Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended December 27, 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
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(Exact name of registrant as specified in its charter)
A Delaware Corporation 95-1950506
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
75 Robin Hill Road, Goleta, California 93117
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(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 683-5353
(No Change)
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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: 24,071,411, $.10 par value common stock as of February 9, 1998.
Exhibit Index on page 17
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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 27,
1997.
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 per share data)
For the three months ended
December 27, December 28,
1997 1996
------------ ------------
Net sales $ 74,412 $ 121,627
Cost of sales 81,490 75,030
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Gross profit (loss) (7,078) 46,597
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Research and development expenses 23,309 11,148
Selling, general and administrative expenses 1,785 2,044
Restructuring charge 8,400 --
--------- ---------
Total operating expenses 33,494 13,192
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Income (Loss) from operations (40,572) 33,405
Interest income 2,261 1,862
Interest expense (3,033) (3,151)
Other income, net 1,625 279
--------- ---------
Income (Loss) before taxes (39,719) 32,395
Provision for income taxes 30 523
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Net income (loss) $ (39,749) $ 31,872
========= =========
Net income (loss) per share:
Earnings per common share $ (1.67) $ 1.37
========= =========
Earnings per common share-assuming dilution $ (1.67) $ 1.10
========= =========
Weighted average number of common and common
equivalent shares outstanding:
Common shares 23,858 23,267
========= =========
Common shares-assuming dilution 23,858 30,861
========= =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these 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
December 27, September 27,
1997 1997
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Current Assets:
Cash and equivalents $ 130,767 $ 162,302
Accounts receivable, net 31,729 52,924
Inventories 46,949 51,438
Prepaid expenses and other 12,690 11,420
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222,135 278,084
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Property, plant and equipment, at cost 390,595 371,224
Less-accumulated depreciation (182,545) (181,732)
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208,050 189,492
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Other assets 11,857 10,412
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$ 442,042 $ 477,988
========= =========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 495 $ 513
Bank notes payable 50,080 50,188
Accounts payable 46,017 49,103
Accrued payroll and benefits 9,118 11,287
Other current liabilities 16,501 5,829
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122,211 116,920
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Long-term debt, net 115,808 116,030
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Other liabilities 2,724 4,257
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Shareholders' Investment:
Preferred stock, $.10 par value, authorized
5,000,000 shares, none issued and outstanding -- --
Common stock, $.10 par value, authorized 40,000,000
shares, issued 23,991,739 shares at December 27,
1997 and 23,976,711 shares at September 27, 1997 2,399 2,398
Paid-in capital 191,301 191,185
Retained earnings 9,554 49,303
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203,254 242,886
Treasury stock, at cost (128,384 shares at
December 27, 1997 and September 27, 1997) (1,554) (1,554)
Unearned restricted stock compensation (401) (551)
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201,299 240,781
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$ 442,042 $ 477,988
========= =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these consolidated balance sheets.
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APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows - Unaudited
(In thousands)
For the three months ended
December 27, December 28,
1997 1996
------------ ------------
Cash Flows from Operating Activities:
Net income (loss) $ (39,749) $ 31,872
Adjustments to derive cash flows:
Depreciation and amortization 11,770 8,574
Restructuring charge 8,400 --
Amortization of unearned restricted stock
compensation, net 150 --
Changes in assets and liabilities
Accounts receivable 21,195 (184)
Inventories 4,489 (1,537)
Prepaid expenses and other (1,269) 845
Accounts payable (3,086) 6,370
Accrued payroll and benefits (2,169) 418
Other assets and liabilities 454 523
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Net cash flows provided by operating activities 185 46,881
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Cash Flows from Investing Activities:
Additions to property, plant and equipment (30,735) (17,682)
Notes receivable 26 31
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Net cash flows used in investing activities (30,709) (17,651)
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Cash Flows from Financing Activities:
Proceeds from issuance of debt 62,230 46,039
Repayment of debt (62,578) (46,508)
Proceeds from stock options exercised, net 117 785
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Net cash flows provided (used) by financing
activities (231) 316
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Effect of Exchange Rate Changes on Cash and
Equivalents (780) 28
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Net Increase (Decrease) in Cash and Equivalents (31,535) 29,574
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Cash and Equivalents at Beginning of Period 162,302 127,400
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Cash and Equivalents at End of Period $ 130,767 $ 156,974
========= =========
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these consolidated statements.
Page 5 of 24
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Selected Notes to Condensed Consolidated Financial Statements
Unaudited
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):
December 27, September 27,
1997 1997
------------ -------------
Purchased parts and
manufacturing supplies $17,931 $24,187
Work in progress 20,397 25,434
Finished goods 8,621 1,817
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$46,949 $51,438
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Note B: Restructure Charge
- --------------------------
During the first quarter of fiscal 1998, the Company recorded a pre-tax
restructuring charge of approximately $8.4 million primarily in connection with
the planned shut down of its production facility in Ireland and write down of
certain tooling and equipment.
Note C: Income (Loss) Per Share Computation
- -------------------------------------------
Effective in fiscal 1998, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128
replaces the presentation of primary income (loss) per share ("EPS") with the
presentation of basic EPS. Income (loss) per common share is computed by
dividing net income (loss) by the weighted average number of shares of common
stock outstanding during the period. Income (loss) per common share - assuming
dilution is computed based on weighted average number of shares of common stock
and common stock equivalents outstanding during the period and as if the
Company's 7.0% Convertible Subordinated Debentures due March 15, 2006 (the
"Convertible 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 Debentures.
During a loss period, the assumed exercise of in-the-money stock options and
conversion of Convertible Debentures have an antidilutive effect. As a result,
these shares are not included in the weighted average shares outstanding of
23,857,600 used in the calculation of basic and fully diluted loss per common
share at December 27, 1997. Prior year EPS has been conformed to current year
presentation.
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Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
During fiscal 1997, the Company experienced continued revenue growth and
profitability compared to fiscal 1996 due to strong customer demand for the
Company's inductive thin film products.
In December 1997, (during the first quarter of fiscal 1998), the Company
experienced a significant decrease in shipments to Western Digital Corporation
("Western Digital"), its largest customer. Western Digital had sharply reduced
its production schedules as a reaction to the recent hard disk drive oversupply
in the industry's distribution channel. As a result, the Company experienced
significant cancellations, production reschedules and price reductions during
the first quarter of fiscal 1998. Due to continued hard disk drive market
oversupply, the Company expects that revenues for the second quarter of fiscal
1998 will remain flat compared to the first quarter of fiscal 1998.
In response to reductions in production schedules, the Company has taken
several measures to reduce expenditures, including capital spending, in order to
realign costs to the current level of business. In addition, the Company planned
the shutdown of its manufacturing facility in Ireland in order to consolidate
foreign manufacturing operations. A pretax restructuring charge of $8.4 million
was recorded in the first quarter of fiscal 1998, primarily relating to the
costs associated with the shut down of the Ireland facility. Included in the
charge is the write-down of certain tooling and equipment.
The Company experienced significantly lower MR revenue during the first
quarter of fiscal 1998 as two MR programs reached end of life earlier than
expected. The current oversupply in the disk drive industry and customers'
decisions to shift focus to other disk drive product lines contributed to
accelerated termination of the programs. Also, qualifications on additional MR
programs did not occur as expected during the first quarter of fiscal 1998. The
Company is currently working on program qualifications for production in the
third fiscal quarter of 1998. Sales revenue for the third quarter of fiscal 1998
and beyond will be heavily dependent on the successful qualification and
production ramp of new MR programs. Operating and financial results for fiscal
1998 will continue to be impacted as the Company works toward qualification
status on new MR programs. Implementation of timely production ramps and
improvement of process and production yields on its new programs are critical to
the Company's future profitability. As a result, the third quarter of fiscal
1998 projected revenue may be significantly lower than either the first or
second quarter of fiscal 1998 revenue as the Company transitions to MR
technology products, while inductive thin film products reach end of life.
Three Months Ended December 27, 1997
- ------------------------------------
NET SALES. Net sales of $74.4 million in the first quarter of fiscal 1998
decreased 38.8% from net sales of $121.6 million in the first quarter of fiscal
1997, primarily due to significantly lower sales volumes to Western Digital,
pricing declines and lower production yields on the Company's inductive thin
film products. MR net sales were $1.8 million in the first quarter of fiscal
1998 compared to $7.1 million for the same period in the prior year.
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GROSS PROFIT. As a percentage of net sales, gross profit was a negative 9.5% for
the first quarter of fiscal 1998 compared to 38.3% for the first quarter of
fiscal 1997. The decrease in gross profit in the first quarter of fiscal 1998 as
compared to the same quarter in the prior fiscal year was due to the reasons
discussed under "Net Sales".
RESEARCH AND DEVELOPMENT. Research and development expenses as a percent of net
sales were 31.3% and 9.2% for the first quarter of fiscal 1998 and the first
quarter of fiscal 1997, respectively. Expenses in dollars during the first
quarter of fiscal 1998 were $23.3 million compared to $11.1 million the first
quarter of fiscal 1997. The significant increase as a percent of net sales was
due to significantly lower revenue as well as an increase in absolute dollars
due to the Company's acceleration of MR technology development and program
qualification efforts as a result of earlier than expected end of life for its
existing inductive thin film products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percent of net sales were 2.4% and 1.7% for the
first quarter of fiscal 1998 and the first quarter of fiscal 1997, respectively.
Expenses in dollars for the first quarter of fiscal 1998 decreased $0.3 million
from the first quarter of fiscal 1997. The increase as a percent of sales was
due to lower revenues.
RESTRUCTURING CHARGE. During the first quarter of fiscal 1998, the Company
recorded a pre-tax restructuring charge of approximately $8.4 million primarily
in connection with the planned shut down of its production facility in Ireland
and the write-down of certain tooling and equipment.
INTEREST INCOME AND EXPENSE. Interest income in the first quarter of fiscal 1998
increased $0.4 million compared the first quarter of fiscal 1997 due to higher
average cash balances. Interest expense in the first quarter of fiscal 1998
decreased $0.1 million compared to the first quarter of fiscal 1997, while
average debt outstanding was approximately $3.0 million higher, due to lower
average interest rates.
OTHER INCOME AND EXPENSE. Other income, net, was $1.6 million and $0.3 million
for the first quarter of fiscal 1998 and the first quarter of fiscal 1997,
respectively. Other income in the first quarter of fiscal 1998 primarily
included foreign currency gains. Other income in the first quarter of fiscal
1997 included $0.1 million in foreign currency gains and $0.2 million in gains
on sale of excess assets.
PROVISION FOR INCOME TAXES. The Company's provision for income taxes for the
three months ended December 27, 1997, primarily related to state minimum taxes
and foreign taxes.
Liquidity and Capital Resources
- -------------------------------
At December 27, 1997, the Company's cash and equivalents decreased to
$130.8 million from $162.3 million at September 27, 1997. During the first
quarter of fiscal 1998, the Company generated $0.2 million from operating
activities, comprised primarily of the net effect of the following: i) $39.7
million of net loss which included $11.8 million of depreciation and
amortization expense; ii) decrease in accounts receivable of $21.2 million; iii)
Page 8 of 24
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decrease in inventories of $4.5 million and iv) decrease in the accounts payable
balance of $3.1 million.
At December 27, 1997, total debt, including notes payable, amounted to
$166.4 million, a decrease of $0.3 million from the balance outstanding at
September 27, 1997. Total debt included $115.0 million of 7.0% Convertible
Subordinated Debentures, due 2006. Also included in total debt at December 27,
1997, was $50.1 million in Malaysian borrowings. All the credit facilities are
callable on demand and have no termination date. 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 five other banks, established by the Company's
Malaysian subsidiary during fiscal 1997 are unsecured. Unused borrowings
available under all these facilities were approximately $16.4 million at
December 27, 1997. While the Company has no reason to believe the loan
facilities will be called, there can be no assurance that the banks will
continue to make this credit available. Should any or all significant portion of
the Malaysian credit facilities become unavailable for any reason, the Company
would need to pursue alternative financing sources.
The Company has a secured, asset-based revolving line of credit of up to
$35.0 million from CIT Group/Business Credit, Inc. that has been in place since
January 1995. As of December 27, 1997, there were no borrowings outstanding and
the balance available under this line of credit was approximately $25.7 million.
In response to reductions in production schedules during the first quarter
of fiscal 1998, the Company reduced its capital spending plan, in order to
realign capacity requirements to the current level of business. For fiscal 1998,
the Company has reduced its capital plan from approximately $170.0 million to
$100.0 million, which includes equipment to be obtained through operating
leases. The capital plan is primarily related to continued development and
production of MR technologies and products, increase of overall production
capacity and product development of Giant MR ("GMR") technology. Capital
expenditures for the three months ended December 27,1997 were $30.7 million. In
addition, the Company leased $14.4 million of production equipment through
operating leases. Purchase commitments totalled approximately $28.0 million at
December 27, 1997.
During fiscal 1998, the Company believes that it will have sufficient cash
flows from existing cash balances, existing credit facilities and equipment
lease financing alternatives to meet its operating and capital expenditure
requirements as the Company transitions from inductive thin film disk head
production to MR disk head production. The Company's shipment and revenue growth
and profitability will depend on the Company's ability to achieve a qualified
status with its customers, achievement of satisfactory production yields and
successful execution of planned production ramps on its MR products. While the
Company is devoting substantial engineering and manufacturing resources to these
efforts, there can be no assurances 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 a material adverse effect on the Company's
operating results and liquidity. This may require the Company to either obtain
additional capital from external sources or to curtail its capital, research and
Page 9 of 24
<PAGE>
development or working capital expenditures. Such curtailment could materially
adversely affect the Company's future years' operations and competitive
position.
Certain Additional Business Factors
- -----------------------------------
TECHNOLOGY TRANSITIONS
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
9 to 12 months. The demand for greater data storage capacity requires disk drive
and disk head manufacturers to continue to build greater performance into their
respective products. There is no assurance that the Company's products will
achieve such performance or that the Company will continue to qualify as a
supplier for disk drive manufacturers' programs. During fiscal 1996 and
continuing through fiscal 1997, the Company experienced increased customer
demand and significant revenue growth and profitability. This success was due
primarily to continued timely production ramps on a number of inductive thin
film programs and continued successful transition to advanced inductive thin
film disk head products as a result of achievement of profitable yields. During
fiscal 1998, the Company faces another technology transition from inductive thin
film to MR disk head technology. 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. 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, on occasion, and as recently as the
first quarter of fiscal 1998, experienced cancellations and rescheduling of
orders and reductions in quantities ordered as customer requirements changed.
Cancellation, rescheduling and reductions of orders resulted in underutilization
of production capacity and write-down of certain tooling and equipment which had
a material adverse effect on the Company's first quarter 1998 results. The
Company's operating results have in the past been and likely will in the future
be adversely affected during periods when production capacity is underutilized.
DEPENDENCE ON CYCLICAL HARD DISK DRIVE INDUSTRY
Multimedia personal computers and high-end computer applications such as
network servers (Internet and intranet), workstations and mainframes are driving
the demand for greater storage capacity and performance. In addition, the market
growth of laptop, notebook and sub-notebook computers has increased the demand
for smaller form factor disk drives. As a result, the Company experienced
significant customer demand for its advanced inductive thin film products during
fiscal 1997. However, due to continued industry trends towards even greater
storage capacity and performance, customer demand began to shift from inductive
thin film product technology to MR technology. By the end of fiscal 1997, some
Page 10 of 24
<PAGE>
of the Company's customers had discontinued development of new products based on
inductive thin film disk head technology. MR disk heads, which generally permit
greater storage capacities per disk and provide higher data transfer rates than
inductive thin film disk heads, now represent the fastest growing segment of the
recording head industry. The Company believes that demand for inductive thin
film disk heads peaked during fiscal 1997. Fiscal 1998 is a year of significant
technology transition, as the Company's product mix evolves from predominantly
inductive thin film to MR technology by the fourth quarter of fiscal 1998.
In recent years, the disk drive industry has experienced significant
growth and the Company has expanded its capacity during the last two fiscal
years to meet that growth. However, 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. The disk drive
industry recently entered into an oversupply condition and, as a result, head
suppliers including the Company, are experiencing competitive pricing pressures
for their inductive thin film and MR heads. A continued decline in demand for
hard disk drives may have a material adverse effect on the Company's future
operating results.
SIGNIFICANT CAPITAL NEEDS
The recording 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 MR and
GMR. 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. Capital expenditures
for the three months ended December 27, 1997 were $30.7 million. In addition,
the Company leased $14.4 million of production equipment through operating
leases during the same period. During fiscal 1998, the Company plans to spend
approximately $100.0 million on capital expenditures. The Company believes that
it will be able to fund future expenditures from a combination of existing cash
balances, existing credit facilities and equipment 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 materially
adversely affect the Company's future operating results.
SHORT-TERM BORROWINGS
At December 27, 1997, the Company had outstanding approximately $50.1
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 loan facilities are used for manufacturing equipment and 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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<PAGE>
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 experienced a significant shift in its customer base
during fiscal 1997. The Company has one customer, Western Digital, whose
revenues accounted for 79% of the Company's net sales in fiscal 1997. 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 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 successful deployment of new technologies by their
competitors or various other factors. A significant reduction in orders, the
loss of a major customer or the inability to increase the customer base, which
could occur for any variety of reasons, could have a material adverse effect on
the Company's operating results.
The Company believes that disk drive customers and systems companies that
are not vertically integrated represent significant opportunities for sale of
the Company's disk head products for competitive and other reasons. Moreover,
the Company believes that certain vertically integrated companies will continue
to rely on independent suppliers of disk heads as alternative sources of supply,
or in some cases, as primary sources of supply for individual disk drive
programs.
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 Ltd., Hitachi Ltd., IBM,
Quantum/MKE and Seagate produce some or all inductive thin film, MR, and/or GMR
heads for their own use. All these companies have significantly greater
financial, technical and marketing resources than the Company. IBM also makes
its recording head products available in the original equipment manufacturers
("OEM") market to competing drive manufacturers, in direct competition with the
Company.
Read-Rite Corporation ("Read-Rite") has had substantially greater sales of
inductive thin film and MR disk head products than the Company and has been the
largest competitor among independent inductive thin film and MR disk head
manufacturers. Read-Rite and Sumitomo Metal Industries, Ltd. ("SMI") have a
joint venture in Japan to make inductive thin film and/or MR wafers.
Currently, several large Japanese companies, each with considerably more
resources than the Company, compete in the independent head market and have had
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 recording heads.
FURTHER CONSOLIDATION OF THE DISK DRIVE INDUSTRY
The disk drive industry continues to experience significant consolidation.
Certain disk drive and systems companies, such as Quantum, have acquired or
merged with magnetic disk head companies in an effort to produce magnetic disk
heads for their own use. In fiscal 1997, Quantum announced the sale of a
majority interest in its recording head group to Matsushita-Kotobuki Electronics
Industries, Ltd. ("MKE"), Quantum's contract manufacturing partner for disk
drives. The resulting venture, MKE-Quantum Components ("MKQC"), in which Quantum
Page 12 of 24
<PAGE>
retains 49% interest, supplies recording heads to MKE for use in Quantum disk
drives. Revenue from Quantum during fiscal 1997 was less than 2% of total
revenues. The Company does not expect a material impact to its future revenue.
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. Conner was the Company's largest customer in fiscal
1995. Revenues from Conner declined materially during fiscal 1996. There can be
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.
In fiscal 1997, NEC announced plans to discontinue internally developed
NEC drives and engage in a contract manufacturing relationship with IBM. Revenue
from NEC during fiscal 1997 was less than 10% of total revenues. The Company
expects that revenue from NEC will decline materially. During the first quarter
of fiscal 1998, Singapore Technologies announced plans to shut down its disk
drive subsidiary, Micropolis, due to unfavorable financial and market
conditions. At the time of the shutdown, the Company had no active production
programs with Micropolis.
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.
DEPENDENCE ON FOREIGN OPERATIONS
The Company conducts substantially all of its production, assembly and
test operations in its facilities in 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 that its success depends on the innovative skills and
technological competence of its employees and upon proper protection of its
Page 13 of 24
<PAGE>
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
During the past two fiscal years, the Company experienced significant
growth. In order to maintain and improve operating results during periods of
rapid expansion, the Company's management will be required to manage growth and
related expansion effectively. Future expansion 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.
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has been volatile, with
daily closing market prices ranging from $17.38 to $60.50 per share during
fiscal 1997 and ranging from $11.13 to $33.25 during the first quarter of
fiscal 1998. 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
- ---------------------------
When used in Management's Discussion and Analysis, the words "believe",
"anticipate", "expect" and similar expressions are intended to identify
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). These forward looking statements speak only as of the date
hereof. All of the forward looking statements are based on estimates and
assumptions made by management of the Company, which, although believed to be
reasonable, are inherently uncertain and difficult to predict; therefore, undue
reliance should not be placed upon such estimates. Such statements are subject
to certain risks and uncertainties inherent in the Company's business that could
cause actual results to differ materially from those projected. These factors
include, but are not limited to: (i) successful transition to volume production
of MR disk head products with profitable yields; (ii) the relatively limited
number of customers and customer changes in short range and long range plans;
(iii) dependence on continued customer demand for the Company's inductive thin
film products; (iv) competitive pricing pressures; (v) the Company's ability to
control inventory levels; (vi) domestic and international competition in the
Company's product areas; (vii) risks related to international transactions; and
(viii) general economic risks and uncertainties.
Page 14 of 24
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Exhibit
Number Description
------- -----------
10(a) Amendment dated December 15, 1997 to Financing Agreement
of November 14, 1994 between the Company and the CIT
Group/Business Credit, Inc.
11 Statement re computation of per share information.
27 Financial Data Schedule
(b) Reports on Form 8-K. None
Page 15 of 24
<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: February 10, 1998 /s/Craig D. Crisman
------------------------------------
Craig D. Crisman
Chairman of the Board and Chief Executive Officer
(Principal Financial Officer)
Dated: February 10, 1998 /s/Peter T. Altavilla
------------------------------------
Peter T. Altavilla
Corporate Controller
(Principal Accounting Officer)
Page 16 of 24
<PAGE>
EXHIBIT INDEX
Sequentially
Exhibit Numbered
No. Description Page
- --------------------------------------------------------------------------------
10(a) Amendment dated December 15, 1997 to Financing
Agreement of November 14, 1994 between the Company
and the CIT Group/Business Credit, Inc. 18
11 Statement re computation of per share information. 23
27 Financial Data Schedule 24
Page 17 of 24
<PAGE>
EXHIBIT 10
The CIT Group/
Business Credit, Inc.
3rd Floor
300 South Grand Avenue
Los Angeles, CA 90071
Tel: 213 613-2575
Fax: 213 613-2588
December 15, 1997
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, CA 93117
Dear Sirs:
We refer to the Financing Agreement, dated January 11, 1995 (as amended, the
"Agreement") between Applied Magnetics Corporation, a Delaware Corporation (the
"Company") and The CIT Group/Business Credit, Inc., a New York corporation
("CITBC"). Capitalized terms not otherwise defined herein shall be as defined in
the Agreement.
The Company and CITBC hereby agree that the Agreement is amended, as follows:
1. The definitions of "Capital Expenditures", "Capital Lease", "Current
Liabilities", "Documents of Title", "EBITDA", "Free Cash Flow", "Leverage
Ratio", "Net Interest Expense", "Operating Leases", "Total Liabilities" and
"Working Capital" set forth in Section 1 of the Agreement are hereby deleted in
their entirety.
2. The definition of "Collateral" set forth in Section 1 of the
Agreement is hereby amended by deleting the words 'Equipment" and "Documents of
Title" therefrom.
3. The definitions of "Early Termination Date" and "Early Termination
Fee" set forth in Section 1 of the Agreement are hereby amended by deleting the
word "third" in each instance where it appears in such definitions, and
inserting in lieu thereof the word "sixth".
4. Sub-subclause zz) of subclause ii) of clause b) in the definition of
Eligible Account Receivable set forth in Section 1 of the Agreement is hereby
amended by deleting the words "twenty percent (20%)" and inserting in lieu
thereof the words "thirty percent (30%)".
Page 1
Page 18 of 24
<PAGE>
5. Subclause xii) of clause b) in the definition of "Eligible Accounts
Receivable" set forth in Section 1 of the Agreement is hereby deleted in its
entirety, and the following is inserted in lieu thereof:
"xii) Accounts due from (x) Western Digital Corporation to the extent such
outstanding Accounts exceed eighty percent (80%) of all then outstanding
Accounts, and (y) Accounts due from any other customer to the extent such
outstanding Accounts due from such other customer exceed fifty percent (50%) of
all then outstanding Accounts."
6. Subclause x) of clause vii) in the definition of "Permitted
Indebtedness" set forth in Section 1 of the Agreement is hereby amended by
deleting the amount of "$20,000,000.00" set forth therein, and inserting in lieu
thereof the amount of "$30,000,000.00".
7. The second sentence of paragraph 1 of Section 3 of the Agreement is
hereby amended by deleting the words "eighty percent (80%)", and inserting in
lieu thereof the words "eighty-five percent (85%)".
8. The first sentence of paragraph 1 of Section 6 of the Agreement is
hereby amended by deleting clauses (b) and (d) thereof.
9. Paragraph 2 of Section 6 of the Agreement is hereby amended by
deleting clause (b) thereof.
10. Paragraph 9 of Section 7 of the Agreement is hereby deleted in its
entirety, and the following is inserted in lieu thereof:
"9. The Company, and the Foreign Entities, shall maintain at all times, on
a consolidated basis, a Net Worth of not less than $165,000,000.00."
11. Clause F of paragraph 10 of Section 7 of the Agreement is hereby
deleted in its entirety, and the following is inserted in lieu thereof:
"Assume, guarantee, endorse, or otherwise become liable upon the obligations of
any person, firm, entity or corporation, except by the endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business, provided, however, that the Company may assume, guarantee,
endorse or otherwise become liable upon the obligations of the Foreign Entities
provided the sum of such amounts does not exceed $200,000,000.00 in the
aggregate at any one time;"
Page 2
Page 19 of 24
<PAGE>
12. Clause J of paragraph 10 of Section 7 of the Agreement is hereby
amended by deleting the dollar amount of "$82,000,000.00" in both instances
where it appears, and inserting in lieu thereof the dollar amount of
"$82,000,000.00.
13. Paragraphs 11, 14, 15 and 16 of Section 7 of the Agreement are
hereby deleted in their entirety.
14. Paragraphs 1 and 2 of Section 8 of the Agreement are hereby deleted
in their entirety, and the following are inserted in lieu thereof:
"1. Interest on the Revolving Loan shall be payable monthly as of the end of
each month and shall be an amount equal to the sum of three-quarters percent
(0.75%) or, subject to paragraph 2 of this Section 8, one-quarter percent
(0.25%) if the Company's EBIT for the previous two (2) fiscal quarters was
greater than zero, and the Chase Bank Rate, on a per annum basis, on the average
of the net balances (other than Libor Loans) owing by the Company to CITBC in
the Company's account at the close of each day during such month or, at the
Company's option, the sum of two and one-quarter percent (2 1/4%) or, subject to
paragraph 2 of this Section 8, one and three-quarters percent (1.75%) if the
Company's EBIT for the previous two (2) fiscal quarters was greater than zero,
and the Libor on any then outstanding Revolving Loans which are Libor Loans, on
a per annum basis, on the average of the net balances owing by the Company to
CITBC in the Company's account at the close of each day during such month. The
Company may elect to use Libor as to any new or then outstanding Revolving Loans
provided x) there is then no Default or unwaived Event of Default and y) the
Company has advised CITBC of its election to use Libor and the Libor Period
selected no later than four (4) Business Days prior to the proposed borrowing
or, in the case of a Libor election with respect to a then outstanding Revolving
Loan, four (4) Business Days prior to the conversion of any then outstanding
Revolving Loans to Libor Loans and z) the election and Libor shall be effective,
provided, there is then no Default or unwaived Event of Default, on the fifth
Business Day following said notice. The Libor elections must be for
$1,000,000.00 or whole multiples thereof. If no such election is timely made or
can be made, then CITBC shall use the Chase Bank Rate to compute interest. In
the event of any change in said Chase Bank Rate, the rate hereunder shall
change, as of the first of the month following any change, so as to remain
three-quarters percent (0.75%),or, if appropriate, one-quarter percent (0.25%),
above the Chase Bank Rate. The rates hereunder shall be calculated based on a
365-day year. CITBC shall be entitled to charge the Company's account at the
rate provided for herein when due until all Obligations have been paid in full."
Page 3
Page 20 of 24
<PAGE>
"2. If the Company has, for the previous two (2) fiscal quarters, EBIT in excess
of zero, then the Company shall be entitled for the next succeeding fiscal
quarter (but subject to the provisions of paragraph 2 of Section lO of this
Financing Agreement) to the lower spread over the Chase Bank Rate and Libor
provided each of the following conditions are met: a) the Company shall have
delivered to CITBC a copy of the Company's filed (with the Securities and
Exchange Commission) (i) 10Q Statement for the fiscal quarter then ended in
which EBIT was greater than zero or (ii) 10K Statement (if the fiscal year is
then over) evidencing that EBIT for the last fiscal quarter of the fiscal year
was greater than zero; b) there is no Default or Event of Default then in
existence on both (i) the date of filing of the aforesaid Statement with the
Securities and Exchange Commission and (ii) the date of effectiveness of such
lower spreads; c) the lower spread over (i) the Chase Bank Rate shall be
effective on the first day of the fiscal quarter following CITBC's receipt of
the aforesaid Statement; (ii) Libor as to all Revolving Loans which are not
Libor Loans shall be effective on the first day of the fiscal quarter following
CITBC's receipt of the aforesaid Statement; and (iii) Libor as to all then Libor
Loans shall be effective on the day after the expiration of a Libor Period; and
d) the lower spread over the Chase Bank Rate and Libor shall be prospective only
and shall not be retroactive."
15. Paragraph 7 of Section 8 of the Agreement is hereby deleted in its
entirety, and the following is inserted in lieu thereof:
"7. Upon the last Business Day of each month, the Company shall pay CITBC the
Line of Credit Fee which shall be an amount determined by multiplying x)
one-eighth of one percent (1/8%) per annum on the difference between the Line of
Credit and the average daily Revolving Loan for such month, if the Company's
EBIT for the previous two (2) fiscal quarters was greater than zero, or y)
one-quarter of one percent (1/4%) per annum on the difference between the Line
of Credit and the average daily Revolving Loan for such month, if the Company's
EBIT for the previous two (2) fiscal quarters was less than zero."
16. Paragraph 9 of Section 8 of the Agreement is hereby deleted in its
entirety, and the following is inserted in lieu thereof:
"9. Upon each Anniversary Date, the Company shall pay to CITBC a Collateral
Management Fee in the amount of $30,000.00."
17. The word "third" in the first and fourth sentence of Section 11 is
hereby deleted, and the word "sixth" is inserted in lieu thereof.
Page 4
Page 21 of 24
<PAGE>
18. All references in the Agreement to the "Chemical Bank Rate" and/or
"Chemical Bank" shall be deemed to read "Chase Bank Rate" and "The Chase
Manhattan Bank" respectively.
19. To induce CITBC to enter into this letter amendment, the Company
shall pay to CITBC a fee in the amount of $25,000.00 payable upon execution of
this letter amendment.
20. Upon execution hereof by both parties hereto, this letter amendment
shall be deemed effective from and after December 15,1997.
Except as otherwise hereinabove provided, no other amendment or modification of
the Agreement is hereby intended or implied. If the foregoing is in accordance
with your understanding, please so indicated by signing and returning to us the
enclosed copy of this letter.
Very truly yours,
The CIT Group/Business Credit, Inc.
By /s/ William Shiao
----------------------------------
Title: Assistant Vice President
Acknowledged and Agreed.
Applied Magnetics Corporation
By: /s/ Peter T. Altavilla
--------------------------
Title: Corporate Controller
Page 5
Page 22 of 24
<PAGE>
EXHIBIT 11
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(in thousands, except per share data)
For the three months ended
December 27, December 28,
1997 1996
------------ ------------
Earnings Per Share:
Net income (loss) $(39,749) $ 31,872
======== ========
Common shares outstanding 23,858 23,267
======== ========
Earnings per common share $ (1.67) $ 1.37
======== ========
Earnings Per Common Share-Assuming Dilution:
Net income before adjustment (39,749) 31,872
Add back subordinated debentures interest -- 2,013
Add back subordinated debentures amortization -- 107
Less tax impact -- (85)
-------- --------
Net income as adjusted $(39,749) $ 33,907
======== ========
Shares
Weighted average common shares outstanding 23,858 23,267
Dilutive effect of stock options -- 1,411
Assuming conversion of convertible subordinated
debentures -- 6,183
-------- --------
Common shares-assuming dilution 23,858 30,861
======== ========
Earnings per common share assuming dilution $ (1.67) $ 1.10
======== ========
Earnings per common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period. Earnings
per common share - assuming dilution is computed based on the 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. During a loss
period, the assumed exercise of in-the-money stock options and conversion of
convertible debentures have an anti-dilutive effect. As a result, these shares
are not included in the weighted average shares outstanding used in the
calculation of basic and fully diluted loss per common share at December 27,
1997. Prior year earnings per share has been conformed to current year
presentation.
Page 23 of 24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet and the Consolidated Statement of Operations
for the three months ended as of December 27, 1997 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-03-1998
<PERIOD-END> DEC-27-1997
<CASH> 130,767
<SECURITIES> 0
<RECEIVABLES> 31,729
<ALLOWANCES> 0
<INVENTORY> 46,949
<CURRENT-ASSETS> 222,135
<PP&E> 390,595
<DEPRECIATION> (182,545)
<TOTAL-ASSETS> 442,042
<CURRENT-LIABILITIES> 122,211
<BONDS> 0
0
0
<COMMON> 2,399
<OTHER-SE> 198,900
<TOTAL-LIABILITY-AND-EQUITY> 442,042
<SALES> 74,412
<TOTAL-REVENUES> 74,412
<CGS> 81,490
<TOTAL-COSTS> 81,490
<OTHER-EXPENSES> 33,494
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,033)
<INCOME-PRETAX> (39,749)
<INCOME-TAX> 30
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,749)
<EPS-PRIMARY> (1.67)
<EPS-DILUTED> (1.67)
</TABLE>
