<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
------------------------
FORM 10-K
/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 28, 1996.
/ / 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
incorporation or organization Identification No.)
75 ROBIN HILL ROAD, GOLETA, CALIFORNIA 93117
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (805) 683-5353
------------------------
Securities registered pursuant to Section 12 (b) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
- -------------------------------------- --------------------------------------
Common Stock, $.10 par value New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _x_ No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 or Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or in any
amendment to this Form 10-K /X/
The aggregate market value of the Common Stock held by non-affiliates of
registrant was $547,409,504 as of December 16, 1996.
COMMON STOCK (PAR VALUE $.10) 19,207,351
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the registrant's 1997 Annual Meeting of
Stockholders, to be filed pursuant to Regulation 14A within 120 days following
the registrant's fiscal year ended September 28, 1996, are incorporated by
reference into Part III on this Form 10-K.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART 1
ITEM 1. BUSINESS
GENERAL
Applied Magnetics Corporation (the "Company" or "Applied Magnetics") was
incorporated in California in 1957 and was reincorporated in Delaware in 1987.
The Company presently operates in one industry segment, namely, components
for the computer peripheral industry with one major product group, recording
heads for rigid disk drives.
Applied Magnetics is a leading independent manufacturer of magnetic
recording heads and of head stack assemblies for disk drives. The Company
manufactures advanced inductive thin film ("thin film") disk head products,
magnetoresistive ("MR") disk head products and assembles ferrite metal-in-gap
("ferrite" or "MIG") disk head products, in each case, primarily to supply to
manufacturers of 3.5 inch hard disk drives. The Company's products compete on
the basis of price, performance and availability.
Performance improvements in microprocessors, continuing proliferation of
powerful operating systems and applications software, image intensive
applications, increased home personal computer use, network connections, on-line
services and the Internet have resulted in increasing demand for greater data
storage capacity and performance in smaller form factor disk drives. In
addition, the market growth of notebook and sub-notebook computers has increased
demand for smaller form factor disk drives. Due to these trends, thin film disk
heads, which generally permit greater storage capacities per disk and provide
higher data transfer rates than ferrite disk heads, represent one of the fastest
growing segments of the recording head industry.
The Company has focused its long-range growth strategy on thin film and MR
disk head technologies and believes that MR disk heads, which ultimately afford
greater recording densities and other performance advantages as compared to thin
film heads, represent the next important magnetic recording head technology.
The Company believes that, overall, the market for ferrite disk heads peaked
in 1995 and the Company's customers are typically no longer developing new
products based on ferrite disk head technology. As a result, the Company
completed new ferrite head manufacturing, as planned, in the fourth quarter of
fiscal 1996 and does not currently anticipate additional ferrite head business
in fiscal 1997.
During fiscal 1996, market conditions in the disk drive industry served by
the Company were characterized by continued reduction of product life cycles and
intense competition. The industry product life cycle is currently running
approximately 9 to 12 months. The Company experienced a transition to a new
generation of higher performance thin film heads during the third quarter of
fiscal 1996, resulting in a temporary decline of yields, which negatively
impacted production volumes, revenues and profits. By the fourth fiscal quarter,
this transition was completed and yields returned to planned levels.
Prior to December 10, 1994, the Company also manufactured and sold recording
heads for tape drives which are used in the computer peripheral industry. On
December 10, 1994, the Company sold its Tape Head business unit to Seagate
Technology, Inc. ("Seagate") for $21.5 million, pursuant to a Stock Purchase
Agreement (the "Seagate Agreement"). The Company received $19.9 million during
fiscal 1995 and a final payment of $1.3 million in the first quarter of fiscal
1996, upon completion of certain performance obligations to supply tape related
products and services to Seagate. In accordance with the terms of the Seagate
Agreement, at the conclusion of one year, it was mutually agreed that the
Company would forego $0.3 million, as a result of claims presented by Seagate,
relating to the representations and warranties made by the Company. Except for
those arrangements to provide tape-related products and services to Seagate, the
Company is no longer engaged in the design, development, manufacture and sale of
recording heads for tape drives.
2
<PAGE>
DISK DRIVE INDUSTRY
Rigid disk drives (hard disk drives) are the predominant high capacity data
storage device used in all classes of computers. Rigid disk drives typically
include one to ten disks onto and from which data is recorded and retrieved by
two to twenty recording heads. These heads are positioned by an actuator
assembly to fly within two micro inches, or less, on one or both sides of each
disk. The head (or "slider") attached to a suspension assembly comprises a head
gimbal assembly ("HGA"). Multiple HGAs, assembled together with other
components, comprise an actuator, or head stack assembly ("HSA"). The Company
supplies both HGAs and HSAs to disk drive manufacturers.
Disk drive manufacturers are constantly developing higher capacity and
higher performance products. Head suppliers, such as the Company, work with the
drive manufacturers to develop customized HGAs and HSAs for each new drive
program. Head suppliers seek to have their products "designed-in" for a
particular drive program, thus becoming a primary supplier. Achieving a "primary
supplier" status usually offers a competitive advantage, manifested as higher
internal yields and more favorable pricing, compared to entering the program
later in its product life cycle.
The Company was successful in achieving "primary supplier" status on a
number of programs in fiscal 1996. The disk drive industry continues to be
highly competitive. Achieving mature, mass production status on newer technology
products as a primary supplier will be required in order for the Company to
continue the revenue and shipment volume growth rate experienced in fiscal 1996.
The disk drive industry is cyclical and has been characterized by periods of
intense product demand requiring high production levels followed by periods of
oversupply, order cancellations, pricing pressure and reduced production levels.
During periods of high demand, the Company has expanded production facilities,
but at times has been unable to expand facilities and hire and train production
personnel rapidly enough to meet the demand for its products. Conversely, in
periods of lower demand, the Company has had excess production capacity and has
experienced gross margin declines.
TECHNOLOGY
Magnetic disk heads are electromechanical devices that record ("write") data
onto and retrieve ("read") data from the magnetic layers of magnetic data
storage disks. The principal elements of an inductive magnetic recording head
are a magnetic core, which is interrupted by a non-magnetic gap, and an
electrically conducting coil wrapped or deposited in turns around the core. To
write data, a current is passed through the coil, thereby inducing a magnetic
field in the core. Since the core is interrupted by a non-magnetic gap, the
magnetic field must "fringe" out from the gap, and in doing so, it magnetizes a
segment of the disk. Reversing the direction of the current reverses the
polarity of the next magnetized segment of the disk as it passes by the gap of
the head, thus allowing data to be encoded as a pattern of reversing polarities.
To read data, the previously encoded disk is again passed by the head and the
reversing magnetic polarities induce reversing magnetic fields in the core.
These reversing magnetic fields in the core generate correspondingly reversing
currents in the coil which are sensed and decoded by the drive circuitry.
Disk drive storage capacity and performance are largely determined by the
magnetic properties and interface of the recording head and disk. The number of
coil turns and magnetic materials of the recording head are each optimized to
achieve required performance. The number of coil turns and coil pitch
characteristics (including the geometry of the coils and the distance between
the coils) are selected to provide appropriate writing and maximum read-back
signal levels. Higher data densities require that the head fly both closer to
the disk and at more uniform flying heights across the disk or, alternatively,
that the head maintain a light contact with the disk at a point near the head's
gap, with the disk sliding over this portion of the head (known as contact
recording). This is influenced by the size and mass of the head and by its
hydrodynamic air bearing design and performance characteristics.
3
<PAGE>
Historically, ferrite disk heads have represented more cost-effective design
alternatives for rigid disk drives than thin film disk heads. However, as demand
for high performance, small form factor rigid disk drives has grown, there has
been a corresponding increase in demand for disk heads that provide higher areal
densities and data transfer rates. This technology and market shift has resulted
in disk head specifications that increasingly require higher performance thin
film heads. Coupled with the increasing supply of competitively priced thin film
disk heads and the tendency of major disk drive customers to select thin film
products rather than ferrite disk heads, the Company expects that demand for
ferrite devices will continue to decline dramatically and the Company's
customers are typically no longer developing new products based on ferrite disk
head technology. As a result, the Company completed new ferrite disk head
manufacturing in the fourth quarter of fiscal 1996 and does not currently
anticipate additional ferrite disk head business in fiscal 1997.
Thin film heads are produced with processes adapted from semiconductor
manufacturing operations in which thin films of magnetic, conductive and
insulating materials are deposited on a non-magnetic substrate to form the
magnetic core and the electrical coils of the head. These processes permit a
greater degree of precision and repeatability, greater miniaturization and lower
mass than can be achieved with ferrite production methods in which the
electrical coil is usually wound on a machined ferrite core.
The Company believes that MR disk heads represent the next important
magnetic recording head technology. In contrast to an inductive disk head, which
is typically designed to "read" and "write" data using a single inductive
element, an MR disk head uses an inductive element to "write" data onto the disk
and a separate MR element to "read" data from the disk. The MR read element
incorporates a magnetoresistor whose electrical resistance changes in the
presence of a magnetic field. As the encoded disk is passed by the read element,
the disk drive circuitry senses and decodes the changes in electrical resistance
caused by the reversing magnetic polarities. The greater sensitivity of MR read
elements provides higher signal output per unit of recording track width on the
disk surface. As a result, MR disk heads have certain design and performance
advantages over inductive heads, particularly in high performance small form
factor disk drive applications. In addition, MR disk heads can read data from a
rotating disk independent of the speed of rotation, thus allowing these devices
to read data more reliably from small form factor disks in which linear
velocities are inherently lower. MR disk heads also allow for optimization of
read and write gaps independently. Typical inductive heads incorporate a single
gap for both read and write functions.
PRODUCTS
THIN FILM AND MR DISK HEADS. During fiscal 1996, the Company qualified and
made volume production shipments on a number of new disk drive programs which
require thin film products. The Company's thin film products are produced in
volume for 3.5 inch disk drives to achieve areal densities of up to
approximately 700 megabits of data per square inch of disk surface. The thin
film disk drive programs for which the Company has become and is seeking to
become qualified are primarily for high capacity, low profile, 3.5 inch disk
drives for use in next generation personal computers and workstations and
represent drive applications with recording densities of up to 1,200 megabits
per square inch.
Development and commercialization of MR disk heads continued to be a major
investment for the Company in fiscal 1996. During fiscal 1996, the Company
entered production on its first volume MR disk head program and, in addition,
continued to ship prototype and qualification samples of MR disk head products
to selected customers for drive applications with recording densities of up to
1,200 megabits per square inch. During fiscal 1997, MR drive applications are
expected to require areal densities of nearly 1,600 megabits per square inch.
This will require the Company's engineering and production resources to meet
their targeted design and process development plan, achieve "design-in" with the
customer drives and successfully execute the planned production ramp.
4
<PAGE>
During fiscal 1996, the Company continued to make important progress in the
design and production of new, advanced thin film disk heads, including higher
efficiency products which increase the output signal for a given number of coil
turns. Additional thin film advances have been made in developing processes,
known as "track trimming", for defining thin film magnetic core elements that
are both narrower and of more equal width which, in turn, enhance the capability
of the head to write narrower and more densely packed tracks of data onto the
disk surface. Advances have also been made in the Company's efforts to develop
and offer thin film and MR disk heads with fully etched air bearing ("FEAB")
negative air pressure bearing surfaces. The implementation of these designs and
processes improved production yields and enhanced the hydrodynamic
characteristics of the disk heads, allowing the head to fly at lower, more
uniform heights, or in light contact with the disk, thus contributing to higher
areal densities, and thereby improving the reliability of the disk head. During
fiscal 1997, most of the Company's customer programs will include these design
improvements. As a result, the Company's continued shipment and revenue growth
and achievement of satisfactory production yields to increase profitability
depend on the Company's ability to achieve "design-in" status with its customers
utilizing these advanced thin film heads.
During fiscal 1996, all of the disk head products supplied by the Company
were in the "nanoslider" or "50%" form factor (in which the slider is
approximately 50% of the size, in each of its three dimensions, of the original
inductive thin film slider). The Company has been and continues to develop
products in the smaller "picoslider" or "30%" form factor, for both advanced
inductive thin film and MR disk heads and anticipates the introduction of
picoslider form factor products during the second half of fiscal 1997. This will
require the Company's engineering and production resources to complete
development plans for these products, achieve "design in" with customer drives
and successfully execute the planned production ramp.
FERRITE DISK HEADS. Due to declining volumes caused by limited demand for
ferrite disk heads, the Company has chosen to focus its resources on advanced
thin film and MR disk heads and does not plan to actively pursue any ferrite
programs in fiscal 1997. Further, because the Company's thin film disk head
production is vertically integrated, the Company believes that obtaining sales
of thin film products generally represents more attractive opportunities for
revenue growth and profit improvement than the ferrite disk head business.
For discussion of net sales and percentage of sales by product, see "Annual
Results of Operations" under Item 7.
MANUFACTURING
WAFER / SLIDER FABRICATION
MR and thin film transducers are manufactured using a semiconductor-like
wafer fabrication process. This process involves photolithography, vacuum
deposition, wet chemical and plasma etching and precision electroplating
technologies. The Company's two wafer fabrication facilities in Goleta,
California, are based on 150mm (approximately six inch) diameter round
substrates. Fiscal 1996 production was of the nanoslider form factor, where
approximately 8,400 individual (unyielded) sliders can be produced from each six
inch wafer. During the second half of fiscal 1997, in addition to nanosliders,
the Company expects to commence initial production of picosliders, where
approximately 15,300 individual (unyielded) sliders can be produced from each
wafer.
Completed wafers are sliced into row bars containing 29 sliders per bar for
the nanoslider form factor and 44 sliders per bar for the picoslider form
factor. After testing, row bars are shipped to Penang, Malaysia for further
processing.
Rows are converted into individual sliders in the Company's slider
fabrication facility in Penang, Malaysia. This process involves high precision
lapping as well as photolithography and ion milling technologies utilized to
define the critical air bearing geometries which allow the head to fly at about
two microinches (or less) above the disk surface. On some of the Company's
products, photolithography and
5
<PAGE>
ion milling technologies are also used to define pole tip geometries and hence
recording densities produced by the heads. For some programs, a thin, hard
carbon overcoat is vacuum deposited onto the air bearing surface of the head in
order to improve the performance of the head/disk interface and to provide added
protection for the magnetic elements of the head.
All of the aforementioned processes can be characterized as high technology
and their intrinsic yields directly define final production output and Company
revenue. Typically, new (higher performance) head designs place increasing
demands on process technology. The Company's ability to execute depends on its
ability to develop new processing technology, maintain control over its
processes and ramp these new products into production volume in a timely manner.
The Company believes that demand for recording heads will continue to
increase. To meet this demand, it is critical that wafer and slider output
increase. This increase is dependent on the Company's ability to generate the
required capital funding. If the Company is unable to obtain the required funds
in sufficient amounts and at the required times, its future revenues could be
adversely affected. See "Liquidity and Capital Resources" under Item 7.
The Company also believes that developing new products involving both
advanced inductive thin film and MR technologies will be critical to continued
revenue growth.
ASSEMBLY AND TEST
The Company assembles all of its volume production of HGAs and HSAs outside
of the United States. Principal manufacturing sites are in Penang, Malaysia;
Chung-Ju, South Korea; Dublin, Ireland and Beijing, China.
The Company also maintains contractual relationships with unaffiliated
parties that provide manufacturing space and contract labor in Malaysia and
China. The Company plans on continuing such relationships in the future.
From time to time, the Company has experienced a shortage of assembly and
test direct labor at its manufacturing locations. Although it is not anticipated
that there will be a significant shortage in fiscal 1997, there can be no
guarantee that such a condition will not develop. Due to increased market and
customer demand forecasted in fiscal 1997, the Company plans to expand all of
its current manufacturing locations and some contract labor relationships, and
is exploring the possibility of new manufacturing locations in Asia. If such
demand declines, management believes that it will be able to reduce its planned,
but not committed, capital expenditures accordingly.
The Company's foreign operations can be subject to risks associated with
currency exchange fluctuations, government approvals, political instability,
currency restrictions, trade restrictions, labor unrest, changes in tariff, and
the like. Experience indicates that these factors have not produced significant
liability, but there can be no assurances that these factors will not impact the
Company's future operations.
RESEARCH AND DEVELOPMENT
The Company commits substantial resources to technology, product and process
development in order to meet its customers' continuing demands for higher
performance disk heads for successive disk drive product families. Technology
development activities relate to creating technological advances required for
new product development and the advancement of production processes required in
new product manufacturing (e.g., development of smaller form factor products,
advanced coil and core structures, constant flying height and contact recording
technologies and the development of MR technology). In addition, development
activities focus on conceptual formulation, design and testing of new product
alternatives and construction of prototypes. Development activities relating to
advanced disk head products are predominantly performed at the Company's Goleta,
California location. In addition, the
6
<PAGE>
Company also has engineering and technical staff located at various production
operations and locations to provide manufacturing process and integration
support.
The Company's future success in achieving "design-in" positions and/or
program qualifications depends heavily on the successful and timely completion
of its product and process development efforts. While the Company is devoting
substantial resources to these efforts, there can be no assurance that the
Company will realize satisfactory product and process development results. To
the extent that the Company is unable to do so, there could be an adverse effect
on the Company's operating results.
The Company's technology development is primarily devoted to
commercialization of advanced inductive thin film disk head technology and of MR
disk head technology. Research and development expenses were $50.9 million,
$33.7 million and $38.8 million for fiscal years 1996, 1995 and 1994,
respectively, before cost offsets of $14.1 million in fiscal 1994, primarily
related to funding pursuant to a License and Technology Agreement with Hitachi
Metals, Ltd. ("HML"), dated December 1992. The technology development agreement
was concluded in fiscal 1994. The Company does not currently have any ongoing
technology development agreements providing funding for research and development
efforts relating to new or advanced technology disk head products. While it may
continue to consider and pursue opportunities relating to such arrangements, the
Company believes that its existing cash resources and expected operating results
will provide sufficient financial resources, on an independent basis, to fund
its ongoing research and development activities in a manner consistent with its
current operating plan.
Under the HML Agreement, the Company granted to HML an exclusive,
non-transferable license to use the Company's technology to manufacture in Japan
thin film, MR and certain ferrite disk head products, HSAs, HGAs and components
(the "Licensed Products") and a nonexclusive license to have Licensed Products
made by HML subsidiaries and affiliates worldwide. Additionally, the Company
granted HML and its subsidiaries and affiliates certain exclusive rights to
market and sell Licensed Products to disk drive and head manufacturers in Japan
and retained exclusive marketing rights to Licensed Products and improvements to
Licensed Products in the rest of the world.
SOURCES OF SUPPLY
The Company relies on Sumitomo Corporation as its principal supplier of
substrates which are used to produce wafers for the Company's thin film and MR
disk heads and on multiple independent suppliers for other materials used in the
manufacturing process. The Company purchases suspension assemblies from
Hutchinson Technology, Incorporated ("Hutchinson") and various other
manufacturers. The Company also manufactures suspension assemblies internally.
Although the Company has not experienced significant limitations on the
availability of these materials, shortages could occur in the future. Such
developments could disrupt the Company's production volume and have an adverse
effect on the Company's operations.
CUSTOMERS AND MARKETING
The Company's customers include, among others, Maxtor Corporation
("Maxtor"), Micropolis Corporation ("Micropolis"), NEC Corporation ("NEC"),
Quantum Corporation ("Quantum"), Seagate and Western Digital Corporation
("Western Digital"). Western Digital, NEC, Seagate and Quantum represented
approximately 44.0%, 20.1%, 13.4% and 10.3%, respectively, of net sales during
the year ended September 28, 1996.
Due to the small number of disk drive manufacturers and computer system
companies requiring independent sources of supply for magnetic recording heads,
the Company's customer base is likely to remain concentrated. In addition, the
customer base may become more concentrated if disk drive manufacturers that do
not have their own internal capabilities for designing and producing disk heads
adopt and implement further vertical integration strategies. While the Company
believes that industry conditions and economic factors will continue to create
an environment in which drive manufacturers will
7
<PAGE>
require, as their primary source of supply, independent suppliers of magnetic
recording heads and in which vertically integrated disk drive and systems
companies will require alternative or "secondary" sources of supply, the further
consolidation or integration of one or more of the Company's major customers
with other disk drive or disk head firms could have an adverse effect on the
Company's business. Such occurrences, however, could potentially be offset by
the entry of new manufacturers in the disk drive market. See "Competition" for
further discussion.
Seagate, a major disk drive manufacturer, and Conner Peripherals,
Incorporated ("Conner"), completed the merger of their companies in fiscal 1996.
Seagate has a large vertically integrated capability in recording heads and its
long term goal will likely be to supply all head requirements for Conner
products. Conner was the Company's largest customer in fiscal 1995. Revenues
from Conner declined materially during fiscal 1996.
During fiscal 1996, Maxtor, a subsidiary of Hyundai Electronics of America,
experienced continuing operating losses and announced reorganization of its
operations. The Company believes the steps Maxtor is taking are positive, but
there can be no assurance that Maxtor will be successful in the future.
During fiscal 1996, Micropolis experienced operating losses and it was
acquired by Singapore Technologies. The Company believes that this acquisition
is a positive development, but there can be no assurance that they will be
successful in the future.
The Company believes that the most effective means of marketing and selling
magnetic recording disk heads is by establishing close customer relationships at
the engineering level, which permits technical collaboration and may result in
the Company's heads being "designed-in" for particular disk drives. Through its
product planning and marketing efforts, the Company seeks to identify those disk
drive programs it believes will achieve high volume in order to concentrate its
engineering resources on these programs.
The Company's magnetic recording disk heads are sold in the United States
and foreign countries by its direct sales personnel and through its subsidiary
in Ireland. As of December 1992, in accordance with the HML Agreement, the
Company granted certain exclusive marketing rights in Japan to HML.
The Company has been successful in achieving "design-in" positions with
certain customers on certain disk drive programs. There can be no assurance that
the Company will successfully obtain "design-in" positions on a sufficient
number of the new disk drive programs that it is currently pursuing or that it
expects to pursue, or that, after having achieved this position on any given
customer program, it will not experience difficulties in obtaining desired
levels of production volumes on a timely basis. The failure to secure and
satisfactorily perform against orders for volume shipments of thin film disk
heads could result in customer cancellations, reschedules and diversion of
certain orders to the Company's competitors. To the extent any significant
orders for the Company's thin film and/or MR disk heads are canceled,
rescheduled or diverted, such actions could have an adverse effect on the
Company's operations.
COMPETITION
The Company competes with other independent recording head suppliers, as
well as disk drive companies and systems companies that produce magnetic
recording heads used in their own products. Fujitsu, Hitachi, IBM, NEC, Quantum
and Seagate produce some or all thin film and/or MR heads for their own use. IBM
and Seagate make their thin film and MR disk head products available in the OEM
market to competing drive manufacturers. All of these companies have
significantly greater financial, technical and marketing resources than the
Company.
The Company believes that disk drive customers and systems companies that
are not vertically integrated continue to represent significant opportunities
for sales of the Company's disk head products for competitive and other reasons.
Moreover, the Company believes that certain vertically integrated
8
<PAGE>
companies will continue to rely on independent suppliers of disk head products
as alternative sources of supply, or in some cases, as primary sources of supply
for individual disk drive programs
Read-Rite Corporation ("Read-Rite") has had substantially greater sales of
thin film disk head products than the Company and has been its largest
competitor among independent thin film disk head manufacturers. Read-Rite and
Sumitomo Metal Industries, Ltd. ("SMI") have a joint venture in Japan to make
thin film and MR wafers. Read-Rite also acquired certain assets and technology
rights of Censtor Corporation ("Censtor"), a developer of "planar" thin film
head technology, during fiscal 1996, and plans to introduce advanced inductive
recording heads based on the Censtor planar technology. The Company believes
that its picoslider technology is competitive on the basis of cost and
performance with planar technology, but there can be no assurance that customer
and market demand for the Company's product technology will continue and
increase at its current growth rate.
In recent years, several large Japanese companies, each with considerably
more resources than the Company, have entered the independent head market with
considerable success in gaining market share. Alps Electric Corporation, Ltd.,
TDK Corporation (and its SAE Magnetics, Ltd. subsidiary,) and Yamaha Corporation
continue to aggressively develop and market thin film and/or MR disk heads.
The principal competitive factors in the markets the Company addresses are
price, product performance, quality, product availability, responsiveness to
customers and technological sophistication. The disk head industry is intensely
competitive and largely dependent on sales to a limited number of disk drive
manufacturers and systems companies. The Company's ability to obtain new orders
depends on its ability to anticipate technological changes, develop products to
meet individualized customer requirements and on timely delivery of products
that meet customer specifications at competitive prices. The market for the
Company's disk head products could be adversely affected if one or more disk
drive manufacturers were to vertically integrate by acquiring disk head
manufacturing capability. In addition, the disk drive industry is highly
cyclical. Disk drive manufacturers may quickly lose market share as a result of
the technological innovations of their competitors or various other factors. A
reduction in market share by one of the Company's customers could result in the
loss of business from such customer. This loss could have a material, adverse
effect on the Company's future operations.
BACKLOG
The Company's backlog of open orders scheduled for delivery within six
months at September 28, 1996 was approximately $116.3 million, compared to
approximately $107.5 million at September 30, 1995. Backlog increased
year-to-year as a result of increased customer demand for thin film and MR disk
head products. Backlog includes only firm orders for which the customers have
released a specific purchase order and specified a delivery schedule.
The Company receives purchase orders from its customers which express the
customer's intentions to purchase, at stated unit prices, certain quantities of
products during a specified period, generally for one to two quarters. Orders
are subject to rescheduling provisions which permit increases or decreases in
volume of shipments during a specified period. In addition, at times of supply
shortages, the Company believes it is a common practice for disk drive
manufacturers to place orders in excess of actual requirements. Conversely,
during periods of soft demand the Company has experienced cancellation and
rescheduling of orders, reductions in quantities and repricing as customer
requirements change.
The contractual arrangements between the Company and most of its customers
permit the Company to assert claims for cancellation costs and expenses in these
circumstances. However, the resolution of these claims is often a lengthy and
extensively negotiated process, resulting in a compromise arrangement in which,
among other things, the Company and the customer may agree that the claimed
amount to be paid is reduced or that the Company will continue to deliver and
the customer will accept all or part of the canceled order over an extended
period of time at reduced unit prices.
9
<PAGE>
In previous years, particularly those in which the disk drive industry was
experiencing overcapacity and intense price competition conditions, certain of
the Company's customers delayed shipment dates and requested extended payment
terms and price concessions. It is possible that these circumstances could
reoccur in future periods which could adversely offset the Company's revenues
and profitability. Further, as a result of the foregoing factors, the Company's
backlog may not be indicative of product shipments in any future period.
EMPLOYEES
As of September 28, 1996, the Company had approximately 6,400 employees of
whom approximately 950 are located in California, approximately 5,200 are
located in Asia and approximately 250 are located in Ireland. The Company's
employees located in Korea are represented by a labor union, and the Company's
Korean operations have, from time to time in past years, been affected by labor
disruptions and slow downs. To meet planned fiscal 1997 production requirements,
the Company will be expanding its Malaysian, Korean and China factories, as well
as its established subcontractors. Also, additional factory expansion in Asia
for assembly capacity is anticipated during the second half of fiscal 1997.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company regards elements of its manufacturing processes, product
designs, and equipment as proprietary and seeks to protect its proprietary
rights through a combination of employee and third party non-disclosure
agreements, internal procedures and patent protection. The Company has been
issued a number of United States Patents and has additional patent applications
pending. There is no assurance that patents will be issued with respect to such
applications or that any patents issued to the Company will protect the
Company's competitive position. The Company believes its competitive position is
more dependent on the technological know-how and creative skills of its
personnel than on patent rights.
The Company and IBM hold cross licenses with respect to certain patents held
by each of them. Such cross licenses do not include any patents filed by IBM
after January 1, 1991, nor any patents filed by the Company after July 1, 1991.
While the Company has had discussions with IBM regarding extensions of the
existing licenses, there can be no guarantee that such an extension will be
negotiated.
Under an agreement (the "Hutchinson Agreement") with Hutchinson, the Company
and Hutchinson hold cross licenses with respect to certain patents held by each
of them concerning suspension assemblies to make, use and sell such products.
The Company's purpose of entering into the Hutchinson Agreement was to avoid
possible future infringements, thereby reducing the prospects for disputes and
litigation. See also "Sources of Supply."
In connection with the sale of its Tape Head business unit to Seagate in
December 1994, the Company and Seagate have entered into a broad cross license
with respect to certain patents held by each of them.
The Company believes that its success depends on the innovative skills and
technological competence of its employees and upon proper protection of its
intellectual properties. The Company has, from time to time, been notified of
claims that it may be infringing patents owned by others. If it appears
necessary or desirable, the Company may seek licenses under patents which it is
allegedly infringing. Although patent holders commonly offer such licenses, no
assurance can be given that licenses will be offered or that the terms of any
offered licenses will be acceptable to the Company. The failure to obtain a key
patent license from a third party could cause the Company to incur substantial
liabilities and/or to suspend the manufacture of the products utilizing the
patented invention.
10
<PAGE>
ENVIRONMENTAL REGULATIONS AND WATER SUPPLY RESTRICTIONS
The Company uses certain hazardous chemicals in its manufacturing process
and is subject to a variety of environmental and land use regulations related to
the use, storage and disposal of such chemicals and the conduct of its
manufacturing operations. The State of California "Permit by Rule" legislation
requires the Company to obtain permits for any treatment or transportation of
materials considered to be hazardous wastes. Although the Company believes it
will receive the necessary permits prior to the time required by this
legislation, there is no assurance that such permits will be issued in a timely
manner or at all. A failure by the Company to comply with present or future
regulations could subject it to liability or result in production suspension or
delay. In addition, environmental or land use regulations could restrict the
Company's ability to expand its current production facilities or establish
additional facilities in other locations, or could require the Company to
acquire costly equipment, or to incur other significant expenses for compliance
with environmental regulations or to clean up prior discharges. The Company,
which is subject to water use regulations, uses a significant amount of water in
its manufacturing process. Although to date the Company has been able to obtain
sufficient water supplies without significantly increased costs, stricter water
use regulations may be mandated and additional expenditures for water
reclamation and conservation may be required.
The Company has been identified as a potentially responsible party at a
hazardous waste facility operated by the Omega Chemical Company in Whittier,
California. Omega Chemical was employed by the Company for purposes of waste
chemical disposal from 1987 to 1990 and was subsequently cited for stockpiling
waste chemicals and for allowing leaking containers to contaminate their site.
Omega has declared bankruptcy and a cleanup order was issued to the Company
along with 56 other customers of Omega. The Company's share of the clean up
totaled approximately $16,000 during fiscal 1995 and $1,000 during fiscal 1996
and is expected to be approximately $25,000 during fiscal 1997. Phase I & II of
the clean up have now been completed and a site closure plan is being prepared
for submission to the U.S. Environmental Protection Agency ("EPA"). While the
U.S. EPA cannot predict how they will respond to the closure plan, it is
expected that site closure should be completed within the next two years.
On July 13, 1994, the California Regional Water Quality Control Board
("CRWQCB") issued a clean up and abatement order to the Company concerning
property previously used and owned by the Company on Ward Drive in Goleta,
California. As a result of the order, the Company has been required to carry out
an environmental study to determine the extent of contamination related to
chemicals used by the Company at this site. This study involved taking a number
of soil samples and sinking several test wells to test the ground water and
monitor the water's condition over a twelve month period. The soil sample work
is complete and showed no metal or volatile organic compound ("VOC")
contamination. Ground water samples showed low levels of VOC contamination.
These contaminants have either remained constant or declined in concentration
over the past twelve month period. The CRWQCB has extended the monitoring
requirements to an adjacent site and it is anticipated that they will require
the Company to continue monitoring for a further twelve months. At the end of
the study the CRWQCB will assess the need, if any, for further investigation or
cleanup and may issue another order at that time.
SEASONALITY
Management believes that the Company's revenues are cyclical rather than
seasonal. See "Industry" for further discussion.
11
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth information as to the name, age, and
office(s) held by each executive officer of the Company as of December 16, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION OR OFFICE
- ---------------------------- --- ---------------------------------------------------------
<S> <C> <C>
Craig D. Crisman............ 55 Chairman of the Board and Chief Executive Officer
Peter T. Altavilla.......... 43 Corporate Controller and Secretary
</TABLE>
Craig D. Crisman became an employee of the Company on August 1, 1995. Prior
to that time, since 1981, he was a member in the consulting firm of Grisanti,
Galef & Goldress, Inc. ("GG&G"). GG&G was engaged by the Company on August 1,
1994, to provide crisis management and turnaround services to the Company. The
turnaround engagement was determined to have been successfully completed on July
27, 1995. Mr. Crisman was elected Chief Executive Officer and a director of the
Company on August 1, 1994. He was elected Chairman of the Board on November 3,
1995. During the five years preceding his appointment as Chief Executive Officer
and a director of the Company, Mr. Crisman was a partner of GG&G. In that
capacity he had been engaged, as a crisis management consultant, in business
turnaround assignments involving a number of different enterprises in various
industries.
Peter T. Altavilla has been employed by the Company since 1987. He served as
Assistant Controller until August 1, 1994, when he was elected to his present
position as Corporate Controller. Mr. Altavilla was elected Secretary on
February 9, 1996.
ITEM 2. PROPERTIES
Certain information concerning the Company's principal properties at
September 28, 1996 is set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
- ------------------------------------- ------------------------- --------------------------- ----------- -----------
<S> <C> <C> <C> <C>
Goleta (Santa Barbara), California... Headquarters, office, Marketing and 217,000 Owned
plant and warehouse manufacturing, research and
engineering
San Jose, California................. Office Customer support 1,300 Leased
Penang, Malaysia..................... Office, plant and Manufacturing 208,000 Owned*
warehouse
Chung Ju, Korea...................... Office, plant and Manufacturing 293,000 Owned
warehouse
Republic of Singapore................ Office Customer support 6,000 Leased
Beijing, China....................... Office, plant and Manufacturing 24,000 Leased
warehouse
Dublin, Ireland...................... Office, plant and Manufacturing 40,000 Owned
warehouse
</TABLE>
- ------------------------
* Property held as collateral for Malaysian revolving credit facility. See Note
6 to the Notes to Consolidated Financial Statements under Item 8.
The Company owns a building in Dassel, Minnesota which is leased by the
Company to the acquiror of a subsidiary which was previously sold by the
Company.
One facility in Chung Ju, Korea, comprising 93,000 square feet, is being
offered for sale.
The Company believes expansion of its existing manufacturing facilities
and/or the addition of new production facilities will be required to support
customer requirements during the second half of fiscal 1997.
12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
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 the U.S. District Court for the
Central District of California. Settlement of the suit was subject to the terms
of a definitive agreement which was submitted to the court for preliminary
approval during December, 1994. On May 31, 1995, the Court entered 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.
Under the terms of the settlement, the Company was not required to make any cash
payments but was required to issue shares of its common stock having an
aggregate value of $1.25 million, which was charged to operations in fiscal
1994. The stock, along with $2.75 million from the Company's insurance carrier,
was distributed, after court approval was received on September 23, 1996, 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.
The Company is not a party, nor are its properties subject to, any material
pending legal proceedings other than ordinary routine litigation incidental to
the Company's business and the matters described above.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
13
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the New York Stock Exchange under
the symbol "APM." The following table sets forth for the periods indicated the
high and low sale prices for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
Fiscal year ending September 30, 1995
First Quarter......................................................... $ 4- 3/8 $ 2- 1/4
Second Quarter........................................................ 3- 7/8 2- 1/2
Third Quarter......................................................... 7 2- 5/8
Fourth Quarter........................................................ 18- 3/8 7- 1/8
Fiscal year ending September 28, 1996
First Quarter......................................................... $ 19 $ 12- 1/8
Second Quarter........................................................ 19- 1/8 13- 3/4
Third Quarter......................................................... 21- 3/4 9- 1/2
Fourth Quarter........................................................ 18- 1/4 8- 1/4
</TABLE>
At December 16, 1996, there were approximately 1,465 record holders of the
Company's Common Stock.
There were no cash dividends paid by the Company during the fiscal years
1996 or 1995. The Company currently intends to retain any earnings for use in
its business and does not anticipate paying cash dividends in the foreseeable
future.
14
<PAGE>
APPLIED MAGNETICS CORPORATION
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS) 1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales................................................. $ 344,754 $ 292,600 $ 275,927 $ 335,898 $ 297,864
Income (Loss) from continuing operations.................. 32,218 1,748 (52,670) (43,728) 315
Loss from discontinued operations......................... -- -- -- -- (25,422)
Net income (loss)......................................... 32,218 1,748 (52,670) (43,728) (25,107)
Net income (loss) per share:
Net income (loss) from continuing operations............ $ 1.35 $ 0.08 $ (2.39) $ (2.17) $ 0.02
Loss from discontinued operations....................... -- -- -- -- (1.53)
Net income (loss)....................................... $ 1.35 $ 0.08 $ (2.39) $ (2.17) $ (1.51)
Weighted average common and common equivalent shares
outstanding:............................................ 23,897 22,472 22,082 20,156 16,604
Order backlog............................................. $ 116,262 $ 107,466 $ 64,781 $ 77,126 $ 96,104
Year-end employment....................................... 6,401 5,478 5,531 7,259 7,407
BALANCE SHEET
Working capital (1)....................................... $ 117,882 $ (5,963) $ (36,443) $ 33,920 $ 17,823
Total assets.............................................. 359,450 246,817 220,556 278,516 263,319
Total debt................................................ 163,917 69,629 67,151 57,183 71,224
Shareholders' investment.................................. 139,699 103,592 98,433 151,095 124,399
</TABLE>
- ------------------------
(1) This balance includes borrowings outstanding under 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. The
balances for the year ended September 28, 1996 and years ended September 30,
1995, 1994, 1993 and 1992 were $45.8 million, $46.9 million, $46.1 million,
$35.2 million and $38.1 million, respectively.
15
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The Company posted a net profit of $32.2 million and $1.7 million for the years
ended September 28, 1996 and September 30, 1995, respectively, compared to a net
loss of $52.7 million for the year ended September 30, 1994. Net sales increased
17.8% in fiscal 1996 from fiscal 1995 and increased 6.0% in fiscal 1995 from
fiscal 1994. The Company's significant revenue growth and profitability during
fiscal 1996 as compared to the previous two years is attributable to numerous
factors, including increased customer demand for its thin film products,
continued timely production ramps on a number of qualified thin film programs
during the first half of fiscal 1996, successful transition to a new generation
of advanced thin film disk head products and achievement of profitable yields
during the second half of fiscal 1996. The fourth quarter of fiscal 1996 also
included revenue derived from the Company's first production volume program for
magnetoresistive ("MR") technology products. Improvements in production yields,
coupled with favorable customer demand for the Company's advanced thin film disk
head and MR disk head products, position the Company to meet its customers'
requirements for fiscal 1997.
MR disk head product development continues to be critical to the Company's
future growth. The Company is committed to substantial engineering, production
process and capital investments in MR. It began production volume shipments
during the fourth quarter of fiscal 1996 and expects MR technology products to
contribute to revenue and profitability during fiscal 1997. See "Products" under
Item 1.
During fiscal 1995, in response to increased customer demands that began
during fiscal 1994, 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 are 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 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 air pressure bearing surfaces, that
improved product performance.
During fiscal 1994, 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.
16
<PAGE>
ANNUAL RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
-------------------------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 30,
(IN THOUSANDS) 1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Thin Film Disk Head Products
Net Sales....................................................... $ 262,027 $ 201,380 $ 121,967
Percentage of Total............................................. 76.0% 68.8% 44.2%
Ferrite Disk Head Products
Net Sales....................................................... 41,597 21,801 110,110
Percentage of Total............................................. 12.1% 7.5% 39.9%
Other Disk Head Products
Net Sales....................................................... 41,130 69,419 43,850
Percentage of Total............................................. 11.9% 23.7% 15.9%
------------- ------------- -------------
Total Net Sales..................................................... $ 344,754 $ 292,600 $ 275,927
100.0% 100.0% 100.0%
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
NET SALES: Net sales increased 17.8% in fiscal 1996 from fiscal 1995. Net
sales of thin film disk head products increased as a percent of total net sales
to 76.0% in 1996 from 68.8% in 1995. In absolute terms, thin film net sales
increased 30.1% in 1996 from 1995. The continued growth of thin film disk heads
during 1996 was attributable primarily to an increase in head stack assembly
("HSA") shipments which included new advanced thin film technology products
shipped during the last half of fiscal 1996. Ferrite disk head net sales, which
represented 12.1% of total net sales in 1996, increased in absolute terms, 90.8%
in 1996 from 1995, as one customer completed its program requirements.
Substantially all ferrite orders were shipped during the fourth quarter of
fiscal 1996. Thin film production has replaced ferrite business. Other net sales
included disk head products, for which the Company only performs final assembly
of HSAs using thin film and MR disk heads purchased from other manufacturers,
the Company's internally manufactured MR disk heads and tape head products.
Other net sales decreased, in absolute terms, 40.8% in 1996 from 1995, primarily
due to a decrease in net sales for final assembly of thin film and MR HSAs and a
decrease in tape head product net sales, partially offset by $6.1 million in net
sales of the Company's prototype programs and its first volume production
program for MR technology products.
Net sales increased 6.0% in fiscal 1995 from fiscal 1994. Net sales of thin
film disk head products increased as a percent of total net sales to 68.8% in
1995 from 44.2% in 1994. In absolute terms, thin film net sales increased 65.1%
in 1995 from 1994. 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 for more mature products. Net sales
of ferrite disk head products decreased 80.2% in fiscal 1995 from fiscal 1994.
The Company attributed the decline to the market shift to thin film and MR 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. As a result, the Company committed its engineering and production
resources to further advancement of thin film inductive and MR technology. Other
net sales increased 58.3% in fiscal 1995 from fiscal 1994 as a result of
increased assembly of HSAs, using thin film and MR disk heads purchased from
other manufacturers, offset by a decrease in tape head products. Tape head
products were produced by the Company's Tape Head business unit which was sold
to Seagate Technology Inc., ("Seagate") in December 1994. Pursuant to the sales
agreement, the Company continued to provide certain tape-related goods and
services on an ongoing basis.
GROSS PROFIT: The gross margin increased in fiscal 1996 to 27.0% as
compared to 13.6% in fiscal 1995. The increase resulted from significantly
higher revenues and a change in product mix, that included an increase in
production of HSAs.
17
<PAGE>
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 cost reductions implemented at the end of fiscal
1994.
RESEARCH AND DEVELOPMENT: Research and development expenses ("R&D") were
$50.9 million, $33.7 million and $38.8 million for fiscal years 1996, 1995 and
1994, respectively, before a cost offset of $14.1 million in fiscal 1994. These
expenses represented 14.8%, 11.5% and 14.1% of net sales, respectively, for such
periods. The cost offset in fiscal 1994 was related primarily 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. Funding for this agreement was concluded by the end of
fiscal 1994.
R&D expenses increased by $17.2 million from fiscal 1995 to 1996 as the
Company focused on next generation thin film inductive technology and made
significant capital and engineering investments in MR production process
development.
R&D expenses decreased by $5.1 million from fiscal 1994 to 1995 as the
Company implemented cost controls at the end of fiscal 1994, in response to
significantly lower revenues and deteriorating gross margins.
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 such expenditures. The
Company did not receive any development funding from customers and strategic
partners in fiscal 1995 and 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative ("SG&A") expenses in absolute dollars were $6.5 million, $7.4
million and $17.3 million in fiscal 1996, 1995 and 1994, respectively. These
expenses represented 1.9%, 2.5% and 6.3% of net sales, respectively, for such
periods. SG&A expenses in 1996 were partially offset by a bad debt recovery of
$0.5 million, related to a final payment of a 1990 bankruptcy settlement with a
previous customer. The reduction in SG&A expenses from fiscal 1994 to 1995 was
primarily due to a cost reduction program implemented at the end of fiscal 1994,
in response to lower sales volumes.
VALUATION ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: The Company's allowance for
uncollectible accounts receivable at September 28, 1996 was $0.8 million. The
Company's allowance for uncollectible accounts receivable at September 30, 1995
was $0.7 million, which was $2.9 million less than the reserve required at
September 30, 1994. The reduction in this allowance was due to the improved
financial stability of the Company's significant customers.
During fiscal 1994, the reserve for notes receivable, (related to the sale
of the Company's two subsidiaries, Magnetic Data, Inc. and Brumko Magnetics to
Delta Bravo, Inc. ("DBI"), a privately owned company), was increased by $0.8
million as all income related to interest payments from DBI was deferred. During
fiscal 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 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. There were no special charges in fiscal
1996, 1995 and 1994.
INTEREST INCOME AND EXPENSE: Interest income was $4.2 million, $2.0 million
and $0.8 million in fiscal 1996, 1995 and 1994, respectively. Interest income
increased $2.2 million in fiscal 1996 from 1995 and increased $1.2 million in
fiscal 1995 from 1994, due to higher average cash balances. Interest expense was
$9.1 million, $4.8 million and $4.2 million in fiscal 1996, 1995 and 1994,
respectively. Interest expense
18
<PAGE>
increased $4.3 million in fiscal 1996 from 1995, primarily as a result of the
Company's March 1996 issuance of $115.0 million 7% Convertible Subordinated
Debentures due in 2006. Interest expense increased $0.6 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.
OTHER INCOME (EXPENSE): Other income of $2.0 million in fiscal 1996
included $1.3 million in final proceeds from the sale of the Company's Tape Head
business unit to Seagate. Other income in fiscal 1996 also included $0.5 million
in foreign exchange translation and transaction net gains. Other income of $6.3
million in fiscal 1995 included $4.9 million in income recognized as the Company
completed certain performance milestones in connection with the sale to Seagate.
Other income in fiscal 1995 also included $1.3 million related to sale of
tooling and excess assets. Other income (expense) for fiscal 1994 primarily
consisted of foreign exchange translation and transaction gains and losses.
PROVISION FOR INCOME TAXES: The fiscal 1996 provision for income taxes
included alternative minimum state and federal taxes and provision for foreign
income taxes. For fiscal years 1995 and 1994, 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 4 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1996, the Company's cash and cash equivalents balance
increased to $127.4 million from $48.2 million at September 30, 1995. During
fiscal 1996, the Company generated $39.7 million from operating activities,
comprised primarily of the net effect of the following: i) $32.2 million from
net income, which included $28.9 million of depreciation and amortization
expense; ii) increase in the accounts receivable balance of $6.8 million as a
result of the increase in net sales in September 1996 over September 1995, and
due to discontinuance of accelerated payment terms by the Company's customers
beginning in fiscal 1996; iii) increase in inventories of $3.3 million as the
Company began production ramp up of advanced thin film technology and MR
products and iv) decrease in the accounts payable balance of $12.2 million,
primarily due to reduced business with one supplier that previously had provided
extended payment terms and, to a lesser extent, due to reduction in direct
material purchases. Increased thin film and MR disk head inventories more than
offset the decrease in ferrite disk head inventories, which typically have
relatively higher purchased material content.
During fiscal 1996, cash of $16.9 million was generated from the following
investing activities: i) the sale of a building in Chunchon, Korea for $3.8
million; ii) repayment of notes receivable of $1.8 million; and (iii) $11.3
million from the sale and leaseback of fixed assets.
During fiscal 1996, net cash of $92.7 million was also generated from
financing activities, consisting primarily of net proceeds from the issuance of
$115.0 Convertible Subordinated Debentures in March 1996. The Company used cash
to pay off $17.5 million of line of credit debt and made $69.9 million in
capital expenditures, primarily related to increasing thin film and MR disk
production capacity and MR disk head technology development. Additionally, the
Company entered into $40.0 million of operating leases for machinery and
equipment, with terms of up to five years.
In March 1996, the Company completed the sale, in an offshore offering and
in a concurrent private placement in the United States, of $115.0 million of
7.0% Convertible Subordinated Debentures due in 2006. Net proceeds of $110.7
million were used to retire a $10.0 million line of credit maturing March 29,
1996. As a result, total debt at September 28, 1996, including notes payable,
was $163.9 million, a net increase of $94.3 million from the balance outstanding
at September 30, 1995. During fiscal 1996, the Company also drew down its
secured Malaysian credit facility to $45.8 million from a bank in Malaysia. The
facility is callable on demand, has no termination date, is guaranteed by the
Company, is secured by the Company's real property holdings in Malaysia and is
subject to certain covenants which preclude the Company from granting liens and
security interests in other assets in Malaysia. Should all or any significant
19
<PAGE>
portion of the Malaysian credit facility become unavailable for any reason, the
Company would need to pursue alternative financing sources. Additional
borrowings available under this facility were approximately $2.0 million at
September 28, 1996.
The Company has 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 28, 1996,
there were no borrowings outstanding. The balance available under this line of
credit was approximately $18.3 million at September 28, 1996 and the Company was
in compliance with all financial covenants. The line of credit expires January
11, 1998.
In 1997, the Company plans approximately $135.0 million in capital
expenditures, including equipment to be obtained through operating leases,
primarily to continue to improve thin film production processes and continue
development and production of MR technologies and products and increase overall
production capacity.
The Company's accounts receivable and inventory balances are heavily
concentrated with a small number of customers. Sales to Western Digital
Corporation, NEC Corporation, Seagate and Quantum Corporation accounted for
44.0%, 20.1%, 13.4% and 10.3%, respectively, of the Company's sales in 1996.
Further consolidation of the disk drive industry may reduce the number of disk
drive programs requiring the Company's products and may increase credit risks
for the Company due to the concentration of its customers.
In fiscal 1995, Conner agreed to be acquired by Seagate. The Company
experienced a significant decrease in the sales volumes to Conner in fiscal
1996, which was replaced by increased business with Western Digital. 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. 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
was a decrease of $0.3 million in cash for fiscal 1996 and an increase $0.1
million in cash for fiscal 1995.
During fiscal 1997, the Company believes it will have sufficient cash flows
from operations and equipment lease financing alternatives to meet its operating
and capital expenditure requirements. 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.
FORWARD-LOOKING INFORMATION
Certain statements or assumptions in Management's Discussion and Analysis
contain or are based on "forward-looking" information (as defined in the Private
Securities Litigation and Reform Act of 1995) that involves risk and
uncertainties inherent in the Registrant's business. Actual outcomes are
dependent upon the Registrant's successful performance of internal plans, its
ability to control inventory levels, customer changes in short range and long
range plans, domestic and international competition in the Registrant's product
areas, successful completion of expansion within current cost estimates,
continued acceptance of existing products and the development and acceptance of
new products, performance issues
20
<PAGE>
with key customers, risks related to international transactions and hedging
strategies and general economic risks and uncertainties.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed of" ("SFAS 121"). SFAS
121 requires an impaired property to be written down to fair value. This
Statement will become effective for financial statements of the Company in the
first quarter of fiscal 1997. Management believes that the adoption of SFAS 121
will not have a material impact on the Company's financial condition and results
of operations when it is adopted.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock compensation plans, but allows for the
continuation of the intrinsic value based method of accounting to measure
compensation cost prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). For companies electing
not to change their accounting, SFAS 123 requires pro-forma disclosures of
earnings and earnings per share as if the change in accounting provision of SFAS
123 had been adopted. The Company has elected to continue to utilize the
accounting method prescribed by APB 25 and adopt the disclosure requirements of
SFAS 123 when required in fiscal 1997. As a result, SFAS 123 will have no effect
on the financial condition or results of operations of the Company.
21
<PAGE>
APPLIED MAGNETICS CORPORATION
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Public Accountants (Arthur Andersen LLP)............................................. F-2
Consolidated Statements of Operations for the years ended September 28, 1996, September 30, 1995 and
September 30, 1994....................................................................................... F-3
Consolidated Balance Sheets as of September 28, 1996 and September 30, 1995................................ F-4
Consolidated Statements of Cash Flows for the years ended September 28, 1996, September 30, 1995 and
September 30, 1994....................................................................................... F-5
Consolidated Statements of Shareholders' Investment for the years ended September 28, 1996, September 30,
1995 and September 30, 1994.............................................................................. 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
28, 1996 and September 30, 1995, and the related consolidated statements of
operations, shareholders' investment and cash flows for each of the three years
in the period ended September 28, 1996. 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 28, 1996 and September
30, 1995, and the results of their operations and their cash flows for each of
the three years in the period ended September 28, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
December 12, 1996
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 28, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................................................... $ 344,754 $ 292,600 $ 275,927
Cost of sales....................................................... 251,503 252,684 281,997
------------- ------------- -------------
Gross profit (loss)............................................... 93,251 39,916 (6,070)
------------- ------------- -------------
Research and development expenses................................... (50,867) (33,655) (24,682)
Selling, general and administrative expenses........................ (6,533) (7,434) (17,267)
Interest income..................................................... 4,228 1,996 825
Interest expense.................................................... (9,056) (4,826) (4,216)
Other income (expense), net......................................... 2,047 6,335 (160)
------------- ------------- -------------
Income (Loss) before income taxes................................. 33,070 2,332 (51,570)
Provision for income taxes.......................................... 852 584 1,100
------------- ------------- -------------
Net income (loss)................................................. $ 32,218 $ 1,748 $ (52,670)
------------- ------------- -------------
------------- ------------- -------------
Net income (loss) per share:...................................... $ 1.35 $ 0.08 $ (2.39)
------------- ------------- -------------
------------- ------------- -------------
Weighted average common and common equivalent shares
outstanding:.................................................... 23,897,168 22,472,208 22,081,751
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these consolidated statements.
F-3
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
ASSETS
<TABLE>
<CAPTION>
AS OF
----------------------------
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and equivalents.............................................................. $ 127,400 $ 48,236
Accounts receivable, less allowances of $766 in 1996 and $652 in 1995............. 43,403 36,571
Inventories....................................................................... 35,980 32,727
Prepaid expenses and other........................................................ 10,122 10,411
------------- -------------
216,905 127,945
------------- -------------
Property, plant and equipment, at cost:
Land.............................................................................. 2,556 2,556
Buildings......................................................................... 72,284 67,314
Manufacturing equipment........................................................... 155,696 146,706
Other equipment and leasehold improvements........................................ 28,268 29,410
Construction in progress.......................................................... 30,052 6,967
------------- -------------
288,856 252,953
Less-accumulated depreciation and amortization.................................... (155,134) (148,636)
------------- -------------
133,722 104,317
------------- -------------
Other assets........................................................................ 8,823 14,555
------------- -------------
$ 359,450 $ 246,817
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt................................................. $ 1,865 $ 12,004
Bank notes payable................................................................ 45,789 54,371
Accounts payable.................................................................. 32,314 44,535
Accrued payroll and benefits...................................................... 11,001 9,361
Other current liabilities......................................................... 8,054 13,637
------------- -------------
99,023 133,908
------------- -------------
Long-term debt, net................................................................. 116,263 3,254
------------- -------------
Other liabilities................................................................... 4,465 6,063
------------- -------------
Shareholders' Investment:
Preferred stock, $.10 par value, authorized 5,000,000 shares, none issued and
outstanding..................................................................... -- --
Common stock, $.10 par value, authorized 40,000,000 shares, issued 23,283,047
shares at September 28, 1996 and 22,619,205 shares at September 30, 1995........ 2,328 2,262
Paid-in capital................................................................... 185,378 181,191
Retained deficit.................................................................. (46,813) (79,031)
------------- -------------
140,893 104,422
Treasury stock, at cost (116,995 shares at September 28, 1996 and 96,603 shares at
September 30, 1995)............................................................... (1,194) (830)
------------- -------------
139,699 103,592
------------- -------------
$ 359,450 $ 246,817
------------- -------------
------------- -------------
</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 28, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)................................................... $ 32,218 $ 1,748 $ (52,670)
Adjustments to derive cash flows:
Depreciation and amortization..................................... 28,891 27,600 23,643
Gain on sale of business and assets............................... -- (6,109) --
Amortization of unearned restricted stock compensation, net....... -- 721 (145)
Changes in assets and liabilities:
Accounts receivable............................................. (6,832) (17,712) 19,153
Other receivables............................................... -- -- 5,170
Inventories..................................................... (3,253) (3,772) 10,906
Prepaid expenses and other...................................... (750) (3,074) (305)
Accounts payable................................................ (12,221) 23,168 (5,955)
Accrued payroll and benefits.................................... 1,705 181 (2,739)
Other assets and liabilities.................................... (86) (3,855) (9,998)
------------- ------------- -------------
Net cash flows provided by (used in) operating activities......... 39,672 18,896 (12,940)
------------- ------------- -------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment.......................... (69,900) (27,676) (31,452)
Proceeds from sale of businesses and fixed assets, net.............. 15,122 29,539 3,516
Notes receivable.................................................... 1,803 2,048 2,038
------------- ------------- -------------
Net cash flows provided by (used in) investing activities......... (52,975) 3,911 (25,898)
------------- ------------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible subordinated debentures....... 115,000 -- --
Proceeds from issuance of debt...................................... 144,214 160,868 142,767
Proceeds from issuance of capital lease obligations................. -- 5,142 464
Repayment of debt................................................... (164,787) (163,705) (134,402)
Payment of debt issuance costs...................................... (4,274) -- --
Proceeds from stock options exercised, net.......................... 2,574 2,270 153
------------- ------------- -------------
Net cash flows provided by financing activities................... 92,727 4,575 8,982
------------- ------------- -------------
Effect of exchange rate changes on cash and equivalents............. (260) 93 1,246
------------- ------------- -------------
Net increase(decrease) in cash and equivalents...................... 79,164 27,475 (28,610)
Cash and equivalents at beginning of period......................... 48,236 20,761 49,371
------------- ------------- -------------
Cash and equivalents at end of period............................... $ 127,400 $ 48,236 $ 20,761
------------- ------------- -------------
------------- ------------- -------------
Supplemental Cash Flow Data:
Interest paid....................................................... $ 8,698 $ 4,827 $ 4,215
------------- ------------- -------------
------------- ------------- -------------
Income taxes paid................................................... $ 541 $ 494 $ 1,025
------------- ------------- -------------
------------- ------------- -------------
</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
NUMBER PAID-IN RETAINED NUMBER STOCK
OF SHARES AMOUNT CAPITAL DEFICIT OF SHARES AMOUNT COMPENSATION
------------ --------- ---------- ---------- ----------- --------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1993..... 22,153,742 $ 2,215 $ 178,533 $ (28,109) 79,328 $ (736) $ (808)
Stock options exercised....... 26,087 3 226 -- -- -- --
Purchase of treasury stock,
net......................... -- -- -- -- 13,181 (76) --
Restricted stock issuance,
net......................... (18,369) (2) (278) -- -- -- 280
Amortization of unearned
restricted stock
compensation, net........... -- -- -- -- -- -- (145)
Net loss...................... -- -- -- (52,670) -- -- --
------------ --------- ---------- ---------- ----------- --------- -----
Balance, September 30, 1994..... 22,161,460 2,216 178,481 (80,779) 92,509 (812) (673)
Stock options exercised....... 399,773 40 2,668 -- -- -- --
Purchase of treasury stock,
net......................... -- -- -- -- 4,094 (18) --
Restricted stock issuance,
net......................... 57,972 6 42 -- -- -- (48)
Amortization of unearned
restricted stock
compensation, net........... -- -- -- -- -- -- 721
Net income.................... -- -- -- 1,748 -- -- --
------------ --------- ---------- ---------- ----------- --------- -----
Balance, September 30, 1995..... 22,619,205 2,262 181,191 (79,031) 96,603 (830) --
Stock options exercised....... 582,772 58 2,945 -- -- -- --
Purchase of treasury stock,
net......................... -- -- -- -- 20,392 (364) --
Litigation settlement......... 81,070 8 1,242 -- -- -- --
Net income.................... -- -- -- 32,218 -- -- --
------------ --------- ---------- ---------- ----------- --------- -----
Balance, September 28, 1996..... 23,283,047 $ 2,328 $ 185,378 $ (46,813) 116,995 $ (1,194) $ --
------------ --------- ---------- ---------- ----------- --------- -----
------------ --------- ---------- ---------- ----------- --------- -----
<CAPTION>
SHAREHOLDERS'
INVESTMENT
-------------
<S> <C>
Balance, September 30, 1993..... $ 151,095
Stock options exercised....... 229
Purchase of treasury stock,
net......................... (76)
Restricted stock issuance,
net......................... --
Amortization of unearned
restricted stock
compensation, net........... (145)
Net loss...................... (52,670)
-------------
Balance, September 30, 1994..... 98,433
Stock options exercised....... 2,708
Purchase of treasury stock,
net......................... (18)
Restricted stock issuance,
net......................... --
Amortization of unearned
restricted stock
compensation, net........... 721
Net income.................... 1,748
-------------
Balance, September 30, 1995..... 103,592
Stock options exercised....... 3,003
Purchase of treasury stock,
net......................... (364)
Litigation settlement......... 1,250
Net income.................... 32,218
-------------
Balance, September 28, 1996..... $ 139,699
-------------
-------------
</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. NATURE OF THE BUSINESS
Applied Magnetics Corporation (the "Company") was incorporated in California
in 1957 and was reincorporated in Delaware in 1987. The Company manufactures
advanced inductive thin film ("thin film") disk head products, magnetoresistive
("MR") disk head products and assembles ferrite metal-in-gap ("ferrite") disk
head products, in each case, primarily to supply to manufacturers of 3.5 inch
hard disk drives.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies is presented to assist the
reader in understanding and evaluating the consolidated financial statements.
These policies are in conformity with generally accepted accounting principles.
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of Applied Magnetics Corporation and its subsidiaries. All
significant intercompany accounts and transactions have been eliminated. Certain
1994 and 1995 accounts have been reclassified to conform with the 1996
presentation.
USE OF ESTIMATES: The preparation of financial statements in conformity
with general 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.
Management believes that these estimates and assumptions provide a reasonable
basis for the fair presentation of the consolidated financial statements.
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 gains of $0.5 million in 1996 and losses
of $0.2 million in 1995 and 1994 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. As a
result, effects of currency rate fluctuations can affect results of operations.
Fluctuations may also have a significant effect on reported cash balances.
Malaysian debt maturities are not currently hedged, as the credit facilities are
held in U.S. dollars. As a result, there is no current foreign translation or
transaction exposure, associated with the Malaysian debt.
DEPRECIATION AND AMORTIZATION POLICIES: Plant and equipment are accounted
for on a historical cost basis and 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 average useful life................................ 15-16 Years
Manufacturing equipment...................................... 2 - 5 Years
Other equipment.............................................. 1 - 5 Years
Leasehold improvements....................................... Term of Lease
</TABLE>
F-7
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Depreciation and amortization expense from continuing operations amounted to
$28.9 million, $27.6 million and $23.6 million in 1996, 1995 and 1994,
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 $9.0 million, $6.4 million and $8.7 million in 1996, 1995 and 1994,
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.
CASH EQUIVALENTS: Cash equivalents consist primarily of money market
instruments maturing within 90 days and are carried at cost, which approximates
market. Cash equivalents were $120.9 million at September 28, 1996 and $43.6
million at September 30, 1995. The fair value of cash equivalents at September
28, 1996 approximates its carrying value.
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.
The components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
Purchased parts and manufacturing supplies...................... $ 10,957 $ 13,036
Work in process................................................. 21,601 17,589
Finished goods.................................................. 3,422 2,102
------------- -------------
$ 35,980 $ 32,727
------------- -------------
------------- -------------
</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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair value has been
determined by the Company using available market information and appropriate
valuation methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange.
The fair value of the Company's debt instruments at September 28, 1996
approximates its carrying value.
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE: Net income 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.
F-8
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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" ("SFAS 109"). See Note 4.
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 5.
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.
RECENT ACCOUNTING PRONOUNCEMENTS: In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of" ("SFAS 121"). SFAS 121 requires an impaired property to be written
down to fair value. This statement will become effective for financial
statements of the Company in the first quarter of fiscal 1997. Management
believes that the adoption of SFAS 121 will not have a material impact on the
Company's financial condition and results of operations when it is adopted.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for employee stock compensation plans, but allows for the
continuation of the intrinsic value based method of accounting to measure
compensation cost prescribed by Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25"). For companies electing
not to change their accounting, SFAS 123 requires pro-forma disclosures of
earnings and earnings per share as if the change in accounting provision of SFAS
123 had been adopted. The Company has elected to continue to utilize the
accounting method prescribed by APB 25 and adopt the disclosure requirements of
SFAS 123 when required in fiscal 1997. As a result, SFAS 123 will have no effect
on the financial condition or results of operations of the Company.
F-9
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. 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>
FOR THE YEARS ENDED:
-------------------------------------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 30,
(AS A PERCENTAGE OF SALES) 1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Western Digital................................. 44% 9% 0%
NEC............................................. 20% 9% 0%
Seagate......................................... 13% 41% 53%
Quantum......................................... 10% 8% 10%
All Others...................................... 13% 33% 37%
--- --- ---
Total........................................... 100% 100% 100%
--- --- ---
--- --- ---
</TABLE>
Export sales are made by the United States operations to the following
geographic locations (in thousands):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED:
-------------------------------------------
SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Europe.......................................... $ 219 $ 159 $ 1,523
Asia............................................ 322,405 231,781 35,082
North America................................... -- -- 67
------------- ------------- -------------
$ 322,624 $ 231,940 $ 36,672
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-10
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. SEGMENTS OF BUSINESS (CONTINUED)
Information regarding the Company's domestic and foreign operations is as
follows (in thousands):
<TABLE>
<CAPTION>
UNITED
STATES FOREIGN TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
1996
Net sales................................................ $ 329,992 $ 14,762 $ 344,754
---------- ---------- ----------
---------- ---------- ----------
Intercompany sales....................................... $ 207,023 $ 304,527 $ --
---------- ---------- ----------
---------- ---------- ----------
Operating profit......................................... $ 9,887 $ 28,011 $ 37,898
Interest expense, net.................................... (4,828)
----------
Income before income taxes............................. $ 33,070
----------
----------
Identifiable assets...................................... $ 246,067 $ 113,383 $ 359,450
---------- ---------- ----------
---------- ---------- ----------
1995
Net sales................................................ $ 271,947 $ 20,653 $ 292,600
---------- ---------- ----------
---------- ---------- ----------
Intercompany sales....................................... $ 138,230 $ 213,620 $ --
---------- ---------- ----------
---------- ---------- ----------
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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
A significant percentage of the Company's customers, located in the U.S.,
have production facilities primarily in Asia that receive the Company's
products. The majority of the accounts receivable balance is from three of these
customers.
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 transfer of sales invoicing
responsibility to the U.S. operations.
Results of operations for United States-based operations includes all
research and development expenditures, thereby causing an unfavorable comparison
with the operating results of foreign-based operations.
United States income for 1994 includes research and development cost offsets
relating to the license and technology development agreement with Hitachi
Metals, Ltd. ("HML"). See Note 9.
F-11
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES
The provision for income taxes for the following fiscal years consist of (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal Income Taxes
Current............................................................ $ 527 $ -- $ --
Deferred........................................................... -- -- --
State Income Taxes
Current............................................................ 181 92 211
Deferred........................................................... -- -- --
Foreign income taxes................................................. 144 492 889
--------- --------- ---------
$ 852 $ 584 $ 1,100
--------- --------- ---------
--------- --------- ---------
</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>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
Income tax at the United States federal income tax rate......................... $ 11,575 $ 816 $ (18,050)
State income taxes, net of federal income tax benefit........................... 118 59 137
Foreign income taxed at lower rate.............................................. (8,485) (2,217) (550)
Temporary differences/net operating losses (benefited) not benefited............ (2,356) 1,926 19,563
Other, net...................................................................... -- -- --
--------- --------- ----------
$ 852 $ 584 $ 1,100
--------- --------- ----------
--------- --------- ----------
</TABLE>
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 28, 1996 and September 30, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Inventory reserves.................................................... $ 4,414 $ 1,348
Restructuring & other reserves........................................ 7,984 9,594
Net operating loss carryforwards...................................... 23,005 32,536
Foreign tax & general business credit carryforwards................... 6,589 5,442
Unrepatriated foreign earnings........................................ (4,550) --
Depreciation.......................................................... 1,703 (4,970)
Other, net............................................................ (336) 2,783
---------- ----------
Subtotal............................................................ 38,809 46,733
Valuation allowance................................................... (38,809) (46,733)
---------- ----------
Total net deferred tax asset (liability).............................. $ -- $ --
---------- ----------
---------- ----------
</TABLE>
F-12
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
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 28, 1996, the Company had total deferred tax liabilities of $4.9
million and deferred tax assets of $43.7 million. The Company recorded a
valuation allowance in the amount of $38.8 million against the amount by which
deferred tax assets exceed deferred tax liabilities. The valuation reserve at
September 28, 1996 has been provided due to the uncertainty of the amount of
future domestic taxable income.
Consolidated retained deficit at September 28, 1996 included approximately
$61.8 million of accumulated earnings of foreign operations. A deferred tax
liability of $4.5 million has been recognized as of September 28, 1996. This
liability has been recognized due to the Company's reduction of certain foreign
manufacturing operations which may result in the repatriation of foreign
earnings to the United States.
The Company had federal net operating loss carryforwards available for tax
purposes of approximately $62.7 million. To the extent not used, the net
operating loss carryforward expires in varying amounts beginning in 2005.
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS
The Company adopted stock option plans in 1988, 1992 and 1994. Incentive or
nonqualified stock options may be granted under the 1992 and 1994 plans while
the 1988 plan is limited to nonqualified 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 NUMBER AVAILABLE
PER SHARE OF SHARES FOR GRANT
---------------- ---------- -----------
<S> <C> <C> <C>
Balance at September 30, 1993........................................ $ 5.63 - 13.63 1,122,086 178,329
Increase in shares available for grant............................. -- 1,000,000
Grants............................................................. $ 4.25 - 5.88 1,107,000 (1,107,000)
Exercised.......................................................... $ 6.00 - 6.38 (2,625) --
Canceled........................................................... $ 5.00 - 12.50 (672,959) 672,959
---------- -----------
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) --
Canceled........................................................... $ 2.38 - 13.63 (861,520) 861,520
---------- -----------
Balance at September 30, 1995........................................ $ 2.38 - 13.63 1,444,201 515,353
---------- -----------
---------- -----------
Increase in shares available for grant............................. -- 1,100,000
Grants............................................................. $12.88 - 20.88 1,034,000 (1,034,000)
Exercised.......................................................... $ 2.38 - 13.63 (468,288) --
Canceled........................................................... $ 2.38 - 15.63 (57,711) 57,711
---------- -----------
Balance at September 28, 1996........................................ $ 2.88 - 20.88 1,952,202 639,064
---------- -----------
---------- -----------
</TABLE>
F-13
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
At September 28, 1996 and September 30, 1995 and 1994, there were
exercisable options outstanding under the option plans to purchase an aggregate
of 307,356, 161,889 and 812,002 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 28, 1996, no options to
purchase Common Stock were available for future issuance under these two plans,
and nonqualified options of 29,232 shares were outstanding at prices from $1.90
to $2.04 per share, of which 26,838 shares were exercisable. During 1996,
options for 6,804 shares were exercised at prices from $1.93 to $2.02 per share
and no options 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 28, 1996, 25,369 shares were available for future
issuance under the 1989 plan and 28,687 shares remain subject to restrictions.
During 1996, no shares were issued, 3,034 shares were canceled and restrictions
were removed from 64,000 shares under the 1989 plan. Compensation expense
recorded under the 1989 plan during 1995 and 1994 was approximately $0.7 million
and $0.2 million, respectively. No compensation expense was recorded during
1996.
In 1994, the Company adopted a non-qualified stock option plan for
non-employee directors (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 28, 1996, the Company had reserved 100,000 shares of its $.10 par
value Common Stock for future issuance under this plan, options for 50,000
shares were outstanding at prices from $3.00 to $17.88 per share, of which 9,996
shares were exercisable. During 1996, no options were exercised or canceled
under this plan.
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. During 1996,
options for 10,714 shares were exercised.
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
F-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS (CONTINUED)
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 28, 1996 or September 30, 1995. 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.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
<S> <C> <C>
7% Convertible Subordinated Debentures, due March 15, 2006.......................... $ 115,000 $ --
Secured revolving credit agreement, interest rate of 10.50% as of September 30,
1995.............................................................................. -- 7,500
Secured revolving credit agreement due March 1996, interest rate of 8.75% as of
September 30, 1995................................................................ -- 10,000
Secured Malaysian bank credit facility, interest rates from 6.95% to 7.25% as of
September 28, 1996................................................................ 45,789 46,871
Mortgage payable, interest rate of 8.50% as of September 28,1996.................... 106 126
Capital leases...................................................................... 3,022 5,132
------------- -------------
163,917 69,629
Less--current portion, including bank notes payable................................. 47,654 66,375
------------- -------------
$ 116,263 $ 3,254
------------- -------------
------------- -------------
</TABLE>
The aggregate principal payments of bank notes payable and long-term debt
for the years subsequent to September 28, 1996 are: 1997--$47.7 million,
1998--$1.2 million, thereafter-$115.1 million.
In March 1996, the Company completed the sale, in an offshore offering and
in a concurrent private placement in the United States, of $115.0 million of its
7.0% Convertible Subordinated Debentures (the "Convertible Debentures") due in
2006. The net proceeds were used to retire a $10.0 million line of credit
maturing March 29, 1996. The balance of the proceeds will be used for working
capital and other general corporate purposes, including capital expenditures. Of
the $115.0 million debt, $22.0 million may be converted, at any time after May
1, 1996, at a conversion price of $18.60 per share. The remaining $93.0 million
of Convertible Debentures may be converted at the same price, at any time after
March 22, 1997.
The Company has 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 and is
secured by trade receivables, inventories and certain other assets. As of
September 28, 1996, no borrowings were outstanding. The balance available for
borrowings under this line of credit was approximately $18.3 million at
September 28, 1996 and the Company was in compliance with all financial
covenants. The CIT Agreement expires January, 1998.
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company's Malaysian subsidiary has credit facilities with a Malaysian
bank which provide for up to $47.8 million in financing, 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
these facilities at September 28, 1996. The interest rates outstanding on these
loan facilities ranged from 6.95% to 7.25% at September 28, 1996 and had a
weighted average interest of 7.1%. The Company intends to continue its practice
of repaying maturities with new borrowings under these facilities.
7. ACQUISITIONS
During 1993, the Company sold its subsidiaries, Magnetic Data, Inc. and
Brumko Magnetics, which had been accounted for as a discontinued operations in
1992, to Delta Bravo, Inc. ("DBI"). A portion of the sales consideration
consisted of notes issued to the Company. DBI subsequently defaulted on several
note covenants and breached related pledge agreements with the Company. On July
17, 1996, the Company, through a foreclosure procedure, acquired the common
stock of DBI for a $2.5 million reduction in debt owed the Company by DBI. All
DBI note balances had been fully reserved by the Company in previous years and
the Company has no investment in DBI. The Company has engaged a third party
consulting firm to operate and facilitate the sale of DBI, which has been
accounted for as a discontinued operation at September 28, 1996. It is
management's intent to complete the sale of DBI during fiscal 1997. DBI's
financial position and results of operations are immaterial to the Company's
consolidated financial statements.
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 five years with renewal options in certain instances. Future
minimum lease payments under capital and operating leases as of September 28,
1996 are as follows (in thousands):
<TABLE>
<CAPTION>
LEASES
----------------------
CAPITAL OPERATING
--------- -----------
<S> <C> <C>
1997.................................................................... $ 2,063 $ 20,049
1998.................................................................... 1,208 16,156
1999.................................................................... 22 8,481
2000.................................................................... -- 5,957
2001.................................................................... -- 3,423
--------- -----------
Total minimum payments.................................................. 3,293 $ 54,066
--------- -----------
--------- -----------
Less imputed interest................................................... (271)
---------
Present value of payments under capital leases.......................... 3,022
Less current portion.................................................... 1,845
---------
Long-term lease obligations............................................. $ 1,177
---------
---------
</TABLE>
F-16
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Manufacturing and other equipment at September 28, 1996 include assets under
capitalized leases of $6.0 million with related accumulated depreciation of $3.2
million.
Total rental expense, net of sublease rental income, for the years ended
September 28, 1996 and September 30, 1995 and 1994, including items on a
month-to-month basis, was approximately $15.2 million, $10.2 million and $3.6
million, respectively.
One of the senior executives of the Company has a five year employment
agreement. Any changes to the agreement require approval by the Board of
Directors.
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.
9. LICENSE AND TECHNOLOGY DEVELOPMENT AGREEMENTS
The Company does not currently have any ongoing technology development
agreements providing funding for research and development efforts relating to
new or advanced technology disk head products.
In September 1992, the Company entered into a license and technology
development agreement with HML (the "Agreement") to further the development and
marketing of advanced magnetic recording disk head technologies and products.
During fiscal 1994, the Company recognized cost offsets of $14.1 million
primarily related to funding pursuant to the Agreement. The technology
development portion of the agreement was concluded in fiscal 1994. Under the
licensing portion of the Agreement, HML will have rights to manufacture products
based on this technology and will have certain marketing and distribution rights
for certain disk head products and markets.
10. COMMON STOCK ISSUANCE
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 the U.S. District Court for the
Central District of California. Settlement of the suit was subject to the terms
of a definitive agreement which was submitted to the court for preliminary
approval during December 1994. On May 31, 1995, the Court entered a judgment
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.
Under the terms of the settlement, the Company was not required to make any cash
payments but was required to issue shares of its common stock having an
aggregate value of $1.25 million, which was charged to operations in fiscal
1994. The stock, along with $2.75 million from the Company's insurance carrier,
was distributed, after court approval was received on September 23, 1996, to a
class consisting of all persons who purchased the Company's stock during the
period of October 22, 1992, through October 1, 1993.
11. RELATED PARTY TRANSACTION
The Company paid $680,000 and $140,000 in fiscal years 1995 and 1994,
respectively, to Grisanti, Galef & Goldress ("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, has been the Chairman
of the Company's Board of Directors. Jerry Goldress, has been a director of the
Company since November 3, 1995 and is Chief Executive Officer of GG&G.
F-17
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. BENEFIT PLANS
The Company has a qualified retirement plan (the "401(k) 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 has a profit sharing
plan, in which all eligible employees participate. Profit sharing amounts are
distributed as 75% in cash, except for foreign employees who receive their
profit sharing in cash, and 25% which is contributed to employees participating
in the Company's 401(k) Plan. Compensation expense recorded under the cash
profit sharing plan during 1996 was approximately $3.3 million, of which
approximately $0.5 million was contributed to participating employees' 401(k)
accounts. There was no compensation expense recorded and no 401(k) contributions
were made by the Company during fiscal 1995 and 1994.
13. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 30 MARCH 30 JUNE 29 SEPTEMBER 28
------------ ----------- --------- ------------
<S> <C> <C> <C> <C>
1996
Net sales...................................................... $ 94,709 $ 86,706 $ 74,037 $ 89,302
Gross profit................................................... 23,514 25,297 17,882 26,558
Net income..................................................... 9,028 8,696 2,350 12,144
Net income per share:.......................................... $ 0.38 $ 0.36 $ 0.10 $ 0.51
Weighted average common and common equivalent shares
outstanding:................................................. 23,774 23,894 24,039 23,882
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 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)............................................ (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 common equivalent shares
outstanding:.................................................. 22,074 22,100 22,666 23,577
</TABLE>
F-18
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
None
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K,
portions of the information required by Part III of Form 10-K are incorporated
by reference from the Company's Proxy Statement to be filed with the Commission
in connection with the 1997 Annual Meeting of Stockholders ("the Proxy
Statement").
ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Information concerning Directors of the Company appears in the Company's
Proxy Statement, under Item 1 "Election of Directors". This portion of the Proxy
Statement is incorporated herein by reference.
(b) For information with respect to Executive Officers, see Part I of this
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation appears in the Company's Proxy
Statement, under the caption "Executive Compensation", and is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the security ownership of certain beneficial owners
and management appears in the Company's Proxy Statement, under Item 1 "Election
of Directors", and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
appears in the Company's Proxy Statement, under Item 1 "Election of Directors",
and is incorporated herein by reference.
I-1
<PAGE>
PART IV
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 as
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> <C>
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 1986 Long-Term Incentive Plan (6)
(c) Applied Magnetics Corporation 1988 Stock Option Plan (7)
(d) Applied Magnetics Corporation 1989 Long-Term Incentive Plan (8)
(e) Loan Agreement dated February 13, 1992 between Applied Magnetics Corporation and Union Bank, N. A.,
as amended (9)
(f) License and Technology Development Agreement dated as of September 25, 1992, between Applied
Magnetics Corporation and Hitachi Metals, Ltd. (9)
(g) Deeds of Trust naming as beneficiary Hitachi Metals, Ltd to secure the Company's obligations under
a letter agreement dated March 24, 1995 (15)
(h) Applied Magnetics Corporation 1992 Stock Option Plan (9)
(i) Financing Agreement dated January 11, 1995 between the Company and CIT Group/ Business Credit, Inc.
(14)
(j) Letter Agreement between Registrant and Hitachi Metals, Ltd. Dated May 30, 1995 extending maturity
date of Letter of Credit to April 12, 1996 (16)
(k) 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)
(l) Security Agreement between Registrant and Hitachi Metals, Ltd. dated May 30, 1995 (16)
(m) Cross License and Joint Research and Development Agreement effective as of November 5, 1993,
between the Company and Hutchinson Technology Incorporated (11)
(n) Applied Magnetics Corporation 1994 Employee Stock Option Plan (12)
(o) Applied Magnetics Corporation 1994 Nonemployee Director's Stock Option Plan (12)
</TABLE>
I-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------------
<C> <S> <C>
(p) Letter Agreement dated as of November 14, 1994, between the Company and the CIT Group/Business
Credit, Inc. (13)
(q) Stock Purchase Agreement by and among the Company, Seagate Technology,Inc. and Applied Tape
Technology, Inc. (13)
(r) Letter Agreement dated September 12, 1994, between the Company and William R. Anderson (13)
(s) Letter Agreement dated August 1, 1994, between the Company and Grisanti, Galef & Goldress, Inc.
(13)
(t) Offer letter dated April 19, 1995 between Maybank Banking Berhad and Applied Magnetics (M) Sdn Bhd.
for extension of Credit Facility (16)
(u) Corporate Guarantee of the Registrant dated June 8, 1995 in favor of Maybank Banking Berhad (16)
(v) Employment Agreement between Craig D. Crisman and the Company dated August 1, 1995 (17)
(w) Letter Agreement dated July 19, 1995, between the Company and Raymond P. Le Blanc (17)
(x) 1995 Key Management Incentive Bonus Plan dated March 16, 1995 (17)
(y) Worldwide Cash Profit Sharing Plan (18)
(z) Form of Indemnification Agreement
(aa) Form of Agreement (relating to termination benefits to key employees)
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 to 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 12, 1996.
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 reference
(3) Filed as an exhibit to the Corporation's Annual Report on Form 10-K dated December 21, 1989 and incorporated
hereby reference
(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
</TABLE>
I-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------------
<C> <S> <C>
(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 16, 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
(17) Filed as an exhibit to the Company's Annual Report on Form 10-K dated December 21, 1995, as amended by Form
10K/A, dated June 11, 1996 and incorporated herein by reference
(18) Filed as an exhibit to the Company's Report on Form 10-Q/A dated March 4, 1996 and incorporated herein by
reference
</TABLE>
(b) Reports on Form-8K. The Company filed a report on Form 8-K, dated March
11, 1996, during the quarter ended March 30, 1996, reporting, under Item 5 of
such Form, the Company's intention to raise $100 million through sale of
convertible subordinated notes to institutional investors and non-U.S. investors
for repaying debt and for other working capital purposes. The Company filed a
report on Form 8-K, dated March 20, 1996, during the quarter ended March 30,
1996, reporting, under Item 5, that an agreement for the sale of debentures had
been executed, and under Item 7, a Press Release dated March 15, 1996,
announcing such agreement. The Company filed a report on Form 8-K, dated April
2, 1996, during the quarter ended March 30, 1996, reporting under Item 5 of such
Form, the completion of the sale of $115 million of Convertible Subordinated
Debentures, and under Item 7, a Press Release dated March 25, 1996, announcing
completion of sale. The Company filed a report on Form 8-K, dated August 1,
1996, during the quarter ended September 28, 1996, reporting under Item 2 of
such Form, that on July 17, 1996, the Company, through a non-judicial
foreclosure following a breach of a stock pledge by a third party, acquired 75%
of the outstanding common stock of Delta Bravo, Inc, a Delaware Corporation
("DBI"), in satisfaction of approximately $2.5 million of debt owed by DBI to
the Company. The Company filed a report on Form 8-KA Amendment No. 1, dated
September 27, 1996, during the quarter ended September 28, 1996, reporting under
Item 7, audited financial statements of DBI.
(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
I-4
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 (d) or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED MAGNETICS CORPORATION
Date: December 20, 1996 By: /s/ CRAIG D. CRISMAN
-----------------------------------------
Craig D. Crisman
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: December 20, 1996 By: /s/ PETER T. ALTAVILLA
-----------------------------------------
Peter T. Altavilla
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities and on the dates indicated.
/s/ CRAIG D. CRISMAN
- ------------------------------ Chairman of the Board and December 20, 1996
Craig D. Crisman Chief Executive Officer
/s/ HAROLD R. FRANK
- ------------------------------ Director and Chairman December 20, 1996
Harold R. Frank Emeritus
/s/ R. C. MERCURE, JR.
- ------------------------------ Director December 20, 1996
R. C. Mercure, Jr.
/s/ HERBERT M. DWIGHT, JR.
- ------------------------------ Director December 20, 1996
Herbert M. Dwight, Jr.
/s/ JERRY E. GOLDRESS
- ------------------------------ Director December 20, 1996
Jerry E. Goldress
I-5
<PAGE>
SCHEDULE II
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING AT END
CLASSIFICATION OF PERIOD ADDITIONS DEDUCTIONS(B) OTHER(A)(B) OF PERIOD
- ------------------------------------------------------ ----------- ----------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
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 -- 6,045 20,459
Year Ended September 28, 1996
Allowance for doubtful collection:
Accounts Receivable................................. $ 652 $ -- $ -- $ 114 $ 766
Notes Receivable.................................... 20,459 -- (2,874) (17,585) --
</TABLE>
- ------------------------
(A) In 1994 and 1996 the accounts receivable allowance amount represents
recoveries of accounts previously written off.
The notes receivable allowance for doubtful collection represents the
potential uncollectability of notes from Delta Bravo, Inc. ("DBI").
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. Also, in
1995 the Company applied $2.8 million of excess 1993 restructure reserves to
its allowance for notes receivable where it was required.
(B) In previous years, the Company fully reserved all DBI note balances. In July
1996, the Company, acquired 100% of DBI (see Note 7). As such the related
notes receivable and notes receivable reserve were eliminated in
consolidation.
S-1
<PAGE>
EXHIBIT 10(Z)
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of , 1996,
by and between APPLIED MAGNETICS CORPORATION, a Delaware corporation (the
"Company"), and ("Indemnitee"), with reference to the following
facts:
A. Indemnitee is currently serving as a key executive of the Company.
B. The Company and Indemnitee recognize the substantial increase in
corporate litigation in general, subjecting key executives to expensive
litigation risks at the same time as the availability and coverage of liability
insurance has been severely limited.
C. Indemnitee does not regard the current protection available to be
adequate under the present circumstances to protect him or her against the risks
associated with his or her service to the Company and the Company recognizes
that Indemnitee and other key executives of the Company may not be willing to
continue to serve as key executives without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, including Indemnitee, to serve as key executives of the
Company and thus desires to indemnify its key executives to provide them with
the maximum protection permitted by law.
THEREFORE, IN CONSIDERATION OF the foregoing premises, the Company and
Indemnitee hereby agree as follows:
1. INDEMNIFICATION.
1.1 THIRD PARTY PROCEEDINGS. The Company shall indemnify Indemnitee if
Indemnitee is or was a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of the Company to procure a
judgment in its favor) by reason of the fact that Indemnitee is or was a key
executive of the Company, or any subsidiary of the Company, and such proceeding
relates to any action or inaction on the part of Indemnitee while a key
executive or by reason of the fact that Indemnitee is or was serving at the
request of the Company as a key executive, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including, subject to Section 13 hereof, attorneys' fees and any
expenses of establishing a right to indemnification pursuant to this Agreement
or under Delaware law), judgments, fines, settlements (if such settlement is
approved in advance by the Company, which approval shall not be unreasonably
withheld) and other amounts actually and reasonably incurred by Indemnitee in
connection with such proceeding if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and, in the case of a criminal proceeding, if
Indemnitee had no reasonable cause to believe Indemnitee's conduct was unlawful.
The termination of any proceeding by judgment, order, settlement, conviction or
upon a plea of nolo contendere or its equivalent shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or with respect to any criminal proceedings, would not create a
presumption that Indemnitee had reasonable cause to believe that Indemnitee's
conduct was unlawful.
1.2 PROCEEDINGS BY OR IN THE RIGHT OF THE COMPANY. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action by or in the right of the
Company or any subsidiary of the Company to procure a judgment in its favor by
reason of the fact that Indemnitee is or was a key executive of the Company, or
any subsidiary of the Company, and such action relates to any action or inaction
on the part of Indemnitee while a key executive, or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including, subject to Section 13
hereof, attorneys' fees and any expenses of
1
<PAGE>
establishing a right to indemnification pursuant to this Agreement or under
Delaware law) and amounts paid in settlement, in each case to the extent
actually and reasonably incurred by Indemnitee in connection with the defense or
settlement of the proceeding if Indemnitee acted in good faith and in a manner
Indemnitee believed to be in or not opposed to the best interests of the
Company, except that no indemnification shall be made with respect to any claim,
issue or matter to which Indemnitee shall have been adjudged to have been liable
to the Company in the performance of Indemnitee's duty to the Company, unless
and only to the extent that the court in which such proceeding is or was pending
shall determine upon application that, in view of all the circumstances of the
case, Indemnitee is fairly and reasonably entitled to indemnity for expenses and
then only to the extent that the court shall determine is proper.
1.3 SUCCESSFUL DEFENSE ON MERITS. To the extent that Indemnitee has been
successful on the merits in defense of any proceeding referred to in Section 1.1
or 1.2 above, or in defense of any claim, issue or matter therein, the Company
shall indemnify Indemnitee against expenses (including attorneys' fees) actually
and reasonably incurred by Indemnitee in connection therewith.
1.4 CERTAIN TERMS DEFINED. For purposes of this Agreement, references to
"other enterprises" shall include employee benefit plans, references to "fines"
shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan and references to "proceeding" shall include any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative. For purposes of this Agreement, references to
the "Company" shall include all constituent corporations absorbed in a
consolidation or merger as well as the resulting or surviving corporation, so
that an Indemnitee who is or was a director, officer, employee or other agent of
such a constituent corporation, or who, being or having been such a director,
officer, employee or other agent of another corporation, partnership, joint
venture, trust or other enterprise, shall stand in the same position under the
provisions of this Agreement with respect to the resulting or surviving
corporation as an Indemnitee would if he or she had served the resulting or
surviving corporation in the same capacity.
2. AGREEMENT TO SERVE. Indemnitee agrees to serve or continue to serve as
a key executive of the Company for so long as he or she is duly elected or
appointed or until such time as he or she voluntarily resigns. Indemnitee agrees
to tender written notice to the Company at least 30 days prior to voluntarily
resigning. The terms of any existing employment agreement between Indemnitee and
the Company shall continue in effect but shall be modified or supplemented by
the terms of this Agreement. Nothing contained in this Agreement is intended to
create in Indemnitee any right to continued employment.
3. EXPENSES; INDEMNIFICATION PROCEDURE.
3.1 ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
(excluding amounts actually paid in settlement of any action, suit or
proceeding) or appeal of any civil or criminal action, suit or proceeding
referenced in Section 1.1 or 1.2 hereof. Indemnitee hereby undertakes to repay
such amounts advanced only if, and to the extent that, it shall be determined
ultimately that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within twenty (20) days following delivery of a written
request therefor by Indemnitee to the Company.
3.2 NOTICE OF CLAIM. Indemnitee shall, as a condition precedent to his or
her right to be indemnified under this Agreement, give the Company notice in
writing as soon as practicable of any claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Secretary of the Company at the address shown
on the signature page of this Agreement (or such other address as the Company
shall designate in writing to Indemnitee). In addition, Indemnitee shall give
the Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
2
<PAGE>
3.3 ENFORCEMENT RIGHTS. Any indemnification provided for in Section 1
shall be made no later than sixty (60) days after receipt of the written request
of Indemnitee. If a claim or request under this Agreement, under any statute, or
under any provision of the Company's Bylaws providing for indemnification, is
not paid by the Company, or on its behalf, within sixty (60) days after written
request for payment thereof has been received by the Company, Indemnitee may,
but need not, at any time thereafter bring suit against the Company to recover
the unpaid amount of the claim or request, and subject to Section 13, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in connection with any
action, suit or proceeding in advance of its final disposition) that Indemnitee
has not met the standards of conduct which make it permissible under applicable
law for the Company to indemnify Indemnitee for the amount claimed but the
burden of proving such defense shall be on the Company and Indemnitee shall be
entitled to receive interim payments of expenses pursuant to Section 3.1 unless
and until such defense may be finally adjudicated by court order or judgment for
which no further right of appeal exists. The parties hereto intend that, if the
Company contests Indemnitee's right to indemnification, the question of
Indemnitee's right to indemnification shall be a decision for the court and no
presumption regarding whether the applicable standard has been met will arise
based on any determination or lack of determination of such by the Company
(including its Board of Directors or any committee thereof, independent legal
counsel or its stockholders).
3.4 ASSUMPTION OF DEFENSE. In the event the Company shall be obligated to
pay the expenses of any proceeding against Indemnitee, the Company, if
appropriate, shall be entitled to assume the defense of such proceeding with
counsel approved by Indemnitee, which approval shall not be unreasonably
withheld, upon the delivery to Indemnitee of written notice of its election so
to do. After delivery of such notice, approval of such counsel by Indemnitee and
the retention of such counsel by the Company, the Company will not be liable to
Indemnitee under this Agreement for any fees of counsel subsequently incurred by
Indemnitee with respect to the same proceeding, unless (i) the employment of
counsel by Indemnitee is authorized by the Company, (ii) Indemnitee shall have
reasonably concluded that there may be a conflict of interest of such counsel
retained by the Company between the Company and Indemnitee in the conduct of
such defense, or (iii) the Company ceases or terminates the employment of such
counsel with respect to the defense of such proceeding, in any of which events
then the fees and expenses of Indemnitee's counsel shall be at the expense of
the Company. At all times Indemnitee shall have the right to employ other
counsel in any such proceeding at Indemnitee's expense.
3.5 NOTICE TO INSURERS. If, at the time of the receipt of a notice of a
claim pursuant to Section 3.2 hereof, the Company has director and officer
liability insurance in effect, the Company shall give prompt notice of the
commencement of such proceeding to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such proceeding in
accordance with the terms of such policies.
3.6 SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of the Indemnitee, who shall do all things that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the Company effectively to bring suit to enforce such rights.
4. EXCEPTIONS. Notwithstanding any other provision herein to the contrary,
the Company shall not be obligated pursuant to the terms of this Agreement:
4.1 CLAIMS INITIATED BY INDEMNITEE. To indemnify or advance expenses to
Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or as otherwise required under the
Delaware General Corporation Law,
3
<PAGE>
but such indemnification or advancement of expenses may be provided by the
Company in specific cases if the Board of Directors has approved the initiation
or bringing of such suit; or
4.2 LACK OF GOOD FAITH. To indemnify Indemnitee for any expenses incurred
by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce
or interpret this Agreement, if a court of competent jurisdiction determines
that such proceeding was not made in good faith or was frivolous; or
4.3 INSURED CLAIMS. To indemnify Indemnitee for expenses or liabilities of
any type whatsoever (including, but not limited to, judgments, fines, ERISA
excise taxes or penalties, and amounts paid in settlement) that have been paid
directly to Indemnitee by an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the Company; or
4.4 CLAIMS UNDER SECTION 16(B). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
5. PARTIAL INDEMNIFICATION. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of the
expenses, judgments, fines or penalties actually or reasonably incurred by
Indemnitee in the investigation, defense, appeal or settlement of any civil or
criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. ADDITIONAL INDEMNIFICATION RIGHTS; NONEXCLUSIVITY.
6.1 SCOPE. Notwithstanding any other provision of this Agreement, the
Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by
law, including those circumstances in which indemnification would otherwise be
discretionary and notwithstanding that such indemnification is not specifically
authorized by this Agreement. In the event of any change in any applicable law,
statute or rule which narrows the right of a Delaware corporation to indemnify a
key executive, such changes, to the extent not otherwise required by such law,
statute or rule to be applied to this Agreement shall have no effect on this
Agreement or the parties' rights and obligations hereunder.
6.2 NON-EXCLUSIVITY. Nothing herein shall be deemed to diminish or
otherwise restrict any rights to which Indemnitee may be entitled under the
Company's Bylaws, any agreement, any vote of stockholders or disinterested
directors, or under the laws of the State of Delaware.
7. MUTUAL ACKNOWLEDGEMENT. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its key executives under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
8. OFFICER AND DIRECTOR LIABILITY INSURANCE. The Company shall, from time
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors and possibly
certain other key executives of the Company with coverage for losses from
wrongful acts, or to ensure the Company's performance of its indemnification
obligations under this Agreement. Among other considerations, the Company will
weigh the costs of obtaining such insurance coverage against the protection
afforded by such coverage. Notwithstanding the foregoing, the Company shall have
no obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
4
<PAGE>
9. SEVERABILITY. Nothing in this Agreement is intended to require or shall
be construed as requiring the Company to do or fail to do any act in violation
of applicable law. The Company's inability, pursuant to court order, to perform
its obligations under this Agreement shall not constitute a breach of this
Agreement. If this Agreement or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the fullest extent permitted by any
applicable portion of this Agreement that shall not have been invalidated and
the balance of this Agreement not so invalidated shall be enforceable in
accordance with its terms.
10. EFFECTIVE DATES. This Agreement shall be effective as of the date set
forth on the first page and may apply to acts or omissions of Indemnitee which
occurred prior to such date if Indemnitee was a key executive of the Company, or
any predecessor corporation or constituent corporation in a merger involving the
Company, or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, at the time such act or omission occurred.
11. COVERAGE. The provisions of this Agreement shall continue as to
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though Indemnitee may have ceased to serve in such capacity at the
time of any action, suit or other covered proceeding. This Agreement shall be
binding upon the Company and its successors and assigns and shall inure to the
benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and
assigns.
12. NOTICE. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement or
as subsequently modified by written notice.
13. ATTORNEYS' FEES. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that the action was not instituted in good faith or was frivolous. In the event
of an action instituted by or in the name of the Company under this Agreement,
or to enforce or interpret any of the terms of this Agreement, Indemnitee shall
be entitled to be paid all court costs and expenses, including attorneys' fees,
incurred by Indemnitee in defense of such action (including with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action the court determines that Indemnitee's defenses to such
action were not made in good faith or were frivolous.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, as applied to contracts
between Delaware residents entered into and to be performed entirely within
Delaware.
15. CONSENT TO JURISDICTION. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts in the State of Delaware.
16. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one instrument.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
APPLIED MAGNETICS CORPORATION Address:
75 Robin Hill Road
Goleta, California 93117
By:
- --------------------------------------
Title:
- -------------------------------------
INDEMNITEE Address:
--------------------------------------
- --------------------------------------
(Signature)
--------------------------------------
- --------------------------------------
(Printed or typed
name)
6
<PAGE>
EXHIBIT 10(AA)
AGREEMENT
THIS AGREEMENT (the "Agreement"), made and entered into as of the day of
November, 1996, by and between APPLIED MAGNETICS CORPORATION, a Delaware
corporation ("AMC") and ("Executive").
W I T N E S S E T H:
WHEREAS, AMC (including subsidiaries and divisions) has always followed
compensation policies intended to reward executives for past services and to
demonstrate to them that AMC is concerned with the welfare of its employees and
intends to see that loyal executives are treated fairly; and
WHEREAS, AMC regards the continued services of Executive to be in the best
interests of AMC and its shareholders and desires to assure the continued
services of Executives on an objective and impartial basis and without
distraction or conflict of interest in the event of an attempt to obtain control
of AMC; and
WHEREAS, Executive is willing to remain in the employ of AMC upon the
understanding that AMC will provide him or her with income security if his or
her employment is terminated under certain conditions following a change in
control of AMC;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS. For purposes of this Agreement, the following terms shall
have the meanings indicated:
1.1 "AMC" means and includes Applied Magnetics corporation, and any
subsidiary or division thereof, as the context-may require.
1.2 "BASE AMOUNT" means the sum of (a) Executive's then monthly base
salary; (b) Executive's then monthly car allowance, if any, and (c) one-twelfth
of an amount equal to any bonus that Executive received or was entitled to
receive for the fiscal year immediately preceding a Change in Control.
1.3 "CAUSE" means (a) Executive's continued failure to perform his duties
after a written demand for substantive performance is delivered by AMC's Board
of Directors to Executive documenting specific areas of repeated and continuing
nonperformance, or (b) Executive's willful, reckless or grossly negligent
misconduct materially injurious to AMC; PROVIDED, HOWEVER, that "Cause" shall be
deemed not to have-occurred unless and until a resolution shall have been
adopted by the affirmative vote of two-thirds of the entire membership of AMC's
Board of Directors after reasonable notice to Executive of such Cause and
reasonable opportunity for Executive and his or her counsel to be heard.
1.4 "CHANGE IN CONTROL" means (a) any Person becomes the beneficial owner,
directly or indirectly, of securities of AMC representing 20% of the combined
voting power of the then outstanding securities of AMC; or (b) there shall be
consummated any consolidation or merger of AMC in which AMC is not the
continuing or surviving corporation or pursuant to which shares of AMC's Common
Stock would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of AMC's Common Stock immediately
prior to the merger have the same proportionate ownership of common stock of the
surviving corporation immediately after the merger, or (c) any sale, lease,
exchange or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of AMC.
1.5 "DISABILITY" means Executives absence from his or her duties with AMC
for a contiguous period of nine months as a result of Executive's incapacity due
to physical or mental illness, provided that notice
1
<PAGE>
of Executive's termination due to Disability is provided to Executive within the
30-day period following such nine-month period.
1.6 "MEDICAL BENEFITS" mean all life, group insurance, medical and dental
care plans and all disability insurance provided by AMC to Executive immediately
before Executive's Termination of Employment.
1.7 "OPTIONS" means all the options to purchase shares of Common Stock,
$.10 par value, of the Company granted to Executive under AMC's various employee
benefit plans (as defined in Rule 405 promulgated under the Securities Act of
1933), whether or not such options are vested or not.
1.8 "PERSON" means a person as defined or referred to in Sections 3(a)(9)
and 13(d)(1) ET SEQ. of the Securities Exchange Act of 1934 and rules of the
Securities and Exchange Commission promulgated thereunder.
1.9 "RETIREMENT" means termination by AMC or Executive of Executive's
employment based on Executive's having reached age 65 or such other age as shall
have been fixed in any arrangement established with Executive's consent with
respect to Executive.
1.10 "TERMINATION OF EMPLOYMENT" means the termination of Executive's
employment with AMC, within three years after a Change in Control, by either (a)
AMC (other than for "Cause"); or (b) Executive (other than by Retirement, death
or Disability) following the occurrence, without Executive's consent, of any of
the following events ("Good Reason"):
(i) the assignment to Executive of duties inconsistent with and adverse
to Executive's position, duties, responsibilities and status with AMC
immediately prior to a Change in Control of AMC, or an adverse change in
Executives titles or offices as in effect immediately prior to a Change in
Control of AMC, or a reduction of Executive's duties or responsibilities as
in effect immediately prior to a change in Control of AMC, or any removal of
Executive from or any failure to reelect Executive to any of such positions,
except in connection with termination of Executive's employment for
Disability, Retirement or Cause or as a result of Executive's death or by
Executive other than for Good Reason;
(ii) A reduction in Executive's base salary and bonus compensation
unless such reduction is part of a uniformly applied program of reductions
reasonably adopted due to AMC's then business condition;
(iii) A failure to increase Executive's base salary on or before the
later to occur of 12 months from the date of the last increase in
Executive's base salary or 60 days following a Change in Control, in an
amount not less than 50% of the average annual percentage base salary
increase for all "Corporate Executives" of AMC in the 36 months preceding
the date on which such increase shall be due. For purposes of this
subparagraph (iii), "Corporate Executives" of AMC shall include AMC's
Chairman, Chief Executive Officer, President; Chief Financial officer; Vice
President, General Manager, [OTHERS?];
(iv) A failure of AMC to continue in effect any benefit or incentive
plan or arrangement in which Executive is participating at the time of a
Change in Control, or the taking of any action by AMC which would adversely
affect Executive's participation in or materially reduce Executive's
benefits under any such plan or arrangement or deprive Executive of any
material fringe benefit enjoyed by Executive at the time of a Change in
Control, unless such failure results from a uniformly applied program of
reductions reasonably adopted due to AMC's then business condition;
(v) Executive is either (x) transferred to a principal work location
which will require him to travel more than twenty-five (25) miles from his
or her then principal residence to his or her new principal work location,
or (y) he or she is required to engage in a substantially increased amount
of travel on AMC's business;
(vi) any material breach by AMC or any provision of this Agreement.
2
<PAGE>
2. PAYMENT UPON TERMINATION OF EMPLOYMENT. Within 10 days immediately
following Termination of Employment, AMC shall forthwith pay to Executive a
lump-sum payment equal to multiplied by the Base Amount.
3. CONTINUATION OF INSURANCE. For a period of 12 months following
Executive's Termination of Employment or until such time that Executive shall be
employed by an employer who provides Executive with medical benefits
substantially similar to the Medical Benefits, Executive shall receive the same
Medical Benefits that he or she (and his or herfamily, if applicable) received
from AMC prior to his or her Termination of Employment; PROVIDED, HOWEVER, that
if the plans pursuant to which the Medical Benefits were provided to Executive
have been or are modified, Executive shall be entitled to substantially similar
Medical Benefits from other reputable sources. Executive shall be required to
pay the same amount for such Medical Benefits as he or she paid prior to his or
her Termination of Employment.
4. ACCELERATION OF OPTIONS UPON TERMINATION OF EMPLOYMENT. Immediately
upon or following Termination of Employment, all shares covered by Executive's
Options shall become immediately and fully exercisable, and shall remain
exercisable until the expiration thereof, and Executive shall have the right to
purchase, by exercise of such Options, all or any portion of the shares covered
by such Options; provided however, that in no event may any Option be exercised
after the expiration date thereof.
5. REPRESENTATION BY EXECUTIVE; NO EMPLOYMENT CONTRACT. Executive
represents that it is his or her present intention to continue in the employ AMC
and he or she is not currently aware of any facts or circumstances that would
cause him or her to change such intention in the foreseeable future. Executive
acknowledges that Executive has been advised and understands that this Agreement
shall not, however, be deemed in any way to create a contract of employment
between AMC and Executive.
6. EXPENSES OF EXECUTIVE. AMC agrees to pay or reimburse Executive for all
costs and expenses (including court costs and attorneys, fees) incurred by
Executive (a) in the successful prosecution or settlement of any claim or action
by Executive to enforce his or her rights under this Agreement, or (b) in any
other action or proceeding, not involving such a claim or action by Executive,
which challenges the validity or enforceability of this Agreement or any similar
agreements with other employees of AMC. AMC further agrees to pay or reimburse
Executive for all ' costs and expenses (including legal and accounting fees and
expenses) incurred by Executive in connection with any audit or review by the
Internal Revenue Service of any excise tax imposed on any payments under this
Agreement.
7. LIABILITY FOR TAXES. AMC shall have no liability for any tax liability
of Executive attributable to any payment made under this Agreement. AMC may
withhold from any such payment such amounts as may be required by applicable
provisions of the Internal Revenue Code, other tax laws, and the rules and
regulations of the Internal Revenue Service and other tax agencies, as in effect
at the time of any such payment.
8. TERMINATION OF AGREEMENT. This Agreement shall terminate and be of no
further effect (except to the extent that any obligation of AMC hereunder
remains unpaid as of such time) upon the first to occur of (a) termination of
Executive's employment with AMC for any reason, whether voluntarily or
involuntary, prior to a change in Control; (b) termination of Executive's
employment by AMC due to Executive's death, Retirement, Disability or for Cause
or by Executive other than for Good Reason; (c) 36 months from the date of a
Change of Control, or (d) 12 months following the date that written notice of
termination of this Agreement is provided to Executive by AMC's Board of
Directors if a Change in Control does not occur. Within that 12-month period.
9. OTHER PLANS. To the extent that Executive shall receive payments under
this Agreement, he or she shall not be eligible to receive severance benefits
under AMC's standard severance policy; PROVIDED, HOWEVER, that notwithstanding
the previous sentence, Executive shall be entitled to receive unused and accrued
vacation pay and shall be entitled to such other benefits as described in
Section 3 of this Agreement.
3
<PAGE>
10. TAXES. Anything in this Agreement to the contrary notwithstanding, (1)
in the event that any payment to or for the Executive's benefit (whether payable
pursuant to the terms of this Agreement or otherwise) would not be deductible by
AMC as a result of Section 280G of the Internal Revenue Code of 1986, as amended
(the "Code"), then the aggregate amount payable under Section 2 shall be reduced
(but not below zero dollars), so that after giving effect to such reduction, no
payment made to or for the Executive's benefit will not be deductible because of
Section 280G, and (2) if the Executive establishes (in accordance with Section
280G) that all or any portion of the aggregate "parachute payments" (as defined
in Section 280G) payable to or for the Executive's benefit constitutes
reasonable compensation for services actually rendered, and if the present value
of all such "Parachute payments" which constitute reasonable compensation
exceeds 299% of the Executive's "base amount" (as defined in Section 280G), then
the Executive shall be entitled to receive an amount equal to (but not greater
than) the present value of all such "parachute payments" which constitute
reasonable compensation. For purposes of this Section 10, the "present value" of
any payment shall be determined in accordance with Section 1274(b)(2) of the
Code. If it is established that, notwithstanding the good faith of the Executive
and AMC in applying the terms of this Section 10, the aggregate "parachute
payments" paid to or for the Executive's benefit are in an amount that would
result in any portion of such "parachute payments" not being deductible, then
the Executive shall have an obligation to pay AMC upon demand an amount equal to
the sum of (1) the excess of the aggregate parachute payments paid to or for the
Executive's benefit over the aggregate "parachute payments" that could have been
paid to or for the Executive's benefit without any portion of such "parachute
payments" not being deductible; and (2) interest on the amount set forth in
clause (1) of this sentence at the applicable federal rate (as defined in
Section 1274(d) of the Code) from the date of the receipt of such excess by or
for the Executive's behalf until the date of such payment.
11. NO OBLIGATION TO MITIGATE. Executive shall not be required to mitigate
damages or the amount of any payment provided for under this Agreement by
seeking other employment or otherwise, nor shall the amount of any payment
provided for under this Agreement be reduced by any compensation earned by
Executive as the result of employment by another employer after the date of
termination, or otherwise.
12. GENERAL PROVISIONS.
12.1 Subject to the provisions of Section 11.4 below, no right, benefit or
interest hereunder shall be subject to assignment (except by operation of law-to
the personal representative or heirs of Executive if Executive dies after
Termination of Employment but prior to the making of the payment required by
section 2), anticipation, alienation, sale, encumbrance, charge, pledge,
hypothecation or set-off in respect of any claim, debt or obligation, or to
execution, attachment, levy or similar process.
12.2 Except as provided in section 7, this Agreement may not be amended,
modified or canceled except by written agreement of the parties.
12.3 In the event that the scope of any provision of this Agreement, or
portion thereof, shall be determined to be unenforceable to its full extent,
then such provision, or portion thereof, shall be enforced to the maximum extent
permitted by law. In the event that any provision of this Agreement, or portion
thereof, is determined to be invalid in its entirety, the remaining provisions
of this Agreement shall remain in full force and effect to the fullest extent
permitted by law.
12.4 This Agreement shall be binding upon and inure to the benefit of
Executive (and his or her personal representative), AMC, and any successor
organization or organizations which shall succeed to substantially all of the
business and property of AMC, whether by means of merger, consolidation,
acquisition of substantially all of the assets of AMC or otherwise, including by
operation of law.
12.5 This Agreement has been made in and shall be governed and construed in
accordance with the laws of the State of California.
4
<PAGE>
12.6 This Agreement sets forth the entire agreement and understanding of
the parties hereto with respect to the matters covered hereby.
APPLIED MAGNETICS CORPORATION,
a Delaware corporation
By
--------------------------------------
Name:
Title:
EXECUTIVE
------------------------------------
Name:
5
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
SEPTEMBER 28, 1996
-------------------------
FULLY
PRIMARY DILUTED
EARNING EARNINGS PER
PER SHARE SHARE
----------- ------------
<S> <C> <C>
Net income............................................................................... $ 32,218 $ 32,218
----------- ------------
----------- ------------
Weighted average common shares outstanding............................................... 22,913 22,913
Dilutive common stock equivalents........................................................ 984 1,077
----------- ------------
Total weighted average common shares outstanding......................................... 23,897 23,990
----------- ------------
----------- ------------
Net income per share..................................................................... $ 1.35 $ 1.34
----------- ------------
----------- ------------
</TABLE>
Since fully diluted earnings per share does not reduce the Company's
earnings per share by more than 3% of primary earnings per share, the Company
has reflected primary earnings per share on the Consolidated Statement of
Operations for the year ended September 28, 1996.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into the Company's previously filed
Registration Statements on Form S-8 (File Nos. 33-17944, 33-22040, 33-24509,
33-28600, 33-58200, 33-59391 and 33-59393) and Form S-3 (File No. 333-02369).
ARTHUR ANDERSEN LLP
Los Angeles, California
December 12, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 28, 1996 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AS OF SEPTEMBER 28, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 127,400
<SECURITIES> 0
<RECEIVABLES> 43,403
<ALLOWANCES> 0
<INVENTORY> 35,980
<CURRENT-ASSETS> 216,905
<PP&E> 288,856
<DEPRECIATION> (155,134)
<TOTAL-ASSETS> 359,450
<CURRENT-LIABILITIES> 99,023
<BONDS> 0
0
0
<COMMON> 2,328
<OTHER-SE> 137,371
<TOTAL-LIABILITY-AND-EQUITY> 359,450
<SALES> 344,754
<TOTAL-REVENUES> 344,754
<CGS> 0
<TOTAL-COSTS> 251,503
<OTHER-EXPENSES> 57,400
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,056
<INCOME-PRETAX> 33,070
<INCOME-TAX> 852
<INCOME-CONTINUING> 32,218
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,218
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 0
</TABLE>
