SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K/A
AMENDMENT NO. 2
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 17, 1996
APPLIED MAGNETICS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-6635 95-1950506
-------- ------ ----------
(State or other (Commission File (IRS Employer
jurisdiction of Number) Identification
incorporation Number)
Registrant's telephone number, including area code:
(805) 683-5353
--------------
The purpose of this Amendment No. 2 is to amend Item 7 of
Applied Magnetics Corporation's Current Report on Form 8-K for
July 17, 1996 to add (i) Financial Statements of Delta Bravo,
Inc. and subsidiaries for the nine month period ended
September 28, 1996 and (ii) a statement regarding Registrant's
position that pro forma financial statements are not required
to be filed with the Commission.
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<PAGE>
ITEM 7 FINANCIAL STATEMENT AND EXHIBITS
- ------ --------------------------------
(a) Financial statements of businesses acquired.
Nine Months Ended September 28, 1996
Report of Independent Public Accountants
(Arthur Anderson LLP)..........................................6
Consolidated Balance Sheet as of September 28, 1996....................7
Consolidated Statement of Operations for the
Nine Months Ended September 28, 1996...........................9
Consolidated Statement of Shareholders' Deficiency
for the Nine Months Ended September 28, 1996..................10
Consolidated Statement of Cash Flows for the
Nine Months Ended September 28, 1996..........................11
Notes to Consolidated Financial Statements............................13
(b) Proforma Financial Statements
The proforma effect of the "reacquisition" of the Delta Bravo
Inc. subsidiaries (DBI) has no impact on the consolidated
financial statements of Applied Magnetics Corporation (AMC).
AMC obtained a controlling interest in DBI common stock through
foreclosure proceedings in July, 1996 following several DBI
defaults of covenants and payments under notes issued to AMC at
the time of sale in 1993.
AMC has no investment in DBI since the notes have been fully
reserved. At the time of foreclosure AMC designated DBI a
discontinued operation under the provisions of APB No. 30.
Since the net investment in the assets held for sale is zero,
there is no impact on the AMC consolidated financial statements
as a result of the reacquisition.
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<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly
authorized.
APPLIED MAGNETICS CORPORATION
Date: December 3, 1996 By: /s/ Craig D. Crisman
-------------------------
Craig D. Crisman
Chief Executive Officer
Chief Financial Officer
(Principal Financial Officer)
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 28, 1996
TOGETHER WITH INDEPENDENT AUDITORS' REPORT
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<PAGE>
CONTENTS
--------
INDEPENDENT AUDITORS' REPORT
FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 28, 1996
Consolidated Statement of Operations for the nine months ended
September 28, 1996
Consolidated Statement of Shareholders' Deficiency for the
nine months ended September 28, 1996
Consolidated Statement of Cash Flows for the nine months ended
September 28, 1996
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To the Board of Directors and Shareholders of
Delta Bravo, Inc. and Subsidiaries:
We have audited the consolidated balance sheet of DELTA BRAVO, INC.
AND SUBSIDIARIES (the "Company") as of September 28, 1996, and the
related consolidated statement of operations, shareholders'
deficiency, and cash flows for the nine months then ended. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, based on our audit, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Delta Bravo, Inc. and
Subsidiaries as of September 28, 1996, and the results of its
operations and its cash flows for the nine months then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming that the company will continue as a going
concern. As discussed in Note 1 to the consolidated financial
statements, the Company's recurring losses from operations, working
capital deficiency, shareholders' deficiency and debt covenant
violations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are
also described in Note 1. The consolidated financial statements do
not include any adjustments that might result from the outcome of
this uncertainty.
/s/ ARTHUR ANDERSEN LLP
Los Angeles, California
November 25, 1996
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
AS OF SEPTEMBER 28, 1996
------------------------
ASSETS
------
CURRENT ASSETS:
Cash $ 947,000
Accounts receivable, less allowance for
doubtful accounts of $455,000 8,694,000
Inventories, net 4,123,000
Other 553,000
-----------
Total current assets 14,317,000
-----------
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings 2,879,000
Leasehold improvements 1,686,000
Manufacturing equipment 5,878,000
Office equipment 1,047,000
-----------
Total property, plant and equipment 11,490,000
-----------
Less accumulated depreciation 5,072,000
-----------
Total property, plant and
equipment, net 6,418,000
-----------
OTHER ASSETS 41,000
-----------
TOTAL $20,776,000
===========
The accompanying notes are an integral part of this
consolidated balance sheet.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
AS OF SEPTEMBER 28, 1996
------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
----------------------------------------
CURRENT LIABILITIES:
Short-term borrowings $ 4,998,000
Current portion of debt 16,159,000
Accounts payable 4,557,000
Accrued payroll and related costs 2,020,000
Income taxes payable 550,000
Accrued interest 3,234,000
Other current liabilities 7,210,000
------------
Total current liabilities 38,728,000
------------
LONG-TERM LIABILITIES:
Debt, less current portion 721,000
------------
Total liabilities 39,449,000
COMMITMENTS
Redeemable Preferred stock, $100 par value;
200,000 shares authorized;
112,526 issued and outstanding;
liquidation value $12,765,000 9,227,000
SHAREHOLDERS' DEFICIENCY:
common stock:
Class A, without par value; 10,000 shares
authorized; 1,333 issued and outstanding 1,000
Class B, without par value, 5,000 shares
authorized; none issued and outstanding
Additional paid in capital 2,500,000
Accumulated deficit (30,389,000)
Cumulative foreign currency translation
adjustment (12,000)
------------
Total shareholders' deficiency (27,900,000)
------------
TOTAL LIABILITIES AND
SHAREHOLDERS' DEFICIENCY $ 20,776,000
============
The accompanying notes are an integral part of this
consolidated balance sheet.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996
--------------------------------------------
NET SALES $ 39,317,000
COST OF SALES 31,902,000
------------
GROSS PROFIT 7,415,000
------------
OPERATING EXPENSES:
Product development and engineering 332,000
Selling 2,300,000
General and administrative 3,472,000
Restructuring costs 3,250,000
------------
Total operating expenses 9,354,000
------------
LOSS FROM OPERATIONS 1,939,000
OTHER INCOME (EXPENSE):
Interest expense (1,831,000)
Other 134,000
------------
Total other expense (1,697,000)
------------
LOSS BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY ITEMS 3,636,000
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 636,000
------------
LOSS BEFORE TAXES 3,000,000
INCOME TAX PROVISION 564,000
------------
NET LOSS $ 3,564,000
============
PREFERRED DIVIDENDS 468,000
------------
NET LOSS-COMMON SHAREHOLDER $ 4,032,000
============
PER SHARE DATA:
Weighted average of common shares
outstanding 1,333
============
NET LOSS PER COMMON SHARE $ 3,025
============
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
<TABLE>
DELTA BRAVO, INC. AND SUBSIDIARIES
----------------------------------
CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIENCY
--------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 28, 1996
------------------------------------
<CAPTION>
Total
Common stock Cumulative Shareholders'
-------------- Additional Accumulated Translation Equity/
Shares Amount Paid in Capital Deficit Adjustments Deficiency
------ ------ --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1996 1,333 $ 1,000 $(26,357,000) $ 272,000 $(26,084,000)
Additional paid in capital $ 2,500,000 2,500,000
Dividends accreted on preferred
stock (468,000) (468,000)
Translation adjustment (284,000) (284,000)
Net loss (3,564,000) (3,564,000)
----- ------- ------------ ------------ ------------ ------------
BALANCE SEPTEMBER 28, 1996 1,333 $ 1,000 $ 2,500,000 $(30,389,000) $ (12,000) $(27,900,000)
===== ======= ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
-----------------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996
--------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,564,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation 1,515,000
Interest accrued and accreted 1,235,000
Exchange rate effect on operating activities (142,000)
Loss on disposal of fixed assets 6,000
Restructuring charge 3,250,000
Changes in operating assets and liabilities:
Accounts receivable (1,364,000)
Inventories (284,000)
Other current assets (19,000)
Other assets 119,000
Accounts payable 1,362,000
Accrued payroll and related costs 445,000
Income taxes payable 500,000
Other current liabilities (30,000)
-----------
Net cash provided by operating
activities 3,029,000
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (695,000)
-----------
Net cash used in investing activities (695,000)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Gain on extinguishment of debt (636,000)
Payments on notes payable (397,000)
Net reduction on line of credit (769,000)
Exchange rate effect on financing activities (44,000)
-----------
Net cash used in financing activities (1,846,000)
-----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (25,000)
-----------
NET INCREASE IN CASH 463,000
CASH AS OF JANUARY 1, 1996 484,000
-----------
CASH AS OF SEPTEMBER 28, 1996 $ 947,000
===========
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<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $563,000
========
Income taxes $ 64,000
========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Dividends accreted on preferred stock $468,000
========
The accompanying notes are an integral part of these
consolidated financial statements.
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<PAGE>
DELTA BRAVO, INC. AND SUBSIDIARIES
----------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 1996
--------------------------------------------
1. Summary of Significant Accounting Policies
------------------------------------------
Business Activity
- -----------------
Delta Bravo, Inc. and its subsidiaries ("DBI" or the
"Company") manufacture and perform repair and restoration
services for disk drives and other computer peripheral
equipment. The Company's operations are principally conducted
within North America and Western Europe and the company
routinely grants credit to its customers throughout these
regions. Such customers are primarily in the computer or
computer peripheral industries.
Principles of Consolidation
- ---------------------------
The consolidated financial statements present the accounts of
the Company and its subsidiaries, all of which are wholly-
owned. Significant intercompany accounts and transactions
have been eliminated in consolidation. The Company's
subsidiaries are Magnetic Data, Inc. and Brum-Ko Magnetics
Corporation. Magnetic Data, Inc. owns 100% of the following
subsidiaries:
Magnetic Data Belgium, N.V. AM Belgium, N.V.
Magnetic Data United Magnetic Data Inc.,
Kingdom, Ltd. California
Magnetic Data Inc., Magnetic Data Inc., Minnesota
France, S.A.R.L.
Magnetic Data Inc., Germany GmbH
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
Going Concern and Restructuring Costs
- -------------------------------------
The consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As
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<PAGE>
shown in the financial statements, the Company incurred a loss of
$3,564,000 in 1996, has a shareholder's deficiency of $27,900,000,
and a working capital deficiency of $24,411,000 at September 28,
1996, and is not in compliance with its borrowing agreements. The
working capital deficiency at September 28, 1996 includes the
result of the current classification of the Company's notes payable
to AMC resulting from the Company defaulting on its debt
commitments, including violations of certain debt covenants. See
Notes 5 and 10.
Certain of the Company's operations have experienced significant
operating losses and negative cash flows. Accordingly management
approved a formal plan to dispose of certain operations.
Management has identified assets to be disposed of, the expected
method of disposal and expects the completion of disposal to occur
in 1997. Management estimated the loss from the proposed sale or
abandonment of those operations to be approximately $3,250,000 primarily
consisting of shutdown costs and estimated loss on the disposal of assets.
Accordingly, the Company recorded a restructuring charge of $3,250,000 for
the planned disposition of those certain operations.
Management's focus is to improve the operating units' profitability
through increased sales activity in targeted areas and aggressive
cost reduction programs to ensure the Company's ability to meet its
financial obligations.
The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going
concern.
Inventories
- -----------
Inventories are stated at the lower of standard cost, which
approximates cost determined on a first-in, first-out (FIFO) basis,
or market. Inventories consist of purchased materials, direct
production labor and manufacturing overhead.
Property, Plant and Equipment
- -----------------------------
Purchases of property, plant and equipment are recorded at cost or,
in the case of equipment under capital leases, the present value of
future lease payments; and through a business combination, at its
respective fair market values. Maintenance, repairs and minor
tooling costs are expensed as incurred. Depreciation and
amortization are computed on the straight-line method over the
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estimated useful lives of the assets. Estimated useful lives are
as follows:
Buildings 20 - 30 years
Leasehold improvements 3 - 10 years
Manufacturing Equipment 2 - 10 years
Office Equipment 3 - 10 years
Revenue Recognition
- -------------------
Revenue is generally recognized upon shipment of product.
Product Development and Engineering
- -----------------------------------
Costs incurred by the Company in the design, maintenance or
refinement of its existing product line and new product research
and development are expensed when incurred. Total research and
development expenses were approximately $332,000 in 1996.
Income Taxes
- ------------
The Company's income tax provision/benefit has been determined
under Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." This Statement requires an asset
and liability approach to financial accounting and reporting for
income taxes. Deferred income taxes result from temporary
differences in the recognition of revenues and expenses for
financial and income tax reporting purposes. Valuation allowances
have been established to reduce deferred tax assets to the amount
expected to be realized. See Note 8.
Foreign Currency Translation
- ----------------------------
Foreign assets and liabilities are translated to their United
States dollar equivalents based on rates of exchange prevailing at
the end of each respective period. Income statement information is
translated using the average rate for the year. Gains and losses
resulting from foreign currency transactions, other than those
directly related to intercompany loans between the Company's
foreign and domestic entities, are included in the consolidated
statements of operations. Gains and losses resulting from
translation of foreign financial statements and from foreign
currency translations on intercompany loans are included as a
separate component of shareholders' deficiency.
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<PAGE>
Change in Fiscal Year
- ---------------------
As a result of the reacquisition of the Company by Applied
Magnetics Corporation ("AMC") the Company changed its fiscal year-
end from December 31st to the Saturday closest to September 30th in
order to coincide with AMC's year-end date. This change is
effective as of September 28, 1996 for the Company's domestic
entities and September 30, 1997 for its foreign operations.
2. Inventories
-----------
Inventories consist of the following:
Raw materials $ 5,261,000
Work in process 1,427,000
Finished goods 3,048,000
Less reserves for obsolescence (5,613,000)
-----------
Total 4,123,000
==========
3. Segments of Business
--------------------
The Company operates in one business segment, component manufacturing,
refurbishment and repair. Total foreign sales were $13,410,000.
Of this amount sales by operations in the United States to
customers in other countries were $1,098,000. Sales by operations
in Europe to customers in the United States were $760,000.
Identifiable assets, capital expenditures, pre-tax operating loss,
and depreciation are as follows:
Identifiable assets:
United States $13,196,000
Europe 7,580,000
------------
Total $20,776,000
============
Capital expenditures:
United States $ 582,000
Europe 113,000
-----------
Total $ 695,000
===========
Pre-tax operating income (loss) before extraordinary gain:
United States $(4,009,000)
Europe 373,000
-----------
Total $(3,636,000)
===========
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Depreciation:
United States $1,332,000
Europe 183,000
----------
Total $1,515,000
==========
4. Short Term Borrowings
---------------------
The Company has a line of credit (the "credit line") that is
secured by accounts receivable and inventories of its domestic
operating subsidiaries, which expires on March 18, 1997. The
credit line allows borrowings equal to 85% of qualified accounts
receivable and 20% of inventory with an $8,000,000 maximum. At
September 28, 1996, outstanding borrowings under the credit line
were $3,948,000, with availability of approximately $1,000,000
based upon September 28, 1996 accounts receivable and inventory
balances. The credit line bears interest at the prime commercial
interest rate (8.25% at September 28, 1996) plus 2.5%. The Company
is required to meet certain financial covenants under the terms of
the credit line agreement. These covenants include, among other
things, minimum levels of domestic working capital and net worth
requirements. The Company was not in compliance with these
covenants of the credit line as of September 28, 1996.
The Company also maintains a credit line ("foreign line") with a
Belgian financial institution in the amount of 37,500,000 Belgian
Francs (US$1,200,000 based upon year-end exchange rates), which is
secured by accounts receivable and inventories of its foreign
operating subsidiaries. At September 28, 1996, approximately
33,000,000 Belgian Francs (US$1,050,000) were outstanding. The
foreign line is renegotiated every six months, and the interest
rate is adjusted to current rates (6.75% at September 28, 1996).
The foreign line also requires, among other requirements, the
Company's foreign subsidiaries to maintain certain solvency and
working capital ratios. At September 28, 1996 the Company was not
in compliance with the required ratios; however, the Belgian
financial institution has agreed to extend the line through
December 1996, and on a month-to-month basis thereafter.
5. Debt
----
Debt consists of the following:
Note payable to Applied Magnetics Corporation
("AMC"), principal and interest (at 10%),
due March 18, 1996. Due to debt covenant
violations, the note is due and payable on
demand. The note is secured by real and
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<PAGE>
personal property, stock pledged of DBI and
outstanding stock of domestic subsidiaries,
and guaranteed by the Company and the former
majority shareholder. $ 2,650,000
Note payable to AMC, with interest payable
quarterly at the stated rate of 8%, unpaid
interest and principal due March 18, 2000.
Due to debt covenant violations, and default
in interest payments, the note is due and
payable on demand. The note is secured by
real and personal property, stock pledged
of DBI and outstanding stock of domestic
subsidiaries, and guaranteed by the Company
and the former majority shareholder. 13,200,000
Net present value of note payable to vendor
payable in various installments with final
payment due March 15, 1999. $ 807,000
Capitalized lease obligations, secured by
related equipment, interest at 8.9% to 12%,
due in monthly installments through August,
2000. See Note 6 223,000
-----------
Total debt 16,880,000
Current portion of debt 16,159,000
-----------
Debt, less current portion $ 721,000
===========
The Company is required to meet certain financial covenants under
the terms of the notes payable to AMC. These covenants include,
among other things, a maximum debt to equity ratio, minimum net
worth requirements and specified levels of working capital. The
Company was not in compliance with certain of these covenants at
September 28, 1996. In addition, the Company has defaulted on its
note obligation to AMC, and was found by a Delaware Court to be in
default with its obligations to AMC as a result of violating its
Pledge Agreement with AMC. Upon occurrence of an event of default,
all outstanding secured obligations owed by the Company to AMC are
automatically accelerated; and become due and payable upon demand.
Accordingly, the notes payable to AMC have been classified as
current in the accompanying financial statements.
On July 17, 1996, AMC, through a foreclosure proceeding which followed
the Company's breach of its Pledge Agreement with AMC, acquired 100%
of the outstanding common stock of the Company in satisfaction of
$2.5 million of debt owed by the Company to AMC. Accordingly, the
outstanding debt due to AMC has been reduced by $2.5 million as of
September 28, 1996, and a corresponding additional paid in capital
was recorded in the financial statements. See Note 11.
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<PAGE>
During 1996 the Company renegotiated its note obligations with a
vendor whereby the vendor forgave a portion of the outstanding
debt. Accordingly, the Company recognized a gain from the
extinguishment of debt in the amount of $636,000.
The aggregate maturities of debt for the years subsequent to
September 28, 1996 (exclusive of capital lease obligations) are as
follows:
1997 16,090,000
1998 330,000
1999 237,000
2000 -
2001 -
Thereafter -
------------
Total $ 16,657,000
============
6. Lease Commitments
-----------------
The Company leases various equipment and building facilities under
capital and operating leases. Rent expense for the nine months
ended September 28, 1996 was $966,000. Future minimum rental
payments under these leases with an initial term of one year or
more are as follows:
Capital Operating
Leases Leases
------- ---------
1997 $88,000 $1,272,000
1998 85,000 1,244,000
1999 62,000 1,229,000
2000 25,000 1,226,000
2001 -0- 423,000
Thereafter -0- -0-
--------- ----------
Total minimum lease payments 260,000 $5,394,000
==========
Amount representing interest (37,000)
----------
Present value of net minimum
lease payments $ 223,000
----------
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7. Capital Stock
-------------
Preferred Stock
---------------
The Company issued 112,526 shares of convertible preferred stock to
AMC with a face value of $11,253,000 on March, 18, 1993 in
connection with the acquisition of its subsidiaries Magnetic Data,
Inc. and Brum-ko Magnetics Corporation. A summary of AMC's
preferred stock rights is as follows:
* Cumulative 7.5% dividend payable semi-annually.
* Preferential rights on liquidation.
* Mandatory redemption right commencing in the year 2000.
* Convertible into one share of common stock for each 225.052
shares of preferred.
The preferred stock has been valued at its fair market value on the
acquisition date using the discounted cash flow method and assuming
a fair market rate of return for the security of 16%. Accordingly,
the Company is accreting dividends on an annual basis so as to
adjust the carrying value of the security to its face value upon
its redemption dates which commence in the year 2000. As of
September 28, 1996, total dividends accreted amount to $2,337,000.
Stock Options
- -------------
The Company's subsidiary, Magnetic Data, Inc. ("MDI") has two stock
option plans, which were established in 1988 and 1992. Under the
stock option plans, MDI may issue nonqualified and incentive stock
options to officers, directors and other employees to purchase
Class A common stock of MDI at a price that is not less than 100%
of the fair market value at the date Of grant. The right to
exercise the options vest 25% a year, beginning on the first
anniversary of the grant, and the options expire no later than ten
years after the date of grant. There are 620,000 shares authorized
for grant under the plans. As of September 28, 1996, 61,400 shares
are exercisable. The following table summarizes the stock option
activity:
Rage of Option
Shares Prices Per Share
------ ----------------
Outstanding at January 1, 1996 90,400 $6.25-$6.50
Options canceled (29,000) $6.25-$6.50
-------
Outstanding at September 28, 1996 61,400
=======
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8. Income Taxes
------------
The income tax expense consists of the following:
Current:
Federal $ --
State 14,000
Foreign 550,000
---------
Total $ 564,000
=========
For federal income tax purposes, the Company has domestic net
operating loss carryforwards totaling approximately $11.3 million
at September 28, 1996, expiring between 1998 and 2010; and foreign
net operating loss carryforwards of approximately $3.8 million at
September 28, 1996, which do not expire.
Deferred income taxes reflect the tax effects of: temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes and operating loss carryforwards. The tax effects of
significant items comprising the Company's net deferred income tax
assets are net operating loss carryforwards, certain accrued costs,
depreciation, inventory reserves, and differences between the book
and tax basis of property and the amortization of intangibles. The
Company has provided a valuation allowance for the excess benefits
of the operating loss and other deferred tax assets, since
realization of these assets cannot be assured.
As of September 28, 1996 the deferred income taxes consist of the
following:
Federal State Foreign
----------- ----------- -----------
Deferred taxes:
Operating loss
carryforward $ 3,843,396 $ 791,287 $ 1,520,361
Reserve for inventory
obsolescence 3,845,813 791,785 174,023
Accruals and other costs 1,296,295 266,884 809,287
Differences between book
and tax basis of property 82,346 16,689 14,884
----------- ----------- -----------
Total deferred taxes 9,067,850 1,866,645 2,518,555
Valuation allowance (9,067,850) (1,866,645) (2,518,555)
----------- ----------- -----------
Deferred income taxes $ -- $ -- $ --
=========== =========== ===========
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Reconciliation of the actual Federal provision (benefit) for income taxes
to the income tax calculated at the United States Federal statutory
rates for continuing operations is as follows:
Income tax (benefit) at the United States Federal
income tax rate (34)%
Temporary differences/net operating losses not benefited 34
----
- %
====
The consolidated effective tax rate may differ from the U.S.
Federal statutory rate primarily due to the Company and its
consolidated foreign subsidiaries, each filing separate income tax
returns in their respective countries. As a result, the losses of
one company cannot be offset against the taxable income of other
companies.
9. Retirement Savings Plan
-----------------------
The Company has a qualified retirement plan under the provisions of
Section 401(k) of the Internal Revenue Code, in which eligible
employees may participate. Substantially all participants in this
plan are able to defer compensation up to the annual maximum amount
allowable under Internal Revenue Service regulations.
Additionally, the Company may match employees' contributions with
discretionary amounts as may be determined by the Board of
Directors. The Board of Directors did not authorize any matching
contributions in the nine months ended September 28, 1996.
10. Related Party Transactions
--------------------------
Included in the current portion of debt are amounts due to Applied
Magnetics Corporation ("AMC") , the sole shareholder of the
Company, in the aggregate amount of $15,850,000. Also included in
accrued interest is $3,141,000 related to the AMC notes and
$750,000 in other current liabilities for estimated legal and
settlement costs relating to the default on the AMC notes. Such
costs are to be reimbursed to AMC under the terms of the note
agreements. The Company had purchased products and services from
AMC totaling $171,000.
11. Subsequent Events
-----------------
The Company was a defendant in a lawsuit filed by two former
officers and directors of the Company who claimed to be minority
shareholders. Also named in this lawsuit were the Company's former
majority shareholder and a corporation in which the former majority
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shareholder is principal. These individuals had threatened to add AMC
and others to the lawsuit.
On November 19, 1996, the Company settled the lawsuit, and obtained
full releases from the plaintiffs. Resolution of this lawsuit
resulted in no claim by plaintiffs of any minority ownership in the
Company and thus, AMC's ownership is 100% of the outstanding common
stock of the Company. The plaintiffs have not yet filed a formal
dismissal with prejudice of the lawsuit, but are obligated to do so
pursuant to the settlement agreement.
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