Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Quarterly Period Ended March 29, 1997
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from _______to_______
Commission File No.1-6635
APPLIED MAGNETICS CORPORATION
(Exact name of registrant as specified in its charter)
A Delaware Corporation 95-1950506
---------------------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
75 Robin Hill Road, Goleta, California 93117
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 683-5353
(No Change)
---------------------------------------------------------------
Former name, former address and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock: 23,782,811 $.10 par value common stock as of May 6, 1997.
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PART 1. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
--------------------
The unaudited condensed consolidated financial statements included herein have
been prepared by Applied Magnetics Corporation and its subsidiaries (the
"Company") pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. The unaudited condensed consolidated financial statements and
selected notes included therein should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended
September 28, 1996.
The following unaudited condensed consolidated financial statements reflect all
adjustments, consisting only of normal and recurring adjustments, which, in the
opinion of management, are necessary to present fairly the consolidated
financial position and results of operations for the periods presented.
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APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations - Unaudited
(In thousands except share and per share data)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
March 29, March 30, March 29, March 30,
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 126,311 $ 86,706 $ 247,938 $ 181,415
Cost of sales 77,762 61,409 152,792 132,604
------ ------ ------- -------
Gross profit 48,549 25,297 95,146 48,811
------ ------ ------ ------
Research and development expenses 10,815 13,972 21,963 27,287
Selling, general and
administrative expenses 2,288 1,890 4,332 3,561
Terminated merger costs 2,906 - 2,906 -
----- ----- ----- -----
Total operating expenses 16,009 15,862 29,201 30,848
------ ------ ------ ------
Income from operations 32,540 9,435 65,945 17,963
Interest income 2,075 569 3,937 1,107
Interest expense (3,166) (1,293) (6,317) (2,719)
Other income, net 158 167 437 1,656
----- ----- ----- -----
Income before taxes 31,607 8,878 64,002 18,007
Provision for income taxes 516 182 1,039 283
----- ----- ----- -----
Net income $ 31,091 $ 8,696 $ 62,963 $ 17,724
========= ========= ========= =========
Net income per share:
Primary $1.24 $0.36 $2.54 $0.74
========= ========= ========= =========
Fully diluted $1.06 $0.30 $2.16 $0.60
========= ========= ========= =========
Weighted average number of
common shares outstanding
Primary 24,991,769 23,893,592 24,761,753 23,834,031
========== ========== ========== ==========
Fully diluted 31,178,345 30,077,009 31,019,823 30,066,409
========== ========== ========== ==========
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
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APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets - Unaudited
(In thousands except share and par value data)
ASSETS
March 29, September 28,
1997 1996
Current Assets: ---- ----
Cash and cash equivalents $ 155,282 $ 127,400
Accounts receivable, net 61,254 43,403
Inventories 51,666 35,980
Prepaid expenses and other 9,009 10,122
-------- --------
277,211 216,905
-------- --------
Property, plant and equipment, at cost 331,950 288,856
Less-accumulated depreciation (169,800) (155,134)
-------- --------
162,150 133,722
-------- --------
Other assets 9,012 8,823
-------- --------
$ 448,373 $ 359,450
========== ==========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 38 $ 1,865
Bank notes payable 50,644 45,789
Accounts payable 54,091 32,314
Accrued payroll and benefits 11,770 11,001
Other current liabilities 6,637 8,054
------- -------
123,180 99,023
------- -------
Long-term debt, net 115,107 116,263
------- -------
Other liabilities 4,153 4,465
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 23,739,593 shares at
March 29, 1997 and 23,283,047 shares at
September 28, 1996 2,374 2,328
Paid-in capital 188,603 185,378
Retained earnings (deficit) 16,150 (46,813)
-------- --------
Treasury stock, at cost 207,127 140,893
(116,995 shares as of March 29, 1997 and
September 28, 1996) (1,194) (1,194)
-------- --------
205,933 139,699
-------- --------
$ 448,373 $ 359,450
========== ==========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated balance sheets.
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APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited
(In thousands)
For the six months ended
March 29, March 30,
1997 1996
---- ----
Cash flows from Operating Activities:
Net income $ 62,963 $ 17,724
Adjustments to derive cash flows:
Depreciation and amortization 17,955 13,932
Changes in assets and liabilities
Accounts receivable (17,851) (10,034)
Inventories (15,686) 2,158
Prepaid expenses and other 1,113 1,010
Accounts payable 21,777 (4,767)
Accrued payroll and benefits 769 1,371
Other assets and liabilities (1,332) (1,113)
-------- --------
Net cash provided by operating activities 69,708 20,281
-------- --------
Cash flows from Investing Activities:
Additions to property, plant and equipment (46,704) (28,475)
Notes receivable 56 1,071
-------- --------
Net cash used in investing activities (46,648) (27,404)
-------- --------
Cash flows from Financing Activities:
Proceeds from issuance of convertible
subordinated debentures - 115,000
Proceeds from issuance of debt 107,747 78,935
Repayment of debt (105,990) (98,385)
Payment of debt issuance costs - (3,842)
Proceeds from stock options exercised, net 3,262 1,460
-------- --------
Net cash provided by financing activities 5,019 93,168
-------- --------
Effect of Exchange Rate Changes on Cash
and Equivalents (197) (344)
-------- --------
Net Increase in Cash and Equivalents 27,882 85,701
-------- --------
Cash and Equivalents at Beginning of Period 127,400 48,236
-------- --------
Cash and Equivalents at End of Period $ 155,282 $ 133,937
========== =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
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Selected Notes to Condensed Consolidated Financial Statements
Unaudited
(March 29, 1997)
Note A: Inventories
- -------------------
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventory costs consist of purchased materials and services, direct production
labor and manufacturing overhead expense. The components of inventory are as
follows (in thousands):
March 29, September 28,
1997 1996
---- ----
Purchased parts and
manufacturing supplies $22,573 $10,957
Work in process 26,590 21,601
Finished goods 2,503 3,422
------- -------
$51,666 $35,980
======= =======
Note B: Terminated Merger Costs
- -------------------------------
Merger costs of $2.9 million for the second quarter of fiscal 1997 include legal
and accounting fees, financial advisory fees and miscellaneous other expenses
related to the February 1997 proposed business combination between the Company
and Read-Rite Corporation. On March 14, 1997, the Company announced its
withdrawal of the proposal.
Note C: Credit Facilities
- -------------------------
During the second quarter of fiscal 1997, the Company's Malaysian subsidiary
completed credit facility agreements with two additional banks in Malaysia. The
total amount available to borrow under these two new facilities was
approximately $20.0 million of which $15.4 million was outstanding at March 29,
1997. The facilities are callable on demand, have no termination date, are
unsecured, and are guaranteed by the Company. The previously existing Malaysian
bank credit facilities allow for borrowings of up to $48.0 million of which
$35.2 million was outstanding for the same period.
Note D: Earnings Per Share Computation
- --------------------------------------
Primary earnings per share is computed by dividing net income by the weighted
average number of shares of common stock and common stock equivalents
outstanding during the period. Common stock equivalents include exercise of the
Company's stock options. Fully diluted earnings per share is computed based on
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weighted average number of shares of common stock and common stock equivalents
outstanding during the period and as if the Company's Convertible Subordinated
Debentures were converted into common stock at the beginning of the period after
giving retroactive effect to the elimination of interest expense, net of income
tax effect, applicable to the Convertible Subordinated Debentures.
Recent Accounting Pronouncements:
- ---------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 replaces the presentation of primary earnings per share ("EPS") with the
presentation of basic EPS. It also requires dual presentation of basic and fully
diluted EPS on the face of the income statement for all entities with complex
capital structures. This statement will become effective for financial
statements of the Company in the first quarter of fiscal 1998. Management
believes that the adoption of SFAS 128 will not have a material impact on the
Company's EPS disclosure when it is adopted.
Note E: Income Taxes
- --------------------
The Company has no income tax provison, other than minimum tax, due to the
utilization of the Company's net operating losses in the United States and the
fact that the Company operates in Malaysia where it has a tax holiday until
1999. It is expected that the net operating losses will be fully utilized in
fiscal 1998.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
-----------------------------------------------------------------------
Advanced inductive thin film disk head demand continues to be strong and
reflects both the performance and cost effectiveness of this technology. During
the second quarter of fiscal 1997, approximately 63% of advanced thin film
revenue was at the 1 gigabyte per 3.5" disk capacity point and 32% was at the
1.3 gigabyte per 3.5" disk capacity point. The Company also made initial
shipments of 1.7 gigabyte per 3.5" disk capacity point products.
Magnetoresistive ("MR") disk head volume production continued for the fourth
consecutive quarter and is planned to grow significantly in the second half of
fiscal 1997. The Company is in final qualification stages on new MR customer
programs, including an advanced portable/mobile product and a high-end
workstation product. Initial production of these new offerings is planned for
later in the third quarter of fiscal 1997. Initial evaluation units of the
Company's 2.1 gigabyte per 3.5" disk MR product have been shipped and
qualifications are underway on customer programs, with volume production
scheduled for the first quarter of fiscal 1998. The Company is actively engaged
in qualifying on twelve MR programs with four different customers that should
position the Company well for increasing MR production in the latter half of
fiscal 1997 and in fiscal 1998. The Company's future success in achieving
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.
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The Company remains on target with its plan to double volume production rates
during the fourth quarter of fiscal 1997 as compared to the fourth quarter of
fiscal 1996. The Company believes it continues to lead the industry in offering
the most cost effective solutions to its customers.
Three Months Ended March 29, 1997
- ---------------------------------
NET SALES. Net sales of $126.3 million in the second quarter of fiscal 1997
increased 45.7% from net sales of $86.7 million in the second quarter of fiscal
1996, as a result of continuing increases in shipments of advanced thin film
disk heads. Thin film disk head net sales of $116.9 million increased 86.9% from
the same quarter in the prior year and represent 92.6% of the Company's total
net sales for the second quarter of fiscal 1997. By the end of fiscal 1996, the
Company successfully replaced ferrite disk head production with thin film disk
head production. MR disk head net sales were $4.6 million for the second quarter
of fiscal 1997 as compared to $0.3 million for the same quarter in the prior
fiscal year.
GROSS PROFIT. As a percentage of net sales, gross profit was 38.4% and 29.2%,
for the second quarter of fiscal 1997 and the second quarter of fiscal 1996,
respectively. The increase in gross profit in the second quarter of fiscal 1997
as compared to the same quarter in the prior fiscal year was due to higher thin
film disk head sales volumes, resulting in economies of scale, coupled with
cost controls.
RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses as a percent
of net sales were 8.6% and 16.1% for the second quarter of fiscal 1997 and the
second quarter of fiscal 1996, respectively. Expenses in dollars during the
second quarter of fiscal 1997 decreased $3.2 million from the second quarter of
fiscal 1996 primarily due to the transition of MR manufacturing expenses from
R&D status in fiscal 1996 to production in fiscal 1997. The Company continues to
invest heavily in the development of MR and advanced thin film technology
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of net sales decreased to 1.8% for the
second quarter of fiscal 1997 as compared to 2.2% for the second quarter of
fiscal 1996 due to higher net sales.
TERMINATED MERGER COSTS. Merger costs of $2.9 million for the second quarter of
fiscal 1997 include legal and accounting fees, financial advisory fees and
miscellaneous other expenses related to the February 1997 proposed business
combination between the Company and Read-Rite Corporation. On March 14, 1997,
the Company announced its withdrawal of the proposal.
INTEREST INCOME AND EXPENSE. Interest income in the second quarter of fiscal
1997 increased $1.5 million compared to the second quarter of fiscal 1996 due to
higher average cash balances. Interest expense in the second quarter of fiscal
1997 increased $1.9 million compared to the second quarter of fiscal 1996 due to
higher average debt outstanding. Increases in both categories were primarily as
a result of the Company's March 1996 issuance of $115.0 million of 7%
Convertible Subordinated Debentures due in 2006.
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Six Months Ended March 29, 1997
- -------------------------------
NET SALES. Net sales of $247.9 million in the first half of fiscal 1997
increased 36.7% from net sales of $181.4 million in the first half of fiscal
1996, as a result of continuing increases in shipments of advanced thin film
disk heads. Thin film disk head net sales of $228.3 million increased 79.5% from
the same period in the prior year and represent 92.1% of the Company's total net
sales for the first half of fiscal 1997. By the end of fiscal 1996, the Company
successfully replaced ferrite disk head production with thin film disk head
production. MR disk head sales were $11.7 million for the first half of fiscal
1997 as compared to $0.4 million for the same period in the prior fiscal year.
GROSS PROFIT. As a percentage of net sales, gross profit was 38.4% and 26.9%,
for the first half of fiscal 1997 and the first half of fiscal 1996,
respectively. The increase in gross profit in the first half of fiscal 1997 as
compared to the same period in the prior fiscal year was due to higher thin film
disk head sales volumes, resulting in economies of scale, coupled with cost
controls.
RESEARCH AND DEVELOPMENT. Research and development expenses as a percentage of
net sales were 8.9% and 15.0% for the first half of fiscal 1997 and the first
half of fiscal 1996, respectively. Expenses in dollars during the first half of
fiscal 1997 decreased $5.3 million from the first half of fiscal 1996 primarily
due to transition of MR manufacturing expenses from R&D status in fiscal 1996 to
production in fiscal 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales decreased to 1.7% for the
first half of fiscal 1997 as compared to 2.0% for the first half of fiscal 1996
due to higher net sales.
TERMINATED MERGER COSTS. Merger costs of $2.9 million for the first half of
fiscal 1997 include legal and accounting fees, financial advisory fees and
miscellaneous other expenses related to the February 1997 proposed business
combination between the Company and Read-Rite Corporation. On March 14, 1997,
the Company announced its withdrawal of the proposal.
INTEREST INCOME AND EXPENSE. Interest income in the first half of fiscal 1997
increased $2.8 million compared to the first half of fiscal 1996 due to higher
average cash balances. Interest expense in the first half of fiscal 1997
increased $3.6 million compared to the first half of fiscal 1996 due to higher
average debt outstanding. Increases in both categories were primarily as a
result of the Company's March 1996 issuance of $115.0 million of 7% Convertible
Subordinated Debentures due in 2006.
OTHER INCOME AND EXPENSE. Other income, net, was $0.4 million and $1.7 million
for the first half of fiscal 1997 and the first half of fiscal 1996,
respectively. Other income in the first half of fiscal 1996 included $1.3
million related to the final payment from Seagate Technology, Inc., for their
purchase of the Company's Tape Head business unit in December 1994. Other income
for the first half of fiscal 1997 and the balance of the prior year first half
was primarily due to foreign currency exchange gains.
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PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the
six months ended March 29, 1997, is primarily related to federal alternative
minimum taxes, state minimum taxes and foreign taxes. The Company has no
income tax provision, other than minimum tax, due to the utilization of the
Company's net operating losses in the United States, and the fact that the
Company operates in Malaysia where it has a tax holiday until 1999. It is
expected that the net operating losses would be fully utilized in fiscal 1998.
Liquidity and Capital Resources
- -------------------------------
At March 29, 1997, the Company's cash and equivalents increased to $155.3
million from $127.4 million at September 28, 1996. During the first half of
fiscal 1997, the Company generated $69.7 million from operating activities,
comprised primarily of the net effect of the following: i) $63.0 million from
net income which included $18.0 million of depreciation and amortization
expense; ii) increase in accounts receivable of $17.9 million; iii) increase in
inventories of $15.7 million and iv) increase in the accounts payable balance of
$21.8 million. Increased production in response to increased customer orders for
advanced thin film and MR products resulted in higher inventories and accounts
payable for the first half of fiscal 1997 as compared to the same period in the
prior year. Accounts payable increased more than inventories for this period
primarily as a result of timing of payments.
At March 29,1997, total debt, including notes payable, amounted to $165.8
million, an increase of $1.9 million from the balance outstanding at September
28, 1996, primarily due to a $4.9 million increase in borrowings on the
Malaysian credit facilities, offset by a $3.0 million payment of capital leases.
Included in total debt at March 29, 1997, was $50.6 million drawn against the
credit facilities at the Company's Malaysian subsidiary. All the credit
facilities are callable on demand, have no termination date and are guaranteed
by the Company. Credit facilities with one bank, which have been in place since
June 1990, are secured by the Company's real property holdings in Malaysia and
include certain covenants which preclude the Company from granting liens and
security interests in other assets in Malaysia. Credit facilities with two other
banks, established by the Company's Malaysian subsidiary during the second
quarter of fiscal 1997, are unsecured. Additional borrowings available under all
of these facilities were approximately $17.4 million at March 29, 1997. Should
all or any significant portion of the Malaysian credit facilities become
unavailable for any reason, the Company would need to pursue alternative
financing sources. Also included in total debt is $115.0 million of 7.0%
Convertible Subordinated Debentures, due 2006.
The Company has a secured, asset-based revolving line of credit of $35.0 million
from CIT Group/Business Credit, Inc. There were no borrowings outstanding and
the balance available to borrow under this line of credit was approximately
$30.9 million at March 29, 1997. The line of credit expires January 11, 1998.
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Capital expenditures for the six months ended March 29, 1997 were $46.7 million.
In addition, the Company leased $12.2 million of production equipment through
operating leases. During fiscal 1997, the Company plans approximately $135.0
million in capital expenditures, including equipment to be obtained through
operating leases, to increase overall production capacity and continue to
improve MR and advanced thin film production processes. The Company believes
that it will have sufficient cash resources available from cash reserves,
operations and operating lease financing alternatives to meet its operating and
capital expenditure requirements. Market and customer demand continues to be
strong for the Company's products and the Company continues to work with its
customers to qualify on both advanced thin film and MR disk drive programs. In
the event that demand for the Company's products decline, 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 could be a significant adverse impact on liquidity. This may require the
Company to either obtain additional capital from external sources or to curtail
its capital, research and development or working capital expenditures. Such
curtailment could adversely affect the Company's future years' operations and
competitive position.
Certain Additional Business Factors
- -----------------------------------
TECHNOLOGICAL CHANGES
- ---------------------
The magnetic recording head industry has been characterized by rapidly changing
technology, short product life cycles and price erosion. The Company estimates
that the industry product life cycle is currently running as short as nine to 12
months. The demand for smaller, lighter products with greater data storage
capacity requires disk drive and disk head manufacturers to continue to build
greater performance into smaller products. There is no assurance that the
Company's products will achieve such performance or that the Company will
continue to qualify for disk drive manufacturers' programs. 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. During fiscal 1996 and continuing through the first half of
fiscal 1997, the Company experienced significant revenue growth and
profitablity, as compared to fiscal 1995, due primarily to increased customer
demand for its thin film products, continued timely
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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 the achievement of profitable yields during the
second half of fiscal 1996. There can be no assurance that the Company will
continue to qualify for disk head manufacturing programs or that it will not
experience manufacturing and product quality problems in the future. The
Company's future success depends in large part on its ability to develop and
qualify new products on a timely basis and to manufacture them in sufficient
quantities that compete effectively on the basis of price and performance.
FLUCTUATIONS IN QUARTERLY AND ANNUAL OPERATING RESULTS
- ------------------------------------------------------
The Company's operating results have fluctuated and may continue to fluctuate
from quarter to quarter and year to year. As recently as the first two quarters
of fiscal 1995, the Company experienced substantial losses. The Company's sales
are generally made pursuant to individual purchase orders and production is
scheduled and customer-specific materials are ordered on the basis of such
purchase orders. As customer programs mature, the Company may have to write-down
inventory and equipment. In addition, the Company must qualify on future
programs to sell its products. The Company has also, on occasion, experienced
cancellation and rescheduling of orders and reductions in quantities ordered as
customer requirements change. As a result, the Company's backlog may not be a
reliable indicator of future sales. Cancellation, rescheduling and reductions of
orders in the future could result in inventory losses, under-utilization of
production capacity and write-downs of tooling and equipment which would have a
material adverse effect on the Company's future operating results. Moreover, the
Company and several of its major competitors have announced large capital
expenditure programs, and there is no assurance that market demand will be
adequate to absorb this expanded capacity. The Company's operating results have
in the past and likely will in the future be adversely affected during periods
when production capacity is under-utilized.
DEPENDENCE ON CYCLICAL HARD DISK DRIVE INDUSTRY
- -----------------------------------------------
Demand for the Company's products is driven first by demand for disk drive
units. Demand for more and faster disk drives is in turn driven by demand for
such products as personal computers ("PCs"), network servers, disk arrays,
workstation drives, mainframes and internet servers and for memory intensive
services such as video on demand, voicemail and multimedia services. The disk
drive industry is cyclical and historically has experienced periods of
oversupply and reduced production levels, resulting in significantly reduced
demand for disk heads, as well as pricing pressures. The effect of these cycles
on suppliers, including the Company, has been magnified by hard disk drive
manufacturers' practice of ordering components, including disk heads, in excess
of their needs during periods of rapid growth, which increases the severity of
the drop in the demand for components during periods of reduced growth or
contraction. In recent years, the disk drive industry has experienced
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significant growth, and the Company has expanded its capacity and expects to do
so further. There is no assurance that such growth will continue, that the level
of demand for disk drives will not decline, or that future demand will be
sufficient to support existing and future capacity. A decline in demand for
hard disk drives may have a material adverse effect on the Company's future
operating results.
SIGNIFICANT CAPITAL NEEDS
- -------------------------
The magnetic disk head industry is capital intensive and requires significant
expenditures for research and development in order to develop and take advantage
of technological improvements and new technologies such as thin film and MR disk
head products. The Company believes that, in order to achieve its objectives, it
will need significant additional resources over the next several years for
capital expenditures, working capital and research and development. In fiscal
1997, the Company plans to spend approximately $135 million on capital
expenditures, of which $46.7 million was incurred for the six months ended March
29, 1997. In addition, the Company leased $12.2 million of production equipment
through operating leases during the same period. The Company believes that it
will be able to fund these expenditures from a combination of existing cash
balances, cash flow from operations, existing credit facilities and lease
financing arrangements. The Company may need additional sources of capital to
meet requirements in future years. There is no assurance that such additional
funds will be available to the Company or, if available, upon terms and
conditions acceptable to the Company. If the Company were unable to obtain
sufficient capital, it would need to curtail its operating and capital
expenditures, which could adversely affect the Company's future operating
results.
SHORT-TERM BORROWINGS
- ---------------------
At March 29, 1997, the Company had outstanding approximately $50.6 million of
short-term borrowings in floating rate demand loan facilities from banks in
Malaysia, where it has substantial manufacturing operations. The facilities are
callable on demand, have no termination date and are guaranteed by the Company.
The proceeds of the loan facilities were used in the construction of assembly
facilities in Malaysia and are used for working capital purposes. While the
Company has no reason to believe the loan facilities will be called, there is
no assurance that the banks will continue to make this credit available.
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CUSTOMERS
- ---------
The disk head industry is intensely competitive and largely dependent on sales
to a limited number of major disk drive manufacturers and systems companies. The
Company's top four customers accounted for 87.8% of the Company's net sales in
fiscal 1996. Many of the Company's competitors are significantly larger and more
diversified and have substantially greater financial, technical and marketing
resources than does the Company. Additionally, a number of disk drive
manufacturers with significantly greater financial, technical and marketing
resources than the Company, such as IBM, Seagate Technology Incorporated
("Seagate"), Quantum Corporation ("Quantum"), Hitachi, Ltd. ("Hitachi") and
Fujitsu Ltd. ("Fujitsu") currently produce thin film and/or MR heads for their
own use. IBM and Seagate also make their disk head products available to other
disk drive manufacturers. Other disk drive manufacturers could develop or
acquire the ability to produce thin film and MR heads in the future. The
Company's ability to obtain new orders from customers depends on its ability to
anticipate technological changes, develop products to meet individualized
customer requirements and to achieve timely delivery of products that meet
customer specifications at competitive prices. In addition, the disk drive
industry is also intensely competitive and disk drive manufacturers may quickly
lose market share as a result of the successful deployment of new technologies
by their competitors or various other factors. Historically, certain disk drive
manufacturers have declared bankruptcy. A significant reduction in orders from
or the loss of a major customer, which could occur for any of a variety of
reasons, could have a material adverse effect on the Company's future operating
results.
FURTHER CONSOLIDATION OF THE DISK DRIVE INDUSTRY
- ------------------------------------------------
The information technology industry has in recent years experienced significant
consolidation. Certain disk drive and systems companies have acquired or
merged with magnetic disk head companies in an effort to produce magnetic disk
heads for their own use. Seagate, a major manufacturer of both disk drives and
recording heads, 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. There is no assurance that disk drive and systems companies will
not continue to vertically integrate and acquire the ability to produce disk
heads for their own use. 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. As a result, there is no assurance that further vertical integration
of disk drive and system companies and consolidation within the disk drive
industry will not have a material adverse effect on the Company's future
operating results.
14
<PAGE>
DEPENDENCE ON FOREIGN OPERATIONS
- --------------------------------
The Company conducts substantially all of its production, assembly and test
operations in its facilities in Ireland, Korea, Malaysia and the People's
Republic of China ("PRC"). In addition, the Company has contractual
relationships with unaffiliated parties who conduct manufacturing and assembly
operations for the Company in Malaysia, the Philippines and the PRC. The
Company's operations in Korea have, from time to time in recent years, been
affected by labor disruptions and slow downs. The Company's production facility
in Malaysia faced potential labor shortages during fiscal 1996 and may face
potential labor shortages in the future, as other disk drive and component
manufacturers expand their production facilities in Malaysia. In addition to
risks of labor disruption, civil unrest and political instability, the Company's
foreign operations subject it to delays in obtaining governmental permits and
approvals, currency exchange fluctuations, currency restrictions, trade
restrictions and transportation problems.
INTELLECTUAL PROPERTY
- ---------------------
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 employees than on patent
rights.
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.
MANAGEMENT OF GROWTH
- --------------------
The Company is experiencing growth and is planning significant internal
expansion. In order to maintain and improve operating results, the Company's
management will be required to manage this growth and the related expansion
effectively. There is no assurance that the Company's expansion will remain on
15
<PAGE>
schedule or will improve operating results. As the Company continues to expand,
it may become more difficult to manage geographically dispersed operations. The
Company's failure to effectively manage growth could have a material adverse
effect on its future operating results. The volatility of the stock price may
reduce the ability of the Company to raise additional operating funds through
equity offerings.
VOLATILITY OF STOCK PRICE
- -------------------------
The market price of the Company's Common Stock has been volatile, with daily
closing market prices ranging from $18.00 to $59.00 per share over the first
two quarters of fiscal 1997. The trading price of the Company's Common Stock has
fluctuated in response to quarter-to-quarter operating results, industry
conditions, awards of orders to the Company or its competitors, new product or
product development announcements by the Company or its competitors, general
market and economic conditions and other events or factors. In addition, the
volatility of the stock markets in recent years has caused wide fluctuations in
trading prices of stocks of technology companies independent of their individual
operating results. The market price of the Company's Common Stock at any given
time may be adversely affected by factors independent of the Company's
operating results. The volatility of the stock price may reduce the ability
of the Company to raise additional operating funds through equity offerings.
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 with key customers, risks related to
international transactions and hedging strategies and general economic risks and
uncertainties.
16
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
At the Company's Annual Stockholders Meeting held on February 7,1997, the
Company's stockholders voted on the following matters:
1. Election of directors;
2. Approval of indemnification agreements with the non-employee directors of the
Company;
3. Approval of amendment of the Company's 1994 Employee Stock Option Plan to
increase the number of shares of Common Stock authorized for the issuance
thereunder from 2,100,000 to 3,250,000;
4. Approval of amendment of the Company's 1994 Non-Employee Director Stock
Option Plan to increase the initial option grant to non-employee directors
from 5,000 shares to 20,000 shares, change the vesting of options and to
ratify and approve grant of options under said plan to purchase 20,000
shares to Directors Dwight and Mercure and 15,000 shares to Directors Frank
and Goldress;
5. Ratification of selection of auditors;
The tabulation of votes provided by the Inspector of Elections was as follows:
Proposal Voting Tabulation
-------- -----------------
1. Election of directors:
Nominee For Withhold/Against
------- --- ----------------
C.D. Crisman 20,713,154 502,271
H.M. Dwight, Jr. 20,713,018 502,407
H.R. Frank 20,712,644 502,781
J.E. Goldress 20,712,404 503,021
R.C. Mercure, Jr. 20,713,604 501,821
2. Approval of indemnification agreements with the non-employee directors
of the Company:
For Against Abstain
--- ------- -------
20,689,232 469,036 49,632
17
<PAGE>
3. Approval of amendment of the Company's 1994 Employee Stock Option Plan:
For Against Abstain
--- ------- -------
17,770,798 3,385,840 51,262
4. Approval of amendment of the Company's 1994 Non-Employee Director Stock
Option Plan:
For Against Abstain
--- ------- -------
17,406,091 3,642,427 63,136
5. Ratification of selection of auditors:
For Against Abstain
--- ------- -------
21,171,343 11,788 17,498
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description
------- -----------
11 Statement re computation of per share information.
27 Financial Data Schedule
(b) Reports on Form 8-K. Reports on 8-K dated February 24, 1997 and
March 17, 1997 were filed by the Company with respect to the initiation
of a proposed business combination with Read-Rite Corporation, and
subsequent termination thereof, respectively.
18
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
APPLIED MAGNETICS CORPORATION
Dated: May 13, 1997 /s/Craig D. Crisman
-------------------------------
Craig D. Crisman
Chairman of the Board and Chief
Executive Officer
(Principal Financial Officer)
Dated: May 13, 1997 /s/Peter T. Altavilla
-------------------------------
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
19
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands)
<TABLE>
<CAPTION>
For the three months ended For the six months ended
March 29, March 30, March 29, March 30,
----------------------------------------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary Earnings Per Share:
Net income $ 31,091 $ 8,696 $ 62,963 $ 17,724
======== ======== ======== ========
Weighted average common shares outstanding 23,519 22,828 23,393 22,763
Dilutive effect of stock options 1,473 1,066 1,369 1,071
-------- --------- -------- --------
Weighted average number of common shares
outstanding 24,992 23,894 24,762 23,834
======== ========= ======== ========
Primary earnings per common share $ 1.24 $ 0.36 $ 2.54 $ 0.74
======== ========= ======== ========
Fully Diluted Earnings Per Sahre:
Net income $ 31,091 8,696 62,963 17,724
Interest expense related to convertible
subordinated debentures, net of tax
effect 2,035 196 4,070 196
-------- --------- -------- --------
Net income as adjusted $ 33,126 $ 8,892 $ 67,033 $ 17,920
======== ========= ======== ========
Weighted average common shares outstanding 23,519 22,828 23,393 22,763
Dilutive effect of stock options 1,476 1,066 1,444 1,120
Assuming conversion of convertible
subordinated debentures 6,183 6,183 6,183 6,183
-------- --------- -------- --------
Weighted average number of common shares
outstanding as adjusted 31,178 30,077 31,020 30,066
======== ========= ======== ========
Fully diluted earnings per common share: $ 1.06 $ 0.30 $ 2.16 $ 0.60
======== ========= ======== ========
</TABLE>
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-END> MAR-29-1997
<CASH> 155,282
<SECURITIES> 0
<RECEIVABLES> 61,254
<ALLOWANCES> 0
<INVENTORY> 51,666
<CURRENT-ASSETS> 277,211
<PP&E> 331,950
<DEPRECIATION> (169,800)
<TOTAL-ASSETS> 448,373
<CURRENT-LIABILITIES> 123,180
<BONDS> 0
0
0
<COMMON> 2,374
<OTHER-SE> 203,559
<TOTAL-LIABILITY-AND-EQUITY> 448,373
<SALES> 247,938
<TOTAL-REVENUES> 247,938
<CGS> 0
<TOTAL-COSTS> 152,792
<OTHER-EXPENSES> 29,201
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (6,317)
<INCOME-PRETAX> 64,002
<INCOME-TAX> 1,039
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 62,963
<EPS-PRIMARY> 2.54
<EPS-DILUTED> 2.16
</TABLE>
