<PAGE>
As filed with the Securities and Exchange Commission on June 11, 1999
Registration No. 333- 74107
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 2 TO
FORM S-3
ON
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
APPLIED MAGNETICS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1950506
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
_________________________
75 Robin Hill Road
Goleta, California 93117
(805) 683-5353
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
_________________________
CRAIG D. CRISMAN
Chief Executive Officer
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, California 93117
(805) 683-5353
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
With a copy to:
JAMES J. SLABY, ESQ.
JEFFREY A. KAYE, ESQ.
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
(213) 620-1780
____________________________
Approximate date of commencement of proposed sale to the public: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If the any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
__________________________________________________________________________________________________
Proposed maximum Proposed
Title of each class offering maximum
of securities to be Amount to be price per aggregate Amount of
registered registered share (1) offering price registration fee
------------------- ------------ ---------------- -------------- --------------------
<S> <C> <C> <C> <C>
Common Stock, $.10
par value 23,416,211 (2) (2) (2)
Common Stock, $.10
par value 7,028,224 $3.1875 $22,402,464 $6,227.89
Common Stock, $.10
par value 276,750 (2) (2) (2)
_____________________________________________________________________________________________
</TABLE>
(1) Estimated solely for purposes of determining the registration fee
under Rule 457(c). The price indicated is the closing price on the New York
Stock Exchange on June 9, 1999.
(2) Registrant previously paid the applicable fee with respect to these
shares upon filing its Form S-3 on March 9, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Prospectus
[LOGO]
APPLIED MAGNETICS CORPORATION
30,721,185 Shares Common Stock
This prospectus relates to the public offering of:
- - - - - - - - - - - - - - - - - - - - 23,416,211 shares of our common stock that are held by some of our
current stockholders.
- - - - - - - - - - - - - - - - - - - - 7,028,224 shares of our common stock that are issuable upon conversion
of our Series B convertible preferred stock.
- - - - - - - - - - - - - - - - - - - - 276,750 shares of our common stock that are issuable upon exercise of
some of our options.
We will not receive any of the proceeds of any sales by the selling
stockholders.
Our common stock is listed on the New York Stock Exchange under the symbol
"APM." The closing price of the common stock on June 9, 1999 was $3 13/16 per
share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 4 FOR A DISCUSSION OF CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
_______, 1999
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT.
THIS PROSPECTUS MAY ONLY BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES.
---------------
In this prospectus, the following defined terms are used:
"Magnetic recording heads" are used to store and retrieve information on
magnetic storage disks in hard drives.
"Inductive thin film heads" are magnetic recording heads utilizing loops of
wire exposed to a changing magnetic field to enable it to "read" as it passes
over the disk.
"Magnetoresistive heads" are magnetic recording heads that utilize the
physical effect in a film in which electrical resistance changes within a
changing magnetic field. This effect is more sensitive than the inductive
thin film effect, enabling the head to read smaller bits as the head passes
over the disk.
"Giant magnetoresistive heads" are similar to magnetoresistive heads but are
composed of multiple films creating greater sensitivity, enabling the head to
read even smaller bits as the head passes over the disk.
"Gigabyte," means 1 billion bites of information. A byte is the amount of
information required, for example, to store a single letter in a document.
Therefore, a 4.3 gigabyte disk drive contains enough storage capacity to
store 4.3 billion letters and spaces.
"3.5 inch disk" refers to a 3 1/2" diameter disk in which data is stored in
the disk drive. The disk spins at a high speed (typically 5400 rpm), and the
recording head flies in close proximity to the disk. A typical drive may
have from 1 to 10 disks inside.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION ABOUT OUR COMPANY AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE
NOTES TO THOSE STATEMENTS APPEARING ELSEWHERE IN THIS PROSPECTUS.
Applied Magnetics
We are an independent manufacturer of magnetic recording heads and of
head stack assemblies for disk drives. We are in the process of qualifying
our 4.3 gigabyte per disk magnetoresistive heads, primarily to supply to
manufacturers of 3.5 inch hard disk drives. Our products compete on the
basis of price, performance, quality and availability. We have also begun
development of giant magnetoresistive heads, also intended for computer disk
drive applications.
Our principal executive offices are located at 75 Robin Hill Road, Goleta,
California 93117, and our telephone number at that address is (805) 683-5353.
The Offering
The Private Placements. . . . . On February 11, 1999, we issued 12,775,122
shares of our common stock to the
stockholders of DAS Devices, Inc. in
consideration for our merger with DAS and
we reserved 276,750 shares of our common
stock for issuance upon exercise of
options we granted in the merger. On
the same date and in connection with the
merger, we issued 4,641,089 shares of our
common stock to an investor group for a
purchase price of $18,750,000.
On the effective date of this prospectus,
we issued 6,000,000 shares of our common
stock to Kenilworth Partners II, L.P. in
exchange for 7% convertible subordinated
debentures previously issued by us in the
principal amount of $24,000,000. On the
same date, we issued 250,000 shares of our
Series B convertible preferred stock to
Kenilworth Partners II, L.P. for a
purchase price of $25,000,000. Kenilworth
Partners II, L.P. may receive up to
127,767 additional shares of our Series B
convertible preferred stock as in-kind
dividends on the shares of Series B
convertible preferred stock it currently
holds. The Series B convertible preferred
stock issued and to be issued to
Kenilworth Partners II, L.P. is
convertible into 7,028,224 shares of our
common stock.
2
<PAGE>
In connection with each of these private
placements, we agreed to file the
registration statement of which this
prospectus forms a part.
See "Recent Developments".
Shares Offered. . . . . . . . . 30,721,185 shares of our common stock,
consisting of the shares of our common stock
issued or reserved for issuance in
connection with the private placements
described above or into which the preferred
stock issued in the Kenilworth Partners II,
L.P. exchange converts.
Plan of Distribution. . . . . . All of the shares of common stock are being
offered by the selling stockholders. The
selling stockholders may offer from time to
time some or all of the shares of common
stock held by them directly or through
brokers or dealers. See "Plan of
Distribution".
Shares Outstanding . . . . . . . 41,736,741 shares of common stock as of
June 1, 1999.
Proceeds. . . . . . . . . . . . We will not receive any of the proceeds from
the sale of the shares by the selling
stockholders.
NYSE Trading Symbol. . . . . . . APM
Risk Factors. . . . . . . . . . You should read carefully and consider the
matters discussed under the heading "Risk
Factors" beginning on Page 4.
3
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW BEFORE INVESTING
IN OUR COMMON STOCK. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING
US. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE DO NOT PRESENTLY KNOW OR THAT
WE DO NOT PRESENTLY BELIEVE ARE IMPORTANT TO AN INVESTOR MAY ALSO HARM US.
IF ANY OF THE EVENTS OR CONDITIONS DESCRIBED IN THE FOLLOWING RISKS
ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE SERIOUSLY HARMED. IN THAT CASE, YOU MAY LOSE ALL OR PART OF YOUR
INVESTMENT.
WE HAVE AN IMMEDIATE NEED FOR CAPITAL WHICH IF NOT MET WILL JEOPARDIZE OUR
BUSINESS
We have incurred significant operating losses during fiscal 1998 and for
the six months ended April 3, 1999 as we transition from inductive thin film
technology to magnetoresistive and giant magnetoresistive technologies. This
condition also resulted in significant reductions in sales and cash balances.
Our ability to fund our operating and capital requirements for the remainder
of fiscal 1999 and beyond is heavily dependent upon our ability to receive
qualification and to begin volume production of our magnetoresistive and
giant magnetoresistive products on a timely basis. We have an immediate
requirement to raise capital in order to support current operating
activities, and we will be required to raise significant additional capital
in the near term to fund our anticipated magnetoresistive and giant
magnetoresistive product production and related working requirements. If we
are unable to achieve magnetoresistive and giant magnetoresistive production
or raise sufficient capital in the near term, there will be a material
adverse effect on our financial condition, competitive position, and ability
to continue as a going concern.
Due to the significant uncertainties described above, our auditors have
re-issued their report on our October 3, 1998 financial statements. The
re-issued report, dated June 1, 1999, includes a qualification regarding our
ability to continue as a going concern. Our auditors have also advised us
that based on current conditions, it is likely that this qualification will
also be continued with respect to our fiscal 1999 financial statements. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
4
<PAGE>
OUR INABILITY TO QUALIFY OUR PRODUCTS ON CUSTOMER PROGRAMS WILL HARM OUR
OPERATING RESULTS.
The magnetic recording head industry involves rapidly changing
technology, short product life cycles and intense price competition. Demand
for greater data storage capacity requires disk drive and disk head
manufacturers to continue to build greater performance into their respective
products. If our products fail to achieve the performance necessary to
remain competitive, we will not qualify as a supplier for disk drive
manufacturers' programs and our operating results will be significantly
harmed. See "Business - Disk Drive Industry and - Competition" for a
discussion of this industry and its competitive nature.
OUR FAILURE TO SERVICE SHORT-TERM BORROWINGS COULD RESULT IN OUR LOANS BEING
CALLED.
At June 1, 1999, we had approximately $59.3 million of short-term
borrowings outstanding in variable interest rate demand loans from banks in
Malaysia, as well as significant lease obligations and other bank loans. We
cannot assure you that we will continue to meet these obligations when they
come due. If we do not, the lenders could enforce penalties, reclaim
equipment or intellectual property, or otherwise seriously harm our
business, financial condition and results of operations.
OUR REVENUES CURRENTLY COME PRIMARILY FROM A SINGLE CUSTOMER, THE LOSS OF
WHICH WOULD SERIOUSLY HARM OUR FINANCIAL PERFORMANCE.
We have depended on a single customer, Samsung Electronics, for most of
our recent sales. The disk head industry is intensely competitive and
largely dependent on sales to a limited number of major disk drive
manufacturers. Failure to maintain Samsung Electronics as a customer and to
attract new customers would have a severe impact on our business and
financial results. See "Business - Customers and Marketing" for a discussion
of our customers.
CYCLES IN THE DISK DRIVE INDUSTRY CAUSING PERIODS OF OVERSUPPLY, REDUCED
DEMAND AND INTENSE COMPETITIVE PRICING COULD SIGNIFICANTLY HARM OUR OPERATING
RESULTS AND ADVERSELY AFFECT OUR STOCK PRICE.
The disk drive industry is very cyclical and historically has
experienced periods of oversupply and reduced production levels, resulting in
significantly reduced demand for disk heads, as well as intensely competitive
pricing. The effect of these cycles on suppliers, including us, has been
magnified by hard disk drive manufacturers' practice of ordering recording
heads in excess of their needs during periods of rapid growth, which
increases the severity of the drop in the demand for recording heads during
periods of slower growth or contraction. A continued decline in the growth
in demand for magnetic recording heads, as experienced by the industry during
the first half of fiscal 1999, may seriously harm our business and financial
condition. See "Business - Disk Drive Industry" for a discussion of the
cyclical nature of the industry.
DAS TECHNOLOGY IS UNPROVEN AND MAY NOT MEET CUSTOMER EXPECTATIONS, WHICH MAY
CAUSE US TO SPEND ADDITIONAL RESEARCH AND DEVELOPMENT FUNDS AND CAUSE US TO
LOSE CUSTOMER CONTRACTS.
DAS' giant magnetoresistive head technology and production advancements
have been recently developed and are unproven. The DAS giant
magnetoresistive head technology may not meet expectations as to performance,
durability or reliability or may otherwise fail to produce intended
improvements over existing technologies. In that event, we may lose the
opportunity to bid for and receive additional customer contracts, and that
may seriously affect our financial position.
AMORTIZATION OF GOODWILL AND MERGER EXPENSES WILL DELAY OR REDUCE OUR
PROFITABILITY.
Amortization of expenses incurred in the DAS merger will reduce our
profitability. An in-process research and development charge of $28.7
million was recorded in the second quarter of fiscal 1999, the quarter
during which the merger was completed. Intangible assets are comprised of
developed technology and know-how of approximately $30.1 million and goodwill
of approximately $37.6 million. The developed technology and know-how will
be amortized as an expense over three years, and the goodwill will be
amortized as an expense over seven years. See "Recent Developments - DAS
Merger" for a discussion of the DAS merger.
The costs associated with the merger negatively affected results of
operations in the second quarter of fiscal 1999. The combined company
incurred approximately $4.2 million of expenses, primarily relating to costs
associated with combining the operations of the two companies and the fees of
financial advisors, attorneys and accountants.
5
<PAGE>
OUR OPERATING RESULTS HAVE IN THE PAST BEEN AND OUR OPERATING RESULTS LIKELY
WILL IN THE FUTURE BE HARMED DURING PERIODS WHEN PRODUCTION CAPACITY IS
UNDERUTILIZED.
Our sales are generally made pursuant to individual customer orders and
customer-specific materials are ordered on the basis of these customer
orders. As customer programs reach the end of their life cycle, we may have
to write-down inventory and equipment. We experienced substantial losses and
cancellation, rescheduling and reduction of orders in fiscal 1998.
Cancellations, rescheduling and reductions of orders result in inventory
losses, under-utilization of production capacity and write downs of tooling
and equipment, which may seriously harm our business, financial condition and
results of operations. See "Business - Backlog" for a discussion of customer
orders.
6
<PAGE>
INTENSE COMPETITION IN PRODUCT DEVELOPMENT AND PRICING COULD ADVERSELY IMPACT
OUR BUSINESS AND FINANCIAL RESULTS.
We face intense competition with other independent recording head
suppliers, as well as disk drive manufacturers that produce magnetic
recording heads used in their own products. Currently, several large
Japanese companies, some with considerably more resources than us, compete in
the independent head market and have had considerable success in gaining
market share. If we are unable to develop and manufacture competitive
products and sell them at competitive prices, we could experience loss of
sales and a decline in financial performance. See "Business - Competition"
for a discussion of competition in our industry.
CERTAIN RISKS IN FOREIGN OPERATIONS COULD INTERFERE WITH OUR MANUFACTURING
OPERATIONS.
We have from time to time experienced shortages of qualified workers and
on one occasion our operations in Korea were impacted by a labor disruption.
7
<PAGE>
Our Korea, Malaysia and China head production, assembly and test
operations subject us to the inherent risks of doing business abroad. Our
overseas operations could be adversely affected by labor shortages or
disruption, civil unrest and political instability, and may be subject to:
- Delays in obtaining governmental permits and approvals;
- Currency exchange fluctuations;
- Currency and trade restrictions; and
- Transportation problems.
See "Business - Manufacturing" for a discussion of our foreign
operations.
OUR STOCK PRICE HAS VARIED GREATLY AND MAY CONTINUE TO FLUCTUATE, WHICH MAY
REDUCE OUR ABILITY TO RAISE ADDITIONAL OPERATING FUNDS.
The market price of our common stock has been volatile, with closing
market prices ranging from $4.00 to $33.25 per share during fiscal 1998 and
from $2.56 to $9.19 per share during the first eight months of fiscal 1999.
The volatility of our stock price may reduce our ability to raise additional
operating funds.
WE MAY FAIL TO EFFECTIVELY IDENTIFY AND RESOLVE SIGNIFICANT YEAR 2000 PROBLEMS
WITHIN OUR BUSINESS, OR IMPORTANT SUPPLIERS MAY BE UNABLE TO SUPPLY GOODS AND
SERVICES TO US DUE TO YEAR 2000 PROBLEMS.
We may not accurately identify all potential Year 2000 problems within
our business, and the corrective measures that we implement may be
ineffective or incomplete. Any such problems could interrupt our ability to
manufacture and ship our products. The resulting costs could be significant
and we could suffer a significant decrease in sales. Similar problems and
consequences could result if any of our key suppliers experience Year 2000
problems. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Year 2000 Issue".
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT MARKET PRICE OF OUR
COMMON STOCK MAKING IT MORE DIFFICULT TO SELL OUR SECURITIES IN THE FUTURE.
If our stockholders sell substantial amounts of our common stock in the
public market, the market price of our common stock could fall. These sales
also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price we deem appropriate. As of
June 1, 1999, there were 41,736,741 shares of our common stock outstanding.
In addition, we have outstanding:
8
<PAGE>
- 7% Convertible Subordinated Debentures due 2006 which are convertible
into 4,892,473 shares of our common stock;
- Warrants to purchase 1,200,000 shares of our common stock;
- Options under various stock option plans to purchase 5,245,345 shares
of our common stock; and
- Series B convertible preferred stock that, together with additional
shares of such series issuable as dividends to the holders of the
outstanding shares of such series, is convertible into up to 7,028,224
shares of our common stock.
9
<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (SEC). You may
read and copy any document that we file at the SEC's public reference room at
Judiciary Plaza, 450 Fifth Street, N.W. Washington, D.C. 20549 and at the
following regional offices of the SEC: Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our SEC filings are also
available to the public at the SEC's Internet site at http://www.sec.gov.
We have filed a registration statement under the Securities Act of 1933
with respect to this offering. As permitted by the rules of the SEC, this
prospectus does not contain all of the information set forth in the
registration statement. Investors are referred to the registration statement
for further information contained in financial statements, exhibits and
schedules filed therewith. The statements contained in this prospectus about
the contents of any contract or other document referred to are not
necessarily complete, and in each instance, reference is made to a copy of
such contract or other document filed as an exhibit to the registration
statement. Each such statement is so qualified. You may obtain copies of
the registration statement and each document filed as an exhibit at the SEC's
Washington, D.C. office upon payment of charges prescribed by the SEC or, in
the case of documents electronically filed, by accessing the SEC's website at
http://www.sec.gov.
USE OF PROCEEDS
The selling stockholders will receive all of the proceeds from the common
stock sold pursuant to this prospectus.
DIVIDENDS
We did not pay cash dividends on our common stock during fiscal
years 1998 and 1997, or during the first half of fiscal 1999, and we do not
have a policy of paying dividends on our common stock. We currently intend
to retain any earnings for use in our business and we do not anticipate
paying cash dividends on our common stock in the foreseeable future.
MARKET FOR COMMON STOCK
Our common stock is traded on the New York Stock Exchange under the symbol
"APM." The following table sets forth for the periods indicated the high and
low sale prices for our common stock.
10
<PAGE>
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
Fiscal year ended September 27, 1997
First Quarter. . . . . . . . . . . . . . . . . . . $31 7/8 $17 3/8
Second Quarter . . . . . . . . . . . . . . . . . . 60 1/2 27 3/8
Third Quarter. . . . . . . . . . . . . . . . . . . 36 1/2 22 3/8
Fourth Quarter . . . . . . . . . . . . . . . . . . 38 5/8 22 1/4
Fiscal year ended October 3, 1998
First Quarter. . . . . . . . . . . . . . . . . . . $33 1/4 $11 1/8
Second Quarter . . . . . . . . . . . . . . . . . . 13 7/8 10 5/16
Third Quarter. . . . . . . . . . . . . . . . . . . 11 7/8 4
Fourth Quarter . . . . . . . . . . . . . . . . . . 6 5/8 4 3/16
Fiscal year ending October 2, 1999
First Quarter. . . . . . . . . . . . . . . . . . . 9 3/16 3 3/8
Second Quarter . . . . . . . . . . . . . . . . . . 7 15/16 3 5/8
Third Quarter (through June 9, 1999) . . . . . . . 3 15/16 2 9/16
</TABLE>
On June 9, 1999, the reported last sale price of our common stock on the
New York Stock Exchange was $3 13/16 per share. As of June 9, 1999, there were
approximately 1,917 holders of record of our common stock.
11
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated debt and consolidated
capitalization as of April 3, 1999 on a historical basis, which includes the
issuance of approximately 17,416,211 shares in connection with this offering.
The pro forma amounts have been adjusted for the following: (1) issuance of
6,000,000 shares of common stock to Kenilworth in exchange for 7% convertible
subordinate debentures that were previously issued by us in the principal
amount of $24,000,000 and (2) the issuance of 250,000 shares of Series B
convertible preferred stock to Kenilworth for a purchase price of
$25,000,000. The pro forma amounts do not reflect the 7,028,224 common shares
that are reserved for issuance upon conversion of the Series B convertible
preferred stock and the 276,750 shares of common stock reserved for issuance
upon exercise of options granted in the DAS merger. You should read this
table in conjunction with the Unaudited Condensed Consolidated Financial
Statements and notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
APRIL 3, 1999
(IN THOUSANDS)
(UNAUDITED)
---------------------------
HISTORICAL PRO FORMA
---------- ---------
<S> <C> <C>
Short-term debt:
Current portion of long-term debt $ 3,458 $ 3,458
Bank notes payable 64,820 64,820
--------- ---------
Total short-term debt 68,278 68,278
Long-term debt, net 125,373 101,373
Shareholders' Investment:
Preferred stock, $0.10 par value, authorized
5,000,000 shares, none issued at April 3, 1999
and 250,000 issued on a pro forma basis (1) -- 25
Common stock, $0.10 par value, authorized
80,000,000 shares, issued 41,557,887 at April 3, 1999
and 47,557,887 on a pro forma basis 4,156 4,756
Paid-in capital 301,931 350,306
Retained deficit (239,149) (239,149)
Treasury stock, at cost (130,552 shares as of
April 3, 1999) (1,581) (1,581)
Unearned restricted stock compensation (33) (33)
--------- ---------
Total shareholders' investment 65,324 114,324
--------- ---------
Total capitalization $ 258,975 $ 283,975
--------- ---------
--------- ---------
</TABLE>
- - - - - - - - - - - - - - - - - - - -----------------------
(1) The Board of Directors has authority to divide the Preferred Stock into
series, to fix the number of shares comprising any series and to fix or
alter the rights, privileges and preferences of the Preferred Stock. On
May 7, 1999, the Board of Directors authorized the issuance of 250,000
shares of Series B convertible preferred stock. Those shares, together
with additional shares of such series issuable as dividends thereon, are
convertible into up to 7,028,224 shares of our common stock. Those shares
of common stock are being registered as part of this registration
statement.
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
APRIL 3, APRIL 4,
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS) 1999 1998
-------- --------
<S> <C> <C>
OPERATIONS
Net sales $ 31,519 $ 133,255
Net loss (133,084) (71,680)
Net income (loss) per share:
Income (loss) per common share $ (4.53) $ (3.00)
Income (loss) per common share--assuming dilution (4.53) (3.00)
Weighted average number of common shares outstanding:
Common shares 29,353 23,891
Common shares--assuming dilution 29,353 23,891
Order backlog $ 3,886 $ 39,467
Period-end employment 3,480 7,022
<CAPTION>
AS OF AS OF
APRIL 3, APRIL 4,
1999 1998
-------- --------
<S> <C> <C>
BALANCE SHEET
Working capital (deficit)(1) $ (72,584) $ 68,604
Total assets 305,651 383,941
Total debt 193,651 169,247
Shareholders' investment 65,324 169,629
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------
1998 1997 1996 1995 1994
(IN THOUSANDS, EXCEPT PER SHARE AND EMPLOYMENT AMOUNTS) ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net sales $ 183,597 $494,839 $344,754 $292,600 $275,927
Net income (loss) (155,368) 96,116 32,218 1,748 (52,670)
Net income (loss) per share:
Income (loss) per common share $ (6.49) $ 4.08 $ 1.41 $ 0.08 $ (2.39)
Income (loss) per common share--assuming dilution (6.49) 3.37 1.21 0.08 (2.39)
Weighted average number of common shares outstanding:
Common shares 23,931 23,567 22,913 22,145 22,082
Common shares--assuming dilution 23,931 31,011 30,173 22,472 22,082
Order backlog $ 10,752 $137,508 $116,262 $107,466 $ 64,781
Year-end employment 5,154 8,431 6,401 5,478 5,531
BALANCE SHEET
Working capital (deficit)(1) $ 13,399 $161,164 $117,882 $ (5,963) $(36,443)
Total assets 299,518 477,988 359,450 246,817 220,556
Total debt 176,845 166,731 163,917 69,629 67,151
Shareholders' investment 85,960 240,781 139,699 103,592 98,433
</TABLE>
- - - - - - - - - - - - - - - - - - - -----------------------
(1) This balance includes borrowings outstanding under loan facilities with
Malaysian banks which are callable on demand and have no termination date.
The balances for the periods ended April 3, 1999 and April 4, 1998 were
$62,352 and $49,751, respectively. The balances for the years ended
October 3, 1998, September 27, 1997, September 28, 1996, September 30,
1995 and 1994 were $55.5 million, $50.2 million, $45.8 million, $46.9
million and $46.1 million, respectively.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In fiscal 1998, the disk drive industry entered a period of slowdown coupled
with an accelerated transition from the use of inductive thin film to
magnetoresistive head products. We experienced purchase order cancellations,
production reschedules and price reductions related to the industry slowdown
and were late to market with our magnetoresistive head products, which
resulted in a net loss of $155.4 million for the year ended October 3, 1998,
compared to a net profit of $96.1 million for the year ended September 27,
1997, and $32.2 million for the year ended September 28, 1996. Net sales
decreased 62.9% in fiscal 1998 from fiscal 1997, but increased 43.5% in
fiscal 1997 from fiscal 1996. Our financial performance continued to be
impacted by this technology transition in the first half of fiscal 1999. We
are late in qualifying our magnetoresistive head products and we have
incurred a loss of $133.1 million for the first half of fiscal 1999 as
compared to $71.7 million loss in the same period of the previous fiscal year.
Inductive thin film head products represented 96.9% of fiscal 1998 revenue.
During fiscal 1998, we successfully transitioned from inductive thin film
head products at the 1.7 gigabytes per 3.5 inch disk capacity point to
inductive thin film head products at 2.1 gigabytes per 3.5 inch disk. Our 2.1
gigabyte per 3.5 inch disk product was the last generation of inductive thin
film heads. We plan to make inductive film shipments through the third fiscal
quarter of 1999, which makes fiscal 1999 another significant technology
transition year for us. Magnetoresistive head products accounted for 2.5% of
revenue in fiscal 1998 as compared to 4.9% in fiscal 1997. We are currently
working on magnetoresistive head product qualifications with two customers at
the 4.3 gigabyte per 3.5 inch disk and expect to begin volume production
shipments of these products in the fourth fiscal quarter of 1999. We are
continuing our commitment to magnetoresistive and giant magnetoresistive head
products with the addition of technical personnel, capital investments, and
research and development.
In fiscal 1998, we experienced a significant decrease in net sales and demand
for inductive thin film head products, which resulted in a significant loss
and negative cash flow from operations as we continue to transition from
inductive thin film to magnetoresistive and giant magnetoresistive head
technology. Our ability to fund our operating and capital requirements for
fiscal 1999 is heavily dependent on our ability to receive qualification and
begin volume production of our magnetoresistive and giant magnetoresistive
head products on a timely basis. As of June 1, 1999, we are in the final
stages of qualification for one of our magnetoresistive head products and
expect to begin volume production shipments in the fourth quarter of fiscal
1999. We are also attempting to raise capital, which is required immediately
to fund current operating activities, and we will be required to raise
significant additional capital in the near term to fund the anticipated
magnetoresistive head production ramp up and related working capital
requirements. If we are unable to achieve magnetoresistive head production
shipments during the fourth quarter of fiscal 1999 or raise sufficient
capital in the near term, there will be a material adverse effect on our
financial condition, competitive position and ability to continue as a going
concern. Due to the significant uncertainties described above, our auditors
have re-issued their report on our October 3, 1998 financial statements. The
re-issued report, dated June 1, 1999, includes an uncertainty paragraph
regarding our ability to continue as a going concern. Our auditors have also
advised us that based on current conditions, it is likely that this going
concern uncertainty will also be continued with respect to our fiscal 1999
financial statements.
On February 11, 1999, we completed our merger with DAS Devices, Inc., a
research and development company. The consideration exchanged was 13,051,872
shares of our common stock for all of the outstanding preferred and common
shares of DAS. The acquisition was accounted for as a purchase, and the
acquisition price of approximately $99.7 million was allocated to assets
acquired, including the fair value in-process technology, and liabilities
assumed based on their fair values. It was determined that in-process
technology of $28.7 million was acquired. Since the technology has no future
economic value to us, it was written-off during the three months ended April
3, 1999. The excess of the purchase price plus related transaction costs
over the fair value of tangible and intangible assets acquired and
liabilities assumed has been allocated to (1) developed technology and
know-how of approximately $30.1 million, which will be amortized on a
straight line basis over 3 years, the estimated period of future benefit and
(2) goodwill of approximately $37.6 million (including a value of $1.6
million associated with assembled workforce), which will be amortized on a
straight line basis over the estimated period of future benefit of 7 years.
Concurrent with this acquisition and contingent on the merger, a private
investor group purchased 4,641,089 shares of our common stock in exchange for
$18.75 million.
14
<PAGE>
Revenues, shipment volumes, operating and financial results for fiscal 1999
will continue to be impacted by the reduced levels of inductive thin film
shipments while we seek to achieve qualification on the magnetoresistive head
4.3 gigabyte per 3.5 inch disk product, to execute our production ramp and to
improve the associated processes and production yields.
During fiscal 1997, our revenue growth and profitability as compared to
fiscal 1996 were attributable to strong customer demand for our inductive
thin film products, which represented 93.1% of total net sales for that year.
By the end of the fourth quarter of fiscal 1997, we completed the transition
to more advanced inductive thin film head technology.
RECENT RESULTS OF OPERATIONS
The following table sets forth certain financial data for us as a percentage
of net sales for the first half of fiscal 1999 and fiscal 1998.
<TABLE>
<CAPTION>
For the six months ended
April 3, April 4,
-----------------------------
1999 1998
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 179.9% 102.5%
Gross margin (deficit) -79.9% -2.5%
Research and development expenses 195.1% 38.8%
Selling, general and administrative expenses 10.9% 2.7%
Writedown of assets and restructuring charges 14.3% 6.3%
Amortization 6.4%
Purchase in-process technology 91.0%
Total operating expenses 317.8% 47.8%
Loss from operations -397.6% -50.3%
Interest income 3.0% 2.5%
Interest expense -21.9% -4.7%
Other income (expense) -4.1% -1.1%
Loss before taxes -420.6% -53.6%
Provision (benefit) for income taxes 1.6% 0.2%
Net loss -422.2% -53.8%
</TABLE>
SIX MONTHS ENDED APRIL 3, 1999
15
<PAGE>
NET SALES. Net sales of $31.5 million in the first half of fiscal 1999
decreased 76.4% from net sales of $133.3 million in the first half of fiscal
1998 as inductive thin film products reach end of life. Due to production
process problems with new magnetoresistive head products we have been unable
to maintain sales volume experienced with inductive thin film products during
the same period in the prior year.
GROSS PROFIT. As a percentage of net sales, gross profit was a negative
79.9% and a negative 2.5%, for the first half of fiscal 1999 and the first
half of fiscal 1998, respectively. The decrease in gross profit in the first
half of fiscal 1999 as compared to the same period in the prior fiscal year
was due to the reasons discussed under "Net Sales".
RESEARCH AND DEVELOPMENT. Research and development expenses as a percentage
of net sales were 195.1% and 38.8% for the first half of fiscal 1999 and the
first half of fiscal 1998, respectively. Expenses in dollars in the first
half of fiscal 1999 of $61.5 million increased $9.7 million from $51.8
million in the first half of fiscal 1998. We have been focusing the majority
of our technical resources on our new production program qualifications
utilizing magnetoresistive head technology and on development of giant
magnetoresistive head technology. As a result, there continues to be a
significant increase in research and development expenses as we continue our
transition from products with inductive thin film technology to products with
magnetoresistive and giant magnetoresistive head technology.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses as a percentage of net sales were 10.9% and 2.7% for
the first half of fiscal 1999 and the first half of fiscal 1998,
respectively. The percentage increase was due to lower net sales. Expenses
in dollars of $3.4 million in the first half of fiscal 1999 decreased $0.2
million from $3.6 million in the first half of fiscal 1998.
AMORTIZATION. Amortization of the excess of the purchase price plus related
transaction costs over the fair value of the tangible and intangible assets
acquired and liabilities assumed through the merger with DAS were $2.0
million for the first half of fiscal 1999.
PURCHASED IN-PROCESS TECHNOLOGY. The purchase of DAS resulted in the
write-off of purchased in-process technology of $28.7 million in the first
half of fiscal 1999. The cost represents technology that has not reached
technological feasibility and has no alternative future use.
INTEREST INCOME AND EXPENSE. Interest income of $.9 million in the first
half of fiscal 1999 decreased $2.5 million compared to interest income of
$3.4 million the first half of fiscal 1998 due to lower average cash
balances. Interest expense of $6.9 million in the first half of 1999
increased by $.6 million compared to $6.3 million in the first half of fiscal
1998 due to varying interest rates and higher average debt balances.
OTHER INCOME AND EXPENSE. Other expense was a loss of $1.3 million for the
first half of fiscal 1999 compared to other expense of $1.5 million in the
first half of fiscal 1998. The balances represent primarily foreign currency
exchange gains and losses. We have manufacturing operations in Asia that
experienced volatility in exchange rates during fiscal 1998 which continued
into the first fiscal quarter of 1999.
ANNUAL RESULTS OF OPERATIONS
The following table sets forth certain financial data for us as a percentage
of net sales for the last three fiscal years.
16
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
OCTOBER 3, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . . . . 108.2% 66.1% 73.0%
Gross margin . . . . . . . . . . . . . . . . . . (8.2)% 33.9% 27.0%
Operating expenses
Research and development. . . . . . . . . . 62.5% 10.6% 14.8%
Selling, general and administrative . . . . 3.5% 1.7% 19%
Provision for customer bankruptcy . . . . . -- 0.8% --
Terminated merger costs . . . . . . . . . . -- 0.6% --
Restructure charges . . . . . . . . . . . . 4.6% -- --
Total operating expenses. . . . . . . . . . 70.6% 13.7% 16.7%
Income (loss) from operations. . . . . . . . . . (78.8)% 20.2% 10.3%
Interest income. . . . . . . . . . . . . . . . . 3.2 % 1.7% 1.2%
Interest expense . . . . . . . . . . . . . . . . 6.9 % 2.5% 2.6%
Other income, net. . . . . . . . . . . . . . . . 0.8 % 0.5% 0.6%
Income before taxes. . . . . . . . . . . . . . . (83.3)% 19.9% 9.5%
Provision for income taxes . . . . . . . . . . . 1.3% 0.4% 0.2%
Net income . . . . . . . . . . . . . . . . . . . (84.6)% 19.4% 9.3%
</TABLE>
NET SALES: Net sales of $183.6 million decreased 62.9% in fiscal 1998
from net sales of $494.8 million in fiscal 1997 primarily due to the decrease
in shipments of inductive thin film products. The disk drive industry entered
into a period of general slowdown in the first quarter of fiscal 1998 and our
largest customer at that time, Western Digital, reduced its production
schedule resulting in purchase order cancellations, production reschedules
and price reductions for us. We were also late to market with our
magnetoresistive head products in the 2.1, 2.8 and 3.4 gigabyte per 3.5 inch
disk. As a result, we had $4.6 million of magnetoresistive
head product revenue in fiscal 1998 as compared to $24.1 million in fiscal
1997. We are currently working with two customers at the 4.3 gigabyte per 3.5
inch disk and could begin volume production of these products
in the fourth quarter of fiscal 1999.
Net sales of $494.8 million increased 43.5% in fiscal 1997 from net
sales of $344.8 million in fiscal 1996 primarily due to an increase in
shipments of inductive thin film head products. This was achieved as a
result of strong customer demand and an increase in shipments of head stack
assemblies as compared to head gimbal assemblies. Inductive thin film head
net sales represented 93.1% of total net sales in 1997 compared to 76.0% in
1996. We shipped $24.1 million of magnetoresistive head heads in 1997, or
4.9% of total net sales. Other products represented 2.0% of total net sales
and included tape products and disk head products for which we only performed
final assembly of head stack assemblies using thin film and magnetoresistive
head purchased from other manufacturers.
GROSS MARGIN: The gross margin was a negative 8.2% for fiscal 1998 as
compared to 33.9% for fiscal 1997. The decrease was primarily due to the
reduction in inductive thin film shipments related to the slowdown in the
disk drive industry and the market timing with our magnetoresistive head
products. We reduced operating expenses, excluding depreciation, during
fiscal 1998 to partially offset the decrease in sales.
The increase in gross margins from fiscal 1997 compared to fiscal 1996
was due to higher inductive thin film disk head sales volumes, resulting in
economies of scale, coupled with cost controls.
RESEARCH AND DEVELOPMENT: Research and development expenses were $114.7
million, $52.5 million, and $50.9 million for fiscal years 1998, 1997 and
1996, respectively. These expenses represented 62.5%, 10.6% and 14.8% of net
sales, respectively, for such periods.
Research and development expenses increased $62.2 million in fiscal 1998
from fiscal 1997. We increased our level of expenditures as it focused its
efforts on new production program qualifications using magnetoresistive head
technology and on
17
<PAGE>
development of giant magnetoresistive head technology and products. In
fiscal 1998, we made initial deliveries of giant magnetoresistive head
evaluation units to customers that are targeted for products at the 6.4
gigabyte per 3.5 inch disk.
Research and development expenses increased by $1.6 million in fiscal
1997 from 1996. We maintained our level of research and development
investment during 1997, as engineering efforts shifted from advanced thin
film technology development during the first half of the fiscal year to
magnetoresistive head technology and production process development and the
initiation of giant magnetoresistive head technology development.
We continue to invest in advanced technology products and processes, but
expect that expenditures generally will decrease on an absolute dollar basis
during fiscal 1999 as magnetoresistive and giant magnetoresistive head
technology and process development efforts result in product qualifications
and shipments to customers.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses in absolute dollars were $6.5 million, $8.3 million
and $6.5 million in fiscal 1998, 1997 and 1996, respectively. These expenses
represented 3.5%, 1.7%, and 1.9% of net sales, respectively, for such
periods. Selling, general and administrative expenses in 1996 were partially
offset by a bad debt recovery of $0.5 million, related to a final payment of
a 1990 bankruptcy settlement with a previous customer.
VALUATION ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS: Our allowance for
uncollectible accounts receivable at October 3, 1998, September 27, 1997 and
September 28, 1996 was $0.9 million, $4.9 million and $0.8 million,
respectively. Our allowance for uncollectible accounts receivable of $4.9
million at September 27, 1997 included a provision for customer bankruptcy of
$4.2 million. On November 10, 1997, Singapore Technologies Pte Ltd.
announced plans to shut down its subsidiary, Micropolis (S) Pte Ltd., one of
our customers. As a result, we recorded the charge in the fourth quarter of
fiscal 1997.
RESTRUCTURING CHARGE: We recorded an $8.4 million restructuring charge
in the first quarter of fiscal 1998. The charge was primarily related to the
shut down of the Ireland facility, as part of a plan to consolidate foreign
manufacturing operations. The shut down of the Ireland plant was completed
in March 1998. Included in the charge was the write-down of certain tooling
and equipment.
TERMINATED MERGER COSTS: Terminated merger costs of $2.9 million for
fiscal 1997 include legal and accounting fees, financial advisory fees and
miscellaneous expenses related to the February 1997 proposed business
combination with Read-Rite Corporation. On March 14, 1997, we announced the
withdrawal of the proposal.
INTEREST INCOME AND EXPENSE: Interest income was $5.9 million, $8.3
million and $4.2 million in fiscal 1998, 1997 and 1996, respectively.
Interest income decreased $2.4 million in fiscal 1998 from fiscal 1997 due to
investment of lower average cash balances. Interest income increased in
fiscal 1997 from fiscal 1996 due to investment of higher average cash
balances. Interest expense was $12.6 million, $12.3 million and $9.1 million
in fiscal 1998, 1997 and 1996, respectively. Interest expense increased $0.3
million in fiscal 1998 from fiscal 1997 as we maintained similar average
outstanding debt. Interest expense increased $3.2 million in fiscal 1997 for
1996 due to higher debt outstanding. This increase was primarily as a result
of the issuance of $115.0 million 7% Convertible Subordinated Debentures due
in 2006.
OTHER INCOME (EXPENSE): Other expense was $1.5 million in fiscal 1998
compared to other income of $2.4 million and $2.0 million in fiscal 1997 and
1996, respectively. Other expense included $1.4 million in foreign exchange
and net transaction losses compared to $2.1 million in net gains in fiscal
1997. Other income in fiscal 1996 included $1.3 million in final proceeds
from the sale of our Tape Head business unit to Seagate and $0.5 million in
foreign exchange and net transaction gains.
PROVISION FOR INCOME TAXES: The fiscal 1998, 1997 and 1996 provision
for income taxes included alternative minimum state and federal taxes and
provision for foreign income taxes.
We have not provided U.S. federal income taxes on unremitted foreign earnings
as we expect to permanently reinvest such earnings in foreign jurisdictions.
In addition, we have minimal foreign tax credits available to offset the U.S.
tax impact of repatriating foreign earnings. Accordingly, if such foreign
earnings were repatriated to the U.S., these earnings would generally be
taxed at the U.S. statutory rates.
18
<PAGE>
We currently operate under a tax holiday in Malaysia. The tax holiday is
effective through August 31, 2004. The Malaysian Industrial Development
Authority has approved a "Common Pioneer" tax status for the subsequent
five-year period whereby 70% of the Malaysian income would be exempt from
taxes. We are continuing to negotiate with the Malaysian Authorities to
improve the income exemption and extend the term.
When we utilize our remaining net operating loss carryforwards, future U.S.
earnings will be taxed at the U.S. statutory rates less available tax
credits.
LIQUIDITY AND CAPITAL RESOURCES
As of April 3, 1999, our cash and cash equivalents balance decreased to $20.2
million from $71.7 million at October 3, 1998. During the first half of
fiscal 1999, we experienced a net use of cash in the amount of $66.6 million
from operating activities, comprised primarily of the net effect of the
following: i) $133.1 million due to net loss, which included $24.1 million of
depreciation and amortization expense and a $28.7 million writeoff of
purchase-in process technology; ii) $4.5 million charge related to the
writedown of obsolete assets; iii) net decrease in the accounts receivable
balance of $3.9 million; iv) decrease in inventories of $10.9 million and v)
decrease in the accounts payable balance of $6.3 million.
During fiscal 1998, we completed the expansion of our production facilities
in Goleta, California. We completed the second phase of the cleanroom
expansion of the magnetoresistive head fabrication facility in the second
quarter of fiscal 1998, however, due to lower than anticipated production
volumes, the fabrication facility was not fully equipped. In the first half
of fiscal 1999, we purchased manufacturing equipment totaling $6.7 million.
In addition, we leased $3.3 million of production equipment through operating
and capital leases with terms up to five years.
During the first half of fiscal 1999, net cash of $22.0 million was generated
from financing activities, consisting primarily of increases in borrowings of
$3.0 million, an $18.8 million investment related to the completion of a
private placement and net proceeds from stock option exercises of $.2 million.
During the first half of fiscal 1999, we also increased our Malaysian
borrowings to $62.4 million. 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 our real property holdings
in Malaysia and include certain covenants, which preclude us from granting
liens and security interests in other assets in Malaysia. Credit facilities
with four other banks, established by our Malaysian subsidiary during fiscal
1997 are unsecured. While the loan facilities have not been called, there is
no assurance that the banks will continue to make this credit available.
Should all or any significant portion of the Malaysian credit facilities
become unavailable for any reason, we would need to pursue alternative
financing sources. There is no assurance that such additional funds will be
available to us or, if available, upon terms and conditions acceptable to us.
Also included in total debt is $115.0 million of 7.0% Convertible
Subordinated Debentures, due 2006.
We have secured an asset-based revolving line of credit from CIT Group/
Business Credit, Inc. that has been in place since January 1995. This line
of credit provides for borrowings up to $35.0 million based on eligible trade
receivables at various interest rates over a three-year term and is secured
by trade receivables, inventories and certain other assets. In December
1997, we extended the line of credit to January, 2001. As of April 3, 1999,
this line of credit was fully utilized. As of April 3, 1999, we were not in
compliance with the financial covenants under this line of credit, but
received notification from our lender waiving the area of non-compliance
until June 30, 1999, and we expect to successfully renegotiate the terms of
the covenants with the lender.
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
magnetoresistive head and giant magnetoresistive head products. In fiscal
1999, we plan approximately $35.0 million in capital expenditures, including
equipment to be obtained through operating leases, primarily to continue
development and production of magnetoresistive head and giant
magnetoresistive head technologies and products and increase overall
production capacity. Capital equipment purchase commitments totaled $6.7
million at April 3, 1999.
19
<PAGE>
Our accounts receivable and inventory balances are currently heavily
concentrated with one customer, Samsung. Sales to Samsung Electronics Co.,
Ltd. accounted for approximately 76% of our sales in the first half of fiscal
1999. We anticipate that Samsung will continue to represent one of our
largest customers. Program qualifications are under way with several other
customers that, if successful, will provide a broadened customer base.
However, further consolidation of the disk drive industry may reduce the
number of disk drive programs requiring our products and may increase credit
risks for us due to the concentration of our customers.
We operate in a number of foreign countries. Purchases of certain supplies
and certain labor costs are paid for in foreign currencies. We are not
currently hedging against potential foreign exchange risk. Fluctuations of
foreign currency to the dollar could have a significant effect on reported
cash balances. The effect of foreign currency exchange rate changes was a
decrease of $1.4 million in cash for the first half of both fiscal 1999 and
1998.
We continue to work with our customers to qualify on magnetoresistive head
programs and believe we will receive qualification on our 4.3 gigabyte per
3.5 inch magnetoresistive head product and begin volume production shipments
during the fourth quarter of fiscal 1999. However, as of June 1, 1999, we had
not received qualification and did not have any sales backlog for our 4.3
gigabyte per 3.5 inch magnetoresistive head products. Our liquidity and
ability to fund our operating and capital expenditure requirements during
fiscal 1999 are heavily dependent on our ability to receive qualification and
begin volume production of our magnetoresistive and giant magnetoresistive
head products on a timely basis. Although we have completed our plant
capacity expansion and conversion of our existing fabrication facilities to
enable manufacturing of magnetoresistive and giant magnetoresistive heads and
are devoting substantial engineering and manufacturing resources to these
efforts, there can be no assurances that we will receive qualification and
achieve planned production levels on a timely basis. If we are unable to
achieve any of the factors on which the second half of fiscal 1999 liquidity
depends on a timely basis and are unable to obtain adequate alternative
financing, there will be a material adverse effect on our financial
condition, competitive position and ability to continue as a going concern.
MARKET RISKS
We are exposed to market risks, which include changes in U.S. interest rates
as well as changes in currency exchange rates as measured against the U.S.
dollar. We do not actively hedge against these risks using derivative
transactions. We manage our interest rate risk by maintaining a large
portion of our debt on a fixed-rate basis. We attempt to manage our foreign
currency exposure primarily by balancing monetary assets and liabilities and
maintaining cash positions only at levels necessary for operating purposes.
Our foreign currency denominated assets and liabilities are not significant.
The Malaysian debt facilities are denominated in U.S. dollars. We use the
U.S. dollar as the functional currency in Malaysia. Therefore, there is no
current foreign currency transaction loss exposure associated with the
Malaysian debt. The effect of foreign exchange transactions in foreign
currencies is included in periodic income. The net foreign currency gain
(loss) was $(1.0) million and $(1.4) million for the six month period ended
April 3, 1999 and April 4, 1998, respectively. The net foreign currency gain
(loss) was $(1.4) million, $2.1 million and $ .5 million for 1998, 1997 and
1996, respectively.
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 was adopted for our financial
statements in the first quarter of fiscal 1998. The adoption of SFAS 128 did
not have a material impact on our EPS disclosure.
20
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 establishes
standards for the way we report information about operating segments in
annual financial statements and requires that we report selected information
about operating segments in interim financial reports to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. It amends Financial
Accounting Standards Board Statement No. 14, "Financial Reporting for
Segments of a Business Enterprise", but retains the requirement to report
information about major customers. It amends Financial Accounting Standards
Board Statement No. 94 "Consolidation of All Majority-Owned Subsidiaries", to
remove the special disclosure requirements for previously unconsolidated
subsidiaries. This Statement will become effective for our financial
statements in fiscal 1999.
YEAR 2000 COMPLIANCE
Many computer software programs, as well as hardware with embedded software,
use a two-digit date field to track and refer to any given year. After, and
in some cases prior to, January 1, 2000, these software and hardware systems
will misinterpret the year "00," which will cause them to perform faulty
calculations or shut down altogether. Notwithstanding the remedial efforts
and third-party assurances discussed below, this Year 2000 problem may
adversely affect our operations. We believe that our worst-case scenario
would involve the inability of water and power utilities to deliver their
products to one or more of our facilities. That, in turn, could result in a
number of adverse consequences, including:
- delayed or lost revenue;
- diversion of resources;
- damage to our reputation;
- increased administrative and processing costs; and
- liability to suppliers and/or customers.
Any one or a combination of these consequences could significantly disrupt
our operations and have a material adverse effect on our operations and
financial performance.
We began assessing the scope of our potential Year 2000 exposure both
internally and among our suppliers and customers in 1997, and started
implementing remedial measures soon thereafter. To date, our testing and
assessment of Year 2000 compliance is approximately 85% complete, and our
remediation efforts are approximately 60% complete. We will continue to test
our software and hardware systems and modify and replace those systems as
necessary. We expect to complete our internal assessment, testing, and
remediation programs by September 1999. We are not separately accounting for
the cost of performing these tasks. These costs are being accounted for as
part of our normal operating budget. These costs have not had, nor do we
expect them to have, a significant effect on our financial condition or
results of operations.
We believe that these corrective measures will adequately address our
potential Year 2000 problems. We cannot provide assurance, however, that we
will discover and address every Year 2000 problem or that all of our
corrective measures will be effective. To the extent that Year 2000 problems
persist, we could experience the adverse consequences described above, some
or all of which could be material.
We have worked, and will continue to work, with all of our vendors and
suppliers to resolve any potential Year 2000 problems. However, we have no
direct control over these third parties and we cannot assure you that
third-party software and hardware systems will be timely converted. The
failure of certain individual vendors or suppliers, or a combination of
vendors or suppliers, to make their systems Year 2000 compliant could have a
material adverse effect on our business and financial results.
We are currently developing a contingency plan that would enable us, in the
event that our information systems experience Year 2000 problems, to function
for a limited period without those systems. We are also developing a
contingency plan to place a limited amount of finished goods on hand to
enable us to continue revenue generation for a limited period in the event
that our manufacturing capabilities are eliminated. We expect to finalize
these plans in the fall of 1999.
21
<PAGE>
FORWARD-LOOKING INFORMATION
When used in this prospectus, the words "believe", "estimate", "anticipate",
"expect" and similar expressions are intended to identify forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Such statements, which include statements contained in the "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business" sections of this prospectus, are
subject to risks, uncertainties and other factors that could cause actual
results to differ materially from those projected. These factors include, but
are not limited to:
- successful transition to volume production of magnetoresistive and
giant magnetoresistive head products with profitable yields;
- the limited number of customers and customer changes in short range
and long range plans;
- competitive pricing pressures;
- changes in business conditions affecting our financial position or
results of operations which significantly increase our working capital
needs;
- our inability to generate or obtain sufficient capital to fund our
working capital needs;
- our ability to control inventory levels;
- domestic and international competition in our product areas;
- risks related to international transactions;
- year 2000 issues; and
- general economic risks and uncertainties.
22
<PAGE>
BUSINESS
GENERAL
We were incorporated in California in 1957 and were reincorporated in
Delaware in 1987.
We presently operate in one industry segment, the design and manufacture
of components for the computer peripheral industry, and we have one major
product group, magnetic recording heads for hard disk drives which are used
in computers.
We are an independent manufacturer of magnetic recording heads for disk
drives. We manufacture advanced inductive thin film head products and are in
the process of qualifying our 4.3 gigabyte per 3.5 inch disk magnetoresistive
head products, in each case, primarily to supply to manufacturers of 3.5 inch
hard disk drives. Our products compete on the basis of:
- price;
- performance;
- quality; and
- availability.
We have also begun development of giant magnetoresistance head
technology, also intended for computer disk drives. See "Products" for a
more detailed discussion of these products.
Multimedia personal computers and high end computer applications such as
internet and intranet network servers, workstations and mainframes are
driving the continued demand for greater data storage capacity and
performance. The market growth of notebook and sub-notebook computers has
also increased demand for smaller disk drives. In fiscal 1998, the industry
accelerated the shift from inductive thin film to magnetoresistive head
technology due to requirements for greater data storage capacity and
performance. Magnetoresistive heads, which generally permit greater storage
capacities per disk and provide a higher rate of data transfer than thin film
disk heads, now represent the largest segment of the recording head industry.
The disk drive industry entered into a general slowdown late in the
first quarter of fiscal 1998. Our largest customer at the time, Western
Digital Corporation, sharply reduced its scheduled disk drive production as a
reaction to the industry-wide hard disk drive oversupply. We experienced
significant cancellations, production reschedules and price reductions as a
result of the oversupply that impacted our revenue, operating and financial
results throughout fiscal 1998. We were late to market with our 2.1, 2.8,
and 3.4 gigabyte per 3.5 inch disk magnetoresistive head products.
Magnetoresistive head shipments were therefore not a significant source of
revenue in fiscal 1998. We expect to ship inductive thin
23
<PAGE>
film head products up to 2.1 gigabyte per 3.5 inch disk through the third
quarter of fiscal 1999. During fiscal 1999, market conditions in the disk
drive industry we serve were characterized by continued short product life
cycles and intense competition. The industry product life cycle is currently
running approximately nine to 12 months.
We have reduced expenditures, including capital spending, in response to
reductions in production schedules, in order to realign costs to the
decreased level of our business. We also have shut down our manufacturing
facility in Ireland in order to consolidate our foreign manufacturing
operations. We recorded a pre-tax restructuring charge of $8.4 million (which
included the write-down of certain tooling and equipment) during the first
quarter of fiscal 1998, primarily related to the shutdown of the Ireland
facility.
We have focused our long-range growth strategy on magnetoresistive head
and giant magnetoresistive head technologies. We believe that giant
magnetoresistive heads, which ultimately afford greater performance
advantages as compared to either thin film or magnetoresistive heads,
represent the next important magnetic recording head technology.
DISK DRIVE INDUSTRY
Hard disk drives are the predominant high capacity data storage device
used in all classes of computers. Hard disk drives typically include one to
ten disks onto and from which data is recorded and retrieved by two to 20
recording heads. These heads are positioned within a microinch, or less, on
one or both sides of each disk. The head attached to a suspension device
comprises a head gimbal assembly. Multiple head gimbal assemblies, joined
together with other components, comprise a head stack assembly. We supply
both head gimbal assemblies and head stack assemblies to disk drive
manufacturers.
Disk drive manufacturers are constantly developing higher capacity and
higher performance products. Independent head suppliers, such as we, work
with the disk drive manufacturers to develop customized head gimbal
assemblies and head stack assemblies for each new disk drive program. Head
suppliers seek to have their products specifically designed for a particular
drive program, thus becoming a primary supplier to that program. Achieving
primary supplier status usually offers a competitive advantage, generating
higher internal yields and more favorable pricing, compared to entering the
program later in its product life cycle.
We experienced a sudden drop in the demand for our inductive thin film
heads starting in the middle of our first fiscal quarter of 1998. This drop
in demand was due in part to an overall softening in the disk drive industry,
including a reduced demand for recording heads and in part due to a rapid
industry wide adoption of magnetoresistive head technology. We were unable
to respond to this shift and as a result failed to achieve qualification on
several programs at the 2.8 and 3.4 gigabyte per 3.5 inch disk. We
experienced a rapid sequential decline in revenue each quarter during fiscal
1998. The overall market demand for disk drives in the first half of fiscal
1999 improved as excess industry inventory that had been present for most of
fiscal 1998 was reduced to normal levels.
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 us, has been magnified by
hard disk drive manufacturers'
24
<PAGE>
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 is intensely competitive and largely dependent
on sales to a limited number of major disk drive manufacturers. Our customer
base is likely to remain highly concentrated, due to the small number of disk
drive manufacturers requiring independent sources of supply for magnetic
recording heads. Our customer base may become more concentrated if disk drive
manufacturers that do not now have their own internal capabilities for
designing and producing disk heads begin producing head components that can
also be purchased from independent manufacturers. We believe that industry
conditions and economic factors will, however, continue to create an
environment in which disk drive manufacturers unable to produce their own
magnetic recording heads will require, as their primary source of supply,
independent suppliers of magnetic recording heads and in which drive
manufacturers and systems companies capable of internally producing disc
heads will require alternative sources of supply. The further consolidation
or integration of one or more of our major customers with other disk drive or
disk head firms could, however, have an adverse effect on our business. Such
occurrences could potentially be offset by the entry of new manufacturers in
the disk drive market. See "Competition" for further discussion.
25
<PAGE>
PRODUCTS
We qualified and made volume production shipments on new disk drive
programs during fiscal 1998, which required inductive thin film products. We
produce our inductive thin film products in volume for 3.5 inch disk drives
to achieve data storage capacities of up to 2.1 gigabytes per 3.5 inch disk.
However, this represents the last generation of inductive thin film products,
as our product mix transitions to magnetoresistive head and giant
magnetoresistive head technology during fiscal 1999.
26
<PAGE>
We continued to invest heavily in design, development and production of
both magnetoresistive and giant magnetoresistive heads in fiscal 1998. We
shipped prototype and qualification samples of magnetoresistive head products
during fiscal 1998 to selected customers for drive applications with storage
capacities of up to 4.5 gigabytes per 3.5 inch disk. During fiscal 1998, we
also shipped our first samples of giant magnetoresistive heads, aimed at
products with capacities of about 6.5 gigabytes per 3.5 inch disk. We
anticipate that during fiscal 1999, we will achieve volume production of both
magnetoresistive and giant magnetoresistive head products with these
capacities. This will require our engineering and production resources to:
- successfully meet their targeted design and process development plans;
- achieve qualification on customer drive programs; and
- execute the planned production.
Our failure to achieve volume production for magnetoresistive and giant
magnetoresistive head products on a timely basis could have a material
adverse effect on our financial results.
MANUFACTURING
Fabrication
We manufacture magnetoresistive heads, giant magnetoresistive heads and
thin film heads using a wafer fabrication process. This process involves
photolithography, etching and plating technologies. We completed the second
phase of our wafer fabrication facility expansion in Goleta, California in
the first fiscal quarter of 1998. When fully equipped and tooled, the
facility will have the capacity to produce over 300 magnetoresistive head
and/or giant magnetoresistive head wafers per week.
Completed wafers are sliced into rows containing between 29 and 44 heads
per row. Rows are then shipped to our fabrication facility in Penang,
Malaysia, where they are converted into individual heads. This process
involves high precision technologies in order to allow the head to fly to
within about one microinch above the disk surface. For magnetoresistive and
giant magnetoresistive head products, a thin, hard carbon overcoat is
deposited onto the surface of the head in order to improve the performance of
the head/disk interface and to provide added protection for the magnetic
elements of the head.
All of the processes and the product yields derived directly from
fabrication process discussed above will determine final production output
and our revenue and profitability. New head designs typically require higher
performance and place increasing demands on process technology. Our ability
to execute depends on our ability to develop new processing
27
<PAGE>
technology, maintain control over our processes and move these new products
into production volume in a timely and cost effective manner. Our
development of new products involving magnetoresistive head and giant
magnetoresistive head technologies will be critical to our future revenue.
We believe that future demand for recording heads will continue to grow.
To meet this demand, it will be critical that we increase wafer and head
output. This increase will be dependent on our ability to generate the
required capital funding. Our inability to obtain the required funds in
sufficient amounts and at the required times could adversely affect our
future revenues.
Assembly and Test
We put together all of our head gimbal assemblies and head stack
assemblies at facilities outside of the United States. Principal
manufacturing sites are in Penang, Malaysia; Chung-Ju, South Korea; and
Beijing, Peoples Republic of China.
In our head gimbal assembly, wires are attached to the head and the head
is then bonded to a stainless steel suspension. We then test the head's
ability to read and write data. The head gimbal assemblies, along with the
other components joined together as a headstack assembly, allows the heads to
be positioned within the disk drive.
We also maintain contractual relationships with unaffiliated parties
that provide manufacturing space and contract labor in Korea, Malaysia, China
and the Philippines. We plan on continuing such relationships in the future,
as required by our production needs.
We closed our Dublin, Ireland assembly plant in fiscal 1998 due to
decreasing production volume. We terminated approximately 300 employees at
the Ireland plant. We also terminated several subcontractor relationships.
Other than the severance expenses of $2.9 million incurred in connection with
the terminations, we incurred no material losses as a result of terminating
the relationships with the sub-contractors.
We have experienced a shortage of labor, from time to time, during
periods of growth, that is directly related to the manufacture of our
product. We anticipate, however, that existing manufacturing facilities and
contract labor relationships will be adequate to meet our projected market
and customer demand during fiscal 1999.
Our foreign operations can be subject to risks associated with
-currency exchange fluctuations;
-government approvals;
-political instability;
-currency restrictions;
-trade restrictions;
-labor unrest; and
-changes in tariff.
Our Korea facility was affected by a labor disruption in fiscal 1991, due to
union activities. Production was impacted for approximately one quarter. Our
experience indicates that these factors have not produced significant
liability, but we cannot assure you that these factors will not impact our
future operations.
The head stack assembly business carries certain risks and demands in
addition to those of the head gimbal assembly business. Among those risks
are:
- lower gross margins;
- slower inventory turnover;
- increased exposure to inventory obsolescence due to the larger number
of parts required for a head stack assembly and the fact that each head
stack assembly program requires unique components with long lead-time
purchasing commitments; and
- varying product life spans between different types of head stack
assemblies.
28
<PAGE>
We can provide no assurance that our head stack assembly operations will
continue to be successful. The failure of those operations could have a
material adverse effect on our business, operating results and financial
condition. The cost of purchased components incorporated into our head stack
assemblies represents a substantial percentage of the total cost of
manufacturing such products. Our ability to maintain adequate margins in the
face of constant price competition is principally a function of our ability
to obtain price reductions from our vendors, to continuously improve
manufacturing yields and to improve productivity. We anticipate lower
manufacturing yields and higher costs during the initial production phase of
magnetoresistive and giant magnetoresistive heads in comparison to inductive
thin film heads, primarily due to the learning curve associated with the
introduction of the newer technology. We expect our manufacturing yields to
increase during fiscal 1999, as we continue to advance along the process
learning curve as it relates to magnetoresistive and giant magnetoresistive
head production. We can provide no assurance, however, that we will be able
to achieve the component cost levels, manufacturing yields and productivity
levels necessary to achieve profitability.
RESEARCH AND DEVELOPMENT
We commit substantial resources to technology, product and process
development in order to meet our customers' continuing demands for higher
performance disk heads for successive generations of disk drive products.
Our technology development activities relate to creating advances in the
technology required for new product development and the development of
production processes required in new product manufacturing. Our development
activities focus on formulation of concepts, design and testing of new
product alternatives and construction of prototypes. Development activities
relating to advanced disk head products are performed at our Goleta,
California location. We also have engineering and technical staff located at
various production operations worldwide to provide manufacturing process and
integration support.
Our future success in achieving program qualifications depends heavily
on the successful and timely completion of our product and process
development efforts. While we are devoting substantial resources to these
efforts, we can provide no assurance that we will realize satisfactory
product and process development results. To the extent that we fail to do
so, there could be an adverse effect on our operating results.
Our recent research and development efforts have been primarily devoted
to commercialization of magnetoresistive and giant magnetoresistive head
technology products. Our research and development expenses were $114.7
million, $52.5 million and $50.9 million in fiscal years 1998, 1997 and 1996,
respectively.
SOURCES OF SUPPLY
We rely on Sumitomo Corporation as our sole supplier of raw wafers that
are used to produce finished wafers for our thin film and magnetoresistive
and giant magnetoresistive heads. We depend on multiple independent suppliers
for other materials used in the manufacturing process. We purchase
suspension assemblies from Hutchinson Technology, Incorporated and various
other manufacturers. Although we have not experienced significant
limitations on the availability of these materials, shortages could occur in
the future. Material shortages could disrupt our production volume and have
an adverse effect on our operations and financial results.
29
<PAGE>
CUSTOMERS AND MARKETING
Our customers in fiscal 1998 included, among others, Western Digital and
Samsung Electronics Co., Ltd. During the first half of fiscal 1999 Samsung
has been our principal customer.
We sell our magnetic recording disk heads in the United States and
foreign countries through our direct sales personnel, with the exception of
Japan, where Hitachi Metals, Ltd. acts as our sales representative for
products covered under a cross-license agreement with them.
Western Digital represented approximately 20% of our net sales during
the first half of fiscal 1999. During the first fiscal quarter of 1998,
Western Digital announced expected lower revenues and profits for that
quarter. We were then notified of significant reductions to our order backlog
due to Western Digital's plan to substantially transition from thin film to
magnetoresistive head production by the end of the third fiscal quarter of
1998. Western Digital's action was in response to disk drive oversupply in
the industry and to increasing pricing pressures.
Samsung represented approximately 76% of net sales during the first half
of fiscal 1999. Samsung has been among the fastest growing suppliers of hard
disk drives in 1998 and continues to manufacture drives based on
magnetoresistive head technology. We anticipate that Samsung will phase out
magnetoresistive heads in favor of giant magnetoresistive heads during
calendar year 2000.
Quantum Corporation and Matsushita Kotobuki Electronics Industries, Ltd.
announced in October 1998 an agreement to dissolve the MKE-Quantum
Components LLC recording head joint venture and attempt to sell its U.S.
operations. Matsushita Kotobuki Electronics Industries, Ltd. announced its
intent to continue to make head gimbal assemblies and head stack assemblies
in support of its drive production relationship with Quantum.
We have begun our magnetoresistive and giant magnetoresistive head
program qualifications with prospective new customers in order to increase
the size of our customer base. Our ability to obtain new orders from
customers depends on our ability to, among other things:
- anticipate technological changes;
- develop products to meet individualized customer requirements; and
- achieve delivery of products that meet customer specifications at
competitive prices.
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. A significant reduction
in orders or the loss of a major customer, which could occur for a variety of
reasons, including bankruptcy, could have a material adverse effect on our
future operating results. We can provide no assurance that disk drive
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 our
products and may increase our credit risks due to the concentration of our
customers. We can provide no assurance that disk drive companies won't make
their own heads or that consolidation within the disk drive industry will not
have a material adverse effect on our future operating results.
30
<PAGE>
We believe that the most effective means of marketing and selling
magnetic recording heads is by establishing close customer relationships at
the engineering level, which permits technical collaboration with our
customer and may result in our heads being designed for particular disk
drives. Through our product planning and marketing efforts, we seek to
identify those disk drive programs we believe will achieve high volume in
order to concentrate our engineering resources on these programs.
We cannot provide assurance, however, that we will be able to
successfully design heads for particular disk drives on a sufficient number
of the new disk drive programs that we are currently pursuing or that we
expect to pursue. Further, after having achieved this position on any given
customer program, we may experience difficulties in obtaining desired levels
of production volumes on a timely basis. Our failure to secure and
satisfactorily perform against orders for volume shipments of
magnetoresistive and giant magnetoresistive heads could result in
customer cancellations, reschedules and diversion of certain orders to our
competitors. To the extent any significant orders for our magnetoresistive or
giant magnetoresistive heads are canceled, rescheduled or diverted, such
actions could have a material adverse effect on our operations. See "Disk
Drive Industry" for further discussion.
COMPETITION
We compete 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 and
Seagate Technology, Inc. produce some or all disk heads for their own use.
All of these companies have significantly greater financial, technical and
marketing resources than do we.
IBM has made its recording head products available in the original
equipment manufacturers market to competing drive manufacturers. IBM expanded
its disk drive and disk components business during 1997, including its
magnetoresistive head technology, by selling to original equipment
manufacturers. IBM has, historically, produced heads only for internal use.
Our competitive position could be adversely affected if IBM continues to be
successful in marketing its magnetoresistive and giant magnetoresistive
head products at competitive prices. On April 30, 1998, Western Digital and
IBM entered into a letter of intent for a broad-based hard drive component
supply and technology licensing agreement. IBM plans to supply Western
Digital with its giant magnetoresistive heads and other components for
desktop hard drives. Western Digital introduced desktop hard drives based on
IBM products and designs in the first quarter of calendar year 1999. The
agreement does not, however, preclude other head suppliers, such as we, from
competing on future non-IBM desktop programs at Western Digital.
We believe that disk drive customers that are not vertically integrated
continue to represent significant opportunities for sales of our disk head
products. We also believe that certain vertically integrated companies will
continue to rely on independent suppliers of disk head products as
alternative sources of supply, or in some cases, as primary sources of supply
for individual disk drive programs.
Read-Rite Corporation has had substantially greater sales of disk head
products than do we and has been one of our largest competitors among
independent disk head manufacturers. Read-Rite and Sumitomo Metal Industries,
Ltd. have a joint venture in Japan to make disk head wafers.
31
<PAGE>
Several large Japanese companies, each with considerably more resources
than us, currently compete with us in the independent head market and they
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 magnetic
recording heads.
Other independent magnetic recording head manufacturers that are
shipping, or intend to ship, to original equipment manufacturers, include
Headway Technologies, Inc., Silmag, Kaifa Technology, Inc. and Hitachi Metals
Ltd.
The principal competitive factors in the markets we address are:
- price;
- product performance;
- quality;
- product availability; and
- responsiveness to customers and technological sophistication.
The disk head industry is intensely competitive and largely dependent on
sales to a limited number of disk drive manufacturers. See "Customers" for
further discussion.
BACKLOG
Our backlog of open orders scheduled for delivery within six months at
April 3, 1999, was approximately $3.9 million, compared to approximately
$10.8 million at October 3, 1998. Backlog includes only firm orders for
which the customers have released a specific purchase order and a specified
delivery schedule. Backlog decreased as a result of failure to qualify on
magnetoresistive head programs and rapid transition away from inductive thin
film products.
We receive purchase orders from our customers that express their
intentions to purchase, at stated prices, certain quantities of products
during a specified period, generally for three months or less. Orders are
subject to rescheduling provisions which permit increases or decreases in
volume of shipments during a specified period. We believe it is a common
practice, at times of supply shortages, for disk drive manufacturers to place
orders in excess of actual requirements. During periods of soft demand we
have experienced cancellation and rescheduling of orders, reductions in
quantities, shorter order lead time and repricing as customer requirements
change.
The contractual arrangements between us and most of our customers permit
us to assert claims for cancellation costs and expenses. The resolution of
these claims, however, often involves lengthy negotiations, resulting in a
compromise arrangement in which, among other things, we and the customer may
agree that the claimed amount to be paid is reduced or that we will continue
to deliver and the customer will accept all or part of the canceled order
over an extended period of time at reduced prices. Where we are unable to
cover our cancellation exposure, we take a charge against current income. We
have had no cancellation claims for the first half of fiscal 1999.
In previous years, particularly those in which the disk drive industry
was experiencing overcapacity and intense price competition, certain of our
customers reduced order backlog, delayed shipment dates and requested
extended payment terms and price concessions. These circumstances could
continue to occur in future periods which could adversely affect our revenues
and profitability. Our backlog may not be indicative of product shipments in
any future period, given the factors discussed above.
32
<PAGE>
EMPLOYEES
We had approximately 3,020 employees as of June 1, 1999. Approximately
620 of our employees were located in California and approximately 2,400 were
located in Asia. Our employees located in Korea are represented by a labor
union, and our Korean operations have, from time to time in past years, been
affected by labor disruptions and slow downs. We reduced employment in
California and Asia by approximately 2,050 employees in response to our
product transition from inductive thin film to magnetoresistive heads and our
inability to qualify magnetoresistive head products on new customer programs
in the first half of fiscal 1999.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard elements of our manufacturing processes, product designs, and
equipment as proprietary and seek to protect our proprietary rights through a
combination of employee and third party nondisclosure agreements, internal
procedures and patent protection. We have been issued a number of United
States and foreign patents and have additional patent applications pending.
We can offer no assurance that patents will be issued with respect to such
applications or that any patents issued to us will protect our competitive
position. We believe our competitive position is more dependent on the
technological know-how and creative skills of our personnel than on patent
rights.
We and IBM hold cross licenses with respect to certain patents. These
cross licenses do not include any patents filed by IBM after January 1, 1991,
nor any patents filed by us after July 1, 1991.
We and Hutchinson Technology, Incorporated entered into a Cross-License
and Joint Research and Development Agreement, in November 1993, under which
we and Hutchinson Technology hold licenses with respect to certain patents,
concerning suspension assemblies, to make, use and sell these products. We
entered into the Hutchinson Technology agreement to avoid possible future
infringements, thereby reducing the prospects for disputes and litigation.
See also "Sources of Supply."
We and Hitachi Metals, Ltd. entered into a License and Technology
Development Agreement in September 1992, under which Hitachi Metals, Ltd.
received licenses to certain of our patents. This agreement also provides for
joint ownership of jointly developed inventions, and we have several U.S.
patents and pending patents jointly held with Hitachi Metals, Ltd.
We and Seagate Technology, Inc. entered into a broad cross license in
December, 1994, with respect to certain patents held by Seagate Technology,
Inc. and us and with respect to certain future patents which may be issued on
applications filed prior to December 10, 1999.
We currently have several U.S. and foreign patents jointly held with NGK
Insulators, Ltd.
We believe that our success depends on the innovative skills and
technological competence of our employees and upon proper protection of our
intellectual properties. We have, from time to time, been notified of claims
that we may be infringing patents owned by others. If it appears necessary
or desirable, we may seek licenses under patents which we are allegedly
infringing. Although patent holders commonly offer such licenses, we can
offer no assurance that licenses will be offered or that the terms of any
offered
33
<PAGE>
licenses will be acceptable to us. The failure to obtain a key patent
license from a third party could cause us to incur substantial liabilities
and/or to suspend the manufacture of the products using the patented
invention.
ENVIRONMENTAL REGULATIONS AND WATER SUPPLY RESTRICTIONS
We use certain hazardous chemicals in our manufacturing process and are
subject to a variety of environmental and land use regulations related to the
use, storage and disposal of these chemicals and the conduct of our
manufacturing operations. We are required by State of California legislation
to obtain permits for any treatment or transportation of materials considered
to be hazardous wastes. Although we believe we will receive the necessary
permits prior to the time required by this legislation, we can provide no
assurance that such permits will be issued in a timely manner or at all. Our
failure to comply with present or future regulations could subject us to
liability or result in production suspension or delay. Environmental or land
use regulations could also restrict our ability to expand our current
production facilities or establish additional facilities in other locations,
or could require us to acquire costly equipment, or to incur other
significant expenses for compliance with environmental regulations or to
clean up prior discharges. We are subject to water use regulations and we use
a significant amount of water in our manufacturing process. Although to date
we have been able to obtain sufficient water supplies without significantly
increased costs, stricter water use regulations may be mandated and
additional expenditures for water reclamation and conservation may be
required.
We have been identified as a potentially responsible party at a
hazardous waste facility operated by the Omega Chemical Company in Whittier,
California. We contracted with Omega Chemical for purposes of waste chemical
disposal from 1987 to 1990. Omega Chemical was subsequently cited for
stockpiling waste chemicals and for allowing leaking containers to
contaminate their site. Omega Chemical has declared bankruptcy and a cleanup
order was issued to us along with other customers of Omega. A site
remediation plan is being prepared for submission to the U.S. Environmental
Protection Agency. While the U.S. Environmental Protection Agency cannot
predict how they will respond to the proposed remediation plan, it is
expected that they will respond within the next two years.
The California Regional Water Quality Control Board issued a clean up
and abatement order to us on July 13, 1994 concerning property previously
used and owned by us on Ward Drive in Goleta, California. The order required
us to carry out an environmental study to determine the extent of
contamination related to chemicals used by us at this site. This study
involved taking a number of soil samples and sinking several test wells to
test the ground water and monitor the water's condition over a twelve-month
period. The soil sample work is complete and shows no metal or volatile
organic compound contamination. Ground water samples show low levels of
volatile organic compound contamination. These contaminants have either
remained constant or declined in concentration over the past twelve-month
period. The California Regional Water Quality Control Board has extended the
monitoring requirements to an adjacent site and has required us to continue
monitoring at a reduced sample frequency. Further testing indicates a slight
increase in water contaminants and the California Regional Water Quality
Control Board has required us to implement a remediation project. The
schedule calls for pilot testing to be completed by December 1998 and full
scale remediation to begin no later than April 1999.
The Goleta environmental study and subsequent clean-up efforts are
expected to cost us approximately $200,000. The monitoring phase of the
activity will be completed in fiscal 1999 and is expected to cost us
approximately $100,000. The clean-up phase will take an additional year and
is estimated to cost us an additional $100,000.
RECENT DEVELOPMENTS
DAS Merger
34
<PAGE>
Effective February 11, 1999, through an Agreement and Plan of Merger,
dated as of November 24, 1998 and amended and restated as of January 19,
1999, our wholly owned subsidiary combined with Das Devices, Inc., a Delaware
corporation, in a merger transaction in which DAS became our wholly owned
subsidiary. In connection with the merger:
- - - - - - - - - - - - - - - - - - - - we issued to the holders of the common stock and preferred stock of DAS
an aggregate of 12,775,122 shares of our common stock, constituting
approximately 33% of our outstanding common stock after giving effect
to the merger, but excluding the shares of common stock to be sold to
certain investors following the merger; and
- - - - - - - - - - - - - - - - - - - - we reserved 276,750 shares of our common stock for issuance upon
exercise of options we granted in the merger.
The merger was approved by the DAS stockholders on February 11, 1999. The
number of shares of our common stock issued in the merger was determined through
negotiations between our management and DAS management and was approved by each
company's Board of Directors.
Under the terms of a registration rights agreement with DAS, we agreed to
register the shares for resale under the Securities Act of 1933 within 60 days
following the effective time of the merger. We agreed to indemnify each holder
of registered shares for any loss caused by a failure to disclose information or
the disclosure of false information in the registration statement, as long as
the loss is not based upon information provided by such holder. Each holder of
shares included in the registration statement has agreed to indemnify us, any
underwriter and each other holder for any loss caused by a failure to disclose
information or the disclosure of false information in the registration statement
in reliance on information provided to us by such holder. This prospectus has
been prepared pursuant to the registration rights agreement.
Investor Group Private Placement
We entered into a Securities Purchase Agreement on November 24, 1998,
that was amended and restated as of January 19, 1999, with Sierra Ventures
VI, Watershed Partners, L.P., Watershed Cayman, L.L.C., Haussman Holdings,
East River Ventures, L.L.C., JAFCO America Ventures, Inc. and The Chase
Manhattan Bank as Trustee for First Plaza Group Trust. We sold to the
investors 4,641,089 shares of our common stock in consideration of the
payment to us of $18,750,000, on February 11, 1999, pursuant to the Securities
Purchase Agreement. We agreed to register the shares for resale under the
Securities Act of 1933 within 60 days of the date of sale under the terms of
a registration rights agreement. The registration rights agreement contains
indemnities similar to those in our registration rights agreement with DAS.
The registration rights agreement also contains restrictions on the resale of
our securities by the investors similar to those contained in the merger
agreement. This prospectus has been prepared pursuant to the registration
rights agreement.
MDT Sale
We sold our subsidiary, Magnetic Data Technologies, LLC to Dubilier &
Company on April 12, 1999. Magnetic Data Technologies, LLC is a leading
provider of outsourced post-sales services to original equipment
manufacturers of electronic components and systems. We realized a gain of
approximately $25.9 million on the sale.
Kenilworth Exchange
We entered into an Exchange Agreement with Kenilworth Partners II, L.P., a
Delaware limited partnership, on May 10, 1999. Pursuant to the Exchange
Agreement, we issued 6,000,000 shares of our
35
<PAGE>
common stock to Kenilworth Partners in exchange for 7% convertible
subordinated debentures previously issued by us in the principal amount of
$24,000,000. We also sold to Kenilworth Partners 250,000 shares of our Series
B convertible preferred stock for the sum of $25 million. Our Series B
convertible preferred stock carries a 14% dividend rate, payable initially in
additional shares of Series B convertible preferred stock. Kenilworth
Partners may be issued in-kind dividends up to an additional 127,767 shares
of our Series B convertible preferred stock. The shares of Series B
convertible preferred stock issued to Kenilworth Partners, together with the
shares of that series issuable to it as in-kind dividends, are convertible
into up to 7,028,224 shares of our common stock. We agreed under the terms of
a registration rights agreement with Kenilworth Partners, to register for
resale under the Securities Act of 1933 the shares of common stock issued to
Kenilworth Partners and reserved for issuance upon conversion of the shares
of Series B convertible preferred stock. The registration rights agreement
contains indemnities similar to those in our registration rights agreement
with DAS. The registration rights agreement also contains restrictions on
the resale of our securities by Kenilworth Partners similar to those
contained in the DAS merger agreement. This prospectus has been prepared
pursuant to the registration rights agreement.
Cost Reduction Program
We embarked upon a significant cost reduction program on May 11,
1999, in order to realign expenses in response to reduced projections in
revenue and cash flow from operations for the balance of the 1999 calendar
year. The reduced projections resulted in part from recent industry softness
in demand for recording heads and from our being late to market with certain
key products. We reduced our California workforce, as part of our cost
reduction program, by approximately 35% by closing our Milpitas, California
facility and by reducing our workforce in Goleta, California.
PROPERTIES
Certain information concerning our principal properties at June 1, 1999 is
set forth below:
<TABLE>
<CAPTION>
SQUARE
LOCATION TYPE PRINCIPAL USE FOOTAGE OWNERSHIP
- - - - - - - - - - - - - - - - - - - ------------------ --------------------------- ------------------------------------- ----------- ------------
<S> <C> <C> <C> <C>
Goleta (Santa
Barbara), Headquarters, office, plant Marketing and manufacturing, Research 217,000 Owned
California...... and warehouse and engineering
Penang,
Malaysia........ Office, plant & warehouse Manufacturing 208,000 Owned*
Chung Ju,
Korea............ Office, plant & warehouse Manufacturing 293,000 Owned
Republic of
Singapore...... Office Customer Support 6,000 Leased
</TABLE>
36
<PAGE>
- - - - - - - - - - - - - - - - - - - ---------------------
* Property held as collateral for Malaysian revolving credit facility. See
Note 6 to the Notes to our year-end consolidated financial statements
included in this prospectus.
We sold a building in Dassel, Minnesota on December 11, 1998, which was
leased by us to the acquirer of a subsidiary which we previously sold.
We sold the facility in Dublin, Ireland in April 1998, as part of our
consolidation of our offshore facilities.
We are offering for sale one facility in Chung Ju, Korea, comprising 93,000
square feet.
We believe our existing manufacturing facilities are adequate to support
customer requirements during fiscal 1999.
LEGAL PROCEEDINGS
On or about June 4, 1999, Comdisco, Inc., a company that leases
equipment, filed a complaint against DAS Devices and Applied Magnetics in the
California Superior Court for the County of Santa Clara, alleging various
causes of action:
- for recovery of personal property;
- to set aside a fraudulent transfer;
- to set aside a void transfer;
- for damages for breach of lease;
- for damages for breach of assumption agreement; and
- for an accounting.
The complaint alleges that DAS Devices breached a master equipment lease
by failing to pay lease payments and that we breached our obligations to
assume the obligations of DAS Devices under the lease. The complaint also
alleges that we improperly transferred unique and proprietary
magnetoresistive and giant magnetoresistive technologies from DAS Devices to
us for inadequate consideration.
Comdisco seeks to recover:
- money damages, upon accelerating the obligations under the lease, of
$5,144,948;
- an order restraining us from using or transferring the DAS technologies;
- interest; and
- attorneys fees and costs of suit.
We believe that we have valid defenses to the Comdisco claims and we
intend to vigorously defend the suit. We cannot, however, assure you that we
will prevail in this dispute. If Comdisco successfully prosecutes it claims
against us, the resulting money damages and the restraint against our use of
the DAS technologies could significantly harm our business and financial
condition.
We are also involved in various legal proceedings incident to the
ordinary course of our business. We believe that the outcome of these pending
legal proceedings will not, in the aggregate, have a material adverse effect
on our business.
SECURITY OWNERSHIP BY PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table contains certain information regarding beneficial
ownership of our common stock as of June 1, 1999 by (i) each person that we
know owns beneficially more than 5% of our common stock, (ii) each of our
directors, (iii) our Chief Executive Officer and our two other most highly
compensated executive officers and (iv) all of our directors and executive
officers as a group:
<TABLE>
<CAPTION>
Shares Beneficially Percent of
Name Owned Class (1)
- - - - - - - - - - - - - - - - - - - ----------------------- -------------------- ----------
<S> <C> <C>
Non-Employee Directors:
Herbert M. Dwight, Jr. 40,000 (2) .1%
Harold R. Frank 308,906 (2) (3) .6
Jerry E. Goldress 35,000 (2) (4) .1
R.C. Mercure, Jr. 55,533 (2) (4) .1
Executive Officers:
Craig D. Crisman 119,643 (5) .3
John E. Foster 23,256 (6) *
Peter T. Altavilla 7,858 (7) *
Five Percent Stockholders:
Kenilworth Partners II LP 11,323,663 (8) 21.6
The Chase Manhattan Bank, as
Trustee for First Plaza Group Trust 4,900,989 (9) 10.3
All Directors and Named Executive
Officers as a Group (seven persons) 590,196 (10) 1.2
</TABLE>
37
<PAGE>
(1) Calculation is based upon the number of shares of our common stock
outstanding on June 1, 1999 (41,736,741) plus the number of shares of
our common stock issued to Kenilworth Partners II, L.P. on the
effective date of this prospectus (6,000,000).
(2) Includes, as to each of Messrs. Dwight and Mercure, and as to each of
Messrs. Frank and Goldress, options, exercisable within 60 days, to
purchase 40,000 shares and 35,000 shares, respectively, under our 1994
Non-Employee Directors' Stock Option Plan.
(3) Does not include 233,807 shares held by Wilmington Trust Company, as sole
Trustee under irrevocable trusts for three of Mr. Frank's grandchildren, as
to all of which he disclaims any beneficial interest. Includes 1,558
shares held by Mr. Frank as custodian under the California Uniform
Transfers to Minors Act, as to which shares he disclaims any beneficial
interest. Includes options, exercisable within 60 days, to purchase 35,000
shares under the 1994 Non-Employee Directors' Stock Option Plan.
(4) Includes options, exercisable within 60 days, to purchase 35,000 shares
under our 1994 Directors' Plan. See "Certain Relationships and Related
Transactions".
(5) Includes currently exercisable options to purchase 119,643 shares to
Mr. Crisman, pursuant to the arrangement between Grisanti, Galef &
Goldress, Inc. and us. See "Certain Relationships and Related
Transactions".
(6) Includes options to purchase 19,681 shares exercisable within 60 days
pursuant to options granted under employee stock option plans.
(7) Includes options to purchase 5,000 shares exercisable within 60 days
pursuant to options granted under employee stock option plans.
(8) See Notes (7) and (8) to table presented under "Selling Stockholders".
(9) See Note (2) to table presented under "Selling Stockholders".
(10) Includes options to purchase 294,324 shares exercisable within 60 days.
- - - - - - - - - - - - - - - - - - - --------
* less than 1%
38
<PAGE>
MANAGEMENT
The following table sets forth certain information concerning each of our
directors and executive officers:
<TABLE>
<CAPTION>
Name Age Director Since Position or Office
------ --- -------------- ------------------
<S> <C> <C> <C>
Craig D. Crisman 57 1994 Chairman of the Board and
Chief Executive Officer
John S. Foster 40 n/a Chief Operating Officer
Peter T. Altavilla 46 n/a Corporate Controller and
Secretary
Harold R. Frank 75 1957 Chairman Emeritus and Director
Herbert M. Dwight, Jr. 69 1989 Director
Jerry E. Goldress 68 1995 Director
R.C. Mercure, Jr. 68 1982 Director
</TABLE>
Mr. Crisman became our employee on August 1, 1994. Prior to that time,
since 1981, he was a member in the consulting firm of Grisanti, Galef &
Goldress, Inc. We engaged Grisanti, Galef & Goldress, Inc. on August
1, 1994, to provide crisis management and turnaround services to us. The
turnaround engagement was determined to have been successfully completed on
July 27, 1995. Mr. Crisman was elected our Chief Executive Officer and a
Director on August 1, 1994, however; he was elected Chairman of the Board on
November 3, 1995. During the five years preceding his appointment as Chief
Executive Officer and a Director, Mr. Crisman was a partner of Grisanti,
Galef & Goldress, Inc. In that capacity he had been engaged, as a crisis
management consultant, in business turnaround assignments involving a number
of different enterprises in various industries.
Dr. Foster became our employee in 1993. He has served in a number of
management positions for us, including Managing Director of our operation in
Penang, Malaysia and our Vice President of Worldwide Operations. We appointed
Dr. Foster as Chief Operating Officer on February 26, 1999. Dr. Foster has
over 13 years of experience in the recording head industry. Dr. Foster holds
a doctorate in Applied Physics from Stanford University.
We have employed Mr. Altavilla since 1987. He served as Assistant
Controller until August 1, 1994, when he was elected to his present position as
Corporate Controller. Mr. Altavilla was elected Secretary on February 9, 1996.
Mr. Frank, our founder, was named our Chairman Emeritus on
November 3, 1995. He is also director of Circon Corporation, a producer of
endoscopes and ultra miniature color video cameras
39
<PAGE>
for medical and industrial applications, Trust Company of the West, a
financial institution, and Key Technology, Inc., a manufacturer of automated
food processing systems.
Mr. Dwight is, and for more than five years has been, Chairman of the Board
of Directors of Optical Coating Laboratory, Inc., which is engaged in the
design, development and production of precision optical thin film components.
He is also a director of Applied Materials, Inc., a wafer fabrication equipment
manufacturer, and Advanced Fiber Communications, Inc., a company engaged in
providing telecommunications systems for local access.
Mr. Goldress is, and for more than five years has been, Chief Executive
Officer of Grisanti, Galef & Goldress, Inc. Mr. Goldress is also a director
of K2, Inc., a manufacturer of snow skis and fishing tackle. For additional
information concerning the relationship between Grisanti, Galef & Goldress,
Inc. and us see "Certain Relationships and Related Transactions".
Dr. Mercure has since 1996 been Chairman and Chief Executive Officer of CDM
Optics, Inc., a manufacturer of optical components and systems. Prior to 1996
he was Professor and Director of the Engineering Management Program at the
University of Colorado at Boulder. Dr. Mercure has been our Director since
1982. He is also a director of Ball Corporation, a manufacturer of metal and
plastic containers.
MANAGEMENT COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, as to our Chief Executive Officer and our
only other executive officer whose salary plus bonus exceeded $100,000 during
the fiscal year ended October 3, 1998, information concerning compensation
paid for services to us in all capacities during that fiscal year, as well as
the total compensation paid to each such individual in each of our previous
two fiscal years (if such person was the Chief Executive Officer or an
executive officer, as the case may be, during any part of such fiscal year).
<TABLE>
<CAPTION>
Annual Compensation Long term Compensation
------------------------------------------------ --------------------------------------------------
Awards Payouts
---------------------------- ---------------------
Other Annual Restricted Securities LTIP
Name and Compensation Stock Underlying Payout
Principal Position Year Salary($) Bonus($) ($)(1) Awards ($)(2) Option ($)(2)
------------------ ---- --------- -------- ------------- ------------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Craig D. Crisman 1998 450,000 0 0 0 100,000 0
Chief Executive 1997 422,500 431,809 0 0 200,000 0
Officer 1996 375,000 189,287 0 0 100,000 0
Peter T. Altavilla 1998 138,316 0 0 0 30,000 0
Controller and 1997 129,616 66,050 0 56,925 15,000 0
Secretary 1996 115,866 40,431 0 0 10,000 0
</TABLE>
40
<PAGE>
(1) The value of perquisites, if any, fell below $50,000 or 10% of reported
base salary and bonus for each executive.
(2) The restricted stock awards to Mr. Altavilla were issued under our 1989
Long Term Incentive Plan and are subject to restrictions under the 1989
Plan that, among other things, prohibit the sale or transfer of the common
stock. Accordingly, awards under the 1989 Plan are considered restricted
stock. These restrictions are automatically removed ten years following
the date of the award provided the participant is still employed us.
Restrictions may be removed earlier, if certain predetermined performance
objectives are achieved. The shares awarded in 1997 were issued with
restrictions to be lifted if Mr. Altavilla met certain performance
objectives. An aggregate of 1,800 shares of common stock was awarded in
1997, valued at $56,925, and those shares are subject to restrictions
under the terms of the 1989 Plan. The restrictions on 900 shares were
lifted on January 2, 1998 and the aggregate value of these shares based
on the closing price of the NYSE of $12.375 on such date was $11,130.
(3) Includes all stock options granted during the year. No Stock Appreciation
Rights (SARs) were granted and no stock options were granted in tandem with
any SARs.
On August 1, 1995, we entered into an employment agreement with Mr. Crisman
employing him as Chief Executive Officer and Chairman of the Board for a term
ending on July 31, 2000. Under the terms of the employment agreement, as
amended, Mr. Crisman receives a current base salary of $450,000 per year. Upon
execution of the employment agreement Mr. Crisman received a grant of
nonqualified options to purchase 300,000 shares of our common stock at the then
fair market price of our common stock.
STOCK OPTION GRANTS AND EXERCISES
The following tables set forth the stock options granted under our stock
option plans to the executive officers named in the Summary Compensation
Table, and the options exercised by them, during the fiscal year ended
October 3, 1998.
The Option/SAR Grant Table sets forth hypothetical gains for the options at
the end of their respective ten-year terms, as calculated in accordance with the
rules of the SEC. Each gain is based on an arbitrarily assumed annualized rate
of compound appreciation of the market price of 5% and 10%, less the exercise
price, from the date the option was granted to the end of the option term.
Actual gains, if any, on option exercise are dependent on the future
appreciation in value of our common stock which appreciation, if any, would
benefit our stockholders as well as persons to whom options have been granted.
41
<PAGE>
Options Grants in Fiscal 1998
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of
Stock Price
Percentage of Total Appreciation for
Number of Securities Options Granted to Option Term($)(3)
Underlying Options Employees in Fiscal Exercise Price ------------------
Name Granted (#) 1998 (1) Per Share ($/Sh)(2) Expiration Date 5% 10%
- - - - - - - - - - - - - - - - - - - ----- -------------------- --------------------- ------------------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Craig D. Crisman 100,000 8.1 4.38 September 17, 2008 275,141 697,262
Peter T. Altavilla 30,000 2.4 4.38 September 17, 2008 82,542 209,179
</TABLE>
- - - - - - - - - - - - - - - - - - - ------------------------
(1) We did not grant SARs in fiscal 1998.
(2) Options were granted in fiscal 1998 at fair market value and are
exercisable in cumulative annual installments of 25% of the shares granted
beginning one year after date of grant, and in all cases expire ten years
from the grant date.
(3) Potential realizable value is based on an assumption that the price, of the
common stock appreciates at the annual rate shown (compounded annually)
from the date of grant until the end of the ten-year option term.
Potential realizable value is shown net of exercise price. These numbers
are calculated based on the regulations promulgated by the SEC and do not
reflect our estimate of future stock price growth.
42
<PAGE>
Aggregated Option Exercises Fiscal 1998 and
Fiscal 1998 Option Value
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised In-the-Money-Options at
Options at October 3, 1998 October 3, 1998
------------------------------------ ------------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
- - - - - - - - - - - - - - - - - - - ------- -------------- ------------ --------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Craig D. Crisman 0 0 119,643 700,000 7,478 0
Peter T. Altavilla 0 0 5,000 56,250 1,563 0
</TABLE>
- - - - - - - - - - - - - - - - - - - ----------------------
(1) Calculated on the basis of the closing price of our common stock on the New
York Stock Exchange, $4.1875 per share, at October 2, 1998.
REMUNERATION OF DIRECTORS
We paid Messrs. Dwight, Frank, Goldress and Dr. Mercure an annual
retainer of $15,000 and $1,250 for each board meeting attended during the
fiscal year ended October 3, 1998. Directors who are not otherwise employed
by us, but who serve as members of the Audit or Compensation Committees are
entitled to be paid $1,250 for attendance at meetings of such Committees if
they occur on days other than on a regularly scheduled board meeting day. We
do not compensate directors for meetings held by teleconferencing facilities.
We reimburse directors for travel and accommodation expenses incurred in
attending board and committee meetings.
We granted options under our 1994 Non-Employee Directors' Stock Option
Plan, which was approved by the stockholders at the 1994 annual meeting, to
purchase 5,000 shares of common stock to each of Messrs. Dwight, Frank,
Goldress and Dr. Mercure on March 2, 1998, at an exercise price of $11.6875
per share. Under the 1994 Non-Employee Directors' Stock Option Plan, so long
as each person serves as a director, he will be granted an option to purchase
5,000 shares on March 1 of each subsequent year.
The exercise price of each option granted under the 1994 Non-Employee
Directors' Stock Option Plan is set at the fair market value of the common
stock on the date of grant. If the common stock is listed on a stock
exchange, fair market value will be the closing price of the common stock on
such exchange on the date of grant. If, however, the date of grant falls on a
day when such exchange is not open for the trading, the fair market value
will be set at the closing price of the common stock on such exchange on the
first trading day immediately following the date of grant.
43
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We entered into an agreement with Grisanti, Galef & Goldress, Inc. on
August 1, 1994, pursuant to which we retained it to provide crisis management
and turnaround services. Mr. Crisman was the principal consultant assigned
by Grisanti, Galef & Goldress, Inc. to perform these services and was
appointed to serve as our Chief Executive Officer. Pursuant to the terms of
the Grisanti, Galef & Goldress, Inc. agreement, we paid Grisanti, Galef &
Goldress, Inc. a monthly fee of $70,000 plus expenses through May 1995. The
monthly fee was reduced to $55,000 effective June 1995 for the services of
Mr. Crisman and any other consultants assigned by Grisanti, Galef & Goldress,
Inc. to provide services to us. In July 1995, we concluded that the
turnaround engagement of Grisanti, Galef & Goldress, Inc. had been
successfully completed, and the agreement with Grisanti, Galef & Goldress,
Inc. was then terminated. We paid a total of $140,000 and $680,000 in
consulting fees to Grisanti, Galef & Goldress, Inc. in fiscal 1994 and fiscal
1995, respectively.
We granted an option, in December 1994, to Grisanti, Galef & Goldress,
Inc. Equity Partners, a partnership comprised in part of members of Grisanti,
Galef & Goldress, Inc., to purchase 250,000 Shares of common stock at the
then market price of $4.125 per share as a success fee. At approximately the
same time, the Grisanti, Galef & Goldress, Inc. options were assigned to the
individual partners of Grisanti, Galef & Goldress, Inc. Equity Partners,
including Messrs. Goldress, Crisman and Brian Stone. The options are
nonqualified options which are currently exercisable and the shares issuable
upon exercise of these options have been registered under the Securities Act
of 1933, as amended, on Form S-3.
We hired Mr. Crisman as Chief Executive Officer following the
termination of the Grisanti, Galef & Goldress, Inc. Agreement on August 1,
1995. On November 3, 1995, he was elected Chairman of the Board. Pursuant to
our agreement with Grisanti, Galef & Goldress, Inc. we paid to it a
recruiting fee of $131,250 upon the employment of Mr. Crisman and $50,802
during fiscal 1996.
In March, 1996, Magnetic Data Technologies, Inc., one of our
subsidiaries, (formerly "Delta Bravo, Inc.") engaged the services of Brian R.
Stone, a Grisanti, Galef & Goldress, Inc. consultant, and formerly our Acting
Chief Financial Officer, as Chief Executive Officer of Magnetic Data
Technologies, Inc. In accordance with that engagement, Magnetic Data
Technologies, Inc. paid to Grisanti, Galef & Goldress, Inc. a monthly fee of
$35,000. Magnetic Data Technologies, Inc. paid a total of $245,000 and
$420,000 in consulting fees to Grisanti, Galef & Goldress, Inc. in fiscal
1996 and fiscal 1997, respectively. Grisanti, Galef & Goldress, Inc.,
received a success fee based upon a percentage of the cash proceeds to us
resulting from the operations of Magnetic Data Technologies, Inc. and its
subsidiaries and from their sale to Dubilier & Company.
Jerry E. Goldress, Chief Executive Officer and the majority shareholder
of Grisanti, Galef & Goldress, Inc., was elected to our Board of Directors on
November 3, 1995.
SEVERANCE AGREEMENTS
We have entered into severance agreements with certain of our executive
officers and key employees, including the executive officers shown in the
Summary Compensation Table.
These agreements are intended to provide for continuity of management in
the event of a change in the control of our Company. The agreements provide
that covered executive officers and key employees could be entitled to
certain severance benefits following a change in the control of our company.
If, following a change in control, we terminate the executive officer or key
employee is terminated by us for any reason, other than for disability or for
cause,
44
<PAGE>
or if such executive officer or key employee terminates his or her employment
for good reason (as this term is defined in the agreements), then the
executive officer or key employee is entitled to a severance payment that
will be the executive's or key employee's base amount for a period of twelve
months, as defined in the agreements. The severance payment generally is
made in the form of a lump sum.
The agreements are effective for a period of three years after a change
in control occurs. Under the severance agreements, a change in control would
include any of the following events:
- - - - - - - - - - - - - - - - - - - - any "person", as defined in the Securities Exchange Act of 1934, as
amended, acquires 20 percent or more of our voting securities;
- - - - - - - - - - - - - - - - - - - - a majority of our directors are replaced during a two-year period; or
- - - - - - - - - - - - - - - - - - - - shareholders approve certain mergers, a liquidation, or sale of our
assets.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consisted of Messrs. Dwight, Frank and
Goldress during fiscal year 1998. Mr. Frank was our employee and an officer
until November 3, 1995, when he retired. Mr. Dwight and Mr. Goldress have
never been officers or employees of us or any of our subsidiaries. Mr.
Goldress, Chief Executive Officer of Grisanti, Galef & Goldress, Inc., was
appointed to the Board of Directors on November 3, 1995. He was elected to
the Board at the 1996 annual meeting of stockholders. See "Certain
Relationships and Related Transactions."
SELLING STOCKHOLDERS
The following table provides information as to the shares of our common
stock owned beneficially by the selling stockholders as of June 1, 1999, the
number of shares to be sold by the selling stockholders and the number of
shares which will be owned by the selling stockholders after the offering.
<TABLE>
<CAPTION>
NUMBER OF BENEFICIALLY
OWNED SHARES PRIOR NUMBER OF SHARES
TO OFFERING(1) SHARES TO BE BENEFICIALLY
NAME OF SELLING ---------------------- OFFERED FOR OWNED AFTER
STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
-------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
The Chase Manhattan Bank, as Trustee 4,900,989 10.27% 4,900,939 0
for First Plaza Group Trust (2) (3)
Watershed Partners, L.P. (3) 299,505 * 299,505 0
Watershed Cayman, Ltd. (3) 299,505 * 299,505 0
JAFCO America Ventures, Inc. (3) 955,445 2.00% 955,445 0
Zaccaria, Bert L. (4)(5) 204,761 * 204,761 0
Cassin, Brendan Joseph and Isabel B., 186,872 * 186,872 0
Trustees of the Cassin Family Trust
U/D/T dated January 31, 1996 (5)
Donald L. Lucas Profit Sharing Trust 65,815 * 65,815 0
DTD 1-1-84 (5)
Lucas, Richard M. Cancer Foundation 52,619 * 52,619 0
(5)
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF BENEFICIALLY
OWNED SHARES PRIOR NUMBER OF SHARES
TO OFFERING(1) SHARES TO BE BENEFICIALLY
NAME OF SELLING ---------------------- OFFERED FOR OWNED AFTER
STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
-------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Donald L. Lucas, Trustee, Donald L. 13,196 * 13,196 0
Lucas and Lygia S. Lucas Trust DTD
12/3/84 (5)
Viko Technology, Inc. (5) 35,189 * 35,189 0
Patel, Pinakin R., Trustee of the 17,594 * 17,594 0
Pinakin R. and Kalpana P. Patel
Trust, January 13, 1986 (5)
Kitrosser, Steven P. (5) 4,486 * 4,486 0
Teal, Robert G. (5) 5,383 * 5,383 0
Davis, Joseph (5) 1,759 * 1,759 0
Frontline Partners, L.P. (5) 175,948 * 175,948 0
Comdisco (5) 33,824 * 33,824 0
Venture Lending & Leasing Inc. (5) 12,725 * 12,725 0
Victory Ventures LLC (5) 323,407 * 323,407 0
Jacobson, Crystalynn (5) 29 * 29 0
Raza, S. Atiq (5) 52,756 * 52,756 0
Equities Holdings LLC (5) 26,199 * 26,199 0
Sierra Ventures VI (4) (5) 1,747,818 3.66% 1,747,818 0
SV Associates VI (5) 167,233 * 167,233 0
AK Investments, Inc. (5) 351,920 * 351,920 0
RWI Group II, L.P. (5) 213,862 * 213,862 0
CitiCorp (5) 958,279 2.01% 958,279 0
Das, Shyam C. (5) 95 * 95 0
Northlea Partners, Ltd. (5) 3,985 * 3,985 0
Levy, Leonard, Smith Barney, Inc. (5) 1,112 * 1,112 0
Custodian FBO (5)
Goel, Prabhaker as Custodian for 17,596 * 17,596 0
Prakrati Goel (5)
Goel Foundation (5) 17,596 * 17,596 0
Adkisson, James (5) 4,399 * 4,399 0
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF BENEFICIALLY
OWNED SHARES PRIOR NUMBER OF SHARES
TO OFFERING(1) SHARES TO BE BENEFICIALLY
NAME OF SELLING ---------------------- OFFERED FOR OWNED AFTER
STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
-------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Enguehard, Barre (5) 8,798 * 8,798 0
East River Ventures, L.P. (4) (5) 950,930 1.99% 950,930 0
Chisholm Private Capital Partners, 485,294 1.02% 485,294 0
L.P. (5)
Popular Profile Sdn. Bhd. (5) 175,960 * 175,960 0
Carozza, Anna and Dary (5) 1,935 * 1,935 0
Dewis, Joan (5) 2,551 * 2,551 0
Vitiello, Salvatore J. (5) 2,199 * 2,199 0
Lautman, William (5) 17,595 * 17,595 0
Lindgren, Alicia B. (5) 4,231 * 4,2231 0
DeMarco, Christopher (5) 2,639 * 2,639 0
Petillo, John (5) 8,798 * 8,798 0
M3 Partners, L.C. (5) 70,384 * 70,384 0
Newman, Harold J., Newberger & 35,192 * 35,192 0
Berman, LLC, Custodian FBO, IRA
Rollover (5)
Newman Harold J. (5) 52,788 * 52,788 0
M3 Partners L.C. (5) 4,961 * 4,961 0
Bailey, Clarke H. (5) 3,416 * 3,416 0
Egan, Robert L. (5) 3,416 * 3,416 0
Rawn, Stanley R. (5) 3,416 * 3,416 0
Hackett, Melinda, Trust FBO (5) 1,240 * 1,240 0
Pascal, Donald T. (5) 5,639 * 5,639 0
Lowenberg, Jonathan M. (5) 496 * 496 0
Doykos, James (5) 496 * 496 0
Chorske, Michael W. (5) 496 * 496 0
Hackett, Montague III, Trust FBO (5) 1,240 * 1,240 0
Rubin, Donald (5) 6,269 * 6,269 0
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF BENEFICIALLY
OWNED SHARES PRIOR NUMBER OF SHARES
TO OFFERING(1) SHARES TO BE BENEFICIALLY
NAME OF SELLING ---------------------- OFFERED FOR OWNED AFTER
STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
-------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
Martin, Neil P. (5) 1,759 * 1,759 0
Martin, Herbert J. (5) 17,596 * 17,596 0
Lehman Brothers MBG Venture Capital 15,234 * 15,234 0
Partners 1997 L.P. (5)
LBI Group Inc. (5) 232,422 * 232,422 0
Walter A. Carozza (5) 3,519 * 3,519 0
Aragon Fondkommission AB (5) 175,963 * 175,963 0
Brewin Nominees Limited (5) 7,037 * 7,037 0
Gerlach & Co (5) 43,999 * 43,999 0
Banque Edouard Constant SA (5) 52,788 * 52,788 0
Task Holdings Limited (5) 175,963 * 175,963 0
DAHLM Partners (5) 21,995 * 21,995 0
English, Robert D. (5) 17,595 * 17,595 0
Hart, Larry (5) 924 * 924 0
KTS Partners LLC (5) 351,926 * 351,926 0
Lockwood, Christopher J. (5) 17,595 * 17,595 0
Price, D. Miles (5) 17,595 * 17,595 0
Strauss, Peter (5) 26,394 * 26,394 0
Whittier Ventures LLC (5) 175,963 * 175,963 0
Berlin, Howard R. (5) 35,192 * 35,192 0
Paduano, Daniel P. (5) 35,192 * 35,192 0
JAFCO Co., Ltd. (5) 175,963 * 175,963 0
JAFCO R-3 Investment Enterprise 120,523 * 120,523 0
Partnership (5)
JAFCO JS-3 Investment Enterprise 72,313 * 72,313 0
Partnership (5)
JAFCO G-6(A) Investment Enterprise 108,470 * 108,470 0
Partnership (5)
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF BENEFICIALLY
OWNED SHARES PRIOR NUMBER OF SHARES
TO OFFERING(1) SHARES TO BE BENEFICIALLY
NAME OF SELLING ---------------------- OFFERED FOR OWNED AFTER
STOCKHOLDER NUMBER PERCENT RESALE OFFERING(1)
-------------- --------- --------- -------------- --------------
<S> <C> <C> <C> <C>
JAFCO G-6(B) Investment Enterprise 108,470 * 108,470 0
Partnership (5)
JAFCO G-7(A) Investment Enterprise 147,038 * 147,038 0
Partnership (5)
JAFCO G-7(B) Investment Enterprise 147,038 * 147,038 0
Partnership (5)
U.S. Information Technology No. 2 527,890 * 527,890 0
Investment Enterprise Partnership (5)
Flinn, Lawrence Jr. (5) 175,963 * 175,963 0
Yorkton Securities Inc. in trust for 68,625 * 68,625 0
Valeo Limited (5)
Falore, David J. (5) 1,759 * 1,759 0
Falore, Joseph M. (5) 1,759 * 1,759 0
Schaltz, Gerald and Sharon A., 1,759 * 1,759 0
Trustees Shaltz Family Trust, DTD
1/12/98 (5)
Rush & Co. (5) 19,356 * 19,356 0
Lehman Brothers MBG Ventures Capital 577 * 577 0
Partners 1998 (A) L.P. (5)
Lehman Brothers MBG Ventures Capital 10 * 10 0
Partners 1998 (B) L.P. (5)
Lehman Brothers MBG Venture Capital 65 65 0
Partners 1998 (C) L.P. (5)
M.I.S. VC Partners, L.P. (5) 615,870 1.29% 615,870 0
Mitchel G. Underseth (5) 69,307 * 74,257 0.00
ORYX Technology Corp. (5) 54,455 * 54,455 0
Kenilworth Partners II LP (6) 11,323,663 23.72% 13,028,224 (7) 672,500 (8)
</TABLE>
- - - - - - - - - - - - - - - - - - - -----------------
49
<PAGE>
(1) The calculation of shares of our common stock beneficially owned was
determined in accordance with Rule 13d-3 of the Exchange Act and
assumes that the selling stockholder has not acquired shares of our
common stock subsequent to the transactions referred to in Note (3),
(5) or (7), as applicable. The calculation of percentage is based
upon the number of shares of our common stock outstanding on June 1,
1999 (41,736,741) plus the number of shares of our common stock issued
to Kenilworth Partners II, L.P. on the effective date of this
prospectus (6,000,000).
(2) The Chase Manhattan Bank acts as the Trustee for the First Plaza Group
Trust a trust under and for the benefit of certain employee benefit
plans of General Motors Corporation and its subsidiaries. The address
of the Trust is c/o The Chase Manhattan Bank, as Trustee for First
Plaza Group Trust, 4 Chase Metrotech Center, Brooklyn, New York 11245.
These shares may be considered to be owned beneficially by General
Motors Investment Management Corporation a wholly owned subsidiary of
General Motors Corporation. General Motors Investment Management
Corporation's principal business is providing investment advice and
investment management services with respect to the assets of certain
employee benefit plans of General Motors Corporation and its
subsidiaries and with respect to the assets of certain direct and
indirect subsidiaries of General Motors Corporation and associated
entities. General Motors Investment Management Corporation is serving
as the Trust's Investment manager with respect to these shares and in
that capacity has sole power to direct the Trustee as to the voting
and disposition of these shares. Because of the Trustee's limited
role, beneficial ownership of these shares by the Trustee is
disclaimed. The address of General Motors Investment Management
Corporation is 767 Fifth Avenue, New York, New York 10153.
(3) Indicates the selling stockholder purchased its shares under the
Securities Purchase Agreement. See "Recent Developments - Investor
Group Private Placement".
(4) Mr. Zaccaria became a member of our Board of Directors on
February 26, 1999. He resigned as a director on May 12, 1999.
(5) Indicates the selling stockholder received its shares in the DAS
merger. See "Recent Developments - DAS Merger".
(6) By virtue of his position as managing member of the general partner
of Kenilworth Partners II, L.P., Jeffrey Parket may be deemed to
beneficially own the shares held by Kenilworth Partners II, L.P.
The address of Kenilworth Partners II, L.P. and Mr. Parket is
40 Cuttermill Road, Suite 308, Great Neck, New York 11021.
Kenilworth Partners II, L.P. and Mr. Parket each claim sole power
to vote and dispose of the shares.
(7) Consisting of 6,000,000 shares of our common stock purchased under
the Kenilworth Exchange Agreement, 4,651,163 shares of our common
stock into which the Series B convertible preferred stock purchased
under the Kenilworth Exchange Agreement are convertible and 2,777,061
shares of our common stock into which the shares of our Series B
convertible preferred stock that may be issued as dividends on the
purchased preferred are convertible. See "Recent
Developments--Kenilworth Exchange".
(8) Consisting of shares of our common stock purchased by Kenilworth
Partners II, L.P. in the public market.
Our registration of the shares included in this prospectus does not
necessarily mean that the selling stockholders will decide to sell any of the
shares offered by this prospectus. The shares covered by this prospectus may be
sold from time to time by the selling stockholders so long as this prospectus
remains in effect; provided, however, that the selling stockholders are first
required to contact us to confirm that this prospectus is in effect.
DESCRIPTION OF COMMON STOCK
Each holder of our common stock is entitled to one vote per share held of
record on each matter submitted to stockholders. Cumulative voting for the
election of directors is not permitted, and the holders of a majority of shares
voting for the election of directors can elect all members of the Board of
Directors.
Holders of record of shares of our common stock are entitled to receive
ratably dividends when and if declared by the Board of Directors out of funds
of legally available for dividends. In the event of a voluntary or
involuntary winding up or dissolution, liquidation or partial liquidation,
holders of the common stock are entitled to participate ratably in any
distribution of our assets.
Holders of the common stock have no conversion, redemption or preemptive
rights. All outstanding shares of the common stock are validly issued, fully
paid and nonassessible.
50
<PAGE>
ANTI-TAKEOVER EFFECT OF RIGHTS PLAN
We have in place a rights plan. The plan is designed to deter a
non-negotiated takeover of us, by causing substantial dilution to a
person who attempts to so acquire us. The following is a summary of the
rights plan and is qualified by reference to the Amended and Restated Rights
Agreement dated as of October 28, 1998 between us and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, which sets forth the terms and conditions
of the rights plan.
The rights are not exercisable and are not transferable apart from the
shares to which they are attached until the earlier of a public announcement
that, without our prior consent:
- a person or group of related persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of
20% or more of our common stock; or
- ten days (unless extended by our Board of Directors) following
the commencement of (or a public announcement of an intention to make)
a tender offer or exchange offer which would result in any person or
group of related persons becoming an Acquiring Person.
Each right, when exercisable, will entitle its holder to purchase from
us one one-hundredth of a share of a new series of preferred stock, designated
as Series A participating preferred stock, $.10 par value, at a price of $20 per
share. Each shares of Series A participating preferred stock will be entitled
to:
- a preferential quarterly dividend in an amount equal to 100 times
the dividend declared on each share of common stock, but in no event
less than $1.00;
- a preferred liquidation payment in the event of liquidation of our
company, in an amount equal to the greater of 100 times $20 or 100
times the payment made per each share of common stock;
- 100 votes, voting together with the shares of common stock; and
- 100 times the amount and type of consideration received per share of
our common stock, in the event of a merger or other transaction in
which shares of our common stock are exchanged.
If, after the rights become exercisable, we are involved in a merger
or other business combination transaction in which our common stock is
exchanged or changed or we sell 50% or more of our assets or earning power,
each right then outstanding (other than rights held by the Acquiring Person)
would become a right to buy that number of shares of common stock of the
acquiring company which at the time of such transaction would have a market
value of two times the exercise price of the rights. In the event that an
Acquiring Person becomes such (unless pursuant to a tender offer or exchange
offer for all outstanding shares of our common stock at a price and on terms
determined by at least a majority of the members of our Board of Directors
who are not officers of the Company to be both adequate and otherwise in the
best interests of our company and its stockholders (a "Permitted Offer")),
each holder of a right (other than the Acquiring Person) will for a 60 day
period thereafter have the right to receive upon exercise that number of
shares of our common stock having a market value of two times the exercise
price of the right (such right being called the "Subscription Right").
We may redeem the rights at a price of $.01 per right at any time
prior to a person becoming an Acquiring Person. We also may redeem the rights
at a price of $.01 per right after a person becomes an Acquiring Person, but
only if such redemption is incidental to a merger or other business combination
transaction involving us and anyone but an Acquiring Person or if such
redemption is following an event giving rise to, and the expiration of the
exercise period for, the Subscription Right and for as long as an Acquiring
Person beneficially owns less than 20% of our common stock.
The rights expire on the earliest of:
- November 4, 2008;
- consummation of a merger transaction with a person or group who
acquired shares of our common stock pursuant to a Permitted Offer,
and is offering in the merger the same price per share and form of
consideration paid in the Permitted Offer; or
- redemption by us as described above.
51
<PAGE>
PLAN OF DISTRIBUTION
Neither we nor the selling stockholders have employed an underwriter for
the sale of common stock by the selling stockholders. We will pay all expenses,
other than broker or dealer discounts and commissions, stock transfer taxes and
the fees and disbursements of separate counsel, if any, retained by the
shareholders, associated with the sale of the common stock. The securities
covered by this prospectus may be sold by or for the account of the selling
stockholders pursuant to this prospectus or pursuant to Rule 144 under the
Securities Act.
The selling stockholders may offer their shares of common stock directly or
through pledgees, donees, transferees or other successors in interest at various
times in one or more of the following transactions, which may include block
sales:
- on any stock exchange on which the shares of common stock may be
listed at the time of sale, either through a broker or otherwise;
- in negotiated transactions;
- in the over-the-counter market;
- in a combination of any of the above transactions; or
- through any other available market transaction.
The selling stockholders may offer their shares of common stock at any of
the following prices:
- fixed prices which may be changed;
- market prices prevailing at the time of sale;
- prices related to such prevailing market prices; or
- at negotiated prices.
If required by law, we will add a supplement to this prospectus to disclose
the specific shares to be sold, the names of the selling stockholders, the
public offering prices of the shares to be sold, the names of any broker or
dealer employed by the selling stockholders in connection with such sale, and
any applicable commission or discount with respect to a particular offer.
The selling stockholders may effect such transactions by selling shares to
or through broker-dealers, and all such broker-dealers may receive compensation
in the form of discounts, concessions, or commissions from the selling
stockholders and/or the purchasers of shares of common stock for whom such
broker-dealers may act as agents or to whom they sell as principals, or both.
Any broker-dealer acquiring common stock from the selling stockholders may
sell the shares either directly, in its normal market-making activities, through
or to other brokers on a principal or agency basis or to its customers. Any
such sales may be at prices then prevailing on the New York Stock Exchange or at
prices related to such prevailing market prices or at negotiated prices to its
customers or a combination of such methods. The selling stockholders and any
broker-dealers that act in connection with the sale of the common stock might be
deemed to be "underwriters" pursuant to Section 2(11) of the Securities Act; any
commissions received by them and any profit on the resale of shares as
principals might be deemed to be underwriting discounts and commissions under
the Securities Act of 1933. Any such commissions, as well as other expenses
incurred by the selling stockholders and applicable transfer taxes, are payable
by the selling stockholders. In addition, the selling stockholders may be
subject to applicable provisions of Regulation M under the Exchange Act of 1934,
which may limit the timing of the purchases and sales of shares of common stock
by the selling stockholders.
52
<PAGE>
We have not registered or qualified offers and sales of shares of the
common stock under the laws of any country, other than the United States. To
comply with certain states' securities laws, if applicable, the selling
stockholders will offer and sell their shares of common stock in those
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain states the selling stockholders may not offer or sell
shares of common stock unless we have registered or qualified the shares for
sale in such states or we have complied with an available exemption from
registration or qualification.
LEGAL MATTERS
The validity of the shares of common stock being offered by this
prospectus has been passed upon for us by Sheppard, Mullin, Richter & Hampton
LLP, Los Angeles, California.
EXPERTS
The audited consolidated financial statements and schedules of Applied
Magnetics Corporation included or incorporated by reference in this
prospectus and elsewhere have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect to
such audited consolidated financial statements and schedules, and are
included in this prospectus in reliance upon their authority as experts in
giving the indicated report. Reference is made to said report, which includes
an explanatory paragraph with respect to the uncertainty regarding Applied
Magnetics Corporation's ability to continue as a going concern as discussed
in Note 1 to the financial statements.
53
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
APPLIED MAGNETICS CORPORATION
Report of Independent Public Accountants ............................... F-2
Consolidated Balance Sheets as of October 3, 1998 and
September 27, 1997 ................................................... F-3
Consolidated Statements of Operations for the years ended
October 3, 1998, September 27, 1997 and September 28, 1996 ........... F-4
Consolidated Statements of Shareholders' Investment ..................... F-5
Consolidated Statements of Cash Flows for the years ended
October 3, 1998, September 27, 1997 and September 28, 1996 ........... F-6
Notes to Consolidated Financial Statements ............................. F-7
Unaudited Condensed Consolidated Balance Sheets as of April 4, 1998.....F-27
Unaudited Condensed Consolidated Statements of Operations
for the six months ended April 3, 1999 and April 4, 1998 .............F-28
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended April 3, 1999 and April 4, 1998 .............F-29
Notes to Condensed Consolidated Financial Statements ...................F-30
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Applied Magnetics Corporation:
We have audited the accompanying consolidated balance sheets of Applied
Magnetics Corporation (a Delaware corporation) and subsidiaries as of October
3, 1998 and September 27, 1997, and the related consolidated statements of
operations, shareholders' investment and cash flows for each of the three
years in the period ended October 3, 1998. These financial statements are the
responsibility of the Company' s management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Magnetics Corporation and subsidiaries as of October 3, 1998 and September
27, 1997, and the results of their operations and their cash flows for each
of the three years in the period ended October 3, 1998, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to
the financial statements, the company has suffered significant losses and
negative cash flows from operations due to its inability to transition to
current product technology. These conditions raise substantial doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
ARTHUR ANDERSEN LLP
Los Angeles, California
June 1, 1999
F-2
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share and par value data)
ASSETS
<TABLE>
<CAPTION>
As of
-------------------------------
October 3, September 27,
1998 1997
---------- -------------
<S> <C> <C>
Current assets:
Cash and equivalents .............................................. $ 71,674 $ 162,302
Accounts receivable, less allowances of $904
in 1998 and $4,942 in 1997 .................................... 7,291 52,924
Inventories, net .................................................. 13,054 51,438
Prepaid expenses and other ........................................ 15,590 11,420
--------- ---------
107,609 278,084
--------- ---------
Property, plant and equipment, at cost:
Land .............................................................. 2,340 2,556
Buildings ......................................................... 100,810 92,962
Manufacturing equipment ........................................... 201,515 193,217
Other equipment and leasehold improvements ........................ 26,684 32,433
Construction in progress .......................................... 34,120 50,056
--------- ---------
365,469 371,224
--------- ---------
Less-accumulated depreciation and amortization ........................ (188,022) (181,732)
177,447 189,492
--------- ---------
Other assets, net ..................................................... 14,462 10,412
--------- ---------
$ 299,518 $ 477,988
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current liabilities:
Current portion of long-term debt ................................. $ 1,610 $ 513
Bank notes payable ................................................ 58,468 50,188
Accounts payable .................................................. 16,409 49,103
Accrued payroll and benefits ...................................... 8,070 11,287
Other current liabilities ......................................... 9,653 5,829
--------- ---------
94,210 116,920
--------- ---------
Long-term debt, net of current portion ................................ 116,767 116,030
--------- ---------
Other long-term liabilities ........................................... 2,581 4,257
--------- ---------
Shareholders' Investment:
Preferred stock, $.10 par value, authorized 5,000,000 shares,
none issued and outstanding ....................................... -- --
Common stock, $.10 par value, authorized 80,000,000 shares,
issued 24,103,294 shares at October 3, 1998 and 23,976,711
shares at September 27, 1997 ...................................... 2,410 2,398
Paid-in capital ....................................................... 191,225 191,185
Retained earnings (deficit) ........................................... (106,065) 49,303
--------- ---------
87,570 242,886
Treasury stock, at cost (130,233 shares at October 3, 1998
and 128,384 shares at September 27, 1997) ............................. (1,577) (1,554)
Unearned restricted stock compensation ................................ (33) (551)
--------- ---------
85,960 240,781
--------- ---------
$ 299,518 $ 477,988
--------- ---------
--------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these consolidated balance sheets.
F-3
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
<TABLE>
[COMMON]
For the Years Ended
-------------------
October 3, September 27, September 28,
1998 1997 1996
--------- ------------- -------------
<S> <C> <C> <C>
Net sales .................................................. $ 183,597 $ 494,839 $ 344,754
Cost of sales .............................................. 198,742 326,990 251,503
--------- --------- ---------
Gross profit (loss) ...................................... (15,145) 167,849 93,251
--------- --------- ---------
Research and development expenses .......................... (114,659) (52,532) (50,867)
Selling, general and administrative expenses ............... (6,514) (8,330) (6,533)
Provision for customer bankruptcy .......................... -- (4,200) --
Terminated merger costs .................................... -- (2,906) --
Restructuring charges ...................................... (8,400) -- --
Interest income ............................................ 5,877 8,316 4,228
Interest expense ........................................... (12,627) (12,346) (9,056)
Other income (expense), net ................................ (1,495) 2,384 2,047
--------- --------- ---------
Income (loss) before provision for
income taxes .................................... (152,963) 98,235 33,070
Provision for income taxes ................................. 2,405 2,119 852
--------- --------- ---------
Net income (loss) ........................................ $(155,368) $ 96,116 $ 32,218
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share:
Income (loss) per common share ........................... $ (6.49) $ 4.08 $ 1.41
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share--
assuming dilution ................................. $ (6.49) $ 3.37 $ 1.21
--------- --------- ---------
--------- --------- ---------
Weighted average number of common shares outstanding:
Common shares ............................................ 23,931 23,567 22,913
--------- --------- ---------
--------- --------- ---------
Common shares--assuming dilution ......................... 23,931 31,011 30,173
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-4
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
(In Thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock Treasury Stock
------------ --------------
Unearned
Number Retained Number Restricted
of Paid-In Earnings of Stock Shareholders'
Shares Amount Capital (Deficit) Shares Amount Compensation Investment
----------- ------ -------- ---------- ------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30,
1995 .......................... 22,619,205 $2,262 $181,191 $ (79,031) 96,603 $ (830) $ -- $ 103,592
Stock options
exercised ................... 582,772 58 2,945 -- -- -- -- 3,003
Purchase of treasury
stock, net .................. -- -- -- -- 20,392 (364) -- (364)
Litigation settlement ......... 81,070 8 1,242 -- -- -- -- --
Net income -- -- -- 32,218 -- -- -- 32,218
---------- ------ -------- --------- ------- ----- -------- -----------
Balance, September 28,
1996 .......................... 23,283,047 2,328 185,378 (46,813) 116,995 (1,194) -- 139,699
Stock options
exercised ................... 668,296 67 5,008 -- -- -- -- 5,075
Purchase of treasury
stock, net .................. -- -- -- -- 11,389 (360) -- (360)
Restricted stock
issuance, net ............... 25,368 3 799 -- -- -- (802) --
Amortization of
unearned restricted
stock compensation,
net ......................... -- -- -- -- -- -- 251 251
Net income .................... -- -- -- 96,116 -- -- -- 96,116
---------- ------ -------- --------- ------- ----- -------- -----------
Balance, September 27,
1997 .......................... 23,976,711 2,398 191,185 49,303 128,384 (1,554) (551) 240,781
Stock options
exercised .................. 128,650 13 640 -- -- -- -- 653
Purchase of treasury
stock, net .................. -- -- -- -- 1,849 (23) -- (23)
Restricted stock
issuance, net ............... (2,067) (1) (600) -- -- -- 550 (51)
Amortization of
unearned restricted
stock compensation,
net ......................... -- -- -- -- -- -- (32) (32)
Net loss ...................... -- -- -- (155,368) -- -- -- (155,368)
---------- ------ -------- --------- ------- ----- -------- -----------
Balance, October 3,
1998 .......................... 24,103,294 $2,410 $191,225 $(106,065) 130,233 $(1,577) $(33) $ 85,960
---------- ------ -------- --------- ------- ----- -------- -----------
---------- ------ -------- --------- ------- ----- -------- -----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-5
<PAGE>
APPLIED MAGNETICS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Years Ended
-------------------
October 3, September 27, September 28,
1998 1997 1996
--------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) .................................................................. $(155,368) $ 96,116 $ 32,218
Adjustments to reconcile net income (loss) to net cash .............................
provided by (used in) operating activities: .....................................
Depreciation and amortization .............................................. 44,627 38,757 28,891
Gain on sale of business and assets ........................................ (414) -- --
Provision for customer bankruptcy .......................................... -- 4,200 --
Restructuring charges ...................................................... 8,400 -- --
Changes in assets and liabilities:
Accounts receivable ...................................................... 45,633 (13,721) (6,832)
Inventories .............................................................. 38,384 (15,458) (3,253)
Prepaid expenses and other ............................................... (4,170) (1,290) (750)
Accounts payable ......................................................... (32,694) 16,789 (12,221)
Accrued payroll and benefits ............................................. (3,217) 396 1,705
Other assets and liabilities ............................................. (5,752) (1,706) (86)
--------- --------- ---------
Net cash provided by (used in) operating activities ...................... (64,571) 124,083 39,672
--------- --------- ---------
Cash Flows from Investing Activities:
Additions to property, plant and equipment .............................. (35,876) (96,065) (69,900)
Proceeds from sale of businesses and property, plant and equipment, net .. 3,025 -- 15,122
Notes receivable ......................................................... 126 106 1,803
--------- --------- ---------
Net cash used in investing activities ................................... (32,725) (95,959) (52,975)
--------- --------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of convertible subordinated debentures ...................... -- -- 115,000
Proceeds from issuance of debt ..................................................... 273,711 239,200 144,214
Repayment of debt .................................................................. (266,876) (236,403) (164,787)
Payment of debt issuance costs ..................................................... -- -- (4,274)
Proceeds from stock options exercised, net ......................................... 515 4,605 2,574
--------- --------- ---------
Net cash provided by financing activities ............................... 7,350 7,402 92,727
--------- --------- ---------
Effect of exchange rate changes on cash and equivalents ............................ (682) (624) (260)
--------- --------- ---------
Net increase (decrease) in cash and equivalents ................................... (90,628) 34,902 79,164
Cash and equivalents at beginning of period ........................................ 162,302 127,400 48,236
--------- --------- ---------
Cash and equivalents at end of period .............................................. $ 71,674 $ 162,302 $ 127,400
--------- --------- ---------
--------- --------- ---------
Supplemental Cash Flow Data:
Interest Paid .................................................................. $ 12,626 $ 12,346 $ 8,698
Income Taxes paid .............................................................. $ 317 2,239 541
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated financial statements.
F-6
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF THE BUSINESS
Applied Magnetics Corporation and subsidiaries (the "Company") was
incorporated in California in 1957 and was reincorporated in Delaware in
1987. The Company manufactures advanced inductive thin film head products,
magnetoresistive head products, and giant magnetoresistive head products, in
each case, primarily to supply manufacturers of 3.5 inch hard disk drives.
In fiscal 1998, the Company experienced a significant decrease in
net sales and demand for its inductive thin film products, which resulted in
a significant loss and negative cash flow from operations as the Company
transitions from thin film to magnoresistive head and giant magnoresistive
head technology. The Company's ability to fund its operating and capital
requirements for fiscal 1999 is heavily dependent on its ability to receive
qualification and begin volume production of its magnoresistive head and
giant magnoresistive head products on a timely basis. As of June 1, 1999,
the Company is in the final stages of qualification for one of its
magnoresistive head products and expects to begin volume production shipment
in the fourth quarter of fiscal 1999. The Company is also attempting to raise
capital, which is required immediately to fund current operating activities,
and will be required to raise significant additional capital in the near term
to fund the anticipated magnoresistive head production ramp up and related
working capital requirements. If the Company is unable to achieve
magnoresistive head production or raise sufficient capital in the near term,
there will be a material adverse effect on the Company's financial condition,
competitive position and ability to continue as a going concern.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Applied Magnetics Corporation and its subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Certain 1996 accounts have been reclassified to conform with the 1997 and
1998 presentation.
USE OF ESTIMATES: The preparation of financial statements in
conformity with general accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from these
estimates. Management believes that these estimates and assumptions provide a
reasonable basis for the fair presentation of the consolidated financial
statements.
FOREIGN CURRENCIES: Financial statements and transactions of
subsidiaries operating in foreign countries are measured in U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52. The
functional currency for all subsidiaries is the U.S. dollar. The effect of
reporting assets and liabilities stated in foreign currency is included as a
component of "Other Income (expense), net" in the Consolidated Statements of
Operations. A net foreign currency loss of $1.4
F-7
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
million in 1998 and net gains of $2.1 million in 1997 and of $.5 million in
1996 were included in operations.
The Company operates in a number of foreign countries. The relative
impact of foreign currency fluctuations on revenue is not significant as
product pricing is generally based on the U.S. dollar. Purchases of certain
raw materials and certain labor costs are paid for in foreign currencies. As
a result, effects of currency rate fluctuations can affect results of
operations. Fluctuations may also have a significant effect on reported cash
balances. Malaysian debt maturities are not currently hedged, as the credit
facilities are held in U.S. dollars. As a result, there is no current foreign
transaction exposure associated with the Malaysian debt.
DEPRECIATION AND AMORTIZATION POLICIES: Plant, property and
equipment are accounted for on a historical cost basis and are depreciated or
amortized over their estimated useful lives using the straight-line method
except for leasehold improvements which are amortized over the life of the
lease.
Estimated useful lives are as follows:
<TABLE>
<CAPTION>
AVERAGE USEFUL LIFE
-------------------
<S> <C>
Buildings..................................... 15-16 Years
Manufacturing equipment....................... 2-5 Years
Other equipment............................... 1-5 Years
Leasehold improvements........................ Term of Lease
</TABLE>
Depreciation and amortization expense from operations amounted to
$44.6 million, $38.8 million and $28.9 million in 1998, 1997 and 1996,
respectively. Property tax expense amounted to approximately $1.9 million,
$1.5 million and $1.6 million in 1998, 1997 and 1996 respectively.
The Company follows the policy of capitalizing expenditures that
materially increase asset lives. Maintenance and minor replacements are
charged to operations when incurred. Maintenance and repair expenses charged
to operations were $7.9 million, $10.2 million and $9.0 million in fiscal
1998, 1997 and 1996, respectively. When assets are sold or otherwise disposed
of, the cost and related accumulated depreciation or amortization are removed
from the accounts, and any resulting gain or loss is included in results of
operations.
LONG-LIVED ASSETS: In the first quarter of fiscal 1997, the Company
adopted Statement of Financial Accounting Standard No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of" ("SFAS 121"). In accordance with SFAS 121, long-lived assets used by the
Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.
F-8
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CASH EQUIVALENTS: Cash equivalents consist primarily of money market
instruments maturing within 90 days of inception and are carried at cost,
which approximates market value. Cash equivalents were $63.3 million at
October 3, 1998 and $154.1 million at September 27, 1997.
INVENTORIES: Inventories are stated at the lower of cost (first-in,
first- out method) or market. Market for purchased parts and manufacturing
supplies is based on replacement costs and for other inventory
classifications on net realizable value. Inventories consist of purchased
materials and services, direct production labor and manufacturing overhead.
The components of inventory were as follows (in thousands):
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
---------- ------------
<S> <C> <C>
Purchased parts and manufacturing supplies $ 8,578 $24,187
Work in process 2,414 25,434
Finished goods 2,062 1,817
------- -------
$13,054 $51,438
======= =======
</TABLE>
REVENUE RECOGNITION AND WARRANTY POLICIES: Revenue is recognized at
the time the product is shipped to the customer. Under the Company's warranty
terms, customers are allowed to return products within the applicable
warranty periods. The Company reverses the net sales and associated costs
upon receipt of returned products and makes any appropriate adjustments to
the associated warranty reserve when experience indicates such adjustment is
appropriate.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The estimated fair values have
been determined by the Company using available market information and
appropriate valuation methodologies. However, considerable judgment is
required in interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily indicative of
the amounts that the Company could realize in a current market exchange.
The fair value of the Company's debt instruments at October 3, 1998
approximates its carrying value.
NET INCOME (LOSS) PER COMMON SHARE: 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.
Net income (loss) per common share is computed by dividing net income by the
weighted average number of shares of common stock outstanding during the
period. Net income per common share assuming dilution is computed based on
the weighted average number of shares of common
F-9
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
stock and common stock equivalents outstanding during the period as if the
Company's Convertible Subordinated Debentures ("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 used in the calculation of income
(loss) per common share assuming dilution. Prior years EPS has been conformed
to current year presentation.
RESEARCH AND DEVELOPMENT EXPENSES: The Company is actively engaged
in basic technology and applied research and development programs which are
designed to develop new products and product applications and related
manufacturing processes. The costs of these programs are classified as
research and development expenses and are charged to operations as incurred.
INCOME TAXES: The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS 109"). SFAS 109 is an asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, SFAS 109 generally considers all expected future events other
than the proposed changes in the tax law or rates. See Note 4.
STOCK OPTIONS: Proceeds from the sale of common stock issued upon
the exercise of stock options are credited to common stock and paid-in
capital accounts at the time the option is exercised. Income tax benefits
attributable to stock options exercised are credited to paid-in capital when
realized. See Note 5.
CONSOLIDATED STATEMENTS OF CASH FLOWS: In accordance with Statement
of Financial Accounting Standards No. 95, "Statement of Cash Flows," the
Company has selected the "indirect method" of presentation for reporting cash
flows.
RECENT ACCOUNTING PRONOUNCEMENTS: In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). SFAS 131 establishes standards for the way the
Company reports information about operating segments in annual financial
statements and requires that the Company report selected information about
operating segments in interim financial reports issued to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas, and major customers.
F-10
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCREASE IN AUTHORIZED COMMON STOCK
On February 6, 1998, the Company's shareholders approved the
amendment to Company's Certificate of Incorporation to increase the Company's
authorized common stock from 40 million shares to 80 million shares.
FISCAL YEAR
The Company's fiscal year ends on the Saturday closest to September
30. Fiscal years 1998, 1997 and 1996 ended on October 3, 1998, September 27,
1997 and September 28, 1996, respectively. Fiscal year 1998 included 53
weeks. References to years in this annual report relate to fiscal years
rather calendar years.
This Statement supersedes FASB Statement No. 14, "Financial
Reporting for Segments of a Business Enterprise," but retains the requirement
to report information about major customers. It amends Statement of Financial
Accounting Standards No. 94 "Consolidation of All Majority-Owned
Subsidiaries," to remove the special disclosure requirements for previously
unconsolidated subsidiaries. This Statement will become effective for
financial statements of the Company in fiscal 1999.
3. SEGMENTS OF BUSINESS
The Company operates in one market: worldwide-components for the
computer peripheral industry. Sales to major customers are as follows:
<TABLE>
<CAPTION>
For the Years Ended:
--------------------
October 3, September 27, September 28,
1998 1997 1996
---------- ------------- -------------
<S> <C> <C> <C>
(As a Percentage of Sales)
Western Digital ........ 72% 79% 44%
Samsung ................ 27% -- --
NEC .................... -- 6% 20%
Seagate (Conner) ....... -- -- 13%
Quantum ................ -- 2% 10%
All Others ............. 1% 13% 13%
--- --- ---
Total .................. 100% 100% 100%
=== === ===
</TABLE>
Export sales are made by the United States operations to the following
geographic locations (in thousands):
F-11
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
For the Years Ended:
--------------------
October 3, September 27, September 28,
1998 1997 1996
----------- ------------- -------------
<S> <C> <C> <C>
Europe ................................ $ - $ 182 $ 219
Asia .................................. 183,250 483,736 322,405
------- -------- --------
$183,250 $483,918 $322,624
------- -------- --------
------- -------- --------
</TABLE>
The relative impact of foreign currency fluctuations on export sales is
not significant as product pricing and settlement are generally based on the
U.S. dollar.
F-12
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Information regarding the Company's domestic and foreign operations is
as follows (in thousands):
<TABLE>
<CAPTION>
United
States Foreign Total
--------- --------- ---------
<S> <C> <C> <C>
1998
Net sales .......................... $ 183,445 $ 152 $ 183,597
========= ========= =========
Intercompany sales ................. $ 193,875 $ 237,557 $ --
========= ========= =========
Operating loss ..................... $(121,967) $ (24,246) $(146,213)
Interest expense, net .............. (6,750)
---------
Loss before provision for income
taxes $(152,963)
========= ========= =========
Identifiable assets ................ $ 189,026 $ 110,492 $ 299,518
========= ========= =========
1997
Net sales .......................... $ 486,943 $ 7,896 $ 494,839
========= ========= =========
Intercompany sales ................. $ 317,055 $ 507,054 $ --
========= ========= =========
Operating profit ................... $ 42,974 $ 59,291 $ 102,265
Interest expense, net .............. (4,030)
Income before provision for income
taxes ...................... $ 98,235
=========
Identifiable assets ................ $ 331,373 $ 146,615 $ 477,988
========= ========= =========
1996
Net sales .......................... $ 329,992 $ 14,762 $ 344,754
========= ========= =========
Intercompany sales ................. $ 207,023 $ 304,527 $ --
========= ========= =========
Operating profit ................... $ 9,887 $ 28,011 $ 37,898
Interest expense, net .............. (4,828)
---------
Income before provision for income
taxes ....................... $ 33,070
=========
Identifiable assets ................ $ 246,067 $ 113,383 $ 359,450
========= ========= =========
</TABLE>
A significant percentage of the Company's customers, located in the
U.S., have production facilities primarily in Asia that receive the Company's
products. Most of the accounts receivable balance is from one of these
customers.
F-13
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Foreign operations primarily consist of manufacturing/assembly
operations in the Asia-Pacific region and sales invoicing responsibility
resides with U.S. operations.
Results of operations for United States-based operations include all
research and development expenditures, thereby causing an unfavorable
comparison with the operating results of foreign-based operations. The U.S.
based operations include substantially all of the sales of the Company to its
outside customers.
4. INCOME TAXES
The provision for income taxes for the following fiscal years
consists of (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Federal Income Taxes
Current ............. $ (463) $ 1,290 $ 527
Deferred ............ -- -- --
State Income Taxes
Current ............. (658) 780 181
Deferred ............ -- -- --
Foreign Income Taxes ...... 3,526 49 144
------- ------- -------
$ 2,405 $ 2,119 $ 852
======= ======= =======
</TABLE>
Reconciliation of the actual provisions for income taxes to the
income tax calculated at the United States Federal rates for operations were
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income tax (benefit) at the United States
federal income tax rate ....................... $(53,537) $ 34,382 $ 11,575
State income taxes, net of federal income tax
benefit ....................................... 1 507 118
Foreign income taxed at lower rate .................. 12,377 (19,583) (8,485)
Temporary differences/net operating losses
(benefitted) not benefitted ................. 43,564 (13,187) (2,356)
-------- -------- --------
$ 2,405 $ 2,119 $ 852
======== ======== ========
</TABLE>
F-14
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision (benefit) for deferred income taxes results from
temporary differences which result from different tax bases for assets and
liabilities than their reported amounts in the financial statements. Such
differences result in recognition of income or expense in different years for
tax and financial statement purposes. The sources of these differences and
the tax effect of each at October 3, 1998 and September 27, 1997 were as
follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Inventory reserves ..................................... $ 8,536 $ 5,439
Other reserves ......................................... 1,395 10,404
Net operating loss carryforwards ....................... 58,500 3,035
Foreign tax & general business credit carryforwards .... 8,180 6,327
Unrepatriated foreign earnings ......................... (3,500) (3,500)
Depreciation ........................................... 2,635 2,750
Other, net ............................................. (4,718) 475
-------- --------
Subtotal .............................................. 71,028 24,930
Valuation allowance .................................... (71,028) (24,930)
-------- --------
Total net deferred tax asset (liability) ............... $ -- $ --
======== ========
</TABLE>
SFAS 109 requires that all deferred tax balances be determined using
the tax rates and limitations expected to be in effect when the taxes will
actually be paid or recovered. Consequently, the income tax provision will
increase or decrease in the period in which a change in tax rate or
limitation is enacted. As of October 3, 1998, the Company had total deferred
tax liabilities of $8.2 million and deferred tax assets of $79.2 million. The
Company recorded a valuation allowance in the amount of $71.0 million against
the amount by which deferred tax assets exceed deferred tax liabilities. The
valuation reserve at October 3, 1998 has been provided due to the uncertainty
of the amount of future domestic taxable income.
The valuation allowance has been provided after determining that
under the criteria of SFAS No. 109, it was more likely than not that the net
deferred asset would not be realized in the foreseeable future. In reaching
this conclusion, management considered the Company's erratic earnings history
and its structure for income tax reporting purposes, whereby a significant
portion of its earnings are generated in foreign jurisdictions.
The Company has not provided U.S. federal income taxes on unremitted
foreign earnings as the Company expects to permanently reinvest such earnings
in foreign jurisdictions. In addition, the Company has minimal foreign tax
credits available to offset the U.S. tax impact of repatriating foreign
earnings. Accordingly, if such foreign earnings were repatriated to the U.S.,
these earnings would generally be taxed at the U.S. statutory rates.
The Company currently operates under a tax holiday in Malaysia. The
tax holiday is effective through August 31, 2004. The Malaysian Industrial
Development Authority has approved a "Common Pioneer" tax status for the
subsequent five year period whereby 70% of the Malaysian income would be
exempt from taxes. The Company is continuing to negotiate with the Malaysian
Authorities to improve the income exemption and extend the term.
The Company had federal net operating loss carryforwards available
for tax purposes of approximately $148.2 million as of October 3, 1998. To
the extent not used, the net operating loss carryforward expires in varying
amounts beginning in 2009.
F-15
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. STOCK OPTIONS AND LONG-TERM INCENTIVE PLANS
The Company adopted stock option plans in 1988, 1992 and 1994.
Incentive or nonqualified stock options may be granted under the 1992 and 1994
plans while the 1988 plan is limited to nonqualified options only. The options
are issued at exercise prices equal to the fair market value of the Common Stock
at the date of grant. At October 3, 1998, September 27, 1997 and September 28,
1996, there were exercisable options outstanding under the option plans to
purchase an aggregate of 125,076 shares, 490,509 shares and 307,356 shares of
Common Stock, respectively .
In 1994, the Company adopted a nonqualified stock option plan for non-
employee directors (the "1994 Directors' Plan"). Under this plan, directors who
are not employed by the Company are granted options to purchase 20,000 shares of
the Company's Common Stock upon being elected to the board and, thereafter, such
directors receive automatic annual grants of options to acquire 5,000 shares of
Common Stock on March 1 of each year, provided the person continues to serve as
a director. The options granted under the 1994 Directors' Plan are issued at
exercise prices equal to the fair market value of the Common Stock at the date
of grant and become exercisable on the first anniversary following the date of
grant. At October 3, 1998, the Company had reserved 140,000 shares of its $.10
par value Common Stock for future issuance under this plan, options for 160,000
shares were outstanding at prices from $3.00 to $43.13 per share, of which
149,993 shares were exercisable. During fiscal 1998, no options were exercised
or canceled under this plan.
In December 1994, the Company granted 250,000 options to purchase the
Company's Common Stock, at $4.125, to Grisanti, Galef and Goldress, Inc.
("GG&G"), a consulting firm hired in August 1994 to provide the Company with
crisis management and turnaround assistance. The options would be exercisable if
the turnaround engagement was successfully completed, which the Company
determined to be so, in July 1995. The options became exercisable in whole or
part and will expire in five years from date of grant. The exercise price of the
options was set at the closing price of the Common Stock on the New York Stock
Exchange on the date of grant. During fiscal 1998, options for 30,000 shares
were exercised. At October 3, 1998, 125,000 options were exercisable under this
plan.
Stock option activity under the option plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Number Weighted Average
Of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance September 30, 1995 ........ 1,856,453 $ 5.42
Granted ......................... 1,059,000 $ 15.34
Exercised ....................... (582,772) $ 5.19
Cancelled ....................... (62,861) $ 5.90
---------
Balance September 28, 1996 ........ 2,269,820 $ 10.09
---------
Granted .......................... 1,736,006 $ 35.26
Exercised ........................ (668,296) $ 7.43
Cancelled ........................ (837,618) $ 37.62
---------
</TABLE>
F-16
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Number Weighted Average
Of Shares Exercise Price
--------- ----------------
<S> <C> <C>
Balance September 27, 1997 ........ 2,499,912 $ 19.06
---------
Granted .......................... 5,242,101 $ 7.81
Exercised ........................ (128,650) $ 5.05
Cancelled ........................ (4,295,704) $ 16.28
---------
Balance October 3, 1998 ........... 3,317,659 $ 5.42
---------
</TABLE>
The following table summarizes information about the Company's stock
options outstanding and exercisable as of October 3, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Weighted Number Weighted
Range of Exercise Prices Number Average Average Exercisable Average
Exercise Price Outstanding Remaining Exercise Price ----------- Exercise
-------------- ----------- Contractual Life -------------- Price
---------------- --------
<S> <C> <C> <C> <C> <C>
$1.9048 - $ 4.25 202,041 2.22 $ 3.79 202,041 $ 3.79
$4.3750 - $ 4.38 2,841,022 9.96 $ 4.38 -- $ --
$5.1250 - $43.13 274,596 4.94 $17.44 216,928 $17.94
--------- ---- ------ ------- ------
3,317,659 9.07 $ 5.42 418,969 $11.12
--------- ---- ------ ------- ------
--------- ---- ------ ------- ------
</TABLE>
PRO FORMA INFORMATION: In October 1995, the Financial Accounting
Standards Board released Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an
alternative to APB Opinion 25, "Accounting for Stock Issued to Employees" ("APB
25") and requires additional disclosures. The Company has elected to follow APB
25 in accounting for stock options. As a result, the Company generally
recognizes no compensation expense associated with its various stock option
plans. SFAS 123 requires disclosure of pro forma fair market value of options
granted, pro forma net income and pro forma earnings per share as if the Company
had accounted for its stock options granted subsequent to September 30, 1995,
under the fair value method of that statement.
The fair value of the Company's stock options granted to employees was
estimated using a Black Scholes pricing model assuming no expected dividends and
the following weighted-average factors:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Option life (in years)...................... 2.75 2.83
Risk-free interest rate..................... 5.05% 6.18%
Stock price volatility...................... 0.59 0.57
</TABLE>
F-17
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted-average fair value of stock options granted in 1998 and
1997 under the Company's stock option plans was $3.19 and $14.60, respectively.
In February of 1998, the Company modified 1,140,799 options with
initial exercise prices ranging from $15.25 to $35.5625 to a modified exercise
price of $11.9375 per option. In September of 1998, the Company modified
2,841,022 options with initial exercise prices ranging from $5.875 to $31.625 to
a modified exercise price of $4.375 per option. In each case, the new price was
then prevailing market price of the Company's common stock.
Had the Company determined compensation expense based on the fair value
method as described in SFAS 123, the Company's net income and net income per
share would have been reduced to the amounts indicated below:
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
----------- -------------
<S> <C> <C>
Pro forma net income (in thousands) ...... $(164,684) $ 88,963
Pro forma net income per share:
Primary ......................... $ (6.88) $ 3.77
Fully diluted ................... $ (6.88) $ 2.87
</TABLE>
Pro forma net income (loss) and net income (loss) per share reflect
only options granted in the years ended October 3, 1998 and September 27, 1997.
Therefore, the full impact of calculating compensation expense for options under
SFAS No. 123 is not reflected in the pro forma net income amounts presented
above because compensation expense is reflected over the options' vesting period
and compensation expense for options granted before October 1, 1995 is not
considered.
The Company adopted a long-term incentive plan in 1989. Under the 1989
plan, the Company grants shares of Common Stock at no cost to the participants.
These shares are subject to restrictions, which prohibit selling, transferring
assigning or otherwise disposing of the Common Stock. The restrictions
automatically expire ten years following the date of grant, or earlier if
certain performance objectives are achieved. The market value of Common Stock
issued is recorded as unearned restricted stock compensation and shown as a
separate component of shareholders' investment. This compensation is amortized
against income over the periods in which the participants perform services. At
October 3, 1998, 2,068 shares were available for future issuance under the 1989
plan and 10,617 shares remain subject to restrictions. During 1998, no shares
were issued, 2,067 shares were canceled and restrictions were removed from
12,684 shares under the 1989 plan. No compensation expense was required during
1998.
The Company has authorized a class of Preferred Stock consisting of
5,000,000 shares, $.10 par value. The Board of Directors has authority to divide
the Preferred Stock into series, to fix the number of shares comprising any
series and to fix or alter the rights, privileges and preferences of the
Preferred Stock. No shares of the Preferred Stock were outstanding at October 3,
1998 or September
F-18
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
27, 1997. During 1988, the Board of Directors declared a dividend of one
Right for each outstanding share of Common Stock to stockholders of record on
November 4, 1988. Each Right entitles the holder to buy the economic
equivalent of one share of Common Stock in the form of one one-hundredth of a
share of the Preferred Stock at an exercise price of $20.00. Under certain
conditions, each Right will entitle its holder to purchase, at the Right's
exercise price, shares of the Company's Common Stock or common stock
equivalents having a market value of twice the Right's exercise price.
As discussed in Note 1, the Company adopted SFAS 128 effective in
fiscal 1998. The following table illustrates the computation of basic income
(loss) per common share and income (loss) per common share assuming dilution
under the provisions of SFAS 128.
<TABLE>
<CAPTION>
For The Fiscal Year
Ended
-------------------------------
October 3, September 27,
1998 1997
---------- -------------
<S> <C> <C>
Income (Loss) Per Share:
Net income (loss) ....................................... $(155,368) $ 96,116
--------- ---------
--------- ---------
Weighted average common shares outstanding .............. 23,931 23,567
--------- ---------
--------- ---------
Income (Loss) per common share .......................... $ (6.49) $ 4.08
--------- ---------
--------- ---------
Income (Loss) per Common Share--Assuming Dilution:
Net income (loss) before adjustment ..................... (155,368) 96,116
Add back subordinated debentures interest ............... -- 8,050
Add back subordinated debentures amortization ........... -- 428
Less tax impact ......................................... -- (175)
--------- ---------
Net income (loss) as adjusted ......................... $(155,368) $ 104,419
--------- ---------
--------- ---------
Shares
Weighted average common shares outstanding ............ 23,931 23,567
Dilutive effect of stock options ...................... -- 1,261
Assuming conversion of convertible subordinated
debentures .......................................... -- 6,183
--------- ---------
Common shares--assuming dilution ...................... 23,931 31,011
--------- ---------
--------- ---------
Income (Loss) per common share--assuming dilution ........ $ (6.49) $ 3.37
--------- ---------
--------- ---------
</TABLE>
Income (loss) per common share is computed by dividing net income
(loss) by the weighted average number of shares of common stock and common stock
outstanding during the period. Income (loss) per common share--assuming dilution
is computed based on the weighted average
F-19
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
number of shares of common stock and common stock equivalents outstanding
during the period and as if the Company's Convertible Subordinated Debentures
("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, those shares are not included in the weighted average shares
outstanding used in the calculation of basic and fully diluted loss per
common share as of October 3, 1998.
6. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable and long-term debt consists of the following (in
thousands):
<TABLE>
<CAPTION>
October 3, September 27,
1998 1997
--------- -------------
<S> <C> <C>
7.0% Convertible Subordinated Debentures, due March 15, 2006 ....... $114,999 $115,000
Secured Malaysian bank credit facilities, interest
rates from 6.75% to 10.0% ......................................... 55,482 50,188
Mortgage payable, interest rate of 8.5% ............................ 66 86
Bank advance, interest rate of 9.5% ................................ 2,986 --
Capital leases ..................................................... 3,312 1,457
-------- --------
176,845 166,731
Less--current portion, including bank credit
facilities ........................................................ 60,078 50,701
-------- --------
$116,767 $116,030
-------- --------
-------- --------
</TABLE>
The aggregate principal payments of bank notes payable and long-term
debt for the years subsequent to October 3, 1998 are: 1999--$60.1 million,
2000-- $1.5 million., 2001--$0.2 million, thereafter $115.0 million.
The Company's $115.0 million 7.0% Convertible Subordinated Debentures
(the "Convertible Debentures") due in 2006 may be converted, at any time at a
conversion price of $ 18.60 per share.
The Company has a secured, revolving line of credit from CIT
Group/Business Credit, Inc. ("CIT") that has been in place since January, 1995.
This line of credit provides for borrowings up to $35.0 million based on
eligible trade receivables at various interest rates and is secured by trade
receivables, inventories and certain other assets. As of October 3, 1998, the
total amount available for future borrowings was $1.2 million under this
facility. As of October 3, 1998, the Company was
F-20
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
not in compliance with all financial covenants but has received notification
from the Company's lender waiving the area of non-compliance until June 30,
1999, and expects to successfully renegotiate the terms of the covenants with
the lender. In December 1997, the Company extended the line of credit to
January, 2001. For the year ended October 3, 1998, $4.2 million of available
funds were used to secure equipment leases with two of the Company's lessors.
The Company's Malaysian subsidiary has a credit facility with a
Malaysian bank that has been in place since June 1990, is callable on demand and
has no termination date. In May 1995,the Company and the Malaysian bank amended
this credit facility to include a security interest in the Company's real
property holdings in Malaysia and to include certain covenants which preclude
the Company from granting liens and security interests in other assets in
Malaysia. Credit facilities with four other banks, established by the Company's
Malaysian subsidiary during fiscal 1997 are unsecured. The borrowings under the
new facilities are also callable on demand, and have no termination date. The
total amount available to borrow under all the credit facilities was
approximately $60.7 million of which $55.5 million was outstanding at October 3,
1998. The Company was in compliance with all financial covenants under these
facilities. The interest rates outstanding on these loan facilities ranged from
6.75% to 10.0%, at October 3, 1998 and had a weighted average interest of 8.58%.
The Company intends to continue its practice of repaying maturities with new
borrowings under these facilities.
7. DISPOSITIONS
During 1993, the Company sold its subsidiaries, Magnetic Data, Inc.
and Brumko Magnetics, which had been accounted for as a discontinued
operation in 1992, to Delta Bravo, Inc. ("DBI"). A portion of the sales
consideration consisted of notes issued to the Company. DBI subsequently
defaulted on several note covenants and breached related pledge agreements
with the Company. On July 17, 1996, the Company, through foreclosure
proceedings, acquired all the common stock of DBI and Magnetic Data
Technologies ("MDT"), which was formed in conjunction with the foreclosure
for a $2.5 million reduction in debt owed to the Company by DBI. All DBI note
balances had been fully reserved by the Company in previous years and the
Company has no investment in DBI or MDT. The Company engaged a third party
consulting firm to operate and facilitate the sale of MDT. MDT was sold
subsequent to October 3, 1998. See Note 13. MDT's financial position and
results of operations are immaterial to the Company' s consolidated financial
statements.
8. COMMITMENTS AND CONTINGENCIES
The Company has been identified as a potentially responsible party in
connection with a hazardous waste facility in Whittier, California. A site
remediation plan is being prepared for submission to the U.S. Environmental
Protection Agency. Separately, the California Regional Water Quality Control
Board ("CRWQCB") issued a clean up and abatement order to the Company concerning
property previously used and owned by the Company. As a result of this order,
the Company performed an environmental study to determine the extent of
contamination related to
F-21
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
chemicals used by the Company at this site. The CRWQCB required the Company
to implement a remediation project. For these and other environmental sites,
the Company has accrued reserves at the most likely cost to be incurred where
it is probable that the Company will incur remediation costs that can be
reasonably estimated. As of October 3, 1998 and September 27, 1997, the
amounts accrued for environmental reserves were not significant. It is
impossible at this time to determine the ultimate liabilities that the
Company may incur resulting from the foregoing claims and contingencies. In
management's opinion, after taking into account reserves, it is unlikely that
any of these matters will have a material adverse effect on the Company's
financial position or results of operations.
F-22
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A portion of the Company's facilities and equipment are leased under
non- cancelable operating leases and certain equipment is leased under
capitalized leases. The terms of the leases for facilities and equipment expire
over the next five years with renewal options in certain instances. Future
minimum lease payments under capital and operating leases as of October 3, 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
Leases
--------------------------------------
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1999........................................................ $ 1,763 $30,991
2000........................................................ 1,606 25,883
2001........................................................ 236 21,522
2002........................................................ -- 12,655
Thereafter.................................................. -- 2,260
-------- --------
Total minimum payments............................ 3,605 $93,311
-------- --------
-------- --------
Less imputed interest.................................. (293)
-----
Present value of minimum payments under capital
leases........................................................ 3,312
Less current portion................................... (1,590)
-------
Long-term lease
obligation.................................................. $ 1,722
-------
-------
</TABLE>
Manufacturing and other equipment at October 3, 1998 include assets
under capitalized leases of $5.2 million with related accumulated depreciation
of $0.1 million.
Purchase commitments associated with capital expenditures were $3.6
million at October 3, 1998.
The Company entered into $3.3 million of capital leases during fiscal
1998.
The Company's Malaysian subsidiary has a credit facility with a
Malaysian bank that includes security interest in the Company's real property
holdings in Malaysia, with a net book value of $25.4 million at October 3, 1998.
Total rental expense, net of sublease rental income, for the years
ended October 3, 1998, September 27, 1997 and September 28, 1996, including
items on a month-to-month basis, was approximately $32.5 million, $23.7 million
and $15.2 million, respectively.
F-23
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
One of the senior executives of the Company has a five year employment
agreement. Any changes to the agreement require approval by the Board of
Directors.
9. BENEFIT PLANS
The Company has a qualified retirement plan (the "401(k) Plan") under
the provisions of section 401(k) of the Internal Revenue Code, in which eligible
employees may participate. Substantially all participants in this plan are able
to defer compensation up to the annual maximum amount allowable under Internal
Revenue Service regulations. Additionally, the Company has a profit sharing
plan, in which all eligible employees participate. Profit sharing amounts are
distributed as 75% in cash, except for foreign employees who receive all of
their profit sharing in cash, and 25% in cash which is contributed to employees
participating in the Company's 401(k) Plan. There was no compensation expense
recorded under the cash profit sharing plan and the Company made no 401(k)
contributions during fiscal 1998. Compensation expense recorded under the cash
profit sharing plan during 1997 and 1996 was approximately $4.5 million and $3.3
million, respectively, of which approximately $0.6 million and $0.5 million was
contributed to participating employees' 401(k) accounts, respectively.
10. TERMINATED MERGER COSTS
Terminated merger costs of $2.9 million for fiscal 1997 include legal
and accounting fees, financial advisory fees and miscellaneous 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.
11. PROVISION FOR CUSTOMER BANKRUPTCY
On November 10, 1997, Singapore Technologies announced plans to shut
down its subsidiary, Micropolis, one of the Company's customers. As a result,
the Company recorded a provision for customer bankruptcy of $4.2 million in the
fourth quarter of fiscal 1997 related to potentially uncollectible accounts
receivable.
12. RESTRUCTURING CHARGE
The Company recorded a restructuring charge of approximately $8.4
million in the first quarter of fiscal 1998. Of this amount, approximately
$2.9 million pertains to severance and related expenses at the Ireland
facility and approximately $5.5 million represents the write-off of the
unamortized book value of inductive thin-film equipment. The shut down of the
Ireland plant was completed in March 1998 as part of a plan to consolidate
foreign manufacturing operations. Approximately 300 employees were terminated
at the Ireland plant. All amounts for severance, outplacement and relocation
at the Ireland facility were paid during 1998. The restructuring reserve
balance was zero as of October 3, 1998. The inductive thin-film equipment,
which is no longer usable to the Company, has been abandoned due to changing
technology. Management separately isolated the idle equipment. Many of the
products have already been disposed, and the remaining estimated cost of
disposal is expected to be approximately equal to the scrap value.
F-24
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. SUBSEQUENT EVENTS
On November 3, 1998, the Company entered into an agreement with
Gleacher Natwest Inc. ("Gleacher") giving Gleacher, through the issuance of
common stock purchase warrants, the right to purchase up to an aggregate of
1,200,000 shares of the Company's Common Stock in exchange for providing
financial advisory services to the Company until February 12, 2000. The warrants
will be issued in six series and each series entitles the holders thereof to
purchase 200,000 of the Company's common stock at the lower of (i) the current
market price on the vesting date, as defined or (ii) $7.00, subject to
adjustments defined in the agreement. The warrants vest over the term of the
agreement and are valued using the Black Scholes pricing model. The Company
records a corresponding liability equal to the value of the warrants at each
respective vesting date.
On February 11, 1999, the Company completed its merger with DAS, a
research and development company. The consideration exchanged was 13,051,872
shares of the Company's common stock for all of the outstanding preferred and
common shares of DAS. The acquisition was accounted for as a purchase, and
the acquisition price of approximately $99.7 million was allocated to assets
acquired, including the fair value of in-process technology, and liabilities
assumed based on their fair values. It was determined that in-process
technology of $28.7 million was acquired. Since the technology has no future
economic value to the Company, it was written-off during the three months
ended April 3, 1999. The excess of the purchase price plus related
transaction costs over the fair value of tangible and intangible assets
acquired and liabilities assumed has been allocated to (1) developed
technology and know-how of approximately $30.1 million, which will be
amortized on a straight line basis over 3 years, the estimated period of
future benefit and (2) goodwill of approximately $37.6 million (including a
value of $1.6 million associated with assembled workforce), which will be
amortized on a straight line basis over the estimated period of future
benefit of 7 years. Concurrent with this acquisition and contingent on the
merger, a private investor group purchased 4,641,089 shares of the Company's
common stock in exchange for $18.75 million.
On April 12, 1999, the Company completed its previously announced
sale of its subsidiary, Magnetic Data Technologies, LLC ("MDT") to Dubilier &
Company. MDT is a leading provider of outsourced post-sales services to
original equipment manufacturers ("OEM's") of electronic components and
systems. The Company realized a gain from discontinued operations of
approximately $25.9 million on the transaction in the third fiscal quarter of
1999.
14. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
December 27 April 4 July 4 October 3
----------- --------- -------- ---------
<S> <C> <C> <C> <C>
(In Thousands, Except per Share Data)
1998
Net sales ................................ $ 74,412 $ 58,843 $ 33,579 $ 16,763
Gross profit (loss) ...................... (7,078) 3,721 (1,935) (9,853)
Net loss ................................. (39,749) (31,931) (35,842) (47,846)
Net loss per share:
Loss per common share .................. $ (1.67) $ (1.33) $ (1.50) $ (1.99)
Loss per common share--assuming
dilution .............................. (1.67) (1.33) (1.50) (1.99)
Weighted average number of common
shares outstanding:
Common shares .......................... 23,858 23,925 23,968 23,973
Common shares--assuming
dilution .............................. 23,858 23,925 23,968 23,973
</TABLE>
F-25
<PAGE>
APPLIED MAGNETICS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------------------
December 28 March 29 June 28 September 27
----------- -------- -------- ------------
<S> <C> <C> <C> <C>
(In Thousands, Except per Share Data)
1997
Net sales ................................ $121,627 $126,311 $124,073 $122,828
Gross profit ............................. 46,597 48,549 39,884 32,819
Net income ............................... 31,872 31,091 21,028 12,125
Net income per share:
Income per common share ................ $ 1.36 $ 1.32 $ 0.89 $ 0.51
Income per common share--
assuming dilution ..................... 1.10 1.06 0.75 0.46
Weighted average number of common
shares outstanding:
Common shares .......................... 23,267 23,519 23,681 23,803
Common shares--assuming
dilution .............................. 30,861 31,178 30,904 31,100
</TABLE>
F-26
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS -- UNAUDITED
(IN THOUSANDS EXCEPT SHARE AND PAR VALUE DATA)
<TABLE>
<CAPTION>
ASSETS
APRIL 3, OCTOBER 3,
1999 1998
--------------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 20,191 $ 71,674
Accounts receivable, net 3,870 7,291
Inventories 2,229 13,054
Prepaid expenses and other 13,186 15,590
--------------- ---------------
39,476 107,609
--------------- ---------------
Property, plant and equipment, at cost 392,905 365,469
Less-accumulated depreciation (207,679) (188,022)
--------------- ---------------
185,226 177,447
--------------- ---------------
Cost in excess of net assets of business acquired, net 67,268 -
Other assets 13,681 14,462
--------------- ---------------
$ 305,651 $ 299,518
--------------- ---------------
--------------- ---------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Current Liabilities:
Current portion of long-term debt $ 3,458 $ 1,610
Bank notes payable 64,820 58,468
Accounts payable 21,714 16,409
Accrued payroll and benefits 10,329 8,070
Other current liabilities 11,739 9,653
--------------- ---------------
112,060 94,210
--------------- ---------------
Long-term debt, net 125,373 116,767
--------------- ---------------
Other liabilities 2,894 2,581
--------------- ---------------
Shareholders' Investment:
Preferred stock, $.10 par value, authorized
5,000,000 shares, none issued and outstanding - -
Common stock, $.10 par value, authorized
80,000,000 shares, issued 41,557,887 at
April 3, 1999 and 24,103,294 shares at
October 3, 1998 4,156 2,410
Paid-in capital 301,931 191,225
Retained deficit (239,149) (106,065)
--------------- ---------------
66,938 87,570
Treasury stock, at cost (130,552 shares as of April 3, 1999
and 130,233 shares at October 3, 1998) (1,581) (1,577)
Unearned restricted stock compensation (33) (33)
--------------- ---------------
65,324 85,960
--------------- ---------------
$ 305,651 $ 299,518
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated balance sheets.
F-27
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 3, APRIL 4,
--------------- ---------------
1999 1998
<S> <C> <C>
Net sales $ 31,519 $ 133,255
Cost of sales 56,694 136,612
--------------- ---------------
Gross margin (deficit) (25,175) (3,357)
--------------- ---------------
Research and development expenses 61,499 51,750
Selling, general and administrative expenses 3,444 3,575
Writedown of assets and restructuring charges 4,500 8,400
Amortization 2,016 -
Purchase in-process technology 28,700 -
--------------- ---------------
Total operating expenses 100,159 63,725
--------------- ---------------
Loss from operations (125,334) (67,082)
Interest income 941 3,426
Interest expense (6,892) (6,292)
Other income (expense) (1,285) (1,455)
--------------- ---------------
Loss before taxes (132,570) (71,403)
Provision (benefit) for income taxes 514 277
--------------- ---------------
Net loss $ (133,084) $ (71,680)
--------------- ---------------
--------------- ---------------
Net loss per share:
Loss per common share $ (4.53) $ (3.00)
--------------- ---------------
--------------- ---------------
Loss per common share - assuming dilution $ (4.53) $ (3.00)
--------------- ---------------
--------------- ---------------
Weighted average number of common shares outstanding:
Common shares 29,353 23,891
--------------- ---------------
--------------- ---------------
Common shares - assuming dilution 29,353 23,891
--------------- ---------------
--------------- ---------------
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
F-28
<PAGE>
APPLIED MAGNETICS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
APRIL 3, APRIL 4,
--------------- --------------
1999 1998
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss $ (133,084) $ (71,680)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 24,122 23,089
Loss on sale of business and assets 265 -
Restructuring charge 4,500 8,400
Purchase in-process technology 28,700 -
Changes in assets and liabilities, net of effects from
business merger:
Accounts receivable, net 3,913 24,877
Inventories 10,940 19,623
Prepaid expenses and other 2,880 (3,067)
Accounts payable (6,331) (25,925)
Accrued payroll and benefits 1,219 (2,109)
Other assets and liabilities (3,711) (1,981)
--------------- --------------
Net cash flows used in operating activities (66,587) (28,773)
--------------- --------------
Cash Flows from Investing Activities:
Additions to property, plant and equipment (6,658) (48,875)
Proceeds from sale of businesses and property, plant and
equipment, net 401 -
Purchase of business (703) -
Notes receivable 58 62
--------------- --------------
Net cash flows used in investing activities (6,902) (48,813)
--------------- --------------
Cash Flows from Financing Activities:
Proceeds from issuance of debt 91,677 134,995
Repayment of debt (88,637) (132,479)
Proceeds from stock options exercised, net 18,950 528
--------------- --------------
Net cash flows provided by financing activities 21,990 3,044
--------------- --------------
Effect of exchange rate changes on cash and cash equivalents 16 (817)
--------------- --------------
Net decrease in cash and cash equivalents (51,483) (75,359)
--------------- --------------
Cash and cash equivalents at beginning of period 71,674 162,302
--------------- --------------
Cash and cash equivalents at end of period $ 20,191 $ 86,943
--------------- --------------
--------------- --------------
Supplemental Cash Flow Data:
Stock issued to purchase business $ 93,498 $ -
--------------- --------------
--------------- --------------
</TABLE>
The accompanying Selected Notes to Condensed Consolidated Financial Statements
are an integral part of these condensed consolidated statements.
F-29
<PAGE>
Selected Notes to Condensed Consolidated Financial Statements
Unaudited
(April 3, 1999)
NOTE A: MERGER WITH DAS DEVICES, INC. (DAS)
On February 11, 1999, the Company completed its merger with DAS,
a research and development company. The consideration exchanged was
13,051,872 of the Company's common stock for all of the outstanding preferred
and common shares of DAS. The acquisition was accounted for as a purchase,
and the acquisition price of approximately $99.7 million was allocated to
assets acquired, including the fair value of in-process technology, and
liabilities assumed based on their fair values. It was determined that
in-process technology of $28.7 million was acquired. Since the technology has
no future economic value to the Company, it was written-off during the three
months ended April 3, 1999. The excess of the purchase price plus related
transaction costs over the fair value of tangible and intangible assets
acquired and liabilities assumed has been allocated to (1) developed
technology and know-how of approximately $30.1 million, which will be
amortized on a straight line basis over 3 years, the estimated period of
future benefit and (2) goodwill of approximately $37.6 million (including a
value of $1.6 million associated with assembled workforce), which will be
amortized on a straight line basis over the estimated period of future
benefit of 7 years. Concurrent with this acquisition and contingent on the
merger, a private investor group purchased 4,641,089 shares of the Company's
common stock in exchange for $18.75 million.
NOTE B: 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):
<TABLE>
<CAPTION>
APRIL 3, OCTOBER 3,
-------- ----------
1999 1998
---- ----
<S> <C> <C>
Purchased parts and
manufacturing $ 949 $ 8,578
supplies
Work in process 1,280 2,414
Finished goods - 2,062
-------- --------
2,229 13,054
-------- --------
-------- --------
</TABLE>
F-30
<PAGE>
NOTE C: WRITEDOWN OF ASSETS AND RESTRUCTURING CHARGE
The Company recorded a restructuring charge of approximately $8.4
million in the first quarter of fiscal 1998. Of this amount, approximately
$2.9 million pertains to severance and related expenses at the Ireland
facility and approximately $5.5 million represents the write-off of the
unamortized book value of inductive thin-film equipment. The shut down of the
Ireland facility was completed in March 1998 as part of a plan to consolidate
foreign manufacturing operations. Approximately 300 employees were terminated
at the Ireland plant. All amounts for severance, outplacement and relocation
at the Ireland facility were paid during 1998. The inductive thin-film
equipment, which is no longer usable to the Company, has been abandoned due
to changing technology. Management separately isolated the idle equipment.
Many of the products have already been disposed of, and the remaining
estimated cost of disposal is expected to be approximately equal to the scrap
value.
The Company recorded a $4.5 million charge in the second fiscal
quarter of 1999 related to the write-off of the unamortized book value of
obsolete assets and the remaining book value of assets associated with the
discontinuation of an in-house suspension assembly operation. The obsolete
assets and the in-house suspension assembly assets, which were no longer
usable to the Company, are in the process of being abandoned due to changing
technology and product discontinuation. Management separately isolated the
assets. The assets have not yet been disposed of; however, the estimated
costs of disposal are expected to be approximately equal to scrap value.
NOTE D: CREDIT FACILITIES
The Company's Malaysian subsidiary has credit facility agreements with
five Malaysian banks. These credit facilities allow for borrowings of up to
$62.7 million of which $62.4 million was outstanding as of April 3, 1999. All
the Malaysian credit facilities are callable on demand, have no termination date
and are guaranteed by the Company. Credit facilities with one bank are secured
by the Company's real property holdings in Malaysia and include financial
covenants and certain covenants which preclude the Company from granting liens
and security interests in other assets in Malaysia. Credit facilities with the
four other banks are unsecured.
The Company also has a secured, asset-based revolving line of credit
of up to $35.0 million from CIT Group/Business Credit, Inc. As of April 3, 1999,
the Company was not in compliance with the financial covenants under this line
of credit, but has received notification from the Company's lender waiving the
area of non-compliance until June 30, 1999. The Company expects to successfully
renegotiate terms of the covenants with the lender. As of April 3, 1999, the
total amount available under this line of credit was fully utilized.
NOTE E: EARNINGS (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. Loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock outstanding during
the period. 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 has an antidilutive effect. As a result, these shares are not
included in the weighted average shares outstanding of 34,728,792 used in the
calculation of loss per common share and common share - assuming dilution at
April 3, 1999.
F-31
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus in connection
with the offer made by this prospectus. If given or made, you must not rely
on such information or representations. You should not consider that the
delivery of this prospectus or any sale made hereunder under any
circumstances creates any implication that there has been no change in us or
in our business, operations or financial condition since the date of this
prospectus. This prospectus does not constitute an offer or solicitation by
anyone in any jurisdiction in which such offer or solicitation is not
qualified to do so or to anyone to whom it is unlawful to make such
solicitation.
Table of Contents
Page
----
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Where You Can Find More Information. . . . . . . . . . . . . . . . . . . 10
Use of Proceeds . . .. . . . . . . . . . . . . . . . . . . . . . . . . . 10
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Market for Common Stock . . . . . . . . . . . . . . . . . . . . . . . . 10
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .... . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Forward Looking Information. . . . . . . . . . . . . . . . . . . . . . . 22
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Security Ownership of Principal Stockholders
and Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Management Compensation. . . . . . . . . . . . . . . . . . . . . . . . . 40
Selling Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Description of Common Stock. . . . . . . . . . . . . . . . . . . . . . . 50
Anti-Takeover Effect of Rights Plan. . . . . . . . . . . . . . . . . . . 51
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Experts . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . 53
Index to Consolidated Financial
Statements . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . F-1
30,444,435
[LOGO]
COMMON STOCK
----------
PROSPECTUS
----------
_____________,1999
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are
estimates, except the Securities and Exchange Commission registration fee and
the listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ............. $ 20,180*
Printing and engraving expenses ................................. 15,000*
Accounting fees and expenses .................................... 25,000*
Legal fees and expenses ......................................... 75,000*
Miscellaneous expenses .......................................... 7,500*
Total ...................................................... $142,680
</TABLE>
*Estimate
Item 15. Indemnification of Directors and Officers
The indemnification of officers and directors of the Registrant is
governed by Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") and the Certificate of Incorporation and By-Laws of the
Registrant. Subsection (a) of DGCL Section 145 empowers a corporation to
indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an
action by or in the right of the corporation) by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by the person in connection with such action, suit or
proceeding if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the person's conduct was unlawful.
Subsection (b) of DGCL Section 145 empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust
II-1
<PAGE>
or other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by the person in connection with the defense or
settlement of such action or suit if the person acted in good faith and in a
manner the person reasonably believed to be in or not opposed to the best
interests of the corporation and except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent
that the Delaware Court of Chancery or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court
of Chancery or such other court shall deem proper.
DGCL Section 145 further provides that to the extent that a present or
former director or officer is successful, on the merits or otherwise, in the
defense of any action, suit or proceeding referred to in subsections (a) and
(b) of Section 145, or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by such person in connection therewith. In
all cases in which indemnification is permitted under subsections (a) and (b)
of Section 145 (unless ordered by a court), it shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because the applicable standard of conduct has
been met by the party to be indemnified. Such determination must be made,
with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (2) by a
committee of such directors designated by majority vote of such directors,
even though less than a quorum, or (3) if there are no such directors, or if
such directors so direct, by independent legal counsel in a written opinion,
or (4) by the stockholders. The statute authorizes the corporation to pay
expenses incurred by an officer or director in advance of the final
disposition of a proceeding upon receipt of an undertaking by or on behalf of
the person to whom the advance will be made, to repay the advances if it
shall ultimately be determined that he was not entitled to indemnification.
DGCL Section 145 also provides that indemnification and advancement of
expenses permitted thereunder are not to be exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be
entitled under any By-law, agreement, vote of stockholders or disinterested
directors, or otherwise. DGCL Section 145 also authorizes the corporation to
purchase and maintain liability insurance on behalf of its directors,
officers, employees and agents regardless of whether the corporation would
have the statutory power to indemnify such persons against the liabilities
insured.
The Certificate of Incorporation of the Registrant (the "Certificate")
provides that no director of the Registrant shall be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director except for liability (i) for any breach of the director's
duty of loyalty to the Registrant or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for paying a dividend or approving a stock
repurchase in violation of Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit.
The Registrant's By-laws provide that the Registrant shall indemnify an
officer or director for any costs incurred by such officer or director in
connection with a proceeding against such officer or director by reason of
the fact that he is or was an officer or director of the Registrant, unless
such indemnification is prohibited under applicable law. Pursuant to the
By-laws, the Registrant may also be required to advance funds to an officer
or director who is entitled to indemnification upon receipt of an undertaking
by or on behalf of the officer or director to repay the amount if it is
ultimately determined that such person is not entitled to indemnification.
The By-laws further provide that the Registrant may provide indemnification
II-2
<PAGE>
or the advancement of expenses to any other person as permitted by applicable
law. Such By-law provisions are intended to be broader than the statutory
indemnification provided in the DGCL. However, the extent to which such
broader indemnification may be permissible under
The Registrant maintains a directors and officers liability policy. The
policy's coverage, among other things, (i) provides for payment on behalf of
the Registrant's officers and directors against loss (as defined in the
policy) stemming from acts committed by directors and officers in their
capacities as such, with no annual individual deductible element per director
or officer, and (ii) provides for reimbursement of the Registrant against
such loss for which the Registrant grants indemnification to any director or
officer, as permitted by law.
Item 16. EXHIBITS
5.1 Opinion of Sheppard, Mullin, Richter & Hampton LLP
10.1 Exchange Agreement by and between Applied Magnetics Corporation and
Kenilworth Partners II L.P.
10.2 Registration Rights Agreement by Applied Magnetics Corporation and
Kenilworth Partners II L.P.
10.3 Certificate of Designation, Preferences and Rights of Series B
Convertible Preferred Stock of Applied Magnetics Corporation
23.1 Consent of Sheppard, Mullin, Richter & Hampton LLP (included in
Exhibit 5.1)
24.1 Power of Attorney of certain officers and directors (included on
page II-5)
Item 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration Statement:
a. To include any prospectus required by Section 10(a)(3) of the
Securities Act;
b. To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the Registrant
Statement;
c. To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement;
II-3
<PAGE>
2. That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
2. For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of Prospectus
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Goleta, State of California, on
June 11, 1999.
APPLIED MAGNETICS CORPORATION
By Craig D. Crisman
--------------------
Craig D. Crisman
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Craig D. Crisman and Jerry Goldress, and each
of them, his attorneys-in-fact, each with the power of substitution, for him
in any and all capacities, to sign any amendments to this registration
statement and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Date
- - - - - - - - - - - - - - - - - - - --------- ----
Craig D. Crisman June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
Craig D. Crisman, Chairman of the Board
and Chief Executive Officer
(principal executive officer, principal
financial officer)
Peter T. Altavilla June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
Peter T. Altavilla, Secretary and
Controller (principal accounting officer)
Herbert Dwight, Jr.* June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
Herbert Dwight, Jr., Director
II-5
<PAGE>
Harold Frank* June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
Harold Frank, Director
Jerry Goldress* June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
Jerry Goldress, Director
R. C. Mercure* June 11, 1999
- - - - - - - - - - - - - - - - - - - ---------------------------------------
R. C. Mercure, Director
*By Craig D. Crisman
-----------------------------------
Craig D. Crisman
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 5.1
[On SMR&H Letterhead]
June __, 1999
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, California 93117
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
As special counsel for Applied Magnetics Corporation, a Delaware
corporation ("AMC"), in connection with AMC's Registration Statement on Form
S-3, No. 333-74107 (the "Registration Statement"), registering a maximum of
30,444,435 shares of AMC's Common Stock, $0.10 par value (the "Shares"), to
be sold on behalf of certain holders thereof (the "Offering"), we have been
requested to render this opinion.
For the purpose of rendering the opinion set forth herein, we have been
furnished with and examined only the following documents:
1. The Certificate of Incorporation of AMC, certified by the Delaware
Secretary of State as of June __, 1999;
2. The Restated Bylaws of AMC, certified by the Secretary of AMC;
3. The Registration Statement; and
4. Records of the meetings of the Board of Directors of AMC pertaining
to the Offering.
With respect to all of the foregoing documents, we have assumed, without
investigation, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals and the conformity to originals of all
documents submitted to us as certified or reproduced copies. We also have
obtained from the officers of AMC such advice as to such factual matters as
we consider necessary for the purpose of this opinion, and insofar as this
opinion is based on such matters of fact, we have relied on such advice. We
express no opinion as to the statistical information and the financial
statements, the notes
<PAGE>
Applied Magnetics Corporaiton
May 18, 1999
Page 2
thereto and related schedules and other financial data, included, or
documents incorporated by reference, in the Registration Statement.
Based on the foregoing, subject to the assumptions, limitations and
exceptions set forth herein, we are of the opinion that the Shares to be sold
in the Offering are duly authorized, validly issued, fully paid and
nonassessable.
Our opinion expressed herein is limited to those matters expressly set
forth herein, and no opinion may be implied or inferred beyond the matters
expressly stated herein. We hereby disclaim any obligation to notify any
person or entity after the date hereof if any change in fact or law should
change our opinion with respect to any matter set forth in this letter.
This opinion is limited to the Delaware General Corporation Law and the
Securities Act, to present judicial interpretations thereof and to facts as
they presently exist. In rendering this opinion, we have no obligation to
revise or supplement it should such laws be changed by legislative action,
judicial decision or otherwise.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus which is part of the Registration Statement.
Very truly yours,
/s/ Sheppard, Mullin, Richter & Hampton LLP
<PAGE>
EXHIBIT 10.1
EXECUTION VERSION
EXCHANGE AGREEMENT
By and Between
APPLIED MAGNETICS CORPORATION
and
KENILWORTH PARTNERS II LP
Dated as of May 10, 1999
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEBENTURE EXCHANGE; STOCK SALE. . . . . . . . . . . . . . . . . . . . . .1
1.1 Debenture Exchange . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Adjustment to Principal Amount of Debentures . . . . . . . . . . . .1
1.3 Stock Sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
1.4 Purchase Price for Preferred Shares. . . . . . . . . . . . . . . . .2
1.5 Closing Obligations. . . . . . . . . . . . . . . . . . . . . . . . .2
2. RESTRICTIONS ON TRANSFER OF SECURITIES. . . . . . . . . . . . . . . . . .3
2.1 Securities Legend. . . . . . . . . . . . . . . . . . . . . . . . . .3
2.2 Lock-Up Legend . . . . . . . . . . . . . . . . . . . . . . . . . . .3
2.3 Removal of Legends . . . . . . . . . . . . . . . . . . . . . . . . .4
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . .4
3.1 Organization and Good Standing . . . . . . . . . . . . . . . . . . .4
3.2 Capitalization .. . . . . . . . . . . . . . . . . . . . . . . . . .5
3.3 Authority; No Conflict . . . . . . . . . . . . . . . . . . . . . . .5
3.4 Approvals or Notices . . . . . . . . . . . . . . . . . . . . . . . .6
3.5 Compliance with the Law and other Instruments. . . . . . . . . . . .6
3.6 Securities Act Reports . . . . . . . . . . . . . . . . . . . . . . .7
3.7 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . .8
3.8 Absence of Material Changes. . . . . . . . . . . . . . . . . . . . .8
3.9 Certain Proceedings. . . . . . . . . . . . . . . . . . . . . . . . .8
4. REPRESENTATIONS AND WARRANTIES OF KENILWORTH. . . . . . . . . . . . . . .9
4.1 Organization and Good Standing . . . . . . . . . . . . . . . . . . .9
4.2 Authority; No Conflict . . . . . . . . . . . . . . . . . . . . . . .9
4.3 Approvals or Notices . . . . . . . . . . . . . . . . . . . . . . . 10
4.4 Ownership of Debentures. . . . . . . . . . . . . . . . . . . . . . 10
4.5 Investment Matters. . . . . . . . . . . . . . . . . . . . . . . . 10
4.6 Certain Proceedings. . . . . . . . . . . . . . . . . . . . . . . . 11
4.7 Brokers or Finders. . . . . . . . . . . . . . . . . . . . . . . . 11
5. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . 11
5.1 Other Debenture Exchanges. . . . . . . . . . . . . . . . . . . . 11
6. CONDITIONS PRECEDENT TO KENILWORTH'S OBLIGATION TO CLOSE . . . . . . . 11
6.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . . . 11
6.2 The Company's Performance. . . . . . . . . . . . . . . . . . . . . 12
-i-
<PAGE>
6.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.4 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.5 Additional Documents . . . . . . . . . . . . . . . . . . . . . . . 12
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION TO CLOSE . . . . . . . 13
7.1 Accuracy of Representations. . . . . . . . . . . . . . . . . . . . 13
7.2 Kenilworth's Performance . . . . . . . . . . . . . . . . . . . . . 13
7.3 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
7.4 No Prohibition . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.5 Additional Documents . . . . . . . . . . . . . . . . . . . . . . . 14
7.6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.7 Effectiveness of Registration Statement. . . . . . . . . . . . . . 14
8. INDEMNIFICATION; REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . 14
8.1 Indemnification and Payment of Damages by Kenilworth . . . . . . . 14
8.2 Indemnification and Payment of Damages by the Company. . . . . . . 15
8.3 Procedure for Indemnification--Third Party Claims. . . . . . . . . 15
8.4 Procedure for Indemnification--Other Claims. . . . . . . . . . . . 16
9. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
9.2 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
9.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . 17
9.4 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.5 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9.6 Jurisdiction; Service of Process . . . . . . . . . . . . . . . . . 19
9.7 Survival of Representations and Warranties . . . . . . . . . . . . 19
9.8 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . 19
9.9 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.10 Entire Agreement and Modification. . . . . . . . . . . . . . . . . 20
9.11 Assignments, Successors, and No Third-Party Rights . . . . . . . . 20
9.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.13 Section Headings, Construction . . . . . . . . . . . . . . . . . . 21
9.14 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
9.16 Attorneys' Fees. . . . . . . . . . . . . . . . . . . . . . . . . . 21
10. Waiver of Jury Trial. . . . . . . . . . . . . . . . . . . . . . . . . . 21
-ii-
<PAGE>
EXCHANGE AGREEMENT
This Exchange Agreement (the "Agreement") is made as of May 10,
1999, by Kenilworth Partners II LP, a Delaware limited partnership
("Kenilworth"), and Applied Magnetics Corporation, a Delaware corporation
(the "Company").
WHEREAS, Kenilworth is the owner of certain 7% Convertible
Subordinated Debentures issued by the Company in the principal amount of
forty-three million dollars ($43,000,000) (the "Debentures");
WHEREAS, Kenilworth desires to deliver, and the Company desires to
receive, the Debentures in exchange (the "Debenture Exchange") for six
million (6,000,000) shares of the common stock, $.10 par value, of the
Company (the "Common Shares"); and
WHEREAS, Kenilworth desires to purchase, and the Company desires to
sell (the "Stock Sale"), two hundred fifty thousand (250,000), shares of
Series B Convertible Preferred Stock of the Company (the "Preferred Shares")
to Kenilworth for the sum of twenty-five million dollars ($25,000,000).
NOW, THEREFORE, in consideration of the terms and conditions set
forth herein, the parties agree as follows:
1. DEBENTURE EXCHANGE; STOCK SALE.
1.1 DEBENTURE EXCHANGE. Subject to the terms and conditions of
this Agreement and that certain Lock-Up Agreement of even date herewith (the
"Lock-Up Agreement"), on the date of the closing of the transactions
contemplated hereby (the "Closing Date"), Kenilworth shall transfer such
principal amount of Debentures to the Company, as may be determined in
accordance with the terms of Section 1.2 hereof and, in consideration of and
in exchange for the Debentures, the Company shall deliver to Kenilworth the
Common Shares. The Closing Date shall be as soon as reasonably practicable
following the fulfillment (or valid waiver) of the conditions to closing set
forth in Sections 6 and 7 below.
1.2 ADJUSTMENT TO PRINCIPAL AMOUNT OF DEBENTURES. In the event
that the average closing price of the Company's common stock ("Common Stock")
as reported by the New York Stock Exchange on the date of the execution and
delivery of this Agreement (the "Market Price") is less than four dollars
($4.00) per share, the principal amount of Debentures to be exchanged for the
Common Shares shall be reduced on a pro rata basis by one million dollars
($1,000,000) for every one-sixteenth of a dollar ($1/16)
-1-
<PAGE>
by which the Market Price is below four dollars ($4.00) per share. For
example, if the Market Price is three dollars and fifteen-sixteenths per
share ($3-15/16), the principal amount of Debentures to be exchanged shall be
reduced from forty-three million dollars ($43,000,000) to forty-two million
dollars ($42,000,000).
1.3 STOCK SALE. Subject to the terms and conditions of this
Agreement, on the Closing Date the Company will issue and sell the Preferred
Shares to Kenilworth, and Kenilworth will purchase the Preferred Shares from
the Company.
1.4 PURCHASE PRICE FOR PREFERRED SHARES. The purchase price (the
"Purchase Price") for the Preferred Shares will be twenty-five million
dollars ($25,000,000). Such Purchase Price shall be paid to the Company in
U.S. dollars by wire transfer of immediately available funds to an account
designated in writing by the Company.
1.5 CLOSING OBLIGATIONS. On the Closing Date:
(a) The Company will deliver to Kenilworth:
(i) four certificates, each representing one million five
hundred thousand (1,500,000) Common Shares;
(ii) a certificate representing the Preferred Shares;
(iii) a registration rights agreement in the form of
Exhibit 1.5(a)(iii), executed by the Company (the "Registration Rights
Agreement");
(iv) the Lock-Up Agreement, executed by the Company;
(v) a certificate executed by the Company representing and
warranting to Kenilworth that each of the Company's representations and
warranties in this Agreement is accurate in all material respects as of the
Closing Date; and
(vi) such other agreements, certificates or documents as may
be reasonably requested by Kenilworth.
(b) Kenilworth will deliver to the Company:
(i) the Purchase Price;
-2-
<PAGE>
(ii) certificates representing Debentures in the principal
amount of forty-three million dollars ($43,000,000), subject to adjustment in
accordance with Section 1.2 above, duly endorsed (or accompanied by duly
executed stock powers);
(iii) the Registration Rights Agreement, executed by
Kenilworth;
(iv) the Lock-Up Agreement, executed by Kenilworth;
(v) a certificate executed by Kenilworth representing and
warranting to the Company that each of Kenilworth's representations and
warranties in this Agreement is accurate in all material respects as of the
Closing Date; and
(vi) such other agreements, certificates or documents as may
be reasonably requested by the Company.
2. RESTRICTIONS ON TRANSFER OF SECURITIES.
2.1 SECURITIES LEGEND. All certificates evidencing (i) the Preferred
Shares, (ii) subject to the terms of the Lock-Up Agreement and the Registration
Rights Agreement, the Common Shares, and (iii) subject to the terms of the
Registration Rights Agreement, the Common Stock issued upon conversion of the
Preferred Shares (collectively with the Common Stock, if any, issued as
dividends, the "Securities") shall be endorsed with the following, or a
substantially similar, legend (the "Securities Legend") and, to the extent
necessary, with any other legends required pursuant to applicable state
securities laws:
THE SALE OF THE SECURITIES REPRESENTED BY THIS INSTRUMENT
WAS NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE
"ACT"). NO SALE OR OTHER DISPOSITION OF THE SECURITIES MAY
BE EFFECTED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT
RELATING THERETO OR AN OPINION OF COUNSEL SATISFACTORY TO
THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
ACT.
2.2 LOCK-UP LEGEND. Certificates representing seventy-five percent
(75%) of the Common Shares shall be endorsed with the following, or a
substantially similar, legend (the "Lock-Up Legend"):
-3-
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON SALE OR TRANSFER CONTAINED IN A LOCK-UP
AGREEMENT. COPIES OF SUCH AGREEMENT MAY BE INSPECTED AT THE
PRINCIPAL OFFICE OF THE COMPANY.
2.3 REMOVAL OF LEGENDS.
(a) The Securities Legend endorsed on the certificates
evidencing the Securities shall be removed, and the Company shall issue
certificates without such legends to the holder of such shares, if, and to the
extent that, the Securities are registered under the Securities Act of 1933, as
amended (the "Securities Act"), or qualified under applicable state securities
laws or if such holder provides to the Company an opinion of counsel for such
holder, in form and substance reasonably satisfactory to the Company's counsel,
to the effect that a sale, transfer or assignment of such Securities may be made
without registration under the Securities Act, or qualification under applicable
state securities laws.
(b) The Lock-Up Legend endorsed on the certificates representing
the Common Shares shall be removed, and the Company shall issue certificates
without such legends to the holders of such shares, in accordance with the terms
of the Lock-Up Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents
and warrants to Kenilworth as follows:
3.1 ORGANIZATION AND GOOD STANDING. The Company (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Delaware, (ii) has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as it is now being
conducted and (ii) is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
license necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing has not had, either individually or
in the aggregate, a material adverse effect on the business, assets, results of
operations or financial condition of the Company. The Company has delivered to
Kenilworth true and complete copies of its Certificate of Incorporation and
Bylaws, each as amended through and in effect as of the date hereof.
-4-
<PAGE>
3.2 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of
120,000,000 shares of Common Stock, par value $.10 per share, and
5,000,000 shares of preferred stock, par value $.10 per share ("Preferred
Stock"), of which 200,000 shares are designated as Series A Participating
Preferred Stock and 377,767 shares of which are designated as Series B
Convertible Preferred Stock. As of the date hereof, (i) 41,867,293 shares of
Common Stock are issued and outstanding and 7,010,645 shares of Common Stock are
reserved for issuance upon the exercise of outstanding options and warrants, and
(ii) no shares of Preferred Stock are issued and outstanding. All outstanding
shares of Common Stock are duly authorized, validly issued, fully paid and
nonassessable, are not subject to and have not been issued in violation of any
preemptive rights and have not been issued in violation of any federal or state
securities laws. Except as set forth on SCHEDULE 3.2, there are no issued or
outstanding bonds, debentures, notes or other indebtedness of the Company which
have the right to vote (or which are convertible into other securities which
have the right to vote) on any matters on which the Company's stockholders have
the right to vote ("Voting Debt"). Except as set forth on SCHEDULE 3.2, there
are no outstanding or authorized subscriptions, options, warrants, calls,
rights, commitments or any other agreements of any character to or by which the
Company is a party or is bound which, directly or indirectly, obligate the
Company to issue, deliver or sell or cause to be issued, delivered or sold any
shares of Common Stock or Preferred Stock or any other capital stock, equity
interest or Voting Debt of the Company or any securities convertible into, or
exercisable or exchangeable for, or evidencing the right to subscribe for, any
such shares, interests or Voting Debt or obligating the Company to grant, extend
or enter into any such subscription, option, warrant, call or right.
(b) The Securities, upon issuance and delivery in accordance
with the terms and provisions of this Agreement, will be duly authorized, fully
paid and non-assessable, will be free of any liens, claims, charges, security
interests, pledges, voting or shareholder agreements encumbrances (excepting the
Lock-Up Agreement) or equities of any kind whatsoever and will not be issued in
violation of any preemptive rights.
3.3 AUTHORITY; NO CONFLICT.
(a) The Company has all requisite right, power and authority to
execute, deliver and perform its obligations under, and consummate the
transactions contemplated by, this Agreement and the other agreements and
instruments contemplated hereby. All proceedings have been taken and all
authorizations have been secured by the Company which are necessary to authorize
the execution, delivery and performance by the Company of this Agreement and the
other agreements and instruments contemplated hereby.
-5-
<PAGE>
(b) This Agreement, the Lock-Up Agreement and the Registration
Rights Agreement (together, "Company's Closing Documents") have been duly
executed and delivered by the Company and each of the Company's Closing
Documents constitutes the valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by principles governing the availability of equitable remedies.
(c) Neither the execution and delivery of the Company's Closing
Documents by the Company nor the consummation or performance of any of the
transactions contemplated by the Company's Closing Documents will, directly or
indirectly (with or without notice or lapse of time), result in a violation or
breach of (A) any provision of the organizational documents of the Company or
(B) any resolution adopted by the board of directors or the stockholders of the
Company.
3.4 APPROVALS OR NOTICES. Except as set forth in SCHEDULE 3.4, no
authorization, approval, order, license, permit, franchise or consent, and no
registration, declaration, notice or filing by or with any domestic or foreign
governmental authority (including, without limitation, any filing or
registration pursuant to the Securities Act, the Securities Exchange Act of 1934
(the "Exchange Act") or the securities or blue sky laws of the United States of
America or any state or territory thereof) by the Company is required in
connection with the execution and delivery of the Company's Closing Documents,
the performance by the Company of its obligations thereunder and the
consummation of the transactions contemplated thereby. Except as set forth in
SCHEDULE 3.4, the Company is not and will not be required to give any notice to
or obtain any consent or approval from any individual, corporation, partnership,
limited liability company, association or other entity (each, a "Person") in
connection with the execution and delivery of the Company's Closing Documents or
the consummation or performance of any of the transactions contemplated by the
Company's Closing Documents.
3.5 COMPLIANCE WITH THE LAW AND OTHER INSTRUMENTS. The Company is in
material compliance with, and is conducting its businesses in all material
respects so as to comply with, all applicable laws, ordinances, rules and
regulations of all authorities (including, without limitation, any federal,
state or local laws, rules, or regulations regulating the safety of the
workplace and/or the discharge of materials into the environment or otherwise
relating to the protection of the environment). The Company maintains in full
force and effect all licenses, approvals, permits and consents for the lawful
conduct of its business. To its knowledge, the Company is not in default under
or with respect to, nor has it been charged with or threatened with a charge of
any violation or received any notice of any violation of, and is not under
investigation with respect to a possible violation of, any provision of any
federal, state or local law, ruling or regulation, or any judgment, order or
decree of any court, arbitrator or arbitration tribunal
-6-
<PAGE>
or any governmental authority, agency or other instrumentality, domestic or
foreign, against, relating to or otherwise affecting the Company or any of
its assets. The Company is not in violation of, or in default under, any
term or provision of its Certificate of Incorporation or Bylaws (as amended
or revised) or of any material lien, indenture, mortgage, lease, agreement,
instrument, contract, commitment or other arrangement, or subject to any
material restriction of any kind or character, which could have a material
adverse effect on the Company as a whole. The execution and delivery of this
Agreement and the other agreements and instruments contemplated hereby, and
the consummation of the transactions contemplated herein and therein, will
not (a) result in the violation or breach of any material term or provision
of, or constitute a default under any statute, order, judgment, writ,
injunction, decree, license, permit, approval, authorization, rule or
regulation of any court or any governmental or regulatory body applicable to
the Company or by which any of its assets or properties are bound or
affected; or (b) result in the breach of, constitute a default under, or
result in the acceleration of any obligation under, any provision of any
agreement, lease, contract, document, instrument, commitment, obligation or
arrangement of any kind or nature to which the Company is a party or by which
it is bound, unless such breach will not have a material adverse effect on
the business or operations of the Company, which default, breach or
acceleration has not been waived; (c) result in the creation of any lien,
claim or charge on or against any of the assets or properties of the Company;
or (d) result in the termination of any license, franchise, lease or permit
to which the Company is a party or by which it is bound.
3.6 SECURITIES ACT REPORTS. The Company has heretofore made
available to Kenilworth true and complete copies of the Company's Proxy
Statement for the meeting of stockholders held on February 26, 1999, the
Company's Quarterly Report on Form 10-Q for the quarter ended January 2, 1999,
the Company's Annual Report on Form 10-K for the fiscal year ended October 3,
1998, the Company's Current Reports on Form 8-K dated February 12, 1999, as
amended March 5, 1999, the Company's Current Report on Form 8-K dated November
24, 1998, the Company's Current Report on Form 8-K dated October 28, 1998, and
the Company's Registration Statement on Form S-3, as filed on March 8, 1999,
filed by the Company with the Securities and Exchange Commission (the "SEC")
pursuant to the Exchange Act or the Securities Act (collectively, the
"Commission Filings"). The Commission Filings constitute all of the documents
required to be filed by the Company with the SEC since October 1, 1998. As of
their respective dates, each of the Commission Filings complied in all material
respects with the applicable requirements of the Exchange Act, the Securities
Act and the rules and regulations promulgated thereunder, and none of the
Commission Filings contained as of such date any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading. When filed with the
SEC, the financial statements included in the Commission Filings complied as to
form in all material respects with the applicable rules and regulations of the
SEC and were prepared in accordance with generally accepted accounting
principles (as in effect from time to
-7-
<PAGE>
time) applied on a consistent basis(except as may be indicated therein or in
the notes or schedules thereto), and such financial statements fairly present
the consolidated financial position of the Company as at the dates thereof
and the consolidated results of operations and consolidated cash flows of the
Company for the periods then ended, subject, in the case of the unaudited
interim financial statements, to normal, recurring year-end audit
adjustments.
3.7 BROKERS OR FINDERS. Except as set forth on SCHEDULE 3.7, the
Company and its agents have incurred no obligation or liability, contingent or
otherwise, for brokerage or finders' fees or agents' commissions or other
similar payment in connection with this Agreement.
3.8 ABSENCE OF MATERIAL CHANGES. Since January 2, 1999, except as
set forth in SCHEDULE 3.8, (a) the Company has not incurred any liability or
obligation of any kind which, individually or in the aggregate, is material to
the business, assets, results of operations, financial condition or prospects of
the Company; and (b) there has not been any material adverse change in, and no
event has occurred and no condition exists which, individually or together with
other events or conditions, has had a material adverse effect on, the business,
assets, results of operations, financial condition or prospects of the Company.
3.9 CERTAIN PROCEEDINGS. Except as set forth on SCHEDULE 3.9, there
is no action, claim, arbitration, hearing, investigation, litigation or suit
(each, a "Proceeding") pending or, to the Company's knowledge, threatened,
against, involving or affecting the Company or the Company's assets, properties
or business, nor is there any judgment, decree, injunction, rule or order of any
court, governmental department, commission, agency, instrumentality or
arbitrator outstanding against the Company which does or might (i) result in the
modification, termination, suspension, impairment or reformation of any material
contract to which the Company is a party; (ii) materially adversely affect the
manner in which the Company conducts its business; (iii) have a materially
adverse effect on the business, assets, results of operations or financial
condition of the Company; (iv) restrain, prohibit, invalidate or put aside, in
whole or in part, the transactions contemplated hereby; (v) question the
validity of this Agreement, the Registration Rights Agreement or the Lock-Up
Agreement or of any action taken or to be taken by the Company pursuant to or in
connection with the provisions of this Agreement and the transactions
contemplated hereby; or (vi) otherwise prevent or hinder the consummation of
this Agreement, the Registration Rights Agreement or the Lock-Up Agreement.
-8-
<PAGE>
4. REPRESENTATIONS AND WARRANTIES OF KENILWORTH.
Kenilworth represents and warrants to the Company as follows:
4.1 ORGANIZATION AND GOOD STANDING. Kenilworth (i) is a partnership
duly organized, validly existing and in good standing under the laws of the
state of Delaware,(ii) has all requisite corporate power and authority to own,
lease and operate its properties and to carry on its business as it is now being
conducted and (ii) is duly qualified or licensed and in good standing to do
business in each jurisdiction in which the properties owned, leased or operated
by it or the nature of the business conducted by it makes such qualification or
license necessary, except in such jurisdictions where the failure to be so duly
qualified or licensed and in good standing has not had, either individually or
in the aggregate, a material adverse effect on the business, assets, results of
operations or financial condition of Kenilworth.
4.2 AUTHORITY; NO CONFLICT.
(a) Kenilworth has all requisite right, power and authority to
execute, deliver and perform its obligations under, and consummate the
transactions contemplated by, this Agreement and the other agreements and
instruments contemplated hereby. All proceedings have been taken and all
authorizations have been secured by Kenilworth which are necessary to authorize
the execution, delivery and performance by Kenilworth of this Agreement and the
other agreements and instruments contemplated hereby.
(b) This Agreement, the Lock-Up Agreement and the Registration
Rights Agreement (together, "Kenilworth's Closing Documents") have been duly
executed and delivered by Kenilworth and each of Kenilworth's Closing Documents
constitutes the valid and binding obligation of Kenilworth, enforceable against
Kenilworth in accordance with their respective terms, except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by principles governing the availability of equitable remedies.
(c) Neither the execution and delivery of Kenilworth's
Closing Documents by Kenilworth nor the consummation or performance of any of
the transactions contemplated by Kenilworth's Closing Documents by Kenilworth
will give any Person the right to prevent, delay, or otherwise interfere with
any of the transactions contemplated by this Agreement or the Registration
Rights Agreement pursuant to any legal requirement or order to which
Kenilworth may be subject; or any contract, agreement, obligation, promise or
undertaking (a "Contract") to which Kenilworth is a party or by which
Kenilworth may be bound.
-9-
<PAGE>
4.3 APPROVALS OR NOTICES. Except as set forth in SCHEDULE 4.3, no
authorization, approval, order, license, permit, franchise or consent, and no
registration, declaration, notice or filing by or with any domestic or foreign
governmental authority (including, without limitation, any filing or
registration pursuant to the Securities Act, the Exchange Act or the securities
or blue sky laws of the United States of America or any state or territory
thereof) by Kenilworth is required in connection with the execution and delivery
of Kenilworth's Closing Documents, the performance by Kenilworth of its
obligations thereunder and the consummation of the transactions contemplated
thereby. Kenilworth is not and will not be required to give any notice or
obtain any consent or approval from any Person in connection with the execution
and delivery of Kenilworth's Closing Documents or the consummation or
performance of any of the transactions contemplated by Kenilworth's Closing
Documents.
4.4 OWNERSHIP OF DEBENTURES. Kenilworth is the sole and absolute
record and beneficial owner and holder of the Debentures; has good and
marketable title to, full power of disposition over and full right to sell and
transfer such Debentures to the Company in accordance with the terms and
conditions of this Agreement; and, upon transfer at the Closing pursuant to
Section 1.1 hereof, such Debentures shall be free and clear of all liens,
encumbrances, charges, assessments and claims whatsoever.
4.5 INVESTMENT MATTERS. The Securities are being acquired for
Kenilworth's own account and not on behalf of any other Person, and the
Securities are being acquired by Kenilworth for investment purposes only and not
with a view to, or for sale in connection with, any resale or distribution of
the Securities which would be in violation of the Securities Act, the Exchange
Act or the securities or blue sky laws of the United States of America or any
state or territory thereof. Kenilworth has received and examined the Commission
Filings. Kenilworth has had the opportunity to ask questions of and receive
answers from the management of the Company concerning the Company, and has been
furnished with all other information about the Company which it has requested.
Kenilworth believes that it is an "accredited investor" as defined in Rule
501(a) of the Securities Act, that it has been fully apprised of all facts and
circumstances necessary to permit it to make an informed decision about
acquiring the Securities, that it has sufficient knowledge and experience in
business and financial matters, that it is capable of evaluating the merits and
risks of an investment in the Securities and that it has the capacity or protect
its own interests in connection with the transactions contemplated by
Kenilworth's Closing Documents. Kenilworth has been advised by the Company and
understands that, except as expressly contemplated by Kenilworth's Closing
Documents, (a) the Securities to be issued hereunder will not be registered
under any securities laws, including, without limitation, the securities laws of
the United States or any other jurisdiction, (b) the Securities must be held
indefinitely unless and until they are registered or an exemption from
registration becomes available, (c) the Securities shall bear appropriate
restrictive legends and (d) the Company shall have the right to place a stop
-10-
<PAGE>
order against the Securities prohibiting transfer of the Securities except in
accordance with the Securities Act and the Lock-Up Agreement.
4.6 CERTAIN PROCEEDINGS. There is no Proceeding pending or, to
Kenilworth's knowledge, threatened, against, involving or affecting Kenilworth
or Kenilworth's assets, properties or business, nor is there any judgment,
decree, injunction, rule or order of any court, governmental department,
commission, agency, instrumentality or arbitrator outstanding against Kenilworth
which does or might (i) restrain, prohibit, invalidate or put aside, in whole or
in part, the transactions contemplated hereby; (ii) question the validity of
this Agreement or of any action taken or to be taken by Kenilworth pursuant to
or in connection with the provisions of this Agreement and the transactions
contemplated hereby; or (iii) otherwise prevent or hinder the consummation of
this Agreement.
4.7 BROKERS OR FINDERS. Kenilworth has incurred no obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or other similar payment in connection with this Agreement and will
indemnify and hold the Company harmless from any such payment alleged to be due
by or through Kenilworth as a result of the action of Kenilworth or its agents.
5. COVENANTS OF THE COMPANY.
5.1 OTHER DEBENTURE EXCHANGES. To the extent that, after the date
hereof and on or prior to that date which is 135 days after the Closing Date,
the Company enters into any agreements with other holders of Company debentures
to exchange such debentures with other Company securities, any securities issued
by the Company with respect to such exchange shall become freely tradable, if at
all, only after that date which is 135 days after the Closing Date.
6. CONDITIONS PRECEDENT TO KENILWORTH'S OBLIGATION TO CLOSE.
Kenilworth's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, at or prior to the Closing Date, of
each of the following conditions (any of which may be waived by Kenilworth, in
whole or in part):
6.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties contained in Section 3 hereof must be accurate in all material
respects as of the Closing Date.
-11-
<PAGE>
6.2 THE COMPANY'S PERFORMANCE.
(a) Each of the covenants and obligations that the Company is
required to perform or comply with pursuant to the Company's Closing Documents
at or prior to the Closing Date must have been performed or complied with in all
material respects.
(b) Each document required to be delivered to Kenilworth
pursuant to Section 1.5 must have been delivered.
6.3 CONSENTS . Each of the consents identified in Schedule 4.3 must
have been obtained and must be in full force and effect.
6.4 NO PROHIBITION. Neither the consummation nor the performance of
any of the transactions contemplated by Kenilworth's Closing Documents will,
directly or indirectly (with or without notice or lapse of time), materially
contravene, or conflict with, or result in a material violation of, or cause
Kenilworth or any person affiliated with Kenilworth to suffer any material
adverse consequence under, (a) any applicable legal requirement or order, or
(b) any legal requirement or order that has been published, introduced, or
otherwise proposed by or before any governmental body. There shall not have
been any action taken, or any statute, rule, regulation, order, judgment or
decree enacted, promulgated, entered, issued or enforced by any governmental
entity, and there shall be no action, suit or proceeding pending, which
(i) makes the transactions contemplated by this Agreement illegal or imposes, or
is reasonably likely to result in the imposition of, material damages or
penalties in connection therewith or (ii) would, as of or after the Closing,
impose material limitations on the ability of Kenilworth effectively to exercise
full rights of ownership of the securities issued to Kenilworth hereby, other
than those limitations imposed by the terms of Kenilworth's Closing Documents.
6.5 ADDITIONAL DOCUMENTS. Such other documents as Kenilworth may
reasonably request for the purpose of (i) evidencing the accuracy of any
representation or warranty of the Company, (ii) evidencing the performance by
the Company of, or the compliance by the Company with, any covenant or
obligation required to be performed or complied with by the Company,
(iii) evidencing the satisfaction of any condition referred to in this
Section 6, or (iv) otherwise facilitating the consummation of any of the
transactions contemplated by this Agreement, must have been delivered to
Kenilworth.
6.6 ABSENCE OF INJUNCTIONS. No permanent or preliminary injunction
or restraining order or other order by any court or governmental entity of
competent jurisdiction or other legal restraint or prohibition preventing
consummation of the transactions contemplated hereby shall be in effect.
-12-
<PAGE>
6.7 EFFECTIVENESS OF REGISTRATION STATEMENT. The SEC shall have
declared effective the Registration Statement (as such term is defined in the
Registration Rights Agreement) and the SEC shall not have issued any order
preventing or suspending the use of any preliminary or final prospectus included
in the Registration Statement or otherwise filed pursuant to Rule 424(b) of the
Securities Act.
6.8 NO MATERIAL ADVERSE CHANGE. (a) Since the date hereof nothing
shall have occurred which, individually or in the aggregate, has had or, in the
reasonable judgment of Kenilworth, is reasonably likely to have, a material
adverse effect on the business, assets, results of operations, financial
condition or prospects of the Company.
(b) The Company shall not (1) have applied for the appointment of, or
the taking of possession by, a receiver, custodian, sequestrator, trustee or
liquidator of itself, or of all or a substantially part of its property, (2) be
generally unable to pay its debts as they become due or have ceased operations
of its present businesses, (3) have made a general assignment for the benefit of
its creditors, (4) commence a voluntary case under any state or federal
bankruptcy laws, (5) have filed a petition seeking relief under the Bankruptcy
Code or to take advantage of any other law providing for the relief of debtors,
or (6) have taken any corporate action authorizing or otherwise consenting to
the institution of any such proceedings, filings or have taken any action for
the purpose of effecting any of the foregoing.
7. CONDITIONS PRECEDENT TO THE COMPANY'S OBLIGATION TO CLOSE. The
Company's obligation to consummate the transactions contemplated by this
Agreement is subject to the satisfaction, at or prior to the Closing Date, of
each of the following conditions (any of which may be waived by the Company, in
whole or in part):
7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties contained in Section 4 hereof must be accurate in all material
respects as of the Closing Date.
7.2 KENILWORTH'S PERFORMANCE.
(a) Each of the covenants and obligations that Kenilworth is
required to perform or to comply with pursuant to Kenilworth's Closing Documents
at or prior to the Closing must have been performed and complied with in all
material respects.
(b) Each document required to be delivered to the Company
pursuant to Section 1.5 must have been delivered.
7.3 CONSENTS. Each of the consents identified in Schedule 3.4 must
have been obtained and must be in full force and effect.
-13-
<PAGE>
7.4 NO PROHIBITION. There shall not be in effect any legal
requirement or any injunction or other order that (a) prohibits the transactions
contemplated hereby and (b) has been adopted or issued, or otherwise become
effective, since the date hereof.
7.5 ADDITIONAL DOCUMENTS. Such other documents as the Company may
reasonably request for the purpose of (i) evidencing the accuracy of any
representation or warranty of Kenilworth, (ii) evidencing the performance by
Kenilworth of, or the compliance by Kenilworth with, any covenant or obligation
required to be performed or complied with by Kenilworth, (iii) evidencing the
satisfaction of any condition referred to in this Section 7, or (iv) otherwise
facilitating the consummation of any of the transactions contemplated by this
Agreement, must have been delivered to the Company.
7.6 ABSENCE OF INJUNCTIONS. No permanent or preliminary injunction
or restraining order or other order by any court of governmental entity of
competent jurisdiction or other legal restraint or prohibition preventing
consummation of the transactions contemplated hereby shall be in effect.
7.7 EFFECTIVENESS OF REGISTRATION STATEMENT. The SEC shall have
declared effective the Registration Statement (as such term is defined in the
Registration Rights Agreement) and the SEC shall not have issued any order
preventing or suspending the use of any preliminary of final prospectus included
in the Registration Statement or otherwise filed pursuant to Rule 424(b) of the
Securities Act.
8. INDEMNIFICATION; REMEDIES.
8.1 INDEMNIFICATION AND PAYMENT OF DAMAGES BY KENILWORTH. Kenilworth
will indemnify and hold harmless the Company, and its directors, officers,
employees, agents, advisors or other representatives ("Representatives"), and
will pay to the Company and its Representatives the amount of any damages
(including, without limitation, any and all attorneys' fees and expenses)
arising, directly or indirectly, from or in connection with (a) any Breach of
any representation or warranty made by Kenilworth in this Agreement or in any
certificate delivered by Kenilworth pursuant to this Agreement, (b) any Breach
by Kenilworth of any covenant or obligation of Kenilworth in this Agreement, or
(c) any claim by any person for brokerage or finder's fees or commissions or
similar payments based upon any agreement or understanding alleged to have been
made by such person with Kenilworth (or any person acting on its behalf) in
connection with any of the transactions contemplated by this Agreement. For
purposes of this Agreement, a "Breach" shall be deemed to have occurred if there
is any material inaccuracy in, or material failure to perform or comply with, a
representation, warranty, covenant, obligation or other provision.
-14-
<PAGE>
8.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY THE COMPANY. The
Company will indemnify and hold harmless Kenilworth and its partners, officers,
employees, agents, advisors or other representatives (the "Kenilworth
Representatives") and will pay to Kenilworth and the Kenilworth Representatives
the amount of any damages (including, without limitation, any and all attorneys'
fees and expenses) arising, directly or indirectly, from or in connection with
(a) any Breach of any representation or warranty made by the Company in this
Agreement or in any certificate delivered by the Company pursuant to this
Agreement, (b) any Breach by the Company of any covenant or obligation of the
Company in this Agreement, or (c) any claim by any person for brokerage or
finder's fees or commissions or similar payments based upon any agreement or
understanding alleged to have been made by such person with the Company (or any
person acting on its behalf) in connection with any of the transactions
contemplated by this Agreement.
8.3 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS.
(a) Promptly after receipt by an indemnified party of notice of
the commencement of any Proceeding against it, such indemnified party will give
notice to the indemnifying party of the commencement of such claim, but the
failure to notify the indemnifying party will not relieve the indemnifying party
of any liability that it may have to any indemnified party, except to the extent
that the indemnifying party demonstrates that the defense of such action is
prejudiced by the indemnified party's failure to give such notice.
(b) If any Proceeding referred to in Section 8.3(a) is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party will, unless the
claim involves taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 8 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If
the indemnifying party assumes the defense of a Proceeding, (i) it will be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or
-15-
<PAGE>
settlement of such claims may be effected by the indemnifying party without
the indemnified party's consent unless (A) there is no finding or admission
of any violation of legal requirements or any violation of the rights of any
person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that
are paid in full by the indemnifying party; and (iii) the indemnified party
will have no liability with respect to any compromise or settlement of such
claims effected without its consent. If notice is given to an indemnifying
party of the commencement of any Proceeding and the indemnifying party does
not, within ten days after the indemnified party's notice is given, give
notice to the indemnified party of its election to assume the defense of such
Proceeding, the indemnifying party will be bound by any determination made in
such Proceeding or any compromise or settlement effected by the indemnified
party.
(c) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
(d) The Company and Kenilworth each hereby consent to the
non-exclusive jurisdiction of any court in which a Proceeding is brought against
any indemnified person for purposes of any claim that an indemnified person may
have under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on the Company or Kenilworth with
respect to such a claim anywhere in the world.
8.4 PROCEDURE FOR INDEMNIFICATION--OTHER CLAIMS. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
9. GENERAL PROVISIONS.
9.1 TERMINATION. This Agreement may be terminated prior to the
Closing as follows:
(a) At the election of the Company, if Kenilworth has materially
breached any material representation, warranty, covenant or agreement contained
herein and such breach is not cured within a reasonable period following notice
thereof, such reasonable period to consist of not less than five (5) business
days;
-16-
<PAGE>
(b) At the election of Kenilworth, if the Company has materially
breached any material representation, warranty, covenant or agreement contained
herein and such breach is not cured within a reasonable period following notice
thereof, such reasonable period to consist of not less than five (5) business
days;
(c) At the election of the Company on the one hand, or
Kenilworth, on the other hand, if any action shall have been instituted and be
continuing by any governmental authority with proper authority to restrain,
modify or prohibit the carrying out of the transactions contemplated hereby;
and
(d) At any time prior to the Closing Date by mutual written
agreement of the Company and Kenilworth.
If the Company or Kenilworth, as the case may be, elects to terminate
this Agreement pursuant to Sections 9.1(a), (b) or (c) hereof, the terminating
party shall deliver a notice to the other party hereto declaring its election to
so terminate this Agreement in accordance with the provisions of such Section,
and setting forth therein the basis for such termination. If this Agreement so
terminates, it shall become null and void and have no further force or effect,
except as provided in Section 9.7 below; provided, that nothing contained in
this Section shall relieve any party hereto from liability for any breach of
such party's representations, warranties, covenants or agreements contained
herein.
9.2 EXPENSES. Except as otherwise expressly provided in this
Agreement, each party to this Agreement will bear its respective expenses
incurred in connection with the preparation, execution, and performance of this
Agreement and the transactions contemplated by this Agreement, including all
fees and expenses of agents, representatives, counsel and accountants. In the
event of termination of this Agreement, the obligation of each party to pay its
own expenses will be subject to any rights of such party arising from a breach
of this Agreement by another party.
9.3 PUBLIC ANNOUNCEMENTS. Announcements concerning the transactions
provided for in this Agreement by the Company or Kenilworth shall be subject to
the reasonable prior approval of the other party in all essential respects,
except that (a) the approval of Kenilworth shall not be required as to any
statements and other information which the Company may be required to make
pursuant to any rule or regulation of the SEC, or as otherwise required by law,
and (b) the approval of the Company shall not be required as to any statements
and other information which Kenilworth may be required to make pursuant to any
rule or regulation of the SEC or the New York Stock Exchange, or as otherwise
required by law. The provisions of this Section 9.3 shall not be
-17-
<PAGE>
interpreted to limit Kenilworth's ability to discuss information relating to
the transactions contemplated by this Agreement in accordance with Section
9.4 below.
9.4 CONFIDENTIALITY. Kenilworth and the Company will maintain in
confidence any confidential information obtained in the course of the
transactions contemplated by this Agreement, unless (a) such information is
already known to such party or to others not bound by a duty of confidentiality
or such information becomes publicly available through no fault of such party,
(b) the use of such information is necessary or appropriate in making any filing
or obtaining any consent or approval required for the consummation of the
transactions contemplated by this Agreement, or (c) the furnishing or use of
such information is required by legal proceedings. If the transactions
contemplated by this Agreement are not consummated, each party will return or
destroy as much of such written information as the other party may reasonably
request.
9.5 NOTICES. All notices, consents, waivers, and other
communications under this Agreement must be in writing and will be deemed to
have been duly given when (a) delivered by hand (with written confirmation of
receipt), (b) sent by telecopier (with written confirmation of receipt),
provided that a copy is mailed by certified mail, return receipt requested, or
(c) when received by the addressee, if sent by a nationally recognized overnight
delivery service (receipt requested), in each case to the appropriate addresses
and telecopier numbers set forth below (or to such other addresses and
telecopier numbers as a party may designate by notice to the other parties):
If to Kenilworth:
Kenilworth Partners LP
40 Cuttermill Road, Suite 308
Great Neck, New York 11021
Attn: Jeffrey Parket
Telephone: (516) 824-2499
Fax: (516) 829-4106
With a copy to:
Rosenman & Colin LLP
575 Madison Avenue
New York, New York 10022
Attention: Jayshree Parthasarathy, Esq.
Telephone: (212) 940-8800
Fax: (212) 940-8776
-18-
<PAGE>
If to the Company:
Applied Magnetics Corporation
75 Robin Hill Road
Goleta, California 93117
Attn: Mr. Craig D. Crisman
Telephone: (805) 683-5353
Fax: (805) 967-2677
With a copy to:
Sheppard, Mullin, Richter & Hampton LLP
333 South Hope Street, 48th Floor
Los Angeles, California 90071
Attn: James J. Slaby, Esq.
Phone: (213) 617-5411
Fax: (213) 620-1398
9.6 JURISDICTION; SERVICE OF PROCESS. Any action or proceeding
seeking to enforce any provision of, or based on any right arising out of, this
Agreement may be brought against any of the parties in the courts of the State
of California, County of Los Angeles, State of New York, New York County or, if
it has or can acquire jurisdiction, in the United States District Court for the
Central District of California or the United States District Court for the
Southern District of New York, and each of the parties consents to the
jurisdiction of such courts (and of the appropriate appellate courts) in any
such action or proceeding and waives any objection to venue laid therein.
Process in any action or proceeding referred to in the preceding sentence may be
served on any party anywhere in the world.
9.7 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Except as otherwise
expressly provided herein, all covenants and agreements of the parties hereto
shall survive the Closing Date until performed, and all representations,
warranties of the parties hereto shall survive for eighteen (18) months
following the Closing Date (except for the provisions of Sections 3.2(b), 4.4,
4.5, 8 and 9, which shall remain in full force and effect) and shall in no way
be affected by any investigation of the subject matter thereof made by or on
behalf of any party.
9.8 FURTHER ASSURANCES. The parties agree (a) to furnish upon
request to each other such further information (including, without limitation,
information reasonably requested to confirm fulfillment of the respective
party's conditions to closing), (b) to execute and deliver to each other such
other documents, and (c) to do such other acts and
-19-
<PAGE>
things, all as the other party may reasonably request for the purpose of
carrying out the intent of this Agreement and the documents referred to in
this Agreement.
9.9 WAIVER. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power, or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such right,
power, or privilege, and no single or partial exercise of any such right, power,
or privilege will preclude any other or further exercise of such right, power,
or privilege or the exercise of any other right, power, or privilege. To the
maximum extent permitted by applicable law, (a) no claim or right arising out of
this Agreement or the documents referred to in this Agreement can be discharged
by one party, in whole or in part, by a waiver or renunciation of the claim or
right unless in writing signed by the other party; and (b) no waiver that may be
given by a party will be applicable except in the specific instance for which it
is given.
9.10 ENTIRE AGREEMENT AND MODIFICATION. This Agreement supersedes all
prior agreements between the parties with respect to its subject matter and
constitutes (along with the documents referred to in this Agreement) a complete
and exclusive statement of the terms of the agreement between the parties with
respect to its subject matter. This Agreement may not be amended except by a
written agreement executed by the parties hereto.
9.11 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS. Neither
party may assign any of its rights under this Agreement without the prior
consent of the other parties, which will not be unreasonably withheld. Subject
to the preceding sentence, this Agreement will apply to, be binding in all
respects upon, and inure to the benefit of the successors and permitted assigns
of the parties. Nothing expressed or referred to in this Agreement will be
construed to give any person other than the parties to this Agreement any legal
or equitable right, remedy, or claim under or with respect to this Agreement or
any provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.
9.12 SEVERABILITY. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions of
this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
-20-
<PAGE>
9.13 SECTION HEADINGS, CONSTRUCTION. The headings of Sections in this
Agreement are provided for convenience only and will not affect its construction
or interpretation. All references to "Section" or "Sections" refer to the
corresponding Section or Sections of this Agreement. All words used in this
Agreement will be construed to be of such gender or number as the circumstances
require. Unless otherwise expressly provided, the word "including" does not
limit the preceding words or terms.
9.14 GOVERNING LAW. This Agreement will be governed by the internal
laws of the State of California without regard to the conflicts of laws
principles of such state.
9.15 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original copy of this
Agreement and all of which, when taken together, will be deemed to constitute
one and the same agreement.
9.16 ATTORNEYS' FEES. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement, the successful or prevailing party shall be entitled to recover
reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it may be entitled.
10. WAIVER OF JURY TRIAL. THE COMPANY AND KENILWORTH HEREBY WAIVE THE
RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, OR RELATED TO,
THE SUBJECT MATTER OF THIS AGREEMENT. THIS WAIVER IS KNOWINGLY, INTENTIONALLY,
AND VOLUNTARILY MADE BY THE COMPANY AND KENILWORTH, AND THE COMPANY AND
KENILWORTH ACKNOWLEDGE THAT NO PERSON ACTING ON BEHALF OF ANOTHER PARTY TO THIS
AGREEMENT HAS MADE ANY REPRESENTATIONS OF FACT TO INDUCE THIS WAIVER OF TRIAL BY
JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE COMPANY AND KENILWORTH
FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY
TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS
WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF THEIR OWN FREE WILL,
-21-
<PAGE>
AND THAT THEY HAVE HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the date first written above.
"KENILWORTH"
KENILWORTH PARTNERS II LP
____________________________________
_____________________, General Partner
"COMPANY"
APPLIED MAGNETICS CORPORATION
Craig D. Crisman
Chief Executive Officer
-22-
<PAGE>
EXHIBIT 10.2
EXECUTION VERSION
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
effective as of May 10, 1999, by Applied Magnetics Corporation, a Delaware
corporation (the "Company"), and Kenilworth Partners II LP, a Delaware limited
partnership ("Kenilworth").
RECITALS
A. Upon the terms and subject to the conditions of an Exchange
Agreement, dated as of May 10, 1999 (the "Exchange Agreement"), by the Company
and Kenilworth, Kenilworth has agreed to purchase six million (6,000,000) shares
of the common stock, $0.10 par value ("COMMON STOCK"), and two hundred fifty
thousand (250,000) shares of Series B Convertible Preferred Stock ("Preferred
Stock") of the Company.
B. A material inducement for the parties to execute the Exchange
Agreement was that the Company enter into this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements of the parties contained herein, the parties agree as
follows:
1. DEFINITIONS. As used herein, the terms below shall have the
following meanings. Any such term, unless the context otherwise requires, may
be used in the singular or plural, depending upon the reference.
"AFFILIATE" shall have the meaning provided in the Exchange Act and
the rules and regulations of the Commission promulgated thereunder.
"AGREEMENT" shall mean this Registration Rights Agreement.
"CLOSING DATE" shall have the meaning provided in the Exchange
Agreement.
"COMMISSION" shall mean the United States Securities and Exchange
Commission.
"COMMON STOCK" shall have the meaning provided in Recital A.
-1-
<PAGE>
"COMPANY" shall mean Applied Magnetics Corporation.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, or any successor law, and the rules and regulations issued pursuant to
that Act or any successor law.
"EXCHANGE AGREEMENT" shall have the meaning provided in Recital A.
"FORM S-3" shall mean such form under the Securities Act as in effect
on the date hereof or any registration form under the Securities Act
subsequently adopted by the Commission which permits inclusion or incorporation
of comparable information by reference to other documents filed by the Company
with the Commission.
"HOLDER" shall mean any Person who is the record owner of Registrable
Shares, or any permitted assignee thereof in accordance with Section 18.
"KENILWORTH" shall have the meaning provided in the first paragraph of
this Agreement.
"PERSON" shall mean an individual, partnership, limited liability
company, joint venture, corporation, trust or unincorporated organization or any
other similar entity.
"PREFERRED STOCK" shall have the meaning provided in Recital A.
"REGISTER," "REGISTERED" and "REGISTRATION" shall refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act, and the declaration or
ordering of effectiveness of such registration statement or document by the
Commission.
"REGISTRATION EXPENSES" shall mean all expenses incident to the
Company's performance of its obligations under this Agreement, including:
(1) registration and filing fees with the Commission; (2) fees and expenses of
compliance with state securities or blue sky laws (including reasonable fees and
disbursements of blue sky counsel); (3) printing expenses, messenger and
delivery expenses; (4) fees and expenses incurred in connection with the listing
of the Registrable Securities on the New York Stock Exchange or on such
securities exchange as the Common Stock may then be principally traded; and
(5) fees and expenses of counsel for the Company and its independent certified
accountants, including the expenses of any special audits or "cold comfort"
letters.
"REGISTRABLE SHARES" shall mean (a) the Shares, (b) any Common Stock
of the Company issued to a Holder as a dividend or other distribution with
respect to, or in
-2-
<PAGE>
exchange for or in replacement of, any of the Shares or (c) any other shares
of Common Stock of the Company held by a Holder; PROVIDED, HOWEVER, that
shares of Common Stock shall only be treated as Registrable Shares if and so
long as (i) they have not been sold by Kenilworth to or through a broker or
dealer or underwriter in a public distribution or otherwise, all pursuant to
an effective Registration Statement under the Securities Act covering the
sale of such shares, (ii) they have not been sold in a transaction exempt
from the registration and prospectus delivery requirements of the Securities
Act under Section 4(l) thereof (including any sale pursuant to Rule 144 under
the Securities Act or any similar provision) so that all transfer
restrictions and restrictive legends with respect thereto are removed upon
the consummation of such sale, or (iii) the Holder shall not have received
from the Company an opinion of counsel reasonably acceptable to the Holder
stating that they may immediately be resold by the Holder pursuant to Rule
144(k) under the Securities Act without any volume limitation and without any
additional unreasonable expense.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended, or
any successor law, and the rules and regulations issued pursuant to that Act or
any successor law.
"SHARES" shall mean (i) the shares of Common Stock to be issued and
sold by the Company to Kenilworth pursuant to the Exchange Agreement and (ii)
the shares of Common Stock issuable upon conversion of the Preferred Stock to be
issued and sold by the Company to Kenilworth pursuant to the Exchange Agreement.
"VIOLATION" shall have the meaning provided in Section 6(a).
2. REGISTRATION. The Company shall, prior to the Closing Date (as
defined in the Exchange Agreement):
(a) COMMISSION FILING. Prepare and file with the Commission a
registration statement (the "Registration Statement") on a form for which
the Company then qualifies and which shall be available for the sale of the
Registrable Shares in accordance with the intended methods of disposition
thereof, and use its reasonable efforts to cause the Registration Statement
to be declared effective as promptly as reasonably practicable.
(b) AMENDMENTS. Prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to keep the Registration Statement effective and to comply with
the provisions of the Securities Act with respect to the disposition of all
Registrable Securities covered by the Registration Statement until the
earlier of (1) such time as the Registrable
-3-
<PAGE>
Shares have been disposed of in accordance with the intended methods of
disposition thereof as set forth in the Registration Statement or (2) the
expiration of one year following the effective date of the Registration
Statement.
(c) PROSPECTUS. Furnish to the Holders such number of conformed
copies of the Registration Statement and of each amendment and supplement
thereto (in each case including all exhibits), and such numbers of copies
of the prospectus included in the Registration Statement (including each
preliminary prospectus) and such other documents as they may reasonably
request in order to facilitate the disposition of Registrable Shares owned
by them in accordance with the intended method of disposition thereof as
set forth in the Registration Statement, and cause all related filings to
be made with the Commission as required by Rule 424.
(d) BLUE SKY QUALIFICATION. Register and qualify the
Registrable Shares covered by the Registration Statement under such
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders (given the intended method of distribution), and
do any and all other acts and things which may be reasonably necessary or
advisable to enable the Holders to consummate the disposition in such
jurisdictions of the Registrable Shares covered by the Registration
Statement; PROVIDED, HOWEVER, that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business as
a foreign corporation or to take any action that would subject it to
service of process in any such states or jurisdictions in suits other than
those arising out the offer and sale of the Registrable Securities covered
by the Registration Statement.
(e) PROSPECTUS DELIVERY. Promptly notify each Holder of
Registrable Shares covered by the Registration Statement at any time when
the Company becomes aware of the happening of any event as a result of
which the Registration Statement or the prospectus included in the
Registration Statement or any supplement to the prospectus (as then in
effect) contains any untrue statement of a material fact or omits to state
a material fact necessary to make the statements therein (in the case of
the prospectus, in light of the circumstances under which they were made)
not misleading or, if for any other reason it shall be necessary during
such time period to amend or supplement the Registration Statement or the
prospectus in order to comply with the Securities Act, whereupon, in either
case, each Holder shall immediately cease to use the Registration Statement
or prospectus for any purpose and, as promptly as practicable thereafter,
the Company shall prepare and file with the Commission, and furnish without
charge to the appropriate Holders, a supplement to or amendment of the
Registration Statement or prospectus which will correct such statement or
omission or effect such compliance and such copies thereof as the Holders
may reasonably request.
-4-
<PAGE>
(f) Cause the Registrable Securities to be listed on the New
York Stock Exchange or such other securities exchange on which the Common
Stock is principally traded at the time of the filing of the Registration
Statement.
3. The Company shall promptly notify the Holders of the issuance of,
or to the Company's knowledge, threatened issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
receipt by the Company of any notification with respect to the suspension or
threatened suspension of the qualification of any of the Registrable Securities
for sale under the securities or blue sky laws of any jurisdiction, and the
Company shall take all commercially reasonable action necessary (1) to prevent
the entry of any threatened stop order or any threatened suspension or (2) to
remove any stop order or lift any suspensions once entered.
4. The Company shall use its reasonable best efforts to comply with
all applicable rules and regulations of the Commission.
5. The Company shall pay all Registration Expenses in connection
with the registration of the Registrable Shares pursuant to this Agreement.
6. In connection with the preparation and filing of the Registration
Statement, the Holders shall have the opportunity to provide comments to counsel
to the Company during the preparation of the Registration Statement, each
prospectus included therein or filed with the Commission, and each amendment
thereof or supplement thereto. The Company shall not file the Registration
Statement, any prospectus included therein or any amendment thereof or
supplement thereto with the Commission over the reasonable written objections of
counsel for the Holders, if any; provided, that, if the Company fails to file
the Registration Statement, any prospectus included therein or any amendment
thereof or supplement thereto due to objections raised in accordance with the
terms of this Section 6, the Company shall be relieved of its obligation to file
such Registration Statement, prospectus, amendment or supplement pursuant to
Section 2 hereof until such objections have been resolved to the reasonable
satisfaction of the Company and the Holders.
7. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement with
respect to the Registrable Shares of any selling Holder that each Holder shall
furnish to the Company such information regarding itself, the Registrable Shares
held by it, and the intended method of disposition of such securities as the
Company may from time to time reasonably request to prepare the Registration
Statement and maintain its effectiveness.
-5-
<PAGE>
8. DELAY OF REGISTRATION. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Agreement.
9. INDEMNIFICATION.
(a) INDEMNIFICATION BY THE COMPANY. To the full extent
permitted by law, the Company will indemnify and hold harmless each Holder,
each of its directors and officers, any underwriter (as defined in the
Securities Act) for such Holder and each person, if any, who controls such
Holder or underwriter within the meaning of the Securities Act or the
Exchange Act, against any losses, claims, damages, or liabilities (joint or
several) and reasonable expenses to which they may become subject under the
Securities Act, the Exchange Act, or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions or proceedings in
respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "VIOLATION"): (i) any
untrue statement or alleged untrue statement of a material fact contained
in the Registration Statement, including any preliminary prospectus or
final prospectus contained therein or any amendments or supplements
thereto, (ii) any omission or alleged omission to state therein a material
fact required to be stated therein, or necessary to make the statements
therein not misleading, or (iii) any violation or alleged violation of the
Securities Act, the Exchange Act, or any state securities law or any rule
or regulation promulgated under the Securities Act, the Exchange Act, or
any state securities law, and the Company will pay to each such Holder,
director, officer, underwriter or controlling person, as incurred, any
legal or other expenses reasonably incurred by them, including the fees and
expenses of one law firm retained by them, plus appropriate local counsel,
in connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; PROVIDED, HOWEVER, that the indemnity
agreement contained in this Section 6(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability, action or proceeding
if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be
liable in any such case for any such loss, claim, damage, liability, or
proceeding to which any Holder, director, officer, underwriter or
controlling person may become subject to the extent that it arises out of
or is based upon a Violation which occurs in reliance upon and in
conformity with written information furnished expressly for use in
connection with such registration by such Holder, underwriter or
controlling person to the Company. This right to indemnification shall
remain in full force and effect notwithstanding any investigation made by
or on behalf of such Holder or underwriter and shall survive the transfer
of such securities by such Holder.
-6-
<PAGE>
(b) INDEMNIFICATION BY HOLDER. To the full extent permitted by
law, each selling Holder severally, but not jointly, will indemnify and
hold harmless the Company, each of its directors, each of its officers who
has signed the registration statement, each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act,
any underwriter (as defined in the Securities Act), any other Holder
selling securities pursuant to the Registration Statement and each person,
if any, who controls any such underwriter or other Holder within the
meaning of the Securities Act or the Exchange Act, against any losses,
claims, damages, or liabilities (joint or several) and reasonable expenses
to which any of the foregoing persons may become subject, under the
Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions or proceedings in
respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
Holder expressly for use in connection with the preparation of the
Registration Statement; PROVIDED, HOWEVER, that the indemnity agreement
contained in this Section 6(b) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Holder, which consent
shall not be unreasonably withheld; PROVIDED, FURTHER, that in no event
shall any indemnity under this Section 6(b) exceed the net proceeds from
the offering received by such Holder.
(c) PROCEDURES. Promptly after receipt by an indemnified party
under this Section 6 of notice of the commencement of any action (including
any governmental action), such indemnified party will, if a claim in
respect thereof is to be made against any indemnifying party under this
Section 6, deliver to the indemnifying party a written notice of the
commencement thereof and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires,
jointly with any other indemnifying party similarly noticed, to assume the
defense thereof with counsel mutually satisfactory to the parties;
PROVIDED, HOWEVER, that an indemnified party (together with all other
indemnified parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel (plus
appropriate local counsel), with the fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The
failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action, if prejudicial in
any material respect to its ability to defend such action, shall to the
extent prejudicial
-7-
<PAGE>
relieve such indemnifying party of any liability to the indemnified party
under this Section 6, but the omission so to deliver written notice to
the indemnifying party will not relieve it of any liability that it may
have to any indemnified party otherwise than under this Section 6. No
indemnifying party shall consent to the entry of any judgment or enter
into any settlement which does not include as an unconditional term
thereof the giving by the claimant or the plaintiff to such indemnifying
party of a release from all liability in respect of such action.
(d) CONTRIBUTION. If the indemnification provided for in this
Section 6 from the indemnifying party is unavailable to an indemnified
party hereunder in respect of any losses, claims, damages, liabilities or
expenses referred to therein for any reason other than as specified
therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities
or expenses in such proportion as is appropriate to reflect the relative
fault of the indemnifying party on the one hand and the indemnified parties
on the other in connection with the actions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of such indemnifying party
and indemnified parties shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or related to information supplied
by, such indemnifying party or indemnified parties, and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such action; PROVIDED, HOWEVER, that in no event shall
the liability of any selling Holder hereunder be greater in amount than the
difference between the dollar amount of the proceeds received by such
Holder upon the sale of the Registrable Shares giving rise to such
contribution obligation and all amounts previously contributed by such
Holder with respect to such losses, claims, damages, liabilities and
expenses. The amount paid or payable to a party as a result of the losses,
claims damages, liabilities and expenses referred to above shall be deemed
to include any legal or other fees or expenses reasonably incurred by such
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 6(d) were determined by PRO RATA
allocation or by any other method of allocation which does not take into account
the equitable considerations referred to in the immediately preceding paragraph.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation.
-8-
<PAGE>
(e) SURVIVAL. The obligations of the Company and Holders under
this Section 6 shall survive the completion of any offering of Registrable
Shares in a registration statement under this Agreement, and otherwise.
10. REPORTS UNDER EXCHANGE ACT. With a view to making available to
the Holders the benefits of Rule 144 promulgated under the Securities Act and
any other rule or regulation of the Commission that may at any time permit a
Holder to sell securities of the Company to the public without registration
generally or pursuant to a registration on Form S-3, the Company agrees to use
reasonable commercial efforts to:
(a) make and keep public information available, as those terms
are understood and defined in Rule 144;
(b) qualify for registration on Form S-3 for the sale of
Registrable Shares;
(c) file with the Commission in a timely manner all reports and
other documents required of the Company under the Securities Act and the
Exchange Act; and
(d) furnish to any Holder, so long as the Holder owns any
Registrable Shares, promptly upon request (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144,
the Securities Act and the Exchange Act, or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3, (ii) a copy
of the most recent annual and/or quarterly report of the Company and such
other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested in availing any Holder of any
rule or regulation of the Commission which permits the selling of any
Registrable Shares without registration or pursuant to such form.
11. LOCK-UP AGREEMENT. The parties hereto intend to enter into a
Lock-Up Agreement (the "Lock-Up Agreement"), pursuant to which there will be
certain restrictions on the sale and transfer of the Shares. Nothing herein
contained shall be deemed to amend the terms of the Lock-Up Agreement.
12. AMENDMENT OF REGISTRATION RIGHTS. Any provision of this
Agreement may be amended and the observance thereof may be waived (either
generally or in a particular instance and either retroactively or prospectively
only with the written consent of the Company and the holders of sixty-six
percent (66%) of the Registrable Shares then outstanding. Any amendment or
waiver effected in accordance with this Section 9 shall be binding upon each
Holder of any Registrable Shares then outstanding, each future holder of all
such Registrable Shares and the Company.
-9-
<PAGE>
13. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED, INTERPRETED
AND THE RIGHTS OF THE PARTIES DETERMINED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF CALIFORNIA (WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF).
14. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
15. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
16. NEGOTIATION OF AGREEMENT. Each of the parties acknowledges that
it has been represented by independent counsel of its choice throughout all
negotiations that have preceded the execution of this Agreement and that it has
executed the same with consent and upon the advice of said independent counsel.
Each party and its counsel cooperated in the drafting and preparation of this
Agreement and the documents referred to herein, and any and all drafts relating
thereto shall be deemed the work product of the parties and may not be construed
against any party by reason of its preparation. Accordingly, any rule of law or
any legal decision that would require interpretation of any ambiguities in this
Agreement against the party that drafted it is of no application and is hereby
expressly waived. The provisions of this Agreement shall be interpreted in a
reasonable manner to effect the intentions of the parties and this Agreement.
17. NOTICES. Any notice, request, instruction or other document to
be given hereunder by any party hereto to another party hereto shall be in
writing, shall be deemed to have been duly given or delivered when delivered
personally or telecopied (receipt confirmed, with a copy sent by reputable
overnight courier), or one business day after delivery to a reputable overnight
courier, postage prepaid, to the address of the party set forth below such
person's signature on this Agreement or to such address as the party to whom
notice is to be given may provide in a written notice to each of the other
parties to this Agreement, a copy of which written notice shall be on file with
the Secretary of the Company.
18. SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms to the fullest extent permitted by law.
-10-
<PAGE>
19. FURTHER ASSURANCES. Each of the parties shall, without further
consideration, use reasonable efforts to execute and deliver such additional
documents and take such other action as the other parties, or any of them may
reasonably request to carry out the intent of this Agreement and the
transactions contemplated hereby.
20. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon,
and all rights hereto shall inure to the benefit of, the parties hereto, and
their respective successors and permitted assigns.
21. ENTIRE AGREEMENT. This Agreement embodies the entire agreement
and understanding of the parties hereto in respect of the actions and
transactions contemplated by this Agreement. There are no restrictions,
promises, inducements, representations, warranties, covenants or undertakings
with regard to the registration of the Company's capital stock pursuant to the
Securities Act, other than those expressly set forth or referred to in this
Agreement.
22. RECAPITALIZATIONS, ETC. The provisions of this Agreement
(including any calculation of share ownership) shall apply, to the full extent
set forth herein with respect to the Registrable Shares, to any and all shares
of capital stock of the Company or any capital stock, partnership units or, any
other security evidencing ownership interests in any successor or assign of the
Company (whether by merger, consolidation, sale of assets or otherwise) that may
be issued in respect of, in exchange for, or in substitution of the Common Stock
by reason of any stock dividend, split, combination, recapitalization,
liquidation, reclassification, merger, consolidation or otherwise.
(Signature Pages Follow)
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
APPLIED MAGNETICS CORPORATION
By:
----------------------------------
Craig D. Crisman,
Chairman of the Board and
Chief Executive Officer
ADDRESS:
75 Robin Hill Road
Goleta, California 93117
Attention: Chief Executive Officer
TELECOPIER: (805) 967-2677
KENILWORTH PARTNERS II LP
By:
----------------------------------
Its:
----------------------------------
ADDRESS:
40 Cuttermill Road, Suite 308
Great Neck, New York 11021
S-1
<PAGE>
EXHIBIT 10.3
DRAFT OF 5/7/99
CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS
OF SERIES B CONVERTIBLE PREFERRED STOCK
of
APPLIED MAGNETICS CORPORATION
Pursuant to Section 151 of the General Corporation Law
of the State of Delaware
We, Craig D. Crisman, Chief Executive Officer, and Peter T.
Altavilla, Secretary, of Applied Magnetics Corporation, a corporation
organized and existing under the General Corporation Law of the State of
Delaware (the "Corporation"), in accordance with the provisions of Section 3
of the Bylaws thereof, DO HEREBY CERTIFY:
That, pursuant to the authority conferred upon the Board of
Directors by the Corporation's Certificate of Incorporation, the Board of
Directors adopted the following resolution on April __, 1999, creating a
series of [377,767] shares of Preferred Stock designated as Series B
Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of its
Certificate of Incorporation, the Series B Convertible Preferred Stock of the
Corporation be and it hereby is created, and that the designation and amount
thereof and the powers, preferences and relative, participating, optional and
other special rights of the shares of such series, and the qualifications,
limitations or restrictions thereof are as follows:
Section 1. DESIGNATION AND AMOUNT. The shares of such series
shall be designated as "Series B Convertible Preferred Stock," $.10 par value
per share, and the number of shares constituting such series shall be
[377,767]. Such number of shares may be decreased by resolution of the Board
of Directors; provided, that no decrease shall reduce the number of shares of
Series B Convertible Preferred Stock to a number less than the sum of (i) the
number of the shares then outstanding; (ii) the number of shares issuable
upon exercise of outstanding rights, options or warrants or upon conversion
of outstanding securities issued by the Corporation; and (iii) the number of
shares as may be issuable as PIK Dividends (as defined below).
1
<PAGE>
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) The record holders of shares of Series B Convertible Preferred
Stock shall be entitled to receive cumulative dividends out of funds legally
available for payment of dividends. Such dividends shall be payable by the
Corporation at the annual rate per share of fourteen percent (14%) and no
more, and shall be payable in the manner, and at the times, provided below.
(B) Through [THIRD ANNIVERSARY OF CLOSING], dividends on the
Series B Convertible Preferred Stock shall be payable in cash or, in the
Corporation's sole discretion, in fully paid and nonassessable shares of
Series B Convertible Preferred Stock legally available for such purpose (such
dividends paid in kind being herein called "PIK Dividends"); provided,
however, that dividends due on the Series B Convertible Preferred Stock shall
be payable in cash only if, and to the extent that, (i) the aggregate number
of shares of the Corporation's common stock (the "Common Stock") issuable
upon conversion of the Series B Convertible Preferred Stock exceeds twenty
percent (20%) of the aggregate number of the Common Stock as of the original
date of issuance (the "Original Issue Date") of the Series B Convertible
Preferred Stock or (ii) the number of shares of Series B Convertible
Preferred Stock to be issued exceeds the authorized number of such shares.
Dividends of additional shares of Series B Convertible Preferred Stock shall
be paid by delivering to the record holders of Series B Convertible Preferred
Stock a number of shares of Series B Convertible Preferred Stock determined
by dividing the total amount of the cash dividend which otherwise would be
payable on the Quarterly Dividend Payment Date (as defined below) to such
holders (rounded to the nearest whole cent) by $100.00. The issuance of any
such PIK Dividend in such amount shall constitute full payment of such
dividend. No fractional shares of Series B Convertible Preferred Stock shall
be issued as PIK Dividends. In lieu of fractional shares, the Corporation
shall pay cash equal to such fraction multiplied by $100.00. Any additional
shares of Series B Convertible Preferred Stock issued pursuant to this
paragraph shall be governed by this resolution and shall be subject in all
respects, except as to the date of issuance and date from which dividends
accrue and cumulate, to the same terms as the shares of Series B Convertible
Preferred Stock originally issued hereunder. Following ____________, 2002,
such dividends shall be paid by the Corporation solely in cash.
(C) Dividends on shares of Series B Convertible Preferred Stock
shall accrue and be cumulative from the Original Issue Date. Dividends shall
be payable quarterly in arrears on the first day of March, June, September
and December in each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly
Dividend Payment Date after the Original Issue Date. If any Quarterly
Dividend Payment Date occurs on a day that is not a business day, any accrued
dividends otherwise payable on such Quarterly Dividend Payment Date shall be
paid, without interest, on the next succeeding business day. Dividends shall
be paid to the
2
<PAGE>
holders of record of the Series B Convertible Preferred Stock as their names
shall appear on the share register of the Corporation on the date fixed by
the Board of Directors for the determination of holders of shares of Series B
Convertible Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date (the "Record Date") shall be
no more than 30 business days prior to the date fixed for the payment
thereof. If the Board of Directors fails to fix the Record Date, the Record
Date shall be the date 20 business days prior to the Quarterly Dividend
Payment Date. Dividends payable on any Quarterly Dividend Payment Date with
respect to a period (a "Dividend Period") which is less than a full fiscal
quarter in length will be computed on the basis of a 365-day annual period
and actual days elapsed in such Dividend Period. Dividends on account of
arrears for any past Dividend Periods may be declared and paid at any time to
holders of record on the Record Date therefor. For any Dividend Period in
which dividends are not paid in full on the Quarterly Dividend Payment Date
first succeeding the end of such Dividend Period, then on such Quarterly
Dividend Payment Date such accrued and unpaid dividends shall be added to the
Series B Liquidation Preference (as defined in Section 4(A) below) effective
at the beginning of the Dividend Period next succeeding the Dividend Period
as to which such dividends were not paid and shall thereafter accrue
additional dividends in respect thereof at the rate set forth in Section 2(A)
above until such accrued and unpaid dividends have been paid in full.
(D) So long as any shares of Series B Convertible Preferred Stock
shall be outstanding, the Corporation shall not declare, pay or set apart for
payment on any stock ranking junior to the Series B Convertible Preferred
Stock ("Junior Stock") any dividends whatsoever, whether in cash, property or
otherwise (other than dividends payable in shares of the Common Stock with
respect to Junior Stock, together with cash in lieu of fractional shares),
nor shall the Corporation make any distribution on any Junior Stock, nor
shall any Junior Stock be purchased, redeemed or otherwise acquired by the
Corporation (except for such purchases, redemptions or acquisitions of Junior
Stock pursuant to or in accordance with the terms of (i) employee stock
purchase, subscription or similar plans or agreements entered into between
the Corporation and employees of it or its subsidiaries (or otherwise adopted
for the benefit of such person), and (ii) rights of first refusal and other
purchase rights contained in stockholders, subscription or other similar
agreements entered into between the Corporation and one or more of its
stockholders), nor shall any monies be paid or made available for a sinking
fund for the purchase or redemption of any Junior Stock (except in the cases
referenced above), unless all dividends to which the holders of Series B
Convertible Preferred Stock shall have been entitled for all previous
Dividend Periods shall have been paid or declared and set apart for payment.
(E) In the event that full dividends are not paid or declared and
set apart for payment to the holders of all outstanding shares of Series B
Convertible Preferred Stock and of any stock on a par with the Series B
Convertible Preferred Stock ("Parity Stock") and funds available for payment
of dividends shall be insufficient to permit
3
<PAGE>
payment in full to holders of all such stock of the full preferential amounts
to which they are then entitled, then the entire amount available for payment
of dividends shall be distributed ratably among all such holders of Series B
Convertible Preferred Stock and of any Parity Stock in proportion to the full
amount to which they would otherwise be respectively entitled. For purposes
of this subparagraph, the amount of legally available PIK Dividends shall be
deemed funds available for payment of dividends but shall not require payment
of PIK Dividends on Parity Stock.
(F) Notwithstanding anything contained herein to the contrary, no
cash dividends on shares of Series B Convertible Preferred Stock shall be
declared by the Board of Directors or paid or set apart for payment by the
Corporation at such time as the terms and provisions of any agreement of the
Corporation, including any agreement relating to its indebtedness, prohibits
such declaration, payment or setting apart for payment or provides that such
declaration, payment or setting apart for payment would constitute a breach
thereof or a default thereunder, or if such declaration or payment shall be
restricted or prohibited by law.
Section 3. REACQUIRED SHARES. Any shares of Series B
Convertible Preferred Stock purchased or otherwise acquired by the
Corporation in any manner whatsoever shall be retired and canceled promptly
after the acquisition thereof. All such shares shall upon their cancellation
become authorized but unissued shares of Preferred Stock and may be reissued
as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth herein.
Section 4. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation (voluntary or otherwise), dissolution or
winding up of the Corporation, no distribution shall be made to the holders
of Junior Stock unless, prior thereto, the holders of shares of Series B
Convertible Preferred Stock shall have received an amount equal to One
Hundred Dollars ($100) per share plus accrued and unpaid dividends and
distributions thereon, whether or not declared, to the date of such payment
(the "Series B Liquidation Preference").
(B) In the event there are not sufficient assets available to
permit payment in full of the Series B Liquidation Preference and the
liquidation preference of all other series of Parity Stock, if any, then such
remaining assets shall be distributed ratably to the holders of the Series B
Convertible Preferred Stock and holders of other Parity Stock in proportion
to their respective liquidation preferences.
4
<PAGE>
Section 5. CONVERSION.
5.1 Optional Conversion By Holder. Each share of Series B
Convertible Preferred Stock shall be convertible, at the option of the holder
thereof, at any time and from time to time, into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing one
hundred dollars ($100.00) by 115% of the average closing price of the Common
Stock as reported by the New York Stock Exchange (the "NYSE") the five
business days prior to [THE DATE OF EXECUTION OF THE EXCHANGE AGREEMENT] (the
"Series B Conversion Price"); provided, that in no event shall the Series B
Conversion Price equal an amount less than five dollars and thirty-seven and
one-half cents ($5.375) per share. Such Series B Conversion Price, and the
rate at which shares of Series B Preferred Stock may be converted into shares
of Common Stock, shall be subject to adjustment as provided below.
5.2 Mandatory Conversion.
(A) Mandatory Conversion By Corporation In Years Two and Three.
In the event that, following __________, 2000, and on or prior to _________,
2002, the closing price of the Common Stock as reported on the NYSE (or, in
the event the Common Stock is no longer listed on the NYSE, a national
securities exchange or the National Market System of the National Association
of Securities Dealers, Inc. (an "Exchange")) is greater than or equal to 200%
of the Series B Conversion Price for twenty (20) of thirty (30) consecutive
business days, at the option of the Corporation, each share of Series B
Convertible Preferred Stock shall be converted into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing one
hundred dollars ($100.00) by the Series B Conversion Price; provided, that,
in the event of conversion pursuant to this Section 5.2(A) on the record date
of such conversion, the Corporation shall also issue, with respect to each
share of Series B Convertible Preferred Stock being converted, that number of
shares of Common Stock which would be issued pursuant to this Section upon
conversion of (x) the amount of PIK Dividends payable on such Series B
Convertible Preferred Stock through [__________], 2002, less (y) the amount
of PIK Dividends paid by the Corporation through the date of conversion (the
"Makewhole Dividend").
(B) Mandatory Conversion By Corporation After Three Years. In the
event that, at any time after __________, 2002, the closing price of the
Common Stock as reported by an Exchange is greater than or equal to 130% of
the Series B Conversion Price for twenty (20) of thirty (30) consecutive
business days, at the option of the Corporation, each share of Series B
Convertible Preferred Stock shall be converted into such number of fully paid
and nonassessable shares of Common Stock as is determined by dividing one
hundred dollars ($100.00) by the Series B Conversion Price.
5
<PAGE>
5.3 Mechanics of Conversion.
(A) Mechanics of Optional Conversion. In order to convert shares
of Series B Convertible Preferred Stock into shares of Common Stock pursuant
to Section 5.1, the holder shall surrender the certificate or certificates
for such shares of Series B Convertible Preferred Stock at the office of the
transfer agent, together with written notice (the "Optional Conversion
Notice") that such holder elects to convert all or any number of the shares
represented by such certificate or certificates. The Optional Conversion
Notice shall state (i) such holder's name or the names of the nominees in
which such holder wishes the certificate or certificates for shares of Common
Stock to be issued and (ii) a designated date of conversion. If required by
the Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by a written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder or
his or its attorney duly authorized in writing. The effective date of
conversion (the "Optional Conversation Date") shall be deemed to be the later
of (x) the date specified in the Optional Conversion Notice or (y) the date
the Optional Conversion Notice is received by the Corporation. The
Corporation shall, as soon as practicable after the Optional Conversion Date,
issue and deliver to such holder, or to his nominees, a certificate or
certificates for the number of shares of Common Stock to which such holder
shall be entitled, together with cash in lieu of any fraction of a share.
Any cash payment made by the Corporation in lieu of a fractional share shall
be determined by multiplying the fraction by the closing price of the Common
Stock on the Optional Conversion Date.
(B) Mechanics of Mandatory Conversion. In order for the
Corporation to convert shares of Series B Convertible Preferred Shares into
shares of Common Stock pursuant to Section 5.2, at least thirty (30) days
prior to the date set by the Board of Directors on which such holder's Series
B Convertible Preferred Shares will automatically be converted to Common
Stock (the "Mandatory Conversion Date"), written notice (the "Mandatory
Conversion Notice") shall be mailed, postage prepaid, to each holder of
record (at the close of business on the business day next preceding the day
on which notice is given) of the Series B Convertible Preferred Stock, at
each holder's address last shown on the records of the Corporation,
specifying the applicable Conversion Price and the Mandatory Conversion
Date. On or after and as of the Mandatory Conversion Date, such shares shall
be deemed converted into shares of Common Stock in accordance with Section
5.2 above. From and after the Mandatory Conversion Date, all dividends on
the Series B Convertible Preferred Stock shall cease to accrue, all rights of
the holders of Series B Convertible Preferred Stock of the Corporation
(except the right to receive certificates representing the applicable number
of shares of Common Stock upon surrender of the Series B Convertible
Preferred Stock certificate or certificates) shall cease with respect to such
shares, and shares of Series B Convertible Preferred Stock shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
6
<PAGE>
(C) The Corporation shall at all times during which the Series B
Convertible Preferred Stock shall be outstanding, reserve and keep available
out of its authorized but unissued Common Stock for the purpose of effecting
the conversion of the Series B Convertible Preferred Stock, such number of
its duly authorized shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all outstanding shares of Series B
Convertible Preferred Stock.
(D) All shares of Series B Convertible Preferred Stock which shall
have been surrendered for conversion or automatically converted as herein
provided shall no longer be deemed to be outstanding and all rights with
respect to such shares, including the rights, if any, to receive dividends
and notices, shall immediately cease and terminate on the Optional or
Mandatory Conversion Date (as applicable), except only the right of the
holders thereof to receive shares of Common Stock in exchange therefor. Any
shares of Series B Convertible Preferred Stock so converted shall be retired
and canceled and shall not be reissued, and the Corporation may from time to
time take such appropriate action as may be necessary to reduce the number of
shares of authorized Series B Convertible Preferred Stock accordingly.
(E) The conversion rights of the Series B Convertible Preferred
Stock shall continue to, and terminate on, the Redemption Date, as defined in
Section 6(B) below.
5.4 ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(a) Special Definitions. For purposes of this Section 5.4, the
following definitions shall apply:
(1) "Option" shall mean rights, options or warrants issued
by the Corporation to subscribe for, purchase or otherwise acquire
Common Stock or Convertible Securities.
(2) "Convertible Securities" shall mean any evidences of
indebtedness, shares or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(3) "Additional Shares of Common Stock" shall mean all
shares of Common Stock issued (or deemed to be issued) by this
Corporation after the Original Issue Date, other than Key Employee
Shares (as defined below) and other than shares of capital stock
issued or issuable:
7
<PAGE>
A. as a dividend or distribution on Series B
Convertible Preferred Stock pursuant to Section 2;
B. upon conversion of shares of Preferred Stock;
C. pursuant to Options or Convertible Securities
outstanding on the Original Issue Date; or
D. by reason of a dividend, stock split, split-up or
other distribution on shares excluded from the definition of
Additional Shares of Common Stock by the foregoing clauses (1),
(2) or (3).
(4) "Key Employee Shares" shall mean shares of Common
Stock, and/or options to purchase such shares of Common Stock, issued
to officers, directors or employees of or consultants to the
Corporation pursuant to a restricted stock plan or agreement approved
by the Board of Directors, [to acquire up to _______________ shares of
Common Stock after _______________, 1999, subject to appropriate
adjustment for any stock dividend, stock split, combination or similar
recapitalization affecting such shares, provided that such number of
shares shall be increased by the number of shares repurchased by the
Corporation from officers, directors, employees or consultants after
_______________, 1999, at cost pursuant to stock repurchase agreements
approved by the Board of Directors, and further by the number of
shares that are subject to options outstanding on _______________,
1998, or granted thereafter that expire unexercised.]
(5) "Rights to Acquire Common Stock" (or "Rights") shall
mean all rights issued by this Corporation to acquire Common Stock
whether by exercise of a warrant, option or similar call or conversion
of any existing instruments.
(b) ISSUE OF SECURITIES; DEEMED ISSUE OF ADDITIONAL SHARES OF
COMMON STOCK. If the Corporation at any time or from time to time after the
Original Issue Date shall issue any Options or Convertible Securities or
other Rights to Acquire Common Stock, then the maximum number of shares of
Common Stock (as set forth in the instrument relating thereto without
regard to any provision contained therein for a subsequent reduction of
such number) issuable upon the exercise of such Options, Rights or, in the
case of Convertible Securities, the conversion or exchange of such
Convertible Securities, shall be deemed to be Additional Shares of Common
Stock issued as of the time of such issue, provided, that, in any such
case:
8
<PAGE>
(1) No further adjustment in the Conversion Price shall be
made upon the subsequent issue of shares of Common Stock upon the
exercise of such Rights or conversion or exchange of such Convertible
Securities;
(2) Upon the expiration or termination of any unexercised
Option or Right, the Conversion Price shall be readjusted, and the
Additional Shares of Common Stock deemed issued as the result of the
original issue of such Option or Right shall not be deemed issued for
the purposes of any subsequent adjustment of the Conversion Price; and
(3) In the event of any change in the number of shares of
Common Stock issuable upon the exercise, conversion or exchange of any
Option, Right or Convertible Security (except Key Employee Shares),
including, but not limited to, a change resulting from the
anti-dilution provisions thereof, the Conversion Price then in effect
shall forthwith be readjusted to such Conversion Price as would have
obtained had the adjustment that was made upon the issuance of such
Option, Right or Convertible Security not exercised or converted prior
to such change been made upon the basis of such change, but no further
adjustment shall be made for the actual issuance of Common Stock upon
the exercise or conversion of any such Option, Right or Convertible
Security.
(c) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. If the Corporation shall at any time
after the Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued, but
excluding shares issued as a stock split, dividend or distribution and
Key Employee Shares), without consideration or for a consideration per
share less than the Conversion Price in effect immediately prior to such
issue, then and in such event, such Conversion Price shall be reduced,
concurrently with such issue to a price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction, (a) the
numerator of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issue (or deemed issue) on a
fully-diluted basis plus (2) the number of shares of Common Stock which
the aggregate consideration received by the Corporation for the total
number of Additional Shares of Common Stock so issued (or deemed issued)
would purchase at such Conversion Price; and (b) the denominator of
which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue (or deemed issue) on a fully-diluted
basis plus (2) the number of such Additional Shares of Common Stock so
issued (or deemed issued).
9
<PAGE>
Notwithstanding the foregoing, the applicable Conversion Price shall not be
reduced if the amount of such reduction would be an amount less than One Cent
($.01), but any such amount shall be carried forward and reduction with
respect thereto made at the time of and together with any subsequent
reduction which, together with such amount and any other amount or amounts so
carried forward, shall aggregate One Cent ($.01) or more.
(d) DETERMINATION OF CONSIDERATION. For purposes of this
Section 5.4, the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
A. insofar as it consists of cash, be computed at
the aggregate of cash received by the Corporation, excluding
amounts paid or payable for accrued interest or accrued
dividends;
B. insofar as it consists of property other than
cash, be computed at the fair market value thereof at the time
of such issue, as determined in good faith by the Board of
Directors; and
C. in the event Additional Shares of Common Stock
are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both,
be the proportion of such consideration so received, computed
as provided in clauses (A) and (B) above, as determined in
good faith by the Corporation's Board of Directors.
(2) OPTIONS, RIGHTS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued
pursuant to Options, Rights and Convertible Securities shall
be determined by dividing
A. the total amount, if any, received or
receivable by the Corporation as consideration for the issue
of such Options, Rights or Convertible Securities, plus the
minimum aggregate amount of additional consideration (as set
forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent increase of
such consideration) payable to the Corporation upon the
exercise of such Options, Rights or the conversion or exchange
of such Convertible Securities, by
10
<PAGE>
B. the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to
any provision contained therein for a subsequent reduction of
such number) issuable upon the exercise of such Options or the
conversion or exchange of such Convertible Securities.
5.5 Adjustment for Stock Splits, Dividends and Combinations. If
the Corporation shall at any time or from time to time after the Original
Issue Date effect a subdivision of the outstanding Common Stock or shall
issue a dividend in Common Stock on its outstanding Common Stock, the Series
B Conversion Price then in effect immediately before that subdivision shall
be proportionately decreased. If the Corporation shall at any time or from
time to time after the Original Issue Date combine the outstanding shares of
Common Stock into a lesser number of shares of Common Stock, the Series B
Conversion Price then in effect immediately before the combination shall be
proportionately increased. Any adjustment under this paragraph shall become
effective as of the record date for such stock split, dividend or
combination.
5.6 Adjustment for Reclassification, Exchange, or Substitution. If
the Common Stock shall be changed into the same or a different number of
shares of any class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares or stock dividend provided for above, or a reorganization, merger,
consolidation, or sale of assets provided for below), then and in each such
event upon the conversion of each share of Series B Convertible Preferred
Stock, the holder thereof shall have the right to receive the kind and amount
of shares of stock and other securities and property receivable upon such
reorganization, reclassification, or other change, by holders of the number
of shares of Common Stock into which such shares of Series B Convertible
Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
5.7 Adjustment for Merger or Reorganization, etc. In case of any
consolidation or merger of the Corporation with or into another corporation
or the sale of all or substantially all of the assets of the Corporation to
another corporation: each share of Series B Convertible Stock shall
thereafter be convertible into the kind and amount of shares of stock or
other securities or property to which a holder of the number of shares of
Common Stock of the Corporation deliverable upon conversion of such Series B
Convertible Preferred Stock would have been entitled upon such consolidation,
merger or sale; and, in such case, appropriate adjustment (as determined in
good faith by the Board of Directors) shall be made in the application of the
provisions in this Section with respect to the rights and interest thereafter
of the holders of the Series B Convertible Preferred Stock, to the end that
the provisions set forth in this Section (including provisions with respect
to changes in and other adjustments of the Conversion Price) shall thereafter
be
11
<PAGE>
applicable, as nearly as reasonably may be, in relation to any shares of
stock or other property thereafter deliverable upon the conversion of the
Series B Convertible Preferred Stock. In the event that the consolidation or
merger is an all-cash transaction, holders of Series B Convertible Preferred
Stock shall be entitled to cash payment on an as-converted basis, plus, in
the event that such consolidation or merger takes place on or prior to
____________, 2002, a cash payment equal to the amount which would be payable
for the Makewhole Dividend on an as-converted basis.
5.8 Change in Control. In addition to any adjustment provided in
Section 5.7 above, each holder of Series B Convertible Preferred Stock will
have right, at such holder's option, to cause the Corporation to purchase
such Series B Convertible Preferred Stock, in whole but not in part, for a
cash amount equal to $100 per share, together with any and all accrued and
unpaid dividends through the repurchase date, if a Change of Control (as
defined herein) occurs or has occurred. Notice with respect to the occurrence
of a Change of Control will be given not later than 30 days after the date of
the occurrence of such Change of Control. The date fixed for such purchase
will be a date not less than 30 nor more than 60 days after notice of the
occurrence of a Change of Control is given (except as otherwise required by
law). To be purchased, certificates representing the Series B Convertible
Preferred Stock must be received with a duly executed written notice at the
office the Corporation not later than the fifth business day prior to the
date fixed for such purchase. All Series B Convertible Preferred Stock
purchased by the Corporation will be canceled. Holders of Series B
Convertible Preferred Stock who have tendered a notice of purchase will be
entitled to revoke their election by delivering a written notice of such
revocation to the Corporation on or prior to the date fixed for such
purchase.
A "Change of Control" will be deemed to have occurred (i) upon any
merger or consolidation of the Corporation with or into any person or any
sale, transfer or other conveyance, whether direct or indirect, of all or
substantially all of the assets of the Corporation in one transaction or a
series of related transactions if, immediately after giving effect to such
transaction, any "person" or "group" (as such terms are used for purposes of
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) is
or becomes the beneficial owner, directly or indirectly, of more than 50% of
the total voting power in the aggregate normally entitled to vote in the
election of directors, managers, or trustees, as applicable, of the
transferee or surviving entity, (ii) when any "person" or "group" (as such
terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act,
whether or not applicable) is or becomes the beneficial owner, directly or
indirectly, of more than 50% of the total voting power in the aggregate
normally entitled to vote in the election of directors, managers, or
trustees, as applicable, of the Corporation or (iii) when, during any period
of 12 consecutive months after the date hereof, individuals who at the
beginning of any such 12-month period constituted the Board of Directors of
the Corporation (together with any new directors whose election by such Board
of Directors or whose nomination for election by the stockholders of the
Corporation was
12
<PAGE>
approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Corporation then in
office.
5.9 No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or
any other voluntary action, avoid or seek to avoid the observance or
performance of any of the terms to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out
of all the provisions of this Section and in the taking of all such action as
may be necessary or appropriate in order to protect the conversion rights of
the holders of the Series B Convertible Preferred Stock against impairment.
5.10 Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder
of Series B Convertible Preferred Stock a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based and shall file a copy of such certificate
with its corporate records. The Corporation shall, upon the written request
at any time of any holder of Series B Convertible Preferred Stock, furnish or
cause to be furnished to such holder a similar certificate setting forth (1)
such adjustments and readjustments, (2) the Conversion Price then in effect,
and (3) the number of shares of Common Stock and the amount, if any, of other
property which then would be received upon the conversion of such Series B
Convertible Preferred Stock. Despite such adjustment or readjustment, the
form of each or all certificates for Series B Convertible Preferred Stock, if
the same shall reflect the initial or any subsequent conversion price, need
not be changed in order for the adjustments or readjustments to be valued in
accordance with the provisions of this Certificate of Designation which shall
control.
Section 6. REDEMPTION.
(A) On or after __________, 2002, the Corporation may, in its sole
discretion subject to the provisions of this Section, redeem each share of
Series B Convertible Preferred Stock held by such holder or holders for which
redemption has been requested at a price equal to $100 per share plus any
accrued or unpaid dividends thereon (the "Redemption Price"). Redemption of
the Series B Convertible Preferred Stock shall not take place prior to
_____________, 2002.
(B) At least thirty (30) days prior to the date fixed for redemption
of any Series B Convertible Preferred Stock (the "Redemption Date"), written
notice (the
13
<PAGE>
"Redemption Notice") shall be mailed, postage prepaid, to each holder of
record (at the close of business on the business day next preceding the day
on which notice is given) of the Series B Convertible Preferred Stock to be
redeemed, at its post office address last shown on the records of the
Corporation. The Redemption Notice shall specify the Redemption Date, the
applicable Redemption Price, the place at which payment may be obtained and
the date on which such holder's redemption rights as to such shares terminate
and calling upon such holder to surrender to the Corporation, in the manner
and at the place designated, his or its certificate or certificates
representing the shares to be redeemed. On or after the Redemption Date, the
Redemption Price of such shares shall be payable to the order of the person
whose name appears on the Corporation's records as the owner thereof and each
surrendered certificate shall be canceled. From and after the Redemption
Date, unless there shall have been a default in payment of the Redemption
Price, all dividends on the Series B Convertible Preferred Stock designated
for redemption in the Redemption Notice shall cease to accrue, all rights of
the holders of such shares as holders of the Series B Convertible Preferred
Stock of the Corporation (except the right to receive the Redemption Price
without interest upon surrender of their certificate or certificates) shall
cease with respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever.
(C) On or prior to the Redemption Date, the Corporation shall
deposit the Redemption Price of all shares of the Series B Convertible
Preferred Stock designated for redemption in the Redemption Notice and not
yet converted with a bank or trust company having aggregate capital and
surplus in excess of $100,000,000 as a trust fund for the benefit of the
holders of the shares designated for redemption. Any moneys deposited by the
Corporation pursuant to this Section for the redemption of shares that are
thereafter converted into shares of Common Stock pursuant to Section 5 hereof
shall be returned to the Corporation upon such conversion. The balance of any
moneys deposited by the Corporation pursuant to this Section remaining
unclaimed at the expiration of one (1) year following the Redemption Date
shall thereafter be returned to the Corporation, after which the holders of
the shares called for redemption shall be entitled only to receive payment of
the Redemption Price from the Corporation.
Section 7. VOTING RIGHTS. Except as otherwise required by law,
Series B Convertible Preferred Stock shall be nonvoting stock.
Notwithstanding the foregoing and without taking into account the provisions
of Section 2(F) hereof, in the event that the Corporation fails to make
payment in full of any dividends due with respect to the Series B Convertible
Preferred Stock: (i) on the first such occasion, holders of Series B
Convertible Preferred Stock, on an as-converted basis, shall have voting
rights and powers equal to the voting rights and powers of the Common Stock,
and shall be entitled to notice of any meetings of shareholders in accordance
with the Bylaws of the Corporation; and, (ii) in the event that such initial
dividend payment default has not been cured, on the second such
14
<PAGE>
occasion holders of the Series B Convertible Preferred Stock, voting as a
class, shall have the right, in addition, to elect a director to the
Corporation's Board of Directors. The provisions of this Section 7 are in
addition to all other rights, in law or in equity, available to the holders
of Series B Convertible Preferred Stock.
Section 8. RANKING. The Series B Convertible Preferred Stock
shall rank senior to all the Common Stock and other series of the
Corporation's Preferred Stock as to the payment of dividends and the
distribution of assets, and junior to the Corporation's 7% Convertible
Subordinated Debentures, unless the terms of any such series shall provide
otherwise. The issuance by the Corporation of any additional preferred stock
which is senior to the Series B Convertible Preferred Stock shall be subject
to the approval of the holders of the Series B Convertible Preferred Stock,
voting together as a class.
Section 9. FRACTIONAL SHARES. No fractional shares of Common
Stock shall be issued upon conversion of the Series B Convertible Preferred
Stock. In lieu of fractional shares, the Corporation shall pay cash equal to
such fraction multiplied by the then effective Conversion Price.
RESOLVED FURTHER, that the proper officers of the Corporation be,
and each of them hereby is, authorized to execute a Certificate of
Designation with respect to the Series B Convertible Preferred Stock pursuant
to Section 151 of the General Corporation Law of the State of Delaware and to
take all appropriate action to cause such Certificate to become effective,
including, but not limited to, the filing and recording of such Certificate
with and/or by the Secretary of State of the State of Delaware.
IN WITNESS WHEREOF, we have executed and subscribed this Certificate
and do affirm the foregoing as true under the penalties of perjury as of
April __, 1999.
-----------------------------------
Name: Craig D. Crisman
Title: Chief Executive Officer
Attest:
- - - - - - - - - - - - - - - - - - - ------------------------------
Name: Peter T. Altavilla
Title: Secretary
15
