN THOUSANDS) -------- -------- --------
<S> <C> <C> <C>
Thin Film Disk Head Products
Net Sales................................. $250,873 $133,909 $139,553
Percentage of Total....................... 85.7% 48.5% 41.6%
Ferrite Disk Head Products
Net Sales................................. 30,443 123,254 177,094
Percentage of Total....................... 10.4% 44.7% 52.7%
Tape Head Products
Net Sales................................. 11,284 18,764 19,251
Percentage of Total....................... 3.9% 6.8% 5.7%
-------- -------- --------
Total Net Sales............................. $292,600 $275,927 $335,898
100.0% 100.0% 100.0%
======== ======== ========
</TABLE>
NET SALES: Net sales increased 6% from fiscal 1994 to fiscal 1995. Net sales
of thin film disk head products increased as a percentage of total net sales
from 48.5% of net sales in 1994 to 85.7% of net sales in 1995. In absolute
terms, thin film net sales increased 87.3% from 1994 to 1995. The significant
growth in thin film disk heads was attributable to achievement of production
volumes for nanoslider products and continued strong demand by certain
customers on more mature products. Thin film disk head net sales increased
quarter-to-quarter for fiscal 1995 and were $41.9 million, $57.9 million,
$71.9 million and $79.2 million, respectively. This increase during the first
two quarters was due to significant growth in thin film disk head shipments,
while the last two quarters were primarily due to the change in mix of
shipments from head gimbal assemblies ("HGAs") to head stack assemblies
("HSAs") and to a lesser extent due to growth in thin film disk head
shipments. Net sales of ferrite disk head products decreased 75.3% in fiscal
1995 from fiscal 1994. The Company attributes the decline to the market shift
to thin film disk heads that offer competitive prices and superior performance
and to the Company's decision in fiscal 1994 to focus on thin film disk head
product development. The Company believes that computer drive
14
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industry demand will continue to shift to thin film and MR disk heads over the
long term. As a result, over the past three fiscal years, the Company has
committed its engineering and production resources to further advancement of
thin film inductive technology. Net sales for tape head products decreased
39.9% in fiscal 1995 from fiscal 1994. Tape head products were produced by the
Company's Tape Head business unit which was sold to Seagate in December 1994.
Pursuant to the sales agreement, the Company continues to provide certain
tape-related goods and services on an ongoing basis.
Net sales decreased 17.9% from fiscal 1993 to 1994. Net sales of thin film
disk head products increased as a percent of total net sales from 41.6% in
1993 to 48.5% of net sales in 1994, but in absolute terms, net sales decreased
slightly, by 4.0%, from 1993 to 1994. The decline was caused by difficulties
experienced by the Company in achieving production volumes of nanoslider
products. Net sales of thin film disk head products for three quarters of
fiscal 1994 remained between $30.9 million and $32.5 million. In the fourth
quarter of fiscal 1994, thin film disk head shipments increased to $38.0
million as a result of improved production yields. Net sales of ferrite disk
head products decreased 30.4% from fiscal 1993 to 1994 as a result of maturing
of ferrite-based drive programs for which the Company is a supplier. Net sales
of tape head products remained flat in fiscal 1994 as compared to 1993.
GROSS PROFIT: The gross margin increased in fiscal 1995 to 13.6% as compared
to (2.2%) in fiscal 1994. The increase resulted from significantly higher
revenues due to improved production volumes generated from technological
improvements in the thin film nanoslider production processes, conversion from
the 3 inch to 6 inch wafer fabrication, and due to continued cost reductions
implemented during the last quarter of fiscal 1994.
The gross margin decreased in fiscal 1994 to (2.2%) as compared to 14.9% in
fiscal 1993. This decrease was primarily due to lower sales volumes, lower
average unit sales prices and manufacturing difficulties as the Company was
confronted with the sudden and unexpected change in market demands from the
thin film microslider to the nanoslider form factor.
RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were
$33.7 million, $38.8 million and $32.6 million for fiscal years 1995, 1994,
and 1993, respectively, before cost offsets of $14.1 million in fiscal 1994
and $15.1 million in fiscal 1993. These expenses represented 11.5%, 14.1% and
9.7% of net sales, respectively, for such periods. The cost offsets were
related to developmental funding the Company received under a License and
Technology Development Agreement with Hitachi Metals, Ltd. for the advancement
of the Company's inductive thin film technology and the development and
commercialization of MR disk head technology, and from joint product
development agreements with certain major disk drive manufacturers for MR disk
head development. Funding for these agreements was concluded by the end of
fiscal 1994.
R&D expenses decreased by $5.1 million from fiscal 1994 to 1995 as the
Company implemented cost controls during the fourth quarter of fiscal 1994 in
response to significantly lower revenues and deteriorating gross margins. R&D
expenses increased $6.2 million from fiscal 1993 to 1994 as the Company
increased its investment in the development and commercialization of MR disk
head development and continued the advancement of inductive thin film
technology.
The Company continues to invest in advanced technology products and
processes and expects that expenditures generally will increase on an absolute
dollar basis, given that the revenue base can support these expenditures. The
Company did not receive any development funding from customers and strategic
partners in fiscal 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses in absolute dollars were $7.4 million, $17.3
million, and $20.1 million in fiscal 1995, 1994 and 1993, respectively. These
expenses represented 2.5%, 6.3% and 6.0% of net sales, respectively, for such
periods. The Company's allowance for uncollectible accounts receivable at
September 30, 1995 was $0.7 million, which is $2.9 million less than the reserve
required at September 30, 1994. The reduction in this allowance is due to the
improved financial stability of the Company's significant customers. The
Company expects that SG&A expenses as a percent of sales will vary from period
to period depending on the level of net sales.
SPECIAL CHARGES: In 1993 the Company recorded a restructuring charge of $49.6
million to consolidate manufacturing resources and write-down manufacturing
equipment to estimated net realizable value primarily as a result of the
unexpectedly rapid market transition from ferrite and from the thin film
microslider to the nanoslider form factor. Also in 1993, the Company completed
the sale of three of its subsidiaries which were accounted for as discontinued
operations in 1992 (as part of the 1992 restructuring). Magnetic Data, Inc.
(MDI) and Brumko Magnetics (Brumko) were sold to Delta Bravo, Inc. (DBI), a
privately owned company, and Optical Products Division was sold to Most, Inc.
(MOST), a majority-owned subsidiary of Nakamichi Corporation Japan. The stated
amount of the consideration received by the Company from DBI exceeded the
estimated net realizable value of MDI and Brumko and included long-term notes
receivable aggregating $18.4 million. Management believed that it was not
probable that the $18.4 million of notes would be realized based upon its
evaluation of the underlying operations' cash flows, which were the only source
of repayment. Therefore, the $7.7 million reserve established for these
discontinued operations in 1992 was applied against the related notes
receivable, and an additional provision of $3.1 million was made to record these
notes at their estimated net realizable value of $7.6 million. During 1994, the
reserve for notes receivable was increased by $0.8 million as all income related
to interest payments from DBI was deferred. During 1995, DBI defaulted on
certain notes covenants and failed to make the fourth quarter's scheduled
interest payment. Due to this situation and related disputes, management
determined that the remaining DBI notes receivable balance should be fully
reserved. This was accomplished by applying $3.2 million of excess reserve for
accounts receivable, $2.8 million of excess 1993 restructuring reserves, and
$0.8 million of interest payments received from DBI to the reserve for the notes
receivable.
15
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INTEREST INCOME AND EXPENSE: Interest income was $2.0 million in fiscal
1995, and $0.8 million in both fiscal 1994 and 1993. Interest income increased
$1.2 million in fiscal 1995 from 1994 due to higher average cash balances and
improved investment management. Interest income remained unchanged in fiscal
1994 from 1993, primarily due to similar average cash balances in both years.
Interest expense was $4.9 million, $4.2 million and $5.6 million in fiscal
1995, 1994 and 1993, respectively. Interest expense increased $0.7 million in
fiscal 1995 from 1994 primarily as a result of higher average interest rates
on the Malaysian bank loans and letter of credit and loan fees related to the
secured asset-based revolving line of credit established in January 1995.
Interest expense decreased $1.4 million in fiscal 1994 from 1993 which
included the write-off of certain loan origination expenses related to
repayment of debt from proceeds of the Company's equity offering in February
1993.
OTHER INCOME (EXPENSE): Other income of $6.3 million in fiscal 1995 included
$4.9 million income recognized as the Company completed certain performance
milestones pursuant to the sale of its Tape Head business unit to Seagate. See
Note 6 of Notes to Consolidated Financial Statements for further discussion of
the agreement. Other income in fiscal 1995 also included $1.3 million related
to sale of tooling and excess assets. Other income (expense) for fiscal 1994
and 1993 primarily consisted of foreign exchange translation and transaction
gains and losses.
PROVISION FOR INCOME TAXES: For fiscal years 1995, 1994 and 1993, the most
significant component of the provision for income taxes was foreign taxes for
which there were no foreign tax credit offsets available. See Note 3 of Notes
to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1995, in order to improve liquidity and as part of a cash
management and operating plan implemented by the Company, cost and cash
expenditure controls were established, accelerated payment terms were
negotiated with some of the Company's customers, the Tape Head business unit
was sold to Seagate and the Company completed other financings, including new
loan credit facilities, extensions or renewals of existing facilities and
lease financing. The Company expects to continue to use lease financing for
capital expenditures and anticipates that it will continue to maintain cost
and expenditure controls to provide acceptable liquidity.
As of September 30, 1995, the Company's cash and cash equivalents balance
increased to $48.2 million from $20.8 million at September 30, 1994. During
fiscal 1995, the Company generated $18.9 million from operating activities,
comprised primarily of the net effect of the following: i) $1.7 million from net
income, which included $27.6 million of depreciation and amortization expense;
ii) increase in the accounts payable balance of $23.1 million to support higher
levels of net sales and due to extended payment terms from one vendor; iii)
increase in the accounts receivable balance of $17.8 million as a result of
revenues in the fourth quarter of fiscal 1995 increasing to $92.4 million as
compared to the fourth quarter of fiscal 1994 revenues of $64.6 million; and iv)
increase in inventories of $3.8 million. Inventories did not increase as
significantly as the increase in the accounts payable and receivable balances,
as increased thin film disk head inventories were partially offset by the
decrease in ferrite disk head inventories, coupled with better inventory
management by the Company in fiscal 1995.
The Company also generated $25.3 million in cash from the sale of businesses
and assets which were made up of the following: (1) the sale of a building in
Singapore for $4.9 million; (2) the sale of its Tape Head business unit to
Seagate for $21.5 million, of which the Company received $14.0 million at the
closing date of the transaction and $5.7 million, net of related costs, upon
completion of certain performance milestones and (3) $0.7 million for the sale
of excess machinery and equipment. See Note 6 of Notes to Consolidated
Financial Statements for discussion of the Seagate agreement.
At September 30, 1995, total debt, including notes payable, was $69.6
million, an increase of $2.4 million from the balance outstanding at September
30, 1994, primarily due to capital lease financing in Malaysia, where the
Company has substantial manufacturing operations. The Company also had fully
drawn down its unsecured Malaysian credit facilities to $46.9 million from a
bank in Malaysia. In May 1995, the Company's Malaysian subsidiary agreed with
the Malaysian bank to continue these credit facilities which have been in
place since 1990.
16
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The facilities are callable on demand, have no termination date, are
guaranteed by the Company, are secured by the Malaysian subsidiary's real
property holdings in Malaysia and are subject to certain covenants which
preclude the subsidiary from granting liens and security interests in other
assets. Should all or any significant portion of the Malaysian credit
facilities become unavailable for any reason, the Company would need to pursue
alternative financing sources. During fiscal 1995, the Company's Malaysian
subsidiary entered into $5.1 million in capital lease agreements for machinery
and equipment.
In January 1995, the Company retired the $10.0 million debt obligation owed
to Conner. The Company obtained a secured, asset-based revolving line of
credit of $35.0 million from CIT Group/Business Credit, Inc. ("CIT"). This
line of credit provides for borrowings up to $35.0 million based on eligible
trade receivables at various interest rates over a three year term and is
secured by trade receivables, inventories and certain other assets. As of
September 30, 1995, $7.5 million of borrowings was outstanding. The $7.5
million was fully repaid during October 1995. The balance available for
additional borrowings under this line of credit was approximately $1.3 million
at September 30, 1995 and the Company was in compliance with all financial
covenants.
In May 1995, the Company obtained an extension to March 1996, of the
maturity date on a $10.0 million revolving credit facility from a commercial
bank. This facility is secured by a letter of credit issued for the account of
HML, subject to reimbursement by the Company. The Company's reimbursement
obligation to HML is secured by a security interest and lien on certain
machinery and equipment.
The Company continues to have informal understandings with some of its
customers to make payments on accelerated terms. However, the liquidity risk
associated with the cancellation of one or more of these arrangements is
partially ameliorated by the credit available under the CIT Agreement under
which available loan proceeds could generally increase as the Company's trade
accounts receivable increase.
In 1996, the Company plans approximately $100.0 million in capital
expenditures related primarily to improving thin film production processes,
increasing thin film production volumes and development and production of MR
technologies and products. During the next twelve months, the Company believes
it will have sufficient cash flows from operations and equipment lease
financing alternatives to meet its operating and capital expenditure
requirements.
The Company's accounts receivable and inventory balances are heavily
concentrated with a small number of customers. Sales to Conner and Maxtor
accounted for 41% and 19%, respectively, for the Company's sales in 1995. If
any large customer of the Company became unable to pay its debts to the
Company, liquidity would be adversely affected.
In fiscal 1995, Conner agreed to be acquired by Seagate. The Company
anticipates that such acquisition will result in a significant decrease in the
sales volumes to Conner in fiscal 1996 and in future years. See "Customers and
Marketing" under Item 1.
The Company operates in a number of foreign countries. Purchases of certain
raw materials and certain labor costs are paid for in foreign currencies, as
well as repayments of a portion of the Company's Malaysian debt denominated in
ringgitts. The Company is not currently hedging against potential foreign
exchange risk. Fluctuations of foreign currency to the dollar could have a
significant effect on reported cash balances. The effect of foreign currency
exchange rate changes were increases of $0.1 million and $1.2 million in cash,
for fiscal 1995 and 1994, respectively.
Market and customer demand continues to be strong for the Company's thin
film disk heads. In the event that demand for the Company's products declines,
management believes that it will be able to reduce its funding requirements
for planned, but not committed, capital expenditures. However, if the Company
were unable to continue to increase sales or maintain production yields at
acceptable levels in order to permit it to execute customer orders for new
drive programs in a timely manner, there would be a significant adverse impact
on liquidity. This would require the Company to either obtain additional
capital from external sources or to curtail its capital, research and
development and working capital expenditures. Such curtailment could adversely
affect the Company's future years' operations and competitive position.
17
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RECENT ACCOUNTING PRONOUNCEMENTS
In March of 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 121 ("SFAS 121"). This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles
to be disposed of.
This Statement will become effective for financial statements of the Company
in the first quarter of fiscal 1997. Management has not yet determined the
impact which SFAS 121 will have on the Company's financial position and
results of operations when it is adopted.
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APPLIED MAGNETICS CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
FINANCIAL STATEMENTS: ----
<S> <C>
Report of Independent Public Accountants (Arthur Andersen LLP)...... F-2
Consolidated Statements of Operations for the 52 weeks ended
September 30, 1995, September 30, 1994 and September 30, 1993...... F-3
Consolidated Balance Sheets as of September 30, 1995 and September
30, 1994........................................................... F-4
Consolidated Statements of Cash Flows for the 52 weeks ended
September 30, 1995, September 30, 1994 and September 30, 1993...... F-5
Consolidated Statements of Shareholder's Investment for the 52 weeks
ended
September 30, 1995, September 30, 1994 and September 30, 1993...... F-6
Notes to Consolidated Financial Statements.......................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Applied Magnetics Corporation:
We have audited the accompanying consolidated balance sheets of Applied
Magnetics Corporation (a Delaware corporation) and subsidiaries as of
September 30, 1995 and 1994, and the related consolidated statements of
operations, shareholders' investment and cash flows for each of the three
years in the period ended September 30, 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Magnetics Corporation and subsidiaries as of September 30, 1995 and 1994, and
the results of their operations and their cash flows for each of the three
years in the period ended September 30, 1995, in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 12, 1995
F-2
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER
30,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Net sales................................. $ 292,600 $ 275,927 $ 335,898
Cost of sales............................. 252,684 281,997 286,017
---------- ---------- ----------
Gross profit (loss)..................... 39,916 (6,070) 49,881
---------- ---------- ----------
Research and development expenses......... (33,655) (24,682) (17,504)
Selling, general and administrative
expenses................................. (7,434) (17,267) (20,115)
Restructuring charge ..................... -- -- (49,600)
Interest income........................... 1,996 825 803
Interest expense.......................... (4,826) (4,216) (5,632)
Other income (expense), net............... 6,335 (160) 1,244
---------- ---------- ----------
Income (Loss) before income taxes....... 2,332 (51,570) (40,923)
Provision for income taxes................ 584 1,100 2,805
---------- ---------- ----------
Net Income (loss)....................... $ 1,748 $ (52,670) $ (43,728)
========== ========== ==========
Net income (loss) per share............. $ 0.08 $ (2.39) $ (2.17)
========== ========== ==========
Weighted average common and dilutive
equivalent
shares outstanding 22,472,208 22,081,751 20,155,868
========== ========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statementsare an integral part
of these consolidated statements.
F-3
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
<TABLE>
<CAPTION>
AS OF SEPTEMBER
30,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents..................................... $ 48,236 $ 20,761
Accounts receivable, less allowances of $652 in 1995 and
$3,629 in 1994.......................................... 36,571 18,720
Inventories.............................................. 32,727 31,520
Prepaid expenses and other............................... 10,411 6,879
-------- --------
127,945 77,880
-------- --------
Property, plant and equipment, at cost:
Land..................................................... 2,556 3,992
Buildings................................................ 67,314 77,745
Manufacturing equipment.................................. 146,706 163,068
Other equipment and leasehold improvements............... 29,410 30,743
Construction in progress................................. 6,967 13,814
-------- --------
252,953 289,362
Less--accumulated depreciation and amortization............ (148,636) (165,046)
-------- --------
104,317 124,316
-------- --------
Other assets............................................... 14,555 18,360
-------- --------
$246,817 $220,556
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt........................ $ 12,004 $ 20,412
Bank notes payable....................................... 54,371 46,062
Accounts payable......................................... 44,535 22,332
Accrued payroll and benefits............................. 9,361 9,406
Other current liabilities................................ 13,637 16,111
-------- --------
133,908 114,323
-------- --------
Long-term debt, net........................................ 3,254 677
-------- --------
Other liabilities.......................................... 6,063 7,123
-------- --------
Shareholders' Investment:
Preferred stock, $.10 par value, authorized 5,000,000
shares, none issued and outstanding..................... -- --
Common stock, $.10 par value, authorized 40,000,000
shares, issued 22,619,205 shares and 22,161,460 shares
at September 30, 1995 and 1994, respectively............ 2,262 2,216
Paid-in capital.......................................... 181,191 178,481
Retained deficit......................................... (79,031) (80,779)
-------- --------
104,422 99,918
Treasury stock, at cost (96,603 shares and 92,509 shares at
September 30, 1995 and 1994, respectively)................ (830) (812)
Unearned restricted stock compensation..................... -- (673)
-------- --------
103,592 98,433
-------- --------
$246,817 $220,556
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated balance sheets.
F-4
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SEPTEMBER
30,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net profit (loss)............................. $ 1,748 $ (52,670) $ (43,728)
Adjustments to derive cash flows:
Depreciation and amortization............... 27,600 23,643 29,866
Gain on sale of business and assets......... (6,109) -- --
Provision for receivable allowances......... -- 100 550
Restructuring charge........................ -- -- 49,600
Deferred tax provision...................... -- -- 1,384
Amortization of unearned restricted stock
compensation, net.......................... 721 (145) 1,225
Other assets................................ -- (4,167) (1,103)
Other liabilities........................... (1,060) (300) (3,278)
Other, net.................................. -- 1,123 303
Working capital changes affecting cash flows
from operations:
Accounts receivable........................ (17,712) 19,053 (11,562)
Other receivables.......................... -- 5,170 10,900
Inventories................................ (3,772) 10,906 (5,827)
Prepaid expenses and other................. (3,074) (305) (921)
Accounts payable........................... 23,168 (5,955) (3,007)
Accrued payroll and benefits............... 181 (2,739) 2,558
Other current liabilities.................. (2,795) (6,654) 2,424
--------- --------- ---------
Net cash flows provided by (used in)
operating activities....................... 18,896 (12,940) 29,384
--------- --------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.... (23,401) (31,452) (56,652)
Proceeds from sale of businesses and assets,
net.......................................... 25,264 3,516 15,409
Notes receivable.............................. 2,048 2,038 1,433
--------- --------- ---------
Net cash flows provided by (used) in invest-
ing activities.............................. 3,911 (25,898) (39,810)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of debt................ 160,868 142,767 107,724
Proceeds from issuance of capital lease
obligations.................................. 5,142 464 728
Repayment of debt............................. (163,705) (134,402) (127,127)
Proceeds from sale of common stock............ -- -- 66,488
Proceeds from stock options exercised......... 2,270 153 1,475
--------- --------- ---------
Net cash flows provided by financing
activities................................. 4,575 8,982 49,288
--------- --------- ---------
Effect of exchange rate changes on cash and
equivalents.................................. 93 1,246 (964)
--------- --------- ---------
Net increase (decrease) in cash and
equivalents.................................. 27,475 (28,610) 37,898
Cash and equivalents at beginning of period... 20,761 49,371 11,473
--------- --------- ---------
Cash and equivalents at end of period......... $ 48,236 $ 20,761 $ 49,371
========= ========= =========
Supplemental Cash Flow Data:
Interest paid, net of amounts capitalized..... $ 4,827 $ 4,215 $ 4,158
========= ========= =========
Income taxes paid............................. $ 494 $ 1,025 $ 1,209
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
F-5
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------ ----------------
UNEARNED
RESTRICTED SHARE-
NUMBER OF PAID-IN RETAINED NUMBER OF STOCK HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT SHARES AMOUNT COMPENSATION INVESTMENT
---------- ------ -------- -------- --------- ------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30, 1992..... 16,444,323 $1,644 $109,563 $ 15,619 67,626 $(631) $(1,796) $124,399
Stock options
exercised............ 359,772 36 2,780 -- -- -- -- 2,816
Issuance of common
stock................ 5,291,070 529 65,959 -- -- -- -- 66,488
Purchase of treasury
stock, net........... -- -- -- -- 11,702 (105) -- (105)
Restricted stock
issuance, net........ 58,577 6 231 -- -- -- (237) --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- 1,225 1,225
Net loss.............. -- -- -- (43,728) -- -- -- (43,728)
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1993..... 22,153,742 2,215 178,533 (28,109) 79,328 (736) (808) 151,095
Stock options
exercised............ 26,087 3 226 -- -- -- -- 229
Purchase of treasury
stock, net........... -- -- -- -- 13,181 (76) -- (76)
Restricted stock
issuance, net........ (18,369) (2) (278) -- -- -- 280 --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- (145) (145)
Net loss.............. -- -- -- (52,670) -- -- -- (52,670)
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1994..... 22,161,460 2,216 178,481 (80,779) 92,509 (812) (673) 98,433
Stock options
exercised............ 399,773 40 2,668 -- -- -- -- 2,708
Purchase of treasury
stock, net........... -- -- -- -- 4,094 (18) -- (18)
Restricted stock
issuance, net........ 57,972 6 42 -- -- -- (48) --
Amortization of
unearned restricted
stock compensation,
net.................. -- -- -- -- -- -- 721 721
Net income............ -- -- -- 1,748 -- -- -- 1,748
---------- ------ -------- -------- ------ ----- ------- --------
Balance,
September 30, 1995..... 22,619,205 $2,262 $181,191 $(79,031) 96,603 $(830) $ -- $103,592
========== ====== ======== ======== ====== ===== ======= ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these consolidated statements.
F-6
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Applied Magnetics Corporation and its subsidiaries (the
"Company"). All significant intercompany accounts and transactions have been
eliminated. Certain 1993 and 1994 accounts have been reclassified to conform
with the 1995 presentation.
TRANSLATION OF FOREIGN CURRENCIES: Financial statements and transactions of
subsidiaries operating in foreign countries are translated into U.S. dollars
in accordance with Statement of Financial Accounting Standards No. 52. The
functional currency for all subsidiaries is the U.S. dollar. The effect of
translating assets and liabilities stated in foreign currency is included as a
component of "Other Income (Expense), net" in the Consolidated Statements of
Operations. Translation and transaction losses of $0.2 million in 1995 and
1994, and gains of $0.8 million in 1993 were included in operations.
The Company operates in a number of foreign countries. The relative impact
of foreign currency fluctuations on revenue is not significant as product
pricing is generally based on the U.S. dollar. Purchases of certain raw
materials and certain labor costs are paid for in foreign currencies.
Malaysian debt maturities are not currently hedged. As a result, effects of
currency rate fluctuations can affect results of operations. Fluctuations may
also have a significant effect on reported cash balances.
DEPRECIATION AND AMORTIZATION POLICIES: Plant and equipment are depreciated
or amortized over their estimated useful lives primarily using the straight-
line method. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................ 15-50 Years
Manufacturing equipment.................. 2-5 Years
Other equipment.......................... 1-5 Years
Leasehold improvements................... Term of Lease
</TABLE>
Depreciation and amortization expense from continuing operations amounted to
$27.6 million, $23.6 million and $29.9 million in 1995, 1994 and 1993,
respectively.
The Company follows the policy of capitalizing expenditures that materially
increase asset lives. Maintenance and minor replacements are charged to
operations when incurred. Maintenance and repair expenses charged to
operations were $6.4 million, $8.7 million and $7.1 million in 1995, 1994 and
1993, respectively. When assets are sold or otherwise disposed of, the cost
and related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is included in operations.
The cost of buildings and equipment includes interest expense incurred prior
to the time such assets are placed in service. Interest expense of $1.0
million was capitalized in 1993. No interest was capitalized in 1995 and 1994.
CASH EQUIVALENTS: Cash equivalents consist primarily of money market
instruments maturing within 90 days that are carried at cost, which
approximates market. Cash equivalents were $43.6 million and $15.5 million at
September 30, 1995 and September 30, 1994, respectively.
INVENTORIES: Inventories are stated at the lower of cost (first-in, first-
out method) or market. Market for purchased parts and manufacturing supplies
is based on replacement costs and for other inventory classifications on net
realizable value. Inventories consist of purchased materials and services,
direct production labor and manufacturing overhead.
F-7
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INVENTORIES: The components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30
---------------
1995 1994
------- -------
<S> <C> <C>
Purchased parts and manufacturing supplies............... $13,036 $ 9,970
Work in process.......................................... 17,589 17,436
Finished goods........................................... 2,102 4,114
------- -------
$32,727 $31,520
======= =======
</TABLE>
REVENUE RECOGNITION AND WARRANTY POLICIES: Revenue is recognized at the time
the product is shipped to the customer. Under the Company's warranty terms,
customers are allowed to return products within the applicable warranty
periods. The Company accrues for the estimated rework and scrap costs
associated with anticipated returns. In addition, the Company reverses the net
sales and associated costs upon receipt of returned products.
NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE: Net income (loss)
per common and common equivalent share is calculated using the treasury stock
method, except in those periods where the effect of including common
equivalent shares is anti-dilutive.
RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged in basic
technology and applied research and development programs which are designed to
develop new products and product applications and related manufacturing
processes. The costs of these programs are classified as research and
development expenses and are charged to operations as incurred. Sustaining
engineering is charged to cost of sales.
OTHER LIABILITIES: Other liabilities are primarily composed of the non-
current portion of accrued expenses related to various employee compensation
plans.
INCOME TAXES: The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." See Note 3.
STOCK OPTIONS: Proceeds from the sale of common stock issued upon the
exercise of stock options are credited to common stock and paid-in capital
accounts at the time the option is exercised. Income tax benefits attributable
to stock options exercised are credited to paid-in capital when realized. See
Note 4.
CONSOLIDATED STATEMENTS OF CASH FLOWS: In accordance with Statement of
Financial Accounting Standards No. 95, "Statement of Cash Flows," the Company
has selected the "indirect method" of presentation for reporting cash flows.
2. SEGMENTS OF BUSINESS
The Company operates in one market worldwide--components for the computer
peripheral industry. The Company's trade receivables are unsecured. Sales to
major customers are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
SEPTEMBER 30,
(AS A PERCENTAGE OF SALES) ----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Conner Peripherals...................................... 41% 53% 21%
Maxtor.................................................. 19% 13% 28%
All Others.............................................. 40% 34% 51%
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
F-8
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Export sales are made by the United States operations to the following
geographic locations (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Europe........................................... $ 159 $ 1,523 $11,533
Asia............................................. 231,781 35,082 6,564
North America.................................... -- 67 --
-------- ------- -------
$231,940 $36,672 $18,097
======== ======= =======
</TABLE>
Information regarding the Company's domestic and foreign operations is as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED STATES FOREIGN TOTAL
------------- -------- --------
<S> <C> <C> <C>
1995
Net sales.............................. $271,947 $ 20,653 $292,600
======== ======== ========
Intercompany sales..................... $138,230 $213,260 $ --
======== ======== ========
Operating profit (loss)................ $ (3,608) $ 8,770 $ 5,162
Interest expense, net.................. (2,830)
--------
Income before income taxes........... $ 2,332
========
Identifiable assets.................... $165,064 $ 81,753 $246,817
======== ======== ========
1994
Net sales.............................. $ 98,680 $177,247 $275,927
======== ======== ========
Intercompany sales..................... $229,022 $220,507 $ --
======== ======== ========
Operating loss......................... $(27,162) $(21,017) $(48,179)
Interest expense, net.................. (3,391)
--------
Loss before income taxes............. $(51,570)
========
Identifiable assets.................... $141,029 $ 79,527 $220,556
======== ======== ========
1993
Net sales.............................. $159,854 $176,044 $335,898
======== ======== ========
Intercompany sales..................... $202,335 $236,317 $ --
======== ======== ========
Operating loss......................... $(32,749) $ (3,345) $(36,094)
Interest expense, net.................. (4,829)
--------
Loss before income taxes............. $(40,923)
========
Identifiable assets.................... $164,267 $114,249 $278,516
======== ======== ========
</TABLE>
F-9
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Foreign operations primarily consist of operations in the Asia-Pacific
region. The increase in U.S. export sales to Asia and the decrease in sales of
foreign operations in fiscal 1995 was due to the closure of the Company's
production facility in Singapore in July 1994 and the transfer of sales
invoicing responsibility to the U.S. operations.
See Note 7 regarding the charges recorded in 1993 associated with
restructuring of operations. The segment of business information presented
above reflects an allocation of such restructuring charges to the location in
which restructuring costs were incurred. The amount of these charges allocated
between foreign and domestic operations were $30.0 million and $19.6 million,
respectively, in 1993.
Results of operations for United States-based operations include all
research and development expenditures, thereby causing an unfavorable
comparison with the operating results of foreign-based operations.
United States income for 1993 and 1994 include research and development cost
offsets relating to the license and technology development agreement with
Hitachi Metals, Ltd. ("HML"). See Note 9.
3. INCOME TAXES
The provision for income taxes for the years ended September 30, consists of
(in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---- ------ ------
<S> <C> <C> <C>
Federal Income Taxes
Current.............................................. $-- $ -- $ --
Deferred............................................. -- -- 1,384
State income taxes
Current.............................................. 92 211 226
Deferred............................................. -- -- --
Foreign income taxes................................... 492 889 1,195
---- ------ ------
$584 $1,100 $2,805
==== ====== ======
</TABLE>
Reconciliations of the actual provisions for income taxes to the income tax
calculated at the United States Federal rates for continuing operations were
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- -------- --------
<S> <C> <C> <C>
Income tax at the United States federal in-
come
tax rate................................... $ 816 $(18,050) $(13,913)
State income taxes, net of federal income
tax benefit................................ 59 137 149
Foreign income taxed at lower rate.......... (2,217) (550) (1,536)
Temporary differences/net operating losses
not benefitted............................. 1,926 19,563 18,116
Other, net.................................. -- -- (11)
------- -------- --------
$ 584 $ 1,100 $ 2,805
======= ======== ========
</TABLE>
F-10
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision (benefit) for deferred income taxes results from temporary
differences which result from different tax bases for assets and liabilities
than their reported amounts in the financial statements. Such differences
result in recognition of income or expense in different years for tax and
financial statement purposes. The sources of these differences and the tax
effect of each at September 30, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Inventory reserves.................................... $ 1,348 $ 5,181
Restructuring & other reserves........................ 9,594 10,169
Net operating loss carryforwards...................... 32,536 24,204
Foreign tax & general business credit carryforwards... 5,442 4,763
Depreciation.......................................... (4,970) (3,396)
Other, net............................................ 2,783 1,884
-------- --------
Subtotal............................................ $ 46,733 $ 42,805
Valuation allowance................................... (46,733) (42,805)
-------- --------
Total net deferred tax asset (liability).............. $ -- $ --
======== ========
</TABLE>
SFAS 109 requires that all deferred tax balances be determined using the tax
rates and limitations expected to be in effect when the taxes will actually be
paid or recovered. Consequently, the income tax provision will increase or
decrease in the period in which a change in tax rate or limitation is enacted.
As of September 30, 1995, the Company had total deferred tax liabilities of
$5.0 million and total deferred tax assets of $51.7 million. The Company
recorded a valuation allowance in the amount of $46.7 million against the
amount by which deferred tax assets exceed deferred tax liabilities. The
valuation reserve increased from $42.8 million at September 30, 1994 primarily
due to the current year net operating loss which cannot be recognized.
Consolidated retained deficit at September 30, 1995 included approximately
$63.9 million of accumulated earnings of foreign operations for which a
deferred tax liability has not been recognized. The additional taxes which may
become due if those earnings were to be repatriated to the United States,
after utilizing available foreign tax credits, would be approximately $20.5
million. However, the Company intends to reinvest these earnings indefinitely
in maintaining its foreign operations.
The Company had net operating loss carryforwards available for tax purposes
of approximately $79.4 million. To the extent not used, the net operating loss
carryforward expires in varying amounts beginning in 2006.
4. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS
The Company adopted stock option plans in 1988, 1992 and 1994. Incentive or
nonstatutory stock options may be granted under the 1992 and 1994 plans while
the 1988 plan is limited to nonstatutory options only. The options are issued
at exercise prices equal to the fair market value of the Common Stock at the
date of grant, and, accordingly, the Company makes no charges against income
with respect to these options. Stock option activity under the option plans
was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
---------------------------------
OPTION
PRICE PER NUMBER OF AVAILABLE
SHARE SHARES FOR GRANT
----------- --------- ----------
<S> <C> <C> <C>
Balance at September 30, 1994.......... $5.00-13.63 1,553,502 744,288
Grants............................... $2.38- 8.88 1,090,455 (1,090,455)
Exercised............................ $3.88- 9.38 (338,236) --
Cancelled............................ $2.38-13.63 (861,520) 861,520
--------- ----------
Balance at September 30, 1995.......... $2.38-13.63 1,444,201 515,353
========= ==========
</TABLE>
F-11
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At September 30, 1995, 1994 and 1993, there were exercisable options
outstanding under the option plans to purchase an aggregate of 161,889,
812,002 and 591,786 shares, respectively.
The Company adopted long-term incentive plans in 1982, 1986 and 1989. Under
the 1982 and 1986 plans, options were issued at exercise prices lower than the
market value at the date of grant. The Company accrued as compensation
expense, over the life of the plans, the amount by which the market price
exceeded the exercise price at the date of grant for options outstanding and
for cash performance awards granted under the plans. At September 30, 1995, no
options to purchase Common Stock were available for future issuance under
these two plans, and nonstatutory options of 36,036 shares were outstanding at
prices from $1.90 to $2.04 per share, of which 31,248 shares were exercisable.
During 1995, options for 61,537 shares were exercised at prices from $1.30 to
$10.95 per share, and options for 16,208 shares were canceled. Under the 1989
plan, the Company grants shares of Common Stock at no cost to the
participants. These shares are subject to restrictions which prohibit selling,
transferring, assigning or otherwise disposing of the Common Stock. The
restrictions automatically expire ten years following the date of grant, or
earlier if certain performance objectives are achieved. The market value of
Common Stock issued is recorded as unearned restricted stock compensation and
shown as a separate component of shareholders' investment. This compensation
is amortized against income over the periods in which the participants perform
services. At September 30, 1995, 22,335 shares were available for future
issuance under the 1989 plan and 95,721 shares remain subject to restrictions.
During 1995, 68,000 shares were issued, 10,028 shares were canceled and
restrictions were removed from 39,049 shares under the 1989 plan. Compensation
expense recorded under the 1989 plan during 1995, 1994 and 1993 was
approximately $0.7 million, $0.2 million and $1.2 million, respectively.
In 1994, the Company adopted a non-qualified stock option plan for non-
employee directors (the "1994 Directors' Plan"). A total of 150,000 shares of
the Company's Common Stock are reserved for issuance under the 1994 Directors'
Plan. Under this plan, directors who are not employed by the Company are
granted options to purchase 5,000 shares of the Company's Common Stock upon
being elected to the board and, thereafter, such directors receive automatic
annual grants of options to acquire 5,000 shares of Common Stock on March 1 of
each year provided the person continues to serve as a director. The exercise
price of the options is set at the closing price of the common stock on the
New York Stock Exchange on the date of grant. The options granted under the
1994 Directors' Plan become exercisable in one third increments beginning on
the first anniversary following the date of grant. At September 30, 1995,
options for 25,000 shares had been granted under this plan and 5,000 shares
have been canceled.
In December 1994, the Company granted 250,000 shares of the Company's Common
Stock, at $4.125, to Grisanti, Galef and Goldress, Inc. ("GG&G"), a consulting
firm hired in August 1994 to provide the Company with crisis management and
turnaround assistance. The options would be exercisable if the turnaround
engagement was successfully completed, which the Company determined to be so,
in July 1995. The options became exercisable in whole or part and will expire
in five years. The exercise price of the options is set at the closing price
of the common stock on the New York Stock Exchange on the date of grant.
The Company has authorized a class of Preferred Stock consisting of
5,000,000 shares, $.10 par value. The Board of Directors has authority to
divide the Preferred Stock into series, to fix the number of shares comprising
any series and to fix or alter the rights, privileges and preferences of the
Preferred Stock. No shares of the Preferred Stock were outstanding at
September 30, 1995 or September 30, 1994. During 1988, the Board of Directors
declared a dividend of one Right for each outstanding share of Common Stock to
stockholders of record on November 4, 1988. Each Right entitles the holder to
buy the economic equivalent of one share of Common Stock in the form of one
one-hundredth of a share of the Preferred Stock at an exercise price of
$75.00. Under certain conditions, each Right will entitle its holder to
purchase, at the Rights exercise price, shares of the Company's Common Stock
or common stock equivalents having a market value of twice the Right's
exercise price.
F-12
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following at September 30
(in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Secured revolving credit agreement, interest rate of
10.50% as of September 30, 1995...................... $ 7,500 $ --
7% secured note purchase agreement, due January 10,
1995................................................. -- 9,827
Secured revolving credit agreement due March 1996,
interest rate of 8.75% as of September 30, 1995...... 10,000 10,000
Secured Malaysian bank credit facility, interest rates
from 6.00% to 7.41% as of September 30, 1995......... 46,871 46,062
Mortgage payable, interest rate of 8.50% as of
September 30, 1995................................... 126 146
Capital leases........................................ 5,132 1,116
------- -------
69,629 67,151
Less--current portion, including bank notes payable... (66,375) (66,474)
------- -------
$ 3,254 $ 677
======= =======
</TABLE>
The aggregate principal payments of bank notes payable and long-term debt
for the years subsequent to September 30, 1995 are: 1996--$66.4 million,
1997--$1.9 million, 1998--$1.3 million.
In January 1995, the Company retired the $10.0 million debt obligation owed
to Conner Peripherals Inc.
The Company obtained a secured, revolving line of credit from CIT
Group/Business Credit, Inc. ("CIT"). This line of credit provides for
borrowings up to $35.0 million based on eligible trade receivables at various
interest rates over a three-year term and is secured by trade receivables,
inventories and certain other assets. As of September 30, 1995, $7.5 million
of borrowings was outstanding. The interest rate for the amounts outstanding
under the credit facility at September 30, 1995 was 10.5%. The balance
available for additional borrowings under this line of credit was
approximately $1.3 million at September 30, 1995 and the Company was in
compliance with all financial covenants. At September 30, 1995, $4.0 million
of standby letters of credit have been issued on behalf of the Company under
this facility. The $7.5 million of borrowings was fully repaid during October
1995.
The Company has a $10.0 million revolving credit facility from a commercial
bank which is supported by a letter of credit issued for the account of HML,
subject to reimbursement by the Company and the liens in favor of HML on
certain of the Company's manufacturing equipment. At September 30, 1995, the
interest rate on the facility was 8.75%. The credit facility expires in March,
1996.
The Company's Malaysian subsidiary has loan facilities with a Malaysian bank
which have been in place since June 1990, are callable on demand, have no
termination date and are guaranteed by the Company. In May 1995, the Company
and the Malaysian bank amended these credit facilities to include a security
interest in the Company's real property holdings in Malaysia and to include
certain covenants which preclude the Company from granting liens and security
interests in other assets in Malaysia. The Company was in compliance with all
financial covenants under this facility at September 30, 1995. The interest
rates outstanding on these loan facilities ranged from 5.2% to 7.6% at
September 30, 1995 and had a weighted average interest rate of 6.7%. The
Company intends to continue its practice of repaying maturities with new
borrowings under the facilities.
F-13
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. SALE OF ASSETS
During the first quarter of fiscal 1995, the Company completed the sale of a
facility in Singapore and received proceeds of $4.9 million in cash, which
approximated book value.
In December 1994, the Company sold its Tape Head business unit and agreed to
perform certain services and to produce certain tape heads for Seagate
Technology Inc., for $21.5 million in cash, of which the Company received
$19.9 million during fiscal 1995. The Company recorded a gain of $5.7 million,
net of related expenses, during the year ended September 30, 1995. It is
estimated that certain of the remaining performance milestones will be
completed by the end of the first quarter of fiscal 1996 and the remaining
cash will be collected.
7. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of $49.6 million in 1993 to
consolidate manufacturing resources and write-down equipment to estimated net
realizable values primarily as a result of the unexpectedly rapid market
transition from ferrite to thin film and from thin film microslider to
nanoslider form factor. The Company charged costs against these reserves of
$38.4 million and $5.1 million in 1993 and 1994, respectively. In 1995, the
Company charged $0.8 million of equipment write-downs against the reserve and
$0.2 million of expenditures against the reserve. The remaining portion of the
1993 restructuring reserve at September 30, 1995, which is included as a
component of Other Current Liabilities in the accompanying Consolidated Balance
Sheet, is composed of $3.8 million which is expected to be used to write-down
certain long-term assets and $1.3 million to be paid to settle certain
contingencies associated with the shutdown of manufacturing facilities. The
Company expects that the shutdown of manufacturing facilities associated with
the 1993 restructuring will be completed in 1996.
8. COMMITMENTS AND CONTINGENCIES
A portion of the Company's facilities and equipment are leased under non-
cancelable operating leases and certain equipment is leased under capitalized
leases. The terms of the leases for facilities and equipment expire over the
next three years with renewal options in certain instances. Future minimum
lease payments under capital and operating leases as of September 30, 1995 are
as follows (in thousands):
<TABLE>
<CAPTION>
LEASES
------------------
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1996................................................... $ 2,553 $10,939
1997................................................... 2,055 7,874
1998................................................... 1,206 3,311
1999................................................... 22 21
2000................................................... -- --
------- -------
Total minimum payments................................. $ 5,836 $22,145
------- -------
Less imputed interest.................................. (705)
-------
Present value of payments under capital leases......... 5,131
Less current portion................................... (1,984)
-------
Long-term lease obligations............................ $ 3,147
=======
</TABLE>
Manufacturing and other equipment at September 30, 1995 include assets under
capitalized leases of $6.0 million, with related accumulated depreciation of
$1.4 million.
Total rental expense, net of sublease rental income, for the years ended
September 30, 1995, 1994, and 1993, including items on a month-to-month basis,
was approximately $10.2 million, $3.6 million and $4.0 million, respectively.
The Company does not have a post-retirement benefits program. As a result,
no corresponding accrual has been reflected on the accompanying Consolidated
Balance Sheets.
F-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On November 18, 1994, the Company announced that it had entered into an
agreement to dismiss the 1993 securities class action suit brought against the
Company and certain former Company Officers in U.S. District Court for the
Central District of California. On May 31, 1995, the Court entered into a
judgement dismissing the litigation as to all claims against the Company and
the other defendants, pursuant to an agreement by the parties to settle the
litigation. The terms of this settlement have not yet been completely ratified
by the plaintiffs. The Company will not be required to make any cash payments
but will issue to plaintiffs shares of its common stock having an aggregate
value of $1.25 million, which was provided for in fiscal 1994. The stock,
along with $2.75 million from the Company's insurance carrier, will be
distributed, after court approval, to a class consisting of all persons who
purchased the Company's common stock during the period of October 22, 1992
through October 1, 1993.
In addition, the Company or its subsidiaries are defendants in a number of
other cases currently in litigation or potential claims encountered in the
normal course of business which are being vigorously defended. In the opinion
of management, the resolutions of these matters will not have a material
effect on the Company's financial position or results of operations.
9. LICENSE AND TECHNOLOGY DEVELOPMENT AGREEMENTS
In September, 1992, the Company entered into a license and technology
development agreement with HML (the "HML Agreement") to further the
development and marketing of advanced magnetic recording disk head
technologies and products. During fiscal 1993 and 1994, HML paid the Company
$35.0 million, net of $1.0 million in foreign withholding taxes, and supplied
additional technical resources in exchange for certain licenses covering
existing technology and future technology developed by the companies under the
joint development activities contemplated by the Agreement. The combined
technical and financial resources of the Company and HML focused on the
improvement of the Company's inductive thin film disk head business and the
development and commercialization of MR thin film disk head products. HML has
the rights to manufacture products based on this technology and has certain
marketing and distribution rights for certain disk head products and markets.
HML also provided a guarantee for the extension of the Company's existing
$10.0 million revolving credit facility to March 1996.
During fiscal 1993, the Company entered into additional technology
development agreements (the "Development Agreements") with four major domestic
disk drive companies relating to the development of MR thin film disk head
products and technology. During fiscal 1994, the joint development efforts
under one of these Development Agreements were suspended and, under the
remaining Development Agreements, funding of up to an aggregate of $3.1
million was paid to the Company from inception of these programs through the
first quarter of fiscal 1994. During each of fiscal years 1994 and 1993 the
Company recognized as income, funding under the HML Agreement and the
Development Agreements in the amounts of $14.1 million and $15.1 million,
respectively. Funding was completed by the end of fiscal 1994.
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
1995
Net sales........................ $ 55,373 $64,919 $ 79,860 $ 92,448
Gross profit (loss) (1).......... (794) 5,123 16,406 19,181
Net income (loss)................ (11,714) (2,691) 6,721 9,432
Net income (loss) per share $ (0.53) $ (0.12) $ 0.30 $ 0.40
Weighted average common and
dilutive equivalent shares
outstanding 22,074 22,100 22,666 23,577
1994
Net sales........................ $ 71,244 $69,834 $ 70,289 $ 64,560
Gross profit (loss) (1).......... 2,686 2,011 (2,723) (8,044)
Net loss......................... (6,245) (9,375) (16,505) (20,545)
Net loss per share $ (0.28) $ (0.42) $ (0.75) $ (0.93)
Weighted average common and
dilutive equivalent shares
outstanding 22,079 22,087 22,081 22,080
</TABLE>
- --------
(1) Prior year quarterly G&A expense amounts have been reclassified to cost of
sales to conform with fiscal 1995 presentation.
11. RELATED PARTY TRANSACTION
The Company paid $680,000 and $140,000 in fiscal year 1995 and fiscal year
1994, respectively, to GG&G for consulting services provided to the Company
by employees of GG&G. Craig Crisman, who was a principal of GG&G until
August, 1995, has been the Company's Chief Executive Officer and a director
since August 1, 1994, and since August 1, 1995, he has been the Chairman of
the Company's Board of Directors.
F-16
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) The following documents are filed as part of this Report:
Financial Statements--See Index to Consolidated Financial Statements at
Item 8 on F-1 of this Report.
(2) Supplemental Schedule:
Report of Arthur Andersen LLP
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule, or because
the required information is included in the consolidated financial statements
or notes thereto.
(3) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3 Certificate of Incorporation and Bylaws (1) Amended and Restated
Bylaws (2) Amendment to Bylaws dated June 14, 1989(3) Certificate of
Incorporation (as amended) (4)
4 Instruments defining the rights of securities holders including
indentures Rights Agreement, dated as of October 19, 1988, between
Applied Magnetics Corporation and First Interstate Bank of California,
as Rights Agent (2)
10 (a) Applied Magnetics Corporation 1982 Long-Term Incentive Plan (5)
(b) Applied Magnetics Corporation Nonstatutory Stock Option Plan (6)
(c) Applied Magnetics Corporation 1986 Long-Term Incentive Plan (6)
(d) Applied Magnetics Corporation 1988 Stock Option Plan (7)
(e) Applied Magnetics Corporation 1989 Long-Term Incentive Plan (8)
(f) Loan Agreement dated February 13, 1992 between Applied Magnetics
Corporation and Union Bank, N.A., as amended (9)
(g) License and Technology Development Agreement dated as of September 25,
1992, between Applied Magnetics Corporation and Hitachi Metals, Ltd.
(9)
(h) Deeds of Trust naming as beneficiary Hitachi Metals, Ltd. to secure
the Company's obligations under a letter agreement dated March 24,
1995 (15)
(i) Applied Magnetics Corporation 1992 Stock Option Plan (9)
(j) Financing Agreement dated January 11, 1995 between the Company and CIT
Group/Business Credit, Inc. (14)
(k) Letter Agreement between Registrant and Hitachi Metals, Ltd. Dated May
30, 1995 extending maturity date of Letter of Credit to April 12, 1996
(16)
(l) Purchase Agreement between the Company and Delta Bravo, Inc. For the
purchase of capital stock of Magnetic Data, Inc., a Delaware
Corporation and Brumko Magnetic Corp., a Nebraska Corporation (10)
</TABLE>
I-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(m) Security Agreement between Registrant and Hitachi Metals, Ltd. dated
May 30, 1995 (16)
(n) Cross License and Joint Research and Development Agreement effective
as of November 5, 1993, between the Company and Hutchinson Technology
Incorporated (11)
(o) Applied Magnetics Corporation 1994 Employee Stock Option Plan (12)
(p) Applied Magnetics Corporation 1994 Nonemployee Director's Stock Option
Plan (12)
(q) Letter Agreement dated February 8, 1994 between the Company and O.M.
Fundingsland, formerly Executive Vice President of the Company (12)
(r) Letter Agreement dated January 12, 1994 between the Company and Louis
W. Rayer, formerly Vice President of the Company (12)
(s) Retention Agreement dated January 2, 1994, between the Company and
Raymond P. Le Blanc, Vice President, Secretary and General Counsel
of the Company (12)
(t) Letter Agreement dated as of November 14, 1994, between the Company
and the CIT Group/Business Credit, Inc. (13)
(u) Stock Purchase Agreement by and among the Company, Seagate Technology,
Inc. and Applied Tape Technology, Inc. (13)
(v) Letter Agreement dated September 12, 1994, between the Company and
William R. Anderson (13)
(w) Letter Agreement dated June 21, 1994 , between the Company and Dr.
Richard D. Balanson (13)
(x) Letter Agreement dated September 12, 1994, between the Company and
Kathryn E. Gehrke (13)
(y) Letter Agreement dated August 1, 1994, between the Company and
Grisanti, Galef & Goldress, Inc. (13)
(z) Offer letter dated April 19, 1995 between Maybank Banking Berhad and
Applied Magnetics (M) Sdn Bhd. for extension of Credit Facility (16)
(aa) Corporate Guarantee of the Registrant dated June 8, 1995 in favor of
Maybank Banking Berhad (16)
(bb) Employment Agreement between Craig D. Crisman and the Company dated
August 1, 1995
(cc) Letter Agreement dated July 19, 1995, between the Company and Raymond
P. Le Blanc
(dd) 1995 Key Management Incentive Bonus Plan dated March 16, 1995
11 Statement re computation of per share earnings.
13 Annual Report to Shareholders. Integrated with Form 10-K
21 Subsidiaries of the registrant. Incorporated by reference on Form 10-K
dated December 29, 1994
22 Published report regarding matters submitted to vote of security
holders. None
23 Consent of experts and counsel. Consent of Arthur Andersen LLP dated
December 20, 1995.
24 Power of Attorney. None
27 Financial Data Schedule
28 Information from reports furnished to state insurance regulatory
authorities. None
(1) Filed an exhibit to the Company's Registration Statement on Form S-3
(Registration No. 33-13653) filed on April 21, 1987, and incorporated
herein by reference
(2) Filed as an exhibit to the Company's Current Report on Form 8-K dated
October 19, 1988, and incorporated herein by reference
(3) Filed as an exhibit to the Corporation's Quarterly Report on Form 10-Q
dated May 4, 1989 and incorporated herein by reference
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
(4) Filed as an exhibit to the Corporation's Quarterly Report on Form
10-Q dated May 4, 1989 and incorporated herein by reference
(5) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on January 27, 1983, and
incorporated herein by reference
(6) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on December 23, 1985, and
incorporated herein by reference
(7) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on January 7, 1988, and
incorporated herein by reference
(8) Filed as an exhibit to the Company's definitive Proxy Statement
filed pursuant to Regulation 14A on December 30, 1988 and
incorporated herein by reference
(9) Filed as an exhibit to the Company's Annual Report on Form 10-K
dated December 22, 1992, as amended by Form 8, filed February 12,
1993 and incorporated herein by reference
(10) Filed as an exhibit to the Company's Report on Form 10-Q dated May
14, 1993 and incorporated herein by reference
(11) Filed as an exhibit to the Company's Current Report on Form 8-K
dated December 2, 1993 and incorporated herein by reference
(12) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q
dated March 31, 1994, and incorporated herein by reference
(13) Filed as an exhibit to the Company's Annual Report on Form 10-K
dated December 29, 1994
(14) Filed as an exhibit to the Company's Current Report on Form 8-K
dated January 20, 1995 and incorporated by reference
(15) Filed as an exhibit to the Company's Report on Form 10-Q dated May
15, 1995 and incorporated herein by reference.
(16) Filed as an exhibit to the Company's Report on Form 10-Q dated
August 15, 1995 and incorporated herein by reference.
(b) Report on Form-8K. None
(c) Exhibits. The exhibits listed (a) (2) above are submitted as a
separate section of this report
(d) The individual financial statements of the registrant have been
omitted since the registrant is primarily an operating company and
all subsidiaries are included in the consolidated financial
statements.
</TABLE>
I-3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment to report to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Goleta, California, on the 11th day of June, 1996.
APPLIED MAGNETICS CORPORATION
By: /s/ Peter T. Altavilla
---------------------------------
Peter T. Altavilla
Corporate Controller
(Principal Financial and Accounting Officer)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of Applied Magnetics Corporation
included in this Form 10-K and have issued our report thereon dated December
12, 1995. Our audits were made for the purposes of forming an opinion on the
basic consolidated financial statements taken as a whole. The schedule listed
in Item 14 (a) (2) is presented for purposes of complying with the Securities
and Exchange Commissions rules and is not part of the basic consolidated
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Los Angeles, California
December 12, 1995
<PAGE>
SCHEDULE II
APPLIED MAGNETICS CORPORATION
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
BALANCE AT AT END
BEGINNING OF
CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS OTHER (A) PERIOD
-------------- ---------- --------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
Year Ended September 30, 1993
Allowance for doubtful col-
lection:
Accounts Receivable........ $ 1,958 $ 550 $ (5) $ 739 $ 3,242
Notes Receivable........... 2,559 4,309 (3,261) 7,700 11,307
Year Ended September 30, 1994
Allowance for doubtful
collection:
Accounts Receivable........ $ 3,242 $ 100 $ (28) $ 315 $ 3,629
Notes Receivable........... 11,307 1,878 -- -- 13,185
Year Ended September 30, 1995
Allowance for doubtful
collection:
Accounts Receivable........ $ 3,629 $ -- $ 268 $(3,245) $ 652
Notes Receivable........... 13,185 1,229 -- 3,245 17,659
</TABLE>
- --------
(A) In 1993 and 1994 the accounts receivable allowance amount represents
recoveries of accounts previously written off. In 1993, the Company
transferred $7.7 million of the remaining reserve for subsidiaries held for
sale to the notes receivable reserve as notes were received in 1993 upon
the sale of these subsidiaries. In 1995 the Company determined that its
allowance for doubtful trade receivables was in excess of the amount needed
and it transferred this excess to its allowance for notes receivable where
it was required.
<PAGE>
EXHIBIT INDEX
Exhibit Number Description of Exhibit Page
- ------------------------------------------------------------------
23.1 Consent of Independent
Public Accountants
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation in
this Form 10-K/A No. 1 of our reports dated December 12, 1995, included in
Applied Magnetics Corporation's Form 10-K for the year ended September 30, 1995,
as amended by this Form 10-K/A No. 1, and to all references to our Firm included
in this Form 10-K/A No. 1.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
June 3, 1996
